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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2001
[ ] 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 executive offices) (Zip Code)
Registrant's telephone number, including area code: 315-432-8909
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Securities Act:
Common Stock, $.01 Par Value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant, based on the closing sale price of the Common
Stock on September 17, 2001, as reported on the Nasdaq National Market, was
approximately $294,310,203.
The number of shares of Registrant's Common Stock outstanding on September
17, 2001 was 22,416,120.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with its 2001
Annual Meeting of Shareholders are incorporated into Part III of this Annual
Report on Form 10-K.
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PART I
Item 1. Business
Forward-Looking Cautionary Statement
In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this Annual Report on Form 10-K
includes comments by the Company's management about future performance. Because
these statements are forward-looking statements pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, management's
forecasts involve risks and uncertainties, and actual results could differ
materially from those predicted in the forward-looking statements. Among the
factors that could cause actual results to differ materially are the following:
further decline in the general economy, and particularly the wireless
telecommunications sector; loss of one or more of a limited number of original
equipment manufacturers ("OEMs") as customers; the inability to attract and
retain qualified engineers and other key employees to maintain and grow the
Company's business; the unavailability of component parts and services from a
limited number of suppliers; changes in customer order patterns; additional
cancellation of existing contracts or orders; difficulties in successfully
integrating the businesses of Amitron, Inc. ("Amitron"); potential interruption
of operations resulting from the consolidation of Anaren Power Products, Inc.
("APPI") into the Company's Syracuse, New York headquarters; inability to
effectively manage possible future growth; failure to successfully execute the
Company's manufacturing plan; increased pricing pressure and increased
competition; the failure of wireless customers' annual procurement forecasts to
result in future sales; and litigation involving antitrust, intellectual
property, product warranty, and other issues.
General
Anaren Microwave, Inc. (the "Company" or "Anaren") was incorporated in New
York in 1967. The Company's executive offices are located at 6635 Kirkville
Road, East Syracuse, New York 13057. The telephone number of the Company at that
location is (315) 432-8909. The Company's common stock is listed on the Nasdaq
National Market under the symbol "ANEN." Unless the context otherwise provides,
the "Company" or "Anaren" refers to Anaren Microwave, Inc. and its subsidiaries.
On August 31, 2001, the Company acquired all of the outstanding capital
stock of Amitron. Amitron, based in North Andover, Mass., is primarily engaged
in the manufacture of thick film ceramic circuits, and components for the
medical, telecommunications and optics markets.
Overview
The Company is a leading provider of highly integrated microwave
components, assemblies and subsystems for the wireless communications, satellite
communications and defense electronics markets. Anaren uses its proprietary
Multi-Layer Stripline technology to produce compact, light weight,
cost-effective products for use in wireless, satellite and defense electronics
systems. The Company's distinctive microwave modeling capabilities and
integration technology allow it to replace numerous discrete components with
compact integrated assemblies that consistently deliver optimal signal
performance. The Company sells its integrated assemblies, which range from
simple splitting and combining networks to complete microwave backplanes, and
its high end subsystems to leading communications equipment manufacturers in the
mobile and fixed broadband wireless markets and the satellite communications
market. The technology utilized by the Company supports a wide range of digital
and analog wireless communications protocols, systems and standards including:
o Code Division Multiple Access ("CDMA")
o Global System for Mobile communications ("GSM")
o Local Multipoint Distribution System ("LMDS")
o Multi-channel, Multipoint Distribution System ("MMDS")
o Personal Communications System ("PCS")
o Third Generation wireless ("3G")
o Time Division Multiple Access ("TDMA")
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Through its focused research and development efforts, Anaren has designed
and continues to design components and subsystems that enable high speed
wireless access to the Internet and other broadband wireless applications. In
addition, the Company is developing and producing a diverse set of products and
technologies to support the latest generation of wireless communications
systems, including 3G, MMDS and LMDS. 3G is the first internationally agreed
upon standard for a packet-switched data network for mobile and fixed wireless
communications applications. The Company's customer base includes leading global
OEMs that serve the wireless, satellite and defense electronics markets,
including:
o Ericsson
o Lucent Technologies
o Motorola
o Nokia
o Nortel Networks
o Powerwave Technologies
o Boeing, Inc.
o ITT Aerospace/Communications
o Lockheed Martin
o Loral Space & Communications
o Northrop Grumman
o Raytheon
Industry Background
Worldwide demand for integrated voice, data and video communications
services continues to grow. The volume of high-speed data traffic across global
communications networks has grown as the public Internet and private business
intranets have become essential for daily communications and electronic
commerce. The number of persons using the Internet to buy and sell goods and
services also is expected to continue to grow. Servicing the increasing demand
for higher bandwidth content and applications requires cost-effective and
high-speed connections, which are often unavailable or inadequate over existing
wire-based networks. For many users, wireless communications provide an
advantageous access solution for high-speed Internet and multimedia services.
This is underscored by the increasing number of wireless subscribers worldwide.
During the first quarter of calendar year 2001, the telecommunications
industry began to experience a rapid downturn in the wireless marketplace which
resulted in decreased demand for infrastructure equipment. This severe market
downturn has had a negative impact on all of the Company's wireless product
lines, and it appears that unfavorable wireless market conditions will continue
potentially beyond calendar 2001.
A Wireless Network
A typical mobile or fixed wireless communications system comprises a
geographic region containing a number of cells, each of which contains one or
more base stations, which are linked in a network to form a service provider's
coverage area. Each base station houses the equipment that receives incoming
telephone calls from the switching offices of the local wire-based telephone
company and broadcasts calls to the wireless users within the cell. A base
station can process a fixed number of radio channels through the use of multiple
transceivers, power amplifiers and tunable filters, along with an antenna to
transmit and receive signals to and from the wireless user.
Mobile Wireless Communications
The demand for mobile communications has grown significantly during the
past decade and has been fueled by a number of factors including:
o decreasing prices for wireless handsets and airtime;
o more favorable global communications regulatory environment;
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o increasing competition among service providers; and
o greater availability of services and frequency spectrum.
Additionally, many developing countries are installing wireless networks
as an alternative to installing, expanding or upgrading traditional wire-based
networks.
Service providers are striving to keep up with the demand for mobile
wireless services by increasing the capacity of their existing base stations and
by adding more base stations to increase the number of frequency channels in
their networks. Cellular service providers are upgrading their legacy analog
networks to digital networks, such as CDMA, TDMA, GSM and 3G, which allow more
calls per frequency channel and provide improved quality and increased security.
In addition, PCS service providers, which operate at a much higher frequency
than cellular service providers, are expanding the coverage of their networks.
PCS networks generally require a significantly larger number of base stations
than traditional cellular-based networks.
Fixed Broadband Wireless Communications
Fixed broadband wireless solutions provide meaningful advantages over
wire-based alternatives, such as digital subscriber lines, cable and fiber
optics. These advantages include significantly lower initial capital costs for
network equipment, reduced installation costs and more rapid deployment. In
addition, wireless solutions are particularly advantageous in areas where: a
wired infrastructure may be difficult to install or upgrade, minimal or no
communications infrastructure exists or geographically dispersed customers
render the installation of a wired infrastructure impractical or uneconomical.
Emerging fixed broadband wireless data transmissions systems have the
potential to further expand the market for wireless communications by allowing
service providers to increase revenue-generating traffic on their networks.
These systems include 3G, MMDS and LMDS. Broadband wireless technology is being
deployed by both incumbent and emerging service providers. The established
carriers are expected to use broadband wireless technology to reach customers
whom they previously could not serve, fill coverage gaps in their existing
networks and deploy value-added services, such as streaming video, multimedia
conferencing and high-speed Internet access, in a cost-effective manner.
Satellite Communications
Satellite communications currently serve several business and consumer
markets. Current satellite services include direct to home television, direct to
home Internet access, business to business data transmission, regional and
worldwide telephone services and worldwide paging. New services are being
planned to offer high-speed Internet access, videoconferencing, large scale data
transmission and other multimedia applications. These new services will have
significantly greater information content and will therefore require the
allocation of significantly more bandwidth than many current applications. These
large bandwidth allocations are not available at the operating frequencies of
current satellite systems. To address this problem, regulatory agencies around
the world have allocated additional frequency spectrum for two-way transmission.
The proposed systems to deliver these broadband services are significantly more
complex and will therefore require design advances in on-board signal
processing, on-board re-configuration of multi-beam antennas, power handling and
low-cost user equipment.
As demand for Internet access and other data-driven applications expands
and as both commercial and residential consumers are increasingly seeking
efficient and effective means of access, satellite service providers are
entering the broadband wireless market. Some of the advantages of satellite
communications for this market are: global access to an existing satellite
infrastructure, the ability to cover large geographic areas, scalable deployment
and the ability to quickly reallocate capacity.
Defense Electronics
There continues to be a shift in defense spending away from the
development of new platforms and into technologies that improve the performance
and survivability of existing platforms. As a result, funding for advanced radar
systems, advanced jamming systems and smart munitions has continued. These
technologies enable the detection, identification, deception and elimination of
missile systems, a current focus of military planners.
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The Anaren Solution
The Company's technology addresses the demands of the wireless market for
high quality products manufactured in volume with continuous improvements in
performance and cost. The Company also provides the satellite market with
enabling technologies that increase network capacity and flexibility, allowing
for increased revenue generation. The Company's proprietary Multi-Layer
Stripline technology allows the Company to provide compact, light weight,
cost-effective, and highly integrated microwave components, assemblies and
subsystems. The Company's solution includes:
Broad Array of Standard and Customized Products. The Company offers a
broad array of standard and custom microwave products to the mobile and fixed
wireless, satellite communications and defense electronics markets. The
technologies underlying the Company's product portfolio allow the Company to
address the new wireless data communications products being developed by its
existing and potential customers with limited incremental investment. As the
OEMs in the wireless communications industry have been reducing the number of
their suppliers, the Company believes that its expanding product portfolio has
helped the Company become a strategic supplier to many of these OEMs.
Advanced Microwave Design and Manufacturing Capabilities. The engineering
and design staff of 107 engineers as of June 30, 2001 works with customers of
the Company to develop system level solutions. Anaren's engineers collaborate
with customers to develop products that provide state-of-the-art performance and
that can be manufactured in significant volume with excellent quality and
reliability. The Company has consistently met the stringent requirements of the
wireless and satellite communications markets due to the Company's strengths in
advanced packaging and interconnecting of radio, microwave and extremely high
frequency signals, and the Company's ability to produce small, light weight,
cost-effective and efficient microwave components and assemblies.
Rapid Product Development. Anaren's integrated design and manufacturing
facilities allow it to produce custom solutions from concept to product delivery
in a matter of days. With its Multi-Layer Stripline technology, design
libraries, manufacturing experience and investment in automation, the Company
can facilitate a rapid transition from development to production, thereby
offering its customers a complete turnkey solution and allowing them to bring
their products to market faster.
Strong Customer Relationships. The Company believes that it has become an
integral part of its key customers' operations by working closely with them
through the entire development and production process. The Company assigns a
project engineer to each customer to ensure a high level of responsiveness and
customer service. The project engineer and a design team assist customers from
the conceptual, system level design stages through the development and
manufacturing process. By maintaining close contact with the customers' design
engineering, manufacturing, purchasing and project management personnel, the
Company can better understand their needs, rapidly develop customer-specific
solutions and more effectively design the Company's solutions into the
customers' systems and networks. The Company believes that the strength of its
customer support and depth of its customer relationships provide the Company a
competitive advantage.
Strategy
The Company's strategy is to continue to use its proprietary Multi-Layer
Stripline technology, extensive microwave design libraries and turnkey design,
development and manufacturing capabilities to further expand its penetration in
the wireless and satellite communications markets. Key components of the
Company's strategy include the following:
Pursue New Wireless Markets. The Company has successfully penetrated the
mobile wireless market and intends to use its market position to pursue other
wireless markets, including the 3G and fixed broadband wireless markets. The
Company also intends to offer additional products and technologies to address
existing and developing wireless markets.
Increase Component Integration and Value Added Content. The Company plans
to continue to increase the value of its products in wireless and satellite
communications systems. The Company intends to expand its component offerings to
enable the Company to increase the number of its products in each base station.
In addition, with its Multi-Layer Stripline manufacturing technology, the
Company intends to continue to increase
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the functionality of its products, thereby enabling its customers to continue to
reduce the size and cost of their platforms, while the Company increases its
content value. As an example, the Company believes that the dollar value of its
average product content per base station more than doubled between fiscal 1997
and fiscal 2001. The Company is currently selling its integrated solutions to
five of the largest base station manufacturers for the wireless markets.
Strengthen and Expand Customer Relationships. Today, a limited number of
large systems manufacturers drives the wireless and satellite communications
markets. The Company has developed, and plans to continue to expand, customer
relationships with many of these manufacturers, including Ericsson, Lucent,
Motorola, Nokia and Nortel Networks for wireless communications and Boeing,
Lockheed Martin, Loral Space & Communications and TRW for satellite
communications. The Company intends to further strengthen its customer
relationships by offering complete outsourcing solutions, from research and
development through product design and production, thereby increasing the
customers' reliance on the Company.
Enhance Technology Leadership in Wireless Communications. The Company
intends to use its technological leadership in the mobile wireless and satellite
markets to extend its competitive advantage. Anaren plans to pursue further
technological advances through continued investment in research and development.
The Company will seek to advance its leadership in wireless technology by
developing next generation products for the mobile and fixed broadband wireless
markets. In addition, the Company will build upon its relationships with key
wireless OEMs in order to develop state-of-the-art wireless products.
Expand Its Business through Strategic Acquisitions. The Company intends to
continue to make opportunistic acquisitions of companies, product lines and
technologies that complement its business. Amitron's technology and unique
processing capabilities provide performance advantages for high frequency
applications and are another strategic acquisition for the Company. Amitron also
provides a platform to implement low temperature co-fired ceramic ("LTCC")
technology, which the Company believes has application in high frequency
electronics. By expanding its product offerings, the Company expects to better
serve the needs of its OEM customers. The Company intends to use its existing
customer relationships and distribution channels to sell these additional
products.
Technology
Traditional stripline technology consists of circuit runs etched on
dielectric sheets, or thin teflon layers, which are then sandwiched in a
precision machined aluminum case. The case provides grounding on the top and
bottom, and also provides a structure on the edge for mounting connectors.
Integration is achieved through connecting multiple stripline components via
numerous cables.
Multi-Layer Stripline technology is a technique of processing stripline
circuits, in which multiple layers of etched stripline circuits are laminated
together in a manner that is similar to printed circuit board ("PCB")
manufacturing, but with superior microwave characteristics. Similar to
traditional PCB manufacturing, holes are used to interconnect layers. The
Company's proprietary techniques enable it to implement multi-layer connections
that perform optimally at microwave frequencies. Unlike traditional PCB
manufacturing, simply connecting the appropriate points on the multi-layer board
does not ensure adequate performance. In order to achieve optimal microwave
performance on a consistent basis, material and process variations must be
tightly controlled and the circuit design must take into consideration
variations in the manufacturing process. The Company's microwave design
engineering staff has developed proprietary modeling techniques and component
design libraries that allow for consistent and efficient design and production
of complex microwave products.
