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, 2004
__ 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 December 31, 2003, as reported on the Nasdaq National Market, was
approximately $278,115,000.
The number of shares of Registrant's Common Stock outstanding on August 25, 2004
was 19,867,878.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with its 2004
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. These
statements which are not historical information are "forward-looking statements"
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These, and other forward-looking statements, are subject to
business and economic risks and uncertainties that could cause actual results to
differ materially from those discussed. The risks and uncertainties described
below are not the only risks and uncertainties facing our Company. Additional
risks and uncertainties not presently known to us or that are currently deemed
immaterial may also impair our business operations. If any of the following
risks actually occur, our business could be adversely affected, and the trading
price of our common stock could decline, and you may lose all or part of your
investment. Such known factors include, but are not limited to: the Company's
ability to timely ramp up to meet some of our customers' increased demands;
unanticipated delays and/or difficulties relocating the Company's Amitron
subsidiary from North Andover, Massachusetts to Salem, New Hampshire; increased
pricing pressure from our customers; decreased capital expenditures by wireless
service providers; the possibility that the Company may be unable to
difficulties in successfully execute its business strategies or achieve its
operating objectives, generate revenue growth or achieve profitability
expectations; successfully securing new design wins from our original equipment
manufacturer customers, reliance on a limited number of key component suppliers,
unpredictable difficulties or delays in the development of new products; order
cancellations or extended postponements including the new Wireless custom
assembly placed into production during the third quarter; the risks associated
with any technological shifts away from the Company's technologies and core
competencies; unanticipated impairments of assets including investment values
and goodwill; diversion of defense spending away from the Company's products
and/or technologies due to on-going military operations; and litigation
involving antitrust, intellectual property, environmental, product warranty,
product liability, and other issues. You are encouraged to review Anaren's 2004
Annual Report, Anaren's Form 10-K for the fiscal year ended June 30, 2004 and
Anaren's Form 10-Q for the three months ended March 31, 2004, and exhibits to
those Reports filed with the Securities and Exchange Commission to learn more
about the various risks and uncertainties facing Anaren's business and their
potential impact on Anaren's revenue, earnings and stock price. Unless required
by law, Anaren disclaims any obligation to update or revise any forward-looking
statement.
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 August 3, 2004, the Company purchased a 65,000 square foot facility in Salem,
New
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Hampshire to support the anticipated growth at its Amitron operation which will
subsequently operate under a new wholly-owned subsidiary, Anaren Ceramics, Inc.,
effective September 2004. It is presently expected that operations will begin to
transition to the Salem facility beginning in September 2004.
In fiscal 2004, the Company introduced and sold its first components used in
consumer wireless applications.
On July 8, 2004, Teledyne Technologies Incorporated and Celeritek, Inc. jointly
announced that Teledyne, through its subsidiary Teledyne Wireless, Inc., had
entered into an agreement to acquire Celeritek's defense electronics business.
In light of this development, Anaren has determined that it no longer has an
interest in acquiring the business or assets of, or engaging in any other form
of business combination with, Celeritek. The shares of Celeritek Common Stock
beneficially owned by Anaren will, for so long as Anaren retains such ownership,
be held for investment purposes and not with a view towards effectuating a
business combination. As set forth in its latest Amendment to Schedule 13D,
Anaren has disposed of a portion of the Celeritek Common Stock previously held
by it. Depending on the results of its ongoing evaluation of the investment in
the Common Stock, prevailing market conditions, other investment opportunities,
and/or other investment considerations, Anaren may dispose of some or all of its
remaining holdings in privately negotiated or open market transactions, or may
retain such shares for investment purposes as described in its latest Amendment
to Schedule 13D. As of August 25, 2004, the Company has disposed of 72,500
shares of Celeritek's Common Stock and currently owns 704,800 shares.
In March 2004, the Company was selected to receive an order in excess of $11.0
million (to be shipped over 36 months) to supply digital RF memory jamming
subsystems, which will further strengthen the Company's Space and Defense
backlog.
On July 10, 2003, after several restructurings, the Company announced its
decision to dispose of its Anaren Europe subsidiary due to continuing low sales
levels and large operating losses. This facility ceased production during the
first quarter of fiscal 2004, an auction was held and all remaining equipment
was sold in September 2003. This subsidiary is now being accounted for as a
discontinued operation in the statements of earnings for the three years ended
June 30, 2004, 2003 and 2002.
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 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 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 miniature
microwave component products for consumer wireless communications applications
such as WiFi, Bluetooth(R), cellular handsets and satellite reception. 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
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o Andrews
o Boeing, Inc.
o ITT Aerospace/Communications
o Lockheed Martin
o Northrop Grumman
o Raytheon
Industry Background
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 and remained depressed during fiscal
2002 and 2003. During fiscal 2004, expenditures for wireless infrastructure
equipment rebounded with a positive impact on our business.
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. This had a negative
impact on all of the Company's wireless product lines, particularly the
printed-circuit board business. During fiscal 2004, infrastructure spending
rebounded due to the deployment of new technology to expand existing network
capacity resulting in rising sales and orders across all of the Company's
Wireless product lines.
