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, 1999
__ 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 13057
East Syracuse, New York (Zip Code)
(Address of principal
executive offices)
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 voting stock held by non-affiliates of
the Registrant at September 21, 1999 was approximately $144,750,000.
The number of shares of Registrant's Common Stock outstanding on September
21, 1999 was 5,545,092.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with its
1999 Annual Meeting of Shareholders are incorporated into Part III of this
Annual Report on Form 10-K.
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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 Form 10-K report 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 principal factors
that could cause actual results to differ materially are the following: general
market conditions, including demand for the Company's products, manufacturing
capacity and the ability to "ramp" to meet anticipated demand, fluctuations in
yield, availability of third-party supplier parts at reasonable prices,
availability of financial resources to fund anticipated growth, ability to
maintain sole supplier positions with certain defense sectors, successful
adaptation of existing Company technologies to produce new products that meet
specific customer requirements, price pressures, the level of worldwide spending
on military defense products, growth of wireless telephone and satellite
communications systems, acceptance of new products, customer order cancellations
or rescheduling and actual orders compared to annual blanket contracts from
wireless customers.
GENERAL
Anaren Microwave, Inc. ("Anaren" or "the Company") was incorporated in
New York in 1967 as Micronetics, Inc., a name that changed to Anaren Microwave,
Inc. during 1967. The Company's executive offices are located at 6635 Kirkville
Road, East Syracuse, New York 13057. The telephone number is (315) 432-8909.
Anaren designs, develops, manufactures and sells complex microwave
signal distribution networks and components for the wireless communications,
satellite communications and defense electronics markets. The Company utilizes
its advanced, proprietary "Multi-Layer Stripline" technology to deliver compact,
light-weight, cost effective and highly integrated microwave products into the
rapidly expanding markets for cellular/Personal Communications Systems ("PCS")
base stations, microcells and new generations of communications satellites.
Anaren's customer base includes leading global systems suppliers for these
markets, including Motorola, Inc. ("Motorola"), Nortel, Inc. ("Nortel"), Lucent
Technologies Inc. ("Lucent"), Ericsson, Inc. ("Ericsson"), Lockheed Martin
Corporation ("Lockheed Martin"), Loral Space & Communications Ltd. ("Loral Space
& Communications") and Hughes Space & Communications International, Inc.
("Hughes"). The Company is also a leading provider of electronic counter measure
subsystems which primarily protect fighter aircraft. The Company has leveraged
over 30 years of microwave expertise to rapidly develop and implement leading
commercial microwave products, with commercial sales growing from $982,000 in
fiscal 1995 to over $30 million, representing 66% of total Company net sales, in
fiscal 1999.
INDUSTRY BACKGROUND
Worldwide demand for telecommunications services has grown rapidly in
recent years, including basic telephony, mobile cellular communications, video
broadcast, high speed data transmission and paging. Mobile communications serve
basic needs for convenience and flexibility and have grown at rates higher than
the overall market for telecommunications services. The trend has led to
increased growth in the number of subscribers for existing and emerging wireless
applications that are served by terrestrial and satellite based networks. This
demand has resulted in an increased need for cost effective and reliable
telecommunications equipment among service providers.
Telecommunications networks require interconnections and transmission
systems to link geographically dispersed nodes and to provide access to
customers and end users. Available transmission technologies include
twisted-pair copper, coaxial cable, fiber optic cable, microwave radio
technology and satellite broadcast technology. Wireless solutions, terrestrial
and satellite, offer advantages over wireline, including typically lower cost of
implementation and relatively rapid infrastructure deployment. Wireless
solutions are especially superior where geographically dispersed customers or
operations, difficult terrain and environmental constraints render the
installation of copper, coaxial cable on fiber optic cable impractical or
prohibitively expensive.
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Wireless Communications
The demand for cellular, PCS and wireless local loop ("WLL")
(collectively, "wireless") communications services has grown significantly
during the past decade, fueled by decreasing prices for wireless handsets, a
more favorable regulatory environment, increasing competition among service
providers and a greater availability of services and microwave spectrum. In
addition, many developing countries are installing wireless telephone networks
as an alternative to installing, expanding or upgrading traditional wireline
networks. Emerging bi-directional wireless data transmission applications have
the potential to further expand the market for wireless communications by
allowing service providers to increase revenue-generating traffic on their
networks. The growth in wireless communications has required, and will continue
to require, substantial investment by service providers in infrastructure
equipment.
A typical wireless communications system comprises a geographic region
containing a number of cells, each of which contains a cell site (or base
station), which are networked 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 wireline 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 receive and transmit
signals to and from the wireless telephone user.
Traditional cellular systems, which are based on analog technology, are
capable of carrying only one call per channel of spectrum. The continuing growth
for the wireless communications market has resulted in the crowding of
transmissions within the available spectrum. Because the radio frequencies
assigned to transmissions are fixed, service providers are now seeking new
methods to more efficiently use the spectrum to increase capacity. Analog
systems are being supplanted by digital systems, which convert voice
transmissions into bits of electronic information, allowing more calls per
carrier frequency, improved quality and improved security, thereby significantly
increasing the performance of a given wireless network. In addition to digital
cellular networks, which operate within the 800 MHz and 900 MHz bandwidths,
service providers have also begun to construct PCS networks operating within the
1800 MHz and 2000 MHz bandwidths. PCS networks generally require two to three
times as many base stations as cellular networks. As a consequence of these
factors, wireless service providers must anticipate evolving industry standards,
and must invest in infrastructure equipment that both maximizes efficiency in
the management of the limited spectrum licensed to them, and is available in
volume for rapid deployment. There is also strong demand for wireless
infrastructure manufacturers to provide improved performance in smaller, more
cost effective cells and microcells which operate at higher frequencies.
Space and Defense
Satellites provide a number of advantages over terrestrial facilities
for many high-speed communications service applications. First, satellites
enable high-speed communications service where there is no suitable terrestrial
alternative available, or where the terrestrial alternative is inadequate.
Second, unlike the cost of terrestrial networks, the cost to provide services
via satellite does not increase with the distance between sending and receiving
stations. Finally, in contrast to the installation of fiber optic cable,
satellite networks can be rapidly and cost-effectively deployed.
Demand for commercial satellites is determined by several factors
including: growth in demand for new satellite-based applications such as mobile
telephone services, business networking, direct-to-home television and related
voice, video and data systems; development of new satellite-based communications
architectures to provide basic telephone and television services in developing
regions of the world; and replenishment of orbiting satellite constellations
nearing the end of their useful lives. During the next decade continuing launch
activity for commercial satellites is expected. There are at least five
large-scale telecommunications projects (Iridium, Global Star, ICO, Spaceway and
Teledesic) in various stages of development and implementation that are
contributing to the demand for commercial satellites. Launch cost and capacity,
which are directly related to satellite size and weight, are significant factors
in the viability of these proposed systems. As a result, current commercial
satellite designs are being driven to incorporate lighter weight, smaller and
more highly integrated subsystems and components.
Due to the narrowband frequency (10 MHz) allocated for commercial
satellites, system planners have moved from the traditional approach of
broadcasting signals over a large area of the Earth, to receiving and
transmitting via many small beams that cover much smaller areas of the Earth
(multi-beam transmission). The advantage of multi-beam transmission and
reception is that the same frequency can be used by different callers in
different beams (frequency re-use), allowing for significantly higher caller
capacity with the same amount of frequency allocation and increased system
sensitivity to allow for the use of lower-powered handsets. Caller capacity and
system sensitivity increase approximately in proportion to the number of beams
per satellite.
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In addition, new multi-satellite systems are being developed in order
to provide the same global coverage for wideband (500 MHz) services such as
video-conferencing, data transmission, Internet access, and other multi-media
applications. These applications require significantly more bandwidth than
current voice communications systems because the information content in the
transmitted signal is much greater for these new applications. To implement
these systems, much wider frequency band allocations are required than have been
granted for existing voice communications systems. Such large bandwidth
allocations are not available at the operating frequencies of current
communications systems and regulatory authorities, therefore, have provided
wideband frequency allocations at 20-30 GHz, where a more limited base of
technology is available to implement the proposed systems. These proposed
systems are significantly more complex than current systems in that system
operators desire substantially more beams and increased flexibility. With
real-time adjustment of the size and location of the Earth being covered by a
particular beam and by incorporating signal switching networks into the
satellite payload, substantial improvements in system performance and
utilization rates can be achieved, thereby substantially increasing the revenue
generating ability of a satellite system. Increasingly, satellite system
developers are incorporating what has traditionally been ground-based
infrastructure into the satellite payload to improve system performance.
THE ANAREN SOLUTION
Anaren has developed a system of proprietary processes, called
"Multi-Layer Stripline" ("MLS") technology, which enable the Company to deliver
compact, lightweight, cost effective and highly integrated complex microwave
signal distribution and interconnection networks for wireless and satellite
communication systems. The MLS process integrates multiple layers of microwave
circuitry, allowing the elimination of discrete components and discrete
microwave cables, dramatically reducing size, cost and weight while improving
performance. The MLS technology is used in combination with the Company's
extensive proprietary design libraries and turnkey design, development and
manufacturing capabilities which are required to provide custom solutions for
major Original Equipment Manufacturer ("OEM") customers. The technology has been
implemented into products utilizing passive components, including beamforming
networks and signal distribution networks, and is currently being utilized by
the Company to incorporate active devices, including switches, phase shifters
and amplifiers.
TECHNOLOGY
Traditional stripline technology, which the Company has historically
utilized in its Defense products, consists of circuit runs etched on dielectric
sheets that are 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 digital Printed Circuit Board "(PCB")
manufacturing, but with superior microwave characteristics. Like PCB
manufacturing, layers can be interconnected via plated-though holes. The
Company's proprietary techniques, however, enable it to implement multi-layer
transitions that perform optimally at microwave frequencies. Unlike PCB
manufacturing, simply connecting the appropriate points on the multi-layer board
does not ensure adequate performance. In order to achieve optimal microwave
performance consistently, material and process variations must be tightly
controlled and the circuit design must take into consideration all variation 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.
The Company's microwave antenna beamforming technology, developed in
the defense industry, coupled with its MLS manufacturing process, produces
lightweight, cost-effective L band beamforming networks for Motorola's Iridium
Program. These passive networks provide multibeam coverage where the size and
direction of beams is fixed. Additionally, the Company is utilizing its MLS
technology and microwave design experience to develop cost effective solutions
for high data rate transmission applications, such as Internet access and
multi-media communications. In conjunction with Raytheon Company ("Raytheon")
the Company is developing a next generation of its MLS technology to address
applications at 20-30 GHz. In addition, the Company has developed high density
microwave switch matrices by incorporating active microwave switches into its
passive MLS technology, and is currently qualifying a production subsystem for a
commercial communications satellite program. These switch matrices are a key
element in providing the flexibility that system designers desire. In addition,
the Company is developing active beamforming networks, in which the size and
direction of the beams being produced can be remotely
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manipulated in real-time. Through these advancements, system operators can
direct capacity in response to changes in demand, and more efficiently utilize
their space infrastructure assets.
