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, 2003
___ 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, INC.
(Exact name of Registrant as specified in its Charter)
New York 16-0928561
State of incorporation) (I.R.S Employer Identification No.)
6635 Kirkville Road, East Syracuse, New York 13057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 315-432-8909
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Securities Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant, based on the closing sale price of the Common
Stock on August 20, 2003, as reported on the Nasdaq National Market, was
approximately $236,469,928.
The number of shares of Registrant's Common Stock outstanding on August 20, 2003
was 21,867,032.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with its 2003
Annual Meeting of Shareholders are incorporated into Part III of this Annual
Report on Form 10-K.
PART I
Item 1. Business
Forward-Looking Cautionary Statement
In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this Annual Report on Form 10-K
includes comments by the Company's management about future performance. Because
these statements are forward-looking statements pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, management's
forecasts involve risks and uncertainties, and actual results could differ
materially from those predicted in the forward-looking statements. Among the
factors that could cause actual results to differ materially from those
predicted are the following:
Current unpredictable wireless market conditions; decline in demand for Company
products; order cancellations; increased pricing pressure from the Company's
customers; decreased capital expenditures by wireless service providers; the
possibility that the Company may be unable to successfully execute its business
strategies or achieve its operating objectives, generate revenue growth or
achieve profitability; possible inability to successfully secure new design wins
from the Company's OEM customers, possible inability to successfully shutdown
the Company's Anaren Europe subsidiary which may result in additional costs
related to disposal of its assets, environmental clean-up, termination of Anaren
Europe's facility lease and other related issues; potential adverse effects of
SARS at the Company's Suzhou China subsidiary; unpredictable difficulties or
delays in the development of new products; the risks associated with any
technological shifts away from the Company's technologies and core competencies;
additional unanticipated impairments of assets including investment values and
goodwill; foreign currency fluctuations; diversion of defense spending away from
the Company's products and or technologies due to the on-going cost of
maintaining American troops in the Middle East; and litigation involving the
Company's ownership interest in Celeritek or a potential transaction with
Celeritek, or involving antitrust, intellectual property, product warranty,
product liability, and other issues.
General
The Company was incorporated in New York in 1967. The Company's executive
offices are located at 6635 Kirkville Road, East Syracuse, New York 13057. The
telephone number of the Company at that location is (315) 432-8909. The
Company's website is located at www.anaren.com. The Company makes its periodic
and current reports available, free of charge, on its website as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission. The Company's common stock
is listed on the Nasdaq National Market under the symbol "ANEN." Unless the
context otherwise provides, the "Company" or "Anaren" refers to Anaren, Inc. and
its subsidiaries.
Recent Developments
On December 16, 2002, at a Special Meeting of Shareholders, the Company's
Shareholders approved the creation of a holding company structure in which the
Company's operating assets would be transferred to a newly formed, wholly owned,
subsidiary and authorized an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Anaren Microwave, Inc. to
Anaren, Inc. The name change to Anaren, Inc. became effective on December 20,
2002 and the Company's operating assets were transferred to a new wholly owned
subsidiary (named Anaren Microwave, Inc.) effective December 31, 2002.
In the first quarter of calendar 2002, the Company created a new subsidiary,
Anaren Communication Suzhou Company, Ltd. and signed a three year lease for a
12,300 square foot manufacturing facility in Suzhou Industrial Park in Suzhou,
China. A general manager and operating staff were hired from July through
September and light manufacturing and assembly was begun at the facility in the
second quarter of fiscal 2003. In February 2003, the Anaren Suzhou subsidiary
exercised its option to lease the 12,000
2
square foot second floor of its facility to support anticipated additional
business needs in China. Presently, the facility has a staff of 29 workers and
expects to ramp-up to over 100 people in the first half of fiscal 2004 to
support production on a custom wireless program for a European customer. It is
anticipated that this facility will serve all of the Company's Asian customers.
Additionally, it is expected that this location will be used to facilitate
procurement of raw materials in China, when possible, for the Company's other
subsidiaries.
In September 2002, the Company made a decision to downsize its Anaren Europe
workforce as a result of the loss of customers due to a July 2001 fire and the
general decline in the wireless market. Twenty-four people were let go at that
time and a restructuring charge of $403,000 was recorded in the first quarter.
Large operating losses and negative cash flow continued at that facility in the
second and third quarter of fiscal 2003 due to the ongoing weakness in the
printed circuit board segment of the wireless infrastructure market. As a
result, it was determined at the end of the third quarter to significantly
downsize this operation again.
In March 2003, in conjunction with the second reorganization and due to
continued negative cash flow projections after the first restructuring, the
Company performed a FASB 144 evaluation to determine if the fixed assets used by
Anaren Europe were subject to an impairment loss. Based on the results of the
evaluation, an impairment loss of $681,000 was identified and recorded as a
charge in the income statements under the caption "Impairment Loss" for the
third quarter of fiscal 2003. Additionally, staffing at Anaren Europe was
reduced again by forty-four people and a restructuring charge of $631,000 for
severance and outplacement costs was recognized in April.
Operating losses and declining sales levels continued at Anaren Europe
throughout April and May. In late May, the Company decided to dispose of the
Anaren Europe facility as the recovery in sales levels required to make the
facility profitable was not likely to happen in the near future. In conjunction
with the decision to dispose of Anaren Europe, the Company recorded an
additional impairment charge of $2.0 million to adjust fixed asset balances at
that facility to liquidation value and restructuring charges of $281,000 to
record severance for the remaining twenty-three employees and $428,000 for an
inventory write down which was included in cost of sales - restructuring.
In March 2003, as a result of the continuing low level of business at the
Company's RF Power subsidiary, the decision was made to downsize the workforce
at that facility. Sixteen people were subsequently terminated at a cost of
$296,000, which has been recognized as a restructuring charge in the income
statements.
In April 2003, based on the continued weak wireless market conditions and the
current financial performance of the Company, the Company's Anaren Microwave,
Inc. subsidiary reduced its workforce by 30 people. In conjunction with this
action, the Company recorded a restructuring charge of $499,000 in the fourth
quarter and for the year ended June 30, 2003.
On September 19, 2002, the Company submitted an acquisition proposal to
Celeritek, Inc.'s Chairman, President and Chief Executive Officer, which stated
that the Company was prepared to offer $8.75 per share in an all-cash
transaction to acquire all of the outstanding shares of Celeritek, subject to
successful completion of customary due diligence and negotiation and execution
of a definitive acquisition agreement. On September 25, 2002, Celeritek issued a
press release announcing that its Board had rejected the Company's proposal
claiming that the proposal "is not in the best interests of Celeritek
shareholders." In June, 2003 the Company executed a Non Disclosure Agreement
with Celeritek. On July 28 and 29, 2003, the Company's management met with
Celeritek's Chairman, Tamer Husseini, and other members of Celeritek's senior
management to begin to conduct a due diligence review of Celeritek's business.
Anaren intends to continue to consider all of the alternatives available to it,
and may pursue one or more of the possible actions outlined in its Schedule 13D,
as amended.
Overview
The Company is a leading provider of microwave components and assemblies for the
wireless and space and defense markets. The Company's distinctive manufacturing
and packaging techniques enable it to
3
cost-effectively produce compact, lightweight microwave products for use in
wireless communication and space and defense systems.
Through its focused research and development efforts, Anaren has designed and
continues to design components and subsystems that enable wireless communication
systems, as well as advanced radar, beamforming and receiver applications for
the space and defense markets.
In addition, the Company is developing and producing a diverse set of products
and technologies to support the latest generation of wireless communications
systems. The Company's customer base includes leading global original equipment
manufacturers that serve the wireless, space and defense markets, including:
o Ericsson
o Lucent Technologies
o Motorola
o Nokia
o Nortel Networks
o Powerwave Technologies
o Boeing, Inc.
o ITT Aerospace/Communications
o Lockheed Martin
o Northrop Grumman
o Raytheon
Industry Background
Worldwide demand for integrated voice, data and video communications services
continues to grow. The volume of high-speed data traffic across global
communications networks has grown as the public Internet and private business
intranets have become essential for daily communications and electronic
commerce. The number of persons using the Internet and mobile internet terminals
for e-commerce and recreational use is also expected to continue to grow.
Servicing the increasing demand for higher bandwidth content and applications
requires cost-effective and high-speed connections. Wireless communications
provide an advantageous access solution for mobile high-speed Internet and
multimedia services, with a faster deployment and implementation. This is
underscored by the increasing number of wireless systems and subscribers
worldwide.
Despite this continued growth in customer demand, expenditures for capital
infrastructure equipment by service providers began to decline rapidly during
the first quarter of calendar year 2001. This severe market downturn has had a
negative impact on all of the Company's wireless product lines, and it appears
that these unfavorable wireless market conditions will continue for an uncertain
time period.
A Wireless Network
A typical mobile or fixed wireless communications system is comprised of a
geographic region containing a number of cells, each of which contains one or
more base stations, which are linked in a network to form a service provider's
coverage area. Each base station houses the equipment that receives incoming
telephone calls from the switching offices of the local wire-based telephone
company and broadcasts calls to the wireless users within the cell. A base
station can process a fixed number of radio channels through the use of multiple
transceivers, power amplifiers and tunable filters, along with an antenna to
transmit and receive signals to and from the wireless user.
Mobile Wireless Communications
The late 1990's through 2000 saw dramatic growth in the demand for mobile
communications. This was fueled by decreasing prices for handsets and airtime, a
favorable global communications regulatory environment, increased competition
among service providers, opening of new frequency spectrum and services, and the
installation of mobile networks in developing nations as an alternative to
wire-based networks. Despite this rapid growth in customer demand, expenditures
for capital infrastructure equipment by service providers began to decline
rapidly during the first quarter of calendar year 2001. Although this rate of
the decline has slowed, the market continues to be weak with no firm projection
for
4
recovery. This has had a negative impact on all of the Company's wireless
product lines, particularly the printed-circuit board business.
Wireless Local Area Networking
Wireless local area networks are flexible data communication systems that can
either replace or extend wired communication systems. Using radio frequency
technology, wireless local area networks transmit and receive data over the air
without wired cabling. A wireless local area network provides all the features
and benefits of traditional local area network technologies like Ethernet, with
lower installation costs and increased flexibility.
Wireless local area network technology is now in the process of widespread
deployment and accelerated development for low-cost, interoperable products.
