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.
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.
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
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."
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
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
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
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.
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.
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.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company or its subsidiaries.
ITEM 4.
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.
PART II
ITEM 5.
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.
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.
ITEM 6.
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.
ITEM 7.
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.
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.
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 ======= ======= =======
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
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
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
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.
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.
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.
PART IV
ITEM 14.
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
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
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
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
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
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)
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)
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)
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:
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)
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)
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)
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:
The following table summarizes significant ranges of outstanding and exercisable options at June 30, 1999:
(Continued)
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)
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)
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)
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)
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)
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)
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)
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)
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.
* 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)
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)
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)
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:
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.
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.
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.