SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
__ 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 MICROWAVE, INC.
(Exact name of Registrant as specified in its Charter)
New York 16-0928561
-------- ----------
(State of incorporation) (I.R.S Employer Identification No.)
6635 Kirkville Road
East Syracuse, New York 13057
----------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 315-432-8909
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of Registrant's Common Stock outstanding on May 7,
2000 was 7,281,305.
ANAREN MICROWAVE, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
March 31, 2000 and June 30, 1999
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended March 31, 2000 and 1999
Consolidated Condensed Statements of Earnings 5
for the Nine Months Ended March 31, 2000
and 1999
Consolidated Condensed Statements of Cash Flows 6
for the Nine Months Ended March 31, 2000 and
1999
Notes to Consolidated Condensed Financial 7
Statements
Item 2. Management's Discussion and Analysis 10
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative disclosures about
Market Risk
17
PART II - OTHER INFORMATION
---------------------------
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
2
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
March 31, 2000 and June 30, 1999
Unaudited
Assets March 31, 2000 June 30, 1999
------ -------------- -------------
Current assets:
Cash and cash equivalents $ 101,862,349 $ 13,481,576
Marketable debt securities 15,850,697 15,005,129
Receivables, less allowance of $13,000 11,536,624 6,333,096
Inventories 10,308,807 8,384,922
Refundable income taxes 1,128,474 461,846
Prepaid expenses 530,911 224,358
Deferred income taxes 155,150 116,688
------------- -------------
Total current assets 141,373,012 44,007,615
------------- -------------
Property, plant and equipment, net 11,685,771 8,603,784
------------- -------------
Marketable debt securities 5,310,836 4,976,275
Goodwill, net of amortization
of $43,449 in 2000 7,777,455 --
Deferred income taxes 690,377 304,060
Other assets 989,301 574,965
------------- -------------
$ 167,826,752 $ 58,466,699
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 3,577,859 $ 2,360,226
Income taxes payable 226,926 472,190
Accrued expenses 2,718,598 1,773,762
Customer advance payments 986,473 348,454
Other liabilities 161,407 --
------------- -------------
Total current liabilities 7,671,263 4,954,632
Postretirement benefit obligation 1,306,924 1,278,569
Deferred compensation 533,000 388,000
Deferred income taxes 35,424 --
Other 826,957 --
------------- -------------
Total liabilities 10,373,568 6,621,201
------------- -------------
Stockholders' equity:
Common stock of $.01 par value. Authorized
25,000,000 shares; issued 8,060,183 shares
at March 31, 2000 and 6,554,366 shares
at June 30, 1999 80,602 65,544
Additional paid-in capital 137,960,573 37,469,470
Unearned compensation (787,570) --
Retained earnings 23,680,562 17,791,467
------------- -------------
160,934,167 55,326,481
Less cost of 1,020,274 shares in treasury
at March 31, 2000 and June 30, 1999 3,480,983 3,480,983
------------- -------------
Total stockholders' equity 157,453,184 51,845,498
------------- -------------
$ 167,826,752 $ 58,466,699
============= =============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
March 31, 2000 and 1999
Unaudited
Mar. 31, 2000 Mar. 31, 1999
------------- -------------
Net sales $ 15,618,931 $ 11,832,624
Cost of sales 8,985,214 7,156,615
------------ ------------
Gross profit 6,633,717 4,676,009
------------ ------------
Operating expenses:
Marketing 1,332,322 1,057,413
Research and development 1,110,815 722,278
General and administrative 1,115,755 826,848
------------ ------------
Total operating expenses 3,558,892 2,606,539
------------ ------------
Operating income 3,074,825 2,069,470
Other income 434,390 353,658
Interest expense (21,155) (9,618)
------------ ------------
Income before income taxes 3,488,060 2,413,510
Income tax expense 1,271,629 845,000
------------ ------------
Net income $ 2,216,431 $ 1,568,510
============ ============
Net income per common and common
equivalent share:
Basic $ 0.39 $ 0.28
============ ============
Diluted $ 0.36 $ 0.27
============ ============
Shares used in computing net income per common
and common equivalent share:
Basic 5,640,463 5,528,745
============ ============
Diluted 6,164,004 5,815,954
============ ============
Dividends per share $ -- $ --
============ ============
See accompanying notes to consolidated condensed financial statements.