Wireless local area network technology provides data rates to rapidly transfer
large data files, access the web, and support wireless video conferencing from
mobile platforms including handheld personal computers and laptops. The
flexibility that the wireless local area network offers the business and
consumer user is expected to lead to applications such as wireless home
multimedia, wireless roadside assistance, wireless e-business, and wireless
printers and scanners.
Space and Defense
The Space and Defense industry is currently focused on supporting National
Defense programs, integrated communications systems and technologies that
improve the performance and survivability of existing air, land and sea based
platforms. As a result, funding for advanced radar systems, advanced jamming
systems, smart munitions, electronic surveillance systems and satellite and
ground based communication systems has remained strong.
The Anaren Solution
The Company's technology addresses the demands of the wireless market for high
quality products manufactured in volume with continuous improvements in
performance and cost. The Company also provides the satellite market with
enabling technologies that increase network capacity and flexibility, allowing
for increased revenue generation. The Company's proprietary Multi-Layer
Stripline and ceramic circuit technologies, which are described more fully
below, allow the Company to provide compact, light weight, cost-effective, and
highly integrated microwave components, assemblies and subsystems. The Company's
solution includes:
Broad Array of Standard and Customized Products. The Company offers a broad
array of standard and custom microwave products to the mobile and wireless
networking, satellite communications and defense electronics markets. The
technologies underlying the Company's product portfolio allow the Company to
address the new wireless data communications products being developed by its
existing and potential customers with limited incremental investment. As the
original equipment manufacturers in the wireless communications industry have
been reducing the number of their suppliers, the Company believes that its
expanding product portfolio has helped the Company become a strategic supplier
to many of these original equipment manufacturers.
Advanced Microwave Design and Manufacturing Capabilities. The Company's
engineering and design staff of 100 engineers as of June 30, 2003 works with
customers to develop product solutions. Anaren's engineers collaborate with
customers to develop products that provide state-of-the-art performance and that
can be manufactured in significant volume with excellent quality and
reliability. The Company has consistently met the stringent requirements of the
wireless, defense and satellite communications markets due to the Company's
strengths in advanced packaging and interconnecting of radio, microwave and
extremely high frequency signals, as well as its ability to produce small, light
weight, cost-effective and efficient microwave components and assemblies.
Rapid Product Development. Anaren's integrated design and manufacturing
facilities allow it to produce custom solutions from concept to product delivery
in a matter of days. With its Multi-Layer Stripline technology, design
libraries, manufacturing experience and investment in automation, the Company
can facilitate a rapid transition from development to production, thereby
offering its customers a complete turnkey solution and allowing them to bring
their products to market faster.
5
Strong Customer Relationships. The Company believes that it has become an
integral part of its key customers' operations by working closely with them
through the entire development and production process. The Company assigns a
project engineer to each customer to ensure a high level of responsiveness and
customer service. The project engineer and a design team assist the customer
from the conceptual, system level design stages through the development and
manufacturing process. By maintaining close contact with the customers' design
engineering, manufacturing, purchasing and project management personnel, the
Company can better understand their needs, rapidly develop customer-specific
solutions and more effectively design the Company's solutions into the
customers' systems and networks. The Company believes that the strength of its
customer support and depth of its customer relationships provide the Company a
competitive advantage.
Technology
The Company utilizes three basic technologies: Multi-Layer Stripline, Thick Film
Ceramics and Ball Grid Array assembly, including the integration of active
devices.
Multi-Layer Stripline technology is a technique of processing stripline
circuits, in which multiple layers of etched stripline circuits are laminated
together in a manner that is similar to printed circuit board manufacturing, but
with superior microwave characteristics. Similar to traditional printed circuit
board manufacturing, holes are used to interconnect layers. The Company's
proprietary techniques enable it to implement multi-layer connections that
perform optimally at microwave frequencies. Unlike traditional printed circuit
board manufacturing, simply connecting the appropriate points on the multi-layer
board does not ensure adequate performance. In order to achieve optimal
microwave performance on a consistent basis, material and process variations
must be tightly controlled and the circuit design must take into consideration
variations in the manufacturing process.
Ball Grid Array technology is a technique used to integrate active functionality
onto Multi-Layer Stripline circuits at microwave frequencies. Ball Grid Array
technology is an efficient integration technique offering superior high
frequency performance, and is compatible with standard low cost manufacturing
techniques.
Thick Film Ceramic technology is a technique of processing multi-layer ceramic
circuits in which the signal conductors are screen printed onto ceramic
substrates. Thick Film Ceramic technology is an efficient method of integrating
passive components such as resistors and capacitors, eliminating costly assembly
steps to mount discreet components.
The Company's microwave design engineering staff has developed proprietary
modeling techniques and component design libraries that allow for consistent and
efficient design and production of complex microwave products utilizing its
proprietary technologies.
Strategy
The Company's strategy is to continue to use its proprietary technologies,
extensive microwave design libraries and low cost manufacturing capabilities to
further expand its penetration in the wireless and space and defense markets.
Key components of the Company's strategy include the following:
Pursue Large Addressable Markets. The Company has successfully penetrated the
mobile wireless market and intends to use its market position to pursue other
wireless markets. The Company also intends to continue to offer additional
products and technologies to address existing and developing space and defense
applications.
Focus on value added products. The Company plans to continue to increase the
value of its products in wireless and space and defense systems. The Company
intends to expand its component offerings to enable the Company to increase the
number of products addressing each wireless application. In addition, with its
Multi-Layer Stripline, Ball Grid Array and Thick Film Ceramic manufacturing
technologies, the Company intends to continue to increase the functionality of
its products, thereby enabling its wireless and space and defense customers to
continue to reduce the size and cost of their platforms, while the Company
increases its content value.
Strengthen and Expand Customer Relationships. Today, a limited number of large
systems manufacturers drive the wireless and space and defense markets. The
Company has developed, and plans to continue to
6
expand, customer relationships with many of these manufacturers, including
Ericsson, Lucent, Motorola, Nokia, Nortel Networks and Powerwave for wireless
communications and Boeing, Lockheed Martin, Raytheon and Northrup Grumman for
space and defense. The Company intends to further strengthen its customer
relationships by offering complete outsourcing solutions, from research and
development through product design and production, thereby increasing the
customers' reliance on the Company.
Pursue Technology Leadership Position. The Company intends to use its
technological leadership in the mobile wireless and space and defense markets to
extend its competitive advantage. Anaren plans to pursue further technological
advances through continued investment in research and development. The Company
will seek to advance its leadership in wireless technology by developing next
generation products for the mobile and wireless networking markets. In addition,
the Company will attempt to build upon its relationships with key space and
defense original equipment manufacturers in order to develop state-of-the-art
products.
Expand Business through Strategic Acquisitions. The Company intends to continue
to make opportunistic acquisitions of companies, product lines and technologies
that complement its business. The Company will focus on acquisitions that
leverage its technical expertise and business development resources and provide
a competitive advantage for its targeted markets.
Products
Wireless Communications
The Company provides microwave components, assemblies and subsystems to leading
wireless infrastructure equipment manufacturers. Traditionally, all of the
signal distribution, or combining and splitting, within a base station has been
accomplished with discrete signal distribution components and coaxial cables.
Through the use of its Multi-Layer Stripline and ceramic technologies, the
Company provides microwave components, assemblies and subsystems that eliminate
the need for discrete components and interconnecting cables. These integrated
assemblies, which range from simple splitting and combining networks to complete
microwave backplanes, distribute microwave signals throughout the base stations,
from reception at the antenna, to multiple radios, to multiple amplifiers, and
back to the antenna for transmission.
The Company has developed its product offerings to enable customers to reduce
the size and cost, while enhancing the performance, of their equipment. The
Company continually invests capital and resources to enhance existing products
and develop new products to address the latest market demands. The Company has
developed and continues to market a full line of standard products, as well as
custom products, to wireless original equipment manufacturers. A brief
description of the Company's major product categories is as follows:
Component Products
Xinger(R) Surface Mount Components. The Company's Xinger(R) line of products
consists of off-the-shelf surface mount microwave components which provide
passive microwave signal distribution functions. They were originally developed
to provide a low-cost signal distribution component, which could be placed on
standard printed circuit boards with automated production equipment. The primary
application of these products is in radio frequency power amplifiers, but they
are also found in low-noise amplifiers and radios. The Company believes it is
currently the market leader in this product area, supplying industry leading
original equipment manufacturers and leading power amplifier manufacturers. The
Company continues to invest heavily in the expansion of this product line, as
well as its addressable market. The Company has recently announced several
products specifically designed to address the Wireless local area network
market, which are referred to as the "Femto" line.
Ferrite Products. The Company's ferrite components are used in various wireless
and defense applications. They are a key component in base station amplifiers,
and their primary function is to protect the sensitive electronics from damage
by isolating them electronically from potentially harmful signal levels. The
Company's "Xinger(R) Circulator" product line integrates its ferrite technology
with its Xinger(R) technology. This product line offers ferrite product
performance in a surface mountable Xinger(R) package for automated placement and
soldering.
7
Resistive Products. The Company's resistive product line includes resistors,
power terminations, and attenuators for use in high power wireless and medical
imaging applications. They are typically found in power amplifiers and are used
in conjunction with ferrite products as well as Xinger(R) surface mount
components. The products are manufactured using specialized material substrates
designed for optimum heat transfer.
AdrenaLine(R) Power Splitting and Combining Networks. The Company developed the
AdrenaLine(R) product line to provide a low-cost, high-performance network to
combine individual power modules. These products enable the Company's customers
to produce smaller, lower cost, more efficient power amplifiers. AdrenaLine(R)
supports all major wireless standards and frequencies.
Custom Splitting and Combining Products. In addition to its standard products,
the Company offers a wide range of custom signal splitting solutions. These
custom solutions are typically used to distribute signals to and from radio
transceivers and power amplifiers. The Company's custom products offer
consistent performance and can be designed in unique configurations, allowing
base station designers an opportunity to greatly reduce space, complexity and
cost while enhancing performance.
Custom Radio Frequency Backplane Assemblies. The Company's radio frequency
backplanes provide efficient connections of microwave signals between subsystems
in wireless base stations. Radio frequency backplanes are similar to the
motherboard in a personal computer, which efficiently connects signals between
multiple subsystems. These assemblies range from radio frequency-only to fully
integrated radio frequency, direct current power, and signal routing solutions.
They are typically used in conjunction with radio transceivers and radio
frequency power amplifiers. The Company also offers backplane assemblies with
fully integrated radio-frequency signal switching capability.
