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, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 0-6620
ANAREN 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. ___
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 August 2, 2002, as reported on the Nasdaq National Market, was
approximately $178,508,000.
The number of shares of Registrant's Common Stock outstanding on August 2,
2002 was 22,458,620.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with
its 2002 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 from those
predicted are the following:
o further decline in the general economy, and particularly the
wireless telecommunications sector;
o decreased capital expenditures by wireless service providers;
o loss of one or more of a limited number of original equipment
manufacturers as customers;
o costs associated with potential product recalls;
o unpredictable difficulties or delays in the development of new
products;
o the unavailability of component parts and services from a limited
number of suppliers;
o the risks associated with any technological market shifts away from
the Company's technologies and core competencies;
o cancellation of existing contracts or orders, or other declines in
demand for the Company's products;
o difficulties in successfully integrating newly acquired businesses
(including Celeritek Inc. if a transaction were consummated);
o increased pricing pressure and increased competition;
o the failure of wireless customers' annual procurement forecasts to
result in future sales;
o unanticipated impairments of assets and investment values;
o foreign currency fluctuations;
o litigation relating to Anaren's ownership interest in Celeritek,
Inc. or a potential transaction with Celeritek, or involving
antitrust, intellectual property, product warranty, product
liability and other issues;
Anaren disclaims any obligation, unless required by law, to update or
revise any forward looking statement. Readers are advised to carefully review
the risk factors set forth in this Annual Report on Form 10-K filed with the
Securities and Exchange Commission to learn more about the various risks and
uncertainties facing Anaren's business and their potential impact on Anaren's
revenues and earnings.
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General
Anaren Microwave, Inc. 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.
Recent Developments
On August 31, 2001 the Company acquired all of the outstanding stock of
Amitron, Inc. Amitron is based in North Andover, Massachusetts, and is primarily
engaged in the manufacture of precision thick film ceramic components and
circuits for the medical, telecommunications, and defense electronics markets.
Amitron's technology is very complimentary to the Company's proprietary
Multi-Layer Stripline technology (described below). Whereas the Company's
technology is well suited for large scale and high power applications, Amitron's
technology is well suited for miniaturization and low power applications. The
Company believes that Amitron's technology will enable it to increase its
current addressable markets.
On October 1, 2001, the Company, through its wholly owned subsidiary
Anaren Microwave Europe B.V., acquired all of the outstanding stock of The 5M
Company Europe, B.V. (now named Anaren Europe, B.V.). Anaren Europe, based in
Almelo, Netherlands is a manufacturer of high frequency printed circuit boards.
Anaren Europe's manufacturing technology is very similar to the Company's
Multi-Layer Stripline technology. In addition, Anaren Europe has a unique metal
backing technology that offers performance and cost advantages for high power
applications. The Company believes that this acquisition will enable it to
reduce its manufacturing costs, increase its dollar content in high power
applications and provide customers with a higher level of vendor security with a
second manufacturing facility.
In March 2002, the Company, through a newly created subsidiary, Anaren
Communication Suzhou Co., Ltd., signed a three-year lease for a 12,300 square
foot manufacturing facility in the Suzhou Industrial Park in Suzhou, China. The
Company has hired a General Manager for the facility and additional staffing
began in early July 2002. The Company presently expects to begin light
manufacturing and assembly at this location during the second quarter of fiscal
2003. It is anticipated that this facility will serve all of the Company's Asian
customers and will concentrate on producing more labor intensive products.
Additionally, it is expected that the Company will use this location to
facilitate procurement of raw materials in Asia, when possible, for the
Company's other subsidiaries.
On July 11, 2002, the Company filed a Schedule 13D with the Securities and
Exchange Commission to disclose that it has, through open market purchases,
acquired an ownership position of approximately 6.35% of the common stock of
Celeritek, Inc. Anaren believes that a business combination between Anaren and
Celeritek would be in the best interest of the respective shareholders,
customers and employees of both companies and intends to seek a
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negotiated acquisition of Celeritek or take other actions to effect such a
potential transaction, as more fully described in Anaren's Schedule 13D filing.
On August 2, 2002, Tamer Husseini, Celeritek's Chairman, President and
Chief Executive Officer, Margaret E. Smith, Celeritek's Vice President, Finance
and Chief Financial Officer, and Celeritek's outside counsel met with Anaren's
representatives to discuss Anaren's overtures. During this meeting, Mr. Husseini
stated that Celeritek has adopted a "stand-alone strategy" and indicated that
Celeritek is not interested in negotiating a business combination transaction
between Anaren and Celeritek. Following Mr. Sala's stated rationale as to the
merits of a potential business combination, Celeritek counsel stated that
Celeritek would further consider Anaren's position and contact Anaren during the
week of August 5, 2002. In the evening of August 5, 2002, Anaren was informed by
Celeritek's counsel that Celeritek continues to prefer a stand-alone strategy
but offered Anaren the opportunity to present its position to Celeritek's Board
of Directors, and indicated that if Anaren was willing to enter into a
standstill agreement, Celeritek would consider allowing Anaren to perform
certain due diligence investigation. Anaren's management continues to believe in
the merits of a business combination between Celeritek and Anaren and the
benefits to the shareholders, customers and employees of each Company. Given the
disappointing response from Celeritek, Anaren intends to consider all of the
alternatives available to it, and may pursue one or more of the possible actions
outlined in its Schedule 13D, as amended.
Overview
The Company is a leading provider of microwave components and assemblies
for the wireless communications, satellite communications and defense
electronics markets. The Company's distinctive manufacturing and packaging
techniques enable it to cost-effectively produce compact, lightweight microwave
products for use in base stations for wireless communications systems, in
satellites and in defense electronics systems.
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, as
well as advanced radar and receiver applications for defense electronics
subsystem 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. The Company's customer base includes leading
global original equipment manufacturers 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 TRW
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
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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.
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.
Despite this continued growth in customer demand, expenditures for capital
infrastructure equipment by service providers began to decline rapidly during
the first quarter of calendar year 2001. This severe market downturn has had a
negative impact on all of the Company's wireless product lines, and it appears
that these unfavorable wireless market conditions will continue for an uncertain
time period.
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;
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 voice networks to
digital networks, which allow more data to be transmitted to
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users at acceptable speed. With the broader bandwidth technology, service
providers are able to offer additional services including real-time web/e-mail
access.
Wireless Local Area Networking
Wireless local area networks are flexible data communication systems that
can either replace or extend wired communication systems. Using radio frequency
technology wireless local area networks transmit and receive data over the air
without wired cabling. A wireless local area network provides all the features
and benefits of traditional local area network technologies like Ethernet, with
lower installation costs and increased flexibility.
Wireless local area network technology is now in the process of widespread
deployment and accelerated development for low-cost, interoperable products.
Wireless local area network technology provides data rates to rapidly transfer
large data files, access the web, and support wireless video conferencing from
mobile platforms including palm personal computers and laptops. The flexibility
that the wireless local area network, standards offer the business and consumer
user is expected to lead to applications such as wireless home multimedia,
wireless roadside assistance, wireless e-business, wireless printers and
scanners.
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, worldwide paging, and military communication
command and control. 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.
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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.
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 and ceramic circuit technologies, which are described more fully
below, allow 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 wireless
networking, 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
original equipment manufacturers 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 original equipment manufacturers.
Advanced Microwave Design and Manufacturing Capabilities. The engineering
and design staff of 124 engineers as of June 30, 2002 works with customers of
the Company to develop product 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.
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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.
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 manufacturing, but
with superior microwave characteristics. Similar to traditional printed circuit
board 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 printed circuit
board 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
wireless local area networking. In addition, the Company has recently introduced
several new products that incorporate active devices into the passive
Multi-Layer Stripline technology. Active devices require voltage and current to
operate and are typically based on silicon, germanium or gallium arsenide semi
conductor technologies. Active devices are frequently used for amplification,
switching and modulation of radio frequency signals. Passive multi-layer strip
line technology is based on high frequency printed circuit board materials and
is an excellent integration platform for active devices.
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Active devices require voltage and current to operate and are typically
manufactured from silicon, germanium or gallium arsenide materials. Active
devices are frequently used for amplification, switching and modulation of radio
frequency signals. Passive multi-layer stripline technology utilize high
frequency printed circuit board materials and is an excellent integration
platform for active devices.
The Company's etched thick film technology allows for high frequency
performance similar to that of thin film with reduced costs characteristic of
thick film processing. The Company's investment into low temperature co-fired
ceramic capability will result in the ability to build multi-layer ceramic
circuits which fully leverage Anaren's microwave design competence.
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. 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 and ceramic circuit manufacturing
technology, the Company intends to continue to increase 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.
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, Nortel Networks and Powerwave for wireless communications and
Boeing, Lockheed Martin, Raytheon 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
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leadership in wireless technology by developing next generation products for the
mobile and wireless networking markets. In addition, the Company will build upon
its relationships with key wireless original equipment manufacturers 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 and
medical applications and represents another strategic acquisition for the
Company. Amitron also provides a platform to implement low temperature co-fired
ceramic 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 customers. The Company intends to use its existing
customer relationships and distribution channels to sell these additional
products.
Products
Wireless Communications
The Company provides microwave components, assemblies and subsystems to
leading wireless infrastructure equipment manufacturers. 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 and ceramic technologies,
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 original equipment
manufacturers. 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 printed circuit boards with automated production equipment. The primary
application of these products is in radio frequency power amplifiers, but they
are also found in low-noise amplifiers and radios. Based on market intelligence
and
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information from original equipment manufacturers and base station
manufacturers, the Company believes it is currently the market leader in this
product area, supplying industry leading original equipment manufacturers 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.
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. The Company recently introduced a new "Xinger(R)
Circulator" product line integrating the Company's ferrite technology with its
Xinger(R) technology. This product line offers ferrite product performance in a
surface mountable Xinger(R) package for automated insertion.
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. AdrenaLine
supports all major wireless standards and frequencies.
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.
Custom Radio Frequency Backplane Assemblies. The Company's radio frequency
backplanes provide efficient connections of microwave signals between subsystems
in wireless base stations. Radio frequency backplanes are similar to the
motherboard in a personal computer, which efficiently connects signals between
multiple subsystems. These assemblies range from radio frequency-only to fully
integrated radio frequency, direct current power, and signal routing solutions.
They are typically used in conjunction with radio transceivers and radio
frequency 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.
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High Frequency Printed Circuit Boards. Anaren also offers high frequency
circuit board manufacturing capability in its Almelo, The Netherlands facility.
The Company's proprietary metal backing technology is particularly advantageous
for high power applications where thermal management is paramount, such as
basestation amplifiers.
High Frequency Etched Thick Film and LTCC Circuits. The Company's ceramic
capabilities include etched thick film circuits and low temperature co-fired
ceramic built to customer specifications. These circuits are suitable for
wireless, defense, aerospace, and medical applications.
Space and Defense
The Company is a 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 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 radio frequency 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 radio
frequency energy to the antenna elements of the radar. The power dividers are
frequently 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.
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Customers
During the fiscal year ended June 30, 2002, approximately 65.0% of the
Company's sales were to customers in the wireless markets and approximately
35.0% of its sales were to customers in the space and defense markets. The
Company had one customer who accounted for more than 10.0% of net sales.
Approximately 16% of net sales were to Boeing, Inc. through the Company's Space
and Defense group.
Wireless Communications. The Company sells its standard line of Xinger(R)
components to leading original equipment manufacturers and a broad range of
other wireless equipment contract manufacturers. In addition, the Company sells
its custom wireless products to major wireless infrastructure original equipment
manufacturers. In general, customers have purchased the Company's products
directly from the Company or through distributors or sales representatives. 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, 2002:
o Avnet
o BFI Optilas
o Cana
o Celestica Corp.
o ElektroMekan AB
o Ericsson
o Knowles Electronics
o Lucent Technologies
o Motorola
o Nokia
o Nortel Networks
o Pacesetter, Inc.
o Plexus Southern California
o Powerwave Technologies
o Richardson Electronics Inc.
o Sanmina
o Venture Manufacturing
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,
2002:
o Boeing Inc.
o FR Aviation
o Lockheed Martin
o Raytheon
o Thales Defense, Ltd.
