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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, 1997
__ 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 22, 1997 was approximately $94,648,000.
The number of shares of Registrant's Common Stock outstanding on
September 22, 1997 was 4,233,442.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with its
1997 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 defense electronics markets. The Company utilizes advanced
stripline manufacturing technology to produce components and subsystems for
wireless 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 groups.
These business groups are Defense Electronics (formerly Electronic Warfare),
Satellite Communications (formerly Radar and Telecommunications) and Wireless.
Products in the Defense Electronics business group 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). Satellite Communications 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 evolution of the old military microwave components
and are significantly smaller and lighter, while providing better performance.
Each business groups 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.
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 the applications of specific customers.
As wireless technologies have moved higher in frequency for spectrum
availability and increased in complexity to support the rapidly increasing
demand for service, demand for Anaren's microwave design and manufacturing
expertise has increased significantly. As a result of recently developed
proprietary manufacturing techniques, Anaren is able to provide very
competitively priced microwave components and assemblies in high volume, meeting
the very challenging price and delivery demands of wireless infrastructure
original equipment manufacturers (OEMs).
Satellite Communications (formerly 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 geosynchronous communications satellites.
Additionally, the Company produces signal distribution networks for land
based 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.
Defense Electronics (formerly 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 well known supplier of 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.
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
3
can replicate radar signals with sufficient fidelity to counter today's advanced
coherent radar systems.
MARKETING AND CUSTOMERS
The Company currently sells its Defense Electronics products to the United
States and foreign governments through prime contractors and by utilizing
independent sales representatives in both the United States and foreign
countries. Satellite Communications products and Wireless products are sold to
satellite and wireless infrastructure original equipment manufacturers through
independent sales representatives in both the United States and foreign
countries. The Company's business group managers and senior engineering
personnel provide technical sales support. Anaren Microwave, Ltd., the Company's
wholly-owned subsidiary in Waterlooville, England is responsible for marketing
and sales 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, personal
communications systems 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.
During the fiscal year ended June 30, 1997, approximately 16% 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 14% of the Company's consolidated net sales resulted from
shipments to Raytheon Company under several contracts, and 11% resulted from
shipments to Motorola, Inc. under several contracts. No one other contract and
no other customer accounted for more than 10% of consolidated net sales.
During fiscal year 1997, sales to foreign customers, most of which were
prime contractors to foreign governments, accounted for approximately 19% 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 13 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 the export
of military hardware could adversely affect the Company's sales of defense
electronics products to foreign customers.
All of the Company's contracts with prime contractors to United States and
foreign governmental departments or their agencies, as well as satellite
communication and wireless infrastructure equipment customer contracts 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 some are subject to various statutes, regulations and provisions governing
defense contracts. All of these contracts contain termination clauses which
allow the customer to terminate the contract for convenience upon proper notice
and payment of predetermined charges.
4
BACKLOG
At June 30, 1997, the Company's backlog of orders was $32,827,000 as
compared with $23,287,000 at June 30, 1996. 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 Defense Electronics products accounted for 57% and 66% of the
backlog at June 30, 1997 and June 30, 1996, respectively; Satellite
Communications products comprised approximately 37% of the backlog in 1997 and
18% of the backlog in 1996 and Wireless products amounted to 6% and 16% of the
backlog at June 30, 1997 and June 30, 1996, respectively. Approximately 82% of
the June 30, 1997 backlog is expected to be recognized as revenue during fiscal
1998.
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 Digital RF Memories and antenna beamforming networks.
The Company manufactures its products from standard components as well as
from items which are manufactured by vendors to the Company's specifications. A
majority of the Company's commercial and defense electronics assemblies and
subsystem products contain 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 some 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 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 component products for
wireless infrastructure are subject to continuous technological and price
competition from other vendors.
Major competitors include Amp, Inc., Lockheed Martin, Inc., S. T.
Microwave, Inc., RF Power Inc., Mini Circuits Inc. and Filtronics, Inc. for
Defense Electronics products; Merrimac Industries, Inc. and EMS, Inc. for
Satellite Communications products; Merrimac Industries, Inc. and the in-house
capabilities of the Company's major customers, such as Motorola, Inc., Raytheon
Company, Hughes Space and Communications International, Inc. and Nortel, Inc.,
for wireless products.
5
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 to varying degrees in these activities. Research and
development expenses were approximately $540,000 in fiscal 1997, $1,185,000 in
fiscal 1996 and $939,000 in fiscal 1995 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 raw materials utilized in the Company's various product areas are
equally accessible. The Company purchases most of its raw materials from a
variety of vendors and most of these raw materials are available from a number
of sources. The Company has one vendor from which the Company purchases
approximately 10% of the Company's total 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, 1997, the Company employed 217 persons full time. Of these
employees, approximately 186 comprise the engineering and manufacturing staff,
and approximately 31 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, 1997. 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 62 Chairman &
Chief Executive Officer, Director
Carl W. Gerst, Jr. 60 Vice Chairman, Chief
Technical Officer, Treasurer
Lawrence A. Sala 34 President, Director
Gert R. Thygesen 42 Vice President Operations
Joseph E. Porcello 45 Vice President Finance
Stanley S. Slingerland 50 Vice President Human Resources
ITEM 2. PROPERTIES
The Company's principal facility is a 105,000 square foot building located
in East Syracuse, New York. The 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 activities. The construction of this
facility was originally 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 $385,000 and the Company is presently subletting a
portion of the facility for approximately $192,000 annually (see note 11 to the
consolidated financial statements).
The foregoing facilities are regarded by management as adequate for the current
and anticipated short-term future requirements of the Company's business.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company or its
subsidiaries.
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 1996 Fiscal 1997
Quarter Quarter
1st 2nd 3rd 4th 1st 2nd 3rd 4th
High 8-1/2 8-3/8 7-1/4 8-3/4 7-5/8 8 9-1/8 14-1/4
Low 5-1/4 5-1/2 5-1/2 5-3/4 4-1/4 5 6-1/4 7-5/8
The Company has approximately 610 security holders of record at September
23, 1997.
The Company has never paid a cash dividend on its common stock and the
Company's Board of Directors has not set a policy with regard to the payment of
dividends.
ITEM 6. 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's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto referred to herein.