Anaren's microwave antenna beamforming technology, coupled with the
Multi-Layer Stripline manufacturing process, produces light weight,
cost-effective beamforming assemblies for communication satellites. These
beamforming assemblies provide multibeam coverage where the size and direction
of beams is fixed. Additionally, the Company is utilizing its Multi-Layer
Stripline technology and microwave design experience to develop cost-effective
solutions for wireless high data rate transmission applications, such as
Internet access and multimedia communications. In conjunction with Raytheon
Company, the Company developed a next generation Multi-Layer Stripline
technology to address applications at extremely high frequencies. In addition,
the Company has developed high density microwave switch matrices by
incorporating
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active microwave switches into the passive Multi-Layer Stripline technology. The
Company recently completed a production subsystem for a communications satellite
program. These switch matrices are a key element in providing the flexibility
that system designers desire.
Products
Wireless Communications
The Company provides microwave components, assemblies and subsystems to
leading wireless infrastructure equipment manufacturers. The Company believes
that its products are used in most wireless base stations. Traditionally, all of
the signal distribution, or combining and splitting, within a base station has
been accomplished with discrete signal distribution components and coaxial
cables. Through the use of its Multi-Layer Stripline technology, the Company
provides microwave components, assemblies and subsystems that eliminate the need
for discrete components and interconnecting cables. These integrated assemblies,
which range from simple splitting and combining networks to complete microwave
backplanes, distribute microwave signals throughout the base stations, from
reception at the antenna, to multiple radios, to multiple amplifiers, and back
to the antenna for transmission.
The Company has developed its product offerings to enable customers to
reduce the size and cost, while enhancing the performance, of their equipment.
The Company continually invests capital and resources to enhance existing
products as well as develop new products to address the latest market demands.
The Company has developed and continues to market a full line of standard
products, as well as custom products, to wireless OEMs. A brief description of
the Company's major product categories is as follows:
Component Products
Xinger(R) Surface Mount Components. The Company's Xinger(R) line of
products are off-the-shelf surface mount microwave components which provide
passive microwave signal distribution functions. They were originally developed
to provide a low-cost signal distribution component, which could be placed on
standard PCBs with automated production equipment. The primary application of
these products is in radio frequency, or RF, power amplifiers, but they are also
found in low-noise amplifiers and radios. The Company believes it is currently
the market leader in this product area, supplying industry leading OEMs such as
Ericsson, Lucent, Motorola and Nokia, as well as leading power amplifier
manufacturers such as Powerwave Technologies and Spectrian. The Company is
investing to expand this product line, as well as expand its addressable market.
In addition, the Company has one patent, and has filed four other patent
applications, to protect both the construction and product design.
Ferrite Products. The Company's ferrite components are widely used in
various wireless and defense applications. They are a key component in base
station amplifiers, and their primary function is to protect the sensitive
electronics from damage by isolating them electronically from potentially
harmful signal levels.
Resistive Products. The Company's resistive product line includes
resistors, power terminations, and attenuators for use in high power wireless
and medical imaging applications. They are typically found in power amplifiers
and used in conjunction with ferrite products as well as Xinger(R) surface mount
components.
AdrenaLine Power Splitting and Combining Networks. The Company developed
the AdrenaLine product line to provide a low-cost, high-performance network to
combine individual power modules. These products enable the Company's customers
to produce smaller, lower cost, more efficient power amplifiers. The Company has
teamed with Motorola's Semiconductor Product Sector in developing and marketing
AdrenaLine as an effective means of integrating power transistors. AdrenaLine
supports all major wireless standards and frequencies, including the unique
power demands of the new 3G standard.
Custom Splitting and Combining Products. In addition to its standard
products, the Company offers a wide range of custom splitting solutions. These
custom solutions are typically used to distribute signals to and from radio
transceivers and power amplifiers. The Company's custom products offer
consistent performance and can be designed in unique configurations, allowing
base station designers an opportunity to greatly reduce space, complexity and
cost while enhancing performance.
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Custom RF Backplane Assemblies. The Company's RF backplanes provide
efficient connections of microwave signals between subsystems in wireless base
stations. RF backplanes are similar to the motherboard in a personal computer,
which efficiently connects signals between multiple subsystems. These assemblies
range from RF-only to fully integrated RF, direct current power, and signal
routing solutions. They are typically used in conjunction with radio
transceivers and RF power amplifiers.
Hybrid Matrix Assemblies. The Company's hybrid matrix assemblies allow
customers to effectively reduce the number of amplifiers in their base stations.
Base station amplifier systems are designed to handle peak usage, when maximum
calls are made over a network. Due to the sector coverage of typical base
stations, some amplifiers are heavily used while others are not. The Company's
matrices allow the spreading of high usage volume over all base station
amplifiers, permitting a reduction in the total number of amplifiers needed.
Space and Defense
The Company is a leading supplier of passive beamforming networks for use
in multi-beam antennas critical to the success of communications satellites. The
Company's Multi-Layer Stripline technology enables the Company to provide
customers with highly complex beamforming networks that maintain high
performance, while reducing size and weight. Each of these products is
specifically designed for a particular satellite program, and each design
determines the number, size and quality of beams that are produced from the
satellite's antenna. Multi-Layer Stripline technology can be used at extremely
high microwave frequencies, making it well positioned to support the customers'
requirements for the next generation of satellite programs.
The Company is also a leading supplier of electronic subsystems and
passive feed networks to the defense electronics market. The electronic
subsystems sold by the Company utilize several technologies including
Multi-Layer Stripline, application specific integrated circuits and signal
processing technologies.
A brief description of the Company's major product categories is as
follows:
Passive Beamformers. These passive beamformers determine the number, size
and quality of beams that are produced from an antenna array. These products are
essential to allowing satellite communications providers the most efficient use
of their allocated spectrum.
Switch Matrices. Switch matrices route RF signals from a single location
to one or multiple end user locations. These products allow satellite operators
to allocate satellite capacity as required, thereby increasing utilization and
revenue generation.
Radar Feed Networks. Radar feeds are power dividers that distribute RF
energy to the antenna elements of the radar. The power dividers are arranged to
provide two or three inputs and several thousand outputs.
Defense Radar Countermeasure Subsystems. Defense radar countermeasure
subsystems digitally measure, locate and counter enemy radar systems.
Customers
During the fiscal year ended June 30, 2001, approximately 73% of the
Company's sales were to customers in the wireless markets and approximately 27%
of its sales were to customers in the space and defense markets. The Company had
two customers who each accounted for more than 10% of net sales. Approximately
15% of net sales were to Motorola through the Company's Wireless group and
approximately 11% of net sales were to Boeing Satellite through the Company's
Space and Defense group.
Wireless Communications. The Company sells its standard line of Xinger(R)
components to leading OEMs and a broad range of other wireless equipment
manufacturers. In addition, the Company sells its custom wireless products to
major wireless infrastructure OEMs. In general, customers have purchased the
Company's products directly from the Company or through distributors, sales
representatives or contract manufacturers. The following is a list of the
Company's customers who generated $500,000 or more in revenues in the fiscal
year ended June 30, 2001:
o Alcatel Clamart
o Avnet
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o BFI Optilas
o Cana
o ENI Technologies/Asia
o Ericsson
o Lucent Technologies
o Motorola
o Nortel Networks
o Powerwave Technologies
o Qtron
o Richardson Electronics Inc.
o Sanmina
o Spectrian
Space and Defense. The Company currently sells satellite communications
subsystems to many of the world's leading satellite manufacturers. Subsystems
produced by the Company are found on communications satellites. The Company is
actively involved in developing products for major satellite programs. The
Company also sells defense electronics products to prime contractors serving the
United States and foreign governments. The following is a list of the customers
who generated $500,000 or more in revenues in the fiscal year ended June 30,
2001:
o Boeing Satellite
o FR Aviation
o ITT Aerospace/Communications
o Lockheed Martin
o Loral Space & Communications
o Northrop Grumman
o Raytheon Missile
Sales and Marketing
The Company markets its products worldwide to OEMs in wireless and
satellite markets and prime contractors in defense markets primarily through a
sales and marketing force of 19 people as of June 30, 2001. The sales force is
generally organized by geographic territory and market segment. In addition, as
of June 30, 2001, the Company had contracts with two major distributors, Avnet
and Richardson, and with 17 manufacturers' representatives in the United States
and 14 international representatives located in Western Europe, the Middle East
and Asia. As part of its marketing efforts, the Company advertises in major
trade publications, attends major industry shows and maintains a website on the
Internet. Recently, the Company has invested significantly in its Internet
website which contains an electronic version of its entire catalog. In addition,
the website enables users to download important device parameter files. These
files contain the performance information for the catalog parts in a format
which is compatible with commonly used computer aided design/computer aided
modeling, or CAD/CAM equipment. The Company also provides mechanical drawings
and applications notes for proper use of the parts. This service allows
designers to get the information they require and to easily incorporate the
Company's parts into their designs.
After identifying key potential customers, the Company makes sales calls
with its own sales, management and engineering personnel and its manufacturers'
representatives. To promote widespread acceptance of the Company's products and
provide customers with support for their wireless communications needs, the
sales and engineering teams work closely with the customers to develop solutions
tailored for their wireless requirements. The Company believes that its customer
engineering support team, comprised with 107 design and engineering
professionals as of June 30, 2001, is a key competitive advantage.
9
The Company uses distributors for its standard products, most notably the
Xinger(R) line of surface mount components. In the United States, Canada, Asia
and most of Europe, the Company has exclusive agreements with Avnet, which
operates under the name of BFI Optilas in Europe. The Scandinavian countries are
handled by A.G. Components, Inc., a subsidiary of Elektronikgruppen.
Distribution has become an important part of the sales efforts by providing the
Company with a larger sales force to promote its catalog offerings. The Company
is also seeing a trend on the part of its customers to consolidate their
material handling activities, including purchasing, warehousing, and
fulfillment. The result is that many OEMs are outsourcing all or part of these
activities to large distribution firms like Avnet.
Backlog
The Company's backlog of orders for the Wireless group was $6.8 million
and $11.4 million as of June 30, 2001 and 2000, respectively. Backlog for the
Wireless group primarily represents firm orders for surface mount products and
signed purchase orders for custom components due to ship within the next four to
six weeks. However, backlog is not necessarily indicative of future sales.
Accordingly, the Company does not believe that its backlog as of any particular
date is representative of actual sales for any succeeding period. Typically,
large OEMs including Ericsson, Lucent, Motorola, Nokia and Nortel, who use the
Company's surface mount and custom products, negotiate set prices for estimated
annual volumes. The Company receives weekly orders one week prior to shipment.
The Company does not recognize backlog until it has received a firm order.
As part of the Company's close working relationships with major wireless
communications customers, the customers expect the Company to respond quickly to
changes in the volume and delivery schedule of their orders and, if necessary,
to inventory products at the facilities of the Company for just-in-time
delivery. Therefore, although contracts with these customers typically specify
aggregate dollar volumes of products to be purchased over an extended time
period, these contracts also provide for delivery flexibility, on short notice.
In addition, these customers may cancel or defer orders without significant
penalty.
Backlog of orders for the Space and Defense group was $37.2 million and
$38.2 million as of June 30, 2001 and 2000, respectively. During fiscal year
2002, the Company expects to ship between $23.0 million and $25.0 million of its
backlog existing at June 30, 2001. All of the orders included in the Space and
Defense group backlog are covered by signed contracts or purchase orders.
However, backlog is not necessarily indicative of future sales. Accordingly, the
Company does not believe that its backlog as of any particular date is
representative of actual sales for any succeeding period.
Research and Development
The Company's research and development efforts are focused on the design,
development and engineering of both products and manufacturing processes. The
Company intends to focus its future research and development efforts on next
generation products and technologies. The current development efforts of the
Company include:
o advanced Multi-Layer Stripline manufacturing processes for use in
low-cost, light weight satellite and wireless applications;
o products for use in mobile and fixed wireless applications;
o advanced manufacturing technology to produce microwave stripline
structures for broadband millimeter wave, or extremely high
frequency, communications satellite applications;
o advanced low temperature co-fired ceramic for use in low-cost, light
weight satellite and wireless applications; and
o broadband wireless technologies for high-speed Internet access.
These activities include customer-funded design and development, as well
as efforts funded directly by the Company. Research and development expenses
funded by the Company were $5.0 million in fiscal 2001, $3.8 million in fiscal
2000 and $2.8 million in fiscal 1999. Research and development costs are charged
to expense as incurred.
In addition, the Company's net sales included approximately $4.6 million
for fiscal year 2001, approximately $5.1 million for fiscal 2000 and
approximately $1.4 million in fiscal 1999 attributable to payments by customers
10
for the design and development of products within the Space and Defense group to
meet their specific requirements. In any given year, the amount of customer
funding for design and development can vary widely depending upon the status of
particular contracts. The Company is typically not restricted in the use of
technologies developed through customer funding for other applications.
Manufacturing
The Company continues to invest in the advancement of its proprietary
Multi-Layer Stripline manufacturing processes and in the automation of the
manufacturing processes of products for the Wireless group. Automation is
critical in meeting the customers' demands for lower prices, high quality and
on-time delivery. The Company is also investing to enhance its responsiveness to
increased production demands from the Company's wireless customers, as well as
the need to accommodate unpredictable surges in production rates that are common
in this market.
In fiscal 2001, the Company completed a major renovation and upgrade to
its manufacturing facility, located at the headquarters in East Syracuse, New
York, to increase current capacity and improve response time to its customers.
Toward this end, the Company has continued to invest in automated design and
manufacturing equipment to reduce production times. The Company also reorganized
its manufacturing and engineering facility in East Syracuse to allocate more
space and provide for a better workflow for the Wireless group. Additionally,
the Company has created specialized work areas and manufacturing cells required
by its Space and Defense group to meet the demanding specifications of the
Company's space customers. These renovations are expected to provide the Company
with the necessary manufacturing capability and capacity to meet anticipated
customer delivery demands over the next 18 to 24 months. The Company's East
Syracuse facility became ISO 9001 certified on July 19, 1999.
The Company manufactures its products from standard components, as well as
from items which are manufactured by vendors to its specifications. A majority
of the Company's commercial and defense electronics assemblies and subsystem
products contain proprietary Multi-Layer Stripline technology which is designed
and tested by engineers and technicians employed by the Company and is
manufactured primarily at the Company's East Syracuse facility.
The raw materials utilized in the various product areas are generally
accessible and common to both of the Company's business segments. The Company
purchases most of its raw materials from a variety of vendors and most of these
raw materials are available from a number of sources. During fiscal year 2001,
the Company had no vendors from which it purchased more than 10% of its total
raw materials.
