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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -------------------
Commission file number 0-6620
------
ANAREN, INC.
------------
(Exact name of Registrant as specified in its Charter)
New York 16-0928561
-------- ----------
(State of incorporation) (I.R.S Employer Identification No.)
6635 Kirkville Road 13057
East Syracuse, New York -----
- ----------------------- (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: 315-432-8909
Anaren Microwave, Inc.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by Check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
The number of shares of Registrant's Common Stock outstanding on
January 27, 2003 was 22,418,120.
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
December 31, 2002 (unaudited) and June 30, 2002
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended December 31,
2002 and 2001 (unaudited)
Consolidated Condensed Statements of Earnings 5
for the Six Months Ended December 31, 2002
and 2001 (unaudited)
Consolidated Condensed Statements of Cash Flows 6
for the Six Months Ended December 31,
2002 and 2001 (unaudited)
Notes to Consolidated Condensed Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis 15
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls & Procedures 27
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Officer Certifications 30 - 31
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
December 31, 2002 and June 30, 2002
(Unaudited)
Assets December 31, 2002 June 30, 2002
------ ----------------- -------------
Current assets:
Cash and cash equivalents $ 16,290,485 $ 12,565,424
Securities available for sale (note 3) 5,176,818 3,820,942
Securities held to maturity (note 3) 91,728,318 98,955,299
Receivables, less allowance of $558,724
and $529,000, respectively 11,495,026 13,106,583
Inventories (note 4) 17,975,182 20,119,433
Interest and other receivables 1,103,927 1,206,396
Deferred income taxes 1,798,821 1,356,294
Other current assets 1,258,403 1,130,173
------------ ------------
Total current assets 146,826,980 152,260,544
------------ ------------
Securities held to maturity 13,458,543 9,564,558
Property, plant and equipment,
net (note 5) 27,951,805 26,592,375
Patents, net of accumulated
amortization of $251,548 at
December 31, 2002 and $215,613 at
June 30, 2002 (note 2) 323,418 359,353
Goodwill (note 2) 30,715,861 30,715,861
Other intangible assets, net of
accumulated amortization of $570,224 at
December 31, 2002 and $356,390 at
June 30, 2002 (note 2) 1,879,776 2,093,610
------------ ------------
$221,156,383 $221,586,301
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,513,396 $ 5,046,048
Accrued expenses (note 6) 3,609,230 3,297,207
Customer advance payments -- 244,831
Other current liabilities
(note 8) 218,675 185,725
------------ ------------
Total current liabilities 7,341,301 8,773,811
Deferred income taxes 1,456,095 1,357,359
Postretirement benefit obligation 1,440,085 1,440,085
Other liabilities (note 8) 449,522 461,808
------------ ------------
Total liabilities 10,687,003 12,033,063
------------ ------------
Stockholders' equity:
Common stock of $.01 par value
Authorized 200,000,000 shares;
issued 25,666,742 shares
at December 31, 2002 and
25,636,442 at June 30, 2002 256,667 256,364
Additional paid-in capital 169,101,273 168,901,645
Unearned compensation (768,315) (1,086,669)
Accumulated other comprehensive loss (457,878) (828,061)
Retained earnings 47,703,971 47,082,597
------------ ------------
215,835,718 214,325,876
Less cost of 3,249,622 and
3,177,822 treasury shares
at December 31, 2002 and
June 30, 2002 5,366,338 4,772,638
------------ ------------
Total stockholders' equity 210,469,380 209,553,238
------------ ------------
$221,156,383 $221,586,301
============ ============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
December 31, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Net sales $20,885,138 $17,244,979
Cost of sales 15,314,622 12,777,227
----------- -----------
Gross profit 5,570,516 4,467,752
----------- -----------
Operating expenses:
Marketing 1,652,078 1,849,196
Research and development 1,527,747 1,591,697
General and administrative 2,388,420 2,083,467
Fire related (note 1) -- 711,400
----------- -----------
Total operating expenses 5,568,245 6,235,760
----------- -----------
Operating income (loss) 2,271 (1,768,008)
Other income, primarily interest 641,059 1,011,256
Interest expense (10,162) (68,891)
----------- -----------
Income (loss) before income taxes 633,168 (825,643)
and extraordinary item
Income tax expense (benefit) 158,000 (474,000)
----------- -----------
Income (loss) before extraordinary
item 475,168 (351,643)
----------- -----------
Extraordinary item - gain on
acquisition (note 1) -- 3,407,244
----------- -----------
Net income $ 475,168 $ 3,055,601
=========== ===========
Basic earnings (loss) per share:
Income (loss) before
extraordinary item $0.02 $(0.02)
Extraordinary item - gain
on acquisition 0.00 0.15
----- -----
Net income $0.02 $0.13
===== =====
Diluted earnings (loss) per share:
Income (loss) before
extraordinary item $0.02 $(0.02)
Extraordinary item - gain
on acquisition 0.00 0.15
----- ------
Net income $0.02 $ 0.13
===== ======
Shares used in computing net
earnings (loss):
Basic 22,301,824 22,336,004
=========== ===========
Diluted 22,821,430 23,164,627
=========== ===========
See accompanying notes to consolidated condensed financial statements.
4
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Six Months Ended
December 31, 2002 and 2001
(Unaudited)
Dec. 31, 2002 Dec. 31, 2001
------------- -------------
Net sales $41,309,011 $32,246,170
Cost of sales 30,346,988 22,647,365
----------- -----------
Gross profit 10,962,023 9,598,805
----------- -----------
Operating expenses:
Marketing 3,385,883 3,368,231
Research and development 2,928,808 2,744,363
General and administrative 4,697,102 3,842,158
Fire related (note 1) -- 711,400
Restructuring 403,403 --
----------- -----------
Total operating expenses 11,415,196 10,666,152
----------- -----------
Operating loss (453,173) (1,067,347)
Other income, primarily interest 1,310,231 2,292,327
Interest expense (29,684) (85,139)
----------- -----------
Income before income taxes
and extraordinary item 827,374 1,139,841
Income tax expense 206,000 117,000
----------- -----------
Income before extraordinary item 621,374 1,022,841
Extraordinary item - gain on
acquisition (note 1) -- 3,407,244
----------- -----------
Net income $ 621,374 $ 4,430,085
=========== ===========
Basic earnings per share:
Income before extraordinary
item $0.03 $0.05
Extraordinary item - gain
on acquisition 0.00 0.15
----- -----
Net income $0.03 $0.20
===== =====
Diluted earnings per share:
Income before extraordinary
item $0.03 $0.04
Extraordinary item - gain
on acquisition 0.00 0.15
----- -----
Net income $0.03 $0.19
===== =====
Shares used in computing net
earnings (loss):
Basic 22,316,557 22,293,076
=========== ===========
Diluted 22,816,521 23,148,911
=========== ===========
See accompanying notes to consolidated condensed financial statements.