4
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Nine Months Ended
March 31, 2000 and 1999
Unaudited
Mar. 31, 2000 March 31, 1999
-------------- ----------------
Net sales $ 41,354,170 $ 33,368,015
Cost of sales 24,428,744 20,180,718
------------ ------------
Gross profit 16,925,426 13,187,297
------------ ------------
Operating expenses:
Marketing 3,612,624 3,053,373
Research and development 2,600,547 2,082,011
General and administrative 2,905,157 2,390,992
------------ ------------
Total operating expenses 9,118,328 7,526,376
Operating income 7,807,098 5,660,921
Other income 1,372,810 1,017,396
Interest expense (41,184) (28,858)
------------ ------------
Income before income taxes 9,138,724 6,649,459
Income tax expense 3,249,629 2,328,000
------------ ------------
Net income $ 5,889,095 $ 4,321,459
============ ============
Net income per common and common
equivalent share:
Basic $ 1.05 $ 0.78
============ ============
Diluted $ 0.98 $ 0.75
============ ============
Shares used in computing net income per common
and common equivalent share:
Basic 5,582,391 5,516,667
============ ============
Diluted 5,980,212 5,763,129
============ ============
Dividends per share $ -- $ --
============ ============
See accompanying notes to consolidated condensed financial statements.
5
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Nine Months Ended
March 31, 2000 and 1999
Unaudited
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 5,889,095 $ 4,321,459
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of plant and equipment 1,268,751 1,058,652
Amortization of intangibles 97,352 --
Amortization of unearned compensation 106,430 --
Deferred income taxes (57,921) (200,019)
Changes in operating assets and liabilities, net
of acquisition of RF Power Components, Inc.:
Receivables (3,682,776) 192,283
Refundable income taxes (494,105) --
Inventories (450,762) 1,434,212
Prepaid expenses (271,587) (61,012)
Accounts payable (73,709) (312,870)
Accrued expenses 721,186 130,891
Income taxes payable 1,536,455 (137,743)
Customer advance payments 638,019 362,045
Deferred compensation 145,000 108,000
Postretirement benefit obligations 28,355 60,000
Other assets and liabilities (159,398) --
------------- -------------
Net cash provided by
operating activities 5,240,385 6,955,898
------------- -------------
Cash flows from investing activities:
Capital expenditures (3,872,139) (1,081,992)
Purchase of marketable debt securities (1,180,129) (4,754,840)
Purchase of RF Power Components, Inc., net of cash acquired (7,510,093) --
------------- -------------
Net cash used in investing activities (12,562,361) (5,836,832)
------------- -------------
Cash flows from financing activities:
Payments on line of credit (383,026) --
Purchase of treasury stock -- (1,468,906)
Proceeds from common stock offering 94,844,915 --
Proceeds from exercise of stock options 1,240,860 462,363
------------- -------------
Net cash provided by (used in)
financing activities 95,702,749 (1,006,543)
------------- -------------
Net increase in cash
and cash equivalents 88,380,773 112,523
Cash and cash equivalents at beginning of period 13,481,576 11,248,925
------------- -------------
Cash and cash equivalents at end of period $ 101,862,349 $ 11,361,448
============= =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ 41,184 $ 28,858
============= =============
Income taxes $ 2,260,000 $ 2,665,762
============= =============
See accompanying notes to consolidated condensed financial statements.
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
The consolidated condensed financial statements are unaudited (except for the
balance sheet information as of June 30, 1999, which is derived from the
Company's audited consolidated financial statements) and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999. The results
of operations for the three months and nine months ended March 31, 2000 are not
necessarily indicative of the results for the entire fiscal year ending June 30,
2000, or any future interim period.
NOTE 1: Acquisition of RF Power Components, Inc.
----------------------------------------
On February 29, 2000, the Company acquired all of the outstanding stock of RF
Power Components, Inc. RF Power Components, Inc. is based in Long Island, New
York, and is primarily engaged in the manufacture of electronic products,
including power resistors, attenuators and couplers. The transaction is being
accounted for using the purchase method of accounting for a business combination
and, accordingly, the results of operations of RF Power Components, Inc. have
been included in the Company's consolidated financial statements since the date
of acquisition. The purchase price was $7,749,294 in cash including direct
acquisition costs, and 23,517 shares of Anaren's common stock with an aggregate
value of $1,744,667. The purchase price was allocated to the net assets acquired
and liabilities assumed based upon estimated fair market values with the excess
consideration over such fair values recorded as goodwill which is being
amortized on a straight-line basis over 15 years. The preliminary allocation of
the purchase price to the assets acquired and liabilities assumed follows:
Cash $ 239,201
Accounts receivable 1,520,752
Inventories 1,473,123
Prepaid expenses 34,966
Refundable income taxes 172,523
Plant and equipment 478,599
Deposits and other assets 369,193
Deferred income taxes 331,434
Accounts payable (1,291,342)
Accrued expenses (300,687)
Debt (383,026)
Other liabilities (971,679)
Goodwill 7,820,904
-----------
$ 9,493,961
===========
The following unaudited pro forma financial information presents the combined
results of operations of the Company and RF Power Components, Inc., as if the
acquisition had taken place as of July 1, 1998. The pro forma information
includes certain adjustments, including the amortization of goodwill, reduction
of interest income, and certain other adjustments, together with related income
tax effects. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had the Company and RF Power
Components, Inc. constituted a single entity during such periods.