Competition
The microwave component and subsystems industry is highly competitive. The
Company competes against many companies, both foreign and domestic, many of
which are larger and have greater financial and other resources. Direct
competitors of the Company in the wireless market include KDI, M/A-com, a
division of Tyco International, Merrimac Industries, Filtronic PLC, Smith
Industries and Mini-Circuits. As a direct supplier to OEMs, the Company also
faces significant competition from the in-house capabilities of its customers.
Recently, however, in the wireless market many of the OEMs are outsourcing more
design and production work, thereby freeing up their internal resources for
other use. Thus, internal customer competition exists predominantly in the
Company's satellite business.
The principal competitive factors in both the foreign and domestic markets
are technical performance, reliability, ability to produce in volume, on-time
delivery and price. Based on these factors, the Company believes that it
competes favorably in its markets. The Company feels that it is particularly
strong in the areas of technical performance and on-time delivery in the
wireless marketplace.
Government Regulation
The Company's products are incorporated into wireless communications
systems that are subject to regulation domestically by the Federal
Communications Commission and internationally by other government agencies. In
addition, because of its participation in the defense industry, the Company is
subject to audit from time to time for compliance with government regulations by
various governmental agencies. The Company is also
11
subject to a variety of local, state and federal government regulations relating
to environmental laws, as they relate to toxic or other hazardous substances
used to manufacture the Company's products. The Company believes that it
operates its business in material compliance with applicable laws and
regulations. However, any failure to comply with existing or future laws or
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
Intellectual Property
The Company's success depends to a significant degree upon the
preservation and protection of its product and manufacturing process designs and
other proprietary technology. To protect its proprietary technology, the Company
generally limits access to its technology, treats portions of such technology as
trade secrets, and obtains confidentiality or non-disclosure agreements from
persons with access to the technology. The Company's agreements with its
employees prohibit them from disclosing any confidential information, technology
developments and business practices, and from disclosing any confidential
information entrusted to the Company by other parties. Consultants engaged by
the Company who have access to confidential information generally sign an
agreement requiring them to keep confidential and not disclose any non-public
confidential information. The Company also relies on protections available under
trade secret, copyright and trademark law. The Company has recently filed four
United States patent applications regarding new wireless products. The Company
plans to pursue intellectual property protection in foreign countries, primarily
in the form of international patents, in instances where the technology covered
is considered important enough to justify the added expense.
Employees
As of June 30, 2001, the Company employed 412 full-time people. Of these
employees, 107 were members of the engineering staff, 253 were in manufacturing,
19 were in sales and marketing positions, and 33 were in management and support
functions. None of these employees are represented by a labor union, and the
Company has not experienced any work stoppages. The Company considers its
employee relations to be excellent.
Item 2. Properties
The principal facility of the Company is a 105,000 square foot building,
which the Company owns, located on a 30 acre parcel in East Syracuse, New York.
The building currently houses a substantial portion of the Company's marketing,
manufacturing, administrative, research and development, systems design and
engineering activities.
The Company leases a 20,000 square foot building in Frimley, England.
Annual rental cost of this facility is approximately $370,000 and the Company is
currently subletting the building. During the fiscal year ended June 30, 2001,
payments to the Company under this sublease were at more than 90% of the full
lease value. The existing lease term on this building runs to 2014. There is no
assurance that the Company will be able to continuously sublet the building
during the remaining lease term so as to offset its rental cost in whole or in
part.
The Company also leases a 15,700 square foot facility in Bohemia, New
York, which houses the production, engineering and administrative functions of
RF Power, pursuant to a lease that expires in June, 2003. Annual rent for this
facility is approximately $132,000.
The Company also leases a 20,000 square foot facility in Neptune, New
Jersey that formerly housed the production, engineering and administrative
functions of APPI pursuant to a lease that expires in December 2005. Annual rent
for this facility is approximately $272,400. The Company is presently seeking to
sub-lease this building for the remainder of the lease term.
Effective August 31, 2001, the Company signed a five year lease with an
option for five additional years for approximately 20,000 square feet in North
Andover, Massachusetts, which currently houses the acquired business of Amitron.
Annual rent for this facility is approximately $155,000.
Management considers the foregoing facilities adequate for the current and
anticipated short-term future requirements of the Company and expects that
suitable additional space will be available to the Company, as needed, at
reasonable commercial terms.
12
Item 3. Legal Proceedings
There are no material pending legal proceedings against the Company or any
of its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended June 30, 2001, there
were no matters submitted to a vote of security holders.
Item 4A. Executive Officers of the Registrant
Executive officers of the Company, their respective ages as of June 30,
2001, and their positions held with the Company are as follows:
Name Age Position
---- --- --------
Lawrence A. Sala ........ 38 President, Chief Executive Officer and Director
Carl W. Gerst, Jr ....... 63 Chief Technical Officer, Treasurer, Vice
Chairman and Director
Gert R. Thygesen ........ 46 Vice President, Technology
Joseph E. Porcello ...... 49 Vice President, Finance
Stanley S. Slingerland .. 53 Vice President, Human Resources
Mark P. Burdick ......... 43 Vice President and General Manager
Timothy P. Ross ......... 42 Vice President, Business Development
Thomas J. Passaro, Jr ... 40 Vice President and President of RF Power
Lawrence A. Sala joined the Company in 1984. He has been President since
May 1995 and has served as Chief Executive Officer since September 1997. Mr.
Sala became a member of the Board of Directors of the Company in 1995. He holds
a bachelor's degree in computer engineering, a master's degree in electrical
engineering and a master's degree in business administration, all from Syracuse
University.
Carl W. Gerst, Jr. has been a member of the Board of Directors of the
Company since 1968. Mr. Gerst has served as Chief Technical Officer and Vice
Chairman of the Board since May 1995 and as Treasurer since May 1992. Mr. Gerst
previously served as Executive Vice President of the Company from its founding
until May 1995. He holds a bachelor's degree from Youngstown University and a
master's degree in business administration from Syracuse University.
Gert R. Thygesen joined the Company in 1981 and has served as Vice
President of Technology since September 2000. He previously served as Vice
President, Operations since April 1995 and as Operations Manager of the Company
from 1992 until 1995 and as Program Manager, Digital RF Memories & Advanced
Systems, from 1988 to 1992. Mr. Thygesen holds a bachelor of science degree and
a master's degree in electrical engineering from Aalborg University Center,
Denmark.
Joseph E. Porcello joined the Company in 1977 and has served as Vice
President, Finance, since May 1995. He previously served as the Company's
Controller from 1981 to 1999. Mr. Porcello holds a bachelor's degree from the
State University of New York at Buffalo and is a certified public accountant.
Stanley S. Slingerland joined the Company in 1980 and has served as Vice
President, Human Resources since November 1996. He previously served as Human
Resource Manager of the Company until 1996. Mr. Slingerland holds a bachelor's
degree from Hope College.
Mark P. Burdick has been with the Company since 1978 and has served as
Vice President and General Manager since September, 2000. He served as Vice
President and General Manager, Wireless Group since November 1999, as Business
Unit Manager -- Commercial Products from 1994 to 1999, and as Group Manager for
Defense Radar Countermeasure Subsystems from 1991 to 1994. Mr. Burdick holds a
bachelor of science in electrical engineering from the Rochester Institute of
Technology, and a Master's of Business Administration from the University of
Rochester.
Thomas J. Passaro, Jr., joined the Company in February 2000 in connection
with the acquisition of RF Power. He serves as a Vice President of the Company
and as President of RF Power. Mr. Passaro, a co-founder of RF Power, served as
its President from June 1998 to February 2000 and as its Vice President from
1988 to June 1998.
13
Timothy P. Ross has been with the Company since 1982 and has served as
Vice President -- Business Development since September, 2000. He served as Vice
President and General Manager, Space and Defense Group, of the Company since
November 1999. Mr. Ross served as Business Unit Manager -- Satellite
Communications of the Company from 1995 to 1999 and as a Program Manager from
1988 to 1995. Mr. Ross holds an associate's degree in engineering science, a
bachelor of science in electrical engineering from Clarkson University, and a
Master's in Business Education from the University of Rochester.
Each executive officer is elected annually by the Board of Directors of
the Company and serves at the pleasure of the Board.
14
PART II
Item 5. Market For the Company's Common Stock and Related Stockholder Matters
The common stock of the Company is quoted on The Nasdaq National Market
under the symbol "ANEN." The following table sets forth the range of quarterly
high and low sales prices reported on The Nasdaq National Market for the
Company's common stock for the quarters indicated. Quotations represent prices
between dealers and do not include retail mark-ups, mark- downs or commissions.
Prices set forth below have been adjusted to reflect a two-for-one stock split
effectuated in the form of a stock dividend paid on November 27, 2000.
Fiscal 2001 Fiscal 2000
----------- -----------
Quarter Quarter
------- -------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
High 71.375 77.000 66.500 25.490 10.708 18.583 38.917 69.50
Low 31.500 34.625 11.438 10.000 6.833 8.833 14.500 26.125
The Company had approximately 425 holders of record of its common stock at
September 10, 2001.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support the
development of its business and does not anticipate paying cash dividends for
the foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Board of Directors after taking into account various factors,
including the Company's financial condition, operating results and current and
anticipated cash needs. Although there are no direct restrictions on payments of
cash dividends under the Company's bank credit facility, the Company is required
to maintain certain level of tangible net worth. This requirement may restrict
the ability of the Company to pay cash dividends in the future.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below with respect to
the Company's statements of operations for each of the years in the three year
period ended June 30, 2001, and with respect to the balance sheets at June 30,
2000 and 2001, are derived from the consolidated financial statements that have
been audited by KPMG LLP, independent auditors, which are included elsewhere in
this Annual Report on Form 10-K, and are qualified by reference to such
consolidated financial statements. The statement of operations data for the
years ended June 30, 1997 and June 30, 1998, and the balance sheet data at June
30, 1997, June 30, 1998 and June 30, 1999, are derived from audited consolidated
financial statements not included in this Annual Report on Form 10-K. The
following selected financial data should be read in conjunction with the
consolidated financial statements for the Company and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
15
Years Ended
----------------------------------------------------------------
June 30, June 30, June 30, June 30, June 30,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Net sales $ 84,825 $ 60,172 $45,739 $37,449 $24,227
Cost of sales 52,527 35,074 27,711 23,571 16,243
-------- -------- ------- ------- -------
Gross profit 32,298 25,098 18,028 13,878 7,984
-------- -------- ------- ------- -------
Operating expenses:
Marketing 6,584 5,434 4,177 3,998 3,170
Research and development 5,023 3,816 2,835 1,380 540
General and administrative 8,392 4,394 3,220 2,873 2,239
Restructuring 688 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses 20,687 13,644 10,232 8,251 5,949
-------- -------- ------- ------- -------
Operating income 11,611 11,454 7,796 5,627 2,035
-------- -------- ------- ------- -------
Other income (expense):
Interest expense (159) (66) (38) (82) (94)
Other, primarily interest income 7,162 3,316 1,396 922 114
-------- -------- ------- ------- -------
Total other income 7,003 3,250 1,358 840 20
-------- -------- ------- ------- -------
Income before income taxes 18,614 14,704 9,154 6,467 2,055
Income taxes 6,400 5,063 2,204 2,330 --
-------- -------- ------- ------- -------
Net income $ 12,214 $ 9,641 $ 6,950 $ 4,137 $ 2,055
======== ======== ======= ======= =======
Net income per common and common equivalent share:
Basic $ .55 $ .54 $ .42 $ .28 $ .17
======== ======== ======= ======= =======
Diluted $ .52 $ .50 $ .40 $ .26 $ .16
======== ======== ======= ======= =======
Shares used in computing net income per common and
common equivalent share:
Basic 22,134 17,978 16,566 14,952 12,318
Diluted 23,455 19,299 17,310 15,711 12,996
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 11,748 $ 6,179 $13,482 $11,249 $ 3,807
Working capital 146,677 106,271 39,053 38,965 15,042
Total assets 209,055 189,696 58,467 50,903 25,973
Long-term debt, less current installments -- -- -- -- 453
Stockholders' equity 199,454 179,572 51,845 45,506 20,327
Item 7. 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-K. 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 Annual Report on Form 10-K.
16
Overview
The Company designs, develops, and markets integrated microwave
components, assemblies, and subsystems for the wireless communications,
satellite communications, and defense electronics markets. The Company uses its
proprietary Multi-Layer Stripline technology to generate compact, lightweight,
and cost-effective products for use in these markets. The Company offers its
integrated assemblies and high-end subsystems to leading wireless communications
equipment manufacturers such as Ericsson, Motorola, Lucent Technologies, and
Nortel Networks and to satellite communications companies such as Boeing
Satellite and Lockheed Martin.
The Company operates predominantly in the wireless communications,
satellite communications, and defense electronics markets. The two reporting
segments of the Company are the Wireless group and the Space and Defense group.
These groups 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 Company recognizes sales at the time products are shipped to its
customers or, in the case of customer-funded engineering sales, upon achievement
of design milestones. Revenues and estimated profits on fixed-price contracts
are recognized under the percentage of completion method of accounting on the
units-of-delivery basis. Provisions for estimated losses on uncompleted
contracts are made in the period in which the losses are determined.
In April 2000, the Company successfully completed a follow-on offering in
which 4,689,000 new shares of the Company's common stock (adjusted to reflect
three-for-two and two-for-one stock splits effectuated in the form of stock
dividends paid on June 12, 2000 and November 27, 2000, respectively) were sold
by the Company. The offering price was $25.34 per share (on a post-split basis),
resulting in approximately $112.2 million in net proceeds for the Company. The
Company plans to use these net proceeds for general corporate purposes and may
also use a portion of the net proceeds to acquire additional complementary
products, technologies, or businesses.
On February 29, 2000, the Company acquired all of the outstanding capital
stock of RF Power. RF Power, based in Bohemia, New York, is primarily engaged in
the manufacture of electronic products, including power resistors, attenuators,
and couplers. The purchase price for RF Power was $7,749,294 in cash, including
direct acquisition costs, and 70,552 shares (on a post-split basis) of the
Company's common stock with an aggregate value of $1,744,667. The Company
accounted for this acquisition using the purchase method of accounting for
business combinations.
On July 31, 2000, the Company acquired substantially all the net assets of
Ocean Microwave, Inc. ("Ocean Microwave"). Ocean Microwave was based in Neptune,
New Jersey, and is primarily engaged in the design and manufacture of isolator
and circulator components. The acquired business of Ocean Microwave is conducted
from the Company's subsidiary, APPI. The purchase price was $18 million,
including direct acquisition costs. The acquisition was accounted for under the
purchase method of accounting for business combinations. In May 2001, due to the
severe downturn in the wireless infrastructure market, the Company decided to
close the Neptune, New Jersey facility and move the isolator and circulator
production to its East Syracuse, New York facility. This move was completed by
June 30, 2001 and in connection with the relocation, the Company recognized a
restructuring charge of approximately $688,000 in the fourth quarter of fiscal
2001. This charge consisted of employee termination benefits of approximately
$297,000, recognition of a non cancelable lease obligation of approximately
$216,000, and leasehold and equipment impairments approximating $175,000.