5
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Six Months Ended
December 31, 2002 and 2001
(Unaudited)
Dec. 31, 2002 Dec. 31, 2001
Cash flows from operating activities: ------------- -------------
Net income $ 621,374 $ 4,430,085
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 2,518,680 1,806,254
Amortization of intangibles 249,769 178,491
Deferred income taxes (343,791) (640,849)
Unearned compensation 318,354 318,354
Tax benefit from exercise
of stock options -- 96,931
Gain on Acquisition (note 2) -- (3,407,244)
Changes in operating assets
and liabilities, net of
acquisition:
Receivables 1,611,557 1,447,740
Inventories 2,144,251 814,362
Insurance receivable -- 5,339,020
Interest and other receivables 102,469 (34,311)
Other current assets (128,230) 807,988
Accounts payable (1,532,652) 1,125,087
Accrued expenses 312,023 (2,497,355)
Customer advance payments (244,831) (615,617)
Other liabilities 20,664 77,562
Postretirement benefit obligation -- 76,499
----------- ------------
Net cash provided by
operating activities 5,649,637 9,322,997
----------- ------------
Cash flows from investing activities:
Capital expenditures (3,597,185) (6,325,529)
Net maturities of marketable
debt and equity securities 1,976,719 7,540,638
Purchase of businesses, net
of cash acquired -- (12,073,362)
----------- ------------
Net cash used in investing
activities (1,620,466) (10,858,253)
----------- ------------
Cash flows from financing activities:
Net payments on long term debt -- (1,546,261)
Stock options exercised 199,931 375,269
Purchase of treasury stock (593,700) --
----------- ------------
Net cash used in financing
activities (393,769) (1,170,992)
----------- ------------
Effect of exchange rates 89,659 (202,444)
Net increase (decrease)
in cash and cash
equivalents 3,725,061 (2,908,692)
Cash and cash equivalents at
beginning of period 12,565,424 11,748,542
----------- ------------
Cash and cash equivalents at
end of period $16,290,485 $ 8,839,850
=========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ 29,684 $ 85,139
=========== ============
Income taxes, net of refunds $ 750,000 $ 1,059,000
=========== ============
See accompanying notes to consolidated condensed financial statements.
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated condensed financial statements are unaudited (except for the
balance sheet information as of June 30, 2002, which is derived from the
Company's audited consolidated financial statements) and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2002. The results
of operations for the six months ended December 31, 2002 are not necessarily
indicative of the results for the entire fiscal year ending June 30, 2003, or
any future interim period.
On December 16, 2002, at a Special Meeting of Shareholders, the Company's
shareholders approved the creation of a holding company structure in which the
Company's operating assets would be transferred to a newly formed, wholly owned,
subsidiary and authorized an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Anaren Microwave, Inc. to
Anaren, Inc. The name change to Anaren, Inc. became effective on December 20,
2002 and the Company's operating assets were transferred to a wholly owned
subsidiary (named Anaren Microwave, Inc.) effective December 31, 2002.
The income tax rates utilized for interim financial statement purposes for the
six months ended December 31, 2002 and 2001 are based on estimates of income and
utilization of tax credits for the entire year.
NOTE 1: Acquisitions
On August 31, 2001 the Company acquired all of the outstanding stock of Amitron,
Inc. Amitron is based in North Andover, Massachusetts, and is primarily engaged
in the manufacture of precision thick film ceramic components and circuits for
the medical, telecommunications, and defense electronics markets. Amitron's
technology is very complimentary to the Company's multi-layer stripline
technology. Whereas the Company's multi-layer stripline technology is well
suited for large scale and high power applications, Amitron's technology is well
suited for miniaturization and low power applications. The transaction was
accounted for using the purchase method of accounting for business combinations
and, accordingly, the results of operations of Amitron have been included in the
Company's consolidated financial statements since the date of acquisition.
The aggregate purchase consideration for Amitron was $11,693,256, consisting of
cash of $9,919,664 (including cash direct acquisition costs), non-cash direct
acquisition costs in the form of stock options for services of $18,183 and
95,704 shares of the Company's common stock with an aggregate value of
$1,755,409. The purchase price was allocated to the net assets acquired and
liabilities assumed based upon respective fair market values. The fair market
values of plant and equipment and identifiable intangible assets were determined
by an independent valuation. The identifiable intangible assets aggregating
$2,450,000 with a weighted-average useful life of approximately seven years
include customer base of $1,350,000 (six-year weighted-average useful life),
favorable lease of $600,000 (ten-year weighted-average useful life), trade name
of $320,000 (three-year weighted-average useful life), and non-competition
agreements of $180,000 (five-year weighted-average useful life). The excess
consideration over such fair values is recorded as goodwill and was assigned to
the Company's Wireless segment.
7
The allocation of the purchase consideration to the assets acquired and
liabilities assumed follows:
Cash $ 12,844
Accounts receivable 1,309,618
Other receivables 2,258
Inventories 1,081,360
Plant and equipment 1,822,230
Other assets 36,818
Accounts payable (228,751)
Accrued expenses (430,448)
Loans payable (716,154)
Net deferred tax liability (951,846)
Intangible assets 2,450,000
Goodwill 7,305,327
-----------
$11,693,256
===========
On October 1, 2001, the Company, through its wholly owned subsidiary Anaren
Microwave Europe B.V., acquired all of the outstanding stock of The 5M Company
Europe B.V. (now known as Anaren Europe B.V.). Anaren Europe, based in Almelo,
Netherlands, is a manufacturer of microwave circuits. Anaren Europe's
manufacturing technology is very similar to the Company's multi-layer stripline
technology. In addition, Anaren Europe has a unique metal backing technology
that offers performance and cost advantages for high power applications. The
Company believes that this acquisition will enable it to reduce its
manufacturing costs in Europe, increase its dollar content in high power
applications and provide customers with a higher level of vendor security with a
second manufacturing facility. The transaction was accounted for using the
purchase method of accounting for business combinations and, accordingly, the
results of operations of Anaren Europe have been included in the Company's
consolidated financial statements since the date of acquisition.
The purchase consideration for Anaren Europe was $3,869,823 in cash, including
direct acquisition costs, and Company stock options with an aggregate fair value
of $218,724. The fair values of Anaren Europe's assets acquired and liabilities
assumed exceeded the purchase consideration and the resulting, negative goodwill
served to reduce the fair value of purchased equipment to zero with the
remaining excess recognized as an extraordinary gain.
The allocation of the purchase consideration to the assets acquired, liabilities
assumed, and extraordinary gain follows:
Cash $ 1,703,281
Accounts receivable 899,776
Insurance receivable 10,749,113
Other receivables 385,745
Inventories 630,260
Accounts payable (1,768,882)
Accrued expenses (1,656,014)
Notes payable (856,978)
Long term debt (403,268)
Net deferred tax liability (2,187,242)
Extraordinary gain (3,407,244)
-----------
$ 4,088,547
===========
8
The Anaren Europe fire loss in July 2001 was subject to property, casualty and
business interruption insurance. As of December 31, 2001, the Company settled
the insurance claim and an insurance receivable aggregating $10,749,113 is
reflected in the allocation of the Anaren Europe purchase price as of October 1,
2001.
The following unaudited pro forma financial information presents the combined
results of operations of the Company, Amitron and Anaren Europe as if the
acquisitions had taken place as of July 1, 2001. The pro forma information
includes certain adjustments, including insurance recovery accounting, the
amortization of goodwill and intangibles, reduction of interest income, and
certain other adjustments, together with the related income tax effects. The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company, Amitron and Anaren Europe
constituted a single entity during such periods.
