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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Anaren, Inc. (MM) | NASDAQ:ANEN | NASDAQ | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 27.98 | 0 | 01:00:00 |
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 December 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 13057 East Syracuse, New York (Zip Code) (Address of principal executive offices) |
Indicate by Check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Check One: Large accelerated filer __ Accelerated filer X Non-accelerated filer __
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes __ No X
The number of shares of Registrant's Common Stock outstanding on February 7, 2007 was 17,746,298.
Explanatory Note
The purpose of this amended Quarterly Report on Form 10-Q/A of Anaren, Inc. (the "Company") is to restate the Company's consolidated condensed financial statements for the three and six months ended December 31, 2006 ("the financial statements") and to modify the related disclosures. See note 1 to the consolidated condensed financial statements included in this amended Quarterly Report.
The restatement arose from the Company's determination that accounting errors had occurred at its China subsidiary. The accounting errors were caused by a material weakness in the Company's risk assessment and oversight controls as disclosed in the June 30, 2007 Annual Report Form 10-K. The unapproved and undetected changes in procedures over accounting for the reconciliation of inventory and the recording of vendor payables for materials received, but not yet invoiced at the China facility resulted in a misstatement of pre-tax income and inventory. Additionally, the Company has corrected certain errors in accounting for income taxes, equity based compensation and pension expense; and, as part of the Company's adoption of the Securities and Exchange Commissions Staff Accounting Bulletin No. 108, the Company has corrected errors in their warranty expense and allowance for sales returns. As a result of these errors, the Company has determined that its pre-tax income for the three and six months ended December 31, 2006 was overstated by $238,000.
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.
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No. ------------------------------ -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 4 December 31, 2006 (As restated) and June 30, 2006 (unaudited) Consolidated Condensed Statements of Earnings 5 for the Three Months Ended December 31, 2006 (As restated) and 2005 (unaudited) Consolidated Condensed Statements of Earnings 6 for the Six Months Ended December 31, 2006 (As restated) and 2005 (unaudited) Consolidated Condensed Statements of Cash Flows 7 for the Six Months Ended December 31, 2006 (As restated) and 2005 (unaudited) Notes to Consolidated Condensed Financial 8 Statements (unaudited) Item 2. Management's Discussion and Analysis 22 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 6. Exhibits 36 Officer Certifications 37 - 41 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC.
Consolidated Condensed Balance Sheets
December 31, 2006 and June 30, 2006
(Unaudited)
Assets December 31, 2006 June 30, 2006 ------ ----------------- ------------- (As restated) Current assets: Cash and cash equivalents $ 18,008,641 $ 15,733,214 Securities available for sale (note 5) 29,009,921 35,635,000 Securities held to maturity (note 5) 24,663,212 31,124,733 Receivables, less allowances of $231,128 at December 31, 2006 and $84,854 at June 30, 2006 16,060,375 16,362,011 Inventories (note 6) 26,884,270 21,827,271 Other receivables 1,763,909 1,336,009 Prepaid expenses 987,355 584,321 Deferred income taxes 1,012,287 716,287 Other current assets 1,230,447 851,863 ------------- ------------- Total current assets 119,620,417 124,170,709 Securities held to maturity (note 5) 19,865,894 6,131,425 Property, plant and equipment, net (note 7) 31,226,848 27,635,161 Deferred income taxes 32,902 32,902 Goodwill 30,715,861 30,715,861 Other intangible assets, net of accumulated amortization of $2,839,031 at December 31, 2006 and $2,684,595 at June 30, 2006 (note 3) 185,935 340,371 Other assets -- -- ------------- ------------- Total assets $ 201,647,857 $ 189,026,429 ============= ============= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 8,167,666 $ 6,798,793 Accrued expenses (note 8) 2,575,912 3,254,816 Income taxes payable 191,420 703,488 Customer advance payments 483,722 483,722 Other current liabilities (note 9) 1,216,752 769,523 ------------- ------------- Total current liabilities 12,635,472 12,010,342 Deferred income taxes 2,059,955 1,811,955 Pension and postretirement benefit obligation 2,591,439 2,356,789 Other liabilities (note 9) 800,872 728,943 ------------- ------------- Total liabilities 18,087,738 16,908,029 ------------- ------------- Stockholders' equity: Common stock of $.01 par value. Authorized 200,000,000 shares; issued 27,106,641 shares at December 31, 2006 and 26,857,554 at June 30, 2006 271,066 268,575 Additional paid-in capital 186,180,433 181,780,660 Retained earnings 77,478,825 70,493,853 Accumulated other comprehensive loss (386,914) (441,397) ------------- ------------- 263,543,410 252,101,691 Less cost of 9,249,643 treasury shares at December 31, 2006 and June 30, 2006 79,983,291 79,983,291 ------------- ------------- Total stockholders' equity 183,560,119 172,118,400 ------------- ------------- Total liabilities and stockholders' equity $ 201,647,857 $ 189,026,429 ============= ============= |
See accompanying notes to consolidated condensed financial statements.
ANAREN, INC.
Consolidated Condensed Statements of Earnings
Three Months Ended December 31, 2006 and 2005 (Unaudited) December 31, December 31, 2006 2005 ------------- ------------- (As restated) Net sales $ 30,322,785 $ 25,019,013 Cost of sales 19,425,005 16,273,387 ------------ ------------ Gross profit 10,897,780 8,745,626 ------------ ------------ Operating expenses: Marketing 1,928,858 1,715,660 Research and development 2,192,823 2,268,438 General and administrative 2,760,742 2,523,124 ------------ ------------ Total operating expenses 6,882,423 6,507,222 ------------ ------------ Operating income 4,015,357 2,238,404 Other income, primarily interest 917,080 536,821 Interest expense (6,143) (6,143) ------------ ------------ Total other income 910,937 $ 530,678 ------------ ------------ Income before income taxes 4,926,294 2,769,082 Income tax expense 1,165,000 759,000 ------------ ------------ Net income $ 3,761,294 $ 2,010,082 ============ ============ Basic earnings per share $ 0.21 $ 0.12 ============ ============ Diluted earnings per share: $ 0.21 $ 0.11 ============ ============ Shares used in computing net earnings per share: Basic 17,622,700 17,020,360 ============ ============ Diluted 18,088,109 17,595,314 ============ ============ |
See accompanying notes to consolidated condensed financial statements.
ANAREN, INC.
Consolidated Condensed Statements of Earnings
Six Months Ended December 31, 2006 and 2005 (Unaudited) December 31, December 31, 2006 2005 ------------ ------------ (As restated) Net sales $ 60,525,895 $ 49,633,371 Cost of sales 38,788,783 32,233,299 ------------ ------------ Gross profit 21,737,112 17,400,072 ------------ ------------ Operating expenses: Marketing 3,741,564 3,483,739 Research and development 4,331,008 4,303,079 General and administrative 5,528,968 5,015,434 ------------ ------------ Total operating expenses 13,601,540 12,802,252 ------------ ------------ Operating income 8,135,572 4,597,820 Other income, primarily interest 1,813,686 1,124,565 Interest expense (12,286) (12,286) ------------ ------------ Total other income 1,801,400 $ 1,112,279 ------------ ------------ Income before income taxes 9,936,972 5,710,099 Income tax expense 2,415,000 1,474,000 ------------ ------------ Net income $ 7,521,972 $ 4,236,099 ============ ============ Basic earnings per share $ 0.43 $ 0.25 ============ ============ Diluted earnings per share: $ 0.42 $ 0.24 ============ ============ Shares used in computing net earnings per share: Basic 17,557,429 17,211,315 ============ ============ Diluted 18,032,032 17,765,683 ============ ============ |
See accompanying notes to consolidated condensed financial statements.
ANAREN, INC.
Consolidated Condensed Statements of Cash Flows Six Months Ended December 31, 2006 and 2005
(Unaudited)
December 31, 2006 December 31, 2005 ----------------- ----------------- (As restated) Cash flows from operating activities: Net income $ 7,521,972 $ 4,236,099 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 2,524,216 2,391,077 Amortization of intangibles 154,436 166,435 Gain on sale of land (77,508) -- Loss on sales of equipment -- 15,875 Deferred income taxes 254,000 156,405 Stock based compensation 1,662,320 1,725,844 Provision for doubtful accounts (18,726) (2,292) Changes in operating assets and liabilities: Receivables (67,638) 874,917 Inventories (5,056,999) (2,686,286) Other receivables (427,900) 2,480 Prepaids and other current assets (781,618) (268,114) Accounts payable 1,368,873 (551,607) Accrued expenses (678,904) 141,654 Income taxes payable (512,068) (105,658) Customer advance payments -- 483,722 Other liabilities 68,158 26,296 Pension and postretirement benefit obligation 234,650 341,425 ------------ ------------ Net cash provided by operating activities 6,167,264 6,948,272 ------------ ------------ Cash flows from investing activities: Capital expenditures (6,172,903) (2,989,171) Proceeds from sales of land 134,508 -- Proceeds from sale of equipment -- 1,000 Maturities of marketable debt and auction rate securities 62,568,681 39,120,237 Purchase of marketable debt and auction rate securities (63,216,550) (35,610,000) ------------ ------------ Net cash provided by (used in) investing activities (6,686,264) 522,066 ------------ ------------ Cash flows from financing activities: Stock options exercised 2,111,188 646,209 Tax benefit from exercise of stock options 628,756 378,318 Purchase of treasury stock -- (9,792,475) ------------ ------------ Net cash provided by (used in) financing activities 2,739,944 (8,767,948) ------------ ------------ Effect of exchange rates 54,483 25,783 ------------ ------------ Net increase (decrease) in cash and cash equivalents 2,275,427 (1,271,827) Cash and cash equivalents at beginning of period 15,733,214 5,900,841 ------------ ------------ Cash and cash equivalents at end of period $ 18,008,641 $ 4,629,014 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash Paid During the Period For: Interest $ 12,286 $ 12,286 ============ ============ Income taxes, net of refunds $ 2,044,312 $ 1,021,935 ============ ============ |
See accompanying notes to consolidated condensed financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated condensed financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2006. The results of operations for the six months ended December 31, 2006 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2007, or any future interim period.