Three Months Ended March 31 Nine Months Ended March 31
--------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales $17,209,312 $13,522,886 $48,507,688 $38,438,800
Net income 2,026,596 1,458,573 5,398,226 3,995,751
Earnings per share:
Basic 0.36 0.26 0.96 0.71
Diluted 0.33 0.25 0.90 0.68
NOTE 2: Inventories
-----------
Inventories at March 31, 2000 and June 30, 1999 are summarized as
follows:
Mar. 31 June 30
------- -------
Raw materials $ 5,157,370 $ 3,688,704
Work in process 2,892,380 3,241,935
Finished goods 2,259,057 1,454,283
----------- -----------
$10,308,807 $ 8,384,922
=========== ===========
NOTE 3: Property, Plant and Equipment
-----------------------------
Property, plant and equipment at March 31, 2000 and June 30,
1999 are summarized as follows:
Mar. 31 June 30
------- -------
Land and land improvements $ 1,362,050 $ 1,362,050
Buildings and improvements 6,402,309 5,266,135
Machinery and equipment 31,069,404 27,854,840
------------ ------------
38,833,763 34,483,025
Less accumulated
depreciation and
amortization (27,147,992) (25,879,241)
------------ ------------
$ 11,685,771 $ 8,603,784
============ ============
7
NOTE 4: Net Income Per Share
--------------------
Net income per share is computed based on the weighted average number
of common shares and common stock options (using the treasury stock
method) outstanding in accordance with the requirements of Financial
Accounting Standards Board Statement No. 128 "Earnings Per Share."
The following table sets forth the computation of basic and fully
diluted earnings per share:
Three Months Ended Nine Months Ended
----------------------- ----------------------
Mar. 31 Mar. 31 Mar. 31 Mar. 31
Numerator: 2000 1999 2000 1999
- --------- ---- ---- ---- ----
Net income available to
common stockholders $2,216,431 $1,568,510 $5,889,095 $4,321,459
========== ========== ========== ==========
Denominator:
- ------------
Denominator for basic net income per common
and common share equivalent:
Weighted average shares outstanding 5,640,463 5,528,745 5,582,391 5,516,667
========== ========== ========== ==========
Denominator for diluted net income per common
and common share equivalent:
Weighted average shares outstanding 5,640,463 5,528,745 5,582,391 5,516,667
Common stock options 523,541 287,209 397,821 246,462
---------- ---------- ---------- ----------
Weighted average shares and conversions 6,164,004 5,815,954 5,980,212 5,763,129
========== ========== ========== ==========
NOTE 5: Restricted Stock Issue
----------------------
During the second quarter ended December 31, 1999, the Company issued
24,000 of restricted common stock under a deferred compensation program approved
by the board of directors. These shares have been included in the share count
calculation for diluted earnings per share for both the nine months and three
months ended March 31, 2000 as required by FASB Statement No. 128 "Earnings per
Share."
NOTE 6: Segment Information
-------------------
The Company operates predominately in the wireless communications,
satellite communications and space and defense electronics markets. The
Company's two reporting segments are the wireless group and the space and
defense group, and 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 making operating decisions and assessing performance.
The wireless segment designs, manufactures and markets commercial products used
mainly by the wireless communications market. Products produced in this business
segment include highly integrated microwave signal distribution components and
subsystems, as well as a product line of standard surface mount microwave signal
splitting and combining components, trade name Xinger, that are used in
terrestrial wireless communications base station amplifiers. The operations of
RF Power Components, Inc. are reported with the wireless segments.
8
The space and defense segment of the business designs, manufacturers and
markets specialized products for those companies in the radar and satellite
communications market. Products produced in this business segment include
passive beamforming networks for communications satellite multi-beam antennas,
digital frequency discriminators and other radar type discriminators, as well as
a wide range of standard component products for defense electronics, such as
mixers, couplers, power dividers and correlators.
The following table reflects the results of the segments consistent with the
Company's internal financial reporting process. The following results are used
in part, by management, both in evaluating the performance of, and in allocating
resources to, each of the segments.