Three Months Ended Six Months Ended
------------------------- -------------------------
December 31 December 31 December 31 December 31
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $20,885,138 $17,244,979 $41,309,011 $34,578,482
Insurance recoveries -- 14,126,694 -- 15,999,972
Net income 475,168 9,838,474 621,374 9,871,285
Earnings per share:
Basic $0.02 .44 $0.03 .44
Diluted $0.02 .42 $0.03 .43
For purposes of the pro forma financial information, the July 2001 Anaren Europe
fire loss insurance recoveries have been reflected in operations versus the
recognition as a pre-acquisition contingency in the purchase price allocation as
previously discussed. The pro forma information reflects insurance recoveries of
$14,126,694 and $15,999,972 for the three and six months ended December 31,
2001.
The pro forma information reflects no goodwill amortization for the three and
six months ended December 31, 2002 and 2001 due to the adoption of FASB 142,
"Goodwill and Intangible Assets", by the Company.
NOTE 2: Adoption of Accounting Standards
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" (FASB 141) and Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets" (FASB 142). FASB
141, which supercedes APB Opinion 16 and FASB Statement No. 38, requires all
business combinations be accounted for using the purchase method. SFAS 142,
which supercedes APB Opinion No. 17, eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition of goodwill and intangible assets. The
following information provides the required disclosures and describes the impact
the early adoption of FASB 141 and 142 had on the Company during the periods
reported:
9
INTANGIBLE ASSETS:
Intangible assets as of December 31, 2002 are as follows:
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Patent $ 574,966 $251,548
Customer Base 1,350,000 300,000
Trade Name 320,000 142,224
Non-Competition Agreements 180,000 48,000
Favorable Lease 600,000 80,000
---------- --------
Total $3,024,966 $821,772
========== ========
Intangible asset amortization expense for the six month period ended December
31, 2002 and 2001 aggregated $249,769 and $178,491, respectively. Amortization
expense related to intangible assets for the next five years is as follows:
Year Ending June 30,
2003 $499,539
2004 $499,539
2005 $410,645
2006 $392,871
2007 $362,879
GOODWILL:
The changes in the carrying amount of goodwill for the three month period ended
December 31 are as follows:
Fiscal Fiscal
2003 2002
------ ------
Balance as of June 30, 2002 $30,715,861 $23,410,534
and 2001, respectively
Goodwill acquired -- 7,305,327
Goodwill amortization -- --
----------- -----------
Balance as of December 31, 2002
and 2001, respectively $30,715,861 $30,715,861
=========== ===========
In connection with the adoption of FASB 142, the Company completed the
transitional impairment assessment within six months from the date of adoption
as allowed by the standard. In addition, the Company completed a valuation as of
the one year anniversary of adoption of the new standard. As a result of the
impairment assessment, no goodwill impairment was found and no current asset
write down is required.
10
NOTE 3: Marketable Securities
Marketable securities are summarized as follows:
December 31 June 30
----------- -------
Marketable debt securities -
held-to-maturity $105,186,861 $108,519,857
Marketable equity securities -
available for sale 5,176,818 3,820,942
------------ ------------
Total 110,363,679 112,340,799
Current portion 96,905,136 102,776,241
------------ ------------
Long term $ 13,458,543 $ 9,564,558
============ ============
NOTE 4: Inventories
Inventories are summarized as follows:
December 31 June 30
----------- -------
Component parts $ 7,975,673 $ 9,086,987
Work in process 6,630,508 6,179,545
Finished goods 3,369,001 4,852,901
----------- -----------
$17,975,182 $20,119,433
=========== ===========
NOTE 5: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31 June 30
----------- -------
Land and land improvements $ 1,595,821 $ 1,595,821
Buildings, furniture and fixtures 12,612,113 12,258,796
Machinery and equipment 51,245,675 47,720,881
----------- -----------
$65,453,609 $61,575,498
Less accumulated depreciation
and amortization 37,501,804 34,983,123
----------- -----------
$27,951,805 $26,592,375
=========== ===========
NOTE 6: Accrued Expenses
Accrued expenses consist of the following:
December 31 June 30
----------- -------
Compensation $ 951,637 $1,045,085
Commissions 645,872 573,325
Accrued pension cost 612,569 535,874
Income taxes 415,929 530,857
Health insurance 519,909 330,177
Restructuring (note 7) 83,171 --
Other 380,143 281,889
---------- ----------
$3,609,230 $3,297,207
========== ==========
11
NOTE 7: Restructuring
In September 2002, the Company recorded $403,403 of restructuring charges. The
restructuring charges were associated with the Company's restructuring plan as
it relates to its wholly owned subsidiary Anaren Europe, B.V. The Company's
restructuring plan was primarily aimed at reducing the cost of excess personnel,
including termination of 24 employees. The Company's restructuring plans and
associated costs consisted of the following:
September 30, Cash December 31,
2002 Payments 2002
------------- -------- ------------
Severance payment $293,206 ($279,514) $13,692
Outplacement services and others 110,197 (40,718) 69,479
-------- --------- -------
Total $403,403 ($320,232) $83,171
======== ========= =======
All terminations and termination benefits were communicated to the affected
employees prior to the quarter ended September 30, 2002, and severance benefits
are expected to be paid in full during fiscal year 2003. Under the
restructuring, 24 employees were terminated. At December 31, 2002, outstanding
liabilities related to the restructuring totaled $83,171 and are included in
accrued expenses in the accompanying Balance Sheets.
NOTE 8: Other Liabilities
Other liabilities consist of the following:
December 31 June 30
----------- -------
Deferred compensation $514,522 $526,808
Other 153,675 120,725
-------- --------
668,197 647,533
Less current portion 218,675 185,725
-------- --------
$449,522 $461,808
======== ========
NOTE 9: Net Income Per Share
Basic income per share is based on the weighted average number of common shares
outstanding. Diluted income per share is based on the weighted average number of
common shares outstanding, as well as dilutive potential common shares which, in
the Company's case, comprise shares issuable under the stock option and
restricted stock plans. The weighted average number of common shares utilized in
the calculation of the diluted income per share does not include antidilutive
shares aggregating 2,425,700 and 2,225,200 at December 31, 2002 and 2001,
respectively. The treasury stock method is used to calculate dilutive shares
which reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options assumed to be exercised.
12
The following table sets forth the computation of basic and fully diluted
earnings per share:
Three Months Ended Six Months Ended
December 31 December 31
------------------ -----------------
Numerator: 2002 2001 2002 2001
---- ---- ---- ----
Earnings available to
common stockholders $ 475,168 $ 3,055,601 $ 621,374 $ 4,430,085
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 22,301,824 22,336,004 22,316,557 22,293,076
=========== =========== =========== ===========
Denominator for diluted earnings
per share:
Weighted average shares outstanding 22,301,824 22,336,004 22,316,557 22,293,076
Common stock options
and restricted stock 519,606 828,623 499,964 855,835
----------- ----------- ----------- -----------
Weighted average shares and conversions 22,821,430 23,164,627 22,816,521 23,148,911
=========== =========== =========== ===========
NOTE 10: Segment Information
The Company operates predominately in the wireless communications, satellite
communications and defense electronics markets. The Company's two reportable
segments are the wireless group and the space and defense group. These segments
have been determined based upon the nature of the products and services offered,
customer base, technology, availability of discrete internal financial
information, homogeneity of products and delivery channel, and are consistent
with the way the Company organizes and evaluates financial information
internally for purposes of making operating decisions and assessing performance.
The wireless segment designs, manufactures and markets commercial products used
mainly by the wireless communications market. The space and defense segment of
the business designs, manufactures and markets specialized products for the
radar and satellite communications markets. The revenue disclosures for the
Company's reportable segments depict products that are similar in nature.