The income tax rates utilized for interim financial statement purposes for the six months ended December 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 in the fourth quarter of fiscal year 2007, accounting errors had occurred at its China subsidiary which were caused by unapproved and undetected changes in procedures over accounting for the reconciliation of inventory and the recording of vendor payables for materials received and, but not yet invoiced at the China facility, resulting in a misstatement of pretax income and inventory. As a result of these errors, the Company has determined that its inventory was understated at December 31, 2006 and its net income for the three and six months ended December 31, 2006 was overstated. Additionally, the Company has corrected certain errors in accounting for income taxes, equity based compensation and pension expense and, as part of the Company's adoption of the Securities and Exchange Commissions Staff Accounting Bulletin No. 108, the Company has corrected errors in their warranty expense and allowance for sales returns.
The Company's previously issued condensed consolidated financial statements for the three months ended December 31, 2006 have been restated to correct the accounting for the following items:
o Recording in the second quarter of fiscal 2007 an increase in other liabilities of $451,000, a reduction in accounts receivable of $388,000, an increase in deferred tax benefits of $302,000 and a net reduction in retained earnings of $537,000 to reflect the adoption of SAB 108 to establish warranty reserve and sales return allowance accounts.
o Recording in the second quarter and first six months of fiscal 2007, additional cost of sales of $333,000 to correct the recording of vendor payables for items received but not yet invoiced and inventory reconciliation errors. Recording a corresponding increase in accounts payable of $398,000 and an increase in inventory of $65,000
o Recording in the second quarter and first six months of fiscal 2007, an $83,000 reduction in cost of sales due to a reduction in pension expense in the second quarter and first six months and a reduction in other liabilities of $83,000 at December 31, 2006.
o Recording in the second quarter and first six month of fiscal 2007 a reduction in cost of sales of $49,000 resulting from a reduction in warranty expense and a corresponding reduction in other liabilities at December 31, 2006 of $49,000.
o Recording in the second quarter of fiscal 2007 a reduction in sales and accounts receivable of $3,000 to adjust the sales return allowance.
o Recording in the second quarter and first six months of fiscal 2007 an increase in general and administrative expense of $34,000 and a corresponding increase in additional paid in
capital of $34,000 at December 31, 2006 to correct equity based compensation expense for the quarter.
o Recording in the second quarter and first six months of fiscal 2007 an increase in income tax expense of $49,000, an increase in taxes payable of $43,000 and a decrease in deferred tax benefits of $6,000 to correct taxes payable at December 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 six months ended December 31, 2006:
Statement of Earnings: Three Months Ended December 31 ---------------------------------------- 2006 Previously 2006 Reported Adjustments As restated ----------- ------------ ----------- Sales $30,325,785 (3,000) $30,322,785 Cost of sales 19,224,005 201,000 19,425,005 ----------- -------- ----------- Gross profit 11,101,780 (204,000) 10,897,780 ----------- -------- ----------- General and administrative 2,726,742 34,000 2,760,742 ----------- -------- ----------- Total operating expenses 6,848,423 34,000 6,882,423 ----------- -------- ----------- Operating income 4,253,357 (238,000) 4,015,357 ----------- -------- ----------- Income before income taxes 5,164,294 (238,000) 4,926,294 Income tax expense 1,116,000 49,000 1,165,000 ----------- -------- ----------- Net income $ 4,048,294 (287,000) $ 3,761,294 =========== ======== =========== Basic earnings per share $ 0.23 (.02) $ 0.21 =========== ======== =========== Diluted earnings per share $ 0.22 (.01) $ 0.21 =========== ======== =========== Six Months Ended December 31 ---------------------------------------- 2006 Previously 2006 Reported Adjustments As restated ----------- -------- ----------- Sales $60,528,895 (3,000) $60,525,895 Cost of sales 38,587,783 201,000 38,788,783 ----------- -------- ----------- Gross profit 21,941,112 (204,000) 21,737,112 ----------- -------- ----------- General and administrative 5,494,968 34,000 5,528,968 ----------- -------- ----------- Total operating expenses 13,567,540 34,000 13,601,540 ----------- -------- ----------- Operating income 8,373,572 (238,000) 8,135,572 ----------- -------- ----------- Income before income taxes 10,174,972 (238,000) 9,936,972 Income tax expense 2,366,000 49,000 2,415,000 ----------- -------- ----------- Net income $ 7,808,972 (287,000) $ 7,521,972 =========== ======== =========== Basic earnings per share $ 0.44 (.01) $ 0.43 =========== ======== =========== Diluted earnings per share $ 0.43 (.01) $ 0.42 =========== ======== =========== |
Balance Sheet: As of December 31 --------------------------------------------- 2006 Previously 2006 Reported Adjustments As restated ------------ ------------ ------------ Accounts receivable $ 16,451,375 (391,000) $ 16,060,375 Inventories 26,819,270 65,000 26,884,270 Deferred income taxes 716,287 296,000 1,012,287 ------------ ------------ ------------ Total current assets 119,650,417 (30,000) 119,620,417 ------------ ------------ ------------ Total assets 201,677,857 (30,000) 201,647,857 ============ ============ ============ Accounts payable 7,769,666 398,000 8,167,666 Income taxes payable 148,420 43,000 191,420 Other current liabilities 814,752 402,000 1,216,752 ------------ ------------ ------------ Total current liabilities 11,792,472 843,000 12,635,472 Pension and postretirement benefit obligation 2,674,439 83,000 2,591,439 ------------ ------------ ------------ Total liabilities 17,327,738 760,000 18,087,738 ------------ ------------ ------------ Additional paid-in capital 186,146,433 34,000 186,180,433 Retained earnings 78,302,825 (824,000) 77,478,825 ------------ ------------ ------------ Total stockholders' equity 184,350,119 (790,000) 183,560,119 ------------ ------------ ------------ Total liabilities and stockholders' equity $201,677,857 (30,000) $201,647,857 ============ ============ ============ |
The adjustments to the balance sheet and income statement at and for the three and six months ended December 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 2, 4, 6, 9, 10, 11, and 12.
NOTE 2: Adoption of SAB 108
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year misstatements when Quantifying misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. Under SAB 108, both the balance sheet and the income statement approach must be considered when evaluating the materiality of misstatements. The Company adopted SAB 108 in the fourth quarter of 2007, effective July 1, 2006. After applying the dual approach, the accounting errors relating to the warranty accrual and the sales returns reserve, that were recorded on a cash basis as the events occurred and were deemed immaterial in the prior years using the income statement approach, were deemed material to the current year financial statements using the balance sheet approach. In accordance with SAB 108, the cumulative effect adjustment of these accounting changes was recorded to the beginning retained earnings as of July 1, 2006. The impact of the two items noted above on the July 1, 2006 balances are presented below:
Accounts receivable $(388,000) Other liabilities (451,000) Total: (839,000) Less deferred tax benefit 302,000 --------- Adjustment to retained earnings $(537,000) ========= |
NOTE 3: Intangible Assets
Intangible assets as of December 31, 2006 and June 30, 2006 are as follows:
December 31 June 30 ------------------------ ------------------------ Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ---------- ------------ ---------- ------------ Patent $ 574,966 $ 539,031 $ 574,966 $ 503,095 Customer Relationships 1,350,000 1,200,000 1,350,000 1,087,500 Trade Name 320,000 320,000 320,000 320,000 Non-Competition Agreements 180,000 180,000 180,000 174,000 Favorable Lease 600,000 600,000 600,000 600,000 ---------- ----------- ---------- ---------- Total $3,024,966 $2,839,031 $3,024,966 $2,684,595 |
Intangible asset amortization expense for the six month period ended December 31, 2006 and 2005 aggregated $154,436 and $166,435, respectively, while tangible asset amortization expense for the three months ended December 31, 2006 and 2005 aggregated $74,218 and $83,217, respectively. Estimated amortization expense related to intangible assets for the remaining six months of fiscal 2007 and for the next five years is as follows:
Year Ending June 30, 2007 $ 148,439 2008 $ 37,496 2009 $ 0 2010 $ 0 2011 $ 0 |
NOTE 4: 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 stock-based compensation expense recognized for the three months and six months ended December 31, 2006 was $853,883 (As restated) and $1,681,691 (As restated), respectively. These amounts include $108,609 and $190,892 related to the Company's restricted stock program (see restricted stock programs below) and $725,903 (As restated) and $1,471,428 (As restated) related to the Company's stock option program for the three and six month periods, respectively.