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Sales and Marketing
The Company markets its products worldwide to original equipment
manufacturers in wireless and satellite markets and prime contractors in defense
markets primarily through a sales and marketing force of 43 people as of June
30, 2002. The Company has regional sales offices located in Sacramento,
California; Raleigh, North Carolina; Waterloo, England; and Suzhou, China. In
addition, as of June 30, 2002, the Company had contracts with two major
distributors, Avnet and Richardson, and with 20 manufacturers' representatives
in the United States and 15 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. The Company has also 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 of 124 design and engineering professionals
as of June 30, 2002, is a key competitive advantage.
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 agreements with Richardson and Avnet, which
operates under the name of BFI Optilas in Europe. The Scandinavian countries are
handled by E.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 original equipment manufacturers 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 $10.4 million
and $6.8 million as of June 30, 2002 and 2001, respectively. Backlog for the
Wireless group primarily represents firm orders for surface mount products
(i.e., orders for a fixed quantity of component products) and signed purchase
orders (i.e., orders for specific custom sub-assemblies) 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
15
particular date is representative of actual sales for any succeeding period.
Typically, large original equipment manufacturers 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 $33.5 million and
$37.2 million as of June 30, 2002 and 2001, respectively. During fiscal year
2003, the Company expects to ship between $27.0 million and $29.0 million of its
backlog existing at June 30, 2002. 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 Miniature components for wireless networking and subscriber
applications
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
16
were $6.3 million in fiscal 2002, $5.0 million in fiscal 2001 and $3.8 million
in fiscal 2000. Research and development costs are charged to expense as
incurred.
In addition, the Company's net sales included approximately $1.1 million
for fiscal year 2002, approximately $4.6 million for fiscal 2001 and
approximately $5.1 million in fiscal 2000 attributable to payments by customers
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 reduce the size of its
products to increase its addressable markets including local area networking and
wireless subscriber applications.
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. The Company's East Syracuse facility has been ISO
9001 certified since July 1999.
During fiscal 2002, the Company completed the consolidation of its New
Jersey based subsidiary, Anaren Power Products, Inc., into its East Syracuse,
New York operation. In March of 2002, the Company opened a facility in Suzhou,
China for the purpose of serving a growing customer base in the Asia-Pacific
region. This location will serve as a light manufacturing operation supporting
all of the Company's wireless business interests.
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
17
of sources. During fiscal year 2002, the Company had one vendor from which it
purchased more than 10.0% of its total raw materials, but the Company believes
that alternate sources of supply are generally available for these and other 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, Radiall
Smith Industries and Mini-Circuits. As a direct supplier to original equipment
manufacturers, the Company also faces significant competition from the in-house
capabilities of its customers. Recently, however, in the wireless market many of
the original equipment manufacturers 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.
In the wireless market, the overall weak market conditions and reduction
in demand for wireless infrastructure equipment have resulted in increased price
pressure from the Company's customers. It is anticipated that this pricing
pressure will continue until the overall wireless market conditions improve.
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 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
18
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 has four patents and has filed eight other patent applications that are
currently pending before the United States Patent and Trademark Office to
protect both the construction and product design of its 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, 2002, the Company employed 643 full-time people including
17 temporary employees. Of these employees, 124 were members of the engineering
staff, 435 were in manufacturing, 43 were in sales and marketing positions, and
41 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, 2002,
payments to the Company under this sublease were at more than 90.0% 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
its subsidiary RF Power Components, Inc. pursuant to a lease that expires in
June, 2003. Annual rent for this facility is approximately $132,000.
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.
19
The Company also leases a 45,000 square foot facility in Almelo, The
Netherlands, which houses Anaren Europe which was acquired effective October 1,
2001. Annual rent for this facility is approximately $182,000 and the lease
expires in December 2003.
In March 2002, the Company signed a lease for a 12,300 square foot
facility in Suzhou, China to begin light manufacturing and assembly activities
for its Asian customers. This facility has an annual rent of $21,400 and expires
in 2005, and may be renewed for an additional three year period. Additionally,
the Company has an option to lease the second floor of this facility
(approximately 12,300 square feet) at a slightly reduced rate per square foot.
This option is available until March 2003.
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.
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, 2002, 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,
2002, and their positions held with the Company are as follows:
Name Age Position
Lawrence A. Sala..........................39 President, Chief Executive
Officer, Chairman and Director
Carl W. Gerst, Jr.........................64 Chief Technical Officer, Vice
Chairman and Director
Gert R. Thygesen..........................47 Vice President, Technology
Joseph E. Porcello........................50 Vice President, Finance,
Treasurer
Mark P. Burdick...........................44 Vice President and General
Manager
Timothy P. Ross...........................43 Vice President, Business
Development
Thomas J. Passaro, Jr.....................41 Vice President and President of
RF Power
Raymond Simione...........................61 Vice President and President of
Amitron
Rutger Theunissen.........................34 Managing Director of Anaren
Europe
Stanley S. Slingerland....................54 Vice President, Human Resources
20
Lawrence A. Sala joined the Company in 1984. He has been President since
May 1995, has served as Chief Executive Officer since September 1997, and has
been Chairman of the Board of Directors since November 2001. 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 served as Treasurer from May 1992 to
November 2001. 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 and Treasurer since November 2001. 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.
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.
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 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.
21
Raymond C. Simione joined the Company in August 2001 with the acquisition
of Amitron. He serves as a Vice President of the Company and as President of
Amitron. Mr. Simione was one of the founders of Amitron in 1985 and has served
as its President since the founding. Mr. Simione holds an associate degree in
electrical engineering from Lowell Technical Institute and a bachelor of science
in industrial engineering from Merrimac College.
Rutger Theunissen joined the Company in May 2002 as the Managing Director
of Anaren Europe, The Netherland subsidiary acquired by the Company as of
October 1, 2001. Prior to joining Anaren, Mr. Theunissen was a strategic
purchaser for Philips Electronics from 1996 to 1998 and the Global Purchasing
Manager for Philips Electronics from 1998 to 2000. Mr. Theunissen holds a
bachelor's degree in chemical technology from the Delft University of Technology
and a Master's in Business Administration from INSEAD in France.
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. Effective July 12, 2002, Mr. Slingerland retired from
the Company.
Each executive officer is elected annually by the Board of Directors of
the Company and serves at the pleasure of the Board.
22
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 2002 Fiscal 2001
Quarter Quarter
----------------------------------------------- -------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
High $26.010 $19.330 $19.630 $16.100 $71.375 $77.000 $66.500 $25.490
Low $15.000 $13.500 $11.920 $7.640 $31.500 $34.625 $11.438 $10.000
The Company had approximately 423 holders of record of its common stock at
August 2, 2002.
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 a 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 income for each of the years in the three year
period ended June 30, 2002, and with respect to the balance sheets at June 30,
2001 and 2002, 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 statements of income data for the years
ended June 30, 1998 and June 30, 1999, and the balance sheet data at June 30,
1998, June 30, 1999 and June 30, 2000, 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.
23
Years Ended
June 30, June 30, June 30, June 30, June 30,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Income Data:
Net sales $ 73,568 $ 84,825 $ 60,172 $ 45,739 $ 37,449
Cost of sales 51,369 52,527 35,074 27,711 23,571
-------- -------- -------- -------- --------
Gross profit 22,199 32,298 25,098 18,028 13,878
-------- -------- -------- -------- --------
Operating expenses:
Marketing 7,256 6,584 5,434 4,177 3,998
Research and development 6,283 5,023 3,816 2,835 1,380
General and administrative 8,105 8,392 4,394 3,220 2,873
Restructuring -- 688 -- -- --
Fire related 711 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses 22,355 20,687 13,644 10,232 8,251
-------- -------- -------- -------- --------
Operating income (loss) (156) 11,611 11,454 7,796 5,627
-------- -------- -------- -------- --------
Other income (expense):
Interest expense (149) (159) (66) (38) (82)
Other, primarily interest income 3,932 7,162 3,316 1,396 922
-------- -------- -------- -------- --------
Total other income 3,783 7,003 3,250 1,358 840
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary item 3,627 18,614 14,704 9,154 6,467
Income taxes (405) 6,400 5,063 2,204 2,330
-------- -------- -------- -------- --------
Income before extraordinary item 4,032 12,214 9,641 6,950 4,137
Extraordinary item-gain on acquisition 3,407
-------- -------- -------- -------- --------
Net income $ 7,439 $ 12,214 $ 9,641 $ 6,950 $ 4,137
======== ======== ======== ======== ========
Basic earnings per share:
Net income before extraordinary item $ .18 $ .55 $ .54 $ .42 $ .28
Extraordinary item - gain on acquisition .15 -- -- -- --
-------- -------- -------- -------- --------
Net income $ .33 $ .55 $ .54 $ .42 $ .28
======== ======== ======== ======== ========
Diluted earnings per share:
Net income before extraordinary item $ .17 $ .52 $ .50 $ .40 $ .26
Extraordinary item - gain on acquisition .15 -- -- -- --
-------- -------- -------- -------- --------
Net income $ .32 $ .52 $ .50 $ .40 $ .26
======== ======== ======== ======== ========
Shares used in computing net earnings per share:
Basic 22,323 22,134 17,978 15,566 14,952
Diluted 23,090 23,455 19,299 17,310 15,711
24
Years Ended
June 30, June 30, June 30, June 30, June 30,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands, except per share data)
Balance Sheet Data:
Cash and cash equivalents $ 12,565 $ 11,748 $ 6,179 $ 13,482 $ 11,249
Working capital 143,487 146,677 106,271 39,053 38,965
Total assets 221,586 209,055 189,696 58,467 50,903
Long-term debt, less current installments -- -- -- -- --
Stockholders' equity 209,553 199,454 179,572 51,845 45,506
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.
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, Inc.
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 generally recognizes sales at the time products are shipped to
customers, provided that persuasive evidence of an arrangement exists, the sales
price is fixed or easily determinable, collectibility is reasonably assured and
title and risk of loss have passed to the
25
customer. Title and the risks and rewards of ownership of products are generally
transferred at the time of shipment. Payments received from customers in advance
of products delivered are recorded as customer advance payments until earned. 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.
Effective July 1, 2001, the Company adopted Financial Accounting Standard
Board (FASB) Statement No. 141 - Business Combinations and Statement No. 142 -
Goodwill and Other Intangibles. As a result of the adoption of these new
standards and in conjunction with the completion of goodwill impairment reviews
by an outside appraisal firm, the Company ceased amortization of the goodwill
recorded as part of its previous acquisition transactions. If the Company had
discontinued amortization of goodwill at the beginning of the first quarter of
the prior fiscal year (2001), net earnings and basic and diluted earnings per
share would have been increased by $1,553,042 or $.07 per share for the year
ended June 30, 2001.
On August 31, 2001, the Company acquired all of the outstanding capital
stock of Amitron, Inc. Amitron is based in North Andover, Massachusetts and is
primarily engaged in the design and manufacture of ceramic components and
circuits for the medical, telecommunications and defense electronics markets.
The aggregate purchase consideration was $11,693,256, consisting of cash of
$9,919,664 (including cash direct acquisition costs), non-cash direct
acquisition costs in the form of stock options for service of $18,183, and
95,704 shares of the Company's common stock with an aggregate value of
$1,755,409. The acquisition was accounted for under the purchase method of
accounting for business combinations.
Effective October 1, 2001 the Company acquired all of the outstanding
capital stock of The 5M Company Europe, B.V., a manufacturer of microwave
circuits based in Almelo, The Netherlands. The Company's name was subsequently
changed to Anaren Europe, B.V. Anaren Europe's manufacturing technology is
similar to the Company's Multi-Layer Stripline technology. This manufacturing
technology utilizes a unique metal backing technology which offers both cost and
performance advantages for high power applications. The aggregate purchase
consideration for this transaction was $4,088,547, consisting of cash of
$3,869,823 (including direct acquisition costs), and Company stock options with
an aggregate fair value of $218,724. The acquisition was accounted for under the
purchase method of accounting for business combinations.
In January 2002, Anaren Europe completed the reconstruction of its factory
due to a fire in July 2001, which partially destroyed this facility. As of July
2002, Anaren Europe's facility is fully operational and the Company is actively
engaged in rebuilding its customer base. As a result of the fire, Anaren Europe
received an insurance settlement through its property and business interruption
insurance policies of approximately $16.0 million in December 2001 to offset
expenses incurred in out-sourcing production, cleaning the facility and
equipment and repairing equipment damaged but not destroyed in the fire, and to
recognize the replacement cost to be received for inventory and equipment
destroyed by the fire.