13
The following table reflects the operating results of the segments consistent
with the Company's internal financial reporting process. The following results
are used in part, by management, both in evaluating the performance of, and in
allocating resources to, each of the segments:
Space & Corporate and
Wireless Defense Unallocated Consolidated
-------- ------- ------------- ------------
Net sales:
Three months ended:
December 31, 2002 $13,316,311 7,568,827 -- $ 20,885,138
December 31, 2001 $10,612,648 6,632,331 -- $ 17,244,979
Six months ended
December 31, 2002 $26,424,657 14,884,354 -- $ 41,309,011
December 31, 2001 $19,155,624 13,090,546 -- $ 32,246,170
Operating income (loss):
Three months ended:
December 31, 2002 (1,521,726) 1,523,997 -- 2,271
December 31, 2001 (3,399,840) 1,631,832 -- (1,768,008)
Six months ended:
December 31, 2002 (3,637,320) 3,184,147 -- (453,173)
December 31, 2001 (4,176,916) 3,109,569 -- (1,067,347)
Goodwill and intangible assets:
December 31, 2002 32,919,055 -- -- 32,919,055
June 30, 2002 33,168,824 -- -- 33,168,824
Identifiable assets:*
December 31, 2002 15,713,308 13,756,900 158,767,120 188,237,328
June 30, 2002 19,147,586 14,096,923 155,172,968 188,417,477
Depreciation:**
Three months ended:
December 31, 2002 963,102 373,348 -- 1,336,450
December 31, 2001 694,881 284,684 -- 979,565
Six months ended:
December 31, 2002 1,775,290 743,390 -- 2,518,680
December 31, 2001 1,181,343 624,911 -- 1,806,254
Goodwill and intangibles amortization:***
Three months ended:
December 31, 2002 124,884 -- -- 124,884
December 31, 2001 124,884 -- -- 124,884
Six months ended:
December 31, 2002 249,769 -- -- 249,769
December 30, 2001 178,491 -- -- 178,491
* Segment assets primarily include receivables, inventories, and property,
plant and equipment related to business acquisitions. The Company does not
segregate other assets on a products and services basis for internal
management reporting and, therefore, such information is not presented.
Assets included in corporate and unallocated principally are cash and cash
equivalents, marketable securities, other receivables, prepaid expenses,
deferred income taxes, and property, plant and equipment not specific to
business acquisitions.
14
** Depreciation expense related to acquisition - specific property, plant and
equipment is included in the segment classification of the acquired
business. Depreciation expense related to non business combination assets
is allocated departmentally based on an estimate of capital equipment
employed by each department. Depreciation expense is then further
allocated within the department as it relates to the specific business
segment impacted by the consumption of the capital resources utilized. Due
to the similarity of the property, plant and equipment utilized, the
Company does not specifically identify these assets by individual business
segment for internal reporting purposes.
*** Amortization of goodwill and identifiable intangible assets arising from
business combinations, and patent amortization, is allocated to the
segments based on the segment classification of the acquired or applicable
operation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis set forth below reviews the Company's
operating results for the three month and six month periods ended December 31,
2002 and its financial condition at December 31, 2002. This review should be
read in conjunction with the accompanying consolidated condensed financial
statements. Statements contained in management's discussion and analysis, other
than historical facts, are forward-looking statements that are qualified by the
cautionary statements at the end of this discussion.
Overview
The consolidated condensed financial statements present the financial condition
of the Company as of December 31, 2002 and June 30, 2002, and the consolidated
results of operations and cash flows of the Company for the six months ended
December 31, 2002 and 2001.
On December 16, 2002, at a Special Meeting of Shareholders, the Company's
shareholders approved the creation of a holding company structure in which the
Company's operating assets would be transferred to a newly formed, wholly owned,
subsidiary and authorized an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Anaren Microwave, Inc. to
Anaren, Inc. The name change to Anaren, Inc. became effective on December 20,
2002 and the Company's operating assets were transferred to a wholly owned
subsidiary (named Anaren Microwave, Inc.) effective December 31, 2002.
The Company designs, develops and markets microwave components and assemblies
for the wireless communications, satellite communications and defense
electronics markets. The Company's distinctive manufacturing and packaging
techniques enable it to cost-effectively produce compact, lightweight microwave
products for use in base stations for wireless communications systems, in
satellites and in defense electronics systems. The Company sells its products to
leading wireless communications equipment manufacturers such as Ericsson, Lucent
Technologies, Motorola, Nokia, Nortel Networks, and Powerwave and to satellite
communications and defense electronics companies such as Boeing Satellite,
I.T.T., Lockheed Martin, Northrup Grumman and Raytheon.
The Company generally recognizes sales at the time products are shipped to
customers, provided that persuasive evidence of an arrangement exists, the sales
price is fixed or easily determinable, collectibility is reasonably assured and
title and risk of loss have passed to the customer. Title and the risks and
rewards of ownership of products are generally transferred at the time of
15
shipment. Payments received from customers in advance of products delivered are
recorded as customer advance payments until earned. A small percentage of sales
are derived from long-term fixed-price contracts for the sale of large space and
defense electronics products. Sales and estimated profits under long-term
contracts are recognized using the percentage of completion method of accounting
on a units-of-delivery basis. Profit estimates are revised periodically based
upon changes in sales value and costs at completion. Any losses on these
contracts are recognized in the period in which such losses are determined.
On August 31, 2001, the Company acquired all of the outstanding capital stock of
Amitron. Amitron is based in North Andover, Massachusetts and is primarily
engaged in the design and manufacture of ceramic components and circuits for the
medical, telecommunications and defense electronics market. The aggregate
purchase consideration was $11,693,256, consisting of cash of $9,919,664
(including cash direct acquisition costs), non-cash direct acquisition costs in
the form of stock options for services of $18,183 and 95,704 shares of the
Company's common stock with an aggregate value of $1,755,409. The acquisition
was accounted for under the purchase method of accounting for business
combinations.
Effective October 1, 2001 the Company acquired all of the outstanding capital
stock of 5M (now known as Anaren Europe, B.V.), a manufacturer of microwave
circuits based in Almelo, Netherlands. Anaren Europe's manufacturing technology,
which is similar to the Company's multi-layer stripline technology, uses a
unique metal backing technology, which offers both cost and performance
advantages for high power applications. The aggregate purchase consideration for
this transaction was $4,088,547, consisting of cash of $3,869,823 (including
direct acquisition costs), and Company stock options with an aggregate fair
value of $218,724. The acquisition was accounted for under the purchase method
of accounting for business combinations.
In January 2002, Anaren Europe completed the reconstruction of its factory due
to a fire in July 2001, which partially destroyed this facility. As of July
2002, Anaren Europe's facility was fully operational and the Company is actively
engaged in rebuilding its customer base lost due to the fire. As a result of the
fire, Anaren Europe received an insurance settlement through its property and
business interruption insurance policies of approximately $16.0 million in
December 2001 to offset expenses incurred in out-sourcing production, cleaning
and repairing the facility and equipment damaged in the fire and to recognize
the replacement cost for inventory and equipment destroyed by the fire.
In March 2002, the Company, through a newly created subsidiary, Anaren
Communication Suzhou Co., Ltd., signed a three-year lease for a 12,300 square
foot manufacturing facility in Suzhou Industrial Park in Suzhou, China. The
Company has hired a General Manager and additional staff for the facility and
began light manufacturing and assembly at this location during the second
quarter of fiscal 2003. It is anticipated that this facility will serve all of
the Company's Asian customers and will concentrate on producing more labor
intensive products. Additionally, it is expected that the Company will use this
location to facilitate procurement of raw materials in China, when possible, for
the Company's other subsidiaries.