Wireless Local Area Networking
Wireless local area networks (WLAN) generally referred to as WiFi 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 high 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 leading to applications such as
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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 106 engineers (as of June 30, 2004) works with
customers to develop product solutions. Anaren's engineers collaborate with
customers to develop products that provide state-of-the-art performance 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. The Company
utilizes its Suzhou China based operation to manufacture and test microwave
component and subassembly products for wireless infrastructure applications.
This local presence provides rapid and cost effective manufacturing for its
Asian customer base.
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.
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.
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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, plated through 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 infrastructure market and intends to use its market position to
pursue other wireless markets like consumer component applications. 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 expand, customer relationships
with many of these manufacturers, including Ericsson, Lucent, Motorola, Nokia,
Nortel Networks and Andrew 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.
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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 pursue 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 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. During fiscal 2004, the Company introduced its
next generation Xinger II product line offering significantly improved RF
performance and power handling in a package that supports the latest global
environment friendly initiatives. The Company has recently announced several
products specifically designed to address the consumer components Wireless local
area network market, cellular telephone and Bluetooth applications. These
products are 1/50th the size of our typical Xinger(R) type of product and offer
performance and cost advantages over traditional components.
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.
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
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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 circuits 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, 2004, approximately 68% of the Company's
sales were to customers in the wireless markets and approximately 32% of its
sales were to customers in the space and defense markets. The Company had two
customers who accounted for more than 10.0% of net sales, Raytheon, who
represented approximately 14.2% of sales and Motorola, Inc., who represented
11.4% of sales in fiscal 2004.
Wireless Communications. The Company sells its standard line of Xinger(R)
components, resistive components, and ferrite components, 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, 2004:
o Alcatel
o Avnet
o BAE Optilas
o Celestica Corp.
o EG Components
o Lucent Technologies
o MKS Instruments
o Motorola
o Nokia
o Remec
o Richardson Electronics Inc.
o St. Jude
o Solectron
o Telecom International
o Venture
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, 2004:
o BAE
o Boeing Inc.
o Corbett
o Harris
o ITT Avionics
o LG Innotek Co. Ltd.
o Lockheed Martin
o Northrup Grumman
o Raytheon
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 32 people as of June 30,
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2004. 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, 2004, the Company had contracts with
two major distributors, with 15 manufacturers' representatives in the United
States, and with ten 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 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 106 design and engineering professionals
as of June 30, 2004, 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, with
the latter operating under the name of BFI Optilas in Europe. The Scandinavian
countries are serviced 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 $15.6 million as of
June 30, 2004 versus $8.8 million as of June 30, 2003. The increase in backlog
is reflective of the overall increase in worldwide demand for wireless
infrastructure products that we experienced during the last half of fiscal 2004.
Backlog for the Wireless group primarily represents firm orders for component
products and signed purchase orders (i.e., orders for specific custom
sub-assemblies) for custom components due to ship within the next eight to
twelve weeks. However, backlog is not necessarily indicative of future sales.
Accordingly, the Company does not believe that its Wireless 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 then receives a
firm delivery commitment 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 $37.1 million as of June
30, 2004 versus $26.3 million as of June 30, 2003. The increase in Space and
Defense backlog year over year was due largely to the receipt of a contract from
Raytheon (Goleta, CA) in excess of $11.0 million for Digital Radio
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Frequency (RF) Memory subsystems used in the Raytheon AN/ALQ-187 internal (RF)
jammer. This contract is in support of a Raytheon contract for the provision of
an electronic warfare system for Hellenic Air Force F-16 fighters and deliveries
are anticipated to extend over approximately 36 months. During fiscal year 2004,
the Company expects to ship between $25.0 million and $28.0 million of its June
30, 2004 backlog. 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.
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 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; and
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 $5.9 million in fiscal 2004, $6.1 million in fiscal 2003 and
$6.3 million in fiscal 2002. Research and development costs are charged to
expense as incurred.
Manufacturing
The Company currently maintains manufacturing locations in Syracuse and Bohemia,
New York; North Andover, Massachusetts; and Suzhou, China. During fiscal 2004,
the Company closed and liquidated its Almelo, Netherlands circuit board
facility. During fiscal year 2003, the Company began the transitioning of much
of the ceramic processing capability from its Bohemia 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. Beginning
in September 2004, the Company's Amitron operation will begin manufacturing
operations in its newly acquired Salem, New Hampshire facility which includes a
State-of-the-Art Class 10,000 clean room, under a newly formed wholly owned
subsidiary, Anaren Ceramics, Inc.
The Company continues to develop capability to produce highly engineered,
complex microwave subassemblies to support its Space and Defense business. In
fiscal 2004, the Company continued to invest 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.
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 2005. 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
11
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 2004, the Company had no
vendors from which it purchased more than 10.0% of its total raw materials, and
the Company believes that alternate sources of supply are generally available
for all 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
Aeroflex, 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, increased price pressure from the Company's customers is
a continuing challenge. It is anticipated that this pricing pressure will
continue indefinitely.
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.
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.