26
As a result of the fire and the subsequent insurance claim, the value of
Anaren Europe's assets at the time of purchase was significantly higher than the
consideration paid by Anaren. This situation resulted in significant negative
goodwill being generated by the transaction, which, under current accounting
convention, was first offset by writing down the acquired long-lived assets to
zero and then by recognizing an "extraordinary gain" of $3,407,000, or $0.15 per
share, in the second quarter ended December 31, 2001.
In March 2002, the Company, through a newly created subsidiary, Anaren
Communication Suzhou Co., Ltd., signed a three-year lease for a 12,300 square
foot manufacturing facility in Suzhou Industrial Park in Suzhou, China. The
Company has hired a General Manager for the facility and additional staffing
began in early July 2002. The Company presently expects to begin light
manufacturing and assembly at this location during the second quarter of fiscal
2003. It is anticipated that this facility will serve all of the Company's Asian
customers and will concentrate on producing more labor intensive products.
Additionally, it is expected that the Company will use this location to
facilitate procurement of raw materials in China, when possible, for the
Company's other subsidiaries.
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,
--------------------------
2002 2001 2001
---- ---- ----
Net sales ..................................... 100.0% 100.0% 100.0%
Cost of sales ................................. 69.8 61.9 58.3
----- ----- -----
Gross profit .................................. 30.2 38.1 41.7
----- ----- -----
Operating expenses:
Marketing ................................ 9.9 7.8 9.0
Research and development ................. 8.5 5.9 6.3
General and administrative ............... 11.0 9.9 7.3
Restructuring ............................ -- 0.8 --
Fire related ............................. 1.0 -- --
----- ----- -----
Total operating expenses ............. 30.4 24.4 22.6
----- ----- -----
Operating income .............................. (0.2) 13.7 19.1
----- ----- -----
Other income (expense):
Interest expense ......................... (0.2) (0.2) (0.1)
Other, primarily interest income ......... 5.3 8.4 5.5
----- ----- -----
Total other income ................... 5.1 8.2 5.4
----- ----- -----
Income before income taxes and
extraordinary item .......................... 4.9 21.9 24.5
Income taxes .................................. (0.6) 7.5 8.4
----- ----- -----
Net income before extraordinary item % ........ 5.5% 14.4% 16.1%
Extraordinary item - gain on acquisition ...... 4.6 -- --
----- ----- -----
Net income .................................... 10.1% 14.4% 16.1%
===== ===== =====
27
The following table sets forth the Company's net sales by industry segment
for the periods indicated:
Years Ended June 30,
--------------------
2002 2001 2000
---- ---- ----
(In thousands)
Wireless ....................... $47,497 $61,710 $38,807
Space & Defense ................ 26,071 23,115 21,365
------- ------- -------
$73,568 $84,825 $60,172
======= ======= =======
Year Ended June 30, 2002 Compared to Year Ended June 30, 2001
Net Sales. Net sales decreased $11.2 million, or 13.3%, to $73.6 million for the
year ended June 30, 2002 compared to $84.8 million for the previous year. This
decrease was caused by a 23.0% drop in Wireless sales, which was partially
offset by a 12.8% rise in sales of Space and Defense products.
The $14.2 million decrease in sales of Wireless products, which consist of
standard surface mount components and custom subassemblies for use in building
wireless base station equipment, was caused by a rapid downturn in capital
expenditures for wireless infrastructure equipment which began in the latter
part of fiscal 2001. This downturn resulted in numerous reductions in customer
demand forecasts and delivery push outs beginning in March 2001 and continuing
through fiscal 2002. This market downturn has affected all of the Company's
Wireless product lines and has most severely affected sales of Wireless standard
components. The downturn in Wireless market sales was somewhat offset by the
inclusion of $8.4 million in sales in fiscal 2002 from Anaren Europe and
Amitron, the Company's fiscal 2002 acquisitions. Although delivery push outs
have stopped and the Company saw a $2.7 million increase in Wireless sales from
quarter two to quarters three and a $1.6 million increase from quarter three to
quarter four, the worldwide Wireless market downturn is expected to continue for
an uncertain period.
Space and Defense products consist of custom components and assemblies for
communication satellites and defense radar countermeasures subsystems for the
military. Sales in the Space and Defense group rose $3.0 million, or 12.8%, in
fiscal 2002, compared to the prior fiscal year. This increase in shipments
resulted from factory production shipments for the Boeing Spaceway program. This
satellite program, which entered full factory production in the fourth quarter
of fiscal 2001, is expected to place Space and Defense shipments in the $7.0 -
$7.5 million range, quarterly, through the remainder of calendar 2002.
Gross Profit. Cost of sales consists primarily of engineering design costs,
material, material fabrication costs, assembly costs and test costs. Gross
profit for fiscal 2002 was $22.2 million (30.2% of net sales), down from $32.3
million (38.1% of net sales) for the prior year. The decrease in gross margin
resulted from the decline in sales volume, which caused under absorption of
factory overhead compared to the previous year. Presently, the Company expects
gross margins to remain at or below current levels in fiscal 2003 and not to
improve significantly without an increase in sales volume, both domestically and
at Anaren Europe in The Netherlands.
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 10.1% to $7.3
million (9.9% of net sales) for fiscal 2002 from
28
$6.6 million (7.8% of net sales) for fiscal 2001. Marketing expenses increased
due to the addition of new east and west coast marketing offices and the
additional marketing expenses associated with the Company's acquired businesses,
Amitron and Anaren Europe, which amounted to approximately $1.0 million in
fiscal 2002.
Research and Development. Research and development expenses consist of material
and salaries and related overhead costs of employees engaged in ongoing
research, design and development activities associated with new products and
technology development. Research and development expenses increased 25.1% to
$6.3 million (8.5% of net sales) in fiscal 2002 from $5.0 million (5.9% of net
sales) for fiscal 2001. Research and development expenditures are supporting
further development of wireless infrastructure products and new wireless
networking product opportunities with a renewed emphasis on developing new
standard surface mount wireless products. Despite the current wireless market
downturn, the Company does not expect to reduce its current research and
development efforts in the near term and is presently working on a number of new
standard wireless products.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, goodwill (in fiscal 2001) and
intangible amortization, travel related expenses and other corporate costs.
General and administrative expenses decreased 3.4% to $8.1 million (11.0% of net
sales) for fiscal 2002 from $8.4 million (9.9% of net sales) for fiscal 2001.
General and administrative expenses have decreased primarily due to the adoption
of FASB Statement No. 142 which eliminated the amortization of goodwill starting
in the first quarter of fiscal 2002. The elimination of goodwill reduced general
and administrative expenses by $1.6 million in the current year compared to last
year. This elimination of goodwill amortization was partially offset by an
increase in identifiable intangible amortization of $356,000 in fiscal 2002
associated with the Company's acquisition of Amitron. Additionally, general and
administrative expense for fiscal 2002 includes ten months and nine of expense
for Amitron and Anaren Europe, respectively, which amounted to approximately
$2.0 million in the aggregate.
Operating Income. Operating income decreased $11.8 million to an operating loss
of $156,000 (0.2% of net sales) for fiscal 2002, from an operating profit of
$11.6 million (13.7% of net sales) for fiscal 2001. On a reporting segment
basis, the Wireless operating loss was $7.9 million for fiscal 2002, down 219.0%
or $14.5 million from $6.6 million operating income in fiscal 2001. The
principal reason for the decrease in Wireless operating income in fiscal 2002
compared to fiscal 2001 was the 23.0% decrease in wireless sales year over year
due to the large decrease in Wireless base station equipment demand worldwide,
which began in the last half of fiscal 2001 and continues at the present time.
The large decline in sales levels in the Wireless segment resulted in
significant under absorption of fixed overhead within the group during the
current fiscal year. Additionally, operating income in the Wireless sector was
further decreased by the $4.4 million operating loss at Anaren Europe in fiscal
2002 due to the fire recovery costs and the low level of sales caused by the
fire.
Space and Defense operating income rose $2.7 million, or 52.5%, for fiscal 2002
compared to fiscal 2001. This increase resulted from a $3.0 million rise in
Space and Defense revenues year over year, due to the Spaceway Program entering
full production at the end of fiscal year 2001.
29
This increase in revenue resulted in better absorption of fixed overhead in
fiscal 2002 compared to the previous year. Additionally, cost reduction and
efficiency efforts in this segment were successful in reducing the overall cost
of operations in fiscal 2002 compared to the prior year.
Other Income. Other income is primarily interest income received on invested
cash balances and income from debt extinguishment due to leased equipment
destroyed in the Anaren Europe July 2001 fire. Other income decreased 45.1% to
$3.9 million (5.3% of net sales) for the year ended June 30, 2002 from $7.2
million (8.4% of net sales) for the same period last year. This decrease was
caused mainly by the decline in market interest rates over the last 12 months
brought about by reductions in the Federal Fund rates, and the use of
approximately $12.1 million in cash to complete the acquisitions of Amitron and
Anaren Europe. Interest income will fluctuate based on the level of interest
rates and the level of investible cash balances. During the fourth quarter of
fiscal 2002, the Company recorded an other income item amounting to
approximately $194,000 representing the remaining principal balance on a
capitalized lease obligation which was no longer payable by the Company. The
equipment leased by the Company was destroyed in the July 2001 fire.
Interest Expense: Interest expense primarily represents loan interest,
commitment fees and interest incurred on certain deferred obligations. Interest
expense for fiscal 2002 was $149,000 (0.2% of net sales) compared to $160,000
(0.2% of net sales) for fiscal 2001.
Income Taxes. The tax benefit for fiscal 2002 was $405,000 ((0.6)% of net
sales). This compared to tax expense of $6.4 million (7.5% of net sales) for
fiscal 2001, representing an effective tax rate of 34.4%. During the fourth
quarter, the Company finalized an analysis of certain available research credits
and export tax benefits and recorded a tax benefit of $857,000. In addition, the
Company's effective tax rate decreased as a direct result of the increased
proportion of federally exempt state municipal bond income in relation to income
before taxes. Going forward the Company's effective tax rate will be impacted by
the levels of tax credits, export tax benefits, nontaxable interest income and
the income/loss generated by the foreign subsidiaries in relation to income
before taxes.
Extraordinary gain. The extraordinary gain in fiscal 2002 of $3.4 million (4.6%
of net sales) resulted from the purchase of Anaren Europe. As a result of the
fire and the subsequent insurance settlement, the value of the Anaren Europe
assets at the time of purchase was significantly higher than the consideration
paid by Anaren. This situation resulted in significant negative goodwill being
generated by the transaction, which, under current accounting convention, was
first offset by writing down the acquired fixed assets to zero and then by
recognizing an "extraordinary gain" of $3,407,000, or $0.15 per share, in the
second quarter of fiscal 2002.
30
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 amounted to $22.9 million and
reflects mainly the addition of sales the Company's two acquisitions, Anaren
Power Products and RF Power, whose combined sales were $24.1 million for fiscal
2001. 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 fiscal 2001, the Company saw a rapid downturn in
expenditures for capital infrastructure by service providers. This 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 had a negative impact on all of the Company's
Wireless product lines that continues at present.
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 had
been in an engineering design phase for the preceding year and a half, entered
full factory production in the fourth quarter of fiscal 2001.
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 fiscal 2001 sales growth, 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 capital spending for wireless infrastructure equipment. In light
of the lower sales levels, the Company took action to consolidate its
operations, reduced its personnel levels by over 25.0% from their peak in
February 2001, and decreased other indirect costs.
Marketing. 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 Anaren Power Products and RF
Power, respectively, not included in fiscal 2000 expenses.
Research and Development. 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 expanded to
support further development of wireless infrastructure products and new
broadband fixed wireless product opportunities. The inclusion of Anaren Power
Products and RF Power in the Company's research and development expense in
fiscal 2001 accounted for approximately $438,000 in additional expenses.
31
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 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
fiscal 2001 expense includes 11 and eight months general and administrative
expense for Anaren Power Products 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 Anaren Power Products' New
Jersey facility and relocation of its 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.