In September 2002, as a result of customers lost due to the fire and the general
decline in the wireless market, the Company made a decision to downsize the
Anaren Europe workforce by 24 people. The cost of this restructuring was
$403,403 and included notice and severance pay, benefit costs, and outplacement
costs. This charge has been recognized as a separate line item in the income
statement for the six months ended December 31, 2002, and is expected to be paid
in full during fiscal year 2003.
16
On September 19, 2002, the Company submitted an acquisition proposal to
Celeritek, Inc.'s Chairman, President and Chief Executive Officer, which stated
that the Company was prepared to offer $8.75 per share in an all-cash
transaction to acquire all of the outstanding shares of Celeritek, subject to
successful completion of customary due diligence and negotiation and execution
of a definitive acquisition agreement. On September 25, 2002, Celeritek issued a
press release announcing that its Board had rejected the Company's proposal
claiming it "is not in the best interests of Celeritek shareholders." The
Company has taken no further action regarding its equity position in Celeritek
or its offer to purchase all of the outstanding shares of Celeritek since
learning of Celeritek's rejection on September 25, 2002. Anaren intends to
continue to consider all of the alternatives available to it, and may pursue one
or more of the possible actions outlined in its Schedule 13D, as amended.
The Company's original investment in Celeritek common stock averaged
approximately $8.47 a share and totaled $6.6 million. During the six month
reporting period ended December 31, 2002 the market value of Celeritek common
stock has fluctuated substantially, and has, at times traded above the cost of
the Company's investment. This investment had a market value at December 31,
2002 of approximately $5.2 million, a decline of $1.4 million. The Company
considers this to be a temporary decline in market value and it has been
recorded as a charge to other comprehensive loss in the shareholders'equity
section of the balance sheet at December 31, 2002. If, at a future date, this
drop in market value is determined to be other than temporary, then the decline
in value, including the amount previously charged as other comprehensive loss to
shareholders equity, would at that time be recognized as a loss in the current
period income statement.
Net sales for the second quarter ended December 31, 2002 were $20,885,000, up
21.1% from net sales of $17,245,000 for the same period in fiscal 2002. The
Company recorded earnings of $475,000, or $0.02 per diluted share, for the
second quarter of fiscal 2003, compared to a net loss before extraordinary item
of ($352,000), or ($0.02) per diluted share and net income of $3.1 million, or
$0.13 per diluted share for the same quarter last year.
17
Results of Operations
The following table sets forth the percentage relationships of certain items
from the Company's consolidated condensed statements of earnings as a percentage
of net sales.
Three Months Ended Six Months Ended
Dec. 31, 2002 Dec. 31, 2001 Dec. 31, 2002 Dec. 31, 2001
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.3% 74.1% 73.5% 70.2%
----- ------ ----- -----
Gross profit 26.7% 25.9% 26.5% 29.8%
----- ------ ----- -----
Operating expenses:
Marketing 7.9% 10.7% 8.2% 10.5%
Research and development 7.3% 9.2% 7.1% 8.5%
General and administrative 11.5% 12.1% 11.3% 11.9%
Restructuring -- -- 1.0% --
Fire related -- 4.2% -- 2.2%
----- ------ ----- -----
Total operating expenses 26.7% 36.2% 27.6% 33.1%
----- ------ ----- -----
Operating income (loss) -- (10.3%) (1.1%) (3.3%)
----- ------ ----- -----
Other income (expense):
Other, primarily interest income 3.1% 5.9% 3.2% 7.1%
Interest expense (0.1%) (0.4%) (0.1%) (0.3%)
----- ------ ----- -----
Total other income (expense), net 3.0% 5.5% 3.1% 6.8%
----- ------ ----- -----
Income (loss) before income taxes
and extraordinary item 3.0% (4.8%) 2.0% 3.5%
Income taxes 0.7% (2.8%) 0.5% 0.3%
----- ------ ----- -----
Income (loss) before extraordinary item 2.3% (2.0%) 1.5% 3.2%
Extraordinary item - gain on acquisition -- 19.7% -- 10.5%
----- ------ ----- -----
Net income 2.3% 17.7% 1.5% 13.7%
===== ====== ===== =====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Six Months Ended
December 31 December 31
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Wireless $13,316 $10,613 $26,424 $19,156
Space and Defense 7,569 6,632 14,885 13,090
------- ------- ------- -------
$20,885 $17,245 $41,309 $32,246
======= ======= ======= =======
Three Months Ended December 31, 2002 Compared to Three Months Ended December 31,
2001
Net Sales. Net sales increased $3.6 million, or 21%, to $20.9 million for the
three months ended December 31, 2002 compared to $17.2 million for the second
quarter of the previous fiscal year. This increase resulted from a $2.7 million
(25.5%) rise in shipments of wireless infrastructure products and a $937,000
(14.1%) increase in sales of Space and Defense products.
18
The increase in sales of Wireless products, which consist of standard surface
mount components and custom subassemblies for use in building wireless base
station equipment, was the result of a slight general rise in customer demand
for wireless infrastructure products. Wireless product and customer lead times
remain very short, resulting in little or no visibility going forward. Given
this ongoing situation, the Company expects Wireless sales to remain at or below
current levels in the second half of fiscal 2003.
Space and Defense products consist of custom components and assemblies for
communication satellites and defense radar and countermeasure subsystems for the
military. Sales in the Space and Defense group rose $937,000, or 14.1%, in the
second quarter of fiscal 2003, compared to the same quarter in the prior fiscal
year. This increase in shipments resulted from production sales under a number
of defense contracts for Digital Frequency Discriminators (DFD's) and Digital RF
Memories (DRFMs) for foreign applications, radar antenna feed networks and
precision ranging subsystems (PRSS) for U.S. Government applications. These
products were part of the rise in defense orders in the Company's backlog over
the last fiscal year. Space and Defense shipments are expected to range between
$7.0 and $7.5 million per quarter for the remainder of fiscal 2003.
Gross Profit. Cost of sales consists primarily of engineering design costs,
material, material fabrication costs, assembly costs, direct and indirect
overhead, and test costs. Gross profit for the second quarter of fiscal 2003 was
$5.6 million (26.7% of net sales), up $1.1 million from $4.5 million (25.9% of
net sales) for the same quarter of the prior year. The rise in gross margin as a
percent of net sales in quarter two is a result of the 21% increase in sales
over quarter two in fiscal 2002 and the Company's continuing cost cutting
programs. The Company has reduced its personnel levels by 68 people, or 10.3%,
over the first six months of this fiscal year. These cost cutting efforts should
help to improve future gross margins, but any significant improvement in gross
margins will only occur with a rise in sales volume.
Marketing. Marketing expenses consist mainly of employee related expenses,
commissions paid to sales representatives, trade show expenses, advertising
expenses and related travel expenses. Marketing expenses decreased 10.7% to $1.7
million (7.9% of net sales) for the second quarter of fiscal 2003 from $1.9
million (10.7% of net sales) for the second quarter of fiscal 2002. Marketing
expense declined in the second quarter of fiscal 2003 due to a budgeted decline
in advertising expenditures in the current fiscal year compared to 2002 and the
reassignment of some marketing personnel to other company functions.