On August 31, 2001, the Company acquired all of the outstanding capital
stock of Amitron. Amitron is based in North Andover, Massachusetts and is
primarily engaged in the design and manufacture of ceramic components and
circuits and for the medical, telecommunications and defense electronics market.
The purchase price was $9,775,000 in cash and 95,704 shares of the Company's
common stock with an aggregate value of $1,776,812. The acquisition will be
accounted for under the purchase method of accounting for business combinations.
17
Results of Operations
The following table sets forth the percentage relationships of certain
items from the Company's consolidated statements of operations as a percentage
of net sales for the periods indicated:
Years Ended June 30,
--------------------
2001 2000 1999
---- ---- ----
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 61.9 58.3 60.6
----- ----- -----
Gross profit ............................... 38.1 41.7 39.4
----- ----- -----
Operating expenses:
Marketing ............................. 7.8 9.0 9.1
Research and development .............. 5.9 6.3 6.2
General and administrative ............ 9.9 7.3 7.0
Restructuring ......................... 0.8 -- --
----- ----- -----
Total operating expenses .......... 24.4 22.6 22.3
----- ----- -----
Operating income ........................... 13.7 19.1 17.1
----- ----- -----
Other income (expense):
Interest expense ...................... (0.2) (0.1) (0.1)
Other, primarily interest income ...... 8.4 5.5 3.1
----- ----- -----
Total other income ................ 8.2 5.4 3.0
----- ----- -----
Income before income taxes ................. 21.9 24.5 20.1
Income taxes ............................... 7.5 8.4 4.8
----- ----- -----
Net income ................................. 14.4% 16.1% 15.3%
===== ===== =====
The following table sets forth the Company's net sales by industry segment
for the periods indicated:
Years Ended June 30,
--------------------
2001 2000 1999
---- ---- ----
(In thousands)
Wireless ....................... $61,710 $38,807 $21,450
Space & Defense ................ 23,115 21,365 24,289
------- ------- -------
$84,825 $60,172 $45,739
======= ======= =======
Year Ended June 30, 2001 (Fiscal 2001) Compared to Year Ended June 30, 2000
(Fiscal 2000)
Net Sales. Net sales for fiscal 2001 were $84.8 million, up 41.0% over net
sales of $60.2 million in fiscal 2000. The increase was the result of a 59.0%
rise in Wireless sales and an 8.2% increase in shipments of Space and Defense
products.
The increase in the sale of Wireless products, which consist of standard
and surface mount catalog components and custom subassemblies for use in
building wireless basestation equipment, amounted to $22.9 million and reflects
mainly sales of the Company's two recent acquisitions, APPI and RF Power, whose
combined sales were $24.1 million for fiscal 2001. Real Wireless product sales
growth, after adjusting for these acquisitions, was approximately 12.4%, or $4.1
million, in fiscal 2001 compared to the prior year sales.
During the latter part of the third quarter of fiscal 2001, the Company
saw a rapid downturn in the wireless marketplace which resulted in an increasing
number of reductions in customer demand forecasts and delivery pushouts
beginning toward the end of February 2001 and continuing through June 2001. This
severe market downturn has had a negative impact on all of the Company's
Wireless product lines and it appears that unfavorable Wireless market
conditions will continue potentially beyond calendar 2001. This world-wide
wireless market downturn is expected to possibly result in further declines in
the Company's Wireless sales in the first half of fiscal 2002.
18
Space and Defense products consist of custom multi-layer components and
assemblies for communication satellites and defense radar countermeasures
subsystems for the military. Sales in the Space and Defense group rose $1.8
million or 8.2% in fiscal 2001 compared to the prior fiscal year. This small
increase in shipments resulted from the first pre-production engineering
hardware shipments and initial production shipments for the Boeing Spaceway
program. This program, which has been in an engineering design phase for the
past year and a half, entered full factory production in the fourth quarter of
fiscal 2001. This satellite program is expected to place Space and Defense
shipments in the $6.0 - $6.5 million range, quarterly, for fiscal 2002.
Gross Profit. Gross profit for fiscal 2001 was $32.3 million (38.1% of net
sales), up $7.2 million from $25.1 million (41.7% of net sales) for fiscal 2000.
Gross profit increased significantly due to the absolute increase in sales in
fiscal 2001 compared to fiscal 2000. The rise in sales volume did not result in
further improvement in gross margin as a percent of sales, year over year, as
the gross margin at the Company's new subsidiaries, which provided the majority
of the current year sales increase, were below those of its main plant
operations in East Syracuse, New York. Additionally, gross profit improvement
was further hindered by the decline in shipments in the second half of fiscal
2001 due to the downturn in the world-wide wireless market. In light of the
current and expected lower sales levels, the Company has taken action to
consolidate its operations, reduced its personnel levels by over 25% from their
peak in February 2001, and minimized other indirect costs. These efforts should
have some effect on gross profit, but the Company does not expect gross profit
margins to improve significantly unless and until sales return to prior levels.
Cost of sales consists primarily of engineering design costs, material
fabrication 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 21.1% to
$6.6 million (7.8% of net sales) for fiscal 2001 from $5.4 million (9.0% of net
sales) for fiscal 2000. This increase was a result of the continuing expansion
of the marketing and sales organization to support the Company's expanding
commercial markets, as well as eleven and eight months of expense for APPI and
RF Power, respectively, not included in fiscal 2000 expenses. Despite the recent
wireless market downturn, the Company is planning to continue to expand its
sales and marketing capabilities over the next six months.
Research and Development. Research and development expenses consist of
materials, salaries and related overhead costs of employees engaged in ongoing
research, design, and development activities associated with new products and
technology. Research and development expenses increased 31.6% to $5.0 million
(5.9% of net sales) in fiscal 2001 from $3.8 million (6.3% of net sales) for
fiscal 2000. Research and development expenditures are expanding to support
further development of wireless infrastructure products and 3G broadband fixed
wireless product opportunities. The inclusion of APPI and RF Power in the
Company's research and development expense in fiscal 2001 accounted for
approximately $438,000 in additional expenses. Despite the current wireless
market downturn, the Company does not expect to reduce its current research and
development efforts in the near term.
General and Administrative. General and administrative expenses increased
91.0% to $8.4 million (9.9% of net sales) for fiscal 2001 from $4.4 million
(7.3% of net sales) for fiscal 2000. General and administrative expenses have
increased due to the hiring of additional personnel to support the Company's
corporate acquisition activity, a rise in professional fees due to the Company's
growth, and amortization of goodwill expense related to acquisitions.
Additionally, the current year expense includes 11 and eight months general and
administrative expense for APPI and RF Power, respectively, not included in
fiscal 2000.
Restructuring. Restructuring expense consists of severance pay, vacation
pay, abandoned equipment and leasehold impairment charges and accrued
noncancellable lease obligation expenses related to the closure of APPI's New
Jersey facility and relocation of APPI's operations to East Syracuse, New York.
Restructuring expenses were $688,000 (0.8% of net sales) in fiscal 2001 compared
to no restructuring expense in fiscal 2000.
Interest Expense. Interest expense represents commitment fees and interest
paid on certain long-term deferred obligations. Interest expense for fiscal 2001
was $160,000 (0.2% of net sales) compared to $66,000 (0.1% of net sales) for
fiscal 2000. The increase in interest expense was caused by the addition of
interest bearing obligations of RF Power.
Other income. Other income is primarily interest income received on
invested cash balances. Other income increased 116.0% to $7.2 million (8.4% of
net sales) for fiscal 2001 from $3.3 million (5.5% of net sales) for fiscal 2000
due to the income received on the $112 million of net proceeds raised through
the Company's follow-on offering completed in April 2000.
19
Income Taxes. Income tax expense for fiscal 2001 was $6.4 million (7.5% of
net sales), representing an effective tax rate of 34.4%. This compared to $5.1
million (8.4% of net sales) for fiscal 2000, also representing an effective tax
rate of 34.4%.
Year Ended June 30, 2000 (Fiscal 2000) Compared to Year Ended June 30, 1999
(Fiscal 1999)
Net Sales. Net sales increased 31.6% to $60.2 million for fiscal 2000. The
increase was led by an 80.9% rise in Wireless sales which more than offset a
12.0% decline in sales of Space and Defense products.
The increase in sales of Wireless products reflected both strong demand by
the major base station OEMs, as well as the Company's success in achieving
higher dollar content per base station for its latest microwave backplane
products. Both shipments of custom backplanes to OEMs and shipments of Xinger(R)
surface mount products to amplifier manufacturers rose significantly in fiscal
2000 in response to this demand. The increase in Wireless sales also reflected
the inclusion of four months sales of RF Power, which the Company acquired on
February 29, 2000.
Sales in the Space and Defense group fell $2.9 million, or 12.0% for the
year ended June 30, 2000, compared to fiscal 1999. This decline resulted from
both delays in satellite contract awards in fiscal 1999 and the completion of
the Airborne Self Protection Jammer program contract in the second quarter of
fiscal 2000, both of which were events the Company anticipated.
Gross Profit. Gross profit for fiscal 2000 was $25.1 million (41.7% of net
sales), up $7.1 million from $18.0 million (39.4% of net sales) for fiscal 1999.
This improvement resulted from the increase in sales volume in the Wireless
group which resulted in significant economies of scale in the manufacturing
operation. These economies were further enhanced by investment in new automated
equipment within the Wireless group which helped to further increase production
yields and manufacturing efficiency. Gross profit was also improved by an
increase in higher margin engineering design sales in the Space and Defense
group.
Marketing. Marketing expenses increased 30.0% to $5.4 million (9.0% of net
sales) for fiscal 2000 from $4.2 million (9.1% of net sales) for fiscal 1999.
This increase was a result of the continuing expansion of the Company's
marketing and sales organization to support increased order volume and the
inclusion of four months marketing expense of RF Power. Marketing expenses were
further increased in fiscal 2000 as advertising expense rose due to special
programs to inform customers of acquisitions and product introductions.
Research and Development. Research and development expenses increased
34.6% to $3.8 million (6.3% of net sales) in fiscal 2000 from $2.8 million (6.2%
of net sales) for fiscal 1999. Research and development expenditures expanded to
support development of wireless infrastructure products and satellite
communications opportunities. The acquisition of RF Power did not have a
material impact on research and development expenses in fiscal 2000.
General and Administrative. General and administrative expenses increased
36.5% to $4.4 million (7.3% of net sales) for fiscal 2000 from $3.2 million
(7.0% of net sales) for fiscal 1999. General and administrative expenses have
increased due to the hiring of additional personnel, a rise in professional fees
due to Company growth, and the inclusion of four months general and
administrative expense of RF Power.
Interest Expense. Interest expense for fiscal 2000 was $66,000 (0.1% of
net sales) compared to $39,000 (0.1% of net sales) for fiscal 1999. The increase
in interest expense was caused by the addition of interest expense on
obligations of RF Power.
Other income. Other income increased 137.5% to $3.3 million (5.5% of net
sales) for fiscal 2000 from $1.4 million (3.1% of net sales) for fiscal 1999.
This rise was due to a significant increase in cash balances in the current year
compared to the prior year resulting from the $112.2 million net proceeds raised
through the Company's follow-on offering completed in March 2000.
Income Taxes. Income tax expense for fiscal 2000 was $5.1 million (8.4% of
net sales) representing an effective tax rate of 34.4%. This compares to $2.2
million (4.8% of net sales) in fiscal 1999 representing an effective tax rate of
24.1% compared to a normal effective tax rate of 37-38%. The lower effective tax
rate in fiscal 1999 resulted from a one time tax benefit recorded for the
write-off of the Company's investment in its closed European subsidiary. The
lower effective tax rate in fiscal 2000 resulted from a significant increase in
tax exempt income on investments.
20
Liquidity and Capital Resources
Net cash provided by operations for the years ended June 30, 2001 and 2000
was $16.7 million and $6.8 million, respectively. The positive cash flow from
operations in both fiscal 2001 and 2000 was due primarily to the profit attained
in both years. The higher level of cash provided by operations in fiscal 2001,
compared to fiscal 2000, resulted primarily from significantly higher levels of
non-cash items such as depreciation and amortization of goodwill in fiscal 2001
compared to fiscal 2000. Additionally, the increase in cash generated by tax
benefits related to the exercise of stock options by employees rose from $2.5
million in fiscal 2000 to $5.4 million in fiscal 2001.
Net cash used in investing activities in fiscal 2001 and 2000 consisted of
funds used to purchase capital equipment, cash used to fund acquisitions in both
fiscal years, and cash used for or generated by the purchase and sale of
short-term marketable debt securities in both fiscal years.
Capital equipment purchases in fiscal 2001 and 2000 were $8.0 million and
$6.0 million, respectively. The capital investments in both years consisted
primarily of manufacturing equipment and building renovations to expand the
Company's wireless production capacity. Additionally, in fiscal 2001 and 2000,
the Company expended $7.5 million and $17.9 million in cash, respectively, to
acquire RF Power and Ocean Microwave.
Cash provided by financing activities in fiscal 2001 and fiscal 2000
consisted of funds received for the exercise of stock options in both years
($2.9 and $1.5 million, respectively) and in fiscal 2000, $112.2 million in net
proceeds received from the completion of a follow-on stock offering in April
2000. Cash used in financing activities in fiscal 2001 and 2000 consisted of
payments on long-term debt of $408,000 and $383,000, respectively. Additionally,
during the fourth quarter of fiscal 2001, $1.3 million was used to repurchase
117,000 shares of the Company's common stock. The purchases were made under a
2.0 million share repurchase program authorized by the Board of Directors in
March 2001.
The Company has 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. The Company believes that it
was in compliance with all restrictions and covenants at June 30, 2001. At June
30, 2001, $0 was outstanding under the credit facility. The Company believes
that its cash requirements for the foreseeable future will be satisfied by
currently invested cash balances, expected cash flows from operations, and funds
available under the credit facility.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations which supersedes Accounting Principles Board
(APB) Opinion No. 16, Business Combinations. SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations and modifies
the application of the purchase accounting method. The elimination of the
pooling-of-interests method is effective for transactions initiated after June
30, 2001. The remaining provisions of SFAS 141 will be effective for
transactions accounted for using the purchase method that are completed after
June 30, 2001. The Company has reviewed the Statement and believes that, upon
implementation, the Statement will not have a material impact on its
consolidated financial statements.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, Goodwill and Intangible Assets which supersedes APB Opinion
No. 17, Intangible Assets. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life, and addresses the
impairment testing and recognition for goodwill and intangible assets. SFAS 142
will apply to goodwill and intangible assets arising from transactions completed
before and after the Statement's effective date. SFAS 142 is effective for
fiscal 2002. The Company is currently assessing the Statement and has not yet
made a determination of the impact adoption will have on its consolidated
financial statements.