STRATEGY
The Company's strategy is to attempt to continue to leverage its
proprietary Multi-Layer Stripline technology, extensive proprietary microwave
design libraries, and turnkey design, development and manufacturing capabilities
to further expand its penetration in the wireless communications and satellite
communications markets. Key components of the Company's strategy include the
following:
Increase Levels of Component Integration and Value Added Content. The
Company plans to increase the value of its content in wireless and satellite
communications systems. Through its MLS manufacturing technology, the Company is
able to integrate multiple discrete functions into a single assembly.
Integration of active technologies, such as switching and amplification, into
its MLS assemblies would significantly broaden the array of functions that can
be integrated by the Company on satellite and terrestrial wireless communication
systems.
Further Expansion into Commercial Markets. The Company has over 30
years experience in microwave technology used in designing and manufacturing
complex microwave subsystems for the defense market. During the past five years,
the Company has successfully expanded into the commercial satellite and wireless
communications markets as demonstrated by its revenue growth from commercial
applications to 66% of net sales in fiscal 1999 from 5% in fiscal 1995.
Maintain Leadership in Microwave Technology. The Company intends to
pursue further technological advances through continued investment in research
and development. The Company will seek to advance its leadership in microwave
technology by continuing its participation in selected defense and satellite
programs that involve highly sophisticated, state-of-the-art microwave
technology. The Company will attempt to continue to leverage these technological
advancements into its terrestrial wireless products, as well as other commercial
applications.
Strengthen and Expand Customer Relationships. The commercial wireless
and satellite communications markets are driven by a limited number of large
systems manufacturers. The Company has developed customer relationships with
many of these manufacturers, including Motorola, Lucent, Ericsson and Northern
Telecom, Ltd. ("Nortel") for wireless communications and Lockheed Martin,
Hughes, Loral Space & Communications and TRW, Inc. ("TRW") for satellite
communications. The Company intends to continue to build strong technical and
business relationships with major customers that are global industry leaders in
order to provide opportunities for recurring high volume supply contracts.
Enhance Capabilities as Turnkey Supplier. The Company has in place
extensive design libraries, automated manufacturing equipment and statistical
process controls which have enabled it to competitively manufacture high volume
MLS assemblies. The Company intends to continue to expand, improve and automate
its design, manufacturing and test capabilities to provide innovative, cost
effective solutions. The Company believes that these investments are necessary
to maintain and enhance its position as a turnkey supplier to industry-leading
OEMs.
INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company operates in two industry segments: The design and
manufacture of high volume custom and off-the-shelf surface mount components for
use in wireless basestation infrastructure construction ("Wireless"); and the
design and manufacture of complex custom signal processing devices for the
satellite communications and defense electronics counter-measure subsystems for
military aircraft ("Space and Defense"). The Company is managed on the basis of
these two industry segments and sells its product worldwide through a network of
sales representatives, distributors and an internal sales force, all of which
service both segments. The Company has one manufacturing plant, in East
Syracuse, New York, where all its products are produced.
Information required by Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information, is
provided for each of the operating segments as determined by the "management
approach" for each of the last three years in Note 12 of Notes to the
Consolidated Financial Statements included in "Item 8 - Financial Statements and
Supplementary Data."
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PRODUCTS
Wireless Communications
The Company provides custom microwave signal distribution networks to
leading wireless infrastructure equipment manufacturers. Traditionally, all of
the signal distribution (combining and splitting) within a base station has been
accomplished with discrete signal splitting/combining components with discrete
microwave cables providing the necessary interconnectivity. Through the use of
its MLS technology, the Company provides highly integrated microwave signal
distribution networks that eliminate the need for discrete componentry 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. Much like the mother board in a personal computer efficiently
provides interconnectivity of digital signals between multiple subsystems, the
Company's microwave signal distribution networks provide efficient
interconnectivity of microwave signals between subsystems in wireless base
stations.
In addition to providing custom integrated system level signal
distribution solutions to wireless OEMs, the Company has developed and markets a
line of standard surface mount microwave signal splitting and combining
components, trade named Xinger(R), that are used in terrestrial wireless
communications base station amplifiers. The Company originally developed these
products in response to customers' needs for economical, high power signal
splitting and combining components that could be utilized in an automated
production environment. The Company is currently the market leader in this
product area, supplying industry leading OEMs such as Ericsson, Motorola, Nortel
and Lucent, as well as leading power amplifier manufacturers such as Powerwave
Technologies, Inc. and Spectrian Corporation.
Space and Defense
The Company is a supplier of passive (fixed) beamforming networks for
communications satellite multi-beam antennas. These products are custom designed
for a particular satellite program, and determine the number, size and quality
of beams that are produced from a single antenna array. Multi-beam satellite
antennas, which can have more than 100 independently modulated beams, require
very complex microwave signal distribution matrices, which would be too bulky,
heavy and unreliable for use in satellites if they used conventional microwave
interconnection techniques. These networks are utilized by leading
communications satellite manufacturers to achieve the desired ground coverage
and to provide the desired capacity allocation. Through the forming of multiple
beams, service providers are able to allocate a satellite's capacity based on
projected demand, and to increase the number of callers that can be serviced
simultaneously. In addition, the Company has recently developed the capability
to produce high-density microwave switch matrices which allow the dynamic
allocation of satellite capacity, thereby increasing utilization and revenue
generation.
The Company is a leading supplier of certain subsystem products to the
defense electronics market, including Digital Frequency Discriminators ("DFDs")
and Digital RF Memories ("DRFMs"). These products are vertically integrated
within the Company utilizing advanced stripline, Application Specific Integrated
Circuits ("ASIC"), digital and signal processing technologies. DFD products
rapidly measure the frequency and other characteristics of radar signals. This
information is then used in electronic warfare systems to identify, classify
and/or counter radar systems. DRFM products digitize and store radar signals,
and can reproduce them in real time in counter advanced radar systems. DRFM
products are currently the only technology available that can replicate radar
signals with sufficient fidelity to counter today's advanced radar systems.
The Company also produces a wide range of standard component products
for defense applications. These products include mixers, couplers, power
dividers, pin attenuators and correlators that are utilized in a variety of
electronic warfare applications to perform various RF microwave functions
including signal distribution, measurement and frequency conversion.
CUSTOMERS
During the fiscal year ended June 30, 1999, approximately 13% of the
Company's sales were attributable to contracts with prime contractors to
numerous offices and agencies of the United States government. The Company had
two customers who received shipments in excess of 10% of consolidated net sales.
Approximately 18% resulted from shipments to Motorola, Inc. under several
contracts in the
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Wireless group and approximately 12% resulted from shipments to ITT Aerospace
under one contract in the Space and Defense group. No one other contract and no
other customer accounted for more than 10% of consolidated net sales.
During fiscal year 1999, sales to foreign customers, most of which were
prime contractors to foreign governments, accounted for approximately 20% of the
Company's consolidated net sales and included shipments to twenty-seven
countries. All the Company's contracts with foreign customers are payable in
U.S. dollars. See note 12 of notes to the consolidated financial statements for
the sales to foreign customers for each of the last three fiscal years.
Wireless Communications. The Company sells its custom wireless products
to major wireless infrastructure OEMs including Motorola, Nortel, Lucent and
Ericsson. In addition, the Company sells its standard line of Xinger(R)
components to leading OEMs and a broad range of other wireless equipment
manufacturers.
Space and Defense. The Company currently sells satellite communications
subsystems to the world's leading satellite manufacturers, including Lockheed
Martin, Hughes, Loral Space & Communications and TRW. The Company's subsystems
are found on low Earth orbit satellite communications networks like Motorola's
Iridium program, as well as regional geostationary Earth orbit communications
satellites for Lockheed Martin. The Company is now actively involved in
developing products for a number of major, near-term commercial satellite
programs.
The Company currently sells its defense electronics products to the
United States and foreign governments through prime contractors such as
Raytheon, the Avionics division of ITT Defense and Electronics Company ("ITT
Avionics"), Lockheed Martin and Racal, Ltd. The Company's DRFMs are being
utilized in ITT Avionics' portion of the Sanders division of Lockheed Martin's
IDECM program, an RF countermeasures subsystem to be used on multiple platforms,
including Navy F/A-18s and Air Force B-1D Lancer Jet bombers. In addition, the
Defense Electronics group has teamed with Lockheed Martin in the development of
a passive emitter location subsystem. The Company has also teamed with a large
defense OEM on a new, custom ASIC converter chip for next-generation receivers.
SALES AND MARKETING
The Company markets its products worldwide to OEMs in commercial
markets and prime contractors in defense markets primarily through a sales force
of 18 people generally organized by geographic territory and market segment. In
addition, the Company has contracts with one major distributor and with 17
manufacturers' representatives in the United States and 24 international
representatives which are located in Western Europe, the Middle East and Asia.
As part of its marketing efforts, the Company advertises in major trade
publications and attends major industry shows in the commercial wireless
communications and defense markets.
After the Company has identified key potential customers in its market
segments, the Company makes sales calls with its own sales, management and
engineering personnel and its manufacturers' representatives. Many of the
companies entering the wireless communications markets possess expertise in
digital processing, but have relatively little experience in analog signal
processing and wireless transmission. In order to promote widespread acceptance
of its products and provide customers with support for their wireless
communications needs, the Company's sales and engineering teams work closely
with its customers to develop tailored solutions to their wireless requirements.
The Company believes that its customer engineering support provides it with a
key competitive advantage.
BACKLOG
The Company's total backlog of orders was $24.6 million and $27.6
million at June 30, 1999 and 1998, respectively. The Company's Wireless products
accounted for approximately 14% and 10% of backlog at June 30, 1999 and 1998,
respectively. Space and Defense products comprised approximately 90% and 86% of
backlog at June 30, 1999 and 1998, respectively.
All of the orders included in backlog are covered by signed contracts
or purchase orders. However, backlog is not necessarily indicative of future
sales, particularly with respect to the Company's Wireless group. Accordingly,
the Company does not believe that its backlog as of any particular date is
representative of actual sales for any succeeding period. As part of the
Company's close working relationships with its major wireless communications
customers, these customers expect the Company to
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respond quickly to changes in the volume and delivery schedule of their orders,
and if necessary, to inventory products at the Company's facilities 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 that scheduled shipment dates
of particular volumes are generally released to the Company only a few days or
weeks prior to the actual required delivery dates. In addition, the Company's
customers may cancel or defer orders without significant penalty.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on design,
development, engineering and implementation activities. These activities include
customer-funded design and development, as well as efforts funded directly by
the Company.
The Company's net sales for fiscal 1999 included approximately $1.4
million paid 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 typically is not
restricted in its use of technologies developed through customer funding.