Research and Development. Research and development expenses consist of material
and salaries and related overhead costs of employees engaged in ongoing
research, design and development activities associated with new products and
technology development. Research and development expenses decreased 4.0% to $1.5
million (7.3% of net sales) in the second quarter of fiscal 2003 from $1.6
million (9.2% of net sales) for the second quarter of fiscal 2002. Research and
development expenditures are supporting further development of wireless
infrastructure products and new wireless networking product opportunities.
Despite the continuing Wireless market downturn, the Company does not expect to
reduce its current research and development efforts in the near term and is
presently working on a number of new standard wireless products.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, and intangible amortization,
travel related expenses and other corporate costs. General and administrative
expenses increased 14.6% to $2.4 million (11.5% of net sales) for the second
quarter of fiscal 2003 from $2.1 million (12.1% of net sales) for the
19
second quarter of fiscal 2002. Of the $300,000 increase in the second quarter,
approximately $125,000 was related to professional services associated with the
Celeritek bid, $100,000 was related to the Company's new operation in China and
the remainder represents personnel reclassifications due to the new holding
company structure.
Operating Income: Operating income increased $1.8 million in the second quarter
of fiscal 2003 to a profit of $2,000 (0.0% of sales), from a loss of $1.8
million, (10.3% of net sales), for the second quarter of fiscal 2002. On a
reporting segment basis, the Wireless operating loss was $1.5 million for the
second quarter of 2003, an improvement of $1.9 million from the Wireless
operating loss of $3.4 million in the second quarter of 2002. The principal
reason for the improvement in the Wireless operating loss was the decrease in
the operating loss at Anaren Europe in the current second quarter ($900,000)
compared to the operating loss at Anaren Europe in the second quarter of 2002
($2.4 million). The operating loss at Anaren Europe for the second quarter last
year included approximately $1.2 million in fire related costs and costs to
outsource production due to the July 2001 fire. Wireless operating profits in
the second quarter of fiscal 2003 improved approximately $600,000 over the first
quarter, but are expected to remain depressed at current sales levels.
Space and Defense operating income fell $108,000 in the second quarter of fiscal
2003 to $1.5 million compared to $1.6 million in the second quarter of fiscal
2002. This decrease resulted from a change in product mix during the current
second quarter compared to the second quarter last year. This year's second
quarter sales included more military programs while the sales in the second
quarter last year were driven by more profitable Space programs.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 36.6% to $641,000 (3.1% of net sales) for
the quarter ended December 31, 2002 from $1.0 million (5.9% of net sales) for
the same quarter last year. This decrease was caused mainly by the decline in
market interest rates over the last 12 months brought about by reductions in the
Federal Fund rates. Interest income will fluctuate based on the level of
interest rates and the level of investable cash balances.
Interest Expense: Interest expense represents commitment fees and interest paid
on a deferred obligation. Interest expense for the second quarter of fiscal 2003
was $10,000 (0.1% of net sales) compared to $69,000 (0.4% of net sales) for the
second quarter of fiscal 2002.
Income Taxes: Income tax expense for the second quarter of fiscal 2003 was
$158,000 (0.7% of net sales), representing an effective tax rate of 25%. This
compares to a tax benefit of 2.8% of net sales for the second quarter of fiscal
2002, representing an effective tax benefit rate of 57.4%. The Company's
effective tax rate is a direct result of the proportion of federally exempt
state municipal bond income and federal tax credit and benefits in relation to
the levels of taxable income.
Six Months Ended December 31, 2002 Compared to Six Months Ended December 31,
2001
Net Sales. Net sales increased $9.1 million; or 28.1%, to $41.3 million for the
first six months of fiscal 2003, compared to $32.2 million for the first six
months of the prior fiscal year. This increase consisted of a $7.3 million
(37.9%) rise in Wireless sales and a $1.8 million (13.7%) increase in shipments
of Space and Defense products.
The $7.3 million increase in fiscal 2003 Wireless sales resulted from a
combination of new acquisitions during fiscal 2002 and increased customer
demand. Wireless sales for the first half
20
of fiscal 2003 include a full six months of sales for Amitron and Anaren Europe,
while the first six months of fiscal 2002 included only three months and four
months sales for Anaren Europe and Amitron, respectively. These acquisitions
resulted in additional sales in fiscal 2003 of $3.4 million compared to fiscal
2002. Additionally, customer wireless infrastructure demand rose slightly in the
second quarter, coming mainly from Asian customers.
Sales in the Space and Defense group rose $1.8 million or 13.7%, in the first
six months of fiscal 2003, compared to the same period in the prior fiscal year.
This increase in shipments resulted from production sales under a number of
defense contracts for Digital Frequency Discriminators (DFDs) and Digital RF
Memories (DRFMs) for foreign applications, radar antenna feed networks, and
precision ranging subsystems (PRSS) for U.S. Government applications. These
products were part of the rise in defense orders in the Company's backlog during
the last fiscal year. Space and Defense shipments are expected to range between
$7.0 and $7.5 million per quarter for the remainder of fiscal 2003.
Gross Profit. Gross profit for the first half of fiscal 2003 was $11.0 million
(26.5% of net sales, up $1.4 million from $9.6 million (29.8% of net sales) for
the first six months of fiscal 2002. Gross profit as a percent of sales fell in
the current six months compared to the same period last year due to the
inclusion of Anaren Europe for a full two quarters in the current year compared
to one quarter last year. Anaren Europe has been running negative gross profit
while it rebuilds its sales base due to the fire in its facility in July 2001.
The Company continues to implement cost cutting programs and has reduced its
personnel levels over 10% during the first six months of this year. These
efforts should help to improve future margins, but any significant improvement
will require an increase in sales volume.
Marketing. Marketing expenses increased one-half of one percent in the first six
months of fiscal 2003 compared to the first half of fiscal 2002. Budgeted
declines in advertising expenditures in the first half of the current year
offset increases in other marketing expenses due to the higher sales volume in
the current six months. Marketing expense is expected to continue at the lower
current levels through the remainder of fiscal 2003.
Research and Development. Research and development expenses increased 6.7% to
$2.9 million (7.1% of net sales) in the first six months of fiscal 2003 from
$2.7 million (8.5% of net sales) for the first six months of fiscal 2002.
Research and development expenditures are supporting further development of
wireless infrastructure products and new wireless networking product
opportunities. Despite the current Wireless market downturn, the Company does
not expect to reduce its current research and development efforts in the near
term and is presently working on a number of new standard wireless products.
General and Administrative. General and administrative expenses increased 22.3%
to $4.7 million (11.3% of net sales) for the first six months of fiscal 2003
from $3.8 million (11.9% of net sales) for the first half of fiscal 2002. This
increase was due to professional services costs associated with the Celeritek
offer, costs incurred at the new China facility, a full six months of
expenditures for Amitron and Anaren Europe compared to four and three months
last year and reassignment of personnel from other functions due to the new
holding Company structure.
Restructuring. In September 2002, the Company recorded $403,403 of restructuring
charges. The restructuring charges are associated with the Company's
restructuring plan as it relates to its wholly owned subsidiary Anaren Europe,
B.V. The Company's restructuring plan was primarily aimed at reducing the cost
of excess personnel, including termination of 24 employees.
