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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-6620
ANAREN MICROWAVE, INC.
(Exact name of Registrant as specified in its Charter)
New York 16-0928561
(State of incorporation) (I.R.S Employer Identification No.)
6635 Kirkville Road 13057
East Syracuse, New York (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: 315-432-8909
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Securities Act:
Common Stock, $.01 Par Value
----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at September 16, 1996 was approximately $18,640,000.
The number of shares of Registrant's Common Stock outstanding on September
16, 1996 was 4,103,842.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for use in connection with its
1996 Annual Meeting of Shareholders are incorporated into Part III of this
Annual Report on Form 10-K.
1
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Anaren Microwave, Inc. (hereinafter referred to as "Anaren" or "the
Company") was incorporated in 1967 as Micronetics, Inc., a name that changed to
Anaren Microwave, Inc. during 1967.
Anaren designs, develops, manufactures and markets "RF" Radio Frequency,
microwave components and subsystems for the wireless communications, satellite
communications, and electronic warfare markets. The Company utilizes advanced
stripline manufacturing technology to produce components and subsystems for
cellular and PCS infrastructure equipment, communications satellites, radar,
radar warning receivers, and radar jammers. The Company's products are used in a
wide array of both commercial and defense applications and vary significantly in
terms of cost and complexity.
Microwaves are electromagnetic waves similar to ordinary radio waves except
that the wavelengths are very short and the frequency of oscillation is very
high. These high frequencies of oscillation enable microwave signals to carry
large amounts of information. This and other unique properties make them
especially suitable for radar and communications applications and for other
technologies.
To better serve its emerging commercial markets, the Company reorganized,
during the first quarter of fiscal 1996 into three internal business units.
These business units are Electronic Warfare, Radar and Telecommunications and
Wireless. Products in the electronic warfare business unit consist of the
Company's line of military products, which include Digital Frequency
Discriminators (DFD's), Digital RF Memories (DRFM's), ESM receivers and military
Microwave Integrated Circuit components (MIC's). Radar and Telecommunications
products consist of signal distribution networks for phase array antennas and
customized commercial multilayer components such as Butler matrices and
beamforming networks for commercial telecommunications satellites. Wireless
products are microwave components and assemblies for use in building cellular
base station equipment. These products are a forward evoluation of the old
military microwave components and are significantly small and lighter, while
providing better performance.
Each business unit is composed of an independent engineering and
marketing/sales team whose purpose is to develop, market and deliver product to
its customers. This action was taken to optimize responsiveness to customer
needs and to provide extended fiscal accountability downward throughtout the
organization.
PRODUCTS
Anaren has a wide range of products covering RF, microwave, and millimeter
wave frequencies for both commercial and defense applications. The Company's
products range from individual components to advanced subsystems that are
integrated vertically within the Company incorporating both wideband signal
processing and advanced stripline technologies. These products are used in land
based communications systems, satellite communications systems, as well as
military ships, aircraft, and land based systems.
2
Wireless
The Company's wireless products utilize advanced multi-layer stripline
technology and include microwave signal distribution components and subsystems,
microwave signal switching networks and antenna feed networks that are used to
split and combine microwave signals within wireless infrastructure systems.
These products include both general use type products developed by the Company
and custom assemblies developed for a specific customer's applications.
As wireless technologies have moved higher in frequency for spectrum
availability and increased in complexity to support the rapidly incresing demand
for service, demand for Anaren's microwave design and manufacturing expertise
has increased significantly. As a result of recently developed proprietary
manufacturing techniquies, Anaren is able to provide very competitively priced
microwave components and assemblies in high volume, meeting the very challenging
price and delivery demand of wireless infrastructure OEM's.
Radar and Telecommunications
Anaren is a supplier of Passive Antenna Beamforming Networks for
communications satellite applications. Utilizing advanced multi-layer stripline
technology the Company produces Butler Matrices and other beamforming networks
that are compact and light weight for high performance multi-element array
antenna applications. These products determine the number, size and quality of
beams that can be produced from a single antenna array.
Satellite antenna feed networks are microwave signal distribution networks
comprised of passive signal splitters and combiners. These networks,
traditionally large, complex, and heavy, are widely utilized in modern
communications satellites to allow for multiple beams of differing sizes to be
supported for a single antenna array. Anaren's proprietary stripline technology
and expertise in designing these complex structures has allowed the Company to
rapidly penetrate this growing market. These networks are utilized on the
proposed Low Earth Orbiting (LEO) satellite wireless communications networks as
well as Geo Synchronous communications satellites.
Additionally, the Company produces signal distribution networks for phased
array antennas. These devices are used to distribute a microwave signal to each
element of a phased array antenna. Phased array antennas are being utilized
increasingly for radar and communications applications in both commercial and
defense applications.
Electronic Warfare
The Company produces a wide range of component products utilizing advanced
stripline technology. 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 and microwave functions including
signal distribution, signal measurement, and signal frequency conversion.
The Company is a leader in subsystem products including Digital Frequency
Discriminators (DFD), Digital Radar Frequency Memory (DRFM), and other custom
designed subsystems used in electronic warfare applications. These products are
vertically integrated within the Company utilizing advanced stripline,
Application Specific Integrated Circuits (ASIC), digital and signal processing
technologies.
3
DFD products rapidly measure the frequency and other characteristics of
radar signals. This information is 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 to 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
coherent radar systems.
The Company's Electronic Support Measures (ESM) subsystem is used in
shipborne applications to measure radar signals and generate a digital
description of the received signal. The subsystem is vertically integrated
utilizing the company's DFD technology and incorporating direction finding
technology that identifies the angle to the emitting platform.
MARKETING AND CUSTOMERS
The Company currently sells its Electronics Warfare products to the United
States and foreign governments through prime contractors and by utilizing sales
representatives in both the United States and foreign countries. Radar and
Telecommunications products and Wireless products are sold to Satellite and
cellular infrastructure original equipment manufacturers through sales
representatives in both the United States and foreign countries. The Company's
business unit managers and senior engineering personnel provide technical sales
support. Anaren Microwave, Ltd. the Company's wholly-owned subsidiary in
Frimley, England is responsible for marketing and sale in Europe.
Anaren's principal customers are manufacturers of electronic equipment that
is based on the transmission and reception of RF, microwave, and millimeter wave
signals. The Company supplies a broad base of customers, both commercial and
defense based, with a wide array of applications including cellular, PCS and
wireless local loop communications systems, Low Earth Orbiting (LEO) and
geosynchronous satellite communications systems, radar, radar warning receivers,
radar jamming, and electronic support measures systems.
The Company utilizes independent representatives to support both domestic
and international sales.
During the fiscal year ended June 30, 1996, approximately 20% 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 26% of the Company's consolidated net sales resulted from
shipments to Raytheon Company under several contracts, and 10% resulted from
shipments to Racal Defense Electronics under several contracts. No one other
contract and no other customer accounted for more than 10% of shipments.
During fiscal year 1996, sales to foreign customers, most of which were
prime contractors to foreign governments, accounted for approximately 36% of the
Company's consolidated net sales and included shipments to twenty-one countries.
All the Company's contracts with foreign customers are payable in U.S. dollars.
See note 12 to the consolidated financial statements for the sales to foreign
customers for each of the last three fiscal years.
Export sales of military reconnaissance systems must be approved by the
United States Department of State. Any tightening of restrictions on export of
military hardware could adversely affect the Company's sales to foreign
customers.
4
All of the Company's contracts with prime contractors to United States and
foreign governmental departments or their agencies are fixed price contracts,
some of which require delivery over time periods in excess of one year. With
this type of contract, the Company agrees to deliver products at an agreed upon
price except for costs incurred because of change orders issued by the customer.
Some of these contracts contain provisions for escalation due to inflation
incurred between the effective contract date and the delivery date, and are
subject to various statutes, regulations and provisions governing defense
contracts.
BACKLOG
At June 30, 1996, the Company's backlog of orders was $23,287,000 as
compared with $13,700,000 at July 1, 1995. All of the orders included in backlog
are covered by signed contracts, most of which contain customary provisions
permitting termination at any time at the customer's convenience upon the making
of a termination payment to the Company.
The Company's Electronic Warfare products accounted for 66% and 48% of the
backlog at June 30, 1996 and July 1, 1995, respectively; Radar and
Telecommunications products comprised approximately 18% of the backlog in 1996
and 51% of the backlog in 1995 and Wireless products amounted to 16% and 1% of
the backlog at June 30, 1996 and July 1, 1995, respectively. Approximately 61%
of the June 30, 1996 backlog is expected to be recognized as revenue during
fiscal 1997.
MANUFACTURING AND ENGINEERING
The Company's manufacturing operations are vertically integrated from the
production of specialized hybrid circuits to the final assembly of complete
subsystems, such as ESM Receivers.
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 Electronic Warfare assembly and subsystems products contain
multi-layer stripline technology which is designed and tested by the Company's
engineers and technicians and is manufactured at the Company's own facilities.
The Company utilizes skilled permanent and contract personnel in the
manufacture of its products. Quality assurance checks are performed on purchased
items, work in process, and finished products. Because of the complexity of the
Company's products, final tests are performed on all products by highly skilled
engineers and technicians.
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 specific technical and installation requirements.
COMPETITION
The microwave component 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 than Anaren. 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
5
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. Once a particular supplier's products have been selected for
incorporation in a military radar or commercial satellite system, further
competition by other vendors during the life cycle of the program typically
becomes more limited. Commercial wireless component products for cellular
infrastructure are subject to continuous technological and price competition
from other vendors.
Major competitors include Amp, Inc., Lockheed Martin, Inc., ST Microwave,
Inc. and Filtronics, Inc. for electronic warfare products; EMS, Inc. and
Merrimac Industries, Inc. for radar and telecommunications products; and
Merrimac Industries, Inc. RF Power, Inc., Mini Circuits, Inc. and the in-house
capabilities of the Company's major customers, such as Motorola, Inc., Lucent,
Inc. and Nortel,Inc., for wireless products.