Hybrid Matrix Assemblies. The Company's hybrid matrix assemblies allow customers
to effectively reduce the number of amplifiers in their base stations. Base
station amplifier systems are designed to handle peak usage, when maximum calls
are made over a network. Due to the sector coverage of typical base stations,
some amplifiers are heavily used while others are not. The Company's matrices
allow the spreading of high usage volume over all base station amplifiers,
permitting a reduction in the total number of amplifiers needed. These products
are offered in a number of packaging configurations, including backplanes.
High Frequency Etched Thick Film and LTCC Circuits. The Company's ceramic
capabilities include etched thick film circuits and Low Temperature Co-fired
Ceramic built to customer specifications. These circuits are suitable for
wireless, defense, aerospace, and medical applications.
Space and Defense
The Company is a supplier of radar countermeasure subsystems and beamforming
networks for use in missile guidance systems, electronic surveillance, radar
countermeasures and communications systems. The Company's Multi-Layer Stripline
and Ball Grid Array technologies enable the Company to provide customers with
highly complex electronic subsystems and beamforming networks that maintain high
performance, while reducing size, cost and weight. Each of these products is
specifically designed for a particular program. A brief description of the
Company's major Space and Defense product categories is as follows:
Radar Countermeasure Subsystems. Defense radar countermeasure subsystems
digitally measure, locate and counter enemy radar systems.
Beamformers. Beamformers determine the number, size and quality of beams that
are produced from an antenna array. The Company supplies passive and active
beamformers. Passive beamformers produce fixed beam locations while active
beamformers allow for real-time reconfiguration of the beam pattern.
Switch Matrices. Switch matrices route radio frequency signals from a single
location to one or multiple end user locations. These products allow system
operators to allocate capacity as required, thereby increasing utilization and
revenue generation.
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Radar Feed Networks. Radar feeds are power dividers that distribute radio
frequency energy to the antenna elements of the radar. The power dividers are
frequently arranged to provide two or three inputs and several thousand outputs.
Customers
During the fiscal year ended June 30, 2003, approximately 64% of the Company's
sales were to customers in the wireless markets and approximately 36% of its
sales were to customers in the space and defense markets. The Company had one
customer who accounted for more than 10.0% of net sales, Raytheon, who
represented approximately 12.5% of sales in fiscal 2003.
Wireless Communications. The Company sells its standard line of Xinger(R)
components, resistive components, ferrite components, and printed wiring boards,
to leading original equipment manufacturers and a broad range of other wireless
equipment contract manufacturers. In addition, the Company sells its custom
wireless products to major wireless infrastructure original equipment
manufacturers. In general, customers have purchased the Company's products
directly from the Company or through distributors or sales representatives. The
following is a list of the Company's Wireless customers who generated $500,000
or more in revenues in the fiscal year ended June 30, 2003:
o Avnet
o BFI Optilas
o Cana
o Celestica Corp.
o EG Components
o Ericsson
o Knowles Electronics
o Lucent Technologies
o Motorola
o Nokia
o Nortel Networks
o Pacesetter, Inc.
o Powerwave Technologies
o Richardson Electronics Inc.
Space and Defense. The Company currently sells passive components and electronic
subsystems to prime contractors serving the United States and foreign
governments. The following is a list of Space and Defense customers who
generated $500,000 or more in revenues in the fiscal year ended June 30, 2003:
o Boeing Inc.
o ITT Avionics
o LG Innotek Co. Ltd.
o Lockheed Martin
o Northrup Grumman
o Raytheon
o Thales Defense, Ltd.
Sales and Marketing
The Company markets its products worldwide to original equipment manufacturers
in the wireless and space and defense markets primarily through a sales and
marketing force of 31 people as of June 30, 2003. The Company has regional sales
offices located in Sacramento, California; Raleigh, North Carolina;
Waterlooville, England; and Suzhou, China. The regional sales offices have
dedicated technical product managers to better serve the customer base. In
addition, as of June 30, 2003, the Company had contracts with two major
distributors, with 19 manufacturers' representatives in the United States, and
with nine international representatives located in Western Europe, the Middle
East and Asia. As part of its marketing efforts, the Company advertises in major
trade publications and attends major industry shows. The Company has also
invested significantly in its Internet website which contains an electronic
version
9
of its entire catalog. In addition, the website enables users to download
important device parameter files. These files contain the performance
information for the catalog parts in a format which is compatible with commonly
used computer aided design/computer aided modeling, or CAD/CAM, equipment. The
Company also provides mechanical drawings and applications notes for proper use
of the parts. This service allows designers to get the information they require
and to easily incorporate the Company's parts into their designs.
After identifying key potential customers, the Company makes sales calls with
its own sales, management and engineering personnel and with manufacturers'
representatives. To promote widespread acceptance of the Company's products and
provide customers with support for their wireless communications needs, the
sales and engineering teams work closely with the customers to develop solutions
tailored for their wireless requirements. The Company believes that its customer
engineering support team, comprised of 100 design and engineering professionals
as of June 30, 2003, is a key competitive advantage.
The Company uses distributors for its standard products, most notably the
Xinger(R) line of surface mount components. In the United States, Canada, Asia
and most of Europe, the Company has agreements with Richardson and Avnet, which
operates under the name of BFI Optilas in Europe. The Scandinavian countries are
handled by E.G. Components, Inc., a subsidiary of Elektronikgruppen.
Distribution has become an important part of the Company's sales efforts by
providing the Company with a larger sales force to promote its catalog
offerings. The Company is also seeing a trend on the part of its customers to
consolidate their material handling activities, including purchasing,
warehousing, and fulfillment. The result is that many original equipment
manufacturers are outsourcing all or part of these activities to large
distribution firms like Avnet and Richardson.
Backlog
The Company's backlog of orders for the Wireless group was $8.8 million as of
June 30, 2003 and $10.4 million as of June 30, 2002. The decline in backlog was
a result of the $1.9 million decline in backlog at the Anaren Europe subsidiary
which the Company has announced the pending disposal of in the first half of
fiscal 2004. Backlog for the Wireless group primarily represents firm orders for
component products (i.e., orders for a fixed quantity of component products) and
signed purchase orders (i.e., orders for specific custom sub-assemblies) for
custom components due to ship within the next four to six weeks. However,
backlog is not necessarily indicative of future sales. Accordingly, the Company
does not believe that its backlog as of any particular date is representative of
actual sales for any succeeding period. Typically, large original equipment
manufacturers including Ericsson, Lucent, Motorola, Nokia and Nortel, who use
the Company's component and custom products, negotiate set prices for estimated
annual volumes. The Company receives a firm delivery commitment one week prior
to shipment. The Company does not recognize backlog until it has received a firm
order.
As part of the Company's close working relationships with major wireless
communications customers, the customers expect the Company to respond quickly to
changes in the volume and delivery schedule of their orders and, if necessary,
to inventory products at its facilities for just-in-time delivery. Therefore,
although contracts with these customers typically specify aggregate dollar
volumes of products to be purchased over an extended time period, these
contracts also provide for delivery flexibility, on short notice. In addition,
these customers may cancel or defer orders without significant penalty.
Backlog of orders for the Space and Defense group was $26.3 million as of June
30, 2003 and $33.5 million as of June 30, 2002. The decline in Space and Defense
backlog year over year was due largely to the completion of the Spaceway program
in the fourth quarter of fiscal 2003. Spaceway backlog was $0 million at June
30, 2003, compared to $4.8 at June 30, 2002. During fiscal year 2004, the
Company expects to ship between $23.0 million and $26.0 million of its backlog
existing at June 30, 2003. All of the orders included in the Space and Defense
group backlog are covered by signed contracts or purchase orders. However,
backlog is not necessarily indicative of future sales. Accordingly, the Company
does not believe that its backlog as of any particular date is representative of
actual sales for any succeeding period.
10
Research and Development
The Company's research and development efforts are focused on the design,
development and engineering of both products and manufacturing processes. The
Company intends to focus its future research and development efforts on next
generation products and technologies. The current development efforts of the
Company include:
o Advanced Multi-Layer Stripline manufacturing processes for use in low-cost,
light weight electronic sub-assembly and wireless applications;
o Products for use in mobile and fixed wireless applications;
o Advanced manufacturing technology to produce microwave stripline structures
for broadband Millimeter wave, or extremely high frequency, communications
satellite applications;
o Advanced low temperature co-fired ceramic for use in low-cost, light weight
integrated substrates
o Miniature components for wireless networking and subscriber applications
These activities include customer-funded design and development, as well as
efforts funded directly by the Company. Research and development expenses funded
by the Company were $6.1 million in fiscal 2003, $6.3 million in fiscal 2002 and
$5.0 million in fiscal 2001. Research and development costs are charged to
expense as incurred.
In addition, the Company's net sales included approximately $1.5 million for
fiscal year 2003, approximately $1.1 million for fiscal 2002 and approximately
$4.6 million for fiscal 2001 attributable to payments by customers for the
design and development of products within the Space and Defense group to meet
their specific requirements. In any given year, the amount of customer funding
for design and development can vary widely depending upon the status of
particular contracts. The Company is typically not restricted in the use of
technologies developed through customer funding for other applications.
Manufacturing
The Company currently supports manufacturing locations in Syracuse and Bohemia,
New York; North Andover, Massachusetts; and Suzhou, China. The Company
announced, in June 2003, its plans to dispose of its operations in Almelo, The
Netherlands. During fiscal 2002, the Company completed the consolidation of its
New Jersey based subsidiary, Anaren Power Products, Inc., into its East
Syracuse, New York operation. In March of 2002, the Company opened a facility in
Suzhou, China to support a growing Asia-Pacific customer base and to establish a
low cost light manufacturing operation supporting all of its wireless business.
The Company continues to invest in further development of its Multi-Layer
Stripline and ceramic technologies. In fiscal 2001, the Company completed a
major renovation in its Syracuse operation to enhance its Multi-Layer Stripline
manufacturing as well as improving the layout and throughput of its wireless
manufacturing areas. Continued incremental investments in equipment have further
improved the Multi-Layer Stripline and automated design capabilities of the
Syracuse operation. In late fiscal year 2002 the Company established a Low
Temperature Co-fired Ceramic capability in its North Andover, Massachusetts
operation. This capability is well-suited to support packaging requirements for
both defense and space based applications. Additionally, during fiscal year 2003
the Company began the transitioning of much of the ceramic processing capability
from its Bohemia, New York operation to its North Andover operation. This
transfer was initiated to reduce manufacturing cost and to concentrate all
ceramic processing and expertise in one location.