9
Selected Financial Data
-----------------------
Fiscal Year Ended
-----------------
June 30, June 30 July 1, July 2, June 26,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Summary of Consolidated Statements of Operations:
Net Sales ..................................................... $ 24,227 $ 17,082 $ 17,996 $ 20,237 $ 26,996
-------- -------- -------- -------- --------
Costs and Expenses:
Costs of Sales ........................................... 16,243 11,147 13,081 14,415 19,306
Marketing, Research and Development ...................... 3,711 4,155 3,967 3,490 4,081
General and Administrative ............................... 2,238 2,075 2,041 2,266 2,399
Provision for losses on contracts ........................ -- -- 300 1,570 --
Restructuring Costs ...................................... -- 810 360 -- 452
-------- -------- -------- -------- --------
Total Costs and Expenses ............................. 22,192 18,187 19,749 21,741 26,238
-------- -------- -------- -------- --------
Operating Income (Loss) ....................................... 2,035 (1,105) (1,753) (1,504) 758
Interest Expense .............................................. 94 123 213 271 434
Other Income, Primarily Interest .............................. (114) (148) (164) (298) (134)
Income (Loss) before income taxes and
cumulative effect of change in accounting
principle ................................................... 2,055 (1,080) (1,802) (1,477) 458
Income tax Expense (benefit) .................................. -- -- (330) (115) 180
-------- -------- -------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle ........................... 2,055 (1,080) (1,472) (1,362) 278
Cumulative effect of change in accounting
for post-retirement benefits ................................ -- -- -- (995) --
-------- -------- -------- -------- --------
Net Earnings (loss) .................................. $ 2,055 $ (1,080) $ (1,472) $ (2,357) $ 278
======== ======== ======== ======== ========
Earnings (loss) Per Common and
Common Equivalent Share:
Primary .................................................. $ .50 $ (.27) $ (.36) $ (.53) $ .06
======== ======== ======== ======== ========
Assuming Full Dilution ................................... $ .46 $ (.27) $ (.36) $ (.53) $ .06
======== ======== ======== ======== ========
Shares Used in Computing Earnings (loss) Per
Common and Common Equivalent Shares:
Primary .................................................. 4,106 4,057 4,047 4,435 4,530
======== ======== ======== ======== ========
Assuming Full Dilution ................................... 4,440 4,057 4,047 4,435 4,530
======== ======== ======== ======== ========
June 30, June 30 July 1, July 2, June 26,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Consolidated Balance Sheet Data:
Working Capital ............................................... $ 15,043 $ 12,914 $ 13,258 $ 16,245 $ 17,592
Total Assets .................................................. $ 25,973 $ 21,793 $ 23,365 $ 27,942 $ 28,470
Long-Term Debt (less current installments) .................... $ 453 $ 680 $ 1,052 $ 1,760 $ 2,482
Stockholders' Equity .......................................... $ 20,327 $ 18,195 $ 18,824 $ 21,679 $ 24,098
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis reviews the Company's operating results for
each of the three years in the period ended June 30, 1997, and its financial
condition at June 30, 1997. This review should be read in conjunction with the
accompanying consolidated financial statements, the related notes to the
consolidated financial statements, and the other information provided in this
annual report Form 10-K. Statements contained in management's discussion and
analysis, other than historical facts, are forward looking statements which are
qualified by the cautionary statement at the end of this discussion.
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, 1997.
Fiscal Year Ended
(In Thousands)
June 30, 1997 June 30, 1996 July 1, 1995
------------- ------------- ------------
Defense Electronics $8,064 $9,343 $14,416
Satellite Communications 8,518 5,642 3,239
Wireless 7,645 2,097 341
------- ------- -------
$24,227 $17,082 $17,996
======= ======= =======
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."
To better serve its emerging commercial markets, the Company reorganized,
during the first quarter of fiscal 1996 into three internal business groups.
These business groups are Defense Electronics (formerly Electronic Warfare),
Satellite Communications (formerly Radar and Telecommunications) and Wireless.
Products in the Defense Electronics 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). Satellite Communications 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 wireless base station equipment.
These products are a forward evolution of the military microwave components and
are significantly smaller and lighter, while providing better performance.
Each business group 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.
Fiscal Year 1997 Compared to Fiscal Year 1996
Consolidated results of operations for fiscal 1997 were highlighted by
significant increases in sales of the Company's commercial products and the
highest net earnings and backlog achieved by the Company in the past ten years.
Net sales for fiscal 1997 were $24,227,000, up
11
42% from fiscal 1996 net sales of $17,082,000 and the Company recorded net
earnings of $2,055,000 compared to a loss of $1,080,000 for the prior year.
During fiscal 1997, sales in both the Company's commercial Satellite
Communications group and Wireless group increased substantially over the prior
year's levels, while during this same period, sales of the Defense Electronics
group continued the decline seen over the past five years.
Sales of Wireless products, which are mainly surface mount and custom
components for use in building cellular base station equipment, increased
$5,548,000 in fiscal 1997, a 265% rise over sales of $2,097,000 in fiscal 1996.
The rise in sales in this product group is currently being fueled by significant
increases in shipments of custom base station components being built for Lucent
Technologies, Inc., Motorola, Inc. and Nortel, Inc. under a number of continuing
contracts with a projected current annual shipment value of over $9,000,000.
Shipments under these contracts totaled over $4,600,000 in fiscal 1997, compared
to less than $200,000 in the previous fiscal year. Additionally, shipments of
off-the-shelf surface mount catalog components, which are used mainly in the
construction of cellular base station amplifiers, rose 80% in fiscal 1997
compared to fiscal 1996, as amplifier manufacturers' demands continue to
increase for these products.
New orders for Wireless products totaled approximately $6,200,000 during
fiscal 1997, resulting in a firm backlog of $2,060,000 at June 30, 1997, all of
which is expected to ship in the first quarter of fiscal 1998.
It is typical procedure for the Company's large base station manufacturing
customers to negotiate an annual blanket contract for price and delivery using
an estimated expected annual demand for a particular product. These
manufacturers then provide the Company with a firm purchase order for the
products required on a quarterly, monthly or weekly basis. It has been the
Company's internal policy to only book orders for the Wireless group upon
receipt of these short-term firm purchase orders. In July 1997, the first
quarter of fiscal 1998, the Company recorded firm orders for the Wireless group
totaling over $3,400,000, all of which is scheduled to ship in the first half of
fiscal 1998.
Sales of Satellite Communications products, which consist of custom
multi-layer components such as butler matrices and beamforming networks for
commercial telecommunications and military communications satellites, rose
$2,876,000 or 51% in fiscal 1997 compared to fiscal 1996. This substantial rise
in shipments is attributed to sales of over $3,800,000 for contract engineering
design work on two beamformers for commercial satellite applications for Space
Systems Loral, Inc. and Martin Marietta Overseas Corp. Sales in fiscal 1996
included approximately $690,000 in billings for initial design work on these two
programs.
Of the remaining $4,700,000 shipped by this group in fiscal 1997,
approximately $3,200,000 represented production under the final phase of the
$6,000,000 Iridium program and spares production for the Ground Based Radar
military program, both of which are being built for Raytheon Company. These two
programs amounted to over $4,500,000 in sales in fiscal 1996.
New orders for the Satellite Communications group amounted to $16,545,000
in fiscal 1997 compared to $2,850,000 in the previous fiscal year. The two
largest of these orders were a firm fixed price contract for over $6,000,000
from Martin Marietta Overseas Corp. for the design and production of antenna
beamforming networks for the Asia Cellular Satellite System (ACeS) and a
$3,800,000 contract from Hughes Space and Communications International, Inc. for
the manufacture of microwave signal distribution networks for the ICO system.