Operating Income. Operating income increased 1.3% to $11.6 million (13.7% of net
sales) for fiscal 2001, compared to $11.5 million (19.1% of net sales) for
fiscal 2000. On a reporting segment basis Wireless operating income was $6.6
million for fiscal 2001, down 21.4% from $8.4 million for fiscal 2000. The main
reason for the decline in Wireless operating income was the sudden drop in
worldwide demand for wireless infrastructure equipment which resulted in a
severe decline in Company Wireless sales in the latter part of fiscal 2001.
These significantly lower sales levels, coupled with the restructuring charge
related to the closing of Anaren Power Products' New Jersey facility and
relocation of its ferrite production to the Company's East Syracuse, New York
facility, caused steep declines in Wireless operating income which culminated in
a Wireless operating loss in the fourth quarter.
Space and Defense operating income rose 64.2% to $5.1 million in fiscal 2001,
compared to $3.1 million in fiscal 2000. This increase resulted from a $1.9
million rise in revenue for this segment in fiscal 2001, as well as a much more
profitable product mix for fiscal 2001 compared to the previous fiscal year
which allowed the Company to ship more product with a lower head count within
the segment.
Interest Expense. 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 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.
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%.
32
Critical Accounting Policies
The methods, estimates and judgments management uses in applying the Company's
most critical accounting policies have a significant impact on the results
reported in the Company's financial statements. The U.S. Securities and Exchange
Commission has defined the most critical accounting policies as the ones that
are most important to the portrayal of Anaren's financial condition and results,
and requires management to make the most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently
uncertain. Based on this definition, the Company's most critical policies
include: valuation of accounts receivable, which impacts general and
administrative expense; valuation of inventory, which impacts cost of sales and
gross margin; the assessment of recoverability of goodwill and other intangible
assets, which impacts write-offs of goodwill and intangibles; and accounting for
income taxes, which impacts valuation allowance and the effective tax rate.
Management reviews the estimates, including, but not limited to, allowance for
doubtful accounts, inventory reserves and income tax valuations on a regular
basis and makes adjustments based on historical experiences, current conditions
and future expectations. The reviews are performed regularly and adjustments are
made as required by current available information. The Company believes these
estimates are reasonable, but actual results could differ from these estimates.
The Company states inventories at the lower of cost or market, using a standard
cost methodology to determine the cost basis for the inventory. This method
approximates actual cost on a first-in-first-out basis. The recoverability of
inventories is based on the types and levels of inventory held, forecasted
demand, pricing, competition and changes in technology. The Company's accounts
receivable represent those amounts, which have been billed to our customers but
not yet collected. The Company analyzes various factors including historical
experience, credit worthiness of customers and current market and economic
conditions. The allowance for doubtful accounts balance is established based on
the portion of those accounts receivable which are deemed to be potentially
uncollectible. Changes in judgments on these factors could impact the timing of
costs recognized.
The Company records valuation allowances to reduce deferred tax assets when it
is more likely than not that some portion of the amount may not be realized. The
Company evaluates the need for valuation allowances on a regular basis and
adjust as needed. These adjustments, when made, would have an impact on the
Company's financial statements in the period that they were recorded.
33
Intangible assets with estimable useful lives are amortized to their residual
values over those estimated useful lives in proportion to the economic benefit
consumed.
Goodwill is tested annually for impairment by the Company at the reporting unit
level, by comparing the fair value of the reporting unit with its carrying
value. Valuation methods for determining the fair value of the reporting unit
include reviewing quoted market prices and discounted cash flows. If the
goodwill is indicated as being impaired (the fair value of the reporting units
is less than the carrying amount), the fair value of the reporting unit is then
allocated to its assets and liabilities in a manner similar to a purchase price
allocation in order to determine the implied fair value of the reporting unit
goodwill. This implied fair value of the reporting unit goodwill is then
compared with the carrying amount of the reporting unit goodwill and, if it is
less, the Company would then recognize an impairment loss.
The projection of future cash flows for the goodwill impairment analysis
requires significant judgments and estimates with respect to future revenues
related to the assets and the future cash outlays related to those revenues.
Actual revenues and related cash flows or changes in anticipated revenues and
related cash flows could result in changes in this assessment and result in an
impairment charge. The use of different assumptions could increase or decrease
the related impairment charge.
Liquidity and Capital Resources
Net cash provided by operations for the years ended June 30, 2002 and 2001 were
$17.1 million and $16.7 million, respectively. The positive cash flow from
operations in both fiscal 2002 and 2001 was due to the net income attained in
both years and, in fiscal 2002, to the large amount of cash received in the
second and third quarters ($10.7 million) from the Anaren Europe insurance
settlement. Additionally, the increase in cash generated by operations in fiscal
2001 was augmented by $5.4 million generated by tax benefits related to the
exercise of stock options by employees compared to $461,000 in fiscal 2002.
Net cash used in investing activities in fiscal 2002 consists of funds used to
purchase capital equipment and cash used to purchase the capital stock of
Amitron in August 2001 and Anaren Europe in October 2001. Capital equipment
placed in service amounted to $9.8 million, including $5.8 million at Anaren
Europe, in the year ended June 30, 2002 compared to $8.0 million in the
previous fiscal year. Additionally, the Company expended $9.9 million in cash to
purchase all the capital stock of Amitron. Funds for this transaction were
obtained through the proceeds of matured marketable debt securities in the
amount of $13.3 million. In October 2001, the Company expended $3.9 million in
cash to purchase the capital stock of Anaren Europe. Funds for this transaction
came from the Company's operating cash account. Additionally, the Company
expended $5.2 million in fiscal 2002 to purchase common stock of Celeritek, Inc.
Funds for these purchases came from the Company's operating cash account.
The majority of the cash used in investing activities in fiscal 2001 was the
$17.9 million used to purchase the assets of Ocean Microwave, Inc. Funds for
this transaction were obtained through the proceeds of matured marketable debt
securities in the amount of $18.5 million.
34
Net cash used by financing activities was $1.6 million in fiscal 2002 and
consisted of $2.0 million used to pay off loans of Amitron and Anaren Europe,
reduced by $399,000 generated from the exercise of stock options. In the prior
year funds generated by financing activities amounted to $1.2 million and
consisted of $2.9 million generated through the exercise of stock options, and
$408,000 used to pay off loans of Ocean Microwave which were assumed as part of
the asset purchase.
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. No repurchases of the Company's shares took place in fiscal 2002.
The Company has a credit facility providing an unsecured $10 million working
capital revolving line of credit bearing interest at the LIBOR interest rate
plus one hundred twenty-five basis points and maturing December 31, 2006. 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, 2002. At June 30, 2002, $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.
Disclosures About Contractual Obligations and Commercial Commitments
Accounting standards require disclosure concerning the Company's obligations and
commitments to make future payments under contracts, such as debt and lease
agreements, and under contingent commitments, such as debt guarantees. The
Company's obligations and commitments are as follows:
Less
Total Than 1 Yr. 2 - 3 Yrs. 4 - 5 Yrs. Over 5 Yrs.
----- ---------- ---------- --------- ----------
Payment Due by Period
---------------------
Contractual obligations
- -----------------------
Long term debt $ -- $ -- $ -- $ -- $ --
Operating leases - facilities 6,023,091 994,409 1,341,155 1,021,325 2,666,202
Deferred compensation 526,808 65,000 130,000 130,000 201,808
Lines of credit -- -- -- -- --
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." FASB 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. FASB 143 is required for adoption for fiscal
years beginning after June 14, 2002. The Company has reviewed the provisions of
FASB 143, and believes that upon adoption, the Statement will not have a
significant effect on its consolidated financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." FASB 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. FASB 144 is required for adoption for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. The
Company has reviewed the provisions of FASB 144, and believes that upon
adoption, the Statement will not have a significant effect on its consolidated
financial statements.
35
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS
145). SFAS 145 is required for adoption for fiscal years beginning after May 15,
2002, with early adoption of the provisions related to the rescission of
Statement 4 encouraged. The Company has reviewed the provisions of SFAS 145, and
believes that upon adoption, the Statements will not have a significant effect
on its consolidated financial statements.
In July 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 146, Accounting for Restructuring Costs
(SFAS 146). SFAS 146 applies to costs associated with an exit activity
(including restructuring) or with a disposal of long-lived assets. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS 146, a company will record a liability for a cost associated with an exit
or disposal activity when that liability is incurred and can be measured at fair
value. SFAS 146 will require a company to disclose information about its exit
and disposal activities, the related costs, and changes in those costs in the
notes to the interim and annual financial statements that include the period in
which an exit activity is initiated and in any subsequent period until the
activity is completed. SFAS 146 is effective prospectively for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
Under SFAS 146, a company may not restate its previously issued financial
statements and the new Statement grandfathers the accounting for liabilities
that a company had previously recorded under EITF Issue 94-3.
Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Annual Report on Form 10K.
As of June 30, 2002, the Company had cash, cash equivalents and marketable
securities of $124.9 million, of which approximately $108.5 million consisted of
highly liquid investments in marketable debt securities and $3.8 million
consisted of marketable equity securities. The marketable debt securities at
date of purchase normally have maturities between one and 18 months, are exposed
to interest rate risk and will decrease in value if market interest rates
increase. A hypothetical decrease in market interest rate of 10.0% from June 30,
2002 rates, or 0.3%, would have reduced net income and cash flow by
approximately $328,000, or $0.014 per share for the year. Due to the relatively
short maturities of the securities and its ability to hold those investments to
maturity, the Company does not believe that an immediate decrease in interest
rates would have a significant effect on its financial condition or results of
operations. Over time, however, declines in interest rates will reduce the
Company's interest income.
The Company currently owns equity investments held for sale with a market value
of approximately $3.8 million. Fluctuations in market value of these securities
are charged to stockholders' equity monthly. A theoretical 10.0% decline in
market value of these securities would result in a $380,000 reduction in
stockholders' equity.
All of the Company's sales from its domestic U.S. subsidiaries to foreign
customers are denominated in United States dollars and, accordingly are not
exposed to foreign currency exchange risk. Sales of the Company's Netherlands
subsidiary, Anaren Europe, are denominated in Euros to European customers and
United States dollars to U.S. customers. Sales to U.S. customers by Anaren
Europe denominated in United States dollars would be subject to currency
exchange losses. At present, due to the fire at Anaren Europe, sales of that
subsidiary to U.S. customers in U.S. dollars subject to possible currency losses
are less than $100,000 per quarter and thus any possible losses due to currency
fluctuations would not be material to the operating results of the Company until
such time as Anaren Europe's sales increase significantly.
36
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 23 to the consolidated financial statements of the Company
which are included elsewhere in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
37
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 2002 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 2002 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 2002 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 2002 Annual Meeting of Shareholders and is
incorporated by reference herein.
38
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 was not required to file a Current Report on Form
8-K during the quarter ended June 30, 2002.
(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 (5)
10.2 Pension Plan and Trust (6)
10.3 Anaren Microwave, Inc. Incentive Stock Option Plan, as
amended (7)
10.4 Anaren Microwave, Inc. 1989 Non-statutory Stock Option Plan,
as amended (8)
10.5 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 (9)
39
10.8 Amendment dated January 1, 2002 to Credit Facility Agreement,
dated as of December 23, 1997, between the Company and
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)
10.11 Form of Change of Control Agreements dated March 15, 2002 with
Joseph Porcello, Mark Burdick, Timothy Ross, Stanley
Slingerland and Gert Thygesen
10.12 Employment Agreement, dated as of April 25, 2002, between the
Company and Rutger Theunissen
10.13 Employment Agreement, dated as of August 31, 2001, between the
Company and Raymond C. Simione
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.
40
(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 10.1 to the Company's Annual
Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
June 30, 2001.
(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 10.13 to the Company's
Quarterly Report on Form 10-Q for the three months ended December 31,
1997.
(10) Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended December 31,
2001.
(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.