12
The Company currently has 8 active patents and has filed 13 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. By agreement, Company employees who initiate or contribute to a
patentable design or process are obligated to assign their interest in any
potential patent to the Company.
Employees
As of June 30, 2004, the Company employed 582 full-time people, including 39
temporary employees. Of these employees, 106 were members of the engineering
staff, 404 were in manufacturing positions, 32 were in sales and marketing
positions, and 40 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 real estate 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. The Company's
Amitron subsidiary currently leases an approximately 20,000 square foot facility
in North Andover, Massachusetts, which houses that operation. This lease
originally was set to expire in August 2006 and has an annual lease cost of
approximately $155,000. In May 2004 the Company, through a wholly owned
subsidiary, Anaren Properties, LLC, agreed to purchase a 65,000 square foot
building situated on approximately 12 acres in Salem, New Hampshire for $5.0
million. The building was acquired on August 3, 2004, and it is the Company's
intention to move the Amitron operation to this facility and operate under a
newly formed, wholly owned subsidiary, Anaren Ceramics, Inc. beginning in
September 2004. This facility was acquired to provide adequate space for future
growth of that business. In conjunction with the decision to move to this new
facility, the Company negotiated a buyout of the remaining lease of the North
Andover facility for a one-time charge of $350,000 and accelerated amortization
of leasehold improvements and certain intangibles related to lease amounting to
approximately $250,000. These expenses were recorded and recognized in the
quarter ended June 30, 2004. The Company expects similar related charges,
including moving expenses, of approximately $300,000 - $350,000, to be recorded
during the quarter ended September 30, 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 March
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 March 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 $470,000 and the Company is
currently subletting the building. During the fiscal year ended June 30, 2004,
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.
13
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.
Item 3. Legal Proceedings
There are no material legal proceedings pending 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, 2004, 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, 2004,
and their positions held with the Company are as follows:
Name Age Position
Lawrence A. Sala 41 President, Chief Executive Officer, Chairman
and Director
Carl W. Gerst, Jr 66 Chief Technical Officer, Vice Chairman and Director
Gert R. Thygesen 48 Vice President, Technology
Joseph E. Porcello 52 Vice President, Finance, Treasurer
Mark P. Burdick 46 Vice President and General Manager
Timothy P. Ross 44 Vice President, Business Development
Amy B. Tewksbury 40 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 its founding. 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.
14
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 Defense Group, of the Company from
November 1999 until September 2000. Mr. Ross served as Business Unit Manager --
Satellite Communications 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 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 Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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 2004 Fiscal 2003
Quarter Quarter
-------------------------------- ---------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- ---- --- ---
High .... $14.68 16.03 21.34 18.78 $10.64 12.54 10.15 10.37
Low ..... $ 9.25 12.20 14.21 14.50 $ 6.83 6.99 7.61 7.28
The Company had approximately 373 holders of record of its common stock at
August 11, 2004.
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.
Issuer Purchases of Equity Securities
On November 10, 2003, the Board of Directors increased the number of common
stock shares available for repurchase through its previously announced stock
repurchase program, up to 2,000,000 in open market or privately negotiated
transactions. The program, which may be suspended at any time without notice,
has no expiration date. The following table sets forth information regarding
shares repurchased and purchasable under the program during and as of the end of
the periods indicated. On August 10, 2004, the Board increased its repurchase
authorization by 2,000,000 shares, which when combined with the remaining shares
from the prior authorization left a total authorization of 2,927,496 shares.
- ----------------------------------------------------------------------------------------------------------------------
Period Total Number of Average Price Paid Total Number of Maximum Number (or
Shares (or Units) per Share (or Unit) Shares (or Units) Approximate Dollar
Purchased Purchased as Part of Value) of Shares (or
Publicly Announced Units) that May Yet
Plans or Programs Be Purchased Under
the Plans or Programs
- ----------------------------------------------------------------------------------------------------------------------
April 2004 -- -- -- 1,069,600
- ----------------------------------------------------------------------------------------------------------------------
May 2004 25,704 $14.99 25,704 1,043,896
- ----------------------------------------------------------------------------------------------------------------------
June 2004 116,400 $15.01 116,400 927,496
- ----------------------------------------------------------------------------------------------------------------------
Total 142,104 $15.01 142,104
- ----------------------------------------------------------------------------------------------------------------------
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, 2004, and with respect to the balance sheets at June 30, 2004 and
2003, are derived from the consolidated financial statements that have been
audited by KPMG LLP, independent registered public accounting firm, 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, 2000 and June 30, 2001, and the balance sheet
data at June 30, 2000, June 30, 2001 and June 30, 2002, are derived from audited
consolidated financial statements not included in this Annual Report on Form
10-K. The following
16
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.