Item 7A. 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 Annual Report on Form 10-K.
21
As of June 30, 2001, the Company had cash, cash equivalents, and
marketable debt securities of $132.0 million, of which approximately $120.3
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 June 30, 2001 rates would cause the market price of
these securities to fluctuate by an insignificant amount. Due to the relatively
short maturities of the securities and the Company's ability to hold these
investments to maturity, an immediate increase in interest rates would not have
a significant effect on the financial condition or results of operations of the
Company. Over time, however, declines in interest rates will reduce the
Company's interest income.
The Company does not currently own any material equity investments.
Therefore, the Company does not currently have any direct equity price risk.
All of the Company's sales to foreign customers are denominated in United
States dollars and, accordingly, the Company is not currently exposed to foreign
currency exchange risk.
Item 8. Financial Statements and Supplementary Data
The financial statements and financial statement schedules called for by
this Item are provided under "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K," which information is incorporated herein by reference.
The unaudited supplementary financial information required by this Item is
contained in note 21 to the consolidated financial statements of the Company
which have been submitted as a separate section of this Annual Report on Form
10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
PART III
Item 10. Directors and Executive Officers of Registrant
Information required by this Item concerning directors of the Company is
contained in the Company's proxy statement filed with respect to the 2001 Annual
Meeting of Shareholders and is incorporated by reference herein. The information
regarding executive officers of the Company required by this Item is included in
Item 4A hereof.
Item 11. Executive Compensation
Information required by this Item is contained in the Company's proxy
statement filed with respect to the 2001 Annual Meeting of Shareholders and is
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is contained in the Company's proxy
statement filed with respect to the 2001 Annual Meeting of Shareholders and is
incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is contained in the Company's proxy
statement filed with respect to the 2001 Annual Meeting of Shareholders and is
incorporated by reference herein.
23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Schedules:
Reference is made to the Index of Financial
Statements hereinafter contained
3. Exhibits:
Reference is made to the list of Exhibits
hereinafter contained
(b) Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on April 26, 2001 related
to its implementation of a Shareholder Protection Rights Plan.
(c) Exhibits:
Index to Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Restated By-Laws (2)
4.1 Specimen Certificate of Common Stock (3)
4.2 Shareholder Protection Rights Agreement dated as of April 20,
2001, between the Company and American Stock Transfer & Trust
Company, including forms of Rights Certificate and Election to
Exercise (4)
10.1 Employment Agreement, dated as of July 1, 2001, between the
Company and Lawrence A. Sala
10.2 Consulting Agreement, dated as of March 1, 1997, between the
Company and Dale F. Eck (5)
10.3 Pension Plan and Trust (6)
10.4 Anaren Microwave, Inc. Incentive Stock Option Plan, as amended
(7)
10.5 Anaren Microwave, Inc. 1989 Non-statutory Stock Option Plan,
as amended (8)
10.6 Employment Agreement, dated as of October 7, 1997, between the
Company and Hugh A. Hair (9)
10.7 Credit Facility Agreement, dated as of December 23, 1997,
between the Company and Manufacturers and Traders Trust
Company, together with the Revolving Credit Note dated
December 23, 1997 executed by the Company in favor of
Manufacturers and Traders Trust Company (10)
10.8 Anaren Microwave, Inc. Incentive Stock Option Plan for Key
Employees (11)
10.9 Anaren Microwave, Inc. Stock Option Plan (12)
10.10 Employment Agreement, dated as of February 29, 2000, between
the Company and Thomas J. Passaro, Jr. (13)
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
----------
(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 on December 19, 1980, is incorporated herein by reference
to Exhibit 4.1(ii) to the Company's Registration Statement on Form S-2
(Registration No. 2-86025); (C) Amendment, filed on 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 on 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 on
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; (F) Amendment, filed on February 8, 2000,
is incorporated herein reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (Registration No. 333-31460) filed with
the Securities and Exchange Commission on March 2, 2000; and (G)
Amendment, filed on November 22, 2000, is incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (Commission
File No. 0-6620) for the three months ended December 31, 2000.
24
(2) Incorporated herein reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-31460) filed with the
Securities and Exchange Commission on March 2, 2000.
(3) Incorporated herein reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-3 (Registration No. 333-31460) filed with the
Securities and Exchange Commission on March 2, 2000.
(4) Incorporated herein by reference to Exhibits 4.1 and 4.2 to the Company's
Registration Statement on Form 8-A (Commission File No. 0-6620) filed with
the Securities and Exchange Commission on April 26, 2001.
(5) Incorporated herein by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
June 30, 1997.
(6) Incorporated herein by reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-8 (Registration No. 33-19618).
(7) Incorporated herein by reference to Appendix A to the Company's definitive
proxy statement for its 1998 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 25, 1998.
(8) Incorporated herein by reference to Appendix B to the Company's definitive
proxy statement for its 1998 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 25, 1998.
(9) Incorporated herein by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q (Commission File No. 0-6620) for the three
months ended September 30, 1997.
(10) Incorporated herein by reference to Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q for the three months ended December 31,
1997.
(11) Incorporated herein by reference to Appendix A to the Company's definitive
proxy statement for its 2000 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 18, 2000.
(12) Incorporated herein by reference to Appendix B to the Company's definitive
proxy statement for its 2000 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 18, 2000.
(13) Incorporated herein by reference to Exhibit 10.10 to the Company's Annual
Report Form 10-K (Commission File No. 0-6620) for the fiscal year ended
June 30, 2000.
25
Pursuant to the requirements of Section 13 or 15 (d) 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.
/s/ Lawrence A. Sala
--------------------------------------------
Name: Lawrence A. Sala
Title: President and Chief Executive Officer
Date: September 19, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Lawrence A. Sala President and Chief September 19, 2001
----------------------- Executive Officer
Lawrence A. Sala (Principal Executive Officer)
/s/ Joseph E. Porcello Vice President of Finance September 19, 2001
----------------------- (Principal Financial and
Joseph E. Porcello Accounting Officer)
/s/ Hugh A. Hair Chairman of the Board September 19, 2001
-----------------------
Hugh A. Hair
/s/ Carl W. Gerst, Jr. Vice Chairman of the Board September 19, 2001
-----------------------
Carl W. Gerst, Jr.
/s/ Herbert I. Corkin Director September 19, 2001
-----------------------
Herbert I. Corkin
/s/ Dale F. Eck Director September 19, 2001
-----------------------
Dale F. Eck
/s/ Matthew S. Robison Director September 19, 2001
-----------------------
Matthew S. Robison
/s/ David Wilemon Director September 19, 2001
-----------------------
David Wilemon
26
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2001 and 2000
(With Independent Auditors' Report Thereon)
27
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report ............................................ 29
Consolidated Balance Sheets as of June 30, 2001 and 2000 ................ 30
Consolidated Statements of Operations for the Years ended
June 30, 2001, 2000 and 1999 ........................................ 31
Consolidated Statements of Stockholders' Equity for the Years ended
June 30, 2001, 2000 and 1999 ........................................ 32
Consolidated Statements of Cash Flows for the Years ended
June 30, 2001, 2000 and 1999 ........................................ 33
Notes to Consolidated Financial Statements .............................. 34
28
Independent Auditors' Report
The Board of Directors
Anaren Microwave, Inc.:
We have audited the consolidated financial statements of Anaren Microwave,
Inc. and subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Anaren
Microwave, Inc. and subsidiaries as of June 30, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
August 1, 2001
Syracuse, New York
29
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 and 2000
Assets
2001 2000
------------- -------------
Current assets:
Cash and cash equivalents ................. $ 11,748,542 $ 6,179,202
Marketable debt securities (note 3) ....... 108,557,983 79,926,644
Receivables, less allowance for bad
debts of $195,000 and $55,000 in
2001 and 2000, respectively ............. 11,504,168 10,992,693
Inventories (note 4) ...................... 18,566,977 12,385,125
Accrued interest receivable ............... 1,304,877 2,121,050
Refundable income taxes ................... 53,804 690,729
Prepaid expenses .......................... 569,242 658,792
Deferred income taxes (note 17) ........... 956,759 301,220
Other current assets ...................... 1,139,157 506,621
------------ ------------
Total current assets ....... 154,401,509 113,762,076
Marketable debt securities (note 3) .......... 11,725,960 53,874,918
Property, plant and equipment,
net (note 5) .............................. 18,805,901 13,336,593
Goodwill, net of accumulated amortization
of $1,726,838 and $173,796 in 2001
and 2000, respectively (note 2) ........... 23,410,534 7,647,108
Deferred income taxes (note 17) .............. 263,348 571,862
Patent, net of accumulated amortization
of $143,742 and $71,871 in 2001 and
2000, respectively (note 1) ............... 448,224 503,094
------------ ------------
$209,055,476 $189,695,651
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .......................... $ 2,985,793 $ 3,830,807
Accrued expenses (note 6) ................. 2,966,258 2,244,241
Income taxes payable ...................... 938,984 623,431
Customer advance payments ................. 767,790 601,957
Other current liabilities (note 8) ........ 65,000 190,814
------------ ------------
Total current liabilities .. 7,723,825 7,491,250
Postretirement benefit obligation (note 16) .. 1,391,496 1,324,978
Other liabilities (note 8) ................... 486,380 1,307,788
------------ ------------
Total liabilities .......... 9,601,701 10,124,016
------------ ------------
Commitments and concentrations (notes 18,
19, and 20) Stockholders' equity:
Common stock of $.01 par value
Authorized 200,000,000 shares
(note 10); issued 25,496,238 and
24,964,362 in 2001 and 2000,
respectively ............................ 254,962 249,644
Additional paid-in capital ................ 166,051,341 156,097,167
Unearned compensation (note 13) ........... (1,723,377) (723,712)
Retained earnings ......................... 39,643,487 27,429,519
------------ ------------
204,226,413 183,052,618
Less cost of 3,177,822 and 3,060,822
treasury shares in 2001 and 2000,
respectively ............................ 4,772,638 3,480,983
------------ ------------
Total stockholders' equity . 199,453,775 179,571,635
------------ ------------
$209,055,476 $189,695,651
============ ============
See accompanying notes to consolidated financial statements.
30
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Net sales ............................. $84,825,275 $60,171,836 $45,738,992
Cost of sales ......................... 52,526,584 35,074,116 27,710,807
----------- ----------- -----------
Gross profit ................. 32,298,691 25,097,720 18,028,185
----------- ----------- -----------
Operating expenses:
Marketing .......................... 6,584,090 5,433,627 4,176,762
Research and development ........... 5,022,882 3,815,862 2,834,697
General and administrative ......... 8,392,118 4,394,099 3,220,238
Restructuring (note 7) ............. 688,337 -- --
----------- ----------- -----------
Total operating expenses ..... 20,687,427 13,643,588 10,231,697
----------- ----------- -----------
Operating income ............. 11,611,264 11,454,132 7,796,488
----------- ----------- -----------
Other income (expense):
Interest expense ................... (159,506) (65,999) (38,537)
Other, primarily interest income ... 7,162,210 3,315,666 1,395,874
----------- ----------- -----------
Total other income ........... 7,002,704 3,249,667 1,357,337
----------- ----------- -----------
Income before income taxes ............ 18,613,968 14,703,799 9,153,825
Income tax expense (note 17) .......... 6,400,000 5,063,000 2,204,000
----------- ----------- -----------
Net income ................... $12,213,968 $ 9,640,799 $ 6,949,825
=========== =========== ===========
Net income per common and
common equivalent share:
Basic ........................ $ .55 $ .54 $ .42
=========== =========== ===========
Diluted ...................... $ .52 $ .50 $ .40
=========== =========== ===========
Shares used in computing net income per
common and common equivalent share:
Basic ........................ 22,133,585 17,977,782 16,566,168
=========== =========== ===========
Diluted ...................... 23,455,244 19,299,460 17,309,098
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2001, 2000 and 1999
Common Stock Additional
------------------------------ Paid-in Unearned
Shares Amount Capital Compensation
------------- ------------- ------------- ------------
Balance at June 30, 1998 ............ 19,366,098 $193,661 $ 36,482,644 $ --
Net income ....................... -- -- -- --
Purchase of treasury stock ....... -- -- -- --
Stock options exercised (note 12) 297,000 2,970 513,549 --
Stock options granted in
connection with acquisition of
patent (notes 1 and 12) ........ -- -- 249,965 --
Tax benefit from exercise of
stock options (note 17) ........ -- -- 92,225 --
---------- -------- ------------ -----------
Balance at June 30, 1999 ............ 19,663,098 196,631 37,338,383 --
Net income ....................... -- -- -- --
Stock options exercised (note 12) 469,800 4,698 1,459,929 --
Tax benefit from exercise of
stock options (note 17) ........ -- -- 2,513,788 --
Issuance of restricted stock
(note 13) ...................... 72,000 720 893,280 (894,000)
Amortization of unearned
compensation (note 13) ......... -- -- -- 170,288
Issuance of stock in connection
with acquisition (note 2) ...... 70,552 705 1,743,962 --
Sale of common stock (note 10) ... 4,689,000 46,890 112,147,825 --
Dividends to stockholders
(note 11) ...................... (88) -- -- --
---------- -------- ------------ -----------
Balance at June 30, 2000 ............ 24,964,362 249,644 156,097,167 (723,712)
Net income ....................... -- -- -- --
Purchase of treasury stock .......... -- -- -- --
Stock options exercised (note 12) 500,900 5,009 2,882,102 --
Tax benefit from exercise of
stock options (note 17) ........ -- -- 5,375,231 --
Issuance of restricted stock
(note 13) ...................... 30,976 309 1,524,791 (1,525,100)
Amortization of unearned
compensation (note 13) ......... -- -- -- 525,435
Stock options granted for services
(note 12) ...................... -- -- 172,050 --
---------- -------- ------------ -----------
Balance at June 30, 2001 ............ 25,496,238 $254,962 $166,051,341 $(1,723,377)
========== ======== ============ ===========
Treasury Stock Total
Retained --------------------------- Stockholders'
Earnings Shares Amount Equity
------------- ----------- -------------- -------------
Balance at June 30, 1998 ............ $10,841,642 2,676,822 $(2,012,077) $ 45,505,870
Net income ....................... 6,949,825 -- -- 6,949,825
Purchase of treasury stock ....... -- 384,000 (1,468,906) (1,468,906)
Stock options exercised (note 12) -- -- -- 516,519
Stock options granted in
connection with acquisition of
patent (notes 1 and 12) ........ -- -- -- 249,965
Tax benefit from exercise of
stock options (note 17) ........ -- -- -- 92,225
----------- --------- ----------- ------------
Balance at June 30, 1999 ............ 17,791,467 3,060,822 (3,480,983) 51,845,498
Net income ....................... 9,640,799 -- -- 9,640,799
Stock options exercised (note 12) -- -- -- 1,464,627
Tax benefit from exercise of
stock options (note 17) ........ -- -- -- 2,513,788
Issuance of restricted stock
(note 13) ...................... -- -- -- --
Amortization of unearned
compensation (note 13) ......... -- -- -- 170,288
Issuance of stock in connection
with acquisition (note 2) ...... -- -- -- 1,744,667
Sale of common stock (note 10) ... -- -- -- 112,194,715
Dividends to stockholders
(note 11) ...................... (2,747) -- -- (2,747)
----------- --------- ----------- ------------
Balance at June 30, 2000 ............ 27,429,519 3,060,822 (3,480,983) 179,571,635
Net income ....................... 12,213,968 -- -- 12,213,968
Purchase of treasury stock .......... -- 117,000 (1,291,655) (1,291,655)
Stock options exercised (note 12) -- -- -- 2,887,111
Tax benefit from exercise of
stock options (note 17) ........ -- -- -- 5,375,231
Issuance of restricted stock
(note 13) ...................... -- -- -- --
Amortization of unearned
compensation (note 13) ......... -- -- -- 525,435
Stock options granted for services
(note 12) ...................... -- -- -- 172,050
----------- --------- ----------- ------------
Balance at June 30, 2001 ............ $39,643,487 3,177,822 $(4,772,638) $199,453,775
=========== ========= =========== ============
See accompanying notes to consolidated financial statements.