RESEARCH, DEVELOPMENT AND NEW PRODUCTS
The Company believes that its continued success depends in large part on
its ability to develop new products and extend its technology to additional
product applications. The Company's primary efforts in this regard are focused
on development, design, engineering and implementation activities rather than
pure research. Most of the Company's professional staff have been involved at
various times and in varying degrees in these activities. Research and
development expenses were approximately $1,185,000 in fiscal 1996, $939,000 in
fiscal 1995 and $560,000 in fiscal 1994 and were funded solely from the
Company's current operating budget.
Existing development efforts are focused on (i) the development of advanced
multilayer stripline manufacturing processes for use in low cost light weight
commercial and space applications; (ii) the development of advanced
manufacturing technology to produce millimeter wave stripline structures for
communication satellite applications; (iii) evolutions of current technologies
to aid airborne receiver systems in the location and unambiguous identification
of radar platforms; (iv) variants of existing products for use in additional
cellular and PCS infrastructure applications and on additional military
platforms. The Company believes that it is at the forefront of microwave signal
processing technology in terms of ability to deal with complex signal
environments.
SUPPLIERS
The Company purchases most of its raw materials from a variety of vendors
and most of these raw materials are available from a variety of sources. The
Company has one vendor which represents approximately 12% of the Company's raw
material purchases, but the Company believes that substitute sources of supply
are readily available for these and all other products purchased.
EFFECTS OF INFLATION
The Company does not believe that its operations are materially effected by
inflation. Contract prices for items deliverable over a period in excess of one
year are normally indexed for inflation, thereby offsetting any increase in
operating costs due to inflation.
6
EMPLOYEES
As of June 30, 1996, the Company employed 186 persons fulltime. Of these
employees, approximately 85% comprise the engineering and manufacturing staff,
and approximately 15% are in management and support functions.
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, 1996. Each executive officer is elected for a
term of one year at the reorganizational meeting of the board of directors
following the annual shareholders meeting.
Name Age Position
---- --- --------
Hugh A. Hair 61 Chief Executive Officer,
Director
Carl W. Gerst, Jr. 59 Vice Chairman, Chief
Technical Officer, Treasurer
Lawrence A. Sala 33 President, Director
Gert R. Thygesen 41 Vice President Operations
Joseph E. Porcello 44 Vice President Finance
ITEM 2. PROPERTIES
The Company's principal property is a 105,000 square foot administrative,
manufacturing and engineering facility located in East Syracuse, New York. The
administrative, manufacturing and engineering plant was constructed during
fiscal 1981 and expanded during fiscal year 1985. This facility houses all of
the Company's marketing, manufacturing, administrative, research and
development, systems design and engineering experimentation and drafting
activities. The construction of this facility was financed through the issuance
of Onondaga County Industrial Revenue Bonds in the original amount of $5,940,000
(see note 5 to the consolidated financial statements for information concerning
encumbrances on the facility).
Anaren Microwave, Ltd., the Company's wholly-owned subsidiary in the United
Kingdom, leases a 20, 000 square foot facility in Frimley, England which
previously housed the administrative, marketing, and manufacturing operations of
that subsidiary prior to the Company's divestiture of its electronic warfare
simulator manufacturing operation in March 1996. Annual rental cost of this
facility is approximately $374,000 and the Company is presently subletting a
portion of the facility for approximately $186,000 annually (see note 11 to the
consolidated financial statements). The foregoing facilities are regarded by
management as adequate for the current and anticipated future requirements of
the Company's business.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company or its
subsidiaries.
7
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.
8
PART II
Item 5. Market for the Company's Common Stock and Related Security Holder
Matters
The Company's common stock is traded In the over-the-counter market under
the NASDAQ symbol "ANEN".
The following table sets forth the range of quarterly high and low sales
prices on The NASDAQ Stock Market for the Company's common stock for the
quarters indicated. Quotations represent prices between dealers and do not
include retail mark-ups, mark downs or commissions.
Fiscal 1995 Fiscal 1996
Quarter Quarter
1st 2nd 3rd 4th 1st 2nd 3rd 4th
High 3-1/8 3-5/8 3 8-1/4 8-1/2 8-3/8 7-1/4 8-3/4
Low 2-1/8 2 1-7/8 2-3/8 5-1/4 5-1/2 5-1/2 5-3/4
The Company has approximately 748 security holders of record at September
16, 1996.
The Company has never paid a cash dividend on its common stock, and is
restricted by its credit arrangements as to the amount of cash dividends which
may be paid during any fiscal year (see note 5 to the consolidated financial
statements).
The Company's Board of Directors has not set a policy with regard to the
payment of dividends.
Item 6. Selected Financial Data
The selected financial data set forth below have been derived from the
Company's consolidated financial statements referred to under "Item 14.
Exhibits, Financial Statements and Reports on form 8-k" of this Annual Report on
Form 10-k and on previously published historical financial statements not
included herein.
The selected financial data should be read in connection with "Item 7.
Management Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements, including the notes therefor
referred to herein.
9
Fiscal Year Ended
-----------------
June 30, July 1, July 2, June 26, June 27,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Summary of Consolidated Statements
of Operations:
Net Sales .................................. $ 17,082 $ 17,996 $ 20,237 $ 26,996 $ 33,020
-------- -------- -------- -------- --------
Costs and Expenses:
Costs of Sales .......................... 11,147 13,081 14,415 19,306 22,819
Provision for losses on contracts ....... -- 300 1,570 -- --
Marketing, Research and Development ..... 4,155 3,967 3,490 4,081 7,090
General and Administrative .............. 2,075 2,041 2,266 2,399 3,263
Restructuring Costs ..................... 810 360 -- 452 633
-------- -------- -------- -------- --------
Total Costs and Expenses ............ 18,187 19,749 21,741 26,238 33,805
-------- -------- -------- -------- --------
Operating Earnings (Loss) .................. (1,105) (1,753) (1,504) 758 (785)
Interest Expense ........................... 123 213 271 434 594
Other Income, Primarily Interest ........... 148 164 298 134 90
-------- -------- -------- -------- --------
Earnings (Loss) before income taxes and
cumulative effect of change in accounting
principle ................................. (1,080) (1,802) (1,477) 458 (1,289)
Income Tax Expense (benefit) ............... -- (330) (115) 180 (384)
-------- -------- -------- -------- --------
Earning (loss) before cumulative effect
of change in accounting principle ......... (1,080) (1,472) (1,362) 278 (905)
Cumulative effect of change in accounting
for postretirement benefits ............... -- -- (995) -- --
-------- -------- -------- -------- --------
Net Earnings (loss) ................. $ (1,080) $ (1,472) $ (2,357) $ 278 $ (905)
======== ======== ======== ======== ========
Earnings (loss) Per Share .................. $ (.27) $ (.36) $ (.53) $ .06 $ (.20)
======== ======== ======== ======== ========
Weighted Average Shares Outstanding ........ 4,057 4,047 4,435 4,530 4,503
======== ======== ======== ======== ========
June 30, July 1, July 2, June 26, June 27,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
Consolidated Balance Sheet Data:
Working Capital ............................ $ 12,914 $ 13,258 $ 16,245 $ 17,592 $ 19,040
Total Assets ............................... $ 21,793 $ 23,365 $ 27,942 $ 28,470 $ 32,437
Long-Term Debt (less current installments) . $ 680 $ 1,052 $ 1,760 $ 2,482 $ 4,748
Stockholders' Equity ....................... $ 18,195 $ 18,824 $ 21,679 $ 24,098 $ 24,074
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth the Company's net sales by product line for
each of the years in the three year period ended June 30, 1996.
Fiscal Year Ended
---------------------------------
(In Thousands)
June 30 July 1 July 2
1996 1995 1994
------- ------- -------
Electronic Warfare $ 9,343 $14,416 $18,223
Radar and Telecommunications 5,642 3,239 2,011
Wireless 2,097 341 3
------- ------- -------
$17,082 $17,996 $20,237
======= ======= =======
New sales historically associated with particular product lines may not be
indicative of future trends because of the relative size of individual orders
and changes in the Company's emphasis on specific product lines. See "Business -
Company Products" and "Business - Backlog."
During fiscal 1996 the Company changed its accounting period from a 52-53
week fiscal year to a twelve month fiscal year ending June 30. References herein
to the current fiscal year are for the twelve month period ended June 30, 1996.
Fiscal 1995 and fiscal 1994 ended on July 1, 1995 and July 2, 1994,
respectively. Fiscal 1995 was a 52 week period, while fiscal 1994 was a 53 week
period. The impact of this change on reported results was insignificant.
To better serve its emerging commercial markets, the Company reorganized,
during the first quarter of fiscal 1996 into three internal business units.
These business units are Electronic Warfare, Radar and Telecommunications and
Wireless. Products in the electronic warfare business unit consist of the
Company's line of military products, which include Digital Frequency
Discriminators (DFD's), Digital RF Memories (DRFM's), ESM receivers and military
Microwave Integrated Circuit components (MIC's). Radar and Telecommunications
products consist of signal distribution networks for phase array antennas and
customized commercial multilayer components such as Butler matrices and
beamforming networks for commercial telecommunication satellites. Wireless
products are microwave components and assemblies for use in building cellular
base station equipment. These products are a forward evolution of the old
military microwave components and are significantly smaller and lighter, while
providing better performance.
Each business unit is composed of an independent engineering and
marketing/sales team whose purpose is to develop, market and deliver product to
its customers. This action was taken to optimize responsiveness to customer
needs and to provide extended fiscal accountability downward throughout the
organization.