Space & Corporate and
Wireless Defense Unallocated Consolidated
-------- ------- ----------- ------------
Net sales:
Three months ended
March 31, 2000 $ 10,208,470 $ 5,410,461 $ -- $ 15,618,931
March 31, 1999 5,415,537 6,417,087 -- 11,832,624
Nine months ended
March 31, 2000 $ 24,459,737 $ 16,894,433 $ -- $ 41,354,170
March 31, 1999 14,519,245 18,848,770 -- 33,368,015
Operating income:
Three months ended
March 31, 2000 1,785,854 1,288,971 -- 3,074,825
March 31, 1999 872,981 1,196,489 -- 2,069,470
Nine months ended
March 31, 2000 4,800,402 3,006,696 -- 7,807,098
March 31, 1999 1,676,832 3,984,089 -- 5,660,921
Identifiable assets:*
Nine months ended
March 31, 2000 21,469,709 7,681,537 138,675,506 167,826,752
June 30, 1999 5,355,217 8,792,434 44,319,048 58,466,699
Depreciation and Amortization:**
Three months ended
March 31, 2000 339,265 183,058 -- 522,323
March 31, 1999 150,573 211,034 -- 361,607
Nine months ended
March 31, 2000 756,643 609,460 -- 1,366,103
March 31, 1999 431,389 627,263 -- 1,058,652
* Segment assets primarily include trade accounts receivable, goodwill 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 debt securities;
other receivables; prepaid expenses; deferred income taxes; refundable
income taxes; property, plant and equipment; and patent.
** Depreciation and amortization expense is allocated departmentally based on
an estimate of capital equipment employed by each department. Depreciation
expense is then further allocated within the department as it relates to
the specific business segment impacted by the consumption of the capital
resources utilized. Due to the similarity of the property, plant and
equipment utilized, the Company does not specifically identify these
assets by individual business segment for internal reporting purposes.
Amortization of goodwill recorded in acquisition transactions is allocated
to the segments based on the sales segment classification of the acquired
company.
NOTE 7: Income Taxes
------------
The income tax rates of 36.5% and 35.5% utilized for interim financial
statement purposes for the three and nine months ended March 31, 2000 are based
on estimates of income and utilization of tax credits for the entire year.
9
NOTE 8: Common Stock Offering
---------------------
During the third quarter of fiscal 2000, the Company sold an additional
1,323,000 shares of its common stock in a public offering for $94,844,915, net
of issuance costs. In April 2000, the underwriters exercised their option to
purchase an additional 240,000 shares, resulting in additional proceeds to the
Company of $17,305,200, net of issuance costs.
NOTE 9: Stock Split
-----------
On February 19, 2000, the Company's board of directors authorized a 3 for 2
stock split in the form of a stock dividend to shareholders of record on May 12,
2000. Share and per share amounts have not been restated to reflect the split
which will occur subsequent to the filing of this Quarterly report on form 10Q.
Item 2: Management's Discussion and Analysis of Financial and
Results of Operations
Management's discussion and analysis set forth below reviews our operating
results for the three months and the nine months ended March 31, 2000, and our
financial condition at March 31, 2000. This review should be read in conjunction
with the accompanying consolidated condensed financial statements. Statements
contained in management's discussion and analysis, other than historical facts,
are forward-looking statements that are qualified by the cautionary statements
at the end of this discussion.
Overview
The consolidated condensed financial statements present the financial condition
of the Company as of March 31, 2000 and June 30, 1999 and the consolidated
results of operations and cash flows of the Company for the three months and the
nine months ended March 31, 2000 and 1999.
On February 29, 2000, we acquired all of the outstanding capital stock of RF
Power Components, Inc. RF Power Components, Inc. based in Long Island, New York,
had approximately 90 employees as of February 29, 2000, and is primarily engaged
in the manufacture of electronic products, including power resistors,
attenuators and couplers. The purchase price for RF Power Components, Inc. was
$7,749,294 in cash including direct acquisition costs, and 23,517 shares of our
common stock with an aggregate value of 1,744,667. We accounted for this
acquisition using the purchase method of accounting.
In March, we successfully completed a follow on offering in which 1,563,000 new
shares of our common stock were sold by the Company, including the
over-allotment option exercise by the underwriters in April, 2000. The offering
price was $76 per share resulting in approximately $112 million in net proceeds
for the Company, of which $95.0 million was received in March 2000 and $17.0
million in April 2000. We plan to use these net proceeds for general corporate
purposes, and may also use a portion of the net proceeds to acquire
complimentary products, technologies, or business.
Operations for the third quarter and the first nine months of fiscal 2000 were
highlighted by continuing escalation of wireless sales and a significant
improvement in net income over the same periods in fiscal 1999.
In February 2000, the Board of Directors authorized a three for two stock split,
to be effected in the form of a stock dividend payable to shareholders of record
on May 12, 2000.
Net sales for the third quarter ended March 31, 2000 were $15,619,000, up 32%
from net sales of $11,833,000 for the same period in fiscal 1999, while net
sales for the first nine months of fiscal 2000 were $41,354,000, up 24% over
sales of $33,368,000 for the first nine months in the previous year. We recorded
net earnings of $2,216,000 for the third quarter of fiscal 2000, compared to net
earnings of $1,569,000 for the same quarter in fiscal 1999, while net earnings
for the first nine months ended March 31, 2000 amounted to $5,889,000, an
increase of 36% over net earnings of $4,321,000 for the first nine months of
fiscal 1999.