17
Years Ended
--------------------------------------------------------------
June 30, June 30, June 30, June 30, June 30,
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(In thousands, except per share data)
Statement of Income Data:
Net sales ............................... $ 85,079 $ 75,520 $ 70,638 $ 84,825 $ 60,172
Cost of sales ........................... 55,070 51,821 45,713 52,527 35,074
--------- --------- --------- --------- ---------
Gross profit ............................ 30,009 23,699 24,925 32,298 25,098
--------- --------- --------- --------- ---------
Operating expenses:
Marketing ............................. 6,723 6,160 6,771 6,584 5,434
Research and development .............. 5,861 6,140 6,283 5,023 3,816
General and administrative ............ 8,731 8,392 7,617 8,392 4,394
Restructuring ......................... -- 795 -- 688 --
--------- --------- --------- --------- ---------
Total operating expenses ................ 21,315 21,487 20,671 20,687 13,644
--------- --------- --------- --------- ---------
Operating income ........................ 8,694 2,212 4,254 11,611 11,454
--------- --------- --------- --------- ---------
Other income (expense):
Interest expense ...................... (10) (50) (93) (159) (66)
Other, primarily interest income ...... 1,678 2,211 3,745 7,162 3,316
--------- --------- --------- --------- ---------
Total other income, net ............. 1,668 2,161 3,652 7,003 3,250
--------- --------- --------- --------- ---------
Income before income taxes .............. 10,362 4,373 7,906 18,614 14,704
Income taxes ............................ 2,695 798 1,179 6,400 5,063
--------- --------- --------- --------- ---------
Income from continuing operations ....... 7,667 3,575 6,727 12,214 9,641
Discontinued operations:
(Loss) from discontinued
operations of Anaren Europe ........... (1,510) (8,029) (872) -- --
Income tax benefit ...................... (1,800) (662) (1,584) -- --
--------- --------- --------- --------- ---------
Net income (loss) from discontinued
operations ............................ 290 (7,367) 712 -- --
--------- --------- --------- --------- ---------
Net income (loss) ...................... $ 7,957 $ (3,792) $ 7,439 $ 12,214 $ 9,641
========= ========= ========= ========= =========
Basic earnings (loss) per share:
Income from continuing operations ..... $ .37 $ .16 $ .30 $ .55 $ .54
Income (loss) from discontinued
operations .......................... .01 (.33) .03 -- --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ .38 $ (.17) $ .33 $ .55 $ .54
========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Income from continuing operations ..... $ .35 $ .16 $ .29 $ .52 $ .50
Income (loss) from discontinued
operations .......................... .01 (.33) .03 -- --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ .36 $ (.17) $ .32 $ .52 $ .50
========= ========= ========= ========= =========
Shares used in computing net earnings
per share:
Basic ................................. 21,026 22,214 22,323 22,134 17,978
Diluted ............................... 21,808 22,701 23,090 23,455 19,299
Balance Sheet Data:
Cash and cash equivalents ............... $ 23,303 $ 11,063 $ 12,565 $ 11,748 $ 6,179
Working capital ......................... 106,737 126,235 144,023 146,677 106,271
Total assets ............................ 207,482 213,088 221,586 209,055 189,696
Long-term debt, less current installments -- -- -- -- --
Stockholders' equity .................... 190,364 200,597 209,553 199,454 179,572
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.
18
Overview
The consolidated financial statements present the financial condition of the
Company as of June 30, 2004 and 2003, and the consolidated results of operations
and cash flows of the Company for the years ended June 30, 2004, 2003 and 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. In 2004, the Company introduced
new components addressing consumer wireless applications such as wireless local
area networks, Bluetooth, cellular handsets and satellite telecommunications.
The Company sells its products to leading wireless communications equipment
manufacturers such as Ericsson, Lucent Technologies, Motorola, Nokia, Nortel
Networks, and Andrews 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 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 then weak wireless market conditions and the
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 July 10, 2003, after several restructurings, the Company announced its
decision to dispose of its Anaren Europe subsidiary due to continuing low sales
levels and large operating losses. This facility ceased production during the
first quarter of fiscal 2004, an auction was held and all remaining equipment
was sold in September 2003. This subsidiary is now being accounted for as a
discontinued operation in the statements of earnings for the three years ended
2004, 2003, and 2002. Included in the results of discontinued operations for
fiscal 2004 are a loss from European operations of $1.5 million and a U.S. tax
benefit of $1.8 million resulting from investment losses attributable to Anaren
Europe.
On August 3, 2004, the Company purchased a 65,000 square foot building situated
on approximately 12 acres in Salem, New Hampshire for $5.0 million. It is the
Company's
19
intention to move the Amitron operation to this facility, beginning in September
2004, and operate the business under the name of Anaren Ceramics, Inc., a newly
created wholly owned subsidiary of the Company. This newly acquired facility
will provide adequate space for anticipated future growth of that business. In
conjunction with the decision to move to this new facility, the Company
negotiated a buyout of the remaining lease of the North Andover facility for a
one-time charge of $350,000 and accelerated amortization of the leasehold
improvements and lease related intangibles amounting to $250,000. These costs
were recorded and recognized in the June 30, 2004 income statement.
On July 8, 2004, Teledyne Technologies Incorporated and Celeritek, Inc. jointly
announced that Teledyne, through its subsidiary Teledyne Wireless, Inc., had
entered into an agreement to acquire Celeritek's defense electronics business.