Research and development costs are charged to expense as incurred. The
Company receives fees under a technology development contract and such fees are
recorded as a reduction of research and development costs as work is performed
pursuant to the related contract and as defined milestones are attained. In
fiscal 1999, 1998 and 1997 Company funded research and development expenses were
$2,835,000, $1,380,000 and $540,000, respectively, net of recognized product
development fees of $100,000, $335,000 and $339,000, respectively, under the
contract.
The Company's current development efforts include: (i) advanced MLS
manufacturing processes for use in low-cost, light-weight satellite and wireless
applications; (ii) advanced manufacturing technology to produce millimeter wave
stripline structures for communication satellite applications; (iii) products
for use in cellular, PCS and other terrestrial wireless base station equipment
for both mobile and fixed wireless applications; and (iv) technologies for
airborne receiver systems.
MANUFACTURING
The Company's manufacturing operations are vertically integrated from
the production of specialized hybrid circuits to the final assembly of complete
subsystems such as DRFMs and antenna beamforming networks. Most of the Company's
contracts for assemblies and subsystems have required engineering efforts to
modify existing Company products to meet a particular customer's technical
needs.
The Company manufactures its products from standard components, as well
as from items which are manufactured by vendors to the company's specifications.
A majority of the Company's commercial and defense electronics assemblies and
subsystem products contain proprietary MLS technology which is designed and
tested by the Company's engineers and technicians and is manufactured at the
Company's own facilities.
The Company continues to invest in the advancement of its proprietary
MLS manufacturing processes and in automation of the manufacturing processes of
its Wireless group. Automation is critical in meeting its customers' demands for
price improvement competitiveness, world class quality and on-time delivery. The
Company is also investing to enhance its responsiveness to increased production
demands from its wireless customers, as well as the need to accommodate
unpredictable surges in production rates that are common in this market.
The raw materials utilized in the Company's various product areas are
readily accessible and common to both business segments. The Company purchases
most of its raw materials from a variety of vendors and most of these raw
materials are available from a number of sources. The Company has two vendors
from which it makes approximately 14% and 11% of its total raw materials
purchases, respectively, but the Company believes that alternate sources of
supply are readily available for these and all other products purchases.
The Company utilizes skilled permanent and contract personnel in the
manufacture of its products. Quality assurance checks are performed on
manufacturing processes, purchased items, work-in-process and
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finished products. Due to the complexity of the Company's products, final tests
are performed on some products by highly skilled engineers and technicians.
COMPETITION
The microwave component and subsystems industry is highly competitive
and the Company competes against many companies, both foreign and domestic, many
of which are larger, have greater financial resources and are better known. As a
supplier to prime contractors and OEMs, the Company also experiences significant
competition from the in-house capabilities of its actual and prospective
customers in both of its market segments. Other competitors include
Electromagnetic Sciences, Inc. (Space) S.T. Microwave, Inc. (defense), the
M/A-Com division of AMP, Inc., Mini Circuits Inc. and Filtronic Comtek, Inc.
The principal competitive factors in both the domestic and foreign
markets are technical performance, reliability, ability to produce, on-time
delivery and price. Based on a combination of these factors, the Company
believes that it competes favorably in its markets. The Company's most important
competitive attributes are its emphasis on technical superiority and its ability
to produce in quantity to specific delivery schedules.
GOVERNMENT REGULATION
The Company's wireless communications products are incorporated into
wireless telecommunications systems that are subject to regulation domestically
by the FCC 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 its 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, among other things,
the storage, discharge, handling, omission, generation, manufacture and disposal
of 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 impact
on the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
While the Company holds several patents, the Company relies primarily
on a combination of trade secret, copyright and trademark laws and employee and
third-party nondisclosure agreements to protect its intellectual property, as
well as limiting access to and distribution of proprietary information. There
can be no assurance that the steps taken by the Company to protect its
intellectual property rights will be adequate to prevent misappropriation of the
Company's technology or to preclude competitors from independently developing
such technology. Furthermore, there can be no assurance that, in the future,
third parties will assert infringement claims against the Company or with
respect to its products for which the Company has indemnified certain of its
customers. Asserting the Company's rights or defending against third party
claims could involve substantial costs and diversion of resources, thus
materially and adversely affecting the Company's business, financial condition
and results of operations. In the event a third party were successful in a claim
that one of the Company's products infringed its proprietary rights, the Company
may have to pay substantial royalties or damages, remove that product from the
marketplace or expand substantial amounts in order to modify the product so that
it no longer infringes such proprietary rights, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of June 30, 1999, the Company employed 290 persons full time. Of
these employees, 83 comprise the engineering staff, 163 constitute manufacturing
personnel, 21 occupy sales and marketing positions, and 23 are in management and
support functions. In addition, the Company utilizes approximately 17 temporary
personnel in various positions throughout its organization.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the Company's executive officers, their ages and
their positions as of June 30, 1999. Each executive officer is elected for a
term of one year at the organizational meeting of the board of directors
following the annual shareholders meeting.
9
Name Age Position
Lawrence A. Sala 36 President, Chief Executive Officer,
Director
Hugh A. Hair 64 Chairman of the Board
Carl W. Gerst, Jr. 62 Vice Chairman, Chief
Technical Officer, Treasurer
Gert R. Thygesen 44 Vice President Operations
Joseph E. Porcello 47 Vice President Finance
Stanley S. Slingerland 52 Vice President Human Resources
ITEM 2. PROPERTIES
The Company's principal facility is a 105,000 square foot building
located on a thirty acre parcel owned by the Company in East Syracuse, New York.
The plant was constructed during fiscal 1981 and expanded during fiscal 1985.
This facility houses all of the Company's marketing, manufacturing,
administrative, research and development, systems design and engineering
experimentation activities. The Company believes that its existing facilities
are adequate to meet its current needs and that suitable additional or
alternative space will be available on commercially reasonable terms as needed.
The Company leases a 20,000 square foot facility in Frimley, England
which previously housed the administrative, marketing, and manufacturing
operations of Anaren Microwave, Ltd. prior to the Company's divestiture of its
electronic warfare simulator manufacturing operation in March 1996. Annual
rental cost of this facility is approximately $397,000 and the Company is
presently subletting the facility at the full lease rental value. The existing
lease term on this facility extends until 2014, however, and there can be no
assurance that the Company will be able to sublet the facility during the
remaining unexpired term of the lease to an extent that is sufficient to offset
its rental cost in whole or in part.
The foregoing facilities are regarded by management as adequate for the
current and anticipated short-term future requirements of the Company's
business.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company or
its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Annual
Report on Form 10-K there were no matters submitted to a vote of security
holders.
10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market
under the symbol "ANEN".
The following table sets forth the range of quarterly high and low
sales prices 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.
Fiscal 1998 Fiscal 1999
Quarter Quarter
1st 2nd 3rd 4th 1st 2nd 3rd 4th
High 28-1/4 35-3/4 25-3/4 23-3/4 15-3/8 21-1/2 28 26-3/8
Low 13 13-1/2 13-3/8 14-3/8 9-7/8 11 20-1/2 17-1/4
The Company has approximately 492 security holders of record at
September 21, 1999.
The Company has never paid a cash dividend on its common stock and
the Company's Board of Directors has not set a policy with regard to the payment
of dividends.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to the Company's statements of operations for each of the years in the three
year period ended June 30, 1999, and with respect to the balance sheets at June
30, 1998 and 1999, are derived from the consolidated financial statements that
have been audited by KPMG LLP, independent auditors which are included elsewhere
in this Form 10-K and are qualified by reference to such consolidated financial
statements. The statement of operations data for the years ended July 1, 1995
and June 30, 1996 and the balance sheet data at July 1, 1995, June 30, 1996 and
June 30, 1997 are derived from audited consolidated financial statements not
included in this 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.
Years Ended
------------------------------------------------------------
June 30, June 30, June 30, June 30, July 1,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data: (In thousands, except per share data)
Net sales ................................... $45,739 $37,449 $24,227 $17,082 $17,996
Cost of sales ............................... 27,711 23,571 16,243 11,147 13,081
Provision for losses on contracts ........... -- -- -- -- 300
------- ------- ------- ------- -------
Gross profit ................................ 18,028 13,878 7,984 5,935 4,615
------- ------- ------- ------- -------
Operating expenses:
Marketing .............................. 4,177 3,998 3,170 2,970 3,028
Research and development ............... 2,835 1,380 540 1,185 939
General and administrative ............. 3,220 2,873 2,239 2,075 2,041
Restructuring .......................... --- --- --- 810 360
------- ------- ------- ------- -------
Total operating expenses ........... 10,232 8,251 5,949 7,040 6,368
------- ------- ------- ------- -------
Operating income (loss) ..................... 7,796 5,627 2,035 (1,105) (1,753)
------- ------- ------- ------- -------
Other income (expense):
Interest expense ............................ (38) (82) (94) (123) (213)
Other, primarily interest income ........... 1,396 922 114 148 164
------- ------- ------- ------- -------
Total other income (expense) ....... 1,358 840 20 25 (49)
------- ------- ------- ------- -------
Income (loss) before income taxes ........... 9,154 6,467 2,055 (1,080) (1,802)
Income taxes ................................ 2,204 2,330 -- -- (330)
------- ------- ------- ------- -------
Net income (loss) ........................... $ 6,950 $ 4,137 $ 2,055 $(1,080) $(1,472)
======= ======= ======= ======= =======
Net income (loss) per common and
common equivalent share:
Basic .................................. $ 1.26 $ .83 $ .50 $ (.27) $ (.36)
======= ======= ======= ======= =======
Diluted ................................ $ 1.20 $ .79 $ .47 $ (.27) $ (.36)
======= ======= ======= ======= =======
Shares used in computing net income (loss)
per common and common equivalent share:
Basic .................................. 5,522 4,984 4,106 4,057 4,047
Diluted ................................ 5,770 5,237 4,332 4,057 4,047
June 30, June 30, June 30, June 30, July 1,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data: (In thousands)
Cash and cash equivalents ................... 13,482 $11,249 $ 3,807 $ 1,740 $ 2,140
Working capital ............................. 39,053 38,965 15,042 12,914 13,258
Total assets ................................ 58,467 50,903 25,973 21,794 23,365
Long-term debt, less current installments --- --- 453 680 1,052
Stockholders' equity ........................ 51,845 45,506 20,327 18,195 18,824
12
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 for the Company and the notes thereto
appearing elsewhere in this Form 10-K. The following discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including risk
factors described elsewhere in this Form 10-K.
Overview
Historically, the Company has principally engaged in designing and
manufacturing microwave components and subsystems for the defense industry. In
fiscal 1995, the Company expanded its capabilities in order to serve the
emerging commercial wireless and satellite communications markets.
Organizationally, the Company operates predominately in the Wireless
Communications, and Space and Defense markets. The Company's two reportable
segments have been determined based upon the nature of the products and services
offered, customer base, technology, availability of discrete internal financial
information, homogeneity of products, delivery channel, and other factors.