The Company continues to develop capability to produce highly engineered,
complex microwave subassemblies to support its Space and Defense business. In
fiscal 2003 the Company invested in equipment and processes required to
manufacture assemblies utilizing high-density and frequency Ball Grid Array
technology, supporting high reliability requirements suitable for both defense
and space based platforms.
11
A continued focus of the Company is to provide the lowest cost manufacturing
solutions. Part of this strategy has evolved with the opening of a facility in
Suzhou, China. Manufacturing product lines from the Syracuse and North Andover
operations have been successfully transitioned to Suzhou, with additional
products and lines planned for fiscal year 2004. Additionally, the Suzhou
facility is expected to provide support in identifying and qualifying new
lower-cost and local Asian sources of raw materials for all of the Company's
businesses.
The Company's East Syracuse facility has been ISO 9001 certified; its Bohemia,
New York and North Andover, Massachusetts facilities are both ISO 9002
certified. In addition, the East Syracuse facility has recently been certified
to IPC 6010 for manufacture of high-reliability printed circuit boards.
The Company manufactures its products from standard components, as well as from
items which are manufactured by vendors to its specifications. The raw materials
utilized in the various product areas are generally accessible and common to
both of the Company's business segments. The Company purchases most of its raw
materials from a variety of vendors and most of these raw materials are
available from a number of sources. During fiscal year 2002, the Company had one
vendor from which it purchased more than 10.0% of its total raw materials, but
the Company believes that alternate sources of supply are generally available
for these and other raw materials.
Competition
The microwave component and subsystems industry continues to be highly
competitive. The Company competes against many companies, both foreign and
domestic, many of which are larger and have greater financial and other
resources. Direct competitors of the Company in the wireless market include KDI,
M/A-com, a division of Tyco International, Merrimac Industries, Filtronic PLC,
Radiall, Smith Industries, Soshin and Mini-Circuits. As a direct supplier to
original equipment manufacturers, the Company also faces significant competition
from the in-house capabilities of its customers. However, the current trend in
the wireless marketplace has been for the original equipment manufacturers to
outsource more design and production work, thereby freeing up their internal
resources for other use. Thus, the Company believes that internal customer
competition exists predominantly in its Space and Defense and satellite
businesses.
In the wireless market, the overall weak market conditions and reduction in
demand for wireless infrastructure equipment have resulted in increased price
pressure from the Company's customers. It is anticipated that this pricing
pressure will continue indefinitely until the overall wireless market conditions
improve.
The principal competitive factors in both the foreign and domestic markets are
technical performance, reliability, ability to produce in volume, on-time
delivery and most critically, price. Based on these factors, the Company
believes that it competes favorably in its markets. The Company believes that it
is particularly strong in the areas of technical performance and on-time
delivery in the wireless marketplace. With the introduction of manufacturing
capability in Suzhou, China, and new innovative design techniques, the Company
believes that it now competes favorably on price as well.
Government Regulation
The Company's products are incorporated into wireless communications systems
that are subject to regulation domestically by the Federal Communications
Commission and internationally by other government agencies. In addition,
because of its participation in the defense industry, the Company is subject to
audit from time to time for compliance with government regulations by various
governmental agencies. The Company is also subject to a variety of local, state
and federal government regulations relating to environmental laws, as they
relate to toxic or other hazardous substances used to manufacture the Company's
products. The Company believes that it operates its business in material
compliance with applicable laws and regulations. However, any failure to comply
with existing or future laws or regulations could have a material adverse effect
on the Company's business, financial condition and results of operations.
12
Intellectual Property
The Company's success depends to a significant degree upon the preservation and
protection of its product and manufacturing process designs and other
proprietary technology. To protect its proprietary technology, the Company
generally limits access to its technology, treats portions of such technology as
trade secrets, and obtains confidentiality or non-disclosure agreements from
persons with access to the technology. The Company's agreements with its
employees prohibit them from disclosing any confidential information, technology
developments and business practices, and from disclosing any confidential
information entrusted to the Company by other parties. Consultants engaged by
the Company who have access to confidential information generally sign an
agreement requiring them to keep confidential and not disclose any non-public
confidential information.
The Company currently has five active patents and has filed thirteen other
patent applications that are currently pending before the United States Patent
and Trademark Office to protect both the construction and design of its
products. The Company plans to pursue intellectual property protection in
foreign countries, primarily in the form of international patents, in instances
where the technology covered is considered important enough to justify the added
expense.
Employees
As of June 30, 2003, the Company employed 520 full-time people including 37
temporary employees. Of these employees, 100 were members of the engineering
staff, 346 were in manufacturing positions, 31 were in sales and marketing
positions, and 43 were in management and support functions. None of these
employees are represented by a labor union, and the Company has not experienced
any work stoppages. The Company considers its employee relations to be
excellent.
Item 2. Properties
The principal facility of the Company is a 105,000 square foot building, which
the Company owns, located on a 30 acre parcel in East Syracuse, New York. The
Company's principal subsidiary, Anaren Microwave, Inc., utilizes this facility
which houses a substantial portion of the Company's marketing, manufacturing,
administrative, research and development, systems design and engineering
activities. The Company's RF Power subsidiary leases a 15,700 square foot
facility in Bohemia, New York, which houses the production, engineering and
administrative functions of RF Power pursuant to a lease that expires in June,
2006. Annual rent for this facility is approximately $132,000. Effective August
31, 2001, the Company's Amitron, Inc. subsidiary signed a five year lease with
an option for five additional years for approximately 20,000 square feet in
North Andover, Massachusetts, which currently houses that business. Annual rent
for this facility is approximately $155,000.
The Company's Anaren Europe subsidiary that was acquired effective October 1,
2001 leases a 45,000 square foot facility in Almelo, The Netherlands. Annual
rent for this facility is approximately $182,000 and the lease expires in
December 2004.
In March 2002, the Company's Anaren Suzhou Communications Inc. subsidiary signed
a lease for a 12,300 square foot facility in Suzhou, China to begin light
manufacturing and assembly activities for the Company's Asian customers. This
facility has an annual rent of $21,400, and the lease, which expires in 2005,
may be renewed for an additional three year period. Additionally, in February
2003 Anaren Suzhou exercised an option to lease the second floor of this
facility (approximately 12,300 square feet) at a rate per square foot totaling
$21,000 annually through 2005, subject to the three year renewal period noted
above.
The Company leases a 20,000 square foot building in Frimley, England. Annual
rental cost of this facility is approximately $370,000 and the Company is
currently subletting the building. During the fiscal year ended June 30, 2003,
payments to the Company under this sublease were more than 95.0% of the full
lease value. The existing lease term on this building runs to 2014. There is no
assurance that the Company will be able to continuously sublet the building
during the remaining lease term so as to offset its rental cost in whole or in
part.
Management considers the foregoing facilities adequate for the current and
anticipated short-term future requirements of the Company, and expects that
suitable additional space will be available to the Company, as needed, at
reasonable commercial terms.
13
Item 3. Legal Proceedings
There are no material pending legal proceedings against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended June 30, 2003, there were no
matters submitted to a vote of security holders.
Item 4A. Executive Officers of the Registrant
Executive officers of Anaren, Inc., their respective ages as of June 30, 2003,
and their positions held with the Company are as follows:
Name Age Position
Lawrence A. Sala 40 President, Chief Executive Officer, Chairman and Director
Carl W. Gerst, Jr 65 Chief Technical Officer, Vice Chairman and Director
Gert R. Thygesen 47 Vice President, Technology
Joseph E. Porcello 51 Vice President, Finance, Treasurer
Mark P. Burdick 45 Vice President and General Manager
Timothy P. Ross 43 Vice President, Business Development
Amy B. Tewksbury 39 Vice President, Human Resources
Lawrence A. Sala joined the Company in 1984. He has been President since May
1995, has served as Chief Executive Officer since September 1997, and has been
Chairman of the Board of Directors since November 2001. Mr. Sala became a member
of the Board of Directors of the Company in 1995. He holds a bachelor's degree
in computer engineering, a master's degree in electrical engineering and a
master's degree in business administration, all from Syracuse University.
Carl W. Gerst, Jr. has been a member of the Board of Directors of the Company
since 1968. Mr. Gerst has served as Chief Technical Officer and Vice Chairman of
the Board since May 1995 and served as Treasurer from May 1992 to November 2001.
Mr. Gerst previously served as Executive Vice President of the Company from its
founding until May 1995. He holds a bachelor's degree from Youngstown University
and a master's degree in business administration from Syracuse University.
Gert R. Thygesen joined the Company in 1981 and has served as Vice President of
Technology since September 2000. He previously served as Vice President,
Operations from April 1995 to September 2000, as Operations Manager of the
Company from 1992 until 1995 and as Program Manager, Digital RF Memories &
Advanced Systems, from 1988 to 1992. Mr. Thygesen holds a bachelor of science
degree and a master's degree in electrical engineering from Aalborg University
Center, Denmark.
Joseph E. Porcello joined the Company in 1977 and has served as Vice President,
Finance since May 1995 and Treasurer since November 2001. He previously served
as the Company's Controller from 1981 to 1999. Mr. Porcello holds a bachelor's
degree from the State University of New York at Buffalo and is a certified
public accountant.
Mark P. Burdick has been with the Company since 1978 and has served as Vice
President and General Manager since September 2000. He served as Vice President
and General Manager, Wireless Group from November 1999 until September 2000, as
Business Unit Manager -- Commercial Products from 1994 to 1999, and as Group
Manager for Defense Radar Countermeasure Subsystems from 1991 to 1994. Mr.
Burdick holds a bachelor of science degree in electrical engineering from the
Rochester Institute of Technology, and a Master's of Business Administration
from the University of Rochester.
Timothy P. Ross has been with the Company since 1982 and has served as Vice
President -- Business Development since September 2000. He served as Vice
President and General Manager, Space and
14
Defense Group, of the Company from November 1999 until September 2000. Mr. Ross
served as Business Unit Manager -- Satellite Communications of the Company from
1995 to 1999 and as a Program Manager from 1988 to 1995. Mr. Ross holds an
associate's degree in engineering science, a bachelor of science in electrical
engineering from Clarkson University, and a Master's in Business Administration
from the University of Rochester.
Amy Tewksbury joined the Company in October 2002 as the Vice President of Human
Resources. Prior to joining Anaren, Ms. Tewksbury was employed by Wegmans Food
Markets, Inc. for 16 years. She held various positions with Wegmans including
Syracuse Division Human Resources Manager, Corporate Human Resources Project
Manager, and Store Operations. Ms. Tewksbury holds a Bachelor of Science degree
in Management from Syracuse University.