In light of this development, the Company has determined that it no longer has
an interest in acquiring the business or assets of, or engaging in any other
form of business combination with, Celeritek. The shares of Celeritek Common
Stock beneficially owned by Anaren will, for so long as Anaren retains such
ownership, be held for investment purposes and not with a view towards
effectuating a business combination. As set forth in its latest Amendment to
Schedule 13D, Anaren has disposed of a portion of the Celeritek Common Stock
previously held by it. Depending on the results of its ongoing evaluation of the
investment in the Common Stock, prevailing market conditions, other investment
opportunities, and/or other investment considerations, Anaren may dispose of
some or all of its remaining holdings in privately negotiated or open market
transactions, or may retain such shares for investment purposes as described in
its latest Amendment to Schedule 13D. As of August 25, 2004, Anaren has disposed
of 72,500 shares of Celeritek's Common Stock and still owns 704,800 shares.
Results of Operations
Net sales from continuing operations for the year ended June 30, 2004 were $85.1
million, up 12.7% from $75.5 million for fiscal 2003. Income from continuing
operations for fiscal 2004 was $7.7 million, or 9.0% of net sales, up $4.1
million, or 115% from income from continuing operations of $3.6 million in
fiscal 2003.
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:
20
Years Ended June 30,
--------------------------------
2004 2003 2002
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.7 68.6 64.7
----- ----- -----
Gross profit 35.3 31.4 35.3
----- ----- -----
Operating expenses:
Marketing 7.9 8.2 9.6
Research and development 6.9 8.1 8.9
General and administrative 10.3 11.1 10.8
Restructuring -- 1.1 --
----- ----- -----
Total operating expenses 25.1 28.5 29.3
----- ----- -----
Operating income 10.2 2.9 6.0
----- ----- -----
Other income (expense):
Interest expense -- -- (0.1)
Other, primarily interest income 2.0 2.9 5.3
----- ----- -----
Total other income 2.0 2.9 5.2
----- ----- -----
Income from continuing operations before
Income taxes 12.2 5.8 11.2
Income taxes 3.2 1.1 1.7
----- ----- -----
Net income from continuing operations 9.0 4.7 9.5
Discontinued operations:
Income (loss) from discontinued
operations of Anaren Europe (1.8) (10.6) (1.2)
Income tax benefit (2.1) (0.9) (2.2)
----- ----- -----
Net income (loss) from discontinued
operations .3 (9.7) 1.0
----- ----- -----
Net income (loss) 9.3% (5.0%) 10.5%
===== ===== =====
The following table sets forth the Company's net sales by industry segment for
the periods indicated:
Years Ended June 30,
------------------------------------------
2004 2003 2002
---- ---- ----
(In thousands)
Wireless $58,078 $46,629 $44,567
Space & Defense 27,001 28,891 26,071
------- ------- -------
$85,079 $75,520 $70,638
======= ======= =======
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
Net Sales. Net sales increased $9.6 million, or 12.7%, to $85.1 million for the
year ended June 30, 2004, compared to $75.5 million for fiscal 2003. This
increase resulted from a $11.4 million rise in sales of Wireless infrastructure
equipment which more than offset a $1.9 million decline in sales of Space and
Defense products.
The increase in sales of Wireless products, which consisted of standard
components, ferrite components, and custom subassemblies for use in building
wireless base station equipment, was the result of a significant increase in
worldwide demand for wireless base station components over the last twelve
months. This demand generated increased orders from a majority of the Company's
base station infrastructure original equipment manufacturing customers in fiscal
2004. Sales of standard components and custom subassemblies rose $14.7 million,
or 47% in the current year compared to fiscal 2003. This increase was partially
offset by a $3.2 million, or 39% decrease in sales of ferrite component products
in fiscal 2004 compared to last year as a result of the Company's continuing
efforts to eliminate unprofitable and low margin ferrite products in fiscal
2004.
21
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 fell $1.9 million, or 7.0% in
fiscal 2004 to $27.0 million, compared to fiscal 2003. This decrease in sales
resulted from the completion of shipments under the Boeing Spaceway program in
the fourth quarter of fiscal 2003. This program accounted for over $4.8 million
in shipments in fiscal 2003. This decline in commercial space revenue in fiscal
2004 was partially off-set by a $2.9 million increase in military space and
defense product sales. Sales in the Space and Defense segment are expected to
average between $7.0 to $7.5 million per quarter through the first half of
fiscal 2005.
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 2004 was $30.0 million (35.3%
of net sales), up $6.3 million from $23.7 million (31.4% of net sales) for
fiscal 2003. The rise in gross margin as a percent of sales was a result of the
$3.2 million decrease in sales of unprofitable and low margin ferrite products,
coupled with $14.7 million increase in sales of higher margin surface mount and
custom wireless products in fiscal 2004 compared to fiscal 2003. The Company
expects gross margins to continue at current levels over the next few quarters.
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 were $6.7 million (7.9%
of net sales) for fiscal 2004, up $500,000 from $6.2 million (8.2% of net sales)
for fiscal 2003. This increase is a result of the addition of three new
geographic product line marketing positions and a general increase in sales and
marketing support costs to meet the increased demand in both the Wireless and
Space and Defense markets that the Company has experienced over the last year.