11
Fiscal 1996 Compared to Fiscal 1995
Consolidated results of operations for fiscal 1996 showed a loss of
slightly less than $1.1 million resulting from poor sales performance by the
Company's English subsidiary and the decision by the Company to close this
European repair facility at Anaren Microwave, Ltd. and liquidate its Electronic
Warfare (EW) Simulator manufacturing operation headquartered there. Net sales
for fiscal 1996 were $17,082,000, down 5% from fiscal 1995 sales levels, while
the net loss for fiscal 1996 was $1,080,000 compared to a net loss of $1,472,000
for the prior year. Included in the fiscal 1996 loss was an $810,000 third
quarter restructuring charge against earnings related to the divestiture of the
Company's EW Simulator manufacturing operation in the United Kingdom.
During the year ended June 30, 1996, sales in the Radar and
Telecommunications group rose $2,400,000, or 74% over fiscal 1995 levels, while
shipments for the Company's new Wireless group rose $1,750,000 to $2,100,000
compared to only $340,000 in fiscal 1995. During this same period sales of
Electronic Warfare products fell approximately $5,100,000 compared to the
previous fiscal year, resulting in an overall sales decline of $900,000 in
fiscal 1996.
Sales of Radar and Telecommunication products, which consist of customized
commercial multilayer components such as Butler matrices and beamforming
networks for commercial satellites, increased $2,400,000 to $5,640,000 in fiscal
1996 compared to approximately $3,240,000 in fiscal 1995. This increase is
attributable to over $980,000 in shipments in fiscal 1996 under the Army Ground
Based Radar program (GBR) and over $3,550,000 in shipments of satellite
beamforming networks under a $6,000,000 production contract with Raytheon
Company for the Iridium project. These two programs accounted for approximately
$2,500,000 in shipments in fiscal 1995. The Iridium program represents
approximately $2,450,000 in firm backlog at June 30, 1996 and is expected to
ship at the rate of approximately $700,000 to $1,000,000 per quarter in fiscal
1997.
New orders for Radar and Telecommunications products total $2,850,000
during fiscal 1996 and included initial engineering funding for development of
antenna beamforming networks for satellite telecommunications systems being
developed by TRW, Martin Marietta Overseas Corp. and Space Systems/Loral. At
June 30, 1996 firm backlog for Radar and Telecommunication products was
$4,125,000, all of which is expected to ship in fiscal 1997.
Subsequent to the end of fiscal 1996, the Company received a firm fixed
price contract in excess of $6,000,000 for the design and production of
satellite antenna beamforming networks from Martin Marietta Overseas Corp. for
the Asia Cellular Satellite System (ACeS). The ACeS system is a space based
cellular communications system to serve Asia via two geosynchronous satellites.
This contract is expected to be performed over a seventeen month period
beginning in August 1996.
Sales of Wireless products, which consist of components for use in building
cellular base station equipment, rose from $340,000 in fiscal 1995 to almost
$2,100,000 in fiscal 1996. These sales consisted mainly of catalog microwave
components and pilot production runs of custom components for base station
equipment manufacturers.
The Wireless business unit received significant production orders totaling
over $3,000,000 from Nortel and Motorola, Inc. during fiscal 1996 for custom
12
base station components. These orders began initial low level production runs in
the latter part of the fourth quarter of fiscal 1996 and are expected to reach
full production in the second quarter of fiscal 1997. Firm backlog for Wireless
products was approximately $3,735,000 at June 30, 1996, all of which is expected
to ship in fiscal 1997.
Sales of Electronic Warfare products fell $5,100,000 to $9,343,000 in
fiscal 1996, compared to sales of approximately $14,400,000 in fiscal 1995.
Shipments in this business area, which include Digital Frequency Discriminators
(DFD's), Digital RF Memories (DRFM's), ESM Receivers, Military Simulators and
Microwave Integrated Circuit components (MIC's) has been steadily declining over
the past three fiscal years due to the decline in the overall worldwide defense
market. The drop in sales in fiscal 1996 was spread over all of the above
mentioned product areas, except for MIC's and DRFM's due to the completion of a
number of large DFD programs in the latter part of fiscal 1994 and early fiscal
1995, and a drop off in new orders for ESM receivers in fiscal 1995. .
During fiscal 1996, the Company received a number of new orders in the
Electronic Warfare business area totaling over $18,400,000. The most significant
of these was from the ASPJ Joint Venture Team of I.T.T. Avionics and
Northrop/Grumman for foreign sales of the Airborne Self Protection Jammer. These
orders should serve to stabilize shipments in this business unit over the next
two years. Firm backlog in this product area at June 30, 1996 was $15,427,000 of
which approximately $3,200,000 is expected to ship in fiscal 1997, approximately
$8,150,000 in fiscal 1998, and the remainder in fiscal 1999.
During 1996, the Company has booked new orders totaling approximately
$26,700,000 compared to new orders of approximately $15,100,000 for all of
fiscal 1995. Present firm backlog for all business lines as of June 30, 1996
stands at $23,287,000 a 69% increase over firm backlog of $13,800,000 at the end
of fiscal 1995. Due to lead times and customer delivery requirements, this
increase in backlog will not have a significant impact on quarterly shipment
levels until the second quarter of fiscal 1997.
The loss for fiscal 1996 was $1,080,069 compared to a loss of $1,471,682
for fiscal 1995. The current year loss consists of a $270,000 operating loss
caused by the low level of sales and margins at the Company's European
subsidiary and an $810,000 non-recurring restructuring charge against earnings
recorded in the third quarter required to recognize the divestiture of the
Company's Electronic Warfare (EW) Simulator manufacturing operation in the
United Kingdom.
This restructuring charge, which included provisions for the write-down of
EW Simulator assets to realizable value, legal and professional fees and costs
to complete an existing EW Simulator contract in excess of expected revenue,
reduced earnings for both the three months ended March 31, 1996 and the year end
June 30, 1996. These actions were necessitated by the severe downsizing of the
military budgets in Europe which resulted in a substantial reduction in new
orders for EW simulators during the past two years and has resulted in ongoing
losses from operations at Anaren Microwave, Ltd. including a $686,000 operating
loss for fiscal 1996. This divestiture will allow the Company to focus its
efforts on its growing domestic operations.
Gross margin on sales for fiscal 1996 was 35% compared to 27% in fiscal
1995. This substantial improvement was the result of higher sales volume at the
Company's U.S. manufacturing facility which allowed for better absorption of
fixed overhead costs and personnel reductions made in the second quarter of
fiscal
13
1995 which were specifically targeted at reducing manufacturing overhead and
engineering costs.
Additional, during fiscal 1996, approximately $588,000 of costs incurred in
building products for shipment during this period were charged against the
allowance for contract losses established in fiscal 1994 and 1995. These
expenses represent cost overruns incurred on products shipped in the first three
quarters of fiscal 1996 which had previously been identified and provided for
when the allowance was established. The Company expects that gross margins will
continue at fiscal 1996 levels or improve with the closing of its EW Simulator
facility and with higher shipment levels expected in fiscal 1997.
Research and development expense was $1,185,000 for fiscal 1996, up 26%
from $939,000 for the same period in fiscal 1995. This increase represents the
continuing rise in the prototype development efforts for the Company's new
Wireless commercial product line. Current development efforts are being targeted
on adapting existing Company technologies to produce new component products
which fit a specific customer's requirements. Future research and development
expenditures are expected to fluctuate based on sales levels and identified
market opportunities.
Marketing expense fell 2% in fiscal 1996 compared to the previous fiscal
year. This decrease was due mainly to the reassignment of marketing personnel to
other functions with the company due to the business group realignment
undertaken in the first quarter of the current year. Marketing expense is
expected to rise during fiscal 1997 as the Company adds personnel and expenses
in order to meet the demands of the wireless marketplace.
General and administrative expenses rose 1.6% in fiscal 1996 compared to
fiscal 1995. This increase represents normal period to period fluctuation in
expenditures. Current levels of general and administrative spending reflect the
same level or lower of that experienced by the Company in fiscal 1995. General
and administrative expense is expected to remain at current levels or increase
slightly during fiscal 1997.
Interest expense fell 42% in fiscal 1996 compared to the same period in
fiscal 1995. The decline in interest expense reflects the continuing reduction
in long-term debt over the past year. During this same period, other income fell
10% due to lower investable cash balances during the current year compared to
the previous fiscal year.
Consolidated income tax expense was $0 in fiscal 1996 versus an expected
tax benefit of approximately $(367,000) based on 34% of the loss before income
taxes. The primary difference between the actual tax expense recognized in the
financial statements and the expected tax benefit calculated on the loss
incurred was due to the Company's equity in the operating loss of its English
subsidiary which is not subject to U.S. taxation and offset by a decrease in the
deferred tax asset valuation allowance required by the new tax accounting rules
(FAS No. 109) adopted by the Company at the beginning of fiscal 1994. Under the
new tax accounting rules the Company must assess the realizability of deferred
tax assets, considering whether it is more likely than not that some portion or
all of the deferred tax assets, considering 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 in the period in which those temporary differences become
deductible. Management of the company has considered the scheduled reversal of
deferred tax liabilities and
14
projected future taxable income in making the assessment of the realizability of
the deferred tax asset balances at June 30, 1996. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, the Company believes it is
more likely than not that it will realize the benefit of these deductible
differences, net of the existing valuation allowances at June 30, 1996.
Fiscal 1995 Compared to Fiscal 1994
Results of operations for fiscal 1995 continued to reflect the overall
decline in the worldwide defense market and the production problems with the
Ground Based Radar program suffered by the Company during the first half of the
year. Net sales for fiscal 1995 were $17,996,000, down 11% from fiscal 1994,
while the net loss for fiscal 1995 was $1,472,000 compared to a net loss in the
previous year of $2,356,000. The loss in fiscal 1994 included a one time charge
against earnings of $995,000 to recognize the cumulative effect of adopting
statement of Financial Accounting Standards No. 106 Employers Accounting for
Post-retirement Benefits other than Pensions.
The 11% decline in fiscal 1995 sales revenue was due to a 21% decrease in
shipments of Electronic Warfare products. During this same period, shipments of
Radar and Telecommunications products rose 61% and sales revenue from new
wireless products introduced in this fiscal year totaled over $340,000.