15
PART II
Item 5. Market For the Company's Common Equity and Related Stockholder Matters
The common stock of the Company is quoted on The Nasdaq National Market under
the symbol "ANEN." The following table sets forth the range of quarterly high
and low sales prices reported on The Nasdaq National Market for the Company's
common stock for the quarters indicated. Quotations represent prices between
dealers and do not include retail mark-ups, mark-downs or commissions.
Fiscal 2003 Fiscal 2002
--------------------------- ---------------------------
Quarter Quarter
--------------------------- ---------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
High ...... $10.64 12.54 10.15 10.37 $26.01 19.33 19.63 16.10
Low ....... $ 6.83 6.99 7.61 7.28 $15.00 13.50 11.92 7.64
The Company had approximately 427 holders of record of its common stock at
August 8, 2003.
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support the
development of its business and does not anticipate paying cash dividends for
the foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Board of Directors after taking into account various factors,
including the Company's financial condition, operating results and current and
anticipated cash needs.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below with respect to the
Company's statements of income for each of the years in the three year period
ended June 30, 2003, and with respect to the balance sheets at June 30, 2003 and
2002, are derived from the consolidated financial statements that have been
audited by KPMG LLP, independent auditors, which are included elsewhere in this
Annual Report on Form 10-K, and are qualified by reference to such consolidated
financial statements. The statements of income data for the years ended June 30,
1999 and June 30, 2000, and the balance sheet data at June 30, 1999, June 30,
2000 and June 30, 2001, are derived from audited consolidated financial
statements not included in this Annual Report on Form 10-K. The following
selected financial data should be read in conjunction with the consolidated
financial statements for the Company and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein.
16
Years Ended
----------------------------------------------------------------
June 30, June 30, June 30, June 30, June 30,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Income Data:
Net sales ....................................... $ 79,920 $ 73,568 $ 84,825 $ 60,172 $45,739
Cost of sales ................................... 58,723 51,369 52,527 35,074 27,711
Cost of sales restructuring ..................... 428 -- -- -- --
-------- -------- -------- -------- -------
Gross profit .................................... 20,768 22,199 32,298 25,098 18,028
-------- -------- -------- -------- -------
Operating expenses:
Marketing ..................................... 6,620 7,256 6,584 5,434 4,177
Research and development ...................... 6,140 6,283 5,023 3,816 2,835
General and administrative .................... 9,110 8,105 8,392 4,394 3,220
Impairment loss ............................... 2,721 -- -- -- --
Restructuring ................................. 2,109 -- 688 -- --
Fire related .................................. -- 711 -- -- --
-------- -------- -------- -------- -------
Total operating expenses ........................ 26,700 22,355 20,687 13,644 10,232
-------- -------- -------- -------- -------
Operating income (loss) ........................ (5,932) (156) 11,611 11,454 7,796
-------- -------- -------- -------- -------
Other income (expense):
Interest expense .............................. (51) (149) (159) (66) (38)
Other, primarily interest income .............. 2,326 3,932 7,162 3,316 1,396
-------- -------- -------- -------- -------
Total other income, net ..................... 2,275 3,783 7,003 3,250 1,358
-------- -------- -------- -------- -------
Income (loss) before income taxes and
extraordinary item ............................ (3,657) 3,627 18,614 14,704 9,154
Income taxes .................................... 136 (405) 6,400 5,063 2,204
-------- -------- -------- -------- -------
Income (loss) before extraordinary item ......... (3,793) 4,032 12,214 9,641 6,950
Extraordinary item-gain on acquisition .......... -- 3,407
-------- -------- -------- -------- -------
Net income ..................................... $ (3,793) $ 7,439 $ 12,214 $ 9,641 $ 6,950
======== ======== ======== ======== =======
Basic earnings (loss) per share:
Net income (loss) before
extraordinary item .......................... $ (.17) $ .18 $ .55 $ .54 $ .42
Extraordinary item -- gain
on acquisition .............................. -- .15 -- -- --
-------- -------- -------- -------- -------
Net income (loss) ............................. $ (.17) $ .33 $ .55 $ .54 $ .42
======== ======== ======== ======== =======
Diluted earnings (loss) per share:
Net income (loss) before
extraordinary item .......................... $ (.17) $ .17 $ .52 $ .50 $ .40
Extraordinary item -- gain on acquisition ..... -- .15 -- -- --
-------- -------- -------- -------- -------
Net income (loss) ............................. $ (.17) $ .32 $ .52 $ .50 $ .40
======== ======== ======== ======== =======
Shares used in computing net earnings per share:
Basic ......................................... 22,214 22,323 22,134 17,978 15,566
Diluted ....................................... 22,214 23,090 23,455 19,299 17,310
Balance Sheet Data:
Cash and cash equivalents ....................... $ 11,063 $ 12,565 $ 11,748 $ 6,179 $13,482
Working capital ................................. 126,235 144,023 146,677 106,271 39,053
Total assets .................................... 213,088 221,586 209,055 189,696 58,467
Long-term debt, less current installments ....... -- -- -- -- --
Stockholders' equity ............................ 200,597 209,553 199,454 179,572 51,845
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this Form
10-K. The following discussion, other than historical facts, contains
forward-looking statements that involve a number of risks and uncertainties. The
Company's results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including factors
described elsewhere in this Annual Report on Form 10-K.
17
Overview
The consolidated financial statements present the financial condition of the
Company as of June 30, 2003 and 2002, and the consolidated results of operations
and cash flows of the Company for the years ended June 30, 2003, 2002 and 2001.
On December 16, 2002, at a Special Meeting of Shareholders, the Company's
shareholders approved the creation of a holding company structure in which the
Company's operating assets would be transferred to a newly formed, wholly owned,
subsidiary and authorized an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Anaren Microwave, Inc. to
Anaren, Inc. The name change to Anaren, Inc. became effective on December 20,
2002 and the Company's operating assets were transferred to a wholly owned
subsidiary (named Anaren Microwave, Inc.) effective December 31, 2002.
The Company designs, develops and markets microwave components and assemblies
for the wireless communications, satellite communications and defense
electronics markets. The Company's distinctive manufacturing and packaging
techniques enable it to cost-effectively produce compact, lightweight microwave
products for use in base stations for wireless communications systems, in
satellites and in defense electronics systems. The Company sells its products to
leading wireless communications equipment manufacturers such as Ericsson, Lucent
Technologies, Motorola, Nokia, Nortel Networks, and Powerwave and to satellite
communications and defense electronics companies such as Boeing Satellite,
I.T.T., Lockheed Martin, Northrup Grumman and Raytheon.
The Company generally recognizes sales at the time products are shipped to
customers, provided that persuasive evidence of an arrangement exists, the sales
price is fixed or easily determinable, collectibility is reasonably assured and
title and risk of loss have passed to the customer. Title and the risks and
rewards of ownership of products are generally transferred at the time of
shipment. Payments received from customers in advance of products delivered are
recorded as customer advance payments until earned. Annually, a small percentage
of sales are derived from long-term fixed-price contracts for the sale of large
space and defense electronics products. Sales and estimated profits under
long-term contracts are recognized using the percentage of completion method of
accounting on a units-of-delivery basis. Profit estimates are revised
periodically based upon changes in sales value and costs at completion. Any
losses on these contracts are recognized in the period in which such losses are
determined.
In the first quarter of calendar 2002, the Company created a new subsidiary,
Anaren Communication Suzhou Company, Ltd. and signed a three year lease for a
12,300 square foot manufacturing facility in Suzhou Industrial Park in Suzhou,
China. A general manager and operating staff were hired from July through
September 2002 and light manufacturing and assembly was begun at the facility in
the second quarter of fiscal 2003. In February 2003, the Suzhou subsidiary
exercised its option to lease the 12,000 square foot second floor of this
facility to support anticipated additional business needs in China. Presently,
the facility has a staff of 29 workers and expects to ramp-up to over 100 people
in the first half of fiscal 2004 to support production for a custom wireless
program for a European customer. It is anticipated that this facility will serve
all of the Company's Asian customers. Additionally, it is expected that this
location will be used to facilitate procurement of raw materials in China, when
possible, for the Company's other subsidiaries.
In September 2002, as a result of the loss of customers due to the July 2001
fire and the general decline in the wireless market, the Company made a decision
to downsize the Anaren Europe
18
workforce. Twenty-four people were let go at that time and a restructuring
charge of $403,000 was recorded in the first quarter. Large operating losses and
negative cash flow continued at Anaren Europe in the second and third quarters
due to the continued weakness in the printed circuit board segment of the
wireless infrastructure market and it was determined at the end of the third
quarter to significantly downsize this operation again. In April 2003, in
conjunction with this reorganization and due to continued negative cash flow
projections after the restructuring, the Company performed a FASB 144 evaluation
to determine if the fixed assets used by Anaren Europe were subject to an
impairment loss. Based on the results of the evaluation, an impairment loss of
$681,000 was identified and was recorded as a charge in the income statements
under the caption "Impairment Loss" for the third quarter of fiscal 2003. Staff
at Anaren Europe was reduced again by 44 people and an additional restructuring
charge of $631,000 for severance and outplacement costs was recognized in April.
Operating losses and decreasing sales levels continued throughout April and May
and by the end of May the Company decided to dispose of the Anaren Europe
operation as the recovery in sales levels required to make the facility
profitable was not likely to happen in the near future. In conjunction with the
decision to dispose of Anaren Europe, the Company recorded an additional asset
impairment charge of $2.0 million to adjust fixed asset balances at that
facility to liquidation value and a restructuring charge of $281,000 to record
severance for the remaining 23 employees and $428,000 to record inventory write
downs included in cost of sales - restructuring.
In March 2003, as a result of the continuing low level of business at the
Company's RF Power subsidiary, the decision was made to downsize the workforce
at that facility. Sixteen people were subsequently terminated at a cost of
$296,000, which has been recognized as a restructuring charge in the income
statements.
In April 2003, based on the continued weak wireless market conditions and the
current financial performance of the Company, the Company's Anaren Microwave,
Inc. subsidiary reduced its workforce by 30 people. In conjunction with this
action, the Company recorded a restructuring charge of $499,000 in the fourth
quarter of fiscal 2003.