41
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: August 6, 2002
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
- --------------------------------------------------------------------------------------------------------------------
President, Chief Executive Officer and August 6, 2002
--------------------------
Lawrence A. Sala Chairman of the Board, Director
(Principal Executive Officer)
- --------------------------------------------------------------------------------------------------------------------
Vice President of Finance and Treasurer August 6, 2002
--------------------------
Joseph E. Porcello (Principal Financial and
Accounting Officer)
- --------------------------------------------------------------------------------------------------------------------
Chief Technical Officer, August 6, 2002
--------------------------
Carl W. Gerst, Jr. Vice Chairman of the Board and Director
- --------------------------------------------------------------------------------------------------------------------
Director August 6, 2002
--------------------------
Herbert I. Corkin
- --------------------------------------------------------------------------------------------------------------------
Director August 6, 2002
--------------------------
Dale F. Eck
- --------------------------------------------------------------------------------------------------------------------
Director August 6, 2002
--------------------------
Matthew S. Robison
- --------------------------------------------------------------------------------------------------------------------
Director August 6, 2002
--------------------------
David Wilemon
- --------------------------------------------------------------------------------------------------------------------
42
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2002 and 2001
(With Independent Auditors' Report Thereon)
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
Index
Page
Independent Auditors' Report 1
Consolidated Balance Sheets as of June 30, 2002 and 2001 2
Consolidated Statements of Income for the years
ended June 30, 2002, 2001, and 2000 3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended
June 30, 2002, 2001, and 2000 4
Consolidated Statements of Cash Flows for the years
ended June 30, 2002, 2001, and 2000 5
Notes to Consolidated Financial Statements 6
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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
Syracuse, New York
August 5, 2002
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and 2001
Assets 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 12,565,424 11,748,542
Securities available for sale (note 4) 3,820,942 --
Securities held to maturity (note 4) 98,955,299 108,557,983
Receivables, less allowance for doubtful
accounts of $529,000 and $195,000
in 2002 and 2001, respectively 13,106,583 11,504,168
Inventories (note 5) 20,119,433 18,566,977
Accrued interest receivable 1,206,396 1,304,877
Refundable income taxes -- 53,804
Prepaid expenses 941,691 569,242
Deferred income taxes (note 19) 1,356,294 956,759
Other current assets 188,482 1,156,158
------------ ------------
Total current assets 152,260,544 154,418,510
Securities held to maturity (note 4) 9,564,558 11,725,960
Property, plant, and equipment, net (note 6) 26,592,375 18,805,901
Goodwill (note 3) 30,715,861 23,410,534
Deferred income taxes (note 19) -- 263,348
Patent, net of accumulated amortization
of $215,613 and $143,742 in 2002
and 2001, respectively (note 1) 359,353 431,223
Other intangible assets, net of accumulated
amortization of $356,390 at June 30, 2002 2,093,610 --
------------ ------------
$221,586,301 209,055,476
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,046,048 2,985,793
Accrued expenses (note 7) 2,766,350 2,966,258
Income taxes payable 530,857 938,984
Customer advance payments 244,831 767,790
Other current liabilities (note 9) 185,725 65,000
------------ ------------
Total current liabilities 8,773,811 7,723,825
Deferred income taxes (note 19) 1,357,359 --
Postretirement benefit obligation (note 18) 1,440,085 1,391,496
Other liabilities (note 9) 461,808 486,380
------------ ------------
Total liabilities 12,033,063 9,601,701
------------ ------------
Commitments and concentrations
(notes 20, 21, and 22)
Stockholders' equity:
Common stock, $0.01 par value. Authorized
200,000,000 shares (notes 11 and 16);
issued 25,636,442 and 25,496,238
in 2002 and 2001, respectively 256,364 254,962
Additional paid-in capital 168,901,645 166,051,341
Unearned compensation (note 14) (1,086,669) (1,723,377)
Retained earnings 47,082,597 39,643,487
Accumulated other comprehensive loss
(note 15) (828,061) --
------------ ------------
214,325,876 204,226,413
Less cost of 3,177,822 treasury shares 4,772,638 4,772,638
------------ ------------
Total stockholders' equity 209,553,238 199,453,775
------------ ------------
$221,586,301 209,055,476
============ ============
See accompanying notes to consolidated financial statements.
2
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
------------ ------------ ------------
Net sales $ 73,568,319 84,825,275 60,171,836
Cost of sales 51,369,597 52,526,584 35,074,116
------------ ------------ ------------
Gross profit 22,198,722 32,298,691 25,097,720
------------ ------------ ------------
Operating expenses:
Marketing 7,255,465 6,584,090 5,433,627
Research and development 6,282,846 5,022,882 3,815,862
General and administrative 8,105,264 8,392,118 4,394,099
Restructuring (note 8) -- 688,337 --
Fire related (note 2) 711,400 -- --
------------ ------------ ------------
Total operating expenses 22,354,975 20,687,427 13,643,588
------------ ------------ ------------
Operating income (loss) (156,253) 11,611,264 11,454,132
------------ ------------ ------------
Other income (expense):
Interest expense (149,257) (159,506) (65,999)
Other, primarily interest income 3,932,376 7,162,210 3,315,666
------------ ------------ ------------
Total other income 3,783,119 7,002,704 3,249,667
------------ ------------ ------------
Income before income taxes 3,626,866 18,613,968 14,703,799
Income tax expense (benefit) (note 19) (405,000) 6,400,000 5,063,000
------------ ------------ ------------
Income before extraordinary item 4,031,866 12,213,968 9,640,799
Extraordinary item - gain on acquisition (note 2) 3,407,244 -- --
------------ ------------ ------------
Net income $ 7,439,110 12,213,968 9,640,799
============ ============ ============
Basic net income per common and common
equivalent share:
Income before extraordinary item $ 0.18 0.55 0.54
Extraordinary item - gain on acquisition 0.15 -- --
------------ ------------ ------------
Net income $ 0.33 0.55 0.54
============ ============ ============
Diluted net income per common and common
equivalent share:
Income before extraordinary item $ 0.17 0.52 0.50
Extraordinary item - gain on acquisition 0.15 -- --
------------ ------------ ------------
Net income $ 0.32 0.52 0.50
============ ============ ============
Shares used in computing net income per
common and common equivalent share:
Basic 22,322,546 22,133,585 17,977,782
Diluted 23,089,553 23,455,244 19,299,460
See accompanying notes to consolidated financial statements.
3
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended June 30, 2002, 2001, and 2000
Common stock Additional
Comprehensive ------------ paid-in Unearned
Income Amount capital compensation
------------- ------------ ------------ ------------
Balance at June 30, 1999 $196,631 37,338,383 --
Net income -- -- --
Stock options exercised (note 13) 4,698 1,459,929 --
Tax benefit from exercise
of stock options (note 19) -- 2,513,788 --
Issuance of restricted stock (note 14) 720 893,280 (894,000)
Amortization of unearned
compensation (note 14) -- -- 170,288
Issuance of stock in connection
with acquisition (note 2) 705 1,743,962 --
Sale of common stock (note 11) 46,890 112,147,825 --
Dividends to stockholders (note 12) -- -- --
-------- ------------ ----------
Balance at June 30, 2000 249,644 156,097,167 (723,712)
Net income -- -- --
Purchase of treasury stock -- -- --
Stock options exercised (note 13) 5,009 2,882,102 --
Tax benefit from exercise
of stock options (note 19) -- 5,375,231 --
Issuance of restricted stock (note 14) 309 1,524,791 (1,525,100)
Amortization of unearned
compensation (note 14) -- -- 525,435
Stock options granted for services
(note 13) -- 172,050 --
-------- ------------ ----------
Balance at June 30, 2001 254,962 166,051,341 (1,723,377)
Comprehensive income (loss):
Net income $7,439,110 -- -- --
Other comprehensive income (loss):
Foreign currency translation
adjustment 687,667 -- -- --
Minimum pension liability
adjustment, net of tax of $54,737 (106,254) -- -- --
Unrealized loss on securities
available-for-sale (1,409,474) -- -- --
----------
Other comprehensive loss (828,061) -- -- --
----------
Total comprehensive income 6,611,049
==========
Stock options exercised (note 13) 445 398,273 --
Tax benefit from exercise
of stock options (note 19) 460,672 --
Issuance of stock in connection
with acquisition (note 2) 957 1,754,452 --
Stock options granted in connection
with acquisition (note 2) -- 218,724 --
Amortization of unearned
compensation (note 14) -- -- 636,708
Stock options granted for services
(note 13) -- 18,183 --
-------- ------------ ----------
Balance at June 30, 2002 256,364 168,901,645 (1,086,669)
======== ============ ==========
Accumulated
other Treasury stock Total
Retained comprehensive -------------- stockholders'
earnings loss (note 15) Amount equity
------------ -------------- -------------- ------------
Balance at June 30, 1999 17,791,467 -- $ (3,480,983) 51,845,498
Net income 9,640,799 -- -- 9,640,799
Stock options exercised (note 13) -- -- -- 1,464,627
Tax benefit from exercise
of stock options (note 19) -- -- -- 2,513,788
Issuance of restricted stock (note 14) -- -- -- --
Amortization of unearned
compensation (note 14) -- -- -- 170,288
Issuance of stock in connection
with acquisition (note 2) -- -- -- 1,744,667
Sale of common stock (note 11) -- -- -- 112,194,715
Dividends to stockholders (note 12) (2,747) -- -- (2,747)
------------ ------------ ------------ ------------
Balance at June 30, 2000 27,429,519 -- (3,480,983) 179,571,635
Net income 12,213,968 -- -- 12,213,968
Purchase of treasury stock -- -- (1,291,655) (1,291,655)
Stock options exercised (note 13) -- -- -- 2,887,111
Tax benefit from exercise
of stock options (note 19) -- -- -- 5,375,231
Issuance of restricted stock (note 14) -- -- -- --
Amortization of unearned
compensation (note 14) -- -- -- 525,435
Stock options granted for services
(note 13) -- -- -- 172,050
------------ ------------ ------------ ------------
Balance at June 30, 2001 39,643,487 -- (4,772,638) 199,453,775
Comprehensive income (loss):
Net income 7,439,110 -- -- 7,439,110
Other comprehensive income (loss):
Foreign currency translation
adjustment -- -- -- --
Minimum pension liability
adjustment, net of tax of $54,737 -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- --
Other comprehensive loss -- (828,061) -- (828,061)
Total comprehensive income
Stock options exercised (note 13) -- -- -- 398,718
Tax benefit from exercise
of stock options (note 19) -- -- -- 460,672
Issuance of stock in connection
with acquisition (note 2) -- -- -- 1,755,409
Stock options granted in connection
with acquisition (note 2) -- -- -- 218,724
Amortization of unearned
compensation (note 14) -- -- -- 636,708
Stock options granted for services
(note 13) -- -- -- 18,183
------------ ------------ ------------ ------------
Balance at June 30, 2002 47,082,597 (828,061) $ (4,772,638) 209,553,238
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001, and 2000
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 7,439,110 12,213,968 9,640,799
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of plant and
equipment 3,844,834 2,775,594 1,768,234
Amortization of intangibles 428,261 1,624,913 245,667
Provision for doubtful accounts 334,000 140,000 --
Deferred income taxes (1,863,179) (347,025) (120,900)
Unearned compensation 636,708 525,435 170,288
Tax benefit from exercise of stock options 460,672 5,375,231 2,513,788
Extraordinary gain on acquisition (3,407,244) -- --
Changes in operating assets and liabilities, net
of business acquisitions:
Receivables 272,979 836,617 (3,722,212)
Refundable income taxes 53,804 636,925 (56,360)
Inventories 159,164 (4,184,124) (2,527,080)
Accrued interest receivable 486,484 816,173 (1,537,683)
Prepaid expenses (372,449) 89,550 (399,468)
Insurance receivable 10,749,113 -- --
Other assets 1,004,493 (607,052) (137,428)
Accounts payable 62,622 (3,376,398) 179,239
Income taxes payable (408,127) 315,553 151,241
Accrued expenses (2,286,370) 537,628 169,792
Customer advance payments (522,959) 165,833 253,503
Postretirement benefit obligation (112,402) 66,518 46,409
Other liabilities 96,153 (947,222) 138,923
------------ ------------ ------------
Net cash provided by operating activities 17,055,667 16,658,117 6,776,752
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (9,809,078) (7,975,512) (6,022,444)
Net (purchases) sales of marketable debt and equity securities 6,533,670 13,517,619 (113,820,158)
Purchase of businesses, net of cash acquired (note 2) (12,073,362) (17,818,476) (7,510,093)
------------ ------------ ------------
Net cash used in investing activities (15,348,770) (12,276,369) (127,352,695)
------------ ------------ ------------
Cash flows from financing activities:
Payments on notes and line of credit (1,976,400) (407,864) (383,026)
Stock options exercised 398,718 2,887,111 1,464,627
Proceeds from sale of common stock, net (note 11) -- -- 112,194,715
Purchase of treasury stock -- (1,291,655) --
Dividends to stockholders (note 12) -- -- (2,747)
------------ ------------ ------------
Net cash provided by (used in)
financing activities (1,577,682) 1,187,592 113,273,569
------------ ------------ ------------
Effect of exchange rates 687,667 -- --
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 816,882 5,569,340 (7,302,374)
Cash and cash equivalents at beginning of year 11,748,542 6,179,202 13,481,576
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,565,424 11,748,542 6,179,202
============ ============ ============
See accompanying notes to consolidated financial statements.