21
Operating Income. The operating loss decreased $650,000 in the first six months
of fiscal 2003 to a loss of ($453,000) (1.1% of net sales) from an operating
loss of $1.1 million (3.3% of net sales) for the first six months of fiscal
2002. On a reporting segment basis, the Wireless operating loss was $3.6 million
for the first half of fiscal 2003, an improvement of $600,000 from an operating
loss of $4.2 million in the first half of fiscal 2002. The main reason for the
improved Wireless results in the first six months of fiscal 2003, was a combined
$700,000 improvement in the combined operating income at the Amitron and RF
Power subsidiaries due to higher revenue levels at each facility.
Space and Defense operating income rose $74,000 or 2.4% for the first half of
fiscal 2003 compared to the first half of fiscal 2002. This increase resulted
from a $1.8 million rise in Space and Defense revenues year over year, which
caused better absorption of fixed overhead in the first half of fiscal 2003
compared to the previous year. Additionally, cost reduction and efficiency
efforts in this segment were successful in containing the overall cost of
operations in fiscal 2003.
Other Income. Other income decreased 42.8% to $1.3 million (3.2% of net sales)
for the six months ended December 31, 2002 from $2.3 million (7.1% of net sales)
for the same six months last year. This decrease was caused mainly by the
decline in market interest rates over the last 12 months brought about by
reductions in the Federal Fund rates. Interest income will fluctuate based on
the level of interest rates and the level of investable cash balances.
Interest Expense. Interest expense for the first half of fiscal 2003 was $30,000
(0.1% of net sales) compared to $85,000 (0.3% of net sales) for the first half
of fiscal 2002.
Income Taxes: Income tax expense for the first half of fiscal 2003 was $206,000
(0.5% of net sales), representing an effective tax rate of 25%. This compared to
$117,000 (0.3% of net sales) for the first half of fiscal 2002, representing an
effective tax rate of 10.3%. The Company's effective tax rates are a direct
result of the proportion of federally exempt state municipal bond income and
federal tax credits and benefits in relation to the levels of taxable income.
Extraordinary Gain. The extraordinary gain of $3.4 million (19.7% of net sales),
recorded in the second quarter of fiscal 2002, resulted from the purchase of
Anaren Europe. As a result of the fire and the subsequent insurance claim, the
value of the Anaren Europe assets at the time of purchase was significantly
higher than the consideration paid by Anaren. This situation resulted in
significant negative goodwill being generated by the transaction, which, under
current accounting convention, was first offset by writing down the acquired
long-lived assets to zero and then by recognizing an "extraordinary gain" of
$3,407,000, or $0.15 per share, in the second quarter ended December 31, 2001 of
fiscal 2002.
Critical Accounting Policies
The methods, estimates and judgments management uses in applying the Company's
most critical accounting policies have a significant impact on the results
reported in the Company's financial statements. The U.S. Securities and Exchange
Commission has defined the most critical accounting policies as those that are
most important to the portrayal of Anaren's financial condition and results, and
requires management to make the most difficult and subjective judgments, often
as a result of the need to make estimates of matters that are inherently
uncertain. Based on this definition, the Company's most critical policies
include: valuation of inventory, which impacts cost of sales and gross margin;
valuation of allowance for doubtful accounts, which impacts bad debt expense;
the assessment of recoverability of goodwill and other
22
intangible assets, which impacts write-offs of goodwill and intangibles; and
accounting for income taxes, which impacts valuation allowance and the effective
tax rate. Management reviews the estimates, including, but not limited to,
allowance for doubtful accounts, inventory reserves and income tax valuations on
a regular basis and makes adjustments based on historical experiences, current
conditions and future expectations. The reviews are performed regularly and
adjustments are made as required by current available information. The Company
believes these estimates are reasonable, but actual results could differ from
these estimates.
The Company states inventories at the lower of cost or market, using a standard
cost methodology to determine the cost basis for the inventory. This method
approximates actual cost on a first-in-first-out basis. The recoverability of
inventories is based on the types and levels of inventory held, forecasted
demand, pricing, competition and changes in technology.
The Company's accounts receivable represent those amounts which have been billed
to customers but not yet collected. The Company analyzes various factors
including historical experience, credit worthiness of customers and current
market and economic conditions. The allowance for doubtful accounts balance is
established based on the portion of those accounts receivable which are deemed
to be potentially uncollectible. Changes in judgments on these factors could
impact the timing of costs recognized.
The Company records valuation allowances to reduce deferred tax assets when it
is more likely than not that some portion of the amount may not be realized. The
Company evaluates the need for valuation allowances on a regular basis and
adjusts as appropriate. These adjustments, when made, would have an impact on
the Company's financial statements in the period that they were recorded.
Intangible assets with estimable useful lives are amortized to their residual
values over those estimated useful lives in proportion to the economic benefit
consumed.
Goodwill is tested annually for impairment by the Company at the reporting unit
level, by comparing the fair value of the reporting unit with its carrying
value. Valuation methods for determining the fair value of the reporting unit
include reviewing quoted market prices and discounted cash flows. If the
goodwill is indicated as being impaired (the fair value of the reporting unit is
less than the carrying amount), the fair value of the reporting unit is then
allocated to its assets and liabilities in a manner similar to a purchase price
allocation in order to determine the implied fair value of the reporting unit
goodwill. This implied fair value of the reporting unit goodwill is then
compared with the carrying amount of the reporting unit goodwill and, if it is
less, the Company would then recognize an impairment loss.
The projection of future cash flows for the goodwill impairment analysis
requires significant judgments and estimates with respect to future revenues
related to the assets and the future cash outlays related to those revenues.
Actual revenues and related cash flows or changes in anticipated revenues and
related cash flows could result in changes in this assessment and result in an
impairment charge. The use of different assumptions could increase or decrease
the related impairment charge.
Liquidity and Capital Resources
Net cash provided by operations for the six months ended December 31, 2002 and
the six months ended December 31, 2001 were $5.6 million and $9.3 million,
respectively. The positive cash flow from operations in the first six months of
fiscal 2003 was due primarily to the $1.6 million
23
and $2.1 million reductions in accounts receivable and inventory, respectively,
during the period. The positive cash flow from operations in the first half of
fiscal 2002 was due mainly to the high income level and the large amount of cash
($5.3 million) received from the Anaren Europe insurance settlement.
Net cash used in investing activities consists of funds used to purchase capital
equipment and, in fiscal 2002, $12.1 million of cash used to purchase the
capital stock of Amitron and Anaren Europe. Capital equipment placed in service
amounted to $3.6 million in the six months ended December 31, 2002 compared to
$6.3 million in the first six months of the previous fiscal year including $4.7
million at Anaren Europe.
Net cash used in financing activities in the first half of fiscal 2003 was
$394,000. Of this amount, $200,000 was generated by the exercise of stock
options and $594,000 was used to repurchase Company stock under an existing
repurchase plan previously authorized by the Board of Directors. Net cash used
in financing activities was $1.2 million for the first six months of fiscal 2002
and consisted of $1.5 million used to pay off loans of Amitron and Anaren Europe
and $375,000 generated by the exercise of stock options.
During the remainder of fiscal 2003, the Company's main cash requirements will
be for additions to capital equipment. Capital expenditures, including purchases
of $3.6 million made in the first six months, are expected to total
approximately $5.0 million for fiscal 2003 (6% of sales) and will be funded by
existing cash balances.