On September 19, 2002, the Company submitted an acquisition proposal to
Celeritek, Inc.'s Chairman, President and Chief Executive Officer, which stated
that the Company was prepared to offer $8.75 per share in an all-cash
transaction to acquire all of the outstanding shares of Celeritek, subject to
successful completion of customary due diligence and negotiation and execution
of a definitive acquisition agreement. On September 25, 2002, Celeritek issued a
press release announcing that its Board had rejected the Company's proposal
claiming that the proposal "is not in the best interests of Celeritek
shareholders." In June, 2003 the Company executed a Non Disclosure Agreement
with Celeritek. On July 28 and 29, 2003, the Company's management met with
Celeritek's Chairman, Tamer Husseini, and other members of Celeritek's senior
management to begin to conduct a due diligence review of Celeritek's business.
Anaren intends to continue to consider all of the alternatives available to it,
and may pursue one or more of the possible actions outlined in its Schedule 13D,
as amended.
The Company's original investment in Celeritek common stock averaged
approximately $8.47 a share and totaled $6.6 million. During the year ended June
30, 2003, the market value of Celeritek common stock has fluctuated
substantially, and the stock has at times traded above the cost of the Company's
investment. This investment had a market value at June 30, 2003 of approximately
$5.7 million, a decline of $904,000, which has been recorded as a component of
accumulated other comprehensive loss. The Company considers this to be a
temporary decline in market value. If, at a future date, this drop in market
value is determined to be other than temporary, then the decline in value,
including the amount previously charged as other
19
comprehensive loss to shareholders equity, would at that time be recognized as a
loss in the current period income statement.
For the fiscal year ended June 30, 2003, net sales were $79.9 million and the
net loss was $(3.8) million, or $(0.17) per diluted share, compared to net sales
of $73.6 million and net income of $7.4 million, or $0.32 per diluted share, for
fiscal 2002. Excluding the results of Anaren Europe, net sales for the 2003
fiscal year were $75.5 million and net income was $3.6 million, or $0.16 per
diluted share.
Results of Operations
The following table sets forth the percentage relationships of certain items
from the Company's consolidated statements of operations as a percentage of net
sales for the periods indicated:
Years Ended June 30,
-----------------------
2003 2002 2001
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 73.5 69.8 61.9
Cost of sales - restructuring 0.5 -- --
----- ----- -----
Gross profit 26.0 30.2 38.1
----- ----- -----
Operating expenses:
Marketing 8.3 9.9 7.8
Research and development 7.7 8.5 5.9
General and administrative 11.4 11.0 9.9
Impairment loss 3.4 -- --
Restructuring 2.6 -- 0.8
Fire related -- 1.0 --
----- ----- -----
Total operating expenses 33.4 30.4 24.4
----- ----- -----
Operating income (loss) (7.4) (0.2) 13.7
----- ----- -----
Other income (expense):
Interest expense (0.1) (0.2) (0.2)
Other, primarily interest income 2.9 5.3 8.4
----- ----- -----
Total other income 2.8 5.1 8.2
----- ----- -----
Income (loss) before income taxes and
extraordinary item (4.6) 4.9 21.9
Income taxes 0.2 (0.6) 7.5
----- ----- -----
Net income (loss) before extraordinary item % (4.8)% 5.5% 14.4%
Extraordinary item-- gain on acquisition -- 4.6 --
----- ----- -----
Net income (loss) (4.8)% 10.1% 14.4%
===== ===== =====
The following table sets forth the Company's net sales by industry segment for
the periods indicated:
Years Ended June 30,
----------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Wireless $51,029 $47,497 $61,710
Space & Defense 28,891 26,071 23,115
------- ------- -------
$79,920 $73,568 $84,825
======= ======= =======
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
Net Sales. Net sales increased $6.3 million, or 8.6%, to $79.9 million for
fiscal 2003, compared to $73.6 million for the prior fiscal year. This increase
consisted of a $3.5 million (7.4%) rise in Wireless sales and a $2.8 million
(10.8%) increase in sales of Space and Defense products.
20
The $3.5 million increase in fiscal 2003 Wireless sales, which consist of
standard surface mount components and custom subassemblies for use in building
wireless base station equipment, resulted from a combination of new acquisitions
during fiscal 2002 and increased customer demand. Wireless sales for fiscal 2003
include a full twelve months of sales for Amitron and Anaren Europe, while sales
for fiscal 2002 included only nine months and ten months of sales for Anaren
Europe and Amitron, respectively. These acquisitions resulted in additional
sales in fiscal 2003 of $3.1 million compared to fiscal 2002 sales levels.
Additionally, customer wireless infrastructure demand rose slightly in the first
and second quarters, coming mainly from Asian infrastructure build outs.
Space and Defense products consist of custom components and assemblies for
communication satellites and defense radar and countermeasure subsystems for the
military. Sales in the Space and Defense group rose $2.8 million, or 10.8%, in
fiscal 2003, compared to the prior fiscal year. This increase in shipments
resulted from production sales under a number of defense contracts for Digital
Frequency Discriminators (DFDs) and Digital RF Memories (DRFMs) for foreign
applications, radar antenna feed networks, and precision ranging subsystems
(PRSS) for U.S. Government applications. These products contributed to the rise
in defense orders in the Company's backlog during the last fiscal year. Space
and Defense sales are expected to be between $6.0 and $7.0 million, quarterly,
in fiscal 2004.
Gross Profit. Cost of sales consists primarily of engineering design costs,
materials, material fabrication costs, assembly costs, direct and indirect
overhead, and test costs. Gross profit for fiscal 2003 was $20.8 million (26.0%
of net sales), down $1.4 million from $22.2 million (30.2% of net sales) for the
same quarter of the prior year. The drop in gross margin as a percentage of net
sales in fiscal 2003 is a result of the continuing negative margins at Anaren
Europe resulting from declining sales at that facility, and to continuing
pricing pressure from wireless customers, which has resulted in lower average
sales prices year over year. Additionally, cost of sales includes a $428,000
restructuring charge for inventory writedowns related to the disposition of
Anaren Europe. The Company is continuing its cost cutting programs and has
reduced its personnel levels through restructuring and attrition by
approximately 100 people, or over 15% during the past fiscal year. Additionally,
in June 2003, the Company decided to close the Anaren Europe facility and, where
possible, low margin products have been eliminated from the Company line-up. The
Company anticipates that these ongoing cost cutting efforts should help to
improve future gross margins in fiscal 2004, but any significant improvement in
gross margins will most likely occur only with a rise in sales volume.
Marketing. Marketing expenses consist mainly of employee related expenses,
commissions paid to sales representatives, trade show expenses, advertising
expenses and related travel expenses. Marketing expenses decreased 8.8% to $6.6
million (8.3% of net sales) for fiscal 2003 from $7.3 million (9.9% of net
sales) for fiscal 2002. Marketing expense declined in fiscal 2003 due to a
budgeted decline in advertising expenditures in the current fiscal year compared
to fiscal 2002 and the reassignment of some marketing personnel to other company
functions.
Research and Development. Research and development expenses consist of material
and salaries and related overhead costs of employees engaged in ongoing
research, design and development activities associated with new products and
technology development. Research and development expenses were $6.1 million
(7.7% of net sales) in fiscal 2003, down $143,000 from $6.3 million (8.5% of net
sales) for fiscal 2002. Research and development expenditures are supporting
further development of wireless infrastructure products and new wireless
networking product opportunities. Despite the continuing wireless market
downturn, the Company does not expect to
21
significantly reduce its current research and development efforts in the near
term and is presently working on the development of a number of new standard
surface mount wireless products.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, and intangible amortization,
travel related expenses and other corporate costs. General and administrative
expenses increased 12.4% to $9.1 million (11.4% of net sales) for fiscal 2003
from $8.1 million (11.0% of net sales) for fiscal 2002. This increase was due to
professional services costs associated with the Celeritek offer, costs incurred
at the new China facility, and a full twelve months of general and
administrative expenditures for Amitron and Anaren Europe compared to ten and
nine months, respectively, last year.
Impairment loss. In conjunction with the reorganization of Anaren Europe in
April 2003, the Company performed a FASB 144 evaluation to determine if the
fixed assets used by Anaren Europe were subject to an impairment loss, due to
continuing negative cash flow in that operation. A FASB 144 impairment loss of
$681,000 was identified, which was recorded as a charge in the income statements
under the caption "Impairment Loss" in the quarter ended March 31, 2003. In June
2003 due to further deterioration in the business conditions at Anaren Europe,
the Company decided to dispose of that facility and liquidate its assets. As
part of the liquidation process, an auction firm was contracted to appraise and
sell these assets at auction when production ceases at the facility. Due to the
pending closure, an additional FASB 144 evaluation was conducted which resulted
in an additional write down of $2,040,000 to estimated fair value, which was
recorded in the fourth quarter of fiscal 2003. The Company anticipates that this
operation will be liquidated by December 2003.
Restructuring. Restructuring expense consists of severance pay, outplacement
costs, extended benefit costs and other expenses incurred in reducing the
Company's workforce. In September 2002, April 2003 and June 2003, the Company
incurred restructuring charges related to reductions in workforce and the
anticipated closing of its Anaren Europe facility located in the Netherlands.
The restructuring charges amounted to $ 403,000 in September, 2002, and
$1,339,000 in April and June 2003 and included severance pay, outplacement
costs, extended benefits costs and write-offs of excess inventory, included in
cost of sales, related to the closing of Anaren Europe and the termination of
all of its 91 employees. In March 2003, the Company recorded a restructuring
charge of $296,000 related to the Company's restructuring plan at its RF Power
subsidiary. This plan was primarily aimed at reducing the cost of excess
personnel in this operation and included the termination of 16 employees. In
June 2003, the Company also incurred a restructuring charge of $499,000 related
to the Company's restructuring plan to reduce overhead at its Anaren Microwave,
Inc subsidiary. This plan was aimed at reducing the excess cost of indirect
personnel at this operation and included 30 individuals. All restructuring costs
are expected to be paid in full within twelve months.
Operating Income: The Operating loss increased $5.8 million in fiscal 2003 to a
loss of $(5.9) million (7.4% of sales), from a loss of $(156,000), (0.2% of net
sales), for fiscal 2002. On a reporting segment basis, the Wireless operating
loss was $(10.7) million for 2003, an increase of $2.8 million from the Wireless
operating loss of $(7.9) million in fiscal 2002. The principal reason for the
increase in the Wireless operating loss in the current year was the decline in
Wireless sales year over year, the $2.5 million restructuring charge and the
$2.7 million impairment loss recorded in connection with the announced closing
of Anaren Europe. Wireless operating results are expected to improve in fiscal
2004 as a result of the fiscal 2003 reorganizations and the resulting personnel
reductions.