During the third quarter of fiscal 1999, the Company combined its
Satellite Communications and Defense Electronics business groups into one new
group called Space and Defense. These two groups were combined to more
efficiently utilize the engineering, manufacturing and marketing resources
allocated to the separate groups. Increased commonality in the types of products
and manufacturing processes required by the groups, coupled with a marked
increase in new orders and development activity in the satellite area were the
basis for the change. The new combined entity, the Space and Defense group, will
continue to focus on both the defense electronics and space communications
markets.
The Company recognized a tax benefit of $1,012,088 during the fourth
quarter of fiscal 1999 in connection with the dissolution of the Company's
European subsidiary. The disposition of the net assets of the subsidiary and a
corresponding restructuring charge were recognized for financial reporting
purposes in 1996. In the fourth quarter of fiscal 1999, all of the criteria
necessary to support a deduction for the tax investment in the subsidiary were
met and the tax benefit was recorded.
The Company recognizes sales at the time products are shipped to its
customers. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
The Company believes that it develops a significant amount of
intellectual capital through funded research and development. Customer-funded
design and development in fiscal 1999 represented approximately $1.4 million in
sales compared to $1.2 million in fiscal 1998 and $6.2 million in fiscal 1997.
Operations for fiscal 1999 were highlighted by continuing escalation of
commercial Wireless sales, a resurgence of Defense product sales and a
significant improvement in operating margins and net income over fiscal 1998.
Net sales for the year ended June 30, 1999 were $45.7 million, up 22%
from net sales of $37.4 million for fiscal 1998. Operating income for fiscal
1999 was $7.8 million, or 17.0% of sales, compared to $5.6 million and 15.0% of
net sales in the prior year. Net income was $6.9 million and $1.20 per share
(diluted) for fiscal 1999, up significantly from net income of $4.1 million and
$.79 per share (diluted) for fiscal 1998.
Year 2000 Status
The Company has conducted a full review of its computer systems to
identify the programs and systems that could be affected by the "year 2000
problem" and has developed and is continuing to develop an implementation plan
to resolve the problem. The "year 2000 problem" is the result of computer
programs being written using two digits instead of four to define the applicable
year. Programs with this problem may recognize a date using "00" as the year
1900 instead of the year 2000, resulting in system failures or miscalculations.
13
The Company installed a major revision to its manufacturing software at
the end of December, 1998 and has thoroughly tested the system for compliance
with only minor problems encountered to date. This system includes all the
Company's operating software from order entry through production planning and
inventory control (MRP) and including all financial (accounts payable,
invoicing, receivable, purchasing and general ledger) systems.
Presently, the Company is in the process of reviewing its PC based
systems and network for compliance problems and has determined the applicable
software upgrades that are required. We are now awaiting PC and network
operating system upgrades from Microsoft which are certified Y2K compatible.
Additionally, the Company's Y2K committee has performed a room by room
evaluation of all equipment in the Company's facility and has determined which
equipment requires a software upgrade to be compliant, and has completed a
survey of all critical Company vendors for compliance status. Required software
upgrades have been ordered and, where deemed necessary, additional vendor
resources are being evaluated for future use.
Although no assurances can be given, the Company presently believes
that with additional modifications to existing software and conversion to new
software, the "Year 2000 problem" will not pose significant operational problems
for the Company's computer systems. The Company intends to continue to review
information systems for any possible problems, as well as monitor its key
suppliers and customers for any impact that the Year 2000 may have on their
information systems which could impact the Company.
The company does not believe that there will be significant issues or
costs associated with its products related to Year 2000 compliance; however,
there can be no assurance that such products do not contain undetected errors or
defects associated with Year 2000 date functions or that there do not exist
heretofore undetected aspects of the Company's manufacturing process which could
be impacted by the Year 2000. Although the Company is not currently aware of any
material operational issues or costs associated with preparing its products,
manufacturing processes or internal information systems for the Year 2000, there
can be no assurance that the Company will not experience unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its products, manufacturing processes or internal information
systems, which are comprised predominantly of third party software and hardware.
The Company does not currently anticipate that the Year 2000 programming issue
will have a material impact on its business, financial condition or results of
operations.
Should the Company not be completely successful in mitigating internal
and external Year 2000 risks, the result could be a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, manufacture products, and
invoices or engage in similar normal business activities at the Company or its
vendors and suppliers. The Compay believes that under a worse case scenario, it
could continue the majority of its normal business activities on a manual basis.
The Company does not currently have a contingency plan with respect to potential
Year 2000 failures of its suppliers or customers.
14
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,
--------------------
1999 1998 1997
---- ---- ----
Net sales ................................... 100.0% 100.0% 100.0%
Cost of sales ............................... 60.6 62.9 67.1
------- ------- -------
Gross profit ................................ 39.4 37.1 32.9
------- ------- -------
Operating expenses:
Marketing .............................. 9.1 10.7 13.1
Research and development ............... 6.2 3.7 2.2
General and administrative ............ 7.1 7.7 9.2
------- ------- -------
Total operating expenses .......... 22.4 22.1 24.5
------- ------- -------
Operating income ........................... 17.0 15.0 8.4
------- ------- -------
Other income (expense):
Interest expense ....................... (0.1) (0.2) (0.4)
Other, primarily interest income ...... 3.1 2.4 0.5
------- ------- -------
Total other income ................. 3.0 2.2 0.1
------- ------- -------
Income before income taxes .................. 20.0 17.2 8.5
Income taxes ................................ 4.8 6.2 0.0
------- ------- -------
Net income .................................. 15.2% 11.0% 8.5%
======= ======= =======
The following table sets forth the Company's net sales by industry
segment for the periods indicated:
Years Ended June 30,
--------------------
1999 1998 1997
---- ---- ----
(In thousands)
Wireless .......................... $21,450 $16,580 $ 7,645
Space & Defense ................... 24,289 20,869 16,582
------- ------- -------
$45,739 $37,449 $24,227
======= ======= =======
15
Fiscal 1999 Compared to Fiscal 1998
Net Sales. Net sales increased 22% to $45.7 million for the year ended June 30,
1999 from $37.4 million for the year ended June 30, 1998. This increase was led
by a 29% rise in shipments of wireless products and a 16% increase in sales of
Space and Defense products. The increase in sales of wireless products, which
consist of catalog surface mount components and custom sub-assemblies for use in
building wireless base station equipment, reflects the rising worldwide demand
by the major OEM's for both the Company's surface mount products which are used
in base station amplifier manufacture and custom subassemblies which are used to
process cellular phone signals within the base station. Wireless sales were
further augmented by the first shipments of custom integrated backplane
assemblies which significantly increase the Company's dollar content per base
station from the $800-$1200 range to the $2,000 - $3,000 range due to the higher
level of complexity and functionality of the assemblies.
Sales of Space and Defense products consist of custom multi-layer components
such as butler matrices and beamforming networks for commercial and military
satellits, as well as, Digital Frequency Discriminators ("DFD's"), Digital RF
Memories ("DRFM's"), and Microwave Integrated Components ("MIC's"). Shipments in
this product area rose 16% in fiscal 1999 due principally to the Company being
in full production for DFD's and DRFM's for foreign and domestic sales of the
Airborne Self-Protection Jammer for all of fiscal 1999. The ASPJ program was
just entering initial factory production in the first half of the previous
fiscal year. Additionally, Space and Defense sales have been bolstered by
shipments on a number of small satellite component contracts for Hughes Space
and Communications and the initial non-recurring engineering sales for the ACeS
II satellite program being built for Lockheed Martin.
Gross Profit. Cost of sales consists primarily of engineering design costs,
material, material fabrication costs, assembly costs and test costs. Cost of
sales rose 17.5% to $27.7 million (60.6% of net sales) for the year ended June
30, 1999 from $23.6 million (62.9% of net sales) for fiscal 1998. Gross profit
was 39.4% of net sales for the year ended June 30, 1999 compared to 37.1% of net
sales for the same period in fiscal 1998. The improvement in gross profit was
due to improvements in yields for Wireless products, as well as continuing
economies of scale due to higher production volume in both business groups.
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 4.4% to $4.2
million (9.1% of net sales) for the year ended June 30, 1999 from $4.0 million
(10.7% of net sales) for the year ended June 30, 1998. The increase is a result
of higher advertising expenses related to increased sales volume and further
development of the sales organization instituted in fiscal 1998 to support the
Company's expanding commercial markets.
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. Gross research and development costs are reduced by
expense reimbursements received under a Technology Reinvestment Program through
Raytheon, for the Advance Research Project Agency of the United States
Government. Net research and development expenses increased 105% to $2.8 million
(6.2% of net sales) for the year ended June 30, 1999 from $1.4 million (3.7% of
net sales) for the year ended June 30, 1998. Research and development expenses
expanded to support the increased development demands of wireless infrastructure
and satellite communications markets.
General and Administrative. General and administrative expenses increased 12.1%
to $3.2 million (7.1% of net sales) for the year ended June 30, 1999 compared to
$2.9 million (7.7% of net sales) for the year ended June 30, 1998. General and
administrative expense increased due to higher professional fees resulting from
corporate growth and increased compensation levels for existing personnel.
Interest Expense. Interest expense represents commitment fees and interest paid
on the Company's line of credit and letter of credit. Interest expense decreased
52% to $39,000 (0.1% of net sales) for the year ended June 30, 1999 from $82,000
(0.2% of net sales) for the year ended June 30, 1998 due to the payoff of the
Company's outstanding loan balance in December 1997.
Other income. Other income is primarily interest income received on invested
cash balances. Other income increased to $1,396,000 (3.1% of net sales) for the
year ended June 30, 1999 from $922,000 (2.4% of net sales) for the year ended
June 30, 1998, due to a higher level of investable cash balances in the current
year as a result of the large increase in operating cash flow.
Income Taxes. Income tax expense for the year ended June 30, 1999 was $2.2
million (4.8% of net sales) an effective tax rate of 31.7% compared to an
effective tax rate of 36% for fiscal 1998. The decline in the
16
effective tax rate in fiscal 1999 was due to the Company recognizing a tax
benefit of approximately $1.0 million during the fourth quarter of the current
year in connection with the dissolution of the Company's European subsidiary.
The disposition of the net assets of the subsidiary and a corresponding
restructuring charge were recognized for financial reporting purposes in 1996.
In the fourth quarter of fiscal 1999, all of the criteria necessary to support a
deduction for the tax investment were met and the tax benefit was recorded.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net sales. Net sales increased 55% to $37.4 million for the year ended June 30,
1998 up from $24.2 million for the year ended June 30, 1997. This increase was
driven by a 117% rise in shipments of Wireless products and a 26% increase in
sales of Space and Defense products. The increase in sales of Wireless products
was due to continuing strong demand by the major wireless base station OEM's for
the Company's custom products and off-the-shelf surface mount components. Sales
of Space and Defense products in fiscal 1998 consisted of initial shipments of
beamformers to Loral Space & Communications, Ltd., as well as continued
shipments to Lockheed Martin on the ACeS program and a program for Hughes. Sales
of Defense oriented products rose $4.2 million for the year ended June 30, 1998
as a result of shipments of DRFMs for foreign sales of the Airborne Self
Protection Jammer ("ASPJ") system, which first entered full production in the
second quarter of fiscal 1998.