The 21% decline in Electronic Warfare sales revenue in fiscal 1995 was due
to a 50% decrease in shipments of DFD products and a 90% drop in sales of DRFM
products. During this same period, shipments of MIC and Component products rose
20% and sales of ESM Receivers and Special Project products rose 71%, including
a 41% increase in shipments of Anaren Microwave, Ltd, offsetting a large portion
of the decrease in the DFD and DRFM products.
Shipments of DFD products fell 50%, or $4,150,000, in fiscal 1995 compared
to fiscal 1994. This decrease was due to lower unit volume on a number of both
domestic and foreign defense programs in this product area. These programs,
which include the Northrop ALQ-135 program, the Loral Federal Systems STAR
program a Deutche German Jammer program and the Raytheon SLQ-32 and LAMPS
programs, represented approximately $5,200,000 worth of shipments in fiscal 1994
compared to $1,500,000 in shipments during fiscal 1995.
New orders for DFD products totaled $2,400,000 in fiscal 1995, down 38%
from $4,000,000 in fiscal 1994. This decline in new DFD orders reflected the
continuing decline in U.S. Government defense spending and the lack of any new
programs or significant upgrades to U.S. Air Force or Navy airborne electronic
warfare capabilities for which the Company's DFD products would be applicable.
Firm backlog for DFD products was $2,500,000 at July 1, 1995, down 42% from
$4,300,000 at July 2, 1994.
DRFM sales fell $3,400,000 or 75% in fiscal 1995 versus 1994 sales volume
due to the low level of backlog in this product area at the beginning of fiscal
1995, $670,000, compared with firm backlog of $3,500,000 at the beginning of
fiscal 1994. Although customer interest in both the U.S. and foreign defense
market for DRFM technology remains high, new orders for DRFM products totaled
only $910,000 in fiscal 1995. Firm backlog for DRFM products was $1,000,000 at
July 1, 1995.
15
Shipments of ESM Receivers and Special Project products, which includes the
sales of Anaren Microwave, Ltd., rose 71% in fiscal 1995 compared to fiscal
1994. This increase reflected both a substantial increase in the number of ESM
receiver systems shipped in fiscal 1995 and a 41% rise in shipments by Anaren
Microwave, Ltd. The increase in Anaren Ltd. sales was due to a $140,000 rise in
simulator sales in fiscal 1995 resulting from billings on a $1,600,000 simulator
contract with the Dutch Air Force, which had been previously delayed in fiscal
1994. Sales were further augmented by a large order for spare ESM receiver parts
totaling $450,000 and a $150,000 increase in European sales of off the self
catalog component parts. Firm backlog for Anaren Microwave, Ltd. at July 1, 1995
was $650,000 compared to $1,600,000 at July 2, 1994.
Fiscal 1995 sales of ESM receiver systems rose $1,400,000 over fiscal 1994
sales levels due to a tripling of the number of systems shipped in the fiscal
1995, to three, compared to only one system shipped in fiscal 1994. Each of
these systems, which are deployed for ship defense, sells for approximately
$750,000. Firm backlog in this product area at July 1, 1995 was approximately
$870,000, which represented one ESM receiver and orders for various spare parts.
Shipments of MIC and Component products rose approximately $560,000 in
fiscal 1995 due primarily to a small increase in "off the shelf" catalog
component sales and the receipt of $1,000,000 in funding for parts for the E2C
military airborne surveillance program which began shipping in the second six
months of fiscal 1995.
Shipments of Radar and Telecommunications products rose $1,200,000, or 61%,
in fiscal 1995 compared to fiscal 1994, due to a $1,450,000 increase in third
and fourth quarter fiscal 1995 revenues in this product area versus the same six
months in fiscal 1994. This increase was a result of bringing the U.S. Army
Ground Based Radar program, which the Company produced for Raytheon Company
under a $3,800,000 contract, into full factory production at the end of January
1995. Shipments under this contract were severely limited in the first six
months of fiscal 1995 due to difficulties in meeting the customers technical
specifications and manufacturing process problems. During the second quarter of
fiscal 1995, the Company received some technical relief from the customer and
during January 1995 many of the manufacturing process problems were resolved
allowing for a six fold increase in shipment volume on this program during the
last five months of fiscal 1995.
Sales of Radar and Telecommunication products were further augmented in the
second half of fiscal 1995 by the shipment of fifteen preproduction beamforming
networks for the Iridium satellite spacebased telephone system program valued at
over $500,000.
During fiscal 1995, the Company booked over $7,100,000 in new orders for
this business unit, including $6,300,000 in additional funding from Raytheon
Company for production of antenna feed networks for the Iridium project. At July
1, 1995 the firm backlog for this product area was approximately $6,960,000.
The Wireless business unit was a new product area for the Company in late
fiscal 1995 created to serve the wireless cellular telephone base station
equipment marketplace. Sales for fiscal 1995 were approximately $340,000 and
consisted mainly of newly developed surface mount components sold on tape and
reel for high volume manufacturing applications. These newly developed products
generated approximately $500,000 in new orders during fiscal 1995 and at July 1,
1995 the Company had approximately $200,000 in firm backlog.
16
Consolidated total orders received during fiscal 1995 were approximately
$16,130,000, down 21% from $20,400,000 in fiscal 1994, and continued to reflect
the decline in the worldwide defense market. Firm backlog for all product lines
was $13,700,000 at July 1, 1995 down 12% from $15,600,000 at July 2, 1994.
The net loss for fiscal 1995 was $1,472,000 compared to a net loss for
fiscal 1994, before the cumulative effect of the Accounting change for FAS No.
106, of $1,362,000. This drop in earnings was a direct result of the declining
sales levels; smaller margins caused by production problems, rising research and
development expenses and the recording of provisions for both severance costs
and additional contract losses amounting to $360,000 and $300,000, respectively,
during the year.
During fiscal 1995 the Company recorded a net charge against earnings of
$300,000 which reflected additional net provisions for projected losses on fixed
price contracts. This net provision consisted of a $1,050,000 charge against
earnings in the second quarter of fiscal 1995 to provide for expected additional
cost overruns on production contracts, which was subsequently reduced by a
$750,000 credit in the fourth quarter to reflect the successful recovery of a
portion of the cost overruns from a customer. Principal among these contracts is
the Army Ground Based Radar program which represented over $2,000,000 in fiscal
1995 and $1,000,000 in fiscal 1996 revenues. This contract, which was produced
for the Raytheon Company, was previously identified as being in a loss position
at the end of fiscal 1994 and anticipated cost overruns were recorded at that
time as part of a $1,570,000 loss provision. The additional $1,050,000 loss
provision record in the second quarter of fiscal 1995 was necessary due to
production process problems identified during that quarter which required
significant additional engineering expenditures and resulted in increased
estimates for labor, material and scrap costs to complete the contract. During
the third quarter and subsequent to recording this additional provision for
losses, the Company submitted a claim for added scope work under this program
and was successful, in July 1995, in negotiating a settlement for $750,000 in
additional funding. This additional revenue was recorded as a reduction in the
loss provision in the fourth quarter of fiscal 1995, increasing net earnings in
that quarter and reducing the net loss for the year by that same amount.
During the second quarter of fiscal 1995, the Company recorded a $360,000
restructuring charge against earnings, which represented severance and
outplacement costs for reductions in engineering and overhead personnel. These
personnel reductions were made to better position the Company, competitively, in
the new wireless/defense business environment and consisted primarily of
personnel assigned to product areas associated with the declining military
defense business.
Gross margin on sales was 27.3% in fiscal 1995, a 1.5% decline over gross
margins of 28.8% in fiscal 1994. This small drop in gross margin was caused by
higher fixed overhead costs per sales dollar due to the significant decline in
shipments during fiscal 1995 compared to the prior year and by increases in
manufacturing production process costs required to set up automated production
facilities for the Company's new commercial wireless products.
During fiscal 1995, approximately $2,000,000 of costs incurred in building
products for shipment were charged against the allowance for contract losses
established at the end of fiscal 1994 and increased by $1,050,000 during the
second quarter of fiscal 1995. These expenses represented cost overruns incurred
on units
17
shipped during fiscal 1995, which had been previously identified and provided
for when the loss provision allowance was established.
Research and Development expense was $939,000 in fiscal 1995 up 68% over
$560,000 in fiscal 1994. This increase reflects a significant rise in the second
half of fiscal 1995 in the volume of prototype development for the Company's new
wireless cellular base station products. Development efforts were being
concentrated on adapting existing Company technologies to produce products which
are targeted at existing potential customer base station applications and
present both improved performance and significant cost savings compared to the
products currently being used by potential customers.
Marketing expense rose $97,000 or 3% in fiscal 1995 compared to fiscal
1994, due mainly to the increased resources required to penetrate the wireless
commercial marketplace. During fiscal year 1995 the Company added sales
personnel dedicated to the wireless market and increased its advertising and
travel expenditures by 47% and 28%, respectively, in order to serve this new
marketplace and expanded customer base.
General and administrative expenses fell 10% in fiscal 1995 versus fiscal
1994. This reduction was the result of lower travel and professional service
expenses and continuing reductions in personnel through attrition and
reassignments. Interest expense fell 22% in fiscal 1995 compared to fiscal 1994,
while other income decreased 45% during this same period. The drop in interest
expense mirrored the decline in the level of debt outstanding during the current
year, which more than offset the general rise in interest rates experienced in
fiscal 1995. Other income, which is primarily interest income, fell $134,000 in
fiscal 1995. Although investable cash balances and interest rates were
comparable in fiscal 1995 and 1994, during 1994 the Company sold an idle fixed
asset resulting in a one time profit of approximately $108,000. No such
comparable sale of assets occurred in fiscal 1995.