10
Results of Operations
- ---------------------
The following table sets forth the percentage relationships of certain items
from the Company's consolidated condensed statements of earnings as a percentage
of net sales.
Three Months Ended Nine Months Ended
---------------------- ----------------------
Mar. 31 Mar. 31 Mar. 31 Mar. 31
2000 1999 2000 1999
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 57.5% 60.5% 59.1% 60.5%
----- ----- ------ ------
Gross profit 42.5% 39.5% 40.9% 39.5%
----- ----- ------ ------
Operating expenses:
Marketing 8.6% 8.9% 8.7% 9.2%
Research and development 7.1% 6.1% 6.3% 6.2%
General and administrative 7.1% 7.0% 7.0% 7.2%
----- ----- ------ ------
Total operating expenses 22.8% 22.0% 22.0% 22.6%
----- ----- ------ ------
Operating income 19.7% 17.5% 18.9% 16.9%
Other income 2.7% 3.0% 3.3% 3.0%
Interest expense (0.1%) (0.1%) (0.1%) (0.1%)
----- ----- ------ ------
Income before income taxes 22.3% 20.4% 22.1% 19.8%
Income tax expense 8.1% 7.1% 7.9% 7.0%
----- ----- ------ ------
Net income 14.2% 13.3% 14.2% 12.9%
===== ===== ====== ======
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Nine Months Ended
------------------- -------------------
Mar. 31 Mar. 31 Mar. 31 Mar. 31
2000 1999 2000 1999
---- ---- ---- ----
Wireless $10,209 $ 5,416 $24,460 $14,519
Space and Defense 5,410 6,417 16,894 18,849
------- ------- ------- -------
$15,619 $11,833 $41,354 $33,368
======= ======= ======= =======
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
- -------------------------------------------------------------------------------
Net Sales. Net sales increased $3.8 million, or 32% to $15.6 million for the
three months ended March 31, 2000, compared to $11.8 million for the third
quarter of the previous year. This increase was led by an 88% increase in the
wireless sales which more than offset a 16% drop in sales of space and defense
products.
The increase in sales of Wireless products, which consist of catalog surface
mount and custom components use in building wireless basestation equipment,
continues to reflect both the ongoing strong demand by the major basestation
OEM's, as well as the Company's success in achieving higher dollar content per
basestation for its latest digital backplane products. Both shipments of custom
basestation backplanes to original equipment manufacturers or "OEMS" and
shipments of Xinger(TM) surface mount products to amplifier manufacturers rose
significantly in the third quarter in response to this demand. The increase in
wireless sales also reflects the inclusion of March 2000 sales
11
of RF Power Components Inc., which we acquired on February 29, 2000, and which
accounted for approximately $1.2 million of the quarterly sales increase.
Sales of space and defense products consist of custom multi-layer components and
assemblies for communications satellites and defense radar countermeasure
subsystems for the military. Sales in the space and defense Group fell $1.0
million, or 16%, for the three months ended March 31, 2000 compared to the third
quarter of the prior fiscal year. This decline resulted from both delays in
satellite contract awards in the prior fiscal year and the completion of the
Airborne Self Protection Jammer program contract in the second quarter of fiscal
2000, both of which events we anticipated. Quarterly sales in this business area
are expected to remain at current levels through the first quarter of fiscal
2001.
Gross Profit. Gross profit for the third quarter of fiscal 2000 was $6.6 million
(42.5% of net sales), up from $4.7 million (39.5% of net sales) for the third
quarter of fiscal 1999. This improvement was a result of the increase in sales
volume which resulted in significant economies of scale in the manufacturing
operations. Gross profit was further enhanced by an increase in higher margin
engineering design sales in the space and defense group in the current quarter
compared to the third quarter of fiscal 1999. This improvement offset a 4%
decline in wireless gross margins due to a product mix shift toward custom
basestation parts which have a higher material content and lower margins than
surface mount Xingera(TM) products. Additionally, the decline in production of
Space and Defense products in the third quarter resulted in a shift of fixed
manufacturing overhead to the wireless group further decreasing their third
quarter margins. We expect Wireless margins to rebound in the fourth quarter
2000 and first half of fiscal year 2001 as space and defense production
increases next fiscal year. Cost of sales consists primarily of engineering
design costs, material, material fabrication costs, assembly costs and test
costs.
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 increased 26% to $1.3
million (8.6% of net sales) for the third quarter of fiscal 2000 from $1.1
million (8.9% of net sales) for the third quarter of fiscal 1999. This increase
was a result of the continuing expansion of our marketing and sales organization
to support increased order volume and the inclusion of March 2000 marketing
expense by our new acquisition, RF Power Components, Inc.