Gross Profit. Cost of sales rose 45.1% to $23.6 million (62.9% of net sales) for
the year ended June 30, 1998 from $16.2 million (67.1% of net sales) for fiscal
1997. Gross profit was 37.1% of net sales for the year ended June 30, 1998
compared to 32.9% of net sales for the same period in fiscal 1997. The
improvement in gross profit was due to continuing economies of scale in the
Wireless and Space and Defense groups resulting from the higher sales volume.
Marketing. Marketing expenses increased 26.1% to $4.0 million (10.7% of net
sales) for the year ended June 30, 1998 from $3.2 million (13.1% of net sales)
for the year ended June 30, 1997. The increase was a result of higher commission
and advertising expenses related to increased sales volume and further
development of the marketing organization to support the Company's expanding
commercial markets.
Research and Development. Net research and development expenses increased 156%
to $1.4 million (3.7% of net sales) for the year ended June 30, 1998 from $.5
million (2.2% of net sales) for the year ended June 30, 1997. Research and
development expenses expanded to support the increased development of wireless
infrastructure and satellite communications products.
General and Administrative. General and administrative expenses increased 28.4%
to $2.9 million (7.7% of net sales) for the year ended June 30, 1998 compared to
$2.2 million (9.2% of net sales) for the year ended June 30, 1997. General and
administrative expenses increased due to the hiring of additional employees and
increased staffing levels, as well as higher professional fees and increased
compensation levels for existing personnel.
Interest Expense. Interest expense decreased 13% to $82,000 (0.2% of net sales)
for the year ended June 30, 1998 from $94,000 (0.4% of net sales) for the year
ended June 30, 1997, due to the payoff of the Company's outstanding term loan in
December 1997.
Other Income. Other income increased to $922,000 (2.4% of net sales) for the
year ended June 30, 1998 from $114,000 (0.5% of net sales) for the year ended
June 30, 1997, due to a higher level of investable cash balances in the current
year as a result of the public offering completed in November 1997.
Income Taxes. Income tax expense for the year ended June 30, 1998 was $2.3
million (6.2% of net sales), an effective tax rate of 36%. The Company incurred
no income tax expense for the year ended June 30, 1997 due to the utilization of
the remainder of its available loss carryforwards and substantially all of its
available tax credits in fiscal 1997.
Liquidity and Capital Resources
During the second quarter ended December 31, 1997 the Company completed a
secondary public offering of common stock. This offering resulted in the sale of
1,165,450 new shares and provided net proceeds to the Company after underwriters
fees and offering expenses of $19,750,000
Net cash provided by operations for the year ended June 30, 1999 and the year
ended June 30, 1998 were $11.5 million and $3.4 million, respectively. The
positive cash flow from operations in both fiscal 1999
17
and 1998 was due primarily to the profit attained in both years. The additional
$4.6 million in operating cash flow in excess of earnings in fiscal 1999 was the
result of significant reductions in both accounts receivable ($944,000) and
inventory ($1,970,000) during the year compared to the increases in both
balances in fiscal 1998. At June 30, 1999, day sales outstanding had fallen to
46 days compared to 62 days at June 30, 1998.
Net cash used in investing activities during fiscal 1999 and 1998 consisted of
funds used to purchase investments and capital equipment. Capital equipment
additions in fiscal 1999 and fiscal 1998 were $2.1 million and $2.3 million,
respectively. These capital investments consisted primarily of equipment needed
to further automate production for the Company's new Wireless and Satellite
Communications products, as well as test and production equipment for the
current production run of the ASPJ program.
Cash used in financing activities amounted to $1.0 million for the year ended
June 30, 1999 and consisted primarily of funds used to repurchase common stock
of the Company, net of funds received for the exercise of stock options. During
the fourth quarter of fiscal 1998, the Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock at prevailing
market prices. During fiscal 1999, the Company repurchased 128,000 shares and
expended $1,469,000. Cash provided by financing activities for the previous
fiscal year was $20.1 million and consisted primarily of cash generated by the
secondary public offering of common stock and the exercise of stock options.
During fiscal 2000, the Company's major cash requirements will be for additions
to capital equipment, which have been budgeted at $2.6 million. These additions
are expected to be funded by cash generated from operations, as projected
operating cash flows should be more than adequate to meet these financing needs.
During December, 1997 and 1998 the Company renegotiated its credit facility with
its bank, increasing the size of the facility and obtaining more favorable
terms. The new credit facility is an unsecured $10,000,000 working capital
revolving line of credit bearing interest at prime and maturing December 31,
2001. There was no balance outstanding under this credit facility at both June
30, 1999 and June 30, 1998. The terms of the credit facility require maintenance
of a minimum tangible net worth, a minimum ratio of cash flows to maturities,
and leverage ratio as defined in the respective agreements. The Company was in
compliance with all restrictions and covenants at June 30, 1999.
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 its credit facilities.
Management believes the Company has the products, human resources, facilities,
and financial resources to continue its growth, but future revenues, margins and
profits are all influenced by a number of risk factors, including but not
limited to those referenced above.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules called for
by this item are submitted 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 5 to the consolidated financial statements which have been
submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item, other than executive officers
which appears in Part I hereof, is contained in the Registrant's proxy statement
to be filed with respect to the 1999 Annual Meeting of Shareholders and is
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Registrant's
proxy statement to be filed with respect to the 1999 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 Registrant's
proxy statement to be filed with respect to the 1999 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 Registrant's
proxy statement to be filed with respect to the 1999 Annual Meeting of
Shareholders and is incorporated by reference herein.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a) 1. and 2. Financial Statements and Schedules:
Reference is made to the List of Financial
Statements hereinafter contained ................ 23
3. Exhibits:
Reference is made to the List of Schedules
hereinafter contained ........................... 23
(b) Current Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended June 30, 1999.
(c) Exhibits:
Reference is made to the List of Exhibits hereinafter
contained ................................................. 48
21
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
-----------------
President & Chief Executive Officer
S/Joseph E. Porcello
------------------
Vice President of Finance/Controller
Date: ____________________
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:
S/Hugh A. Hair S/Abraham Manber S/Carl W. Gerst, Jr.
- -------------- ---------------- --------------------
Director Director Director
S/Dale F. Eck S/Herbert I. Corkin S/David Wilemon
- ------------- ------------------- ---------------
Director Director Director
S/Matthew S. Robison
- ---------------------
Director
Date: September 21, 1999
22
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Index To Consolidated Financial Statements
Page
Independent Auditors' Report 24
Consolidated Balance Sheets as of June 30, 1999 and 1998 25
Consolidated Statements of Operations for the Years ended
June 30, 1999, 1998, and 1997 26
Consolidated Statements of Stockholders' Equity for the Years ended
June 30, 1999, 1998, and 1997 27
Consolidated Statements of Cash Flows for the Years ended
June 30, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 29
23
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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
------------
KPMG LLP
Syracuse, New York
August 2, 1999
24
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1999 and 1998
Assets 1999 1998
----------- ----------
Current assets:
Cash and cash equivalents $13,481,576 11,248,925
Marketable debt securities (note 2) 15,005,129 13,842,397
Receivables, less allowance for bad debts of
$13,000 in 1999 and 1998 6,333,096 7,277,584
Inventories (note 3) 8,384,922 10,355,025
Refundable income taxes 461,846 --
Prepaid expenses 224,358 138,649
Deferred income taxes (note 11) 116,688 108,801
----------- -----------
Total current assets 44,007,615 42,971,381
Marketable debt securities (note 2) 4,976,275 --
Property, plant and equipment, net (note 4) 8,603,784 7,890,272
Deferred income taxes (note 11) 304,060 41,169
Patent (note 1) 574,965 --
----------- -----------
$58,466,699 50,902,822
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 2,360,226 2,221,397
Accrued expenses (note 5) 1,773,762 1,277,193
Income taxes payable 472,190 317,260
Customer advance payments 348,454 190,681
----------- -----------
Total current liabilities 4,954,632 4,006,531
Postretirement benefit obligation (note 10) 1,278,569 1,246,421
Deferred compensation (note 9) 388,000 144,000
----------- -----------
Total liabilities 6,621,201 5,396,952
----------- -----------
Stockholders' equity:
Common stock of $.01 par value. Authorized
25,000,000 shares; issued 6,554,366 and 6,455,366
in 1999 and 1998, respectively 65,544 64,554
Additional paid-in capital 37,469,470 36,611,751
Retained earnings 17,791,467 10,841,642
----------- -----------
55,326,481 47,517,947
Less cost of 1,020,274 and 892,274 treasury
shares in 1999 and 1998, respectively 3,480,983 2,012,077
----------- -----------
Total stockholders' equity 51,845,498 45,505,870
----------- -----------
Commitments and concentrations (notes 12, 13, and 14)
$58,466,699 50,902,822
=========== ===========
See accompanying notes to consolidated financial statements
25
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 1999, 1998, and 1997
1999 1998 1997
------------ ------------ ------------
Net sales $ 45,738,992 37,449,449 24,226,792
Cost of sales 27,710,807 23,571,334 16,242,884
------------ ------------ ------------
Gross profit 18,028,185 13,878,115 7,983,908
------------ ------------ ------------
Operating expenses:
Marketing 4,176,762 3,998,407 3,170,373
Research and development 2,834,697 1,380,218 540,189
General and administrative 3,220,238 2,873,154 2,237,876
------------ ------------ ------------
Total operating expenses 10,231,697 8,251,779 5,948,438
------------ ------------ ------------
Operating income 7,796,488 5,626,336 2,035,470
------------ ------------ ------------
Other income (expense):
Interest expense (38,537) (81,914) (94,086)
Other, primarily interest income 1,395,874 922,196 113,718
------------ ------------ ------------
Total other income 1,357,337 840,282 19,632
------------ ------------ ------------
Income before income taxes 9,153,825 6,466,618 2,055,102
Income tax expense (note 11) 2,204,000 2,330,000 --
------------ ------------ ------------
Net income $ 6,949,825 4,136,618 2,055,102
============ ============ ============
Net income per common and common equivalent share:
Basic $ 1.26 .83 .50
============ ============ ============
Diluted $ 1.20 .79 .47
============ ============ ============
Shares used in computing net income per common and common equivalent share:
Basic 5,522,056 4,984,307 4,106,245
============ ============ ============
Diluted 5,769,699 5,237,157 4,331,662
============ ============ ============
See accompanying notes to consolidated financial statements.