Despite a 41% increase in sales volume in fiscal 1995, the Company's
foreign subsidiary, Anaren Microwave, Ltd., recorded an operating loss of
($327,000) compared to an operating loss of ($364,000) in fiscal 1994. The loss
incurred was due to delays in delivery and cost overruns on a $1,800,000
simulator contract for the Dutch Air Force.
Fluctuations in foreign currency exchange had no material effect on the
results of operation for Anaren Microwave, Ltd., as the exchange rate for the
British pound varied little during fiscal 1995.
Consolidated income tax benefit was ($330,000) in fiscal 1995 versus an
expected tax benefit of ($612,572) based on 34% of the loss before income taxes
and the cumulative effect of change in accounting principle. The majority of the
difference between the actual tax benefit recognized and the expected tax
benefit calculated on the loss incurred was due to the Company's equity in the
operating loss of its English subsidiary which is not subject to U.S. taxation
and an increase in the deferred tax asset valuation allowance required by the
new tax accounting rules (FAS No. 109) adopted by the Company at the beginning
of fiscal 1994. Under the new tax accounting rules the Company must assess the
realizability of deferred tax assets, considering 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 in the period in which those temporary differences
become deductible. Management of the Company has considered the scheduled
reversal of deferred tax liabilities and
18
projected future taxable income in making the assessment of the realizability of
the deferred tax asset balances at July 1, 1995. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, the Company believes it is
more likely than not that it will realize the benefit of these deductible
differences, net of the existing valuation allowances at July 1, 1995. (See note
9 to the consolidated financial statements).
Liquidity and Capital Resources
At June 30, 1996, the Company had net working capital of $12,914,000, which
included $1,740,000 in cash and cash equivalents, compared to working capital at
June 1, 1995 of $13,258,000 which included $2,140,000 in cash and cash
equivalents. Net cash used was $400,000 in fiscal 1996 compared to cash used of
$1,417,000 in fiscal 1995. Cash flow was negative in both fiscal 1996 and fiscal
1995 due principally to the net losses incurred in both years, continuing
reductions in long-term debt, acquisitions of capital equipment and, in fiscal
1995, the repurchase of approximately $1,460,000 of the Company's common stock.
Long term liabilities, which consist of the Company's unfunded liability
for post-retirement health care costs under FAS No. 106 and long-term debt in
the form of various capitalized lease obligations, decreased $309,000 and
$646,000 in fiscal 1996 and 1995, respectively. The decline in both fiscal year
1996 and 1995 represents scheduled repayment of debt as the Company, presently,
has no plans to fund the long-term liability recognized under FAS No. 106. No
new long term debt was taken on during this two year period as the Company's
cash balances were more than adequate to fund both long and short term cash
needs.
Capital equipment additions in fiscal 1996 amounted to $1,139,000 and
consisted primarily of equipment needed to further automate production for the
Company's new wireless telecommunications component products which were under
development in fiscal 1995. The additions were funded entirely by cash generated
by operations. Capital equipment expenditures for fiscal 1997 have been budgeted
at approximately $1,000,000 and will consist primarily, of additional automated
high volume production equipment to further expand production capacity of the
new wireless products. These additions will continue to be funded by cash
generated from operations and currently existing cash balances as management
believe that these cash resources will be more than adequate to meet these
financing needs.
In fiscal 1995, the Company maintained a revolving line of credit with a
bank which provided for principal drawings of up to $3,500,000. This credit
agreement carried interest on outstanding borrowings at the prime rate plus 3/4%
and was secured by all assets of the Company which were not otherwise pledged
under other agreements. This credit facility expired at December 31, 1994. In
August 1996, the Company secured a commitment for a new credit facility from a
bank providing for a $3,000,000 working capital revolving line of credit bearing
interest at prime + 1% maturing on November 30, 1998, and a $907,000 term loan
payable in semi-annual installments of $113,333 through May, 2000, bearing
interest at prime plus 1.25%. The proceeds of the term loan will be used to
refinance the existing loans of the Company other than capitalized lease
obligations, while the revolving credit facility will be used to supplement
short-term working capital needs brought about by the expected growth in
production and sales volume. Borrowings under the new credit facility will be
secured by substantially all assets of the Company.
19
The Company believes that its cash requirements for the foreseeable future
will be satisfied by currently invested cash balances, expected cash flow from
operations and funds available under its credit facilities.
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 13 to the consolidated financial statements which have been
submitted as a separate section of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
20
PART III
Item 10. Directors and Executive Officers of Registrant
Information required by this item, other than executive officers which
appears in Part I hereof, is contained in the Registrant's proxy statement to be
filed with respect to the 1996 Annual Meeting of Shareholders and is
incorporated by reference herein.
Item 11. Executive Compensation
Information required by this item is contained in the Registrant's proxy
statement to be filed with respect to the 1996 Annual Meeting of Shareholders
and is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is contained in the Registrant's proxy
statement to be filed with respect to the 1996 Annual Meeting of Shareholders
and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this item is contained in the Registrant's proxy
statement to be filed with respect to the 1996 Annual Meeting of Shareholders
and is incorporated by reference herein.
21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
----
(a) 1. and 2. Financial Statements and Schedules:
Reference is made to the List of Financial
Statements and Financial Statement Schedules
hereinafter contained ............................... 25
3. Exhibits:
Reference is made to the List of Schedules
hereinafter contained ............................... 25
(b) Current Reports on Form 8-K:
No Current Reports of Form 8-K were filed by the Company during the last
quarter of the fiscal year ended June 30, 1996.
(c) Exhibits:
Reference is made to the List of Exhibits hereinafter contained ... 45
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Anaren Microwave, Inc. has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Anaren Microwave, Inc.
/s/ Hugh A. Hair
------------------------
Chief Executive Officer
/s/ Carl W. Gerst, Jr.
------------------------
Treasurer
/s/ Joseph E. Porcello
------------------------
Vice President of Finance/Controller
Date: September 27, 1996
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/ Lawrence A. Sala /s/ Abraham Manber
- ------------------------ ------------------------
Director Director
/s/ William J. Mackay /s/ Herbert I. Corkin
- ------------------------ ------------------------
Director Director
/s/ Dale F. Eck
- ------------------------
Director
Date: September 27, 1996
23
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 1996 and July 1, 1995
(With Independent Auditors' Report Thereon)
24
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1996 and July 1, 1995
Consolidated Statements of Operations for the Years ended
June 30, 1996, July 1, 1995, and July 2, 1994
Consolidated Statements of Stockholders' Equity for the Years ended
June 30, 1996, July 1, 1995, and July 2, 1994
Consolidated Statements of Cash Flows for the Years ended June 30, 1996,
July 1, 1995, and July 2, 1994
Notes to Consolidated Financial Statements
25
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, 1996 and July 1, 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended June 30, 1996, in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 8 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" effective June 27, 1993. As discussed in notes 1 and 9,
effective June 27, 1993, the Company also changed its method of accounting
for income taxes to adopt the provisions of the Financial Accounting
Standards Board's Statement No. 109, "Accounting for Income Taxes."
Syracuse, New York
August 16, 1996
26
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 and July 1, 1995
Assets 1996 1995
----------- ----------
Current assets:
Cash and cash equivalents $ 1,739,569 2,139,795
Receivables, less allowance for bad debts of
$13,000 in 1996 and 1995 5,167,996 6,112,540
Refundable income taxes 320,945 330,000
Inventories (note 2) 7,210,320 6,853,755
Prepaid expenses 255,723 235,047
----------- ----------
Total current assets 14,694,553 15,671,137
----------- ----------
Net property, plant and equipment (notes 3 and 5) 7,054,870 7,616,207
----------- ----------
Other assets, net 43,793 77,762
----------- ----------
$21,793,216 23,365,106
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (note 5) 394,633 712,264
Provision for losses on contracts -- 588,031
Accounts payable 663,848 705,101
Accrued expenses (note 4) 471,665 408,060
Customer advance payments 250,000 --
----------- ----------
Total current liabilities 1,780,146 2,413,456
----------- ----------
Postretirement benefit obligation (note 8) 1,138,215 1,075,834
Long-term debt, less current installments (note 5) 680,001 1,051,881
----------- ----------
Total liabilities 3,598,362 4,541,171
----------- ----------
Stockholders' equity:
Common stock of $.01 par value. Authorized
12,000,000 shares; issued 4,992,116 and
4,850,016 shares in 1996 and 1995, respectively 49,921 48,500
Additional paid-in capital 15,507,088 15,057,521
Retained earnings 4,649,922 5,729,991
----------- ----------
20,206,931 20,836,012
Less cost of 892,274 treasury shares
in 1996 and 1995 2,012,077 2,012,077
----------- ----------
Total stockholders' equity 18,194,854 18,823,935
----------- ----------
Commitments (note 11)
$21,793,216 23,365,106
=========== ==========
See accompanying notes to consolidated financial statements.
27
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 1996, July 1, 1995, and July 2, 1994
1996 1995 1994
------------ ------------ ------------
Net sales $ 17,081,901 17,995,752 20,237,226
------------ ------------ ------------
Costs and expenses:
Cost of sales 11,146,510 13,081,115 14,414,798
Provision for losses on contracts -- 300,000 1,570,000
Marketing 2,969,726 3,027,667 2,930,818
Research and development 1,185,168 938,927 559,633
General and administrative 2,075,461 2,041,097 2,265,954
Restructuring (note 10) 810,000 360,000 --
------------ ------------ ------------
Total costs and expenses 18,186,865 19,748,806 21,741,203
------------ ------------ ------------
Operating loss (1,104,964) (1,753,054) (1,503,977)
------------ ------------ ------------
Other (expense) income:
Interest expense (122,759) (212,588) (271,472)
Other, primarily interest income 147,654 163,960 298,077
------------ ------------ ------------
Total other income (expense) 24,895 (48,628) 26,605
------------ ------------ ------------
Loss before income taxes and
cumulative effect of change in accounting
principle (1,080,069) (1,801,682) (1,477,372)
Income tax benefit (note 9) -- (330,000) (115,627)
------------ ------------ ------------
Loss before cumulative effect of
change in accounting principle (1,080,069) (1,471,682) (1,361,745)
Cumulative effect of change in accounting
for postretirement benefits (note 8) -- -- (994,727)
------------ ------------ ------------
Net loss $ (1,080,069) (1,471,682) (2,356,472)
============ ============ ============
Loss per share:
Loss before cumulative effect
of change in accounting principle (.27) (.36) (.31)
Cumulative effect of change in accounting
for postretirement benefits -- -- (.22)
------------ ------------ ------------
Net loss per share $ (.27) (.36) (.53)
============ ============ ============
Weighted average shares outstanding 4,057,300 4,046,729 4,434,801
============ ============ ============
See accompanying notes to consolidated financial statements.