The ACeS system is a space based cellular communications system, to serve Asia
via two geosynchronous satellites, while the Hughes ICO program is a medium
earth orbit constellation of 12 satellites to provide world-wide cellular
telephone service starting in 1999.
12
Firm backlog for this group was $12,121,000 at June 30, 1997, up 193% over
firm backlog of $4,125,000 at June 30, 1996. Of this amount, approximately
$10,000,000 is expected to ship in fiscal 1998 and the remainder in fiscal 1999.
Sales of Defense Electronics products fell $1,279,000 to $8,064,000 in
fiscal 1997 compared to $9,343,000 in the previous year. Shipments in this
business area, which include Digital Frequency Discriminators (DFD's), Digital
RF Memories (DRFM's), ESM Receivers and Microwave Integrated Circuit Components
(MIC's), have been declining over the past three years due to the continuing
decline in the overall worldwide defense market. The drop in sales in fiscal
1997 was spread over all the above mentioned product areas in the Defense
Electronics group and was a result of the completion of one of the Company's
remaining large DFD programs in fiscal 1996 and a general 25% decline in demand
for off-the-shelf catalog military MIC's during the last quarter of fiscal 1996
and continuing in fiscal 1997.
New orders for Defense Electronics products totaled approximately
$11,047,000 in fiscal 1997 and firm backlog for this product area was
$18,646,000 at June 30, 1997. Of this backlog amount, $12,140,000 represented
two orders from the ASPJ Joint Venture Team of ITT Avionics Division of I.T.T.
Industries and Northrop Grumman Corp. for foreign sales of the Airborne Self
Protection Jammer System. These orders should serve to help stabilize sales in
this business area when shipments begin in the first quarter of fiscal 1998.
Approximately $13,760,000 of the firm backlog of $18,646,000 at June 30,
1997 is expected to ship in fiscal 1998 and the remainder in fiscal 1999.
Net earnings for fiscal 1997 were $2,055,102, compared to a net loss of
$(1,080,069) for fiscal 1996. The net loss for the prior year included a one
time charge totaling $810,000 to recognize the cost of the divestiture of the
Company's Electronic Warfare Simulator manufacturing operation in England. This
improvement in earnings was a result of the 42% rise in revenues and was
achieved despite a two percentage point decline in gross margins and small
increase in both marketing and general and administrative costs.
Gross margin on sales for fiscal 1997 was 33% compared to 35% for fiscal
1996. This decline was a direct result of lower margins on initial product runs
of Wireless custom components during the period due to excess scrap costs and
rework costs incurred in repairing production units above normal experience
levels in fiscal 1997. The Company expects that gross margins will improve in
fiscal 1998 with higher production rates and increased experience with high
volume production products.
Research and development expense was $540,000 for fiscal 1997, down
$645,000 from $1,185,000 for fiscal 1996. This decline resulted from a
significant increase in customer funded engineering design work in both the
Defense Electronics and Satellite Communications groups during the period which
consumed all available engineering resources in these groups. Customer funded
design and development work in fiscal 1997 represented approximately $6,200,000
in sales, a three fold increase over engineering revenues of $2,030,000 in
fiscal 1996. Additionally, the Company is currently participating in a
Technology Reinvestment Program through Raytheon Company, for the Advanced
Research Project Agency of the United States Government. Under this project, the
Company was reimbursed for approximately $339,000 of research and development
costs incurred during fiscal 1997 for investigating the development of
manufacturing processes for thin, multilayer millimeter wave signal distribution
networks. This program is expected to run through all of fiscal 1998 at the rate
of approximately $125,000 per quarter.
Current internal research and development efforts are being targeted on
adapting existing Company technologies to produce new Satellite and Wireless
products which fit specific customers' requirements. Future research and
development expenditures are expected to rise with
13
increasing sales volume and to fluctuate based on identified market
opportunities, customer funding for custom engineering development projects and
the level of government supported research development projects.
Marketing expense rose 7% in fiscal 1997 compared to fiscal 1996. This
increase was caused mainly by additions to marketing personnel in Europe to
better serve the Company's emerging commercial markets in that part of the
world, a rise in commission expense due to the a 42% increase in sales and a 23%
increase in advertising expenditures targeted mainly for the Company's wide
variety of new commercial Wireless products. Marketing expense is expected to
rise in fiscal 1998 as the Company intends to expand its sales force and
advertising program to further penetrate the wireless base station equipment
market.
General and administrative expense rose 8%, or $162,000, in fiscal 1997
compared to the prior year. Approximately half of this increase was attributable
to normal increases in payroll costs for existing personnel, while the remaining
increase represents a small increase in personnel, as well as minor increases in
professional services and shareholders expense. General and administrative
expenses are expected to increase modestly in fiscal 1998 as the general level
of Company business continues to rise.
Interest expense fell 23% in fiscal 1997 compared to fiscal 1996. The
decline in interest expense reflects the continuing reduction in long-term debt
over the past year. During this same period, other income was down 23% due to
lower investable cash balances during the current year compared to the previous
fiscal year.
Consolidated income tax expense was $0 in fiscal 1997 versus an expected
tax expense of approximately $699,000 based on 34% of income before income
taxes. The difference between the actual tax expense recognized in the financial
statements and the expected tax calculated on net income was due to the
utilization of net operating loss carry forwards and to a decrease in the
deferred tax asset valuation allowance. Under 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 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 projected future taxable
income in making the assessment of the realizability of the deferred tax asset
balances at June 30, 1997. 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, 1997.
The Company adopted Statement of Financial Accounting Standard No. 123,
Accounting for Stock-based Compensation (Statement 123), beginning with the
Company's first quarter of fiscal 1997. Upon adoption of Statement 123, the
Company continued to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB No. 25,
Accounting for Stock Issued to Employees, and has provided pro forma disclosures
of the effect on net income and earnings per share as if the fair value-based
method prescribed by Statement 123 has been applied in measuring compensation
expense. (See Note 6 of Notes to the Consolidated Financial Statements.)
14
Fiscal Year 1996 Compared to Fiscal Year 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 Satellite Communications
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 Defense Electronics
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 Satellite Communications 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.
New orders for Satellite Communications 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, Inc.; Martin Marietta Overseas Corp. and Space Systems Loral, Inc. At June
30, 1996 firm backlog for Satellite Communications products was $4,125,000.
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 initial production orders
totaling over $3,000,000 from Nortel, Inc. and Motorola, Inc. during fiscal 1996
for custom base station components. These orders began initial low level
production runs in the latter part of the fourth quarter of fiscal 1996 and
reached full production at the end of the second quarter of fiscal 1997. Firm
backlog for Wireless products was approximately $3,735,000 at June 30, 1996.
Sales of Defense Electronics 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) have 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.
15
During fiscal 1996, the Company received a number of new orders in the
Defense Electronics business area totaling over $18,400,000. The most
significant of these was from the ASPJ Joint Venture Team of I.T.T. Avionics
Division of I.T.T. Industries and Northrop Grumman Corp. for foreign sales of
the Airborne Self Protection Jammer. Firm backlog in this product area at June
30, 1996 was $15,427,000.