26
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1999, 1998, and 1997
Common Stock Additional Treasury Stock Total
------------------- Paid-in Retained ---------------------- Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
--------- ------- ---------- --------- ------- ----------- ----------
Balance at June 30, 1996 4,992,116 $49,921 15,507,088 4,649,922 892,274 $(2,012,077) 18,194,854
Net income -- -- -- 2,055,102 -- -- 2,055,102
Stock options exercised (note 8) 20,000 200 77,174 -- -- -- 77,374
--------- ------- ---------- --------- ------- ----------- ----------
Balance at June 30, 1997 5,012,116 50,121 15,584,262 6,705,024 892,274 (2,012,077) 20,327,330
Net income -- -- -- 4,136,618 -- -- 4,136,618
Stock options exercised (note 8) 277,800 2,778 1,050,694 -- -- -- 1,053,472
Sale of common stock (note 7) 1,165,450 11,655 19,738,795 -- -- -- 19,750,450
Tax benefit from exercise
of stock options (note 11) -- -- 238,000 -- -- -- 238,000
--------- ------- ---------- --------- ------- ----------- ----------
Balance at June 30, 1998 6,455,366 64,554 36,611,751 10,841,642 892,274 (2,012,077) 45,505,870
Net income -- -- -- 6,949,825 -- -- 6,949,825
Purchase of treasury stock -- -- -- -- 128,000 (1,468,906) (1,468,906)
Stock options exercised (note 8) 99,000 990 515,529 -- -- -- 516,519
Stock options granted in connection
with acquisition of patent
(notes 1 and 8) -- -- 249,965 -- -- -- 249,965
Tax benefit from exercise
of stock options (note 11) -- -- 92,225 -- -- -- 92,225
--------- ------- ---------- --------- ------- ----------- ----------
Balance at June 30, 1999 6,554,366 $65,544 37,469,470 17,791,467 1,020,274 $(3,480,983) 51,845,498
========= ======= ========== ========== ========= =========== ==========
See accompanying notes to consolidated financial statements.
27
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 6,949,825 4,136,618 2,055,102
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,432,808 1,335,561 1,239,864
Deferred income taxes (270,778) 317,576 (467,546)
Deferred compensation 244,000 144,000 --
Changes in operating assets and
liabilities:
Receivables 944,488 (560,478) (1,549,110)
Refundable income taxes (461,846) -- 320,945
Inventories 1,970,103 (2,619,018) (525,687)
Prepaid expenses (85,709) 58,503 58,571
Other assets (325,000) 13,919 29,874
Accounts payable 138,829 720,534 837,015
Income taxes payable 247,155 61,707 493,553
Accrued expenses 496,569 557,777 247,751
Customer advance payments 157,773 (812,858) 753,539
Postretirement benefit obligation 32,148 65,145 43,061
------------ ------------ ------------
Net cash provided by
operating activities 11,470,365 3,418,986 3,536,932
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (2,146,320) (2,256,532) (1,154,295)
Net purchases of marketable debt securities (6,139,007) (13,842,397) --
------------ ------------ ------------
Net cash used in investing
activities (8,285,327) (16,098,929) (1,154,295)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 906,667
Principal payments on long-term debt -- (682,058) (1,299,243)
Stock options exercised 516,519 1,053,472 77,374
Purchase of treasury stock (1,468,906) -- --
Proceeds from sale of common stock, net
(note 7) -- 19,750,450 --
------------ ------------ ------------
Net cash provided by (used
in) financing activities (952,387) 20,121,864 (315,202)
------------ ------------ ------------
Net increase in cash and
cash equivalents 2,232,651 7,441,921 2,067,435
Cash and cash equivalents at beginning of year 11,248,925 3,807,004 1,739,569
------------ ------------ ------------
Cash and cash equivalents at end of year $ 13,481,576 11,248,925 3,807,004
============ ============ ============
See accompanying notes to consolidated financial statements.
28
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(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 signal processing devices which receive and analyze
radar signals and other microwave transmissions. Its primary
products include devices and systems used in the wireless
communications market, and the space and defense electronics
market.
(c) Sales Recognition
The Company recognizes sales at the time products are shipped to
its customers. Revenues and estimated profits on fixed-price
contracts are recognized under the percentage of completion method
of accounting on the units-of-delivery basis. Provisions for
estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
(d) Cash Equivalents
Cash equivalents of $13,396,334 and $11,160,395 at June 30, 1999
and 1998, respectively, consist of certificates of deposit and
money market instruments having maturities of three months or
less. Cash equivalents are stated at cost which approximates fair
value.
(e) Marketable Debt Securities
The Company classifies its portfolio of marketable debt securities
as held-to-maturity in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities, as the Company does not hold any
securities considered to be trading. Securities held-to-maturity
are those securities the Company has the ability and intent to
hold to maturity.
Held-to-maturity securities are recorded at amortized cost. A
decline in the fair value of a held-to-maturity security that is
deemed to be other than temporary results in a charge to earnings
resulting in the establishment of a new cost basis for the
security, and dividend and interest income are recognized when
earned.
(Continued)
29
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(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) Patent
During fiscal 1999, the Company purchased a patent for $325,000
and 50,000 stock options. The stock options were valued at
$249,965 as discussed in note 8. The patent is being amortized on
a straight-line basis over its remaining contractual life of 8
years.
(i) 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 plans described in
note 8. The treasury stock method is used to calculate dilutive
shares which reduces the gross number of dilutive shares by the
number of shares purchasable from the proceeds of the options
assumed to be exercised.
The weighted average number of common shares outstanding for the
basic income per share calculation was 5,522,056, 4,984,307 and
4,106,245 for 1999, 1998, and 1997, respectively. For diluted
earnings per share purposes, these balances increased by 247,643,
252,850, and 225,417 shares for 1999, 1998, and 1997,
respectively, due to the effect of common equivalent shares which
were issuable under the Company's stock option plans.
(j) Pension and Postretirement Plans
On July 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 132, Employers' Disclosures about
Pension and Other Postretirement Benefits (Statement 132).
Statement 132 revises employers' disclosures about pension and
other postretirement benefit plans; it does not change the method
of accounting for such plans.
(Continued)
30
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(k) Research and Development Costs
Research and development costs are charged to expense as incurred.
The Company receives fees under a technology development contract
and such fees are recorded as a reduction of research and
development costs as work is performed pursuant to the related
contract and as defined milestones are attained. In fiscal 1999,
1998, and 1997, the Company recognized product development fees of
$100,013, $335,390, and $338,939, respectively, under the
contract, which were netted with research and development costs.
(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 operating loss 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, 1999 and 1998. 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 2.
(n) Stock-based Compensation
The Company measures compensation expense for its stock-based
employee compensation plans using the intrinsic value method and
has provided pro forma disclosures of the effect on net income and
earnings per share as if the fair value-based method has been
applied in measuring compensation expense.
(o) Segment Information
Effective June 30, 1999, the Company adopted Financial Accounting
Standards Board Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information, which changes the way the
Company reports information about its operating segments. The
information for fiscal 1998 and 1997 has been restated in
accordance with the requirements of the new standard.
(Continued)
31
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(p) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
(2) Marketable Debt Securities
Marketable debt securities classified as held-to-maturity are summarized
as follows:
June 30, 1999
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- ----------
U.S. Government and
agency obligations $ 151,319 -- 1,131 150,188
Corporate bonds 9,301,129 -- 43,851 9,257,278
Medium and short-term
notes 1,784,263 -- 8,637 1,775,626
Euro Dollar bonds 7,944,693 375 30,048 7,915,020
Taxable auction securities 800,000 -- -- 800,000
------------- ---------- ---------- ----------
Total $ 19,981,404 375 83,667 19,898,112
============= ========== ========== ==========
June 30, 1998
-------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- ----------
U.S. Government and
agency obligations $ 80,300 175 -- 80,475
Corporate bonds 2,751,034 457 4,768 2,746,723
Medium and short-term
notes 953,348 -- 1,518 951,830
Euro Dollar bonds 8,557,715 809 8,335 8,550,189
Taxable auction securities 1,500,000 -- -- 1,500,000
------------- ---------- ---------- ----------
Total $ 13,842,397 1,441 14,621 13,829,217
============= ========== ========== ==========
Marketable debt securities are classified as either current or long-term
assets in the accompanying consolidated balance sheets based upon their
maturity dates. Marketable debt securities with maturity dates of greater
than one year were $4,976,275 and zero as of June 30, 1999 and 1998,
respectively.
(Continued)
32
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(3) Inventories
Inventories at June 30 are summarized as follows:
1999 1998
----------- -----------
Component parts $ 3,688,704 4,212,925
Work-in-process 3,241,935 4,410,112
Finished goods 1,454,283 1,731,988
----------- -----------
$ 8,384,922 10,355,025
=========== ===========
(4) Property, Plant and Equipment
Components of property, plant and equipment at June 30 consist of the
following:
1999 1998
----------- -----------
Land and land improvements $ 1,362,050 1,362,050
Buildings 5,266,135 5,242,499
Machinery and equipment 27,854,840 25,732,156
----------- -----------
34,483,025 32,336,705
Less accumulated depreciation
and amortization 25,879,241 24,446,433
----------- -----------
$ 8,603,784 7,890,272
=========== ===========
(5) Accrued Expenses
Accrued expenses at June 30 are summarized as follows:
1999 1998
---------- ----------
Compensation $1,096,420 859,032
Commissions 400,447 293,434
Other 276,895 124,727
---------- ----------
$1,773,762 1,277,193
========== ==========
(Continued)
33
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(6) Long-term Debt
The Company has a $10,000,000 unsecured working capital revolving line of
credit bearing interest at prime (7.5% at June 30, 1999) through December
31, 2001. 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 in the respective agreement.
There were no borrowings against the line of credit in fiscal 1999 and
1998.
Cash payments for interest were $38,537, $93,148 and $92,358 during
fiscal 1999, 1998, and 1997, respectively.
(7) Common Stock Offering
During the second quarter of fiscal 1998, the Company sold an additional
1,165,450 shares of its common stock in a public offering for
$19,750,450, net of issuance costs. A portion of the proceeds was used to
pay bank debt and other general corporate purposes.
(8) Stock Option Plans
Under the Company's Incentive Stock Option Plan (1996 ISO), 400,000
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%
twelve months from the date of grant and 20% per year thereafter, and
must be exercised within ten years of the date of grant. During fiscal
1999, an additional 500,000 shares of common stock were reserved for the
granting of options.
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, 100,000 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. During fiscal 1999, an additional 150,000
shares of common stock were reserved for the granting of options.
As discussed in note 1, during fiscal 1999, the Company granted 50,000
stock options as partial consideration for a patent. The stock options
were valued at $249,965 using the Black-Scholes model as of June 30, 1999
(the date of grant), are exercisable in one year, and must be exercised
within five years of the date of grant.