5
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(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 subsytems 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 $9,608,324 and $11,668,663 at June 30, 2002 and
2001, 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 Securities
The Company classifies its securities as either available for sale
or held to maturity, as the Company does not hold any securities
considered to be trading. Held to maturity securities are those debt
securities for which the Company has the positive intent and the
ability to hold until maturity. All other securities not included in
held to maturity are classified as available for sale.
Held to maturity securities are recorded at amortized cost.
Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax affect, on
available for sale securities are excluded from earnings and are
reported as accumulated other comprehensive income or loss until
realized.
A decline in the fair value of any available for sale or held to
maturity security, that is deemed other than temporary, is charged
to earnings resulting in the establishment of a new cost basis for
the security, and dividend and interest income are recognized when
earned.
(Continued)
6
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(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
Prior to the adoption of SFAS 142, as discussed in note 3,
long-lived assets, such as property, plant, and equipment, goodwill
and other intangibles were evaluated for impairment when events or
changes in circumstances indicated that the carrying amount of the
assets may not be recoverable through the estimated undiscounted
future cash flows from the use of these assets. When such impairment
existed, the related assets were written down to their fair value.
Upon adoption of SFAS 142, effective July 1, 2001, goodwill is
tested annually for impairment at the reporting unit level, by
comparing the fair value of the reporting unit with its carrying
value. Valuation methods for determining the fair value of the
reporting unit include reviewing quoted market prices and discounted
cash flows. If the goodwill is indicated as being impaired, the fair
value of the reporting unit is then allocated to its assets and
liabilities in a manner similar to a purchase price allocation in
order to determine the implied fair value of the reporting unit
goodwill. This implied fair value of the reporting unit goodwill is
then compared with the carrying amount of the reporting unit
goodwill, and if it is less, the Company would then recognize an
impairment loss. No impairment losses were recorded through June 30,
2002.
(i) Patent
During fiscal 1999, the Company purchased a patent for $325,000 and
150,000 stock options which were subsequently exercised in fiscal
2000. 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.
(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 13 and 14. The weighted average number of
common shares utilized in the calculation of the diluted income per
share does not include antidilutive shares aggregating 1,126,550 and
886,976 at June 30, 2002 and 2001, respectively. The treasury stock
method is used to calculate dilutive shares which reduces the gross
number of dilutive shares by the number of shares purchasable from
the proceeds of the options assumed to be exercised.
(Continued)
7
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The weighted average number of common shares outstanding for the
basic income per share calculation was 22,322,546, 22,133,585, and
17,977,782 for 2002, 2001, and 2000, respectively. For diluted
earnings per share purposes, these balances increased by 767,000,
1,321,659, and 1,321,678 shares for 2002, 2001, and 2000,
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, 2002 and 2001. The
Company's available for sale equity securities are stated at their
fair value, as determined by quoted market prices an June 30, 2002.
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 4.
(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 consolidated 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.
(Continued)
8
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(p) Recent Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 is required for adoption
for fiscal years beginning after June 15, 2002. The Company has
reviewed the provisions of SFAS 143, and believes that upon
adoption, the Statement will not have a significant effect on its
consolidated financial statements.
In August 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment of Disposal of Long-Lived Assets.
(SFAS 144). SFAS 144 addresses financial accounting and reporting
for the impairment of long-lived assets and for long-lived assets to
be disposed of. SFAS 144 is required for adoption for fiscal years
beginning after December 15, 2001 and interim periods within those
fiscal years. The Company has reviewed the provisions of SFAS 144,
and believes that upon adoption, the Statement will not have a
significant effect on its consolidated financial statements.
In April 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). SFAS 145 is
required for adoption for fiscal years beginning after May 15, 2002,
with early adoption of the provisions related to the rescission of
Statement 4 encouraged. The Company has reviewed the provisions of
SFAS 145, and believes that upon adoption, the Statements will not
have a significant effect on its consolidated financial statements.
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, Accounting for
Restructuring Costs (SFAS 146). SFAS 146 applies to costs associated
with an exit activity (including restructuring) or with a disposal
of long-lived assets. Those activities can include eliminating or
reducing product lines, terminating employees and contracts, and
relocating plant facilities or personnel. Under SFAS 146, a company
will record a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be
measured at fair value. SFAS 146 will require a company to disclose
information about its exit and disposal activities, the related
costs, and changes in those costs in the notes to the interim and
annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the
activity is completed. SFAS 146 is effective prospectively for exit
or disposal activities initiated after December 31, 2002, with
earlier adoption encouraged. Under SFAS 146, a company may not
restate its previously issued financial statements and the new
Statement grandfathers the accounting for liabilities that a company
had previously recorded under EITF Issue 94-3.
(q) Reclassifications
Certain 2001 amounts have been reclassified to conform with the 2002
presentation.
(Continued)
9
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(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 in 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
===========
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 13), 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 nonexistence of any identifiable intangible assets. The
excess consideration over such fair values is recorded as goodwill and was
assigned to the Company's Wireless segment. 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
============
On August 31, 2001 the Company acquired all of the outstanding stock of
Amitron, Inc. Amitron is based in North Andover, Massachusetts, and is
primarily engaged in the manufacture of precision thick film ceramic
components and circuits for the medical, telecommunications, and defense
electronics markets. Amitron's technology is very complimentary to the
Company's multi-layer stripline technology. Whereas the Company's
multi-layer stripline technology is well suited for large scale and high
power applications, Amitron's technology is well suited for
miniaturization and low power applications. The Company believes the
Amitron's technology will enable it to significantly increase its current
addressable markets. The transaction was accounted for using the purchase
method of accounting for business combinations and, accordingly, the
results of operations of Amitron have been included in the Company's
consolidated financial statements since the date of acquisition.
(Continued)
10
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The aggregate purchase consideration for Amitron was $11,693,256,
consisting of cash of $9,919,664 (including cash direct acquisition
costs), noncash direct acquisition costs in the form of stock options for
services of $18,183 and 95,704 shares of the Company's common stock with
an aggregate value of $1,755,409. The purchase price was allocated to the
net assets acquired and liabilities assumed based upon respective fair
market values. The fair market values of plant and equipment and
identifiable intangible assets were determined by an independent
valuation. The indentifiable intangible assets aggregating $2,450,000 with
a weighted average useful life of approximately seven years include
customer base of $1,350,000 (six-year weighted average useful life),
favorable lease of $600,000 (ten-year weighted average useful life), trade
name of $320,000 (three-year weighted average useful life), and
noncompetition agreements of $180,000 (five-year weighted average useful
life). The excess consideration over such fair values is recorded as
goodwill and was assigned to the Company's Wireless segment.
The allocation of the purchase consideration to the assets acquired and
liabilities assumed follows:
Cash $ 12,844
Accounts receivable 1,309,618
Other receivables 2,258
Inventories 1,081,360
Plant and equipment 1,822,230
Other assets 36,818
Accounts payable (228,751)
Accrued expenses (430,448)
Loans payable (716,154)
Net deferred tax liability (951,846)
Intangible assets 2,450,000
Goodwill 7,305,327
------------
$ 11,693,256
============
On October 1, 2001, the Company, through its wholly owned subsidiary
Anaren Microwave Europe B.V., acquired all of the outstanding stock of The
5M Company Europe B.V. (now named Anaren Europe, B.V.). Anaren Europe,
based in Almelo, Netherlands is a manufacturer of microwave circuits.
Anaren Europe's manufacturing technology is very similar to the Company's
multi-layer stripline technology. In addition, Anaren Europe has a unique
metal backing technology that offers performance and cost advantages for
high power applications. The Company believes that this acquisition will
enable it to reduce its manufacturing costs in Europe, increase its dollar
content in high power applications and provide customers with a higher
level of vendor security with a second manufacturing facility. Anaren
Europe has recently completed the rebuilding of its factory due to a fire
that occurred in July 2001. The transaction was accounted for using the
purchase method of accounting for business combinations and, accordingly,
the results of operations of Anaren Europe have been included in the
Company's consolidated financial statements since the date of acquisition.
The purchase consideration for Anaren Europe was $3,869,823 in cash,
including direct acquisition costs, and Company stock options with an
aggregate fair value of $218,724. The fair values of Anaren Europe's
assets acquired and liabilities assumed exceeded the purchase
consideration and the negative goodwill served to reduce the fair value of
purchased equipment to zero with the remaining excess recognized as an
extraordinary gain.
(Continued)
11
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The allocation of the purchase consideration to the assets acquired,
liabilities assumed, and extraordinary gain follows:
Cash $ 1,703,281
Accounts receivable 899,776
Insurance receivable 10,749,113
Other receivables 385,745
Inventories 630,260
Accounts payable (1,768,882)
Accrued expenses (1,656,014)
Notes payable (856,978)
Long term debt (403,268)
Net deferred tax liability (2,187,242)
Extraordinary gain (3,407,244)
------------
$ 4,088,547
============
The Anaren Europe fire loss in July 2001 was subject to property, casualty
and business interruption insurance. As of December 31, 2001, the Company
settled the insurance claim and an insurance receivable aggregating
$10,749,113 is reflected in the allocation of the Anaren Europe purchase
price as of October 1, 2001. During the year ended June 30, 2002, Anaren
Europe recognized incremental outsourcing costs aggregating $555,120 in
cost of sales, and fire related cleaning and remediation expenses of
$711,400 in operating expenses.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, RF Power, Ocean, Amitron
and Anaren Europe as if the acquisitions took place as of July 1, 1999.
The pro forma information includes certain adjustments, including the
amortization of goodwill and intangibles, reduction of interest income,
and certain other adjustments, together with the related income tax
effects. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had the Company, RF
Power, Ocean, Amitron and Anaren Europe constituted a single entity during
such periods.
Years ended
----------------------------------------------
June 30, 2002 June 30, 2001 June 30, 2000
------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Net sales $75,900,631 106,745,701 95,124,100
Insurance recoveries 15,999,972 -- --
Net income 12,874,677 11,948,196 8,629,746
Earnings per share:
Basic .57 .53 .47
Diluted .55 .50 .44
For purposes of the pro forma financial information, the July 2001 Anaren
Europe fire loss insurance recoveries have been reflected in operations
versus the recognition as a pre-acquisition contingency in the purchase
price allocation as previously discussed. The pro forma information
reflects insurance recoveries of $15,999,972 for the year ended June 30,
2002.
(Continued)
12
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The pro forma information reflects no goodwill amortization for the year
ended June 30, 2002 due to the adoption of SFAS 142, Goodwill and
Intangible Assets, by the Company. The pro forma information does reflect
goodwill amortization aggregating $1,649,245 and $1,675,823 for the years
ended June 30, 2001 and 2000, respectively, related to acquisitions which
occurred prior to the adoption of SFAS 142.
(3) Adoption of Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business
Combinations" which supersedes APB Opinion No. 16, "Business
Combinations". SFAS No. 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 No. 141 are effective for transactions
accounted for using the purchase method that are completed after June 30,
2001. The Company adopted SFAS No 141 during the first quarter of fiscal
2002 (effective July 1, 2001). Adoption of the Statement did not have an
impact on the Company, as the Company has not historically had
pooling-of-interest transactions and business combinations subsequent to
June 30, 2001 (note 2) were accounted for under the purchase method.
During the first quarter of fiscal 2002 (effective July 1, 2001), the
Company adopted Statement of Financial Accounting Standards No. 142 (SFAS
142), "Goodwill and Intangible Assets", which supercedes APB Opinion No.
17, "Intangible Assets". SFAS No. 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 of goodwill and intangible assets. The
following information describes the impact that the adoption of SFAS No.