During 1996, the Company booked new orders totaling approximately
$26,700,000 compared to new orders of approximately $15,100,000 for all of
fiscal 1995. Firm backlog for all business lines as of June 30, 1996 stood at
$23,287,000 a 69% increase over firm backlog of $13,800,000 at the end of fiscal
1995.
The loss for fiscal 1996 was $1,080,069 compared to a loss of $1,471,682
for fiscal 1995. The 1996 fiscal year loss consisted 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 down sizing 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 allowed 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 1995 which were specifically targeted at reducing manufacturing overhead
and engineering costs.
Additionally, 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.
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 represented the
continuing rise in the prototype development efforts for the Company's new
Wireless commercial product line. Development efforts were being targeted on
adapting existing Company technologies to produce new wireless component
products which fit a specific customer's requirements.
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 within the company due to the business group realignment
undertaken in the first quarter of the current year.
General and administrative expenses rose 1.6% in fiscal 1996 compared to
fiscal 1995. This increase represented normal period to period fluctuation in
expenditures. Fiscal 1996 levels of general and administrative spending reflect
the same level or lower of that experienced by the Company in fiscal 1995.
Interest expense fell 42% in fiscal 1996 compared to the same period in
fiscal 1995. The decline in interest expense reflects the reduction in long-term
debt over the year. During this same
16
period, other income fell 10% due to lower investable cash balances during
fiscal 1996 compared to fiscal 1995.
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. 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 projected
future taxable income in making the assessment of the realizability of the
deferred tax asset balances at June 30, 1996.
Liquidity and Capital Resources
At June 30, 1997, the Company had net working capital of $15,043,000, which
included $3,807,000 in cash and cash equivalents, compared to working capital of
$12,914,000 which included cash and cash equivalents of $1,740,000 at June 30,
1996. Net cash surplus was $2,067,000 for fiscal 1997 compared to a net cash
usage of $400,000 in fiscal 1996. Cash flow was positive in fiscal 1997 due to
the growth in earnings and accounts payable, the receipt of a $321,000 tax
refund from the U.S. government and an increase in advance payments from
customers of over $750,000 during the period.
Long-term liabilities, which consist of the Company's unfunded liability
for post-retirement health care costs, long-term debt in the form of a term loan
and deferred income taxes, decreased $119,000 and $309,000 in fiscal 1997 and
1996, respectively. The decline in both fiscal years 1997 and 1996 represents
scheduled repayment of debt as the Company, presently, has no plans to fund the
long-term liability recognized for post-retirement healthcare costs. No new
long-term debt, other than the transfer of its term loan to its new bank, 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 1997 amounted to $1,154,000 and
consisted primarily of equipment needed to further automate production for the
Company's new Wireless and Satellite Communications products as well as test and
production equipment required to produce Defense Electronics products for the
initial production of the ASPJ program in the first quarter of fiscal 1998. The
additions were funded entirely by cash generated by operations. Capital
equipment expenditures for fiscal 1998 have been budgeted at approximately
$1,500,000 and will consist, primarily, of additional automated high volume
production equipment to further expand production capacity for the new Wireless
products. These additions will continue to be funded by cash generated from
operations and currently existing cash balances as management believes that
these cash resources will be adequate to meet these financing needs.
In fiscal 1994, the Company obtained 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 October
1996, the Company signed an agreement for a new credit facility with a bank
providing for a $3,000,000 working capital revolving line of credit bearing
interest at prime plus 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
17
of the term loan were used to refinance the existing Onondaga County Industrial
Development Agency Revenue bonds of the Company, 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 volumes. Borrowings under
the new credit facility are secured by substantially all the assets of the
Company. The terms of the credit facility require the Company to maintain a
minimum tangible net worth, ratio of cash flows to maturities, and leverage
ratio, as defined in the respective agreements. The Company was in compliance
with all restrictions and covenants at June 30, 1997.
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.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standard No. 128, Earnings Per Share
(Statement 128), was issued in February 1997. Statement 128 specifies the
computation, presentation, and disclosure requirements for earnings per share.
Adoption of Statement 128 will be required for the Company beginning in the
second quarter of fiscal 1998. Adoption of Statement 128 is not expected to have
a material effect on the Company's operating results.
Additionally, Statement of Financial Accounting Standard No. 131, Disclosures
About Segments of an Enterprise and Related Information (Statement 131) was
issued in 1997. Statement 131 establishes standards for the reporting of
information about operating segments and related disclosures about products and
services, geographic areas, and major customers. Adoption of Statement 131 will
be required in fiscal 1999 and require interim disclosures beginning in fiscal
2000. Adoption of Statement 131 is not expected to have a material effect on the
Company's financial statement disclosures.
Forward Looking Cautionary Statement
In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this annual report on Form 10-K
includes comments by the Company's management about future performance. Because
these statements are forward-looking statements, management's forecast involve
risks and uncertainties and actual results could differ materially from those
predicted in the forward looking statements. Among the factors that could cause
actual results to differ materially are the following: general market
conditions, including demand for the Company's products, manufacturing capacity
and the ability to "ramp" to meet anticipated demand, fluctuations yield,
availability of third party supplier parts at reasonable prices, availability of
financial resources to fund anticipated growth, ability to maintain sole
supplier positions with certain defense sectors, successful adaptation of
existing Company technologies to produce new products which meet specific
customer requirements, price pressures, the level of world-wide spending on
military defense products, growth of cellular telephone and satellite
communication systems, acceptance of new products, and actual orders compared to
annual blanket contracts from wireless customers.
Management believes that the Company has the products, human resources,
facilities, and financial resources to continue its growth, but future revenues,
margins and profits are all influenced by a number of risk factors, including,
but not limited to, those discussed above.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules called for by
this item are submitted under "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K" which information is incorporated herein by reference.
The unaudited supplementary financial information required by this item is
contained in note 4 to the consolidated financial statements which have been
submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item, other than executive officers which
appears in Part I hereof, is contained in the Registrant's proxy statement to be
filed with respect to the 1997 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 1997 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 1997 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 1997 Annual Meeting of Shareholders
and is incorporated by reference herein.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) 1. and 2. Financial Statements and Schedules:
Reference is made to the List of Financial
Statements hereinafter contained .......................... 23
3. Exhibits:
Reference is made to the List of Schedules
hereinafter contained ..................................... 23
(b) Current Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company
during the last quarter of the fiscal year ended June 30, 1997.