As a result of the adoption of SFAS 123R, both operating income and income before taxes for the three month and six months ended December 31, 2006 were reduced by $853,883 (As restated) and $1,681,691 (As restated), respectively. Net income was reduced by $668,643 and $1,347,451, or $0.04, and $0.07 per diluted share for the three and six month periods, respectively.
Stock-based compensation expense included in operating expenses is as follows for the three month periods ended December 31:
2006 ------------------------------------------- Stock Total option Restricted stock-based program stock compensation (As restated) program (As restated) ------------- ---------- ------------- Cost of goods sold ........................... $161,027 $ 62,249 $223,276 Marketing .................................... 59,262 -- 59,262 Research and development ..................... 103,965 -- 103,965 General and administrative ................... 401,649 46,360 448,009 -------- -------- -------- Total cost of stock-based compensation . 725,903 108,609 834,512 Change in amounts capitalized in inventory ... 19,371 -- 19,371 -------- -------- -------- Net stock-based compensation expense ......... $745,274 $108,609 $853,883 ======== ======== ======== Amount of related income tax benefit recognized in income ....................... $148,701 $ 36,539 $185,240 ======== ======== ======== |
2005 ------------------------------------------- Stock Restricted Total option stock stock-based program program compensation ------------- ---------- ------------- Cost of goods sold ............................ $197,061 $ 26,634 $223,695 Marketing ..................................... 68,452 -- 68,452 Research and development ...................... 127,702 -- 127,702 General and administrative .................... 441,074 3,000 444,074 -------- -------- -------- Total cost of stock-based compensation .. 834,289 29,634 863,923 Change in amounts capitalized in inventory .... -- -- -- -------- -------- -------- Net stock-based compensation expense .......... $834,289 $ 29,634 $863,923 ======== ======== ======== Amount of related income tax benefit recognized in income ........................ $ 75,297 $ 11,261 $ 86,558 ======== ======== ======== |
Stock-based compensation expense included in operating expenses is as follows for the six month periods ended December 31:
2006 ------------------------------------------- Stock Total option Restricted stock-based program stock compensation (As restated) program (As restated) ------------- ---------- ------------- Cost of goods sold ............................ $ 377,889 $ 112,626 $ 490,515 Marketing ..................................... 123,116 -- 123,116 Research and development ...................... 172,636 -- 172,636 General and administrative .................... 797,787 78,266 876,053 ---------- ---------- ---------- Total cost of stock-based compensation... 1,471,428 190,892 1,662,320 Change in amounts capitalized in inventory .... 19,371 -- 19,371 ---------- ---------- ---------- Net stock-based compensation expense .......... $1,490,799 $ 190,892 $1,681,691 ========== ========== ========== Amount of related income tax benefit recognized in income ........................ $ 261,701 $ 72,539 $ 334,240 ========== ========== ========== |
2005 ------------------------------------------- Stock Restricted Total option stock stock-based program program compensation ------------- ---------- ------------- Cost of goods sold ............................ $ 521,823 $ 53,267 $ 575,090 Marketing ..................................... 136,905 -- 136,905 Research and development ...................... 127,702 -- 127,702 General and administrative .................... 882,147 4,000 886,147 ---------- ---------- ---------- Total cost of stock-based compensation... 1,668,577 57,267 1,725,844 Change in amounts capitalized in inventory .... -- -- -- ---------- ---------- ---------- Net stock-based compensation expense .......... $1,668,577 $ 57,267 $1,725,844 ========== ========== ========== Amount of related income tax benefit recognized in income ........................ $ 128,080 $ 21,761 $ 149,841 ========== ========== ========== |
As of December 31, 2006, there were 2,403,120 stock options outstanding. At December 31, 2006, the aggregate unrecognized compensation cost of unvested options, as determined using a Black-Scholes option valuation model, was $7,228,651 (As restated) (net of estimated forfeitures) which is expected to be recognized as compensation expense in fiscal years 2007 through 2012. The aggregate intrinsic value of these options based on the original grant date was $9,125,792 (net of forfeitures). As of December 31, 2006, 1,396,115 stock options were exercisable, which represents an aggregate intrinsic value of $5,932,680.
During the six month periods ended December 31, 2006 and 2005, the Company granted 186,850 and 374,000 nonstatutory stock options with a fair value of $2,529,872 and $3,202,270 (net of estimated forfeitures), respectively. During the six months ended December 31, 2006 and 2005, 29,000 and 46,770 options were forfeited and/or expired, respectively. During the six months ended December 31, 2006 and 2005, there were 200,637 and 94,859 stock options exercised, which represents an aggregate intrinsic value of $1,361,723 and $814,839, respectively. New option grants made after July 1, 2005, as well as option grants issued prior to that date, have been valued using a Black-Scholes option valuation model.
Stock Option Plans
In November 2004, the shareholders approved the amendment and restatement of the Company's three existing stock option plans, which combined these plans under one single consolidated equity compensation plan, the Anaren, Inc. Comprehensive Long-Term Incentive Plan ("the Plan"). The effect of the amendment and restatement was to combine the separate share pools available for grant under the three existing plans into a single grant pool, expand the type of equity-based awards the Company may grant, and extend the term of the combined plan to October 31, 2014. Under the restated plan, the Company may issue incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, performance shares, and performance units that can vest immediately or up to five years. Under this plan, the Company reserved 1,470,443 common shares available for grant. In November 2006, the shareholders approved an amendment of the plan increasing the number of shares of Common Stock by 600,000 with respect to which awards may be granted and also increasing the number of shares by 600,000 with respect to which awards other than options may be granted. The shareholders also approved limiting the maximum number of shares of Common Stock with respect to which option rights or SARs may be granted in any calendar year to any participant to 100,000 shares along with the approval of other amendments relating to the administration of the Plan. On December 31, 2006, the Company had 1,489,504 shares available for grant under the restated Plan.
Information with respect to this Plan is as follows:
Weighted average Total Option exercise shares price price --------- --------------- --------- Outstanding at June 30, 2005 .......... 2,782,780 $ 2.27 to 57.59 $14.73 Issued ............................. 387,500 11.97 to 21.15 14.22 Exercised .......................... (664,103) 2.27 to 20.17 8.04 Expired ............................ (36,090) 14.73 to 57.59 39.05 Forfeited .......................... (24,180) 9.51 to 53.00 14.43 --------- Outstanding at June 30, 2006 .......... 2,445,907 $ 2.27 to 54.00 $15.91 Issued ............................. 186,850 19.56 to 20.00 19.56 Exercised .......................... (200,637) 2.27 to 19.21 10.97 Expired ............................ (23,100) 15.00 to 19.21 18.81 Forfeited .......................... (5,900) 9.51 to 14.73 14.21 --------- Outstanding at December 31, 2006 ...... 2,403,120 $ 2.27 to 54.00 $16.77 ========= Shares exercisable at December 31, 2006 .................. 1,396,115 $ 2.27 to 54.00 $17.27 ========= |
The following table summarizes significant ranges of outstanding and exercisable options at December 31, 2006:
Options outstanding Options exercisable --------------------------------------- -------------------------------- Weighted Weighted Weighted Range of average average average exercise remaining exercise exercise prices Shares life in years price Shares price ------------- --------- ------------- -------- --------- -------- $1.00 - 5.00 5,000 .39 $ 2.28 5,000 $ 2.28 5.01 - 15.00 1,872,546 6.80 6.72 1,067,391 11.19 15.01 - 40.00 354,974 7.45 19.86 153,124 20.25 40.01 - 65.00 170,600 4.32 53.04 170,600 53.04 --------- --------- 2,403,120 1,396,115 ========= ========= |
During the six months ended December 31, 2006, the per-share weighted average fair value of the nonstatutory stock options granted was $13.89. 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 December 31:
2006 2005 ---- ---- Expected option life (using the Simplified Method) ............... 6.0 - 6.5 years 6.0 - 6.5 years Weighted average risk-free interest rate .................... 4.56% - 4.87% 3.92 - 4.34% Weighted average expected volatility ....................... 60.00% - 75.00% 61.00% - 69.00% Dividend ........................... 0.0% 0.0% |
For the six month period ended December 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 six month period ended December 31, 2006, is based on historical volatility levels of the Company's common stock. The risk-free interest rate for the six month period ended December 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 Program
On November 17, 2004, the Company issued restricted stock grants of 23,500 shares. The per-share price of each grant was $13.60. The shares of restricted stock are subject to a 36 month forfeiture period.
On September 1, 2005, the Company issued restricted stock grants totaling 2,605 shares. The per-share price of each grant was $13.82. The shares of restricted stock are subject to a 36 month foreiture period.
On May 17, 2006, the Company issued restricted stock grants totaling 120,082 shares. The per-share price of each grant was $21.15. These shares are subject to a forfeiture period which expires as of the later of May 17, 2009 and the last day of the Company's single fiscal year during which the Company has both net sales from operations of at least $250 million and operating income of at least 12 percent of net sales. These grant agreements expire if both financial performance conditions above are not met by June 30, 2011. Presently, the Company has recognized no compensation expense for this grant and the shares have not been included in the current diluted earnings per share calculation as the Company believes that it is probable that these goals will not be met within the time period specified. In the future, if it becomes probable that the sales and earnings goal will be achieved then at that time the compensation cost associated with the grant will be recognized over the remaining vesting period.