142 had on the Company for the fiscal years ended June 30:
Intangible Assets:
Intangible assets as of June 30, 2002 are as follows:
Gross Carrying Accumulated
Amount Amortization
-------------- -------------
Patent $ 574,966 $215,613
Customer Base 1,350,000 187,500
Trade Name 320,000 88,890
Non-Competition Agreements 180,000 30,000
Favorable Lease 600,000 50,000
---------- --------
Total $3,024,966 $572,003
========== ========
Intangible asset amortization expense for the years ended June 30, 2002,
2001, and 2000 aggregated $428,261, 71,871 and $71,871 respectively.
Amortization expense related to intangible assets for the next five years
is as follows:
Year Ending June 30,
2003 $499,539
2004 $499,539
2005 $410,645
2006 $392,871
2007 $362,879
Goodwill:
The changes in the carrying amount of goodwill for the years ended June 30
are as follows:
Fiscal Fiscal Fiscal
2002 2001 2000
------ ------ ------
Goodwill as of July 1 $23,410,534 $ 7,647,108 --
Goodwill acquired 7,305,327 17,316,468 7,820,904
Goodwill amortization -- (1,553,042) (173,796)
----------- ----------- -----------
Goodwill as of June 30 $30,715,861 $23,410,534 $ 164,108
=========== =========== ===========
In connection with the adoption of SFAS 142, the Company completed the
transitional impairment assessment within six months from the date of
adoption as allowed by the Standard. As a result of the impairment
assessment, no goodwill impairment was found and no current asset write
down is required.
The impact that the adoption of SFAS 142 had on net income and earnings
per share for the years ended June 30 are presented as follows:
2002 2001 2000
--------- ---------- ---------
Net income 7,439,110 12,213,968 9,640,799
Add back Goodwill amortization -- 1,553,042 173,796
--------- ---------- ---------
Adjusted net income 7,439,110 13,767,010 9,814,595
========= ========== =========
Basic earnings per share:
Net income $0.33 $0.55 $0.54
Goodwill amortization -- 0.07 0.01
----- ----- -----
Adjusted net income $0.33 $0.62 $0.55
===== ===== =====
Diluted earnings per share:
Net income $0.32 $0.52 $0.50
Goodwill amortization -- 0.07 0.01
----- ----- -----
Adjusted net income $0.32 $0.59 $0.51
===== ===== =====
(4) Securities
The amortized cost and fair value of securities are as follows:
June 30, 2002
----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ------------ ------------ ------------
Securities available for sale:
Common stock $ 5,230,416 -- (1,409,474) 3,820,942
------------ ------------ ------------ ------------
Total securities
available for
sale $ 5,230,416 -- (1,409,474) 3,820,942
============ ============ ============ ============
Securities held to maturity:
Municipal bonds $ 62,223,440 175,344 -- 62,398,784
Corporate bonds 20,800,237 18,566 -- 20,818,803
Zero coupon bonds 1,496,180 1,869 -- 1,498,049
Tax free auction securities 24,000,000 -- -- 24,000,000
------------ ------------ ------------ ------------
Total securities
held to maturity $108,519,857 195,779 -- 108,715,636
============ ============ ============ ============
(Continued)
13
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
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
============ ============ ============ ============
Marketable debt securities are classified as either current or long-term
assets in the accompanying consolidated balance sheets based upon their
maturity dates.
On July 11, 2002, the Company filed a Schedule 13D with the Securities and
Exchange Commission to disclose that it has, through open market
purchases, acquired an ownership position of approximately 6.35% of the
common stock of Celeritek, Inc. Anaren believes that a business
combination between Anaren and Celeritek would be in the best interest of
the respective shareholders, customers and employees of both companies and
intends to seek a negotiated acquisition of Celeritek or take other
actions to effect such a potential transaction, as more fully described in
Anaren's Schedule 13D filing.
(5) Inventories
Inventories at June 30 are summarized as follows:
2002 2001
----------- -----------
Component parts $ 9,086,987 9,995,712
Work-in-process 6,179,545 4,497,996
Finished goods 4,852,901 4,073,269
----------- -----------
$20,119,433 18,566,977
=========== ===========
(Continued)
14
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(6) Property, Plant, and Equipment
Components of property, plant, and equipment at June 30 consist of the
following:
2002 2001
----------- -----------
Land and land improvements $ 1,595,821 1,595,821
Buildings and improvements 12,022,768 9,095,944
Machinery and equipment 47,720,881 39,213,503
Construction in process 236,028 155,899
----------- -----------
61,575,498 50,061,167
Less accumulated depreciation and amortization 34,983,123 31,255,266
----------- -----------
$26,592,375 18,805,901
=========== ===========
(7) Accrued Expenses
Accrued expenses at June 30 consist of the following:
2002 2001
---------- ----------
Compensation $1,045,085 989,499
Commissions 573,325 790,609
Restructuring (note 8) -- 307,843
Accrued pension cost (note 17) 535,874 401,032
Other 612,066 477,275
---------- ----------
$2,766,350 2,966,258
========== ==========
(8) 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
Noncancelable lease obligation 216,116
Leasehold and equipment impairment 174,778
--------
$688,337
========
(Continued)
15
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Employee termination benefits related to the announced termination of
approximately 60 salaried and hourly employees. Such costs included
severance payments and costs associated with the accelerated vesting of
employee vacation benefits. The noncancelable lease obligation is
reflected based upon estimated discounted noncancelable cash outlays,
including estimated broker commissions to sublease. Leasehold and
equipment impairment charges related to abandoned assets were reflected as
a reduction of the related assets.
As of June 30, 2001, cash payments of $205,716 were made relating to the
employee termination benefits, leaving a restructuring accrual of $307,843
at June 30, 2001 (note 7).
As of June 30, 2002, the restructuring accrual was $0 as the remaining
restructuring cash outlays were made during the current year.
(9) Other Liabilities
Other liabilities as of June 30 consist of the following:
2002 2001
-------- --------
Deferred compensation 526,808 551,380
Other 120,725 --
-------- --------
647,533 551,380
Less current portion 185,725 65,000
-------- --------
$461,808 486,380
======== ========
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. During fiscal 2002, the employee was
deceased and the annual compensation is being paid to the former
employee's beneficiary.
(10) Long-term Debt
The Company has a $10,000,000 unsecured working capital revolving line of
credit bearing interest at prime (4.75% at June 30, 2002) through December
31, 2006. 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 2002 and 2001.
Cash payments for annual fees relating to maintaining the line of credit
were $37,500, $37,500, and $38,779 during fiscal 2002, 2001, and 2000,
respectively.
(11) 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.
(Continued)
16
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
On December 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.
(12) 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.
(13) 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.
In connection with the acquisition of Ocean as discussed in note 2, the
Company issued 5,000 NSO's to a nonemployee 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.
(Continued)
17
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Information for the three years ended June 30, 2002 with respect to these
plans are as follows:
Shares
------------------------------------------------------------------ Weighted
ISO average
----------------------------- exercise
Key Employee Company-Wide NSO Other Total Option price price
------------ ------------ ------- ------- --------- -------------- -----------
Outstanding at
June 30, 1999 1,532,100 -- 132,000 150,000 1,814,100 $0.46 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) 0.46 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 0.46 to 54.00 8.13
Issued 625,500 45,900 80,000 -- 751,400 14.70 to 62.44 50.40
Exercised (331,900) -- (19,000) (150,000) (500,900) 0.46 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 43,000 208,000 -- 2,301,200 1.38 to 62.44 22.31
Issued 506,850 98,300 87,500 -- 692,650 12.63 to 19.21 16.43
Exercised (18,500) -- (26,000) -- (44,500) 1.38 to 12.42 8.96
Expired -- -- (13,000) -- (13,000) 19.21 to 53.00 45.20
Canceled (368,300) (9,400) (65,000) -- (442,700) 12.42 to 53.00 48.51
--------- ------- ------- ------- --------- -------------- -----
Outstanding at
June 30, 2002 2,170,250 131,900 191,500 -- 2,493,650 1.38 to 62.44
========= ======= ======= ======= ========= ==============
Shares exercisable
at June 30,
2002 841,180 -- 191,500 -- 1,032,680 1.38 to 62.44
Shares available
for grant at
June 30, 2002 1,251,250 868,100 238,000 -- 2,357,350
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 2002:
Options outstanding Options exercisable
- --------------------------------------------------------------- ---------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise prices Shares life in years exercise price Shares exercise price
- --------------- --------- ------------- -------------- ---------- --------------
$ 1.00 to 5.00 359,700 3.92 2.12 347,700 2.06
5.01 to 15.00 1,459,100 6.69 10.89 552,000 9.32
15.01 to 40.00 398,050 7.89 22.37 68,560 24.58
40.01 to 65.00 276,800 7.50 53.14 64,420 53.19
--------- ---------
2,493,650 1,032,680
========= =========
(Continued)
18
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The per share weighted average fair value of stock options granted during
fiscal years 2002, 2001, and 2000 was $11.37, $32.74, and $28.73,
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:
2002 2001 2000
------ ------ ------
Expected option life - key employee plan 5 5 5
Expected option life - company-wide plan 3 -- --
Weighted average risk-free interest rate 4.00% 6.00% 6.00%
Weighted average expected volatility 92.00% 74.00% 69.00%
Expected dividend yield 0.00% 0.00% 0.00%
Stock-based compensation costs would have reduced pretax income by
$9,183,657, $7,830,825, and $3,034,635 in fiscal 2002, 2001, and 2000,
respectively ($8,837,767, $7,474,580, and $2,884,865 after tax and $0.40,
$0.33, and $0.16 per share in fiscal 2002, 2001, and 2000, 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 2002, 2001, and
2000 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.
(14) Restricted Stock Program
As of June 30, 2002 and 2001, the Company has issued shares aggregating
102,976 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, 2002
and 2001, the Company recognized compensation expense associated with the
lapse of restrictions aggregating $636,708 and $525,435, respectively.
(15) Accumulated Other Comprehensive Income (Loss)
The cumulative balance of each component of accumulated other
comprehensive income (loss) is as follows:
Unrealized
Foreign currency Minimum pension gain/(loss) on Accumulated other
translation liability securities comprehensive
adjustment adjustment available for sale income (loss)
---------------- --------------- ------------------- -----------------
Balances at June 30, 2001 $ -- -- -- --
Current period change 687,667 (106,254) (1,409,474) (828,061)
-------- -------- ---------- --------
Balances at June 30, 2002 $687,667 (106,254) (1,409,474) (828,061)
======== ======== ========== ========
(Continued)
19
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(16) 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% or more of the outstanding shares of common stock.
Rights held by persons who exceed the 20% 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 $0.001 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.
(17) Employee Benefit Plans
The Company has a noncontributory 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:
2002 2001 2000
----------- ----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,562,855 5,908,615 6,087,651
Service cost 213,839 204,440 198,174
Interest cost 469,017 437,762 403,830
Actuarial loss (gain) 281,005 237,835 (619,854)
Benefits paid (249,356) (225,797) (161,186)
----------- ----------- -----------
Benefit obligation at end $ 7,277,360 6,562,855 5,908,615
=========== =========== ===========
Change in plan assets:
Fair value of plan assets at beginning of
year $ 6,237,552 5,744,994 5,626,769
Actual return on plan assets (85,062) 718,355 241,093
Employer contributions 203,824 -- 38,318
Benefits paid (249,356) (225,797) (161,186)
----------- ----------- -----------
Fair value of plan assets at end of year $ 6,106,958 6,237,552 5,744,994
=========== =========== ===========
Funded status $(1,170,402) (325,303) (163,621)
Unrecognized net loss (gain) 743,618 (155,335) (155,534)
Unrecognized net obligation existing at initial
application 9,463 18,929 28,395
Unrecognized prior service cost 42,438 60,677 78,916
Adjustment required to recognize minimum
liability (160,991) -- --
----------- ----------- -----------
Accrued pension cost (note 7) $ (535,874) (401,032) (211,844)
=========== =========== ===========
(Continued)
20
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
Components of net periodic pension cost for the years ended June 30 are as
follows:
2002 2001 2000
--------- --------- ---------
Service cost $ 213,839 204,440 198,174
Interest cost 469,017 437,762 403,830
Actual return on plan assets 85,062 (718,355) (241,093)
Amortization of prior service cost 18,239 18,239 18,239
Deferral of gain (loss) (617,948) 237,636 (230,093)
Amortization of net obligation at transition 9,466 9,466 9,466
--------- --------- ---------
Net periodic pension cost $ 177,675 189,188 158,523
========= ========= =========
Weighted average assumptions:
Discount rate at year-end 7.00% 7.25% 7.50%
Rate of increase in compensation levels at
year end 4.00% 4.00% 4.00%
Expected return on plan assets during the
year 8.50% 8.50% 8.50%
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 2002, 2001, and 2000, the Company contributed
$550,094, $491,550, $249,324, 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 $549,693, $300,390, and
$331,000 in fiscal 2002, 2001, and 2000, respectively. While the Company
intends to continue this plan, it reserves the right to terminate or amend
the Plan at any time.