32
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2001, 2000 and 1999
2001 2000 1999
-------------- ------------- -------------
Cash flows from operating activities:
Net income ............................................. $ 12,213,968 $ 9,640,799 $ 6,949,825
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of plant and equipment 2,775,594 1,768,234 1,432,808
Amortization of intangibles ......................... 1,624,913 245,667 --
Provision for doubtful accounts ..................... 140,000 -- --
Deferred income taxes ............................... (347,025) (120,900) (270,778)
Unearned compensation ............................... 525,435 170,288 --
Tax benefit from exercise of stock options .......... 5,375,231 2,513,788 92,225
Changes in operating assets and liabilities,
net of business acquisitions:
Receivables ................................... 836,617 (3,722,212) 944,488
Refundable income taxes ....................... 636,925 (56,360) (461,846)
Inventories ................................... (4,184,124) (2,527,080) 1,970,103
Accrued interest receivable ................... 816,173 (1,537,683) --
Prepaid expenses .............................. 89,550 (399,468) (85,709)
Other assets .................................. (590,051) (137,428) --
Accounts payable .............................. (3,376,398) 179,239 138,829
Income taxes payable .......................... 315,553 151,241 154,930
Accrued expenses .............................. 537,628 169,792 496,569
Customer advance payments ..................... 165,833 253,503 157,773
Postretirement benefit obligation ............. 66,518 46,409 32,148
Other liabilities ............................. (947,222) 138,923 244,000
------------ ------------- -----------
Net cash provided by operating activities . 16,675,118 6,776,752 11,795,365
------------ ------------- -----------
Cash flows from investing activities:
Capital expenditures ................................... (7,975,512) (6,022,444) (2,146,320)
Net purchases of marketable debt securities ............ 13,517,619 (113,820,158) (6,139,007)
Purchase of businesses, net of cash acquired (note 2) .. (17,818,476) (7,510,093) --
Patent acquisition costs ............................... (17,001) -- (325,000)
------------ ------------- -----------
Net cash used in investing activities ..... (12,293,370) (127,352,695) (8,610,327)
------------ ------------- -----------
Cash flows from financing activities:
Payments on notes and line of credit ................... (407,864) (383,026) --
Stock options exercised ................................ 2,887,111 1,464,627 516,519
Proceeds from sale of common stock, net (note 10) ...... -- 112,194,715 --
Purchase of treasury stock ............................. (1,291,655) -- (1,468,906)
Dividends to stockholders (note 11) .................... -- (2,747) --
------------ ------------- -----------
Net cash provided by (used in) financing
activities .............................. 1,187,592 113,273,569 (952,387)
Net increase (decrease) in cash and cash
equivalents ............................. 5,569,340 (7,302,374) 2,232,651
Cash and cash equivalents at beginning of year ............ 6,179,202 13,481,576 11,248,925
------------ ------------- -----------
Cash and cash equivalents at end of year .................. $ 11,748,542 $ 6,179,202 $13,481,576
============ ============= ===========
See accompanying notes to consolidated financial statements.
33
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001, 2000 and 1999
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Anaren
Microwave, Inc. and its wholly-owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated in consolidation.
(b) Operations
The Company is engaged in the design, development and manufacture of
microwave components, assemblies and subsystems which receive and analyze radar
signals and other microwave transmissions. Its primary products include devices
and systems used in the wireless communications, satellite communications and
defense electronics markets.
(c) Sales Recognition
The Company generally recognizes sales at the time products are shipped to
customers. Payments received from customers in advance of products delivered are
recorded as customer advance payments until earned. A small percentage of sales
are derived from long-term fixed-price contracts for the sale of large space and
defense electronics products. Sales and estimated profits under long-term
contracts are recognized using the percentage of completion method of accounting
on a units-of-delivery basis. Profit estimates are revised periodically based
upon changes in sales value and costs at completion. Any losses on these
contracts are recognized in the period in which such losses are determined.
(d) Cash Equivalents
Cash equivalents of $11,668,663 and $6,145,080 at June 30, 2001 and 2000,
respectively, consist of certificates of deposit and money market instruments
having maturities of three months or less. Cash equivalents are stated at cost
which approximates fair value.
(e) Marketable Debt Securities
The Company classifies its portfolio of marketable debt securities as
held-to-maturity in accordance with Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities, as
the Company does not hold any securities considered to be trading or available
for sale. Securities held-to-maturity are those securities the Company has the
ability and intent to hold to maturity.
Held-to-maturity securities are recorded at amortized cost. A decline in
the fair value of a held-to-maturity security that is deemed to be other than
temporary results in a charge to earnings resulting in the establishment of a
new cost basis for the security, and dividend and interest income are recognized
when earned.
(f) Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. Work-in-process inventories related
to fixed-price contracts are stated at the accumulated cost of material, labor
and manufacturing overhead, less the estimated cost of units delivered.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of land
improvements and buildings is calculated by the straight-line method over an
estimated service life of 25 years. Machinery and equipment are depreciated
primarily by the straight-line method based on estimated useful lives of 5 to 10
years.
(h) Goodwill
Goodwill arising from the acquisitions described in note 2 is amortized on
a straight-line basis over 15 years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any, is
based on the excess of the carrying amount over the fair
34
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
value of those assets. No impairment has been indicated to date. The assessment
of the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
(i) Patent
During fiscal 1999, the Company purchased a patent for $325,000 and
150,000 stock options. The stock options were valued at $249,965 as discussed in
note 12. The patent is being amortized on a straight-line basis over its
remaining life of 8 years. During fiscal 2001, the Company capitalized legal
fees aggregating $17,001 associated with obtaining a new patent.
(j) Net Income Per Share
Basic income per share is based on the weighted average number of common
shares outstanding. Diluted income per share is based on the weighted average
number of common shares outstanding, as well as dilutive potential common shares
which, in the Company's case, comprise shares issuable under the stock option
and restricted stock plans described in notes 12 and 13. 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 weighted average number of common shares outstanding for the basic
income per share calculation was 22,133,585, 17,977,782 and 16,566,168 for 2001,
2000 and 1999, respectively. For diluted earnings per share purposes, these
balances increased by 1,321,659, 1,321,678 and 742,930 shares for 2001, 2000 and
1999, respectively, due to the effect of common equivalent shares which were
issuable under the Company's stock option and restricted stock plans.
(k) Research and Development Costs
Research and development costs are charged to expense as incurred.
(l) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates.
(m) Financial Instruments
The Company's financial instruments, which include cash and cash
equivalents, receivables, and accounts payable, are stated at cost which
approximates fair value at June 30, 2001 and 2000. The Company's marketable debt
securities are stated at amortized cost, and their fair values, as determined by
quoted market prices, are presented in note 3.
(n) Stock-based Compensation
The Company measures compensation expense for its stock option-based
employee compensation plans using the intrinsic value method and has provided
pro forma disclosures of the effect on net income and net income per share as if
the fair value-based method had been applied in measuring compensation expense.
Upon issuance of shares of stock pursuant to the Company's Restricted
Stock Program, an unearned compensation charge equivalent to the market value of
the shares on the date of grant is charged to stockholders' equity and is
amortized over the related share restriction period.
(o) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
35
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
(p) Recent Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations which supersedes Accounting Principles Board
(APB) Opinion No. 16, Business Combinations. SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations and modifies
the application of the purchase accounting method. The elimination of the
pooling-of-interests method is effective for transactions initiated after June
30, 2001. The remaining provisions of SFAS 141 will be effective for
transactions accounted for using the purchase method that are completed after
June 30, 2001. The Company has reviewed the Statement and believes that, upon
implementation, will not have a material impact on our consolidated financial
statements.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142, Goodwill and Intangible Assets which supersedes APB Opinion
No. 17, Intangible Assets. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition for goodwill and intangible assets. SFAS 142
will apply to goodwill and intangible assets arising from transactions completed
before and after the Statement's effective date. SFAS 142 is effective for
fiscal 2002. The Company is currently assessing the Statement and has not yet
made a determination of the impact adoption will have on our consolidated
financial statements.
(q) Reclassifications
Certain 2000 amounts have been reclassified to conform with the 2001
presentation.
(2) Acquisitions
On February 29, 2000, the Company acquired all of the outstanding stock of
RF Power Components, Inc. (RF Power). RF Power is based in Bohemia, New York,
and is primarily engaged in the manufacture of electronic products, including
power resistors, attenuators and couplers. The transaction was accounted for
using the purchase method of accounting for business combinations and,
accordingly, the results of operations of RF Power 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 70,552 shares of the Company'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 respective fair market values. The fair market
values of plant and equipment were determined by an independent valuation which
also validated the non existence of any identifiable intangible assets. The
excess consideration over such fair values is recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The 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)
Line of credit indebtedness ....................... (383,026)
Other liabilities ................................. (971,679)
Goodwill .......................................... 7,820,904
-----------
$ 9,493,961
===========
36
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
On July 31, 2000, the Company acquired substantially all the net assets of
Ocean Microwave Corporation (Ocean). Ocean was based in Neptune, New Jersey, and
was primarily engaged in the design and manufacture of isolator and circulator
components. The acquired Ocean business is conducted from the Company's
subsidiary, Anaren Power Products, Inc. (APPI). The transaction was accounted
for using the purchase method of accounting for business combinations and,
accordingly, the results of operations of APPI have been included in the
Company's consolidated financial statements since the date of acquisition.
The purchase price was $17,990,526, including direct acquisition costs
(note 12), which was allocated to the net assets acquired and liabilities
assumed based upon respective fair market values. The fair market values of
plant and equipment were determined by an independent valuation which also
validated the non existence of any identifiable intangible assets. The excess
consideration over such fair values is recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The allocation of the purchase
price to the assets acquired and liabilities assumed follows:
Accounts receivable ............................... $ 1,488,092
Inventories ....................................... 1,997,728
Plant and equipment ............................... 269,390
Other assets ...................................... 42,485
Accounts payable .................................. (2,531,384)
Accrued expenses .................................. (184,389)
Notes payable ..................................... (407,864)
Goodwill .......................................... 17,316,468
-----------
$17,990,526
===========
The following unaudited pro forma financial information presents the
combined results of operations of the Company, RF Power and Ocean, as if the
acquisitions 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, RF Power and
Ocean, constituted a single entity during such periods.
2001 2000 1999
----------- ----------- ------------
(Unaudited)
Net sales ......... $85,764,523 $77,272,375 $61,111,274
Net income ........ 11,821,536 9,136,874 6,513,875
Earnings per share:
Basic ........... .53 .50 .33
Diluted ......... .50 .47 .32
(3) Marketable Debt Securities
Marketable debt securities classified as held-to-maturity are summarized
as follows:
June 30, 2001
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ -------- ----- ------------
Municipal bonds ............................ $ 56,719,914 $120,478 $ -- $ 56,840,392
Commercial paper ........................... 976,483 824 -- 977,307
Corporate bonds ............................ 19,527,093 224,451 -- 19,751,544
Medium and short-term notes ................ 4,991,859 36,741 -- 5,028,600
Euro dollar bonds .......................... 10,418,904 87,683 -- 10,506,587
Zero coupon bonds .......................... 4,939,275 7,200 -- 4,946,475
Tax free auction securities ................ 17,600,262 -- (262) 17,600,000
Asset backed securities .................... 5,110,153 39,892 -- 5,150,045
------------ -------- ----- ------------
Total ................................... $120,283,943 $517,269 $(262) $120,800,950
============ ======== ===== ============
37
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
June 30, 2000
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Gains Value
------------ ------- ------- ------------
Municipal bonds .................... $ 70,602,586 $91,992 $ -- $ 70,694,578
Corporate bonds .................... 28,975,149 -- (113,457) 28,861,692
Medium and short-term notes ........ 15,355,649 -- (77,795) 15,277,854
Euro Dollar bonds .................. 17,368,178 -- (63,023) 17,305,155
Taxable auction securities ......... 1,500,000 -- -- 1,500,000
------------ ------- --------- ------------
Total ........................... $133,801,562 $91,992 $ 254,275 $133,639,279
============ ======= ========= ============
Marketable debt securities are classified as either current or long-term
assets in the accompanying consolidated balance sheets based upon their maturity
dates.
(4) Inventories
Inventories at June 30 are summarized as follows:
2001 2000
----------- -----------
Component parts .............................. $ 9,995,712 $ 6,538,207
Work-in-process .............................. 4,497,996 3,757,139
Finished goods ............................... 4,073,269 2,089,779
----------- -----------
$18,566,977 $12,385,125
=========== ===========
(5) Property, Plant and Equipment
Components of property, plant and equipment at June 30 consist of the
following:
2001 2000
----------- -----------
Land and land improvements ...................... $ 1,595,821 $ 1,362,050
Buildings ....................................... 9,095,944 6,986,155
Machinery and equipment ......................... 39,213,503 32,635,865
Construction in process ......................... 155,899 --
----------- -----------
50,061,167 40,984,070
Less accumulated depreciation and amortization .. 31,255,266 27,647,477
----------- -----------
$18,805,901 $13,336,593
=========== ===========
(6) Accrued Expenses
Accrued expenses at June 30 consist of the following:
2001 2000
---------- ----------
Compensation .................................... $ 989,499 $1,272,376
Commissions ..................................... 790,609 510,855
Restructuring (note 7) .......................... 307,843 --
Accrued pension cost (note 15) .................. 401,032 211,844
Other ........................................... 477,275 249,166
---------- ----------
$2,966,258 $2,244,241
========== ==========
38
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
(7) Restructuring
In May 2001, the Company committed to a plan for the relocation of its
Anaren Power Products, Inc. subsidiary to its Syracuse, New York headquarters to
be completed in June 2001. In connection with this plan, as of June 30, 2001,
the Company recognized restructuring charges as follows:
Employee termination benefits ...................................... $297,443
Noncancellable lease obligation .................................... 216,116
Leasehold and equipment impairment ................................. 174,778
--------
$688,337
========
Employee termination benefits relate to the announced termination of
approximately 60 salaried and hourly employees. Such costs include severance
payments and costs associated with the accelerated vesting of employee vacation
benefits. The noncancellable lease obligation is reflected based upon estimated
discounted noncancellable cash outlays, including estimated broker commissions
to sublease. Leasehold and equipment impairment charges relate to abandoned
assets and have been reflected as a reduction of the related assets.