On August 9, 2006, the Company issued restricted stock grants totaling 48,450 shares. The per share price of each grant was $19.56. The shares of restricted stock are subject to a 36 month forfeiture period.
As of December 31, 2006 and 2005, the Company has issued restricted shares aggregating 194,637 and 26,105, respectively, under its 2004 Comprehensive Long-Term Incentive Plan. No shares were forfeited during the six month periods ended December 31, 2006 and 2005. No shares vested during the six month periods ended December 31, 2006 and 2005.
For the six month periods ended December 31, 2006 and 2005, the Company recognized compensation expense associated with the lapse of restrictions aggregating $190,892 and $57,267, respectively.
NOTE 5: Securities
The amortized cost and fair value of securities are as follows:
December 31, 2006 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------- ----------- ----------- ----------- Securities available for sale: Auction securities $29,009,921 $ -- $ -- $29,009,921 ----------- ----------- ----------- ----------- Total securities available-for-sale $29,009,921 $ -- $ -- $29,009,921 =========== =========== =========== =========== Securities held to maturity: Municipal bonds $36,184,775 $ -- $(81,455) $36,103,320 Commercial paper 3,010,363 -- -- 3,010,363 Corporate bonds 1,486,709 178 -- 1,486,887 Federal Agency Bond 3,847,259 -- (8,711) 3,838,548 ----------- ----------- ----------- ----------- Total securities held to maturity $44,529,106 $178 $(90,166) $44,439,118 =========== =========== =========== =========== |
June 30, 2006 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------- -------------- ---------- ----------- Securities available for sale: Auction rate securities $35,635,000 $ -- $ -- $35,635,000 =========== ============== ========== =========== Total securities Available-for-sale $35,635,000 $ -- $ -- $35,635,000 =========== ============== ========== =========== Securities held to maturity: Municipal bonds $29,056,496 $ -- $(143,144) $28,913,352 Commercial paper 2,976,555 -- -- 2,976,555 Corporate bonds 1,824,132 1,989 (2,666) 1,823,455 Federal agency bonds 3,398,975 -- (41,890) 3,357,085 ----------- -------------- ---------- ----------- Total securities held to maturity $37,256,158 $1,989 $(187,700) $37,070,447 =========== ============== ========== =========== |
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 they recover their amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2006.
Contractual maturities of marketable debt securities held to maturity at December 31, 2006 and June 30, 2006 are summarized as follows:
December 31, 2006 June 30, 2006 ------------------------- ------------------------- Fair Fair Market Market Cost Value Cost Value ----------- ----------- ----------- ----------- Within one year $24,663,212 $24,631,889 $31,124,733 $30,994,480 One year to five years 19,865,894 19,825,229 6,131,425 6,075,967 ----------- ----------- ----------- ----------- Total $44,529,106 $44,457,118 $37,256,158 $37,070,447 =========== =========== =========== =========== |
Contractual maturities of auction rate securities available for sale at December 31, 2006 and June 30, 2006 are summarized as follows:
December 31, 2006 June 30, 2006 ------------------------- ------------------------- Fair Fair Market Market Cost Value Cost Value ----------- ----------- ----------- ----------- Within one year $29,009,921 $29,009,921 $35,635,000 $35,635,000 One year to five years -- -- -- -- ----------- ----------- ----------- ----------- Total $29,009,921 $29,009,921 $35,635,000 $35,635,000 =========== =========== =========== =========== |
The Company invests in auction rate securities. Auction rate securities have long-term underlying maturities; however, the market is highly liquid and the interest rates reset every 7, 28 or 35 days.
NOTE 6: Inventories
Inventories are summarized as follows:
December 31, 2006 June 30, 2006 ----------------- ------------- (As restated) Component parts $13,242,650 $9,936,858 Work in process 8,364,709 8,330,110 Finished goods 5,276,911 3,560,303 ----------- ----------- $26,884,270 $21,827,271 =========== =========== |
NOTE 7: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31, 2006 June 30, 2006 ----------------- ------------- Land and land improvements $ 2,150,823 $ 2,207,823 Construction in process 3,958,809 1,918,653 Buildings, furniture and fixtures 17,578,862 16,608,430 Machinery and equipment 60,338,386 57,176,071 ----------- ----------- $84,026,880 $77,910,977 Less accumulated depreciation and amortization (52,800,032) (50,275,816) ----------- ----------- $31,226,848 $27,635,161 =========== =========== |
NOTE 8: Accrued Expenses
Accrued expenses consist of the following:
December 31, 2006 June 30, 2006 ----------------- ------------- Compensation $1,535,573 $2,082,104 Commissions 789,361 732,749 Health insurance 255,201 294,500 Other (4,223) 145,463 ---------- ---------- $2,575,912 $3,254,816 ========== ========== |
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 9: Other Liabilities
Other liabilities consist of the following:
December 31, 2006 June 30, 2006 ----------------- ------------- (As restated) Deferred compensation $ 865,872 $ 793,943 Pension liability 325,743 312,660 Warranty 402,000 -- Other 424,009 391,863 ---------- ---------- 2,017,624 1,498,466 Less current portion 1,216,752 769,523 ---------- ---------- $ 800,872 $ 728,943 ========== ========== |
NOTE 10: Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company's case, comprise shares issuable under the Company's Comprehensive Long-Term Incentive Plan. The weighted average number of common shares utilized in the calculation of the diluted earnings per share does not include antidilutive shares aggregating 401,716 and 1,065,952 at December 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 Six Months Ended December 31 December 31 -------------------------- -------------------------- 2006 2005 2006 2005 ------------- ---------- ------------- ---------- (As restated) (As restated) Numerator: Net income $3,761,294 $2,010,082 $7,521,972 $4,236,099 ========== ========== ========== ========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 17,622,700 17,020,360 17,557,429 17,211,315 ========== ========== ========== ========== Denominator for diluted earnings per share: Weighted average shares outstanding 17,622,700 17,020,360 17,557,429 17,211,315 Common stock options and restricted stock 465,409 574,954 474,603 554,368 ---------- ---------- ---------- ---------- Weighted average shares and conversions 18,088,109 17,595,314 18,032,032 17,765,683 ========== ========== ========== ========== |
NOTE 11: Components of Net Periodic Pension Benefit Costs
Three Months Ended Six Months Ended December 31 December 31 -------------------------- -------------------------- 2006 2005 2006 2005 ------------- ---------- ------------- ---------- (As restated) (As restated) Service cost $71,588 $85,587 $143,176 $171,174 Interest cost 164,700 151,795 329,400 303,590 Expected return on plan assets (185,068) (173,365) (370,136) (346,730) Amortization of prior service cost (325) (808) (650) (1,616) Amortization of the net (gain) loss 18,386 47,436 36,772 94,872 ---------- ---------- ---------- ---------- Net periodic benefit cost $69,281 $110,645 $138,562 $221,290 ========== ========== ========== ========== |
Expected Pension Contributions
Expected contributions for fiscal 2007 are $336,165.
Estimated Future Pension Benefit Payments
The following estimated benefit payments, which reflect future service, as appropriate, are expected to be paid:
July 1, 2006 - June 30, 2007 ................................ $ 419,601 July 1, 2007 - June 30, 2008 ................................ 480,626 July 1, 2008 - June 30, 2009 ................................ 487,453 July 1, 2009 - June 30, 2010 ................................ 525,600 July 1, 2010 - June 30, 2011 ................................ 543,938 Years 2012 - 2016 ........................................... 3,122,875 |
NOTE 12: Components of Net Periodic Postretirement Health Benefit Costs
Three Months Ended Six Months Ended December 31 December 31 ------------------- -------------------- 2006 2005 2006 2005 ------- ------- -------- -------- Service cost $18,677 $14,285 $ 37,354 $ 28,570 Interest cost 36,665 46,327 73,330 92,654 Amortization of the net (gain) loss 13,208 18,788 26,416 37,576 ------- ------- -------- -------- Postretirement Health $68,550 $79,400 $137,100 $158,800 ======= ======= ======== ======== |
Expected Postretirement Health Contributions
Expected contributions for fiscal 2007 are $165,149, net of $39,381 expected subsidy receipts.
Estimated Future Benefit Payments
Shown below are expected gross benefit payments (including prescription drug benefits) and the expected gross amount of subsidy receipts.
Employer Contributions Subsidy Receipts ---------------------- ---------------- July 1, 2006 - June 30, 2007 204,530 (39,381) July 1, 2007 - June 30, 2008 199,286 (48,950) July 1, 2008 - June 30, 2009 214,390 (53,689) July 1, 2009 - June 30, 2010 216,892 (59,938) July 1, 2010 - June 30, 2011 220,394 (64,144) Years 2012 - 2016 1,140,941 (364,243) |
NOTE 13: Segment Information
The Company operates predominately in the wireless communications, satellite communications and defense electronics markets. The Company's two reportable segments are the wireless group and the space and defense group. These segments have been determined based upon the nature of the products and services offered, customer base, technology, availability of discrete internal financial information, homogeneity of products and delivery channel, and are consistent with the way the Company organizes and evaluates financial information internally for purposes of making operating decisions and assessing performance.