(c) Exhibits:
Reference is made to the List of Exhibits hereinafter contained ....... 43
21
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Anaren Microwave, Inc. has duly 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 26, 1997
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/Dale F. Eck S/Herbert I. Corkin
- ------------- -------------------
Director Director
Date: September 26, 1997
22
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Operations for the Years ended June 30, 1997,
June 30, 1996, and July 1, 1995
Consolidated Statements of Stockholders' Equity for the Years ended June
30, 1997, June 30, 1996, and July 1, 1995
Consolidated Statements of Cash Flows for the Years ended June 30, 1997,
June 30, 1996, and July 1, 1995
Notes to Consolidated Financial Statements
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Anaren Microwave, Inc.:
We have audited the consolidated financial statements of Anaren Microwave, Inc.
and subsidiaries as listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Anaren Microwave,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
Syracuse, New York
August 14, 1997
24
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1997 and 1996
Assets 1997 1996
---- ----
Current assets:
Cash and cash equivalents $ 3,807,004 1,739,569
Receivables, less allowance for bad debts of
$13,000 in 1997 and 1996 6,717,106 5,167,996
Refundable income taxes -- 320,945
Inventories (note 2) 7,736,007 7,210,320
Prepaid expenses 197,152 255,723
Deferred income taxes (note 9) 532,054 --
----------- -----------
Total current assets 18,989,323 14,694,553
Net property, plant and equipment (note 3) 6,969,301 7,054,870
Other assets, net 13,919 43,793
----------- -----------
$25,972,543 21,793,216
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt (note 5) 228,723 394,633
Accounts payable 1,500,863 663,848
Income taxes payable 493,553 --
Accrued expenses (note 4) 719,416 471,665
Customer advance payments 1,003,539 250,000
----------- -----------
Total current liabilities 3,946,094 1,780,146
Postretirement benefit obligation (note 8) 1,181,276 1,138,215
Long-term debt, less current installments (note 5) 453,335 680,001
Deferred income taxes (note 9) 64,508 --
----------- -----------
Total liabilities 5,645,213 3,598,362
----------- -----------
Stockholders' equity:
Common stock of $.01 par value
Authorized 12,000,000 shares;
issued 5,012,116 and 4,992,116
shares in 1997 and 1996, respectively 50,121 49,921
Additional paid-in capital 15,584,262 15,507,088
Retained earnings 6,705,024 4,649,922
----------- -----------
22,339,407 20,206,931
Less cost of 892,274 treasury shares
in 1997 and 1996 2,012,077 2,012,077
----------- -----------
Total stockholders' equity 20,327,330 18,194,854
----------- -----------
Commitments and concentrations (notes 11 and 12)
$25,972,543 21,793,216
=========== ===========
See accompanying notes to consolidated financial statements.
25
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 1997, June 30, 1996, and July 1, 1995
1997 1996 1995
---- ---- ----
Net sales $ 24,226,792 17,081,901 17,995,752
------------ ------------ ------------
Costs and expenses:
Cost of sales 16,242,884 11,146,510 13,081,115
Marketing 3,170,373 2,969,726 3,027,667
Research and development 540,189 1,185,168 938,927
General and administrative 2,237,876 2,075,461 2,041,097
Provision for losses on contracts -- -- 300,000
Restructuring (note 10) -- 810,000 360,000
------------ ------------ ------------
Total costs and expenses 22,191,322 18,186,865 19,748,806
------------ ------------ ------------
Operating income (loss) 2,035,470 (1,104,964) (1,753,054)
------------ ------------ ------------
Other income (expense):
Interest expense (94,086) (122,759) (212,588)
Other, primarily interest income 113,718 147,654 163,960
------------ ------------ ------------
Total other income (expense) 19,632 24,895 (48,628)
------------ ------------ ------------
Income (loss) before income taxes 2,055,102 (1,080,069) (1,801,682)
Income tax benefit (note 9) -- -- (330,000)
------------ ------------ ------------
Net income (loss) $ 2,055,102 (1,080,069) (1,471,682)
============ ============ ============
Earnings (loss) per common and
common equivalent share:
Primary $ .50 (.27) (.36)
============ ============ ============
Assuming full dilution $ .46 (.27) (.36)
============ ============ ============
Shares used in computing earnings
(loss) per common and common
equivalent share:
Primary 4,106,245 4,057,300 4,046,729
============ ============ ============
Assuming full dilution 4,439,632 4,057,300 4,046,729
============ ============ ============
See accompanying notes to consolidated financial statements.
26
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997, June 30, 1996, and July 1, 1995
Common Stock Additional Treasury Stock Total
------------------- Paid-in Retained ------------------- Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
------ ------ --------- -------- ------ ------ -------
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
Net income -- -- -- 2,055,102 -- -- 2,055,102
Stock options exercised (note 6) 20,000 200 77,174 -- -- -- 77,374
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 5,012,116 $ 50,121 15,584,262 6,705,024 892,274 $(2,012,077) 20,327,330
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
27
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1997, June 30, 1996, and July 1, 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 2,055,102 (1,080,069) (1,471,682)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,239,864 1,564,466 1,722,686
Deferred income taxes (467,546) -- --
Net loss on disposition of Anaren
Microwave, Ltd. net assets -- 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)
Receivables (1,549,110) 944,544 947,587
Refundable income taxes 320,945 9,055 (228,810)
Inventories (525,687) (748,111) 1,870,386
Prepaid expenses 58,571 (20,676) 55,884
Other assets 29,874 33,969 88,547
Accounts payable 837,015 (41,253) 168,647
Income taxes payable 493,553 -- --
Accrued expenses 247,751 (219,407) 119,120
Customer advance payments 753,539 250,000 --
Postretirement benefit obligation 43,061 62,381 61,838
----------- ----------- -----------
Net cash provided by operating
activities 3,536,932 976,868 2,352,234
----------- ----------- -----------
Net cash used in investing activities
- capital expenditures (1,154,295) (1,138,571) (1,296,587)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 906,667 -- --
Principal payments on long-term debt (1,299,243) (689,511) (725,526)
Net repayments under revolving line of credit -- -- (363,352)
Proceeds from the issuance of common stock 77,374 450,988 75,787
Purchase of treasury stock -- -- (1,459,278)
----------- ----------- -----------
Net cash used in financing activities (315,202) (238,523) (2,472,369)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,067,435 (400,226) (1,416,722)
Cash and cash equivalents at beginning of year 1,739,569 2,139,795 3,556,517
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,807,004 1,739,569 2,139,795
=========== =========== ===========
See accompanying notes to consolidated financial statements.
28
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, June 30, 1996, and July 1, 1995
(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. In fiscal 1996, the Company changed its
financial 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 satellite communications market, and defense electronics
market.
Anaren Microwave, Ltd., a wholly-owned subsidiary, is incorporated in
England. As discussed in note 10, during fiscal 1996, the Company
disposed of substantially all of the net 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.
(c) Sales Recognition
The Company recognizes sales at the time products are shipped to its
customers. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
(d) Cash Equivalents
Cash equivalents of $3,776,312 and $1,383,021 at June 30, 1997 and
1996, respectively, consist of certificates of deposit and money
market instruments having maturities of three months or less. Cash
equivalents are stated at cost which approximates fair value.