Research and Development. Research and development expenses consist of materials
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 increased 54% to $1.1
million (7.1% of net sales) in the third quarter of fiscal 2000 from $0.7
million (6.1% of net sales) for the third quarter of fiscal 1999. Research and
development expenditures are expanding to support further development of
wireless infrastructure products and satellite communications opportunities. The
acquisition of RF Power Components, Inc. did not have a material impact on our
research and development expense in the third quarter of fiscal 2000.
General and Administrative. General and administrative expenses increased 35% to
$1.1 million (7.1% of net sales) for the third quarter of fiscal 2000 from $0.8
million (7.0% of net sales) for the third quarter of fiscal 1999. General and
administrative expenses have increased due to the hiring of additional
personnel, a rise in professional fees due to our growth, and the inclusion of
one month, general and administrative expense of RF Power Components, Inc.
12
Other Income. Other income is primarily interest income received on invested
cash balances. Other income increased 23% to $434,000 (2.7% of net sales) for
the third quarter of fiscal 2000 from $354,000 (3.0% of net sales) for the third
quarter of fiscal 1999 due to a significant increase in cash balances in the
current year compared to the prior year.
Interest Expense. Interest expense represents commitment fees and interest paid
on our line of credit. Interest expense for the third quarter of fiscal 2000 was
$21,000 (0.1% of net sales) compared to $10,000 (0.1% of net sales) for the
third quarter of fiscal 1999. The doubling of interest expense was caused by the
addition of one month, (March) interest expense on obligations of RF Power
Components, Inc.
Income Taxes. Income tax expense for the third quarter of fiscal 2000 was $1.3
million (8.1% of net sales), representing an effective tax rate of 36.5%. This
compared to $845,000 million (7.1% of net sales) for the third quarter of fiscal
1999, representing an effective tax rate of 35%.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999
Net Sales. Net sales increased 24% to $41.4 million for the first nine months of
fiscal 2000, from $33.3 million for the first nine months of the previous fiscal
year. This increase resulted from a 68% rise in sales of wireless products,
which more than offset a 10% drop in shipments of Space and Defense products.
Wireless product sales continue to rise due to high demand for custom wireless
base station products from our OEM customers as well as escalating demand for
our Xingera(TM) brand of surface mount components used by wireless amplifier
manufacturers. Wireless sales were also increased by the inclsion of one month's
sales of RF Power Components, Inc.
Sales in the space and defense group fell 10%, or $2.0 million, for the first
nine months of fiscal 2000 compared to the first nine months of the previous
year. This decline in sales for the space and defense group was due to delays in
satellite contract awards in the prior fiscal year and the completion of the
Airborne Self Protection Jammer program, or the ASPJ program, contract in the
second quarter of fiscal 2000, both of which events we anticipated. Quarterly
sales in this business area are expected to remain at or below third quarter
levels through the first quarter of fiscal 2001.
Gross Profit. Gross profit for the first nine months of fiscal 2000 was $16.9
million (40.9% of net sales), up from $13.2 million (39.5% of net sales) for the
first nine months of fiscal 1999. This improvement was a result of the increase
in sales volume which resulted in significant economies of scale in the
manufacturing operations and improvements in product yields in the wireless
group, and an increase in high margin space engineering design work in the
current third quarter of fiscal 2000.
Marketing. Marketing expenses increased 18% to $3.6 million (8.7% of net sales)
for the first nine months of fiscal 2000 from $3.1 million (9.2% of net sales)
for the first nine months of fiscal 1999. This increase was a result of the
expansion of our marketing and sales organization to support increased order
volume, and the inclusion of one month's (March) marketing expense for RF Power
Components, Inc.
13
Research and Development. Research and development expenses increased 25% to
$2.6 million (6.3% of net sales) in the first nine months of fiscal 2000 from
$2.1 million (6.2% of net sales) for the first nine months of fiscal 1999.
Research and development expenditures are expanding to support further
development of wireless infrastructure products and satellite communications
opportunities.
General and Administrative. General and administrative expenses increased 21% to
$2.9 million (7.0% of net sales) for the first nine months of fiscal 2000 from
$2.4 million (7.2% of net sales) for the first nine months of fiscal 1999.
General and administrative expenses have increased due to the hiring of
additional personnel, a rise in professional fees due to our growth and the
inclusion of one month's (March) general and administrative expense for RF Power
Components, Inc.
Other income. Other income increased 35% to $1.4 million (3.3% of net sales)
for the first nine months of fiscal 2000 from $1.0 million (3.0% of net sales)
for the first nine months of fiscal 1999 due to a significant increase in cash
balances in the current fiscal year compared to the prior fiscal year.