The wireless segment designs, manufactures and markets commercial products used mainly by the wireless communications market. The space and defense segment of the business designs, manufactures and markets specialized products for the defense electronics and satellite communications markets. The revenue disclosures for the Company's reportable segments depict products that are similar in nature.
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, 2006 (As restated) 16,998,534 13,324,251 -- 30,322,785 December 31, 2005 15,494,100 9,524,913 -- 25,019,013 Six months ended: December 31, 2006 (As restated) 36,825,941 23,699,954 -- 60,525,895 December 31, 2005 31,904,835 17,728,536 -- 49,633,371 Operating income: Three months ended: December 31, 2006 (As restated) 1,199,641 2,815,716 -- 4,015,357 December 31, 2005 1,233,695 1,004,709 -- 2,238,404 Six months ended: December 31, 2006 (As restated) 3,934,703 4,200,869 -- 8,135,572 December 31, 2005 3,278,886 1,318,934 -- 4,597,820 Goodwill and intangible assets: December 31, 2006 30,901,796 -- -- 30,901,796 June 30, 2006 31,056,232 -- -- 31,056,232 Identifiable assets:* December 31, 2006 (As restated) 23,226,038 20,014,607 127,505,416 170,746,061 June 30, 2006 20,376,293 17,944,131 119,649,773 157,970,197 Depreciation:** Three months ended: December 31, 2006 631,936 569,187 -- 1,201,123 December 31, 2005 607,047 582,111 -- 1,189,158 Six months ended: December 31, 2006 1,406,897 1,117,319 -- 2,524,216 December 31, 2005 1,245,959 1,145,118 -- 2,391,077 Intangibles amortization: *** Three months ended: December 31, 2006 74,218 -- -- 74,218 December 31, 2005 83,217 -- -- 83,217 Six months ended: December 31, 2006 154,436 -- -- 154,436 December 31, 2005 166,435 -- -- 166,435 |
* Segment assets primarily include receivables and inventories. The Company does not segregate other assets on a products and services basis for internal management reporting and, therefore, such information is not presented. Assets included in corporate and unallocated principally are cash and cash equivalents, marketable securities, other receivables, prepaid expenses, deferred income taxes, and property, plant and equipment not specific to business acquisitions.
** Depreciation expense related to acquisition - specific property, plant and equipment is included in the segment classification of the acquired business. Depreciation expense related to non- business combination assets is allocated departmentally based on an estimate of capital equipment employed by each department. Depreciation expense is then further allocated within the department as it relates to the specific business segment impacted by the consumption of the capital resources utilized. Due to the similarity of the property, plant and equipment utilized, the Company does not specifically identify these assets by individual business segment for internal reporting purposes.
*** 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.
The purpose of this amended Quarterly Report on Form 10-Q/A of Anaren, Inc. (the "Company") is to restate the Company's consolidated condensed financial statements for the three and six months ended December 31, 2006 ("the financial statements") and to modify the related disclosures. See note 1 to the consolidated condensed financial statements included in this amended Quarterly Report. The restatement arose from the Company's determination that accounting errors had occurred at its China subsidiary. The accounting errors were caused by a material weakness in the Company's risk assessment and oversight controls as disclosed in the June 30, 2007 Annual Report Form 10-K. The unapproved and undetected changes in procedures over accounting for the reconciliation of inventory and the recording of vendor payables for materials received, but not yet invoiced at the China facility resulted in a misstatement of pre-tax income and inventory. Additionally, the Company has corrected certain errors in accounting for income taxes, equity based compensation and pension expense; and, as part of the Company's adoption of the Securities and Exchange Commissions Staff Accounting Bulletin No. 108, the Company has corrected errors in their warranty expense and allowance for sales returns. As a result of these errors, the Company has determined that its pre-tax income for the three and six months ended December 31, 2006 was overstated by $238,000.
Overview
The consolidated financial statements present the financial condition of the Company as of December 31, 2006 and June 30, 2006, and the consolidated results of operations and cash flows of the Company for the three months and six months ended December 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, WiFi, cellular handsets and satellite telecommunications. The Company sells its products to leading wireless communications equipment manufacturers such as Ericsson, Motorola, Nokia, Nortel Networks, and Andrew, and to satellite communications and defense electronics companies such as Boeing Satellite, ITT, Lockheed Martin, Northrup Grumman and Raytheon.
The Company generally recognizes sales at the time products are shipped to customers, provided that persuasive evidence of an arrangement exists, the sales price is fixed or easily determinable, collectibility is reasonably assured and title and risk of loss has passed to the customer. Title and the risks and rewards of ownership of products are generally transferred at the time of shipment. Payments received from customers in advance of products delivered are recorded as customer advance payments until earned. Annually, a small percentage of sales are derived from fixed-price contracts for the sale of engineering design and development efforts for space and defense electronics products. Sales and estimated profits under long-term contracts are recognized according to customer contractual milestones on a units-of-delivery basis. Profit estimates are revised periodically based upon changes in sales value and costs at completion. Any losses on these contracts are recognized in the period in which such losses are determined.
In April 2006, the Company entered into a lease for a new 76,000 square foot facility in Suzhou, China, at an annual rent of $165,227 to replace its current 25,000 square foot leased facility. The initial lease period on the new building runs through April 2013 and is renewable through April 2023. No additional cost was incurred for termination of the lease on the current building in the second quarter of fiscal 2007. The Company has moved its China operation to this new facility and was fully operational in this new facility prior to the end of calendar year 2006.
In July 2006, the Company began construction on a 54,000 square foot addition to its facility in East Syracuse, New York. This addition is needed primarily to accommodate the growth of the Company's Space and Defense business. The project is expected to be completed during the third quarter of calendar 2007 at an estimated cost of $5.8 million for the building addition.
Third Quarter of Fiscal 2007 Outlook
For the third quarter, the Company expects moderate demand for wireless infrastructure products, a seasonally driven decrease in demand for the consumer component product line and increased sales for the Space & Defense segment as a result of recent new contract wins. As a result, the Company expects net sales to be in the range of $27.0 - $30.0 million for the third quarter of fiscal 2007. With an anticipated tax rate of approximately 25.0% and an expected stock based compensation expense of approximately $0.04 per diluted share, we expect net earnings per diluted share to be in the range of $0.16 - $0.21 for the third quarter.
Results of Operations
Net sales from continuing operations for the three months ended December 31, 2006 were $30.3 million, up $5.3 million from $25.0 million for the second quarter of fiscal 2006. Net income for the second quarter of fiscal 2007 was $3.8 million (As restated), or 12.4% (As restated) of net sales, up $1.8 million (As restated), or 90.0% (As restated) from net income of $2.0 million in the second quarter of fiscal 2006.
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, Dec. 31, Dec. 31, Dec. 31, 2006 2005 2006 2005 ------------- -------- ------- ------------- (As restated) (As restated) Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 64.1% 65.0% 64.1% 64.9% ---- ---- ---- ---- Gross profit 35.9% 35.0% 35.9% 35.1% ---- ---- ---- ---- Operating expenses: Marketing 6.4% 6.9% 6.2% 7.0% Research and development 7.2% 9.1% 7.2% 8.7% General and administrative 9.1% 10.1% 9.1% 10.1% ---- ---- ---- ---- Total operating expenses 22.7% 26.1% 22.5% 25.8% ---- ---- ---- ---- Operating income 13.2% 8.9% 13.4% 9.3% ---- ---- ---- ---- Other income (expense): Other, primarily interest income 3.0% 2.1% 3.0% 2.2% Interest expense 0.0% 0.0% 0.0% 0.0% ---- ---- ---- ---- Total other income (expense), net 3.0% 2.1% 3.0% 2.2% ---- ---- ---- ---- Income before income taxes 16.2% 11.0% 16.4% 11.5% Income taxes 3.8% 3.0% 4.0% 3.0% ---- ---- ---- ---- Net income 12.4% 8.0% 12.4% 8.5% ==== ==== ==== ==== |
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 (As restated) (As restated) 2006 2005 2006 2005 ------------- ------- ------------- ------- Wireless $16,999 $15,494 $36,826 $31,905 Space and Defense 13,324 9,525 23,700 17,728 ------- ------- ------- ------- Total $30,323 $25,019 $60,526 $49,633 ======= ======= ======= ======= |
Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005
Net sales. Net sales increased $5.3 million, or 21.2% to $30.3 million for the second quarter ended December 31, 2006 compared to $25.0 million for the second quarter of fiscal 2006. This increase resulted from a $1.5 million rise in shipments of wireless infrastructure and consumer products and a $3.8 million rise in sales of Space and Defense products.
The increase in sales of Wireless products, which consist of standard components, ferrite components and custom subassemblies for use in building wireless basestation and consumer equipment, was a result of a rise in customer demand for standard Wireless components during the current second quarter compared to the second quarter of last year.