(Continued)
34
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Information for the three years ended June 30, 1999 with respect to these
plans are as follows:
Weighted
Shares Average
----------------------------------------------- Exercise
ISO NSO Other Total Option Price Price
------- ------ ------ ------- -------------- --------
Outstanding at
June 30, 1996 627,870 -- -- 627,870 $ 1.38 to 7.50 4.25
Issued 95,000 10,000 -- 105,000 6.50 to 8.25 6.95
Exercised (20,000) -- -- (20,000) 1.38 to 7.50 2.97
Expired (31,870) -- -- (31,870) 6.88 6.88
------- ------ ------ -------
Outstanding at
June 30, 1997 671,000 10,000 -- 681,000 1.38 to 8.25 4.58
Issued 74,500 14,000 -- 88,500 15.00 to 21.13 19.72
Exercised (277,800) -- -- (277,800) 1.38 to 7.50 3.79
------- ------ ------ -------
Outstanding at
June 30, 1998 467,700 24,000 -- 491,700 1.38 to 21.13 7.75
Issued 154,000 20,000 50,000 224,000 11.13 to 25.08 18.06
Exercised (99,000) -- -- (99,000) 1.38 to 19.88 5.22
Expired (12,000) -- -- (12,000) 5.88 5.88
------- ------ ------ -------
Outstanding at
June 30, 1999 510,700 44,000 50,000 604,700 1.38 to 25.08 12.02
======= ====== ====== =======
Shares exercisable
at June 30, 1999 356,700 44,000 -- 400,700 1.38 to 21.13 8.98
======= ====== ====== =======
Shares available for
grant at June 30,
1999 431,300 80,000 -- 511,300
======= ====== ====== =======
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 1999:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise life in exercise exercise
prices Shares years price Shares price
---------------- ----------- --------- -------- ------- --------
$ 1.38 to 4.12 51,000 1.25 1.38 51,000 1.38
4.13 to 6.49 100,000 5.83 4.13 100,000 4.13
6.50 to 8.25 142,400 6.64 7.12 142,400 7.12
8.26 to 13.88 12,000 9.25 11.77 -- --
13.89 to 19.88 231,300 8.70 18.14 96,300 19.47
19.89 to 25.08 68,000 9.87 21.09 11,000 20.56
-------------- ---------------
604,700 400,700
============== ===============
(Continued)
35
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The per share weighted average fair value of stock options granted during
fiscal years 1999, 1998, and 1997 was $9.60, $12.86, and $4.71,
respectively. The fair value of options at the date of the grant was
estimated using the Black-Scholes model with the following weighted
average assumptions for the respective fiscal year:
1999 1998 1997
---- ---- ----
Expected life 5 5 5
Interest rate 4.82% 5.81% 6.08%
Volatility 69% 75% 78%
Dividend yield 0% 0% 0%
Stock-based compensation costs would have reduced pretax income by
$773,810, $393,662, and $166,106 in fiscal 1999, 1998, and 1997
($735,791, $374,718, and $161,678 after tax and $.13, $.08, and $.04 per
share in fiscal 1999, 1998, and 1997, 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 1999, 1998, and 1997 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.
(9) Employee Benefit Plans
The Company has a non-contributory defined benefit pension plan covering
substantially all of its employees. 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,
1999, 1998, and 1997:
1999 1998 1997
------------- --------- ---------
Change in benefit obligation:
Benefit obligation at
beginning of year $ 5,565,886 4,628,285 4,286,150
Service cost 198,406 144,518 140,609
Interest cost 374,331 351,138 316,779
Actuarial loss (gain) 96,912 571,487 (16,783)
Benefits paid (147,884) (129,542) (98,470)
----------- --------- ---------
Benefit obligation at end
of year $ 6,087,651 5,565,886 4,628,285
=========== ========= =========
(Continued)
36
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
1999 1998 1997
----------- ----------- ---------
Change in plan assets:
Fair value of plan assets at
beginning of year $ 5,594,504 4,970,705 4,400,776
Actual return on plan assets 128,367 690,506 549,333
Employer contributions 51,782 62,835 119,066
Benefits paid (147,884) (129,542) (98,470)
----------- ----------- -----------
Fair value of plan assets at
end of year $ 5,626,769 5,594,504 4,970,705
=========== =========== ===========
Funded status (460,882) 28,618 342,420
Unrecognized net (gain)/loss 234,227 (203,778) (501,657)
Unrecognized net assets
existing at initial
application 37,861 47,327 56,793
Unrecognized prior service
cost 97,155 115,394 133,633
----------- ----------- -----------
Prepaid (accrued) pension cost $ (91,639) (12,439) 31,189
=========== =========== ===========
(Continued)
37
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Components of net periodic pension cost for the years ended June 30 are as
follows:
1999 1998 1997
--------- ------- -------
Service cost $ 198,406 144,518 140,609
Interest cost 374,331 351,138 316,779
Actual return on plan assets (128,367) (690,506) (549,333)
Amortization of prior service cost 18,239 18,239 18,239
Deferral of gain (341,093) 273,608 195,949
Amortization of net asset at
transition 9,466 9,466 9,466
--------- --------- ---------
Net periodic pension cost $ 130,982 106,463 131,709
========= ========= =========
Weighted-average assumptions:
Discount rate 6.70% 6.70% 7.50%
Rate of increase in
compensation levels,
applicable to Salaried Plan
only 4.0 4.0 5.0
Expected return on plan assets 8.5 8.0 8.0
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.
During fiscal 1997, the Company contributed an amount equal to 50% of the
participants' contribution up to a maximum of 3% of the participants'
compensation. In fiscal 1998, the Company increased its matching
contribution to an amount equal to 50% of the participants' contribution
up to a maximum of 5% of the participants' compensation. During fiscal
1999, 1998, and 1997, the Company contributed $256,590, $173,369 and
$129,115, respectively, to this plan.
During fiscal 1998, the Company instituted 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 $207,000 and
$231,000 in fiscal 1999 and 1998, respectively. While the Company intends
to continue this plan, it reserves the right to terminate or amend the
Plan at any time.
(Continued)
38
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
During fiscal 1998, the Company implemented a deferred compensation plan
for one employee. Under the plan, the Company will pay a certain sum
annually for fifteen years upon the employee's retirement or in the event
of their death, to the employee's beneficiary. Deferred compensation
expense in fiscal 1999 and 1998 was $244,000 and $144,000, respectively.
(10) Postretirement Benefits
The Company provides medical coverage for current and future eligible
retirees of the Company plus their eligible dependents. Employees
generally become eligible for retiree medical coverage by retiring from
the Company after attaining at least age 55 with 15 years of service
(active employees at June 27, 1993 were eligible by retiring after
attaining at least age 55 with 10 years of service). Retirees at June 27,
1993 pay approximately $30 per month for health care coverage and the
Company is responsible for paying the remaining costs. For this group,
any increase in health care coverage costs for retired employees will be
shared by the Company and retirees on a fifty-fifty basis, while any
increase in coverage costs for retiree dependents will be totally paid by
the retirees. For eligible employees retiring after June 26, 1993, the
Company contributes a fixed dollar amount towards the cost of the medical
plan. Any future cost increases for the retiree medical program for these
participants will be charged to the retiree.
The following table presents the changes in the postretirement benefit
obligation and the funded status of the Plan at June 30, 1999, 1998, and
1997:
1999 1998 1997
----------- --------- ----------
Benefit obligation at beginning
of year $ 1,316,452 1,191,632 1,129,920
Service cost 24,192 27,664 32,784
Interest cost 88,202 89,372 84,744
Plan participants' contributions 30,444 22,865 21,067
Actuarial loss/(gain) 14,690 59,675 (2,868)
Benefits paid (110,690) (74,756) (74,015)
----------- ----------- -----------
Benefit obligation at end of year $ 1,363,290 1,316,452 1,191,632
=========== =========== ===========
Fair value of plan assets $ -- -- --
=========== =========== ===========
Funded status (1,363,290) (1,316,452) (1,191,632)
Unrecognized actuarial (gain) loss 84,721 70,031 10,356
----------- ----------- -----------
Accrued postretirement benefit cost $(1,278,569) (1,246,421) (1,181,276)
=========== =========== ===========
(Continued)
39
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Net periodic postretirement benefit cost includes the following
components:
1999 1998 1997
-------- ------- ------
Service cost $ 24,192 27,664 32,784
Interest cost 88,202 89,372 84,744
-------- ------- -------
Net periodic postretirement benefit
cost $112,394 117,036 117,528
======== ======= =======
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.7% in 1999, 6.7% in 1998, and
7.5% in 1997. 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%, 5% and 8.5% for 1999, 1998, and 1997,
respectively; the rate is assumed to remain at 5% thereafter. The health
care cost trend rate assumption has 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 $ 92,860 83,777
Effect on postretirement benefit obligation 107,394 28,160
(Continued)
40
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(11) Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
----------- ----------- -----------
Year ended June 30, 1999:
U.S. Federal $ 1,806,767 (256,613) 1,550,154
State 668,011 (14,165) 653,846
----------- ----------- -----------
$ 2,474,778 (270,778) 2,204,000
=========== =========== ===========
Year ended June 30, 1998:
U.S. Federal $ 1,831,327 21,547 1,852,874
State 181,097 296,029 477,126
----------- ----------- -----------
$ 2,012,424 317,576 2,330,000
=========== =========== ===========
Year ended June 30, 1997:
U.S. Federal $ 450,262 (738,824) (288,562)
State 17,284 271,278 288,562
----------- ----------- -----------
$ 467,546 (467,546) --
=========== =========== ===========
A reconciliation of the expected consolidated income tax expense, computed by
applying the U.S. Federal corporate income tax rate of 34% to income before
income taxes, to income tax expense, is as follows:
1999 1998 1997
----------- ----------- -----------
Expected consolidated
income tax expense $ 3,112,301 2,198,650 698,735
Tax benefit related to
liquidation of foreign
subsidiary (1,012,088) -- --
State income taxes, net of
Federal income tax
benefit 431,538 314,903 190,451
Change in valuation
allowance (233,044) (350,060) (1,060,599)
Other, net (94,707) 166,507 171,413
----------- ----------- -----------
$ 2,204,000 2,330,000 --
=========== =========== ===========
(Continued)
41
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities at June 30, 1999 and 1998 are
presented below:
1999 1998
----------- -----------
Deferred tax assets:
Inventories $ 56,662 65,411
Deferred compensation 151,320 58,500
Retirement benefits 48,566 31,930
Postretirement benefits 509,700 485,692
Nondeductible reserves 11,460 11,460
State investment tax credit carryforwards 683,715 665,840
----------- -----------
Total deferred tax assets 1,461,423 1,318,833
Less valuation allowance -- 233,044
----------- -----------
Net deferred tax asset 1,461,423 1,085,789
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation (1,040,675) (935,819)
----------- -----------
Net deferred taxes $ 420,748 149,970
=========== ===========
Presented as:
Current deferred tax asset 116,688 108,801
Long-term deferred tax asset 304,060 41,169
----------- -----------
$ 420,748 149,970
=========== ===========
(Continued)
42
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The valuation allowance for deferred tax assets as of June 30, 1999 and
1998 was $0 and $233,044, respectively. The net change in the total
valuation allowance for the years ended June 30, 1999 and 1998 was a
decrease of $233,044 and $350,060, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences,
net of the existing valuation allowances at June 30, 1999. The deferred
tax asset valuation allowance is principally related to the
recoverability of the Company's state investment tax credit carryforwards
at June 30, 1998.