Interest Expense. Interest expense for the first nine months of fiscal 2000 was
$41,000 (0.1% of net sales) compared to $29,000 (0.1% of net sales) for the
first half of fiscal 1999. This increase resulted from the inclusions of one
month's interest (March) on the obligations of RF Power Components, Inc.
Income Taxes. Income tax expense for the first nine months of fiscal 2000 was
$3.2 million (7.9% of net sales) representing an effective tax rate of 35.5%.
This compared to $2.3 million (7.0% of net sales) for the first nine months of
fiscal 1999, representing an effective tax rate of 35%.
Liquidity and Capital Resources
Net cash provided by operations for the nine months ended March 31, 2000 and the
nine months ended March 31, 1999 were $5.2 million and $7.0 million,
respectively. The positive cash flows from operations in both the first nine
months of fiscal 2000 and 1999 was due primarily to the profit attained in both
periods. The relatively lower level of cash provided by operations in the first
nine months of fiscal 2000, compared to the first nine months of fiscal 1999,
resulted primarily from increases in accounts receivable levels in the current
year resulting from the higher shipment levels.
Net cash used in investing activities consists of funds which were used to
purchase short-term marketable securities, capital equipment and, in February
2000, the acquisition of RF Power Components, Inc. Capital equipment purchases
in the nine months ended March 31, 2000 and the nine months ended March 31, 1999
were $3.9 million and $1.1 million, respectively. These capital investments in
fiscal 2000 consist primarily of equipment and building renovations to expand
our wireless production capacity.
Cash provided by financing activities amounted to $95.7 million for the nine
months ended March 31, 2000 and consisted primarily of $94.9 million in net
proceeds resulting from the completion of a follow on stock offering in March.
We sold 1,323,000 shares (not including 240,000 shares which were sold upon
exercise of the underwriters' over allotment option which
14
closed in April 2000) at an offering price of $76.00 per share before fees and
expenses. Cash used in financing activities for the first nine months of fiscal
1999 amounted to $1.0 million and consisted of funds used to repurchase our
common stock net of funds received for the exercise of stock options. During the
fourth quarter of fiscal 1998, our Board of Directors authorized the repurchase
of up to 500,000 shares of our common stock at prevailing market prices. During
fiscal 1999 we repurchased 128,000 shares and expended $1.5 million.
During the remainder of fiscal 2000 our main cash requirement will be for
additions to capital equipment and remaining building renovations. These capital
items have been budgeted at $4.5 million and to date approximately $3.9 million
has been expended.
We have a credit facility providing an unsecured $10 million working capital
revolving line of credit bearing interest at prime and maturing December 31,
2003. The terms of the credit facility require maintenance of a minimum tangible
net worth, ratio of cash flows to maturities, and leverage ratio as defined in
the applicable loan agreement. We believe that we were in compliance wth all
restrictions and covenants at March 31, 2000. At March 31, 2000, $0 was
outstanding under the credit facility.
We believe that our cash requirements for the foreseeable future will be
satisfied by currently invested cash balances, expected cash flows from
operations and funds available under our credit facilities and our net proceeds
from this offering.
Year 2000 Status
We have conducted a full review of its programs and systems that could be
affected by the "year 2000 problem." The "year 2000 problem" is the result of
computer programs being written using two digits instead of four to define the
applicable year. Programs with this problem may recognize a date using "00" as
the year 1900 instead of the year 2000, resulting in system failures or
miscalculations. The Company has undertaken projects to update and replace all
known non-compliant internal information systems and processes to ensure that
the year 2000 situation will not have an adverse impact on the internal
operations of the Company.
As of the date of this filing, we have not incurred any significant business
interruptions as a result of the year 2000 problem. However, while no such
occurrence has developed as of the date of this filing, year 2000 problems may
surface throughout calendar year 2000. Therefore, there is no assurance that the
Company will not be negatively impacted by the year 2000 situation in the
future. We will continue to monitor this situation and expeditiously remediate
any issues that may arise.
Based on our readiness efforts, and our experience to date we currently do not
reasonably foresee any material year 2000 issues, and therefore the costs
associated with potential year 2000 issues that may arise during calendar year
2000 are not expected to have a material adverse effect on either our financial
condition or results of operations. However, there is no guarantee that we will
not incur significant business interruptions due to the year 2000 problem,
whether due to our own year 2000 problems or that of our customers or suppliers.
Recent Accounting Pronouncements
On June 30, 1998, the financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS No.
133), which establishes accounting and reporting standards for derivative
instruments and hedging activities.
15
The statement requires recognition of all derivatives at fair value in the
financial statements, FASB Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement No. 133, defers implementation
of SFAS No. 133 until fiscal years beginning after June 15, 2000. We have
reviewed SFAS No. 133 and believe that, upon implementation, the standard will
not have a significant effect on our financial statements.