Wireless product sales rose $1.5 million, or 9.7% in the second quarter of fiscal 2007 compared to the second quarter of fiscal 2006, due to a $900,000 increase in shipments of standard Wireless components in the second quarter of fiscal 2007 compared to the same quarter in fiscal 2006 due to a continuing higher level of worldwide demand for infrastructure products. Additionally, new Wireless consumer product sales increased $729,000 or 68.0% in the current second quarter compared to the second quarter of fiscal 2006, reflecting the improving customer acceptance of our new commercial products.
Space and Defense products consist of custom components and assemblies for communication satellites and defense radar, receiver, and countermeasure subsystems for the military. Sales of Space and Defense products rose $3.8 million, or 40.0% in the second quarter of fiscal 2007 compared to the second quarter of the previous fiscal year. This increase consisted of a $3.7 million increase in Defense product shipments during the current second quarter compared to the same quarter in fiscal 2006. Defense product sales are increasing due to the higher level of new business booked by the Company over the last two fiscal years. Additionally, shipments under the initial production phase of a contract with SRC Tec, Inc. for components used in a system designed to counter remote controlled improvised explosive devices (Counter IED) amounted to $3.5 million in the quarter. Shipments under this contract are expected to continue at the current rate through the third quarter of fiscal 2007 and then fall to a rate of approximately $0.5 - $1.0 million per quarter in the fourth quarter and beyond.
Gross Profit. Cost of sales consists primarily of engineering design costs, materials, material fabrication costs, assembly costs, direct and indirect overhead, and test costs. Gross profit for the second quarter of fiscal 2007 was $10.9 million (As restated), (35.9% (As restated) of net sales), up $2.2 million (As restated) from $8.7 million (35.0% of net sales) for the same quarter of the prior year. Gross profit on sales increased in the second quarter of fiscal 2007 over the second quarter of last year due to the substantial rise in overall sales of $5.3 million and a more favorable product mix resulting from the increase in sales of higher margin standard Wireless components and the large increase in overall Defense product sales in the current quarter.
Marketing. Marketing expenses consist mainly of employee related expenses, commissions paid to sales representatives, trade show expenses, advertising expenses and related travel expenses. Marketing expenses were $1.9 million (6.4% of net sales) for the second quarter of fiscal 2007, compared to $1.7 million (6.9% of net sales) for the second quarter of fiscal 2006. Marketing expenses in the current second quarter rose $213,000 over the second quarter of last fiscal year due to increased commission expense resulting from the higher sales levels, additional personnel to serve the Asian Wireless and Defense markets and increased expenditures for travel.
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 (7.2% of net sales) in the second quarter of fiscal 2007, down 3.0% from $2.3 million (9.1% of net sales) for the second quarter of fiscal 2006. Research and development expenditures are supporting further development of Wireless infrastructure and consumer component opportunities, as well as new technology development in the Space and Defense Group. Research and Development expenditures have fluctuated with the level of opportunities in the marketplace which have resulted in the hiring of additional personnel over the last twelve months to do development work. The Company does not expect to reduce its current research and development efforts and is presently working on a number of new standard and custom Wireless and Space and Defense opportunities.
General and Administrative. General and administrative expenses consist of employee related expenses, professional services, intangible amortization, travel related expenses and other corporate costs. General and administrative expenses increased 9.4% (As restated) to 2.8 million (As restated) (9.1% (As restated) of net sales) for the second quarter of fiscal 2007 from $2.5 million (10.1% of net sales) for the second quarter of fiscal 2006. The increase resulted primarily from additional personnel costs due to the expanded level of the Company's business, as well as, additional outside consulting services retained by the Company for specific short term initiatives.
Operating Income. Operating income rose 79.4% (As restated) in the second quarter of fiscal 2007 to $4.0 million (As restated) (13.2% (As restated) of sales) compared to $2.2 million (8.9% of net sales) for the second quarter of fiscal 2006. On a reporting segment basis, Wireless operating income was $1.2 million (As restated) for the second quarter of fiscal 2007, remaining flat compared to the same period fiscal 2006
Space and Defense operating income was $2.8 million (As restated) (21.1% (As restated) of Space and Defense net sales), for the second quarter of fiscal 2007, up $1.8 million (As restated) from $1.0 million for the second quarter of fiscal 2006. Operating margins in this group have improved as a result of efficiencies realized from both the overall $5.3 million increase in sales volume and the $3.8 million rise in shipments of Space and Defense Group products in the current second quarter resulting from the $3.5 million of initial production shipments of "Counter IED" products, over the same quarter of the prior year.
Interest Expense. Interest expense represents interest paid on a deferred obligation. Interest expense for the second quarter of fiscal 2007 was $6,000; unchanged from the second quarter of fiscal 2006.
Other Income. Other income is primarily interest income received on invested cash balances. Other income increased 71.0% to $917,000 in the second quarter of fiscal 2007 compared to $537,000 for the second quarter of last year. This increase was caused mainly by the rise in market interest rates over the last twelve months and the approximately $5.0 million increase in investable cash balances during the second quarter. Other income will fluctuate based on short term market interest rates and the level of investable cash balances.
Income Taxes. Income taxes for the second quarter of fiscal 2007 were $1.2 million (As restated) (3.8% (As restated) of net sales), including a tax benefit resulting from the renewal of the federal research and experimentation credit retroactively to January 2006, representing an effective tax rate of 23.6% (As restated). This compares to income tax expense of $759,000 (3.0% of net sales) for the second quarter of fiscal 2006, representing an effective tax rate of 27.4%. The Company's effective tax rate is a direct result of the proportion of federally exempt state municipal bond income and federal tax credits and benefits in relation to the levels of taxable income or loss. The projected effective tax rate for fiscal 2007 is approximately 25.0% compared to an actual effective tax rate of 22.1% for fiscal 2006. The increase in the projected effective tax rate is due mainly to the higher level of taxable income the Company is currently generating.
Six Months Ended December 31, 2006 Compared to Six Months Ended December 31, 2005
Net Sales. Net sales increased $10.9 million, or 22.0% to $60.5 million for the first six months ended December 31, 2006 compared to $49.6 million for the first six months of fiscal 2006. This increase resulted from a $4.9 million rise in shipments of wireless infrastructure and consumer products and a $6.0 million rise in sales of Space and Defense products.
The increase in sales of Wireless products was a result of a rise in worldwide customer demand for Wireless infrastructure products over the past year. Wireless product sales rose $4.9 million or 15.0% in the first half of fiscal 2007 compared to the first six months of fiscal 2006, due to a $1.4 million increase in shipments of custom products resulting from higher demand from Nokia, a $1.4 million increase (60.0%) in sales of new consumer component products and a $2.1 million rise in sales of standard Wireless components used mainly in power amplifier basestation applications.
Sales of Space and Defense products rose $6.0 million, or 33.7%, in the first half of fiscal 2007 compared to the same period last year. This increase consisted mainly of a $5.8 million rise in shipments of Defense products and a relatively minor increase in sales of Space products. Approximately $4.0 million of the increase in Defense product shipments resulted from the initial production phase of a contract with SRC Tec, Inc. to provide components used in a jammer system designed to counter remote controlled improvised explosive devices (Counter IED). Shipments under this contract, which began in September 2006, were approximately $3.5 million in the second quarter and are expected to continue at this rate through the third quarter of 2007 and then to drop to between $0.5 to $1.0 million per quarter in the fourth quarter.
Gross Profit. Gross profit for the first half of fiscal 2007 was $21.7 million
(As restated), (35.9% (As restated) of net sales), up $4.3 million (As restated)
from $17.4 million (35.1% of net sales) for the same period of the prior year.
Gross profit on sales increased in the first half of fiscal 2007 over the first
half of last year due to the substantial rise in overall sales of $10.9 million
including a substantial increase in defense sales and a more favorable product
mix resulting from the increase in sales of higher margin standard wireless
components in the current six months compared to the first half of last year.
Marketing. Marketing expenses were $3.7 million, (6.2% of net sales) for the first half of fiscal 2007, up 7.4% from $3.5 million (7.0% of net sales) for the first half of fiscal 2006. Marketing expenses in the current first six months rose over the first half of last fiscal year due to increased commission expense resulting from the higher sales levels and additional personnel and travel expenses to serve the expanding Asian and Defense markets.
Research and Development. Research and development expenses were $4.3 million (7.2% (As restated) of net sales) in the first six months of fiscal 2007, unchanged from $4.3 million (8.7% of net sales) for the first six months of fiscal 2006. Research and development expenditures are supporting further development of Wireless infrastructure and consumer component opportunities, as well as new technology development in the Space and Defense Group. Internal Research and Development expenditures have increased with the higher level of opportunities in the marketplace. The Company does not expect to reduce its current research and development efforts and is presently working on a number of new standard and custom Wireless and Space and Defense opportunities.
General and Administrative. General and administrative expenses increased 10.2% to $5.5 million (9.1% of net sales) for the first half of fiscal 2007 from $5.0 million (10.1% of net sales) for the first half of fiscal 2006. The increase resulted primarily from additional personnel costs due to the expanded level of Company business, a one-time, first quarter write down of the China facility leasehold improvement costs of $80,000 resulting from the move to a new larger facility, and additional outside consulting services retained by the Company for specific short-term initiatives.