(e) Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of land
improvements and buildings is calculated by the straight-line method
over an estimated service life of 25 years. Machinery and equipment
are depreciated primarily by the straight-line method based on
estimated useful lives of 5 to 10 years.
29 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(g) Earnings Per Share
Earnings per common and common equivalent share are computed using the
weighted average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase
common stock pursuant to the treasury stock method, unless the
results would be anti-dilutive or not material. Common equivalent
shares consist of outstanding stock options.
(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) Research and Development Costs
Research and development costs are charged to expense as incurred. The
Company receives fees under a technology development contract and
such fees are recorded as a reduction of research and development
costs as work is performed pursuant to the related contract and as
defined milestones are attained. In fiscal 1997, the Company
recognized product development fees of $338,939 under the contract,
which were netted with research and development costs. Prior to
fiscal 1997, the Company did not engage in technology development
contracts.
(j) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates.
(k) Financial Instruments
The Company's financial instruments, which include cash and cash
equivalents, accounts receivable, accounts payable, and long-term
debt, are stated at cost which approximates their fair values at June
30, 1997 and 1996.
(l) Stock-based Compensation
The Company adopted Statement of Financial Accounting Standard No. 123,
Accounting for Stock-based Compensation (Statement 123), beginning
with the Company's first quarter of fiscal 1997. Upon adoption of
Statement 123, the Company continued to measure compensation expense
for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, and has provided pro forma disclosures of the effect on
net income and earnings per share as if the fair value-based method
prescribed by Statement 123 has been applied in measuring
compensation expense.
30 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
sales and expenses during the reporting period. Actual results could
differ from those estimates.
(n) Recent Pronouncements
Statement of Financial Accounting Standard No. 128, Earnings Per Share
(Statement 128), was issued in February 1997. Statement 128 specifies
the computation, presentation, and disclosure requirements for
earnings per share. Adoption of Statement 128 will be required for
the Company beginning in the second quarter of fiscal 1998. Adoption
of Statement 128 is not expected to have a material effect on the
Company's operating results.
Additionally, Statement of Financial Accounting Standard No. 131,
Disclosures About Segments of an Enterprise and Related Information
(Statement 131) was issued in 1997. Statement 131 establishes
standards for the reporting of information about operating segments
and related disclosures about products and services, geographic
areas, and major customers. Adoption of Statement 131 will be
required in fiscal 1999 and require interim disclosures beginning in
fiscal 2000. Adoption of Statement 131 is not expected to have a
material effect on the Company's financial statement disclosures.
(2) Inventories
Inventories are summarized as follows:
1997 1996
---- ----
Raw materials $ 3,684,807 3,027,700
Work-in-process 3,072,231 3,031,441
Finished goods 978,969 1,151,179
----------- -----------
$ 7,736,007 7,210,320
=========== ===========
(3) Property, Plant and Equipment
Components of property, plant and equipment are as follows:
1997 1996
---- ----
Land and land improvements $ 1,362,050 1,362,050
Buildings 5,129,221 5,120,245
Machinery and equipment 23,588,902 22,443,583
----------- -----------
30,080,173 28,925,878
Less accumulated depreciation
and amortization 23,110,872 21,871,008
----------- -----------
$ 6,969,301 7,054,870
=========== ===========
31 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Accrued Expenses
Accrued expenses are summarized as follows:
1997 1996
---- ----
Compensation $313,477 168,901
Commissions 242,005 180,002
Other 163,934 122,762
-------- ---------
$719,416 471,665
======== =========
(5) Long-term Debt
Long-term debt is comprised as follows:
1997 1996
---- ----
Industrial Development Revenue Bonds $ -- 906,667
Term loan 680,001 --
Capitalized lease obligations 2,057 167,967
-------- ---------
682,058 1,074,634
Less current installments 228,723 394,633
-------- ---------
$453,335 680,001
======== =========
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 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 was
to mature on May l, 2000, required semi-annual principal payments of
$113,333, plus interest. In October 1996, the bonds were extinguished
with the proceeds of the term loan described below.
In October 1996, the Company entered into an agreement for a credit
facility providing for (1) a $3,000,000 working capital revolving line
of credit bearing interest at prime plus 1% (9.5% at June 30, 1997),
maturing on November 30, 1998, and (2) a $906,667 term loan payable in
semi-annual installments of $13,333 through May 1, 2000, bearing
interest at prime plus 1.25% (9.75% at June 30, 1997). The proceeds of
the term loan were used to refinance the OCIDA revenue bonds. Borrowings
under the credit facility are secured by substantially all assets of the
Company.
The terms of the credit facility require maintenance of a minimum tangible
net worth, ratio of cash flow to current maturities, and leverage ratio,
as defined in the respective agreement. The Company was in compliance
with all restrictions and covenants at June 30, 1997.
Maturities of long-term debt are $228,723 in 1998; $226,667 in 1999 and
2000.
Cash payments for interest were $92,358, $110,959 and $186,824 during
fiscal 1997, 1996 and 1995, respectively.
32 (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, 1997.
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%
twelve 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, 1997 with respect to these
plans are as follows:
Weighted
Shares Average
------------------------------------ Exercise
ISO NSO Total Option Price Price
--- --- ----- ------------ -----
Outstanding at July 2, 1994 621,550 82,500 704,050 $ 1.38 to 6.88 3.78
Issued 100,000 -- 100,000 4.13 4.13
Canceled (25,930) (7,500) (33,430) $ 1.38 to 6.88 4.70
Exercised (10,800) (15,000) (25,800) $ 1.38 to 4.13 2.97
--------- --------- ----------
Outstanding at July 1, 1995 684,820 60,000 744,820 $ 1.38 to 6.88 3.81
Issued 68,000 -- 68,000 $ 6.50 to 7.50 7.43
Canceled (30,000) -- (30,000) $ 1.38 to 6.88 4.90
Exercised (82,100) (60,000) (142,100) $ 1.38 to 6.88 3.19
Expired (12,850) -- (12,850) $ 6.00 6.00
--------- --------- ----------
Outstanding at June 30, 1996 627,870 -- 627,870 $ 1.38 to 7.50 4.25
Issued 95,000 10,000 105,000 $ 6.50 to 8.25 6.95
Exercised (20,000) -- (20,000) $ 1.38 to 7.50 2.97
Expired (31,870) -- (31,870) $ 6.88 6.88
--------- --------- ----------
Outstanding at June 30, 1997 671,000 10,000 681,000 $ 1.38 to 8.25 4.58
========= ========= ==========
Shares exercisable at
June 30, 1997 461,600 10,000 471,600 $ 1.38 to 8.25 3.86
========= ========= ==========
Shares available for grant at
June 30, 1997 137,000 14,000 151,000
========= ========= ==========
33 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Stock Option Plans, Continued
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 1997:
Options Outstanding Options Exercisable
---------------------------------------- --------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise life in exercise exercise
prices Shares years price Shares price
------ ------ ----- ----- ------ -----
$ 1.38 to 4.12 205,000 3.25 1.38 205,000 1.38
$ 4.13 to 6.00 306,000 3.45 5.30 246,000 5.30
$ 6.01 to 8.25 170,000 8.64 7.13 20,600 7.82
--------- ---------
681,000 471,600
========= =========
The per share weighted average fair value of stock options granted during
fiscal year 1997 and 1996 was $4.71 and $4.94, respectively. The fair
value of options at the date of the grant was estimated using the
Black-Scholes model with the following weighted average assumptions for
the respective fiscal year:
1997 1996
---- ----
Expected life 5 5
Interest rate 6.08% 5.63%
Volatility 78% 77%
Dividend yield 0% 0%
Stock based compensation costs would have reduced pretax income by $166,106
and $67,135 in fiscal 1997 and 1996 ($161,678 and $67,135 after tax and
$.04 and $.02 per share in fiscal 1997 and 1996, respectively) if the
fair values of options granted in that year had been recognized as
compensation expense on a straight-line basis over the vesting period of
the grant. The pro forma effect on net income for fiscal 1997 and 1996 is
not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation
expense related to grants made prior to fiscal 1996.