28
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1996, July 1, 1995, and July 2, 1994
Common Stock Additional Treasury Stock Total
---------------------- Paid-in Retained ---------------------- Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
---------- --------- ----------- ----------- -------- ----------- ------------
Balance at June 26, 1993 4,794,852 $ 47,949 14,939,998 9,558,145 359,874 $ (448,134) 24,097,958
Net loss -- -- -- (2,356,472) -- -- (2,356,472)
Stock issued under employee stock
purchase plan 2,964 29 5,958 -- -- -- 5,987
Stock options exercised (note 6) 26,400 264 36,036 -- -- -- 36,300
Purchase of treasury shares -- -- -- -- 40,100 (104,665) (104,665)
---------- --------- ----------- ----------- -------- ----------- ------------
Balance at July 2, 1994 4,824,216 48,242 14,981,992 7,201,673 399,974 (552,799) 21,679,108
Net loss -- -- -- (1,471,682) -- -- (1,471,682)
Stock options exercised (note 6) 25,800 258 75,529 -- -- -- 75,787
Purchase of treasury shares -- -- -- -- 492,300 (1,459,278) (1,459,278)
---------- --------- ----------- ----------- -------- ----------- ------------
Balance at July 1, 1995 4,850,016 48,500 15,057,521 5,729,991 892,274 (2,012,077) 18,823,935
Net loss -- -- -- (1,080,069) -- -- (1,080,069)
Stock options exercised (note 6) 142,100 1,421 449,567 -- -- -- 450,988
---------- --------- ----------- ----------- -------- ----------- ------------
Balance at June 30, 1996 4,992,116 $ 49,921 15,507,088 4,649,922 892,274 $(2,012,077) 18,194,854
========== ========= =========== =========== ======== =========== ===========
See accompanying notes to consolidated financial statements.
29
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1996, July 1, 1995, and July 2, 1994
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,080,069) (1,471,682) (2,356,472)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Cumulative effect of change in
accounting principle -- -- 994,727
Depreciation and amortization 1,564,466 1,722,686 1,702,427
Deferred income taxes -- -- (297,627)
Gain on sale of equipment -- -- (108,427)
Net loss on disposition of Anaren
Microwave, Ltd. 810,000 -- --
Changes in operating assets and
liabilities, exclusive of disposition
of Anaren Microwave, Ltd. net assets:
Provision for losses on contracts (588,031) (981,969) 1,570,000
Receivables 944,544 947,587 (911,184)
Refundable income taxes 9,055 (228,810) (73,623)
Inventories (748,111) 1,870,386 (171,151)
Prepaid expenses (20,676) 55,884 (110,929)
Other assets 33,969 88,547 (20,633)
Accounts payable (41,253) 168,647 83,049
Accrued expenses (219,407) 119,120 (111,743)
Customer advance payments 250,000 -- --
Postretirement benefit obligation 62,381 61,838 19,269
----------- ----------- -----------
Net cash provided by operating
activities 976,868 2,352,234 207,683
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of equipment -- -- 825,000
Capital expenditures (1,138,571) (1,296,587) (1,254,198)
----------- ----------- -----------
Net cash used in investing activities (1,138,571) (1,296,587) (429,198)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (689,511) (725,526) (670,431)
Net borrowings (repayments) under
revolving line of credit -- (363,352) 338,961
Proceeds from the issuance of common
stock 450,988 75,787 42,287
Purchase of treasury stock -- (1,459,278) (104,665)
----------- ----------- -----------
Net cash used in financing activities (238,523) (2,472,369) (393,848)
----------- ----------- -----------
Net decrease in cash and cash
equivalents (400,226) (1,416,722) (615,363)
Cash and cash equivalents at beginning of year 2,139,795 3,556,517 4,171,880
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,739,569 2,139,795 3,556,517
=========== =========== ===========
See accompanying notes to consolidated financial statements.
30
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996, July 1, 1995, and July 2, 1994
(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. The years ended July 1,
1995 and July 2, 1994 consisted of 52 and 53 weeks, respectively.
During fiscal 1996, the Company changed its reporting period to a
calendar month end.
(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, the radar and satellite communications
market, and electronic warfare market.
Anaren Microwave, Ltd., a wholly-owned subsidiary, is incorporated in
England to serve primarily the European electronic warfare
market. As discussed in note 10, during fiscal 1996, the Company
sold substantially all of the assets of Anaren Microwave, Ltd.
and discontinued its manufacturing operations. Currently, the
Company continues to maintain its marketing function in England
to serve the European marketplace.
Companies such as Anaren, which are engaged in supplying
defense-related equipment to the government, are subject to
certain business risks peculiar to that 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. As a result of
the 1985 Balanced Budget and Emergency Deficit Reduction Control
Act, the federal deficit, and changing world order conditions,
Department of Defense budgets have been subject to increasing
pressure, resulting in an uncertainty as to the future effects of
budget cuts. The Company has, nonetheless, maintained a solid
foundation of tactical defense products which meet the needs of
the United States and its allies, as well as servicing a wide
range of commercial electronic businesses. These factors lead
management to believe that there is a high probability of
continuation of the Company's current major tactical defense
programs.
(c) Revenue Recognition
Revenue is recognized upon shipment of the product. Provisions for
estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
(d) Cash Equivalents
Cash equivalents consist of short-term repurchase agreements, with
maturities of three months or less.
31 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Costs include materials, labor, and overhead.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of
buildings and land improvements 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.
(g) Per Share Data
Per share data are based on the weighted average number of shares
outstanding. Options outstanding under the stock option plans are
excluded from the weighted average number of shares as their
inclusion would be anti-dilutive or not material.
(h) Pension Plan
The projected unit credit method is utilized for measuring net
periodic pension costs over the employees' service life.
Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be
earned in the future, and such contributions meet the minimum
funding requirements set forth in the Employee Retirement Income
Security Act of 1974.
(i) Postretirement Benefits
The Company sponsors a defined benefit health care plan for
substantially all retirees and employees. Effective June 27,
1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." The cumulative effect of the
change in method of accounting for postretirement benefits other
than pensions is reported in the fiscal 1994 consolidated
statement of operations.
(j) Income Taxes
Effective June 27, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" on a prospective basis. The cumulative effect
of the initial adoption of Statement 109 was insignificant. Under
the asset and liability method of Statement 109, 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.
32 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(k) Financial Instruments
The carrying amount of the Company's financial instruments, which
include cash and cash equivalents, accounts receivable, accounts
payable, and long-term debt, approximates their fair value at
June 30, 1996 and July 1, 1995.
(l) 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
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(m) New Accounting Standard
The Company will adopt Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation," in fiscal 1997.
The standard defines a fair value based method of accounting for
employee stock options. The compensation expense arising from
this method of accounting can be reflected in the financial
statements or, alternatively, the pro forma net income and
earnings per share effect of the fair value based accounting can
be disclosed in the financial footnotes. The Company expects to
adopt the disclosure alternative.
(n) Reclassifications
Certain 1995 balances have been reclassified to conform with the 1996
presentation.
(2) Inventories
Inventories are summarized as follows:
1996 1995
---------- ----------
Raw materials $3,027,700 2,804,720
Work-in-process 3,031,441 3,266,194
Finished goods 1,151,179 782,841
---------- ----------
$7,210,320 6,853,755
========== ==========
33 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Property, Plant and Equipment
Components of property, plant and equipment are as follows:
1996 1995
----------- -----------
Land and land improvements $ 1,362,050 1,362,050
Buildings 5,120,245 5,094,722
Machinery and equipment 22,443,583 21,968,931
----------- -----------
28,925,878 28,425,703
Less accumulated depreciation
and amortization 21,871,008 20,809,496
----------- -----------
$ 7,054,870 7,616,207
=========== ===========
The gross amount of assets recorded under capital leases amounted to
$2,382,662 as of June 30, 1996 and July 1, 1995. Accumulated
amortization on assets under capital leases amounted to $2,296,605 and
$1,972,282 at June 30, 1996 and July 1, 1995, respectively.
(4) Accrued Expenses
Accrued expenses are summarized as follows:
1996 1995
-------- --------
Compensation $168,901 143,788
Commissions 180,002 77,771
Other 122,762 186,501
-------- --------
$471,665 408,060
======== ========
(5) Long-term Debt
Long-term debt is comprised as follows:
1996 1995
---------- ----------
Industrial Development Revenue Bonds $ 906,668 1,133,334
Capitalized lease obligations 167,966 630,811
---------- ----------
1,074,634 1,764,145
Less current installments 394,633 712,264
---------- ----------
$ 680,001 1,051,881
========== ==========
34 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Long-term Debt, Continued
In August 1985, Onondaga County Industrial Development Agency (OCIDA)
issued revenue bonds bearing interest at 75% of the prime rate in the
amount of $3,400,000. The prime rate was 8.25% at June 30, 1996. The
proceeds from the bonds were used to construct additions to the
Company's manufacturing facility and for the purchase of additional
land and equipment. The related lease agreement, which matures on May
l, 2000, requires semi-annual principal payments of $113,333, plus
interest.