(18) 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.
(Continued)
21
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The following table presents the changes in the postretirement benefit
obligation and the funded status of the Plan at June 30:
2002 2001 2000
----------- ----------- -----------
Benefit obligation at beginning of year $ 1,528,610 1,213,601 1,363,290
Service cost 46,969 43,040 28,845
Interest cost 111,832 105,780 87,539
Plan participants' contributions 39,816 39,274 32,601
Actuarial loss (gain) 143,554 248,491 (196,098)
Benefits paid (150,028) (121,576) (102,576)
----------- ----------- -----------
Benefit obligation at end of year $ 1,720,753 1,528,610 1,213,601
=========== =========== ===========
Fair value of plan assets $ -- -- --
=========== =========== ===========
Funded status (1,720,753) (1,528,610) (1,213,601)
Unrecognized actuarial loss (gain) 280,668 137,114 (111,377)
----------- ----------- -----------
Accrued postretirement benefit
cost $(1,440,085) (1,391,496) (1,324,978)
=========== =========== ===========
Net periodic postretirement benefit cost includes the following
components:
2002 2001 2000
-------- -------- --------
Service cost $ 46,969 43,040 28,845
Interest cost 111,832 105,780 87,539
-------- -------- --------
Net periodic postretirement
benefit cost $158,801 148,820 116,384
======== ======== ========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.00%, 7.25%, and 7.5%, at the end
of fiscal 2002, 2001, and 2000, 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 2002, 2001,
and 2000; 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 $ 3,154 (4,729)
Effect on postretirement
benefit obligation 43,501 (65,230)
(Continued)
22
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(19) Income Taxes
The following table presents the Domestic and Foreign components of income
(loss) before income taxes and extraordinary item and the expense
(benefit) for income taxes from continuing operations:
Years ended
June 30,
2002 2001 2000
----------- ------------ ------------
Income (loss) before income taxes
and extraordinary item:
Domestic $ 7,947,190 18,613,968 14,703,799
Foreign (4,320,324) -- --
----------- ------------ ------------
$ 3,626,866 18,613,968 14,703,799
=========== ============ ============
Income tax expense (benefit)
consists of:
Current:
Federal 1,407,316 6,151,164 5,053,669
State and local 74,230 595,861 130,231
Foreign -- -- --
----------- ------------ ------------
Total current $ 1,481,546 6,747,025 5,183,900
=========== ============ ============
Deferred:
Federal (306,857) (333,599) (180,715)
State and local 4,793 (13,426) 59,815
Foreign (1,584,482) -- --
----------- ------------ ------------
Total deferred $(1,886,546) (347,025) (120,900)
=========== ============ ============
Total income taxes $ (405,000) 6,400,000 5,063,000
=========== ============ ============
(Continued)
23
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
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 and extraordinary item, to income tax expense
(benefit), is as follows:
2002 2001 2000
----------- ----------- -----------
Expected consolidated income tax expense $ 1,233,134 6,328,749 4,999,292
State taxes, net of Federal benefit 52,156 384,407 125,430
Nontaxable interest income (867,624) (815,095) (265,708)
Nondeductible goodwill -- 177,276 59,092
Export tax benefits (238,000) -- --
Research credits (591,038) -- --
Other, net 6,372 324,663 144,894
----------- ----------- -----------
$ (405,000) 6,400,000 5,063,000
=========== =========== ===========
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities at June 30, 2002 and 2001 are
presented below:
2002 2001
----------- -----------
Deferred tax assets:
Inventories $ 1,082,273 619,956
Deferred compensation 246,063 230,377
Retirement benefits 86,086 74,939
Postretirement benefits 547,232 528,768
Restricted stock 506,323 264,375
Nondeductible reserves 176,700 261,865
Federal and state tax credit
carryforwards 710,734 605,664
Foreign and state net
operating loss carryforwards 2,439,857 79,580
Other 21,674 43,345
----------- -----------
Total deferred tax assets 5,816,942 2,708,869
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation (2,875,725) (1,488,762)
Intangible assets including goodwill (923,451) --
Reinvestment reserve (2,073,568) --
----------- -----------
Net deferred tax liabilities (5,872,744) (1,488,762)
----------- -----------
Net deferred taxes $ (55,802) 1,220,107
=========== ===========
Under the income tax law of the Netherlands, the gain related to the
insurance claim on the assets of Anaren Europe destroyed in the fire (as
discussed at Note 2) can be deferred until replacement assets are acquired
by Anaren Europe. At June 30, 2002, Anaren Europe has not replaced all of
the destroyed assets and has a "reinvestment reserve" deferred tax
liability related to the remaining deferred gain. At the time the
replacement assets are acquired, the deferred gain will reduce the income
tax basis in the replacement assets.
(Continued)
24
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
In addition to the net deferred taxes above, at June 30, 2002 the Company
has recorded a deferred tax asset of $54,737 relating to a minimum pension
liability and the associated tax benefit has been recorded in
stockholders' equity. At June 30, 2002, the Company has net unrealized
losses on securities available-for-sale of $1,409,474. If realized, these
losses would be characterized for income tax purposes as capital losses,
which may only be used to offset capital gains. As a result of this
limitation, management does not believe it is more likely than not the
Company will be able to utilize the capital losses and therefore no tax
benefit has been recorded in stockholders' equity.
2002 2001
----------- -----------
Presented as:
Current deferred tax asset $ 1,356,294 956,759
Long-term deferred tax
asset (liability) (1,357,359) 263,348
----------- -----------
$ (1,065) 1,220,107
=========== ===========
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, with the exception of
the deferred tax asset related to the net unrealized losses on securities
available for sale as discussed above, management believes it is more
likely than not the Company will realize the benefits of the remaining
deferred tax assets.
At June 30, 2002, the Company has Federal and State credit carryforwards
of $997,220, the majority of which expire at various dates from 2015
through 2022. At June 30, 2002, the Company has foreign net operating
losses of $6,944,946 which may be carried forward indefinitely. At June
30, 2002, the Company has a state net operating loss carryforward of
$699,376 which expires in 2007.
The tax benefit associated with the exercise of stock options and
disqualifying dispositions by employees reduced taxes payable by $460,672,
$5,375,231, and $2,513,788 in fiscal 2002, 2001, and 2000, respectively.
Such benefits are reflected as additional paid-in capital.
Cash payments for income taxes (net of refunds received) were $1,387,200,
$419,316, and $2,575,231 in fiscal 2002, 2001, and 2000, respectively.
(20) Segment and Related Information
Segments
The Company operates predominately in the wireless communications,
satellite communications and space and defense electronics markets. The
Company's two reportable segments are the wireless group and the space and
defense group. These segments have been determined based upon the nature
of the products and services offered, customer base, technology,
availability of discrete internal financial information, homogeneity of
products, and delivery channel, and are consistent with the way the
Company organizes and evaluates financial information internally for
purposes of making operating decisions and assessing performance.
(Continued)
25
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
The wireless segment designs, manufactures and markets commercial products
used mainly by the wireless communications market. The space and defense
segment of the business designs, manufactures and markets specialized
products for the radar and satellite communications markets. The revenue
disclosures for the Company's reportable segments depict products that are
similar in nature.
The following table reflects the operating results of the segments
consistent with the Company's internal financial reporting process. The
following results are used in part, by management, both in evaluating the
performance of, and in allocating resources to, each of the segments:
Space and Corporate and
Wireless defense unallocated Consolidated
----------- ---------- ------------- ------------
Net sales:
2002 $47,497,015 26,071,304 -- 73,568,319
2001 61,709,080 23,116,195 -- 84,825,275
2000 38,806,936 21,364,900 -- 60,171,836
Operating income (loss):
2002 (7,872,292) 7,716,043 -- (156,249)
2001 6,550,461 5,060,803 -- 11,611,264
2000 8,372,808 3,081,324 -- 11,454,132
Goodwill and intangible assets:
June 30, 2002 33,168,824 -- -- 33,168,824
June 30, 2001 23,858,758 -- -- 23,858,758
Identifiable assets:*
June 30, 2002 19,147,586 14,096,923 155,708,568 188,953,077
June 30, 2001 17,617,672 12,453,474 155,125,572 185,196,718
Depreciation:**
2002 2,662,683 1,182,151 -- 3,844,834
2001 1,629,113 1,146,481 -- 2,775,594
2000 944,061 824,173 -- 1,768,234
Goodwill and intangibles
amortization:***
2002 428,261 -- -- 428,261
2001 1,624,913 -- -- 1,624,913
2000 245,667 -- -- 245,667
(Continued)
26
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
* Segment assets primarily include receivables, inventories, and
property, plant, and equipment related to business acquisitions. The
Company does not segregate other assets on a products and services
basis for internal management reporting and, therefore, such
information is not presented. Assets included in corporate and
unallocated principally are cash and cash equivalents, marketable
debt securities, other receivables, prepaid expenses, deferred
income taxes, and property, plant and equipment not specific to
business acquisitions.
** Depreciation expense related to acquisition - specific property,
plant, and equipment is included in the segment classification of
the acquired business. Depreciation expense related to non business
combination assets is allocated departmentally based on an estimate
of capital equipment employed by each department. Depreciation
expense is then further allocated within the department as it
relates to the specific business segment impacted by the consumption
of the capital resources utilized. Due to the similarity of the
property, plant, and equipment utilized, the Company does not
specifically identify these assets by individual business segment
for internal reporting purposes.
*** Amortization of goodwill prior to the adoption of SFAS 142 and
identifiable intangible assets arising from business combinations,
and patent amortization, is allocated to the segments based on the
segment classification of the acquired or applicable operation.
Geographic Information
Net sales by geographic region are as follows:
Other foreign Consolidated
United States Canada countries net sales
------------- --------- ------------- ----------
2002 $51,922,978 1,752,361 19,892,980 73,568,319
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
Customers
In 2002, sales to one customer (approximately $11,791,000, related to the
space and defense electronics segment) exceeded 10% of consolidated net
sales. 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.
(Continued)
27
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(21) Commitments
The Company is obligated under operating leases for three buildings.
Future minimum payments under the noncancelable operating leases for the
next five years and thereafter are summarized as follows:
Year ending June 30:
2003 $ 994,409
2004 725,890
2005 615,265
2006 591,439
2007 429,886
Thereafter 2,666,202
----------
6,023,091
Less sublease income 399,930
----------
$5,623,161
==========
Rent expense for the years ended June 30, 2002, 2001, and 2000 was
$811,294, $616,422, and $427,890, respectively. Rent expense for fiscal
2002, 2001, and 2000 was offset by sublease income of $376,678, $367,566,
and $329,698, respectively.
(22) 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 15%, 9%, and 13% of consolidated net sales in fiscal
2002, 2001, and 2000, 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.
(Continued)
28
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 2001, and 2000
(23) Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial
information for the years ended June 30, 2002 and 2001:
2002 quarter ended
-------------------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
----------- ---------- ---------- ----------
Net sales $15,001,191 17,244,979 19,821,239 21,500,910
Cost of sales 9,870,138 12,777,227 13,450,520 15,271,712
Income (loss) before extraordinary item 1,374,484 (351,643) 996,328 2,012,696
Extraordinary item - gain on
acquisition -- 3,407,244 -- --
Net income 1,374,484 3,055,601 996,328 2,012,696
Net income (loss) per common and
common equivalent share:
Basic income (loss) per share:
Income (loss) before
extraordinary item 0.06 (0.02) 0.04 0.09
Extraordinary item - gain on
acquisition -- 0.15 -- --
Net income 0.06 0.13 0.04 0.09
Diluted income (loss) per share:
Income (loss) before
extraordinary item 0.06 (0.02) 0.04 0.09
Extraordinary item - gain on
acquisition -- 0.15 -- --
Net income 0.06 0.13 0.04 0.09
(Continued)
29
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002, 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 0.18 0.19 0.12 0.05
Diluted 0.17 0.18 0.12 0.05
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.
30