34 (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, 1997 and
1996:
1997 1996
---- ----
Actuarial present value of accumulated benefit
obligation (vested $4,195,715 in 1997 and
$3,885,557 in 1996) $4,259,753 3,944,861
Effect of assumed increase in compensation levels 368,532 341,289
---------- -----------
Projected benefit obligation for services rendered
to date 4,628,285 4,286,150
Plan assets at fair value 4,970,705 4,400,776
---------- -----------
Plan assets in excess of projected
benefit obligation 342,420 114,626
Unrecognized net gain (501,657) (270,153)
Unrecognized prior service cost 133,633 151,872
Unrecognized net transition asset (15 year
amortization) 56,793 66,259
---------- -----------
Prepaid pension asset $ 31,189 62,604
========== ===========
The following table details the components of net periodic pension cost:
1997 1996 1995
---- ---- ----
Service cost $ 140,609 148,893 146,354
Interest cost 316,779 292,138 259,167
Actual return on plan assets (549,333) (406,032) (794,687)
Net amortization and deferral 223,654 114,897 571,524
---------- -------- --------
Net periodic pension cost $ 131,709 149,896 182,358
========== ======== ========
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 1997 and 1996. The assumed long-term rate of return on plan
assets was 8.0% for 1997 and 1996.
Plan assets consist principally of equity securities, and U.S. government
and corporate obligations.
The Company maintains a voluntary contributory salary savings plan to which
participants may contribute up to 15% of their total compensation. During
fiscal 1996 and 1995, the Company contributed an amount equal to 50% of
the participants' contribution up to a maximum of 3% of the participants'
compensation. In fiscal 1997, the Company increased its matching
contribution to an amount equal to 50% of the participants' contribution
up to a maximum of 5% of the participants' compensation. During fiscal
1997, 1996 and 1995, the Company contributed $129,115, $80,645 and
$112,255, respectively, to this plan.
35 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
The following table presents the accumulated postretirement benefit
obligation at June 30, 1997 and 1996:
1997 1996
---- ----
Retirees $ 553,511 550,312
Fully eligible active plan participants 144,310 284,056
Other active participants 493,811 295,552
Unrecognized net gain (loss) (10,356) 8,295
---------- ----------
Accumulated postretirement benefit
obligation $1,181,276 1,138,215
========== ==========
The following table details the components of net periodic postretirement
benefit cost:
1997 1996 1995
---- ---- ----
Service cost $ 32,784 29,296 30,522
Interest cost 84,744 78,151 71,089
-------- -------- --------
Net periodic postretirement
benefit cost $117,528 107,447 101,611
======== ======== ========
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed
for fiscal 1997; the rate was assumed to decrease gradually to 5% by the
year 2013 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, 1997 by approximately $83,000 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost
for the year ended June 30, 1997 by approximately $6,300.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at June 30, 1997 and 1996.
36 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes
Income tax expense (benefit) consists of:
Current Deferred Total
------- -------- -----
Year ended June 30, 1997:
U.S. Federal $ 450,262 (738,824) (288,562)
State 17,284 271,278 288,562
--------- -------- --------
$ 467,546 (467,546) --
========= ======== ========
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)
========= ======== ========
A reconciliation of the expected consolidated income tax expense (benefit),
computed by applying the U.S. Federal corporate income tax rate of 34% to
income (loss) before income taxes, to income tax expense (benefit), is as
follows:
1997 1996 1995
---- ---- ----
Expected consolidated income
tax expense (benefit) $ 698,735 (367,223) (612,572)
State income taxes, net of
federal income tax benefit 190,451 -- --
Foreign tax effect, net 137,722 496,520 198,662
Change in valuation allowance (1,060,599) (140,552) 58,336
Other, net 33,691 11,255 25,574
----------- -------- --------
$ -- -- (330,000)
=========== ======== ========
37 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes, Continued
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at June 30, 1997 and 1996 are
presented below:
1997 1996
---- ----
Deferred tax assets:
Inventories $ 53,711 43,425
Retirement benefits -- 6,638
Postretirement benefits 460,698 443,904
General business credit carryforwards 30,594 30,594
Federal net operating loss carryforwards -- 723,565
State net operating loss carryforwards 36,636 170,717
State investment tax credit carryforwards 804,631 766,037
Alternative minimum tax credit
carryforwards 491,902 211,952
Nondeductible reserves 11,460 11,459
----------- ----------
Total deferred tax assets 1,889,632 2,408,291
Less valuation allowance 583,104 1,643,703
----------- ----------
Net deferred tax asset 1,306,528 764,588
----------- ----------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation (838,319) (764,588)
Retirement benefits (663) --
----------- ----------
Total deferred tax liabilities (838,982) (764,588)
----------- ----------
Net deferred taxes $ 467,546 --
=========== ==========
Presented as:
Current deferred tax asset 532,054 --
Long-term deferred tax liability (64,508) --
----------- ----------
$ 467,546 --
=========== ==========
38 (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, 1997 and
1996 was $583,104 and $1,643,703, respectively. The net change in the
total valuation allowance for the years ended June 30, 1997 and 1996 was
a decrease of $1,060,599 and $140,552, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at June
30, 1997.
At June 30, 1997, the Company has net operating loss carryforwards for
state income tax purposes of $403,001 which are available to offset
future state taxable income, if any, through 2012. The Company also has
investment tax credit carryforwards for state income tax purposes of
$804,631 which are available to reduce future state income taxes, if
any, through 2006. In addition, the Company has alternative minimum tax
credit carryforwards of $491,902 which are available to reduce future
federal regular income taxes, if any, over an indefinite period.
Cash payments for income taxes were $0 in fiscal 1997 and 1996, and $30,113
in 1995.
(10) Restructuring
In fiscal 1995, the Company 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 restructuring program.
During the third quarter of fiscal 1996, the Company recorded a
restructuring charge of $810,000 resulting from the disposition of the
net assets of the Company's European subsidiary, Anaren Microwave, Ltd.