Operating Income. Operating income rose 77.0% (As restated) in the first six months of fiscal 2007 to $8.1 million (As restated) (13.4% (As restated) of sales) compared to $4.6 million (9.3% of net sales) for the first six months of fiscal 2006. On a reporting segment basis, Wireless operating income was $3.9 million (As restated) for the first six months of fiscal 2007, up $656,000 (As restated), or 20.9% (As restated), from Wireless operating income of $3.3 million in the first half of fiscal 2006. Wireless operating income improved significantly in the current first six months as compared to the first half of last fiscal year. This increase was due to efficiency gains derived from the large overall increase in sales and a more favorable Wireless product mix.
Space and Defense operating income was $4.2 million (As restated) (17.7% of Space and Defense net sales), for the first half of fiscal 2007, up $2.9 million (As restated) from $1.3 million for the first half of fiscal 2006. Operating margins in this group have improved as a result of efficiencies realized from both the overall $10.9 million increase in sales volume and the $6.0 million rise in shipments of Space and Defense Group products in the current first six months resulting from $4.0 million of initial production shipments of "Counter IED" products in the first half of fiscal 2007, compared to the same six months of the prior year.
Interest Expense. Interest expense represents interest paid on a deferred obligation. Interest expense for the first half of fiscal 2007 was $12,000; no change from the first half of fiscal 2006.
Other Income. Other income is primarily interest income received on invested cash balances and gains on the sale of land. Other income increased 61.0% to $1.8 million in the first half of fiscal 2007 compared to $1.1 million for the first half of last year. This increase was caused mainly by the rise in market interest rates over the last twelve months and a one-time gain of $80,000 on the sale of a small parcel of land during the current first quarter. Other income will fluctuate based on short term market interest rates and the level of investable cash balances.
Income Taxes. Income taxes for the first six months of fiscal 2007 were $2.4 million (4.0% (As restated) of net sales), including a tax benefit resulting from the renewal of the federal research and experimentation credit retroactive to January 1, 2006 representing an effective tax rate of 24.3% (As restated). This compares to income tax expense of $1,474,000 (3.0% of net sales) for the first six months of fiscal 2006, representing an effective tax rate of 25.8%. The Company's effective tax rate is a direct result of the proportion of federally exempt state municipal bond income and federal tax credits and benefits in relation to the levels of taxable income or loss. The projected effective tax rate for fiscal 2007 is approximately 25.0% compared to an actual effective tax rate of 22.1% for fiscal 2006. The increase in the projected effective tax rate is due mainly to the higher level of taxable income the Company is currently generating.
Critical Accounting Policies
The methods, estimates and judgments management uses in applying the Company's most critical accounting policies have a significant impact on the results reported in the Company's financial statements. The U.S. Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results, and that require management to make the most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company's most critical policies include: 1) valuation of accounts receivable, which impacts general and administrative expense; 2) valuation of inventory, which impacts cost of sales and gross margin; 3) the assessment of recoverability of goodwill and other intangible and long-lived assets, which impacts write-offs of goodwill, intangibles and long-lived assets; 4) accounting for stock based compensation, which impacts multiple expense components throughout the statements of income; and 5) accounting for income taxes, which impacts the valuation allowance and the effective tax rate. Management reviews the estimates, including, but not limited to, allowance for doubtful accounts, inventory reserves and income tax valuations on a regular basis and makes adjustments based on historical experiences, current conditions and future expectations. The reviews are performed regularly and adjustments are made as required by current available information. The Company believes these estimates are reasonable, but actual results could and have differed at times from these estimates.
The Company's accounts receivable represent those amounts which have been billed to its customers but not yet collected. The Company analyzes various factors including historical experience, credit worthiness of customers and current market and economic conditions. The allowance for doubtful accounts balance is established based on the portion of those accounts receivable which are deemed to be potentially uncollectible. Changes in judgments on these factors could impact the timing of costs recognized.
The Company states inventories at the lower of cost or market, using a standard cost methodology to determine the cost basis for the inventory. This method approximates actual cost on a first-in-first-out basis. The recoverability of inventories is based on the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology.
The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. The Company evaluates the need for valuation allowances on a regular basis and adjusts the allowance as needed. These adjustments, when made, would have an impact on the Company's financial statements in the period that they were recorded.
Intangible assets with estimable useful lives are amortized to their residual values over those estimated useful lives in proportion to the economic benefit consumed.
Long-lived assets with estimated useful lives are depreciated to their residual values over those useful lives in proportion to the economic value consumed. Long-lived assets are tested for impairment at the group level, which is usually an economic unit such as a manufacturing facility or department, which has a measurable economic output or product. Long-lived assets are tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and exceeds its fair market value. This circumstance exists if the carrying amount of the assets in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value as determined by the discounted cash flow or in the case of negative cash flow, an independent market appraisal of the asset.
Goodwill is tested annually during the fourth fiscal quarter, or sooner if indicators of impairment exist, for impairment by the Company at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Valuation methods for determining the fair value of the reporting unit include reviewing quoted market prices and discounted cash flows. If the goodwill is indicated as being impaired (the fair value of the reporting unit is less than the carrying amount), the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value of the reporting unit goodwill is then compared with the carrying amount of the reporting unit goodwill and, if it is less, the Company would then recognize an impairment loss.
The Company accounts for stock based compensation by recognizing expense over the vesting period for any nonvested stock option awards granted. Stock option grants are valued by using a Black-Scholes method at the date of the grant. There are assumptions and estimates made by management which go into the valuation of the options granted, such as volatility, expected option term, and forfeiture rate. The Company recognizes expense on options granted using a straight-line method over the vesting period. Restricted stock grants are expensed over the vesting period, which is determined at the date of the grant.
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, 2006 was $6.2 million compared to net cash provided by operations for the first half of the prior year of $6.9 million. The positive cash flow from operations in the current six months was due to the high level of net income before depreciation and non cash equity compensation ($11.7 million) (As restated) which more than off-set the $5.0 million used to fund the current inventory increase. The positive cash flow from operations in the first half of fiscal 2006 was due primarily to income before depreciation and non cash equity compensation for the period of $8.4 million coupled with a $877,000 decline in trade and other receivables which off-set a $2.7 million increase in inventory.
Net cash used in, or provided by, investing activities consists of funds used to purchase capital equipment, proceeds from the sale of land and equipment and funds used or provided by the net purchase or maturity of marketable debt securities.
Net cash used by investing activities in the first half of fiscal 2007 was ($6.7 million) and consisted of $648,000 used for net purchases and settlement of matured investments and $6.2 million used to acquire capital equipment and fund the Company's current physical plant expansion. Net cash provided by investing activities in the first half of fiscal 2006 was $522,000 and consisted of funds provided by net purchases and settlement of matured investments totaling $3.5 million, less capital additions of $3.0 million.
Net cash provided by financing activities was $2.7 million in the first half of fiscal 2007 and consisted entirely of funds and tax benefits received from the exercise of stock options. Cash used in financing activities the first half of fiscal 2006 consisted of $9.8 million used for the
purchase of 343,611 treasury shares, net of $646,000 received from the exercise of stock options and $378,000 in tax benefits generated by option exercises.
During the remainder of fiscal 2007, the Company anticipates that its main cash requirements will be for additions to capital equipment and funds for the current building expansion. Capital expenditures are expected to total between $11.0 and $12.0 million for fiscal 2007 and will be funded by existing cash balances.
Although no shares have been purchased in the past six months, the Company expects to continue to purchase shares of its common stock in the open market and/or through private negotiated transactions under the current Board authorization, depending on market conditions. At December 31, 2006, there were 1,078,000 shares remaining under the current Board repurchase authorization.
At December 31, 2006, the Company had approximately $91.5 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 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 $4,907,470 $686,804 $1,373,607 $1,373,607 $1,473,452 Deferred compensation 343,671 65,000 130,000 130,000 18,671 |
Recent Accounting Pronouncements
FASB Interpretation 48 was issued in July 2006 to clarify the criteria for recognizing tax benefits under FASB Statement No. 109, Accounting for Income Taxes. The Interpretation defines the threshold for recognizing the benefits of tax-return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority and will affect many companies' reported results and their disclosures of uncertain tax positions. The Interpretation does not prescribe the type of evidence required to support meeting the more-likely-than-not threshold, stating that it depends on the individual facts and circumstances. The benefit recognized for a tax position meeting the more-likely-than-not criterion is measured based on the largest benefit that is more than 50 percent likely to be realized. The measurement of the related benefit is determined by considering the probabilities of the amounts that could be realized upon ultimate settlement, assuming the taxing authority has full knowledge of all relevant facts and including expected negotiated settlements with the taxing authority. Interpretation 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006 (the Company's 2008 fiscal year). The company is currently analyzing the financial statement impact of adopting this pronouncement.
Accounting for Pension and Other Postretirement Benefits -- In September 2006, the FASB published Statement of Financial Accounting No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires companies to report on their balance sheets the funded status of pension and other post retirement benefit plans. The proposal would also require companies to measure plan assets and obligations as of the employer's balance-sheet date. As a result, companies would recognize on their balance sheets actuarial gains and losses and prior service cost that have not yet been included in income. This could significantly increase reported liabilities for many companies with a corresponding reduction in equity reported as accumulated other comprehensive income. The provisions for the statement are effective for fiscal years ending after December 15, 2006, (the Company's 2007 fiscal year) with earlier application encouraged. The Company adopted SFAS No. 158 effective June 30, 2007, and the effect of the adoption did not have a material impact to the consolidated condensed financial statements.