The Company recognized a tax benefit of $1,012,088 during the fourth
quarter of fiscal 1999 in connection with the dissolution of the
Company's European subsidiary. The disposition of the net assets of the
subsidiary and a corresponding restructuring charge were recognized for
financial reporting purposes in 1996. In the fourth quarter of fiscal
1999, all of the criteria necessary to support a deduction for the tax
investment in the subsidiary were met and the tax benefit was recorded.
At June 30, 1999, the Company has investment tax credit carryforwards for
state income tax purposes of $683,715 which are available to reduce
future state income taxes, if any, through 2014.
The tax benefit associated with the exercise of stock options and
disqualifying dispositions by employees reduced taxes payable by $92,225
and $238,000 in fiscal 1999 and 1998, respectively. Such benefits are
reflected as additional paid-in capital.
Cash payments for income taxes were $2,689,469 in fiscal 1999 and
$1,950,717 in fiscal 1998.
(12) Segment and Related Information
Segments
Organizationally, the Company operates predominately in the wireless
communications, and space and defense electronics markets. The Company's
two reportable segments have been determined based upon the nature of the
products and services offered, customer base, technology, availability of
discrete internal financial information, homogeneity of products,
delivery channel, and other factors.
The wireless segment designs, manufactures and markets commercial
products used mainly by the wireless communications market. Products
produced in this business segment include highly integrated microwave
signal distribution components and subsystems, as well as a product line
of standard surface mount microwave signal splitting and combining
components, trade name Xinger, that are used in terrestrial wireless
communications base station amplifiers.
(Continued)
43
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The space and defense segment of the business, designs, manufactures and
markets specialized products for those Companies in the radar and
satellite communications market. Products produced in this business
segment include passive beamforming networks for communications satellite
multi-beam antennas, digital frequency discriminators and other radar
type discriminators, as well as a wide range of standard component
products for defense electronics, such as mixers, couplers, power
dividers and correlators.
The following table reflects the results of the segments consistent with
the Company's internal financial reporting process. The following results
are used in part, by management, both in evaluating the performance of,
and in allocating resources to, each of the segments.
Space & Corporate and
Wireless Defense Unallocated Consolidated
------------- ----------- ------------- ------------
Net sales:
1999 $ 21,450,113 24,288,879 -- 45,738,992
1998 16,580,092 20,869,357 -- 37,449,449
1997 7,644,672 16,582,120 -- 24,226,792
Operating income:
1999 3,266,508 4,529,980 -- 7,796,488
1998 2,961,156 2,665,180 -- 5,626,336
1997 202,100 1,833,370 -- 2,035,470
Identifiable assets*:
1999 5,355,217 8,792,434 44,319,048 58,466,699
1998 4,575,307 11,582,816 34,744,699 50,902,822
1997 2,841,944 11,479,187 11,651,412 25,972,543
Depreciation and amortization**:
1999 612,836 819,972 -- 1,432,808
1998 517,162 818,399 -- 1,335,561
1997 350,572 889,292 -- 1,239,864
* Segment assets primarily include trade accounts receivable and
inventories. The Company does not segregate other assets on a
products and services basis for internal management reporting and,
therefore, such information is not presented. Assets included in
corporate and unallocated principally are cash and cash
equivalents; marketable debt securities other receivables; prepaid
expenses; deferred income taxes; refundable income taxes; property,
plant and equipment; and patent.
** Depreciation expense is allocated departmentally based on an
estimate of capital equipment employed by each department.
Depreciation expense is then further allocated within the
department as it relates to the specific business segment impacted
by the consumption of the capital resources utilized. Due to the
similarity of the property, plant and equipment utilized, the
Company does not specifically identify these assets by individual
business segment for internal reporting purposes.
(Continued)
44
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Geographic Information
Geographic net sales by geographic region are as follows:
Other Foreign Consolidated
United States Canada Countries Net Sales
------------- --------- ------------- ------------
1999 $ 36,468,513 4,590,991 4,679,488 45,738,992
1998 29,837,123 3,252,605 4,359,721 37,449,449
1997 19,525,698 1,102,859 3,598,235 24,226,792
Customers
In 1999, sales to two customers (approximately $6,400,000, relating to
the wireless business segment, and $5,200,000, relating to the space and
defense electronics segment) exceeded 10% of consolidated net sales. In
1998, sales to one customer (approximately $6,800,000, relating to the
wireless business segment) exceeded 10% of consolidated net sales. In
1997, sales to two customers (approximately $3,400,000, relating to the
space and defense electronics segment, and $2,700,000, relating to the
wireless segment) exceeded 10% of consolidated net sales.
(13) Commitments
The Company is obligated under an operating lease for a building. Future
minimum payments under the noncancelable operating lease for the next
five years and thereafter are summarized as follows:
Year ending June 30,
2000 $ 396,861
2001 396,861
2002 396,861
2003 396,861
2004 396,861
Thereafter 3,836,324
----------
5,820,629
Less amounts representing
sublease income 942,546
----------
$4,878,083
==========
Rent expense for the years ended June 30, 1999, 1998, and 1997 was
$396,861, $392,051, and $384,835, respectively. Rent expense for fiscal
1999, 1998, and 1997 was offset by sublease income of $347,254, $242,435,
and $125,667, respectively.
(Continued)
45
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
As discussed in note 1(j), the Company is currently engaged under a
technology development contract. Under this contract, the Company was
committed to provide research and development services through September
1998. Technology development fees and related costs under the contract
are anticipated to aggregate approximately $288,000 in fiscal 2000.
(14) 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 13%, 18% and 16% of consolidated net sales in fiscal
1999, 1998, and 1997, 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 electronic business.
(Continued)
46
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(15) Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial
information for the years ended June 30, 1999 and 1998, respectively:
1999 Quarter Ended
------------------
Sept. 30 Dec. 31 March 31 June 30
------------ ---------- ---------- ----------
Net sales $ 10,478,787 11,056,604 11,832,624 12,370,977
============ ========== ========== ==========
Cost of sales $ 6,473,591 6,550,512 7,156,615 7,530,089
============ ========== ========== ==========
Net income $ 1,322,604 1,430,345 1,568,510 2,628,366
============ ========== ========== ==========
Net income per common and
common equivalent share:
Basic $ .24 .26 .28 .47
============ ========== ========== ==========
Diluted $ .23 .25 .27 .45
============ ========== ========== ==========
1998 Quarter Ended
------------------
Dec. 31 March 31 June 30 Sept. 30
------------ ---------- ---------- ----------
Net sales $ 7,721,323 9,361,780 9,951,100 10,415,246
============ ========== ========== ==========
Cost of sales $ 4,853,726 6,034,971 6,291,273 6,391,364
============ ========== ========== ==========
Net income $ 759,599 957,864 1,171,289 1,247,866
============ ========== ========== ==========
Net income per common and
common equivalent share:
Basic $ .17 .20 .21 .22
============ ========== ========== ==========
Diluted $ .17 .19 .20 .22
============ ========== ========== ==========
Earnings per share amounts for each quarter are required to be computed
independently. As a result, their sum does not necessarily equal the
total year earnings per share amounts.
47
INDEX TO EXHIBITS (1)
Exhibit No. Description
3.1 Certificate of Incorporation of Registrant and
amendments thereof.
(i) Restated Certificate of Incorporation is
incorporated by reference to Exhibit 3(a) to
Registrant's Registration Statement on Form S-1
(No. 2-42704).
(ii) Amendment, filed December 19, 1980, is
incorporated by reference to Exhibit 4.1(ii) to
Registrant's Registration Statement of Form S-2
(No. 2-86025).
(iii) Amendment, filed March 18, 1985 is incorporated
by reference to the identically numbered exhibit
to the Registrant's Annual Reporton Form 10-K
(Commission File No. 0-6620) for the year ended
June 30, 1987.
(iv) Amendment, filed December 14, 1987, is
incorporated by reference to Exhibit 4(a) (iv)
to the Registrant's Registration Statement on
Form S-8 (33-19618).
(v) Amendment, filed April 8, 1999
a 3.2 Registrant's By-Laws, as amended.
l 10.3 Credit Facility Agreement dated as of October 1, 1996
between the Company and Manufacturers and Traders Trust
Company, together with Term Note and Revolving Credit
Note each dated October 1, 1996 executed by the Company
to Manufacturers and Traders Trust Company and Security
Agreement dated October 1, 1996 between the Company and
Manufacturers and Traders Trust Company.
l 10.4 Employment Agreement dated as of July 1, 1997 between
the Company and Lawrence A. Sala.
l 10.5 Consulting Agreement dated as of the March 1, 1997
between the Company and Dale F.Eck.
a 10.6 Registrant's Pension Plan and Trust. (2)
j 10.7 Anaren Microwave, Inc. Incentive Stock Option Plan, as
amended, incorporated herein by reference to Appendix A
to the registrant's proxy statement for its 1998 annual
shareholders' meeting, as filed with the Commission on
September 25, 1998 (Commission File No. 0-6620).
e 10.9 Anaren Microwave, Inc. 1989 Non-statutory Stock Option
Plan, as amended, incorporated herein by reference to
Appendix B to the registrant's proxy statement for its
1998 annual shareholders' meeting, as filed with the
Commission on September 25, 1998 (Commission File No.
0-6620).
m 10.12 Employment Agreement dated as of October 7, 1997 between
the Company and Hugh A. Hair.
n 10.13 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 to
Manufacturers and Traders Trust Company.
g 21 Subsidiaries of Registrant.
23 Consent of KPMG LLP.
27 Financial Data Schedule for the twelve month period
ended June 30, 1999, which is submitted electronically
to the Securities and Exchange Commission for
information only and is not filed.
48
EXHIBIT INDEX (Continued)
a Incorporated herein by reference to exhibit 4(b) to the
Registrant's Registration Statement on Form S-8 (Registration No.
33-19618).
e Incorporated herein by reference from Exhibit No. 4 to the
Registrant's Registration Statement on Form S-8 (Registration No.
33-36761).
g Incorporated herein by reference to exhibit No. 22 to the
Registrant's Annual Report on Form 10-K for the year ended June
30, 1991.
j Incorporated herein by reference to exhibit to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-03193).
l Incorporated herein by reference to the identically numbered
exhibit to the Registrant's Annual Report on Form 10-K for the
year ended June 30, 1997.
m Incorporated herein by reference to exhibit No. 10.12 to the
Registrant's Quarterly Report on Form 10-Q for the three months
ended September 30, 1997.
n Incorporated herein by reference to exhibit No. 10.13 to the
Registrant's Quarterly Report on Form 10-Q for the three months
ended December 31, 1997.
(1) The Company's quarterly and annual reports are filed with the
Securities and Exchange Commission under file no. 0-6620.
(2) Management contract or compensatory plan arrangement.
49