22
Space and Defense operating income fell $3.0 million in fiscal 2003 to $4.7
million compared to $7.7 million in fiscal 2002. This decrease resulted from a
change in product mix during the current year compared to last year. This year's
sales included more military programs, while sales in last year consisted of
more profitable commercial space programs.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 40.8% to $2.3 million (2.9% of net sales)
for the year ended June 30, 2003, from $3.9 million (5.3% of net sales) for last
year. This decrease was caused mainly by the decline in market interest rates
over the last 12 months brought about by reductions in the Federal Fund rates.
Interest income will fluctuate based on the level of interest rates and the
level of investable cash balances.
Interest Expense: Interest expense represents commitment fees and interest paid
on a deferred obligation. Interest expense for fiscal 2003 was $51,000 (0.1% of
net sales) compared to $149,000 (0.2% of net sales) for fiscal 2002. This
decrease was the result of the intentional cancellation of the Company's line of
credit and pay-off of some minor Anaren Europe loan balances.
Income Taxes: Income taxes for fiscal 2003 were $136,000 (0.2% of net sales),
representing an effective tax rate of 3.7%. This compares to income tax benefit
of $405,000 (0.6% of net sales) for fiscal 2002, representing an effective tax
benefit rate of 11.2%. The Company's effective tax rate is a direct result of
the proportion of federally exempt state municipal bond income and federal tax
credits and benefits in relation to the levels of taxable income or loss and the
losses from Anaren Europe that have not generated current tax benefits. In
fiscal 2002, the Company finalized an analysis of certain available research
credits and export tax benefits and recorded a tax benefit of $857,000.
Year Ended June 30, 2002 Compared to Year Ended June 30, 2001
Net Sales. Net sales decreased $11.2 million, or 13.3%, to $73.6 million for the
year ended June 30, 2002 compared to $84.8 million for the previous year. This
decrease was caused by a 23.0% drop in Wireless sales, which was partially
offset by a 12.8% rise in sales of Space and Defense products.
The $14.2 million decrease in sales of Wireless products, was caused by a rapid
downturn in capital expenditures for wireless infrastructure equipment which
began in the latter part of fiscal 2001. This downturn resulted in numerous
reductions in customer demand forecasts and delivery push outs beginning in
March 2001 and continuing through fiscal 2002. This market downturn has affected
all of the Company's Wireless product lines and most severely affected sales of
Wireless standard components. The downturn in Wireless market sales was somewhat
offset by the inclusion of $8.4 million in sales in fiscal 2002 from Anaren
Europe and Amitron, the Company's fiscal 2002 acquisitions.
Sales in the Space and Defense group rose $3.0 million, or 12.8%, in fiscal
2002, compared to the prior fiscal year. This increase in shipments resulted
from factory production shipments for the Boeing Spaceway program.
Gross Profit. Gross profit for fiscal 2002 was $22.2 million (30.2% of net
sales), down from $32.3 million (38.1% of net sales) for the prior year. The
decrease in gross margin resulted from the decline in sales volume, which caused
under absorption of factory overhead compared to the previous year.
Marketing. Marketing expenses increased 10.1% to $7.3 million (9.9% of net
sales) for fiscal 2002 from $6.6 million (7.8% of net sales) for fiscal 2001.
Marketing expenses increased due to the addition of new east and west coast
marketing offices and the additional marketing expenses associated with the
Company's acquired businesses, Amitron and Anaren Europe, which amounted to
approximately $1.0 million in fiscal 2002.
23
Research and Development. Research and development expenses increased 25.1% to
$6.3 million (8.5% of net sales) in fiscal 2002 from $5.0 million (5.9% of net
sales) for fiscal 2001. Research and development expenditures are supporting
further development of wireless infrastructure products and new wireless
networking product opportunities with a renewed emphasis on developing new
standard surface mount wireless products.
General and Administrative. General and administrative expenses decreased 3.4%
to $8.1 million (11.0% of net sales) for fiscal 2002 from $8.4 million (9.9% of
net sales) for fiscal 2001. General and administrative expenses have decreased
primarily due to the adoption of FASB Statement No. 142 which eliminated the
amortization of goodwill starting in the first quarter of fiscal 2002. The
elimination of goodwill reduced general and administrative expenses by $1.6
million in the current year compared to last year. This elimination of goodwill
amortization was partially offset by an increase in identifiable intangible
amortization of $356,000 in fiscal 2002 associated with the Company's
acquisition of Amitron. Additionally, general and administrative expense for
fiscal 2002 includes ten months and nine of expense for Amitron and Anaren
Europe, respectively, which amounted to approximately $2.0 million in the
aggregate.
Operating Income. Operating income decreased $11.8 million to an operating loss
of $(156,000) (0.2% of net sales) for fiscal 2002, from an operating profit of
$11.6 million (13.7% of net sales) for fiscal 2001. On a reporting segment
basis, the Wireless operating loss was $(7.9) million for fiscal 2002, down
219.0% or $14.5 million from $6.6 million operating income in fiscal 2001. The
principal reason for the decrease in Wireless operating income in fiscal 2002
compared to fiscal 2001 was the 23.0% decrease in Wireless sales year over year
due to the large decrease in Wireless base station equipment demand worldwide.
The large decline in sales levels in the Wireless segment resulted in
significant under absorption of fixed overhead within the group during the
current fiscal year. Additionally, operating income in the Wireless sector was
further decreased by the $(4.4) million operating loss at Anaren Europe in
fiscal 2002 due to the fire recovery costs and the low level of sales caused by
the fire.
Space and Defense operating income rose $2.7 million, or 52.5%, for fiscal 2002
compared to fiscal 2001. This increase resulted from a $3.0 million rise in
Space and Defense revenues year over year, due to the Spaceway Program entering
full production at the end of fiscal year 2001. This increase in revenue
resulted in better absorption of fixed overhead in fiscal 2002 compared to the
previous year. Additionally, cost reduction and efficiency efforts in this
segment were successful in reducing the overall cost of operations in fiscal
2002 compared to the prior year.
Other Income. Other income decreased 45.1% to $3.9 million (5.3% of net sales)
for the year ended June 30, 2002 from $7.2 million (8.4% of net sales) for the
prior year. This decrease was caused mainly by the decline in market interest
rates over the preceeding 12 months brought about by reductions in the Federal
Fund rates, and the use of approximately $12.1 million in cash to complete the
acquisitions of Amitron and Anaren Europe. Interest income will fluctuate based
on the level of interest rates and the level of investible cash balances. During
the fourth quarter of fiscal 2002, the Company recorded an other income item
amounting to approximately $194,000 representing the remaining principal balance
on a capitalized lease obligation which was no longer payable by the Company.
The equipment leased by the Company was destroyed in the July 2001 fire.
Interest Expense: Interest expense for fiscal 2002 was $149,000 (0.2% of net
sales) compared to $160,000 (0.2% of net sales) for fiscal 2001.
Income Taxes. The tax benefit for fiscal 2002 was $405,000 ((0.6)% of net
sales). This compared to tax expense of $6.4 million (7.5% of net sales) for
fiscal 2001, representing an effective tax rate of 34.4%. During fiscal 2002,
the Company finalized an analysis of certain available research credits and
export tax benefits and recorded a tax benefit of $857,000. In addition, the
Company's effective tax rate decreased as a direct result of the increased
proportion of federally exempt state municipal bond income in relation to income
before taxes.
24
Extraordinary gain. The extraordinary gain in fiscal 2002 of $3.4 million (4.6%
of net sales) resulted from the purchase of Anaren Europe. As a result of the
fire and the subsequent insurance settlement, the value of the Anaren Europe
assets at the time of purchase was significantly higher than the consideration
paid by Anaren. This situation resulted in significant negative goodwill being
generated by the transaction, which, under current accounting convention, was
first offset by writing down the acquired fixed assets to zero and then by
recognizing an "extraordinary gain" of $3,407,000, or $0.15 per share, in the
second quarter of fiscal 2002.
Critical Accounting Policies
The methods, estimates and judgments management uses in applying the Company's
most critical accounting policies have a significant impact on the results
reported in the Company's financial statements. The U.S. Securities and Exchange
Commission has defined the most critical accounting policies as the ones that
are most important to the portrayal of Anaren's financial condition and results,
and that require management to make the most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently
uncertain. Based on this definition, the Company's most critical policies
include: valuation of accounts receivable, which impacts general and
administrative expense; valuation of inventory, which impacts cost of sales and
gross margin; the assessment of recoverability of goodwill and other intangible
and long-lived assets, which impacts write-offs of goodwill, intangibles and
long-lived assets; and accounting for income taxes, which impacts the valuation
allowance and the effective tax rate. Management reviews the estimates,
including, but not limited to, allowance for doubtful accounts, inventory
reserves and income tax valuations on a regular basis and makes adjustments
based on historical experiences, current conditions and future expectations. The
reviews are performed regularly and adjustments are made as required by current
available information. The Company believes these estimates are reasonable, but
actual results could differ from these estimates.
The Company's accounts receivable represent those amounts which have been
billed to its customers but not yet collected. The Company analyzes various
factors including historical experience, credit worthiness of customers and
current market and economic conditions. The allowance for doubtful accounts
balance is established based on the portion of those accounts receivable which
are deemed to be potentially uncollectible. Changes in judgments on these
factors could impact the timing of costs recognized.
The Company states inventories at the lower of cost or market, using a standard
cost methodology to determine the cost basis for the inventory. This method
approximates actual cost on a first-in-first-out basis. The recoverability of
inventories is based on the types and levels of inventory held, forecasted
demand, pricing, competition and changes in technology.
The Company records valuation allowances to reduce deferred tax assets when it
is more likely than not that some portion of the amount may not be realized. The
Company evaluates the need for valuation allowances on a regular basis and
adjusts the allowance as needed. These adjustments, when made, would have an
impact on the Company's financial statements in the period that they were
recorded.
Intangible assets with estimable useful lives are amortized to their residual
values over those estimated useful lives in proportion to the economic benefit
consumed.
Long-lived assets with estimated useful lives are depreciated to their residual
values over those useful lives in proportion to the economic value consumed.
Long-lived assets are tested for impairment at the group level, which is usually
an economic unit such as a manufacturing facility or department, which has a
measurable economic output or product. Long-lived assets are tested for
impairment when events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable and exceeds its fair market
value. This circumstance exists if the carrying amount of the assets in question
exceeds the sum of the undiscounted cash flows expected to result from the use
of the asset. The impairment loss is measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value as determined by
the discounted cash flow or in the case of negative cash flow, an independent
market appraisal of the asset.