In September 2006, SEC Staff Accounting Bulletin No. 108 was issued to provide guidance on Quantifying Financial Statement Misstatements. Staff Accounting Bulletin No. 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. The SAB requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The SAB does not change the staff's previous guidance in SAB 99 on evaluating the materiality of misstatements. When the effect of initial adoption is determined to be material, the SAB allows registrants to record that effect as a cumulative-effect adjustment to beginning-of-year retained earnings. The requirements are effective for annual financial statements covering the first fiscal year ending after November 15, 2006 (the Company's fiscal 2007). The Company adopted SAB 108 effective July 1, 2006, see note 2 to the consolidated condensed financial statements.
Fair Value Measurements. In September 2006, the FASB published Statement of Financial Accounting No. 157, Fair Value Measurements. This Statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. The Statement applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. It will also affect current practices by nullifying the Emerging Issues Task Force (EITF) guidance that prohibited recognition of gains or losses at the inception of derivative transactions whose fair value is estimated by applying a model and by eliminating the use of "blockage" factors by brokers, dealers, and investment companies that have been applying AICPA Guides. The Statement is effective for fair-value measures already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 (the Company's fiscal 2009) and interim periods within those fiscal years. Early application is permissible only if no annual or interim financial statements have been issued for the earlier periods. The requirements of the Statement are applied prospectively, except for changes in fair value related to estimating the fair value of a large block position and instruments measured at fair value at initial recognition based on transaction price in accordance with EITF 02-3 or Statement 155. The Company is currently assessing the financial impact of SFAS No. 157 on its consolidated financial statements.
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; the Company's ability to timely ramp up to meet some of our customers' increased demands; potential unanticipated liabilities and delays associated with the physical expansion of the Company's Syracuse, New York facility; unanticipated delays in successfully completing customer orders within contractually required timeframes; increased pricing pressure from our customers; decreased capital expenditures by wireless service providers; the possibility that the Company may be unable to successfully execute its business strategies or achieve its operating objectives, generate revenue growth or achieve profitability expectations; successfully securing new design wins from our OEM customers, reliance on a limited number of key component suppliers, unpredictable difficulties or delays in the development of new products; order cancellations or extended postponements; the risks associated with any technological shifts away from the Company's technologies and core competencies; unanticipated impairments of assets including investment values and goodwill; diversion of defense spending away from the Company's products and or technologies due to on-going military operations; and litigation involving antitrust, intellectual property, environmental, product warranty, product liability, and other issues. You are encouraged to review Anaren's 2006 Annual Report, Anaren's Form 10-K (as mended) for the fiscal year ended June 30, 2006 and Anaren's Form 10-Q (as amended) for the three months ended September 30, 2006 and exhibits to those Reports filed with the Securities and Exchange Commission to learn more about the various risks and uncertainties facing Anaren's business and their potential impact on Anaren's revenue, earnings and stock price. Unless required by law, Anaren disclaims any obligation to update or revise any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including factors described elsewhere in this Quarterly Report on Form 10-Q.
As of December 31, 2006, the Company had cash, cash equivalents and marketable securities of $91.5 million, all of which consisted of cash and highly liquid investments in marketable debt securities. The marketable debt securities at date of purchase normally have maturities between one and 18 months, are exposed to interest rate risk and will decrease in value if market interest rates increase. A hypothetical decrease in market interest rates of 10.0% from December 31, 2006 rates, or 0.375%, would have reduced net income and cash flow by approximately $83,000, or $0.004 per share for the quarter. Due to the relatively short maturities of the securities and its ability to hold those investments to maturity, the Company does not believe that an immediate decrease in interest rates would have a significant effect on its financial condition or results of
operations. Over time, however, declines in interest rates will reduce the Company's interest income.
Item 4. Controls and Procedures
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 15d-15(e) as of the end of the period covered by this quarterly report. Management has concluded that their disclosure controls and procedures were not effective at December 31, 2006 due to the material weaknesses in internal control over financial reporting as described below:
The Company did not maintain policies and procedures that were sufficient to assess financial reporting risks on a timely basis. Specifically,
(i) Management did not have an adequate process to assess risks when changes in the internal control system or key finance personnel occur and provide the appropriate level of oversight. This material weakness contributed to the material weakness listed in item (iii) below.
(ii) Management did not maintain controls sufficient to assess on a timely
basis the financial statement impact of significant contracts and
agreements or to identify, monitor, and measure and accounting practices
that are not in compliance with generally accepted accounting principles.
This material weakness contributed to the material weaknesses in items
(iv) through (vi) below.
These material weaknesses contributed to the material weaknesses listed in items
(iii) through (vi) below.
(iii) Accounting for Inventory and Cost of Sales in China: The Company's accounting personnel in China had insufficient knowledge and experience in the application of U.S. generally accepted accounting principles, which resulted in inappropriate changes to the policies and procedures for the accounting for inventory and cost of sales. As a result, the Company did not maintain effective policies and procedures over the determination and reporting of its inventory and cost of sales. This material weakness resulted in restatement of the Company's 2007 interim financial statements.
(iv) Accounting for Distributor Agreements: The Company's policies and procedures were not adequate to properly account for sales transactions with distributors. Specifically, the Company's policies allowed for the recognition of revenue upon shipment to the distributor rather than when earned by the Company in accordance with U.S. generally accepted accounting principles. This material weakness resulted in adjustments to the fiscal 2007 annual consolidated financial statements.
(v) Accounting for Stock-Based Compensation: The Company's policies and procedures were not adequate to properly recognize stock compensation expense. Specifically, the Company's policies allowed for the recognition of expense for retirement eligible employees over nonsubstantive service periods rather than as incurred in accordance with U.S. generally accepted accounting principles. This material weakness resulted in adjustments to the fiscal 2007 annual consolidated financial statements.
(vi) Accounting for Warranty Reserves, Sales Returns and Allowances and Inventory Valuations: The warranty accrual, reserve for sales returns and allowances and practices related to the valuation of inventory were recognized in the Company's financial statements using non-GAAP policies.
The Company did not maintain policies and procedures to monitor these accounting practices that were sufficient to prevent or detect, on a timely basis, a misstatement that could be considered to be material to the Company's financial statements. This material weakness resulted in adjustments to the fiscal 2007 annual consolidated financial statements.
B. Changes in Internal Control Over Financial Reporting
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 control over financial reporting.
PART II OTHER INFORMATION
Item 1A. Risk Factors
The Company is exposed to certain risk factors that may effect operations and/or financial results. The significant factors known to the company are described in the Company's most recently filed annual report on Form 10-K/A 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/A.
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On May 10, 2005, the Board of Directors increased by 2,000,000 the number of shares that the Company was authorized to repurchase in open market or by privately negotiated transactions through its previously announced stock repurchase program. The program, which may be suspended at any time without notice, has no expiration date. The following table sets forth information regarding shares repurchased and purchasable under the program during and as of the end of the periods indicated. On December 31, 2006, 1,077,879 shares remained authorized for purchase.
---------------------------------------------------------------------------------------------------------- Maximum Number (or Total Number of Approximate Dollar Shares (or Units) Value) of Shares (or Total Number of Purchased as Part of Units) that May Yet Shares (or Units) Average Price Paid Publicly Announced Be Purchased Under Period Purchased per Share (or Unit) Plans or Programs the Plans or Programs ---------------------------------------------------------------------------------------------------------- October 2006 0 -- 0 1,077,879 ---------------------------------------------------------------------------------------------------------- November 2006 0 -- 0 1,077,879 ---------------------------------------------------------------------------------------------------------- December 2006 0 -- 0 1,077,879 ---------------------------------------------------------------------------------------------------------- Total 0 -- 0 -- ---------------------------------------------------------------------------------------------------------- |
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual shareholders' meeting was held on November 2, 2006, at which time the election of Directors was conducted. The following named individuals were nominated and re-elected as Directors.
Votes Votes For Withheld ---------- --------- Dale F. Eck 14,730,022 1,646,914 Carl W. Gerst, Jr. 14,731,032 1,645,904 James G. Gould 14,356,789 2,020,147 John L. Smucker 14,890,909 1,486,027 |
Mr. Smucker was elected to a term expiring in 2007. Messr. Eck, Gerst and Gould were elected to terms expiring in 2009. The terms of Directors Lawrence A. Sala, Robert U. Roberts, Dr. David Wilemon, Matthew S. Robison and Herbert I. Corkin continued after the meeting.
Additionally, a proposal to amend the Company's 2004 Comprehensive Long Term Incentive Plan was approved by a vote of 10,240,900 for, 3,962,624 against and 339,193 withheld.
Additionally, the selection of KPMG LLP as the Company's independent registered public accounting firm for fiscal 2007 was approved by a vote of 15,807,861 for, 563,070 against and 6,005 withheld.
Item 6. Exhibits
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
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.
Date: October 31, 2007 /s/Lawrence A. Sala ----------------------------------- Lawrence A.Sala President & Chief Executive Officer Date: October 31, 2007 /s/Joseph E. Porcello ----------------------------------- Joseph E. Porcello Sr. Vice President of Finance and Treasurer |
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