As of June 30, 2001, cash payments aggregating $205,716 have been made
relating to the employee termination benefits, leaving a restructuring accrual
of $307,843 at June 30, 2001 (note 6).
(8) Other Liabilities
Other liabilities as of June 30 consist of the following:
2001 2000
-------- ----------
Postemployment liability .......................... $ -- $ 920,602
Deferred compensation ............................. 551,380 578,000
-------- ----------
551,380 1,498,602
Less current portion .............................. 65,000 190,814
-------- ----------
$486,380 $1,307,788
======== ==========
In connection with the acquisition of RF Power Components, Inc. as
discussed in note 2, the Company assumed a contractual post-employment liability
for a former RF Power Components, Inc. employee. In April 2001, the Company
satisfied the contractual obligation.
During fiscal 1998, the Company implemented a deferred compensation plan
for one employee. Under the plan, the Company will pay $65,000 annually for
fifteen years upon the employee's retirement or, in the event of death, to the
employee's beneficiary.
(9) Long-term Debt
The Company has a $10,000,000 unsecured working capital revolving line of
credit bearing interest at prime (6.75% at June 30, 2001) through December 31,
2003. The terms of the revolving line of credit require maintenance of a minimum
tangible net worth, ratio of cash flow to current maturities, and leverage
ratio, as defined. There were no borrowings against the line of credit in fiscal
2001 and 2000.
Cash payments for interest relating to the line of credit were $37,500,
$38,779 and $38,537 during fiscal 2001, 2000 and 1999, respectively.
(10) Common Stock
During the third and fourth quarters of fiscal 2000, the Company completed
the sale of an additional 4,689,000 shares of its common stock in a public
offering for $112,194,715, net of issuance costs.
39
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
On November 2, 2000, the Company's shareholders approved an amendment to
the Certificate of Incorporation to increase the total number of shares of
common stock from 25,000,000 to 200,000,000.
(11) 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 paid on June 12, 2000 to
shareholders of record on May 12, 2000. The issuance of cash in lieu of
fractional shares has been reflected as a cash dividend and charged to retained
earnings during fiscal 2000. On November 2, 2000, the Company's Board of
Directors authorized a two for one stock split in the form of a stock dividend
paid on November 27, 2000 to shareholders of record on November 17, 2000.
All share and per share data in these consolidated financial statements
and footnotes have been retroactively restated as if the stock splits had
occurred as of the earliest period presented.
(12) Stock Option Plans
Under the Company's Key Employee Incentive Stock Option Plan (Key Employee
Plan), 2,050,200 shares of common stock were reserved for the granting of
options to eligible employees. Options are granted at a price not less than fair
market value of shares at the date of grant, become exercisable 20% six months
from the date of grant and 20% per year thereafter, and must be exercised within
ten years of the date of grant.
In November 2000, the Company established the Company-Wide Stock Option
Plan (Company-Wide Plan) reserving 1,000,000 shares of common stock for the
granting of incentive stock options to eligible employees. All Company employees
are eligible to participate in the Company-Wide Plan in any given fiscal year,
except for employees who have been granted options under the Key Employee Plan
in any given fiscal year. Options are granted at a price not less than the fair
market value of shares at the date of grant, become exercisable 36 months from
the date of grant, and must be exercised within five years of the date of grant.
The Company also has a Non-Statutory Stock Option Plan (NSO) which allows
for the granting of options to Board members and nonemployees. Under the Plan,
500,000 shares of common stock were reserved for the granting of options at
prices to be determined by the Board (options granted to Board members may not
be less than the fair market value on the date of grant). Options become
exercisable immediately and must be exercised within five years of the date of
grant.
As discussed in note 1, during fiscal 1999 the Company granted 150,000
stock options as partial consideration for a patent. The stock options were
valued at $249,965 using the Black-Scholes model as of June 30, 1999 (the date
of grant), become exercisable one year from the date of grant, and must be
exercised within five years of the date of grant.
In connection with the acquisition of Ocean as discussed in note 2, the
Company issued 5,000 NSO's to a non-employee for services provided in brokering
the transaction. The stock options were valued at $172,050 using the
Black-Scholes model as of November 2, 2000 (the date of grant), became
exercisable on the date of grant, and must be exercised within five years of the
date of grant. The option value is included with Ocean direct acquisition costs.
40
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
Information for the three years ended June 30, 2001 with respect to these
plans are as follows:
Shares
-------------------------------------------------------
ISO Weighted
--------------------- Average
Key Company- Option Exercise
Employee Wide NSO Other Total Price Price
--------- ---------- ----- ------ ------ ------- --------
Outstanding at
June 30, 1998 ........ 1,403,100 -- 72,000 -- 1,475,100 $ .46 to 7.05 2.59
Issued ............ 462,000 -- 60,000 150,000 672,000 3.71 to 8.36 6.02
Exercised ......... (297,000) -- -- -- (297,000) .46 to 6.63 1.74
Expired ........... (36,000) -- -- -- (36,000) 1.96 1.96
--------- ------- ------- ------- ---------
Outstanding at
June 30, 1999 ........ 1,532,100 -- 132,000 150,000 1,814,100 $ .46 to 8.36 4.00
Issued ............ 680,500 -- 112,500 -- 793,000 7.65 to 54.00 14.29
Exercised ......... (372,300) -- (97,500) -- (469,800) .46 to 8.67 3.12
Canceled .......... (64,200) -- -- -- (64,200) 2.17 to 7.04 4.38
--------- ------- ------- ------- ---------
Outstanding at
June 30, 2000 ........ 1,776,100 -- 147,000 150,000 2,073,100 $ .46 to 54.00 8.13
Issued ............ 625,500 45,900 75,000 5,000 751,400 14.70 to 62.44 50.40
Exercised ......... (331,900) -- (19,000) (150,000) (500,900) .46 to 13.42 5.78
Canceled .......... (19,500) (2,900) -- -- (22,400) 4.63 to 53.00 21.81
--------- ------- ------- ------- ---------
Outstanding at
June 30, 2001 ........ 2,050,200 43,000 203,000 5,000 2,301,200 1.38 to 62.44 22.31
========= ======= ======= ======= =========
Shares exercisable
at June 30, 2001 ..... 475,600 -- 203,000 5,000 683,600 1.38 to 62.44 11.56
========= ======= ======= ======= =========
Shares available
for grant at
June 30, 2001 ........ 1,504,200 957,000 197,500 -- 2,658,700
========= ======= ======= ======= =========
41
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Life in Exercise Exercise
Prices Shares Years Price Shares Price
--------------- --------- --------- -------- ------ -------
$ 1.00 to 5.00 371,700 4.80 8.79 296,700 1.92
5.01 to 15.00 1,075,500 7.14 9.35 283,900 8.60
15.01 to 40.00 195,500 8.90 28.46 21,400 25.53
40.01 to 65.00 658,500 8.73 53.06 81,600 53.06
--------- -------
2,301,200 683,600
========= =======
The per share weighted average fair value of stock options granted during
fiscal years 2001, 2000 and 1999 was $32.74, $28.73, and $6.40, respectively.
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 fiscal
year:
2001 2000 1999
------- ------- -------
Expected option life ......... 5 5 5
Risk-free interest rate ...... 6.00% 6.00% 4.82%
Expected volatility .......... 74.00% 69.00% 69.00%
Expected dividend yield ...... 0.00% 0.00% 0.00%
Stock-based compensation costs would have reduced pretax income by
$7,830,825, $3,034,635 and $773,810 in fiscal 2001, 2000 and 1999, respectively
($7,474,580, $2,884,865 and $735,791 after tax and $.33, $.16 and $.05 per share
in fiscal 2001, 2000 and 1999, respectively) if the fair values of options
granted in that year had been recognized as compensation expense on a
straight-line basis over the vesting period of the grant. The pro forma effect
on net income for fiscal 2001, 2000 and 1999 is not representative of the pro
forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
fiscal 1996.
(13) Restricted Stock Program
As of June 30, 2001 and 2000, the Company has issued shares aggregating
102,976 and 72,000, respectively, under its Restricted Stock Program. The shares
of restricted stock vest over a period of 42 to 48 months. For the years ended
June 30, 2001 and 2000, the Company recognized compensation expense associated
with the lapse of restrictions aggregating $525,435 and $170,288, respectively.
(14) Shareholder Protection Rights Plan
In April 2001, the Board of Directors adopted a Shareholder Protection
Rights Plan. The plan provides for a dividend distribution of one right on each
outstanding share of the Company's stock, distributed to shareholders of record
on April 27, 2001. The rights will be exercisable and will allow the
shareholders to acquire common stock at a discounted price if a person or group
acquires 20 percent or more of the outstanding shares of common stock. Rights
held by persons who exceed the 20 percent threshold will be void. In certain
circumstances, the rights will entitle the holder to buy shares in an acquiring
entity at a discounted price. The Board of Directors may, at its option, redeem
all rights for $.001 per right at any time prior to the rights becoming
exercisable. The rights will expire on April 27, 2011, unless earlier redeemed,
exchanged or amended by the Board.
42
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
(15) Employee Benefit Plans
The Company has a non-contributory defined benefit pension plan covering
substantially all of its employees. Effective August 15, 2000 the plan was
closed for new participants. Benefits under this plan generally are based on the
employee's years of service and compensation. The following table presents the
changes in the defined benefit pension plan and the fair value of the Plan's
assets for the years ended June 30:
2001 2000 1999
----------- ----------- -----------
Change in benefit obligation:
Benefit obligation at
beginning of year ............. $5,908,615 $6,087,651 $5,565,886
Service cost .................... 204,440 198,174 198,406
Interest cost ................... 437,762 403,830 374,331
Actuarial loss (gain) ........... 237,835 (619,854) 96,912
Benefits paid ................... (225,797) (161,186) (147,884)
---------- ---------- ----------
Benefit obligation at
end of year ................... $6,562,855 $5,908,615 $6,087,651
========== ========== ==========
Change in plan assets:
Fair value of plan assets at
beginning of year ............. 5,744,994 5,626,769 5,594,504
Actual return on plan assets .... 718,355 241,093 128,367
Employer contributions .......... -- 38,318 51,782
Benefits paid ................... (225,797) (161,186) (147,884)
---------- ---------- ----------
Fair value of plan assets at
end of year ................... $6,237,552 $5,744,994 $5,626,769
========== ========== ==========
Funded status ................... (325,303) (163,621) (460,882)
Unrecognized net loss (gain) .... (155,335) (155,534) 234,227
Unrecognized net assets
existing at initial application 18,929 28,395 37,861
Unrecognized prior service cost . 60,677 78,916 97,155
---------- ---------- ----------
Accrued pension cost (note 6) ... $ (401,032) $ (211,844) $ (91,639)
========== ========== ==========
Components of net periodic pension cost for the years ended June 30 are as
follows:
2001 2000 1999
--------- --------- ---------
Service cost ...................... $ 204,440 $ 198,174 $ 198,406
Interest cost ..................... 437,762 403,830 374,331
Actual return on plan assets ...... (718,355) (241,093) (128,367)
Amortization of prior service cost 18,239 18,239 18,239
Deferral of gain (loss) ........... 237,636 (230,093) (341,093)
Amortization of net asset
at transition ................... 9,466 9,466 9,466
--------- --------- ---------
Net periodic pension cost ......... $ 189,188 $ 158,523 $ 130,982
========= ========= =========
Weighted-average assumptions:
Discount rate at year-end ......... 7.25% 7.5% 6.7%
Rate of increase in compensation
levels at year end .............. 4.0% 4.0% 4.0%
Expected return on plan assets
during the year ................. 8.5% 8.5% 8.5%
43
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
Plan assets consist principally of equity securities, and U.S. government
and corporate obligations.
The Company maintains a voluntary contributory salary savings plan to
which participants may contribute up to 15% of their total compensation. The
Company's matching contribution is 50% (75% effective August 2000) of the
participants' contribution up to a maximum of 5% of the participants'
compensation. During fiscal 2001, 2000 and 1999, the Company contributed
$491,550, $249,324, $256,590, respectively, to this plan.
The Company maintains a profit sharing plan which provides an annual
contribution by the Company based upon a percentage of operating earnings, as
defined. Eligible employees are allocated amounts under the profit sharing plan
based upon their respective earnings, as defined. Contributions under the plan
were approximately $300,390, $331,000 and $207,000 in fiscal 2001, 2000 and
1999, respectively. While the Company intends to continue this plan, it reserves
the right to terminate or amend the Plan at any time.
(16) Postretirement Benefits
The Company provides medical coverage for current and future eligible
retirees of the Company plus their eligible dependents. Employees generally
become eligible for retiree medical coverage by retiring from the Company after
attaining at least age 55 with 15 years of service (active employees at June 27,
1993 were eligible by retiring after attaining at least age 55 with 10 years of
service). Retirees at June 27, 1993 pay approximately $30 per month for health
care coverage and the Company is responsible for paying the remaining costs. For
this group, any increase in health care coverage costs for retired employees
will be shared by the Company and retirees on a fifty-fifty basis, while any
increase in coverage costs for retiree dependents will be totally paid by the
retirees. For eligible employees retiring after June 26, 1993, the Company
contributes a fixed dollar amount towards the cost of the medical plan. Any
future cost increases for the retiree medical program for these participants
will be charged to the retiree.