25
Goodwill is tested annually, or sooner if indicators of impairment exist, for
impairment by the Company at the reporting unit level by comparing the fair
value of the reporting unit with its carrying value. Valuation methods for
determining the fair value of the reporting unit include reviewing quoted market
prices and discounted cash flows. If the goodwill is indicated as being impaired
(the fair value of the reporting unit is less than the carrying amount), the
fair value of the reporting unit is then allocated to its assets and liabilities
in a manner similar to a purchase price allocation in order to determine the
implied fair value of the reporting unit goodwill. This implied fair value of
the reporting unit goodwill is then compared with the carrying amount of the
reporting unit goodwill and, if it is less, the Company would then recognize an
impairment loss.
The projection of future cash flows for the goodwill impairment analysis
requires significant judgments and estimates with respect to future revenues
related to the assets and the future cash outlays related to those revenues.
Actual revenues and related cash flows or changes in anticipated revenues and
related cash flows could result in changes in this assessment and result in an
impairment charge. The use of different assumptions could increase or decrease
the related impairment charge.
Liquidity and Capital Resources
Net cash provided by operations for the years ended June 30, 2003 and 2002 were
$12.2 million and $17.1 million, respectively. The positive cash flow from
operations in fiscal 2003 was due primarily to the $3.7 million reduction in
accounts receivable and the $4.4 million reduction in inventory during the
period. The positive cash flow from operations in fiscal 2002 was due mainly to
the high income level and the large amount of cash ($10.7 million) received from
the Anaren Europe insurance settlement.
Net cash used in investing activities in fiscal 2003 and 2002 consists mainly of
funds used to purchase capital equipment, net purchases and maturities of
marketable securities and, in fiscal 2002, $12.1 million used to purchase the
capital stock of Amitron and Anaren Europe. Capital equipment placed in service
amounted to $4.8 million in fiscal 2003 compared to $9.8 million in the previous
fiscal year, including $5.8 million at Anaren Europe due to the July 2001 fire.
Net cash used in financing activities in fiscal 2003 was $5.1 million. Of this
amount, $248,000 was generated by the exercise of stock options and $5.4 million
was used to repurchase 643,000 shares of the Company's common stock under an
existing repurchase plan previously authorized by the Board of Directors. Net
cash used in financing activities was $1.6 million for fiscal 2002 and consisted
of $2.0 million used to pay off loans of Amitron and Anaren Europe, reduced by
$399,000 generated from the exercise of stock options.
At June 30, 2003, the Company had approximately $127.7 million in cash, cash
equivalents, and marketable securities, and no debt and has had positive
operating cash flow for over eight years. For the past six years the Company has
maintained a guaranteed revolving line of credit facility under which it has
never borrowed any funds. Effective October 1, 2002, the Company cancelled this
line to eliminate the then current annual fee of approximately $38,000. The
Company believes that its cash requirements for the foreseeable future will be
satisfied by currently invested cash balances and expected cash flows from
operations.
Disclosures About Contractual Obligations and Commercial Commitments
Accounting standards require disclosure concerning the Company's obligations and
commitments to make future payments under contracts, such as debt and lease
agreements, and under contingent commitments, such as debt guarantees. The
Company's obligations and commitments are as follows:
Less
Total Than 1 Yr. 2 - 3 Yrs. 4 - 5 Yrs. Over 5 Yrs.
----- ---------- ---------- ---------- -----------
Payment Due by Period
---------------------
Contractual obligations
- -----------------------
Long term debt $ -- $ -- $ -- $ -- $ --
Operating leases-- facilities 5,746,043 944,623 1,472,415 890,577 2,438,427
Deferred compensation 502,236 65,000 130,000 130,000 177,236
Lines of credit -- -- -- -- --
26
Recent Accounting Pronouncements
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149, which amends
and clarifies reporting for derivative instruments, is effective for contracts
entered into or modified after June 30, 2003. The Company has reviewed the
provisions of SFAS 149, and believes that upon adoption, the Statement will not
have a significant effect on its financial statements.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (FASB 150). The
statement clarifies how issuers classify and measure certain instruments with
characteristics of both liabilities and equity. It is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise for
fiscal periods beginning after June 15, 2003. The Company has reviewed the
provisions of SFAS 150, and believes that upon adoption, the Statement will not
have a significant effect on its financial statements.
In January 2003, the FASB issued FIN 46: Consolidation of Variable Interest
Entities an interpretation of ARB No. 51 (FIN 46). This interpretation clarifies
the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The FIN applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has reviewed the
provisions of FIN 46, and believes that upon adoption, the FIN will not have a
significant effect on its financial statements.
In March 2003, the Emerging Issues Task Force (EITF) reached a consensus on EITF
00-21: Revenue Arrangements with Multiple Deliverables (EITF 00-21). This Issue
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. Specifically, this
Issue addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. In applying this Issue,
separate contracts with the same entity or related parties that are entered into
at or near the same time are presumed to have been negotiated as a package and
should, therefore, be evaluated as a single arrangement in considering whether
there are one or more units of accounting. That presumption may be overcome if
there is sufficient evidence to the contrary. This Issue also addresses how
arrangement consideration should be measured and allocated to the separate units
of accounting in the arrangement. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company has reviewed the provisions of EITF 00-21, and believes that
upon adoption, the Issue will not have a significant effect on its financial
statements.
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Annual Report on Form 10K.
As of June 30, 2003, the Company had cash, cash equivalents and marketable
securities of $127.7 million, of which approximately $111.0 million consisted of
highly liquid investments in marketable debt securities and $5.7 million
consisted of marketable equity securities. The marketable debt securities at
date of purchase normally have maturities between one and 18 months, are exposed
to interest rate risk and will decrease in value if market interest rates
increase. A hypothetical decrease in market interest rate of 10.0% from June 30,
2003 rates, or 0.15%, would have reduced net income and cash flow by
approximately $167,000, or $0.007 per share for the year. Due to the relatively
short maturities of the securities and its ability to hold those investments to
maturity, the Company does not believe that an immediate decrease in interest
rates would have a significant effect on its financial condition or results of
operations. Over time, however, declines in interest rates will reduce the
Company's interest income.
The Company currently owns equity investments held for sale with a market value
of approximately $5.7 million. Fluctuations in market value of these securities
are charged to stockholders' equity monthly. A theoretical 10.0% decline in
market value of these securities would result in a $570,000 reduction in
stockholders' equity. In the future, if the decline in value of these securities
is considered other than temporary, then the full decline in value experienced
to the date of impairment will be reflected in the then current period income
statement.
All of the Company's sales from its domestic U.S. subsidiaries to foreign
customers are denominated in United States dollars and, accordingly, are not
exposed to foreign currency exchange risk. Sales of the Company's Netherlands
subsidiary, Anaren Europe, are denominated in Euros to European customers and
United States dollars to U.S. customers. Sales to U.S. customers by Anaren
Europe denominated in United States dollars would be subject to currency
exchange losses. At present, due to the July 2001 fire at Anaren Europe, sales
of that subsidiary to U.S. customers in U.S. dollars subject to possible
currency losses are currently less than $100,000 per quarter and thus any
possible losses due to currency fluctuations would not be material to the
operating results of the Company. The Company anticipates that this facility
will be closing in the first half of fiscal 2004.
Item 8. Financial Statements and Supplementary Data
The financial statements and financial statement schedules called for by this
Item are provided under "Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K," which information is incorporated herein by reference. The
unaudited supplementary financial information required by this Item is contained
in note 23 to the consolidated financial statements of the Company which are
included elsewhere in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
28
PART III
Item 10. Directors and Executive Officers of Registrant
Information required by this Item concerning directors of the Company is
contained in the Company's proxy statement filed with respect to the 2003 Annual
Meeting of Shareholders and is incorporated by reference herein. The information
regarding executive officers of the Company required by this Item is included in
Item 4A hereof.
On August 13, 2002, the board of directors adopted Anaren's code of ethics and
business conduct, which outlines the ethical principles that provide the
foundation for the Company's dealings with customers, suppliers, shareholders,
the investment community and employees. The code is applicable to all employees
including officers, and to the Company's directors. The code has been
distributed to all employees and is available for review on the Company's
website, www.anaren.com.
Item 11. Executive Compensation
Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2003 Annual Meeting of Shareholders and is
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2003 Annual Meeting of Shareholders and is
incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2003 Annual Meeting of Shareholders and is
incorporated by reference herein.
Item 14. Controls and Procedures
1. Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this
Annual Report on Form 10-K, the Company's chief executive officer
and chief financial officer have concluded that the Company's
disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective
manner.
2. Changes in internal controls. During the period covered by this
Annual Report on Form 10-K, there were no changes in the Company's
internal control over financial reporting (as defined in Rule
13a-15(f)) that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
Item 15. Principal Accounting Fees and Services
Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2003 Annual Meeting of Shareholders and is
incorporated by reference herein.
29
PART IV
Item 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Schedules:
Reference is made to the Index of Financial Statements
hereinafter contained
3. Exhibits:
Reference is made to the list of Exhibits hereinafter
contained
(b) Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on April 29, 2003 with
respect to its results of operations for the third quarter ended March 31,
2003.
(c) Exhibits:
Index to Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation, as amended (1)
3.2 Restated By-Laws (2)
4.1 Specimen Certificate of Common Stock (3)
4.2 Shareholder Protection Rights Agreement dated as of April 20, 2001,
between the Company and American Stock Transfer & Trust Company,
including forms of Rights Certificate and Election to Exercise (4)
10.1 Employment Agreement, dated as of July 1, 2001, between the Company
and Lawrence A. Sala (5)
10.2 Pension Plan and Trust (6)
10.3 Anaren Microwave, Inc. Incentive Stock Option Plan, as amended (7)
10.4 Anaren Microwave, Inc. 1989 Non-statutory Stock Option Plan, as
amended (8)
10.5 Credit Facility Agreement, dated as of December 23, 1997, between
the Company and Manufacturers and Traders Trust Company, together
with the Revolving Credit Note dated December 23, 1997 executed by
the Company in favor of Manufacturers and Traders Trust Company (9)
10.8 Amendment dated January 1, 2002 to Credit Facility Agreement, dated
as of December 23, 1997, between the Company and Manufacturers and
Traders Trust Company (10)
10.8 Anaren Microwave, Inc. Incentive Stock Option Plan for Key Employees
(11)
10.9 Anaren Microwave, Inc. Stock Option Plan (12)
10.10 Form of Change of Control Agreements dated March 15, 2002