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 $5.9 million
(6.9% of net sales) in fiscal 2004, down 4.6% from $6.1 million (8.1% of net
sales) for fiscal 2003. Research and development expenditures are supporting
further development of wireless infrastructure products and new wireless
networking product opportunities. Research and development expenditures fell in
fiscal 2004 compared to the prior year due to a significantly higher level of
customer funded development activity in the Space and Defense group, resulting
in a higher level of engineering costs being included in cost of goods sold.
Despite the current temporary decline in spending, the Company does not expect
to significantly reduce its current research and development efforts in the long
term and is presently working on a number of new standard wireless products.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, intangible amortization,
travel related expenses and other corporate administrative costs. General and
administrative expenses increased 4.0% to $8.7 million (10.3% of net sales) for
fiscal 2004 from $8.4 million (11.1% of net sales) for last fiscal year. This
increase resulted primarily from rising administrative costs due to
Sarbanes-Oxley regulations, a rise in corporate donations to a local university
to support development of new microwave engineering talent, and a one-time
charge of $350,000 to recognize the cost of settling the existing lease for
Amitron's current facility in North Andover, net of offsetting decreases
resulting from fiscal 2004 cost cutting initiatives.
22
Restructuring. There were no restructuring charges in fiscal 2004. In fiscal
2003, the Company recorded a restructuring charge of $795,000 related to the
Company's restructuring plans at its RF Power and Anaren Microwave, Inc.
subsidiaries. These plans were primarily aimed at reducing the cost of excess
personnel and included the termination of 46 employees.
Operating Income: Operating income increased in fiscal 2004 to $8.7 million
(10.2% of sales) from $2.2 million (2.9% of net sales) for fiscal 2003. On a
reporting segment basis, Wireless operating income was $4.4 million for fiscal
2004, an improvement of $6.9 million from a Wireless operating loss of ($2.5
million) for fiscal 2003. The main reasons for the increase in Wireless income
in the current year were the Company's restructuring and cost reduction
activities in the second half of fiscal 2003 (which lowered Wireless operating
costs), the discontinuation of some unprofitable and low margin wireless ferrite
products, and the $11.5 million increase in Wireless sales in the current year
compared to fiscal 2003. In fiscal 2005, Wireless operating margins are expected
to approximate current levels depending on sales volume and product mix.
Space and Defense operating income fell $412,000 in fiscal 2004 to $4.3 million,
compared to $4.7 million in fiscal 2003. This decrease resulted from the lower
sales volume and a change in product mix during the current year compared to
fiscal 2003. This year's sales included more volume attributable to military
programs, while sales for fiscal 2003 consisted of more profitable shipments for
commercial space programs. Going forward, we expect Space and Defense sales to
be driven primarily by defense related programs.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 24.1% to $1.7 million (2.0% of net sales)
for fiscal 2004, from $2.2 million (2.9% of net sales) for fiscal 2003. This
decrease was caused by the decline in market interest rates over the last 12
months brought about by reductions in the Federal Funds rate and the decrease in
investable cash balances due to the $22.1 million expenditure to repurchase
shares of the Company's common stock for Treasury shares during fiscal 2004.
Interest income will fluctuate based on the level of interest rates and the size
of investable cash balances.
Income Taxes: Income taxes for fiscal 2004 were $2.7 million (3.2% of net
sales), representing an effective tax rate of 26.1%. This compares to income tax
expense of $798,000 (1.1% of net sales) for fiscal 2003, representing an
effective tax rate of 18.2%. The Company's effective tax rate is a direct result
of the proportion of federally exempt state municipal bond income, federal tax
credits and export tax benefits in relation to the anticipated levels of taxable
income for the entire fiscal year.
Discontinued Operations. On July 10, 2003, the Company announced its decision to
dispose of its Anaren Europe operation. During the first quarter of fiscal 2004,
the Company ceased production at Anaren Europe and the remaining net assets of
that operation were liquidated. Effective with the Company's Form 10-Q Quarterly
Report for the first quarter ended September 30, 2003, the results of operations
for Anaren Europe for both the current and prior years have been reclassified as
discontinued operations in the statement of earnings. Discontinued operations
for the year ended June 30, 2004 included a loss from discontinued operations of
($1.5) million and a tax benefit of $1.8 million from the write-off of the
Company's investment resulting in a net gain of $290,000. For fiscal 2003 the
Company had a net loss from discontinued operations of ($8.0) million and a tax
benefit of $662,000 resulting in a net loss of ($7.4) million.
23
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
Net Sales. Net sales increased $4.9 million, or 6.9%, to $75.5 million for
fiscal 2003, compared to $70.6 million for the prior fiscal year. This increase
consisted of a $2.1 million (4.6%) rise in Wireless sales and a $2.8 million
(10.8%) increase in sales of Space and Defense products.
The $2.1 million increase in fiscal 2003 Wireless sales resulted from a
combination of a new acquisition during fiscal 2002 and increased customer
demand. Wireless sales for fiscal 2003 include a full twelve months of sales for
Amitron, while sales for fiscal 2002 included only ten months of sales for
Amitron. The Amitron acquisition resulted in additional sales in fiscal 2003 of
$1.7 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.