Forward-Looking Cautionary Statement
- ------------------------------------
In an effort to provide investors a balanced view of our current condition and
future growth opportunities, this second Quarterly report on Form 10-Q includes
statements about future performance. Because these statements are
forward-looking statements pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, management's forecasts involve risks
and uncertainties, and actual results could differ materially from those
predicted in the forward-looking statement. Among the principal factors that
could cause actual results to differ materially are the following: general
market conditions, including demand for our products, manufacturing capacity and
the ability to "ramp" to meet anticipated demand, fluctuations in yield,
availability of third-party supplier parts at reasonable prices, availability of
financial resources to fund anticipated growth, ability to maintain sole
supplier positions with certain defense sectors, successful adaptation of our
existing technologies to produce new products that meet specific customer
requirements, price pressures, the level of worldwide spending on military
defense products, growth of wireless telephone and satellite communications
systems, acceptance of new products, customer order cancellations or
rescheduling and actual orders compared to annual blanket contracts from
wireless customers.
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Management believes that we have the products, human resources, facilities,
and financial resources to continue its growth, but future revenues, margins,
and profits are all influenced by a number of risk factors, including but not
limited to those discussed above.
Item 3. Quantitative and qualitative disclosure about market risk
Disclosures About Market Risk
The following discusses our 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. Actual results could vary materially as a result of a number of
actors, including those discussed in "Risk Factors."
* Forward-Looking Cautionary Statement
As of March 31, 2000, we had cash, cash equivalents and marketable debt
securities of $123.0 million, of which approxmately $21.2 million consisted of
highly liquid investments in marketable debt securities. These investments at
the date of purchase normally have maturities between one and 18 months and are
exposed to interest rate risk and will decrease in value if market interest
rates increase. A hypothetical increase or decrease in market interest rate of
10% from March 31, 2000 rates would cause the market price of these securities
to decline by an insignificant amount. Due to the relatively short maturities of
the securities and our ability to hold those investments to maturity, an
immediate increase in interest rates is expected to have a significant effect on
our financial condition or result of operations. Over time however, declines in
interest rates will reduce our interest income.
We do not own any material equity investments. Therefore, we do not currently
have any direct equity price risk.
All of our sales to foreign customers are denominated in United States dollars
and, accordingly, we are not currently exposed to foreign currency exchange
risk.
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Item 2. Changes in Securities and Use of Proceeds
(c) In connection with our aquisition of RF Power Components, Inc.
on February 29, 2000, we issued an aggregate of 23,517 shares
of our common stock to the former shareholders of RF Power
Components, Inc. These shares constitute a part of the
purchase price for all the outstanding capital stock of RF
Power Components, Inc. We relied on Section 4(2) of the
Securities Act of 1933, amended, and the related safe harbor
rules and regulations promulgated by the Securities and
Exchange Commission, as well as written representations
provided by the former shareholders of RF Power Components,
Inc. concerning certain factual matters.
Item 6. Exhibits and Reports on Form 8-K
Item 6(a) Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
3.1 Certificate of Incorporation(1)
3.2 Restated By-Laws, as amended on February 1, 2000(2)
27 Financial Data Schedule
Item 6(b) Reports on Form 8K
------------------
We filed a current report on Form 8-K on March 15, 2000
related to our acquisition of all the outstanding capital
stock of RF Power Components, Inc. on February 29, 2000.
- ----------
(1) (A) Restated Certificate of Incorporation of the Company, filed on August
11, 1967, is incorporated herein by reference to Exhibit 3(a) to Company's
Registration Statement on Form S-1 (Registration No. 2-42704), (B)
Amendment, filed December 19, 1980, is incorporated herein by reference to
Exhibit 4.1(ii) to Company's Registration Statement on Form S-2
Registration (Registration No. 2-86025); (C) Amendment, filed March 18,
1985, is incorporated herein by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K (Commission File No. 0-6620) for the fiscal
year ended June 30, 1987; (D) Amendment, filed December 14, 1987, is
incorporated herein by reference to Exhibit 4(a)(iv) to the Company's
Registration Statement on Form S-8 (Registration No. 33-19618); (E)
Amendment, filed April 8, 1999, is incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K (Commission File
No. 0-6620) for the fiscal year ended June 30, 1999; and (F) Amendment,
filed February 8, 2000, is incorporated herein by reference to Exhihbit
4.1 to the Company's Registration Statement on Form S-3 (Registration No.
333-31460) filed on March 2, 2000.
(2) Incorporated herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (Registration No. 333-31460)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Anaren Microwave, Inc.
----------------------
(Registrant)
Date: May 11, 2000 /s/ Lawrence A. Sala
-----------------------------------
President & Chief Executive Officer
Date: May 11, 2000 /s/ Joseph E. Porcello
-------------------------
Vice President of Finance
19