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.
39 (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,
1998 $ 384,835
1999 384,835
2000 384,835
2001 384,835
2002 384,835
Thereafter 4,489,746
---------
6,413,921
Less amounts representing
sublease income 336,731
----------
$6,077,190
==========
Rent expense for the years ended June 30, 1997, June 30, 1996 and July 1,
1995 was $384,835, $373,531, and $378,483, respectively. Rent expense for
fiscal 1997 and 1996 was offset by sublease income of $125,667 and
$53,032, respectively.
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, 1997, the Company was required to maintain a
compensating balance of approximately $600,000 in support of this letter
of credit.
As discussed in note 1(i), the Company is currently engaged under a
technology development contract. Under this contract, the Company is
committed to provide research and development services through September
1998. Technology development fees and related costs under the contract are
anticipated to aggregate approximately $500,000 and $107,000 in fiscal
1998 and 1999, respectively.
(12) Concentrations
In 1997, sales to two customers (approximately $3,400,000 and $2,700,000,
respectively) exceeded 10% of consolidated net sales. 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.
40 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Concentrations, Continued
The Company and others, which are engaged in supplying defense-related
equipment to the United States Government (the Government), are subject
to certain business risks peculiar to the defense industry. Sales to the
Government may be affected by changes in procurement policies, budget
considerations, changing concepts of national defense, political
developments abroad and other factors. Sales to the Government accounted
for approximately 16%, 20% and 48% of consolidated net sales in fiscal
1997, 1996 and 1995, respectively. While management believes there is a
high probability of continuation of the Company's current defense-related
programs, it continues to reduce its dependence on sales to the
Government through development of its commercial electronic business.
(13) Foreign Operations
The following table shows financial information about the Company's foreign
operations:
Years ended
` -----------------------------------------------
June 30, 199 June 30, 1996 July 1, 1995
------------- ------------- ------------
Net sales:
United States $ 24,226,792 15,900,956 14,929,495
European subsidiary -- 1,180,945 3,066,257
------------ ---------- ----------
Consolidated $ 24,226,792 17,081,901 17,995,752
============ ========== ==========
Operating profit (loss):
United States $ 2,055,102 392,015 (1,425,730)
European subsidiary* -- (1,496,979) (327,324)
------------ ---------- ----------
Consolidated $ 2,055,102 (1,104,964) (1,753,054)
============ ========== ==========
* Includes the net loss on dissolution of the net assets of $810,000 in
fiscal 1996 (see note 10).
Years ended
---------------------------------------------
June 30, 1997 June 30, 1996 July 1, 1995
------------- ------------- ------------
Identifiable assets:
United States $25,972,543 20,674,207 20,941,042
European subsidiary -- 1,119,009 2,424,064
---------- ----------- -----------
Consolidated $25,972,543 21,793,216 23,365,106
========== =========== ===========
Sales to customers located outside the United States amounted to $4,701,094
in 1997, $6,108,024 in 1996 and $9,498,737 in 1995.
41 (Continued)
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial
information for the years ended June 30, 1997 and 1996, respectively:
1997 Quarter Ended
----------------------------------------------------
Sept. 30 Dec. 31 March 31 June 30
-------- ------- -------- -------
Net sales $5,065,641 5,313,722 6,059,502 7,787,927
========== ========= ========= =========
Cost of sales $3,572,094 3,481,193 3,995,195 5,194,402
========== ========= ========= =========
Net earnings $ 209,528 370,389 464,733 1,010,452
========== ========= ========= =========
Earnings per common and common equivalent share:
Primary $ .05 .09 .11 .25
========== ========= ========= =========
Assuming full dilution $ .05 .09 .11 .21
========== ========= ========= =========
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
========== ========= ========= =========
Earnings (loss) per common and common
equivalent share:
Primary $ .02 -- (.30) .01
========== ========= ========= =========
Assuming full dilution $ .02 -- (.30) .01
========== ========= ========= =========
As noted in note 1(b) and note 10, 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 net assets of the Company's
European subsidiary.
42
INDEX TO EXHIBITS (1)
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Registrant and amendments
thereof.
(i) Restated Certificate of Incorporation is incorporated
by reference to Exhibit 3(a) to Registrant's
Registration Statement 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).
a 3.2 Registrant's By-Laws, as amended.
b,c 10.1 Lease Agreement between the Registrant and the Onondaga
County Industrial Development Agency, dated June 1, 1980
together with Amendment, dated August 21, 1985 to Lease
Agreement between the Registrant and the Onondaga County
Industrial Development Agency.
h,I,k 10.2 Loan Agreement, dated June 15, 1990, by and between Fleet
National Bank and the Registrant, as amended by First
amendment to loan agreement, dated July 15, 1993, by and
between Fleet National Bank and the Registrant, and Second
amendment to loan agreement, dated June 24, 1994, by and
between Fleet National Bank and the Registrant.
10.3 Credit Facility Agreement dated as of October 1, 1996
between the Company and Manufacturers and Traders Trust
Company, together with Term Note and Revolving Credit Note
each dated October 1, 1996 executed by the Compamy to
Manufacturers and Traders Trust Company and Security
Agreement dated Ocyober 1, 1996 between the Company and
Manufacturers and Traders Trust Company.
10.4 Employment Agreement dated as of July 1, 1997 between the
Company and Lawrence A. Sala.
10.5 Consulting Agreement dated as of March 1, 1997 between the
Company and Dale F. Eck.
a 10.6 Registrant's Pension Plan and Trust. (2)
j 10.7 Registrant's Incentive Stock Option Plan. (2)
d 10.8 Registrant's Employee Stock Purchase Plan. (2)
e 10.9 Registrant's Non-Statutory Stock Option Plan (2)
f 10.10 Registrant's Severance Compensation Plan (2)
10.11 Registrant's Management Incentive Plan for 1998 (2)
g 21 Subsidiaries of Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule for the twelve month period ended
June 30, 1997, which is submitted electronically to the
Securities and Exchange Commission for information only and
is not filed.
43
EXHIBIT INDEX (Continued)
a Incorporated herein by reference to exhibit 4(b) to the
Registrant's Registration Statement on Form S-8
(Registration No. 33-19618).
b Incorporated herein by reference to exhibit 4.4 to the
Registrant's Registration Statement on Form S-2
(Registration No. 2-86025)
c 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.
d Incorporated herein by reference from Exhibit No. 4(c) to
the Registrant's Registration Statement on Form S-8
(Registration No. 33-1768)
e Incorporated herein by reference from Exhibit No. 4 to the
Registrant's Registration Statement on Form S-8
(Registration No. 33-36761).
f 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.
g Incorporated herein by reference to exhibit No. 22 to the
Registrant's Annual Report on Form 10-K for the year ended
June 30, 1991.
h 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.
i 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.
j Incorporated herein by reference to exhibit to the
Registrant's Registration Statement on Form S-8
(Registration No. 333-03193)
k 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.
44