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 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 fiscal 2003.
Gross Profit. Gross profit for fiscal 2003 was $23.7 million (31.4% of net
sales), down $1.2 million from $24.9 million (35.3% of net sales) for fiscal
2002. The decline in margins as a percent of net sales in fiscal 2003 resulted
from continuing price pressure from Wireless customers, which has resulted in
lower average sale prices year over year and from the $2.8 million increase in
sales of space and defense products which normally have a somewhat lower gross
margin than typical wireless products.
Marketing. Marketing expenses decreased 9.0% to $6.2 million (8.2% of net sales)
for fiscal 2003 from $6.8 million (9.6% of net sales) for fiscal 2002. Marketing
expense declined in fiscal 2003 due to a budgeted decline in advertising
expenditures in fiscal 2003 compared to fiscal 2002 and the reassignment of some
marketing personnel to other company functions.
Research and Development. Research and development expenses were $6.1 million
(8.1% of net sales) in fiscal 2003, down $143,000 from $6.3 million (8.9% of net
sales) for fiscal 2002. Research and development expenditures are supporting
further development of wireless infrastructure products and new wireless
networking product opportunities, including 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 10.2% to $8.4 million (11.1% of net sales) for fiscal 2003
from $7.6 million (10.8% 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 compared to ten months in fiscal 2002.
Restructuring. 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 the termination of 30 individuals. The
remaining restructuring accrual will be paid in full during fiscal 2005.
Operating Income. Operating income decreased $2.1 million in fiscal 2003 to $2.2
million (2.9% of net sales) from $4.3 million (6.0% of net sales) for fiscal
2002. On a reporting segment basis, the Wireless operating loss was ($2.5)
million for fiscal 2003, a decrease of $1.0 million from a Wireless operating
loss of ($3.5) million in fiscal 2002. The main reason for the improvement in
Wireless operating income in fiscal 2003 was the $2.1 million increase in
Wireless sales coupled with various cost cutting efforts which improved Wireless
gross margins year over year.
24
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 fiscal 2003 compared to fiscal 2002. Fiscal 2003
sales included more military programs, while sales in fiscal 2002 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 $2.2 million (2.9% of net sales)
for the year ended June 30, 2003, from $3.7 million (5.3% of net sales) for
fiscal 2002. This decrease was caused mainly by the decline in market interest
rates over the 12 months ended June 30, 2003, brought about by reductions in the
Federal Fund rates.
Interest Expense: Interest expense represents commitment fees and interest paid
on a deferred obligation. Interest expense for fiscal 2003 was $50,000 (0.0% of
net sales) compared to $93,000 (0.1% of net sales) for fiscal 2002. This
decrease was the result of the intentional cancellation of the Company's line of
credit.
Income Taxes. Income taxes for fiscal 2003 were $798,000 (1.1% of net sales),
representing an effective tax rate of 18.2%. This compares to income tax of $1.2
million (1.1% 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. 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.
Discontinued Operations. During July 2003, the Company announced its decision to
dispose of its Anaren Europe operation. During the first quarter, production at
Anaren Europe ceased and the remaining net assets of that operation were
liquidated. Effective with the Company's Form 10-Q Quarterly Report for the
first quarter ended September 30, 2003, the results of operations for Anaren
Europe for both the current and prior year have been reclassified as
discontinued operations in the statements of earnings. Discontinued operations
for the year ended June 30, 2003 included a loss from operations of ($8.0)
million, and a federal tax benefit of $662,000. Discontinued operations for
fiscal 2002 included a loss from operations of ($872,000) which consisted of an
operating loss of ($4.3) million and an extraordinary gain at acquisition of
$3.4 million, and a tax benefit of $1.6 million.
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
25
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.
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, 2004, 2003 and 2002
was $15.2 million, $12.2 million and $17.1 million, respectively. The positive
cash flow from operations was due primarily to profit before depreciation in
each year. In fiscal 2004 cash flow was decreased by a rise in receivables,
while in fiscal 2002 and 2003 cash flows were increased due to a decline in
receivables and inventory.
Net cash provided by investing activities for fiscal 2004 was $17.5 million and
consisted of net maturities of marketable debt securities of $16.8 million, and
a return of capital dividend on equity securities (Celeritek, Inc.) held for
resale of $3.5 million, less $4.3 million used to fund capital equipment
acquisitions. Additionally, in fiscal 2004, $1.5 million was generated in
discontinued operations in
26
Europe through the auction sale of capital equipment. Net cash used in investing
activities in fiscal 2002 was $15.3 million and consisted of $4.0 million in
capital expenditures, $8.2 million used to make business acquisitions and $9.7
million related to the discontinued Anaren Europe operation. Additionally in
fiscal 2002, $6.5 million was provided by maturities of marketable debt
securities. Net cash used in investing activities in fiscal 2003 was $8.6
million and consisted of $3.9 million used to acquire capital equipment and net
purchases of marketable debt securities amounting to $4.0 million.