The following table presents the changes in the postretirement benefit
obligation and the funded status of the Plan at June 30:
2001 2000 1999
----------- ----------- -----------
Benefit obligation at beginning
of year ......................... $ 1,213,601 $ 1,363,290 $ 1,316,452
Service cost ...................... 43,040 28,845 24,192
Interest cost ..................... 105,780 87,539 88,202
Plan participants' contributions .. 39,274 32,601 30,444
Actuarial loss (gain) ............. 248,491 (196,098) 14,690
Benefits paid ..................... (121,576) (102,576) (110,690)
----------- ----------- -----------
Benefit obligation at end of year . $ 1,528,610 $ 1,213,601 $ 1,363,290
=========== =========== ===========
Fair value of plan assets ......... $ -- $ -- $ --
=========== =========== ===========
Funded status ..................... (1,528,610) (1,213,601) (1,363,290)
Unrecognized actuarial loss (gain) 137,114 (111,377) 84,721
----------- ----------- -----------
Accrued postretirement benefit cost $(1,391,496) $(1,324,978) $(1,278,569)
=========== =========== ===========
Net periodic postretirement benefit cost includes the following
components:
2001 2000 1999
-------- -------- --------
Service cost ......................... $ 43,040 $ 28,845 $ 24,192
Interest cost ........................ 105,780 87,539 88,202
-------- -------- --------
Net periodic postretirement
benefit cost ....................... $148,820 $116,384 $112,394
======== ======== ========
44
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25%, 7.5% and 6.7% at the end of fiscal
2001, 2000 and 1999, respectively. For measurement purposes, the annual rate of
increase in the per capita cost of covered benefits (i.e., health care cost
trend rate) was assumed to be 5.0% for 2001, 2000 and 1999; the rate is assumed
to remain at 5.0% thereafter. The health care cost trend rate assumption may
have a significant effect on the amounts reported. A one-percentage point change
in assumed health care cost trend rates would have the following effects:
1% increase 1% decrease
----------- -----------
Effect on total of service and interest
cost components ............................ $ 4,760 $ (4,555)
Effect on postretirement benefit obligation .. 63,468 (60,735)
(17) Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
---------- ---------- ----------
Year ended June 30, 2001:
U.S. Federal ............. $6,151,164 $(333,599) $5,817,565
State .................... 595,861 (13,426) 582,435
---------- --------- ----------
$6,747,025 $(347,025) $6,400,000
========== ========= ==========
Year ended June 30, 2000:
U.S. Federal ............. $5,053,669 $(180,715) $4,872,954
State .................... 130,231 59,815 190,046
---------- --------- ----------
$5,183,900 $(120,900) $5,063,000
========== ========= ==========
Year ended June 30, 1999:
U.S. Federal ............. $1,806,767 $(256,613) $1,550,154
State .................... 668,011 (14,165) 653,846
---------- --------- ----------
$2,474,778 $(270,778) $2,204,000
========== ========= ==========
A reconciliation of the expected consolidated income tax expense, computed
by applying the U.S. Federal corporate income tax rate of 34% to income before
income taxes, to income tax expense, is as follows:
2001 2000 1999
---------- ---------- -----------
Expected consolidated
income tax expense ........... $6,328,749 $4,999,292 $ 3,112,301
State income taxes, net of
Federal income tax benefit ... 384,407 125,430 431,538
Municipal interest income ...... (815,095) (265,708) --
Non-deductible goodwill ........ 177,276 59,092 --
Tax benefit related to
liquidation of foreign
subsidiary ................... -- -- (1,012,088)
Change in valuation allowance .. -- -- (233,044)
Other, net ..................... 324,663 144,894 (94,707)
---------- ---------- -----------
$6,400,000 $5,063,000 $ 2,204,000
========== ========== ===========
45
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities at June 30, 2001 and 2000 are presented
below:
2001 2000
------------ -----------
Deferred tax assets:
Inventories ................................ $ 619,956 $ 202,487
Deferred compensation ...................... 230,377 213,860
Retirement benefits ........................ 74,939 78,382
Postretirement benefits .................... 528,768 490,242
Postemployment liability ................... -- 340,623
Restricted stock ........................... 264,375 55,131
Nondeductible reserves ..................... 261,865 20,350
Federal and state tax credit carryforwards . 605,664 633,709
State net operating less carryforwards ..... 79,580 --
Other ...................................... 43,345 63,310
----------- -----------
Total deferred tax assets .............. 2,708,869 2,098,094
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation .............. (1,488,762) (1,225,012)
----------- -----------
Net deferred taxes ....................... $ 1,220,107 $ 873,082
=========== ===========
Presented as:
Current deferred tax asset ................. 956,759 301,220
Long-term deferred tax asset ............... 263,348 571,862
----------- -----------
$ 1,220,107 $ 873,082
=========== ===========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences.
The Company recognized a tax benefit of $1,012,088 during the fourth
quarter of fiscal 1999 in connection with the dissolution of the Company's
European subsidiary. The disposition of the net assets of the subsidiary and a
corresponding restructuring charge were recognized for financial reporting
purposes in 1996. In the fourth quarter of fiscal 1999, all of the criteria
necessary to support a deduction for the tax investment in the subsidiary were
met and the tax benefit was recorded.
At June 30, 2001, the Company has Federal and State credit carryforwards
of $880,821 which expire at various dates through 2021. At June 30, 2001, the
Company has state net operating losses of $1,808,627 which expire at various
dates through 2021.
The tax benefit associated with the exercise of stock options and
disqualifying dispositions by employees reduced taxes payable by $5,375,231,
$2,513,788 and $92,225 in fiscal 2001, 2000 and 1999, respectively. Such
benefits are reflected as additional paid-in capital.
Cash payments for income taxes (net of refunds received) were $419,316,
$2,575,231 and $2,689,469 in fiscal 2001, 2000 and 1999, respectively.
46
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
(18) Segment and Related Information
Segments
The Company operates predominately in the wireless communications,
satellite communications and defense electronics markets. The Company's two
reporting segments are the wireless group and the space and defense group. The
Company's two reportable 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 making operating decisions and assessing
performance.
The wireless segment designs, manufactures and markets commercial products
used mainly by the wirelesss communications market. Products produced in this
business segment include highly integrated microwave components, assemblies 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 wireless
communications base station amplifiers.
The space and defense segment of the business designs, manufactures and
markets specialized products for 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:
2001 ..................... $61,709,080 $23,116,195 $ -- $ 84,825,275
2000 ..................... 38,806,936 21,364,900 -- 60,171,836
1999 ..................... 21,450,113 24,288,879 -- 45,738,992
Operating income:
2001 ..................... 6,550,461 5,060,803 -- 11,611,264
2000 ..................... 8,372,808 3,081,324 -- 11,454,132
1999 ..................... 3,266,508 4,529,980 -- 7,796,488
Identifiable assets*:
2001 ..................... 41,369,613 12,453,474 155,232,389 209,055,476
2000 ..................... 24,841,192 6,741,828 158,112,631 189,695,651
1999 ..................... 5,355,217 8,792,434 44,319,048 58,466,699
Depreciation and amortization**:
2001 ..................... 3,254,026 1,146,481 -- 4,400,507
2000 ..................... 1,189,728 824,173 -- 2,013,901
1999 ..................... 612,836 819,972 -- 1,432,808
----------
* Segment assets primarily include receivables, inventories, goodwill and
patent. 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, and property, plant and equipment.
** Depreciation 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 arising from business combinations, and patent amortization, is
allocated to the segments based on the sales segment classification of the
acquired or applicable operation.
47
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
June 30, 2001, 2000 and 1999
Geographic Information
Net sales by geographic region are as follows:
Other Foreign Consolidated
United States Canada Countries Net Sales
------------- ----------- ------------ -------------
2001 ...................... $63,223,230 $4,232,851 $17,369,194 $84,825,275
2000 ...................... 45,251,267 5,471,193 9,449,376 60,171,836
1999 ...................... 36,468,513 4,590,991 4,679,488 45,738,992
Customers
In 2001, sales to two customers (approximately $13,012,000, relating to
the wireless segment, and approximately $9,422,000, related to the space and
defense electronics segment) exceeded 10% of consolidated net sales. In 2000,
sales to two customers (approximately $10,300,000, relating to the wireless
segment, and $7,000,000, relating to the space and defense electronics segment)
exceeded 10% of consolidated net sales. In 1999, sales to two customers
(approximately $8,375,000, relating to the wireless segment, and $5,250,000,
relating to the space and defense electronics segment) exceeded 10% of
consolidated net sales.
(19) Commitments
The Company is obligated under operating leases for three buildings.
Future minimum payments under the noncancelable operating leases (including
lease as discussed at note 7) for the next five years and thereafter are
summarized as follows:
Year ending June 30,
2002 ............................................... $ 766,537
2003 ............................................... 771,600
2004 ............................................... 639,971
2005 ............................................... 639,971
2006 ............................................... 458,368
Thereafter ......................................... 2,818,130
----------
6,094,577
Less amounts representing sublease income ............. 735,133
----------
$5,359,444
==========
Rent expense for the years ended June 30, 2001, 2000 and 1999 was
$616,422, $427,890 and $396,861, respectively. Rent expense for fiscal 2001,
2000 and 1999 was offset by sublease income of $367,566, $329,698 and $347,254,
respectively.
(20) Concentrations
The Company and others, which are engaged in supplying defense-related
equipment to the United States Government (the Government), are subject to
certain business risks peculiar to the defense industry. Sales to the Government
may be affected by changes in procurement policies, budget considerations,
changing concepts of national defense, political developments abroad and other
factors. Sales to the Government accounted for approximately 9%, 13% and 13% of
consolidated net sales in fiscal 2001, 2000 and 1999, respectively. While
management believes there is a high probability of continuation of the Company's
current defense-related programs, it continues to reduce its dependence on sales
to the Government through development of its commercial electronics business.
48
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (concluded)
June 30, 2001, 2000 and 1999
(21) Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial
information for the years ended June 30, 2001 and 2000:
2001 Quarter Ended
-------------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
----------- ----------- ----------- -----------
Net sales ............................. $22,223,974 $25,188,261 $21,716,061 $15,696,978
=========== =========== =========== ===========
Cost of sales ......................... $13,397,703 $15,117,855 $14,042,456 $ 9,968,570
=========== =========== =========== ===========
Net income ............................ $ 3,981,086 $ 4,294,505 $ 2,751,806 $ 1,186,570
=========== =========== =========== ===========
Net income per common and
common equivalent share:
Basic ............................ $ .18 $ .19 $ .12 $ .05
=========== =========== =========== ===========
Diluted .......................... $ .17 $ .18 $ .12 $ .05
=========== =========== =========== ===========
2000 Quarter Ended
-------------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
----------- ----------- ----------- -----------
Net sales ............................. $12,464,363 $13,270,876 $15,618,931 $18,817,666
=========== =========== =========== ===========
Cost of sales ......................... $ 7,513,058 $ 7,930,472 $ 8,985,214 $10,645,372
=========== =========== =========== ===========
Net income ............................ $ 1,748,735 $ 1,923,929 $ 2,216,431 $ 3,751,704
=========== =========== =========== ===========
Net income per common and
common equivalent share:
Basic ............................ $ .11 $ .12 $ .13 $ .18
=========== =========== =========== ===========
Diluted .......................... $ .10 $ .11 $ .12 $ .16
=========== =========== =========== ===========
Income per share amounts for each quarter are required to be computed
independently. As a result, their sum does not necessarily equal the total year
income per share amounts.
(22) Subsequent Event (Unaudited)
On August 31, 2001, the Company acquired all of the outstanding capital
stock of Amitron, Inc. (Amitron), a privately held company based in North
Andover, Massachusetts. Amitron is primarily engaged in the design and
manufacture of ceramic components and circuits, for the medical,
telecommunications, and defense electronics markets. The purchase price was
$9,775,000 in cash, and 95,704 shares of the Company's common stock with an
aggregate value of $1,776,812. The acquisition will be accounted for under the
purchase method of accounting for business combinations.
49
Index to Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Restated By-Laws (2)
4.1 Specimen Certificate of Common Stock (3)
4.2 Shareholder Protection Rights Agreement dated as of April 20,
2001, between the Company and American Stock Transfer & Trust
Company, including forms of Rights Certificate and Election to
Exercise (4)
10.1 Employment Agreement, dated as of July 1, 2001, between the
Company and Lawrence A. Sala
10.2 Consulting Agreement, dated as of March 1, 1997, between the
Company and Dale F. Eck (5)
10.3 Pension Plan and Trust (6)
10.4 Anaren Microwave, Inc. Incentive Stock Option Plan, as amended
(7)
10.5 Anaren Microwave, Inc. 1989 Non-statutory Stock Option Plan,
as amended (8)
10.6 Employment Agreement, dated as of October 7, 1997, between the
Company and Hugh A. Hair (9)
10.7 Credit Facility Agreement, dated as of December 23, 1997,
between the Company and Manufacturers and Traders Trust
Company, together with the Revolving Credit Note dated
December 23, 1997 executed by the Company in favor of
Manufacturers and Traders Trust Company (10)
10.8 Anaren Microwave, Inc. Incentive Stock Option Plan for Key
Employees (11)
10.9 Anaren Microwave, Inc. Stock Option Plan (12)
10.10 Employment Agreement, dated as of February 29, 2000, between
the Company and Thomas J. Passaro, Jr. (13)
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
----------
(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 on December 19, 1980, is incorporated herein by reference
to Exhibit 4.1(ii) to the Company's Registration Statement on Form S-2
(Registration No. 2-86025); (C) Amendment, filed on 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 on 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 on
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; (F) Amendment, filed on February 8, 2000,
is incorporated herein reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 (Registration No. 333-31460) filed with
the Securities and Exchange Commission on March 2, 2000; and (G)
Amendment, filed on November 22, 2000, is incorporated by reference to
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q (Commission
File No. 0-6620) for the three months ended December 31, 2000.
(2) Incorporated herein reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-31460) filed with the
Securities and Exchange Commission on March 2, 2000.
(3) Incorporated herein reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-3 (Registration No. 333-31460) filed with the
Securities and Exchange Commission on March 2, 2000.
(4) Incorporated herein by reference to Exhibits 4.1 and 4.2 to the Company's
Registration Statement on Form 8-A (Commission File No. 0-6620) filed with
the Securities and Exchange Commission on April 26, 2001.
(5) Incorporated herein by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
June 30, 1997.
(6) Incorporated herein by reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-8 (Registration No. 33-19618).
(7) Incorporated herein by reference to Appendix A to the Company's definitive
proxy statement for its 1998 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 25, 1998.
(8) Incorporated herein by reference to Appendix B to the Company's definitive
proxy statement for its 1998 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 25, 1998.
(9) Incorporated herein by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q (Commission File No. 0-6620) for the three
months ended September 30, 1997.
(10) Incorporated herein by reference to Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q for the three months ended December 31,
1997.
(11) Incorporated herein by reference to Appendix A to the Company's definitive
proxy statement for its 2000 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 18, 2000.
(12) Incorporated herein by reference to Appendix B to the Company's definitive
proxy statement for its 2000 annual meeting of the shareholders
(Commission File No. 0-6620), filed with the Securities and Exchange
Commission on September 18, 2000.
(13) Incorporated herein by reference to Exhibit 10.10 to the Company's Annual
Report Form 10-K (Commission File No. 0-6620) for the fiscal year ended
June 30, 2000.