The substance of the agreement is a lease-purchase transaction between the
Company and OCIDA and a cross-guarantee agreement between the Company
and bondholder (the bank) under which the Company has guaranteed the
payments on the bonds which in the aggregate equal the total payment
required under the lease agreement. Substantially all property, plant
and equipment, exclusive of equipment capitalized under separate lease
agreements, has been pledged to collateralize the bonds.
Under the provisions of the agreement the Company may pay cash dividends up
to 35% of the net earnings in any fiscal year, or if, after giving
effect to such dividends, the Company's retained earnings at the end
of the fiscal year equals or exceeds $2.0 million. Additionally, the
agreement requires maintenance of a minimum current ratio, working
capital, retained earnings and tangible net worth, as defined. The
Company has complied with all restrictions and covenants.
The Company has various capital lease agreements for machinery and
equipment. The Company did not incur any new capital lease obligations
in 1994, 1995 or 1996. Future minimum lease payments are $172,689 in
1997. Included in the minimum lease payments is $4,723 of imputed
interest.
The Company maintained a revolving line of credit providing principal
drawings of $3,500,000 through December 31, 1994. This credit facility
carried interest on outstanding borrowings at the prime rate plus 3/4%
and was secured by assets of the Company which are not otherwise
pledged under lease agreements.
Maturities of long-term debt, exclusive of capitalized lease obligations,
are $226,666 from 1997 to 1999, and $226,670 in 2000.
Cash payments for interest were $110,959, $186,824 and $254,986 during
fiscal 1996, 1995 and 1994, respectively.
In August 1996, the Company secured a commitment for a credit facility
providing for (1) a $3,000,000 working capital revolving line of
credit bearing interest at prime plus 1% maturing on November 30,
1998, and (2) a $907,000 term loan payable in semi-annual installments
of $113,333 through May 1, 2000, bearing interest at prime plus 1.25%.
The proceeds of the term loan are to refinance the existing loans.
Borrowings under the credit facility will be secured by substantially
all assets of the Company.
35 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Stock Option Plans
Under the Company's 1988 Incentive Stock Option Plan (1988 ISO), 1,000,000
shares of common stock were reserved for the granting of options to
officers and key employees. Options were granted at the fair market
price of shares at the date of grant, become exercisable 20% at the
date of grant and 20% per year thereafter, and must be exercised
within ten years of the date of grant. No shares are available for
grant under the 1988 plan as of June 30, 1996.
During fiscal 1996, an Incentive Stock Option Plan (1996 ISO) was approved,
under which 400,000 shares of common stock were reserved for issuance
to eligible employees. Options are granted at a price not less than
fair market value of shares at the date of grant, become exercisable
20% six months from the date of grant and 20% per year thereafter, and
must be exercised within ten years of the date of grant.
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.
Information for the three years ended June 30, 1996 with respect to these
plans are as follows:
Shares
----------------------------
ISO NSO Total Option Price
-------- -------- -------- ------------
Outstanding at June 26, 1993 707,350 82,500 789,850 $ 1.38 to 6.88
Canceled (59,400) -- (59,400) $ 1.38 to 6.88
Exercised (26,400) -- (26,400) $ 1.38
-------- -------- --------
Outstanding at July 2, 1994 621,550 82,500 704,050 $ 1.38 to 6.88
Canceled (25,930) (7,500) (33,430) $ 1.38 to 6.88
Exercised (10,800) (15,000) (25,800) $ 1.38 to 4.12
-------- -------- --------
Outstanding at July 1, 1995 584,820 60,000 644,820 $ 1.38 to 6.88
Issued 168,000 -- 168,000 $ 4.13 to 7.50
Canceled (30,000) -- (30,000) $ 1.38 to 6.88
Exercised (82,100) (60,000) (142,100) $ 1.38 to 6.88
Expired (12,850) -- (12,850) $ 6.00
-------- -------- --------
Outstanding at June 30, 1996 627,870 -- 627,870 $ 1.38 to 7.50
======== ======== ========
Shares exercisable at
June 30, 1996 479,870 -- 479,870 $ 1.38 to 6.88
======== ======== ========
Shares available for grant
at June 30, 1996 232,000 24,000 256,000
======== ======== ========
36 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) 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 sets forth the plan's funded status at June 30, 1996
and July 1, 1995:
1996 1995
----------- -----------
Actuarial present value of accumulated
benefit obligation (vested $3,885,557
in 1996 and $3,378,784 in 1995) $ 3,944,861 3,430,914
Effect of assumed increase in
compensation levels 341,289 386,074
----------- -----------
Projected benefit obligation for services
rendered to date 4,286,150 3,816,988
Plan assets at fair value 4,400,776 3,960,127
----------- -----------
Plan assets in excess of projected
benefit obligation 114,626 143,139
Unrecognized net gain (270,153) (320,292)
Unrecognized prior service cost 151,872 170,111
Unrecognized net transition asset (15 year
amortization) 66,259 75,725
----------- -----------
Prepaid pension asset $ 62,604 68,683
=========== ===========
The following table details the components of net pension cost:
1996 1995 1994
--------- --------- ---------
Service cost $ 148,893 146,354 143,784
Interest cost 292,138 259,167 237,680
Actual return on plan assets (406,032) (794,687) (183,443)
Net amortization and
deferral 114,897 571,524 (16,222)
--------- --------- ---------
Net pension cost $ 149,896 182,358 181,799
========= ========= =========
The projected benefit obligation was determined using an assumed discount
rate of 7.5% and an assumed long-term rate of increase in compensation
of 5.0% for 1996 and 1995. The assumed long-term rate of return on
plan assets was 8.0% for 1996 and 1995.
Plan assets consist principally of equity securities, and U.S. government
and corporate obligations.
The Company maintains a voluntary contributory salary savings plan to
which participants may contribute up to 15% of their total
compensation. The Company contributes an amount equal to 50% of the
participants' contribution up to a maximum of 3% of the participants'
compensation. During fiscal 1996, 1995 and 1994, the Company
contributed $80,645, $112,255 and $39,140, respectively, to this plan.
37 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Employee Benefit Plans, Continued
The Company maintained an Employee Stock Purchase Plan which allowed for
employees to purchase common shares of the Company through payroll
deductions over a period not to exceed twenty-four months. At the
discretion of the Board, shares may be sold to employees under this
plan at not less than 85% of fair market value. The plan was
terminated in fiscal 1995.
(8) 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.
As discussed in note 1, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," as of June 27, 1993 and
elected to immediately recognize the accumulated postretirement
benefit obligation as of that date as the cumulative effect of a
change in accounting principle. There was no income tax benefit
recognized upon the adoption of Statement 106 as the recoverability of
such deferred tax asset would not be assured. The effect of adopting
Statement 106 on earnings, and the net periodic postretirement benefit
cost for the year ended July 2, 1994 was a decrease of $1,013,996, and
an increase of $19,269, respectively.
The following table presents the accumulated postretirement benefit
obligation at June 30, 1996 and July 1, 1995:
1996 1995
---------- ----------
Retirees $ 550,312 474,517
Fully eligible active plan participants 284,056 259,458
Other active participants 295,552 275,714
Unrecognized net gain 8,295 66,145
---------- ----------
Accumulated postretirement benefit
obligation $1,138,215 1,075,834
========== ==========
38 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Postretirement Benefits, Continued
The following table details the components of net periodic postretirement
benefit cost:
1996 1995 1994
-------- -------- --------
Service cost $ 29,296 30,522 26,709
Interest cost 78,151 71,089 74,605
-------- -------- --------
Net periodic postretirement
benefit cost $107,447 101,611 101,314
======== ======== ========
For measurement purposes, a 11% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was
assumed for fiscal 1996; the rate was assumed to decrease gradually to
5% by the year 2005 and remain at that level thereafter. The health
care cost trend rate assumption has an effect on the amounts reported.
However, as the Company contributes a fixed dollar amount to the plan
for the active employee group, this impact is minimized. For example,
increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated postretirement
benefit obligation as of June 30, 1996 by approximately $19,000 and
the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended June 30, 1996
by approximately $1,400.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at June 30, 1996 and July
1, 1995.
(9) Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
--------- --------- ---------
Year ended June 30, 1996:
U.S. Federal $ -- -- --
State -- -- --
--------- --------- ---------
$ -- -- --
========= ========= =========
Year ended July 1, 1995:
U.S. Federal $(330,000) -- (330,000)
State -- -- --
--------- --------- ---------
$(330,000) -- (330,000)
========= ========= =========
Year ended July 2, 1994:
U.S. Federal $ 151,000 (206,331) (55,331)
State 31,000 (91,296) (60,296)
--------- --------- ---------
$ 182,000 (297,627) (115,627)
========= ========= =========
39
(Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes, Continued
A reconciliation of the expected consolidated income tax benefit, computed
by applying the U.S. Federal corporate income tax rate of 34% to loss
before income taxes and cumulative effect of change in accounting
principle, to income tax benefit, is as follows:
1996 1995 1994
--------- --------- ---------
Expected consolidated income
tax benefit $(367,223) (612,572) (502,306)
State income taxes, net of
federal income tax benefit -- -- (39,795)
Equity in loss of subsidiaries
not subject to taxation 496,520 198,662 51,696
Change in valuation allowance (140,552) 58,336 366,219
Other, net 11,255 25,574 8,559
--------- --------- ---------
$ -- (330,000) (115,627)
========= ========= =========
The tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities at June 30, 1996 and July 1,
1995 are presented below:
1996 1995
----------- -----------
Deferred tax assets:
Inventories $ 43,425 18,077
Provision for losses on contracts -- 229,332
Retirement benefits 6,638 15,012
Postretirement benefits 443,904 413,788
General business credit carryforwards 30,594 30,594
Federal net operating loss carryforwards 723,565 614,543
State net operating loss carryforwards 170,717 145,443
State investment tax credit carryforwards 766,037 735,123
Alternative minimum tax credit
carryforwards 211,952 227,952
Other 11,459 42,411
----------- -----------
Total deferred tax assets 2,408,291 2,472,275
Less valuation allowance (1,643,703) (1,784,255)
----------- -----------
Net deferred tax assets 764,588 688,020
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation (764,588) (688,020)
----------- -----------
Total deferred tax liabilities (764,588) (688,020)
----------- -----------
Net deferred taxes $ -- --
=========== ===========
40 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes, Continued
The valuation allowance for deferred tax assets as of June 30, 1996 and
July 1, 1995 was $1,643,703 and $1,784,255, respectively. The net
change in the total valuation allowance for the year ended June 30,
1996 was a decrease of $140,552. 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, 1996.