At December 31, 2002, the Company had approximately $126.7 million in cash, cash
equivalents, and marketable securities and no debt. For the past six years the
Company has maintained a guaranteed revolving line of credit facility under
which it has never borrowed any funds. Effective October 1, 2002, the Company
converted this line to a demand line to eliminate the current annual fee of
approximately $38,000. The Company believes that its cash requirements for the
foreseeable future will be satisfied by currently invested cash balances and
expected cash flows from operations.
Disclosures About Contractual Obligations and Commercial Commitments
Accounting standards require disclosure concerning the Company's obligation and
commitments to make future payments under contracts, such as debt, lease
agreements, and under contingent commitments, such as debt guarantees. The
Company's obligations and commitments are as follows:
Payment Due by Period
---------------------
Less
Total than 1 Yr. 2-3 Yrs 4-5 Yrs Over 5 Yrs
----- ---------- ------- ------- ----------
Contractual obligations
Operating leases - facilities $5,753,257 $946,649 $1,264,367 $960,765 $2,581,476
Deferred compensation 514,522 65,000 130,000 130,000 189,522
Lines of credit -- -- -- -- --
Forward-Looking Cautionary Statement
In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this Quarterly Report on Form 10-Q
includes comments by the Company's management about future performance. Because
these statements are forward-looking statements pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995,
24
management's forecasts involve risks and uncertainties, and actual results could
differ materially from those predicted in the forward-looking statements. Among
the factors that could cause actual results to differ materially include, but
are not limited to:
o further decline in the general economy, and particularly the wireless
telecommunications sector;
o decreased capital expenditures by wireless service providers;
o loss of one or more of a limited number of original equipment
manufacturers as customers;
o costs associated with potential product recalls;
o unpredictable difficulties or delays in the development of new products;
o the timely availability of component parts and services from a limited
number of suppliers;
o the risks associated with any technological market shifts away from the
Company's technologies and core competencies;
o cancellation of existing contracts or orders, or other declines in demand
for the Company's products;
o outbreak of war and the potential adverse effects on the Company's
military defense business;
o difficulties in successfully integrating newly acquired businesses
(including Celeritek Inc. if a transaction were consummated);
o unanticipated difficulties rebuilding Anaren Europe's customer base;
o increased pricing pressure and increased competition;
o the failure of wireless customers' annual procurement forecasts to result
in future sales;
o potential impairments of assets including investment values and goodwill;
o foreign currency fluctuations;
o litigation relating to Anaren's ownership interest in Celeritek, Inc. or a
potential transaction with Celeritek, or involving antitrust, intellectual
property, product warranty, product liability and other issues;
Anaren disclaims any obligation, unless required by law, to update or revise any
forward-looking statement. Readers are advised to carefully review the risk
factors set forth in this quarterly report on form 10-Q and the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission to learn
more about the various risks and uncertainties facing Anaren's business and
their potential impact on Anaren's revenues and earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Quarterly Report on Form 10-Q.
As of December 31, 2002, the Company had cash, cash equivalents and marketable
securities of $126.7 million, of which approximately $105.3 million consisted of
highly liquid investments in marketable debt securities and $5.2 million
consisted of marketable equity securities. The marketable debt securities at
date of purchase normally have maturities between one and 18 months, are exposed
to interest rate risk and will decrease in value if market interest rates
increase. A hypothetical decrease in market interest rate of 10.0% from
September 30, 2002
25
rates, or 0.25%, would have reduced net income and cash flow by approximately
$65,000, or $0.003 per share for the quarter. Due to the relatively short
maturities of the securities and its ability to hold those investments to
maturity, the Company does not believe that an immediate decrease in interest
rates would have a significant effect on its financial condition or results of
operations. Over time, however, declines in interest rates will reduce the
Company's interest income.
The Company currently owns equity investments held for sale with a market value
of approximately $5.2 million. Fluctuations in market value of these securities
are presently considered to be temporary and are charged to stockholders' equity
monthly. A theoretical 10.0% decline in market value of these securities would
result in a $520,000 reduction in stockholders' equity. In the future, if the
decline in value of these securities is considered other than temporary, then
the full decline in value experienced to the date of impairment will be
reflected in the then current period income statement.
All of the Company's sales from its domestic U.S. subsidiaries to foreign
customers are denominated in United States dollars and, accordingly are not
exposed to foreign currency exchange risk. Sales of the Company's Netherlands
subsidiary, Anaren Europe, are denominated in Euros to European customers and
United States dollars to U.S. customers. Sales to U.S. customers by Anaren
Europe denominated in United States dollars would be subject to currency
exchange losses. At present, due to the fire at Anaren Europe, sales of that
subsidiary to U.S. customers in U.S. dollars subject to possible currency losses
are less than $100,000 per quarter and thus any possible losses due to currency
fluctuations would not be material to the operating results of the Company until
such time as Anaren Europe's sales increase significantly.
26
Item 4. Controls and Procedures
Within the 90 days prior to the filing date of this Quarterly Report, the
Company carried out an evaluation, under the supervision and with the
participation of the company's management, including Lawrence A. Sala and Joseph
E. Porcello, of the effectiveness of the design and operation of the company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, Messrs. Sala and Porcello concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the evaluation, including any corrective actions with regard to
significant deficiencies or material weaknesses (as no such deficiencies or
weaknesses were discovered in the course of the evaluation).
27
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders
The Company's Annual Shareholders' meeting was held on November 7, 2002,
at which time the election of Directors was conducted. The following named
individuals were nominated and re-elected as Directors.
Votes Votes
For Against
----- -------
Lawrence A. Sala 21,499,331 36,503
David Wilemon 21,499,221 36,613
Messrs. Sala and Wilemon were elected to terms expiring in 2005. The terms
of Directors Matthew Robison, Carl W. Gerst, Jr., Herbert I. Corkin and
Dale F. Eck continued after the meeting.
The Company held a Special Meeting of Shareholders on December 16, 2002,
at which time the following proposals were voted on and passed:
Authorization to create a holding company structure in which the Company's
operating assets would be transferred to a newly formed, wholly owned,
subsidiary.
Votes For: Votes Against: Votes Abstained:
14,988,348 573,823 8,354
Authorization of an amendment to the Company's Certificate of
Incorporation to change the name of the Company from "Anaren Microwave,
Inc." to "Anaren", Inc. in connection with the proposed reorganization.
Votes For: Votes Against: Votes Abstained:
15,533,066 32,097 5,362
Item 6. Exhibits and Reports on Form 8-K
Item 6(a) Exhibits
--------
99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
3 Certificate of Amendment of the Certificate of Incorporation
Item 6(b) Reports on Form 8-K
On November 18, 2002, the Company filed a Periodic Report on Form 8-K to
announce its adoption of a Code of Business Conduct.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Anaren, Inc.
(Registrant)
Date: January 28, 2003 S/Lawrence A. Sala
-----------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: January 28, 2003 S/Joseph E. Porcello
-----------------------------------
Joseph E. Porcello
Vice President of Finance and Treasurer
29
CERTIFICATIONS
I, Lawrence A. Sala , certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anaren, Inc.;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. the registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 28, 2003
S/Lawrence A. Sala
----------------------------------
Lawrence A. Sala
President, Chief Executive Officer
(Principal Executive Officer)
30
I, Joseph E. Porcello, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Anaren, Inc.;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. the registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 28, 2003
S/Joseph E. Porcello
---------------------------------------
Joseph E. Porcello
Vice President of Finance and Treasurer
(Principal Financial Officer)
31