At June 30, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of $2,128,132 which are available to
offset future federal taxable income, if any, through 2011. At June
30, 1996, the Company has net operating loss carryforwards for state
income tax purposes of $3,448,835 which are available to offset future
state taxable income, if any, through 2011. The Company also has
investment tax credit carryforwards for state income tax purposes of
$766,037 which are available to reduce future state income taxes, if
any, through 2006. In addition, the Company has alternative minimum
tax credit carryforwards of $211,952 which are available to reduce
future federal regular income taxes, if any, over an indefinite
period.
Cash payments for income taxes were $0, $30,113, and $287,202, in 1996,
1995, and 1994, respectively.
(10) Restructuring
During fiscal 1993, the Company received notification of termination of a
contract with the U.S. Navy. In light of the anticipated reduction in
revenue as a result of this termination, the Company instituted cost
cutting measures and restructuring charges of $451,750 were
recognized. In November 1994, the Company further implemented cost
cutting measures designed to reduce overhead costs and improve
operating efficiencies. This program included severance of employees
and reorganization of the manufacturing and engineering functions of
the Company. A restructuring charge amounting to $360,000, consisting
of severance costs, was recognized as a result of the November 1994
program.
During the third quarter of fiscal 1996, the Company recorded a
restructuring charge of $810,000 resulting from the disposition of the
Company's European subsidiary, Anaren Microwave, Limited. The charge
includes provisions for the writedown of assets to net realizable
value, legal and professional fees, and costs to complete an existing
electronic warfare simulator contract in excess of expected revenues.
41 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) 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,
1997 $ 373,531
1998 373,531
1999 373,531
2000 373,531
2001 373,531
Thereafter 4,731,394
------------
6,599,049
Less: amounts representing
sublease income 558,000
------------
$ 6,041,049
============
Rent expense for the years ended June 30, 1996, July 1, 1995 and July 2,
1994 was $373,531, $378,485, and $516,972, respectively. Rent expense
for fiscal 1996 was offset by sublease income of $53,032.
The Company maintains a letter of credit arrangement with a bank. Under
the arrangement, the bank issued a letter of credit in the amount of
approximately $600,000 as required under a contract between the
Company and a customer. At June 30, 1996, the Company was required to
maintain a compensating balance of approximately $600,000 in support
of this letter of credit.
(12) Foreign Operations
The following table shows financial information about the Company's
foreign operations:
Years ended
---------------------------------------------
June 30, 1996 July 1, 1995 July 2, 1994
------------- ------------ ------------
Net sales:
United States $ 15,900,956 14,929,495 18,068,575
European subsidiary 1,180,945 3,066,257 2,168,651
------------- ------------ ------------
Consolidated $ 17,081,901 17,995,752 20,237,226
============= ============ ============
Operating profit (loss):
United States $ 392,015 (1,425,730) (1,139,666)
European subsidiary* (1,496,979) (327,324) (364,311)
------------- ------------ ------------
Consolidated $ (1,104,964) (1,753,054) (1,503,977)
============= ============ ============
* Includes the net loss on disposition of the subsidiary of $810,000 in
fiscal 1996 (see note 10).
42 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Foreign Operations, Continued
Years ended
---------------------------------------------
June 30, 1996 July 1, 1995 July 2, 1994
------------- ------------- -------------
Identifiable assets:
United States $ 20,674,207 20,941,042 25,958,041
European subsidiary 1,119,009 2,424,064 1,983,480
------------- ------------- -------------
Consolidated $ 21,793,216 23,365,106 27,941,521
============= ============= =============
Sales to customers located outside the United States amounted to $6,108,024
in 1996, $9,498,737 in 1995 and $6,968,142 in 1994. In 1996, sales to
two customers (approximately $4,380,000 and $1,720,000, respectively)
exceeded 10% of consolidated net sales. In 1995, sales to two
customers (approximately $4,570,000 and $3,020,000, respectively)
exceeded 10% of consolidated net sales. In 1994, sales to four
customers (approximately $2,520,000, $2,510,000, $2,170,000 and
$2,170,000, respectively) exceeded 10% of consolidated net sales.
(13) Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial
information for the years ended June 30, 1996 and July 1, 1995:
1996 Quarter Ended
------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
---------- --------- --------- ---------
Net sales $4,449,465 4,441,629 4,101,685 4,089,122
========== ========= ========= =========
Cost of sales $2,808,833 2,745,411 2,913,676 2,678,590
========== ========= ========= =========
Restructuring $ -- -- 810,000 --
========== ========= ========= =========
Net earnings (loss) $ 65,947 10,844 (1,197,795) 40,935
========== ========= ========= =========
Net earnings (loss) per
share $ .02 -- (.30) .01
===== ===== ===== =====
During the third quarter ended March 31, 1996, the Company recorded a
restructuring charge of $810,000 for costs associated with the
disposition of the Company's European subsidiary.
43 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Quarterly Financial Data (Unaudited), Continued
1995 Quarter Ended
-----------------------------------------------------
Oct. 1 Dec. 31 April 1 July 1
----------- ----------- ----------- -----------
Net sales $ 4,154,419 2,955,363 4,684,707 6,201,263
=========== =========== =========== ===========
Cost of sales $ 2,929,509 2,558,220 3,191,757 4,401,629
=========== =========== =========== ===========
Provision for losses on
contracts $ -- 1,050,000 -- (750,000)
=========== =========== =========== ===========
Restructuring $ -- 360,000 -- --
=========== =========== =========== ===========
Net earnings (loss) $ (123,397) (2,498,865) (124,272) 1,274,852
=========== =========== =========== ===========
Net earnings (loss) per
share $(.03) (.60) (.04) .31
===== ===== ===== =====
During the second quarter ended December 31, 1994, the Company recorded a
provision for losses on contracts of $1,050,000. This provision
represents expected cost overruns on fixed price contracts with
anticipated fiscal 1995 and 1996 shipping schedules. During the fourth
quarter ended July 1, 1995, the Company was successful in negotiating
favorable price adjustments amounting to $750,000 relating to
contracts which the Company had recorded provisions for losses in the
second quarter of 1995 and prior. These price adjustments are
recognized as an offset to the provision for contract losses.
During the second quarter ended December 31, 1994, the Company recorded a
restructuring provision of $360,000 for severance of employees
resulting from the reorganization of the manufacturing and engineering
functions of the Company.
The 1995 current federal income tax benefit of $330,000 was recognized in
the fourth quarter of 1995 when such amount was determined. Allocation
of this benefit in earlier quarters would result in a reduction of the
reported net loss of $22,600, $457,300, and $22,700 for the first,
second and third quarters, respectively, and a decrease in the
reported income for the fourth quarter of $172,600.
44
EXHIBIT INDEX
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 of Form S-1 (No.
2-42704).
(ii) Amendment, filed December 19, 1980, is incorporated
by referenced 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 Report on 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).
* 3.2 Registrant's By-Laws, as amended.
** 4.2 Lease Agreement between the Registrant and the Onondaga
County Industrial Development Agency, dated June 1, 1980.
*** 4.5 Amendment, dated August 21, 1985 to Lease Agreement between
the Registrant and the Onondaga County Industrial
Development Agency.
******** 4.6 Loan agreement, dated June 15, 1990, by and among Fleet
National Bank and the Registrant.
********* 4.7 First amendment to loan agreement, dated July 15, 1993, by
and among Fleet National Bank and the Registrant.
*********** 4.8 Second amendment to loan agreement, dated June 24, 1994, by
and among Fleet National Bank and the Registrant.
* 10.1 Registrant's Pension Plan and Trust. (2)
********** 10.2 Registrant's Incentive Stock Option Plan. (2)
**** 10.3 Registrant's Employee Stock Purchase Plan. (2)
***** 10.4 Registrant's Non-Statutory Stock Option Plan (2)
****** 10.5 Registrant's Severance Compensation Plan (2)
******* 21 Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule for the twelve month period ended
June 30, 1996, which is submitted electronically to the
Securities and Exchange Commission for information only and
is not filed.
* Incorporated herein by reference to exhibit 4(b) to the
Registrant's Registration Statement on Form S-8 (Registration No.
33-19618).
** Incorporated herein by reference to exhibit 4.4 to the
Registrant's Registration Statement on Form S-2 (Registration No.
2-86025)
*** 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, 1985.
45
EXHIBIT INDEX (Continued)
**** Incorporated herein by reference from Exhibit No. 4(c) to the
Registrant's Registration Statement on Form S-8 (Registration No.
33-1768)
***** Incorporated herein by reference from Exhibit No. 4 to the
Registrant's Registration Statement on Form S-8 (Registration No.
33-36761).
****** 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, 1990.
******* 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.
******** Incorporated herein by reference to exhibit No. 4.6 to the
Registrant's Annual Report on Form 10-K for the year ended June
30, 1991.
********* Incorporated herein by reference to exhibit No. 4.6 to the
Registrant's Annual Report on Form 10-K for the year ended June
26, 1993.
********** Incorporated herein by reference to exhibit to the Registrant's
Registration Statement on Form S-8 (Registration No. 333-03193)
*********** Incorporated herein by reference to exhibit 4.8 to the
Registrant's Annual Report on Form 10-K for the year ended July 2,
1994
(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.
46