Net cash used in financing activities in fiscal 2004, 2003 and 2002 was $20.5
million, $5.1 million and $1.6 million, respectively. Of the fiscal 2004 amount,
$1.6 million was provided by the exercise of stock options and $22.1 million was
used to repurchase 1,579,204 shares of the Company's stock under a previously
approved repurchase plan. Of the fiscal 2003 amount, $248,000 was generated from
the exercise of stock options and $5.4 million was expended to repurchase
643,000 of the Company's stock. The fiscal 2002 amount consisted of $399,000
provided by the exercise of stock options and $2.0 million used to pay-off
acquisition loans.
The Company expects to continue to purchase shares of its common stock in the
open market and/or through private negotiated transactions under the current
Board authorization, depending on market conditions. At June 30, 2004, there
were 927,000 shares remaining under the current Board repurchase authorization.
On August 10, 2004, the Board increased its repurchase authorization by two
million shares, and for the period July 1 through August 25, 2004 the Company
repurchased an additional 682,800 shares, leaving 2,245,000 under the current
authorization.
At June 30, 2004, the Company had approximately $120.5 million in cash, cash
equivalents, and marketable securities and no debt, and has had positive
operating cash flow for over eight years. 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
Operating leases-- facilities $5,197,850 $1,015,293 $1,037,680 $943,462 $2,201,415
Deferred compensation 428,520 65,000 130,000 130,000 103,520
Purchase of building 4,735,000 4,735,000 -- -- --
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149 Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003, except as stated
below, and for hedging relationships designated after June 30, 2003. In
addition, except as stated below, all provisions of SFAS No. 149 should be
applied prospectively. The provisions of SFAS No. 149 relating to SFAS No. 133
Implementation Issues that have been effective for fiscal quarters beginning
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. Adoption of SFAS No. 149 did not have a material
impact on our consolidated financial position, results of operations or cash
flows.
27
In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of these instruments
were previously classified as temporary equity. SFAS No. 150 will be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. For financial instruments created before the
issuance date of SFAS No. 150 and still existing at the beginning of the interim
period of adoption, transition shall be achieved by reporting the cumulative
effect of a change in accounting principle by initially measuring the financial
instruments at fair value or other measurement attribute required by SFAS No.
150. Instruments with characteristics of both liabilities and equity not
addressed in SFAS No. 150 will be addressed in the next phase of the project.
Adoption of SFAS No. 150 did not have a material impact on our consolidated
financial position, results of operations or cash flows.
In December 2003, the FASB issued SFAS No. 132 (revised) Employers' Disclosures
about Pensions and Other Postretirement Benefits, which revise employers'
disclosures about pension plans and other post retirement benefits. The
disclosure provisions are effective for fiscal years ending after June 15, 2004.
We have provided the required disclosures.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) became law in the United States. The Act introduces a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to the Medicare benefit. In accordance with FASB
Staff Position FAS 106-2,"Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," the
Company has elected to defer recognition of the effects of the Act in any
measures of the benefit obligation or cost. Specific authoritative guidance on
the accounting for the federal subsidy is pending and that guidance, when
issued, could require the Company to change previously reported information.
Currently, we do not believe we will need to amend our plan to benefit from the
Act, nor do we expect the Act to have a material impact on our consolidated
financial position, results of operations or cash flows.
EITF Issue No 03-1 "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" must be applied in reporting periods
beginning after June 15, 2004. The disclosure requirements are effective for all
fiscal years after December 15, 2003. We have complied with the disclosure
requirements.
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 10-K.
As of June 30, 2004, the Company had cash, cash equivalents and marketable
securities of $120.5 million, of which approximately $94.7 million consisted of
highly liquid investments in marketable debt securities and $3.0 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
28
of 10.0% from June 30, 2004 rates, or 0.15%, would have reduced net income and
cash flow by approximately $142,000, 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 $3.0 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 $300,000 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.
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 22 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.
Item 9A. 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item concerning directors of the Company is
contained in the Company's proxy statement filed with respect to the 2004 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,
29
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 as revised in February 2004,
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 2004 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 2004 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 2004 Annual Meeting of Shareholders and is
incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2004 Annual Meeting of Shareholders and is
incorporated by reference herein.
30
PART IV
Item 15. 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 27, 2004 with
respect to its results of operations for the third quarter ended March 31,
2004.
(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 with
Joseph Porcello, Mark Burdick, Timothy Ross, Stanley Slingerland and
Gert Thygesen (13)
10.11 Employment Agreement, dated as of August 31, 2001, between the
Company and Raymond C. Simione (14)
10.12 Employment Agreement, dated as of February 14, 2004, between the
Company and Carl W. Gerst, Jr. (15)
21 Subsidiaries of the Company
23 Consent of KPMG LLP
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
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(1) (A) Restated Certificate of Incorporation of the Company, filed on August
11, 1967, is incorporated herein by reference to Exhibit 3(a) to Company's
Registration Statement on Form S-1 (Registration No. 2-42704); (B)
Amendment, filed on December 19, 1980, is incorporated herein by reference
to Exhibit 4.1(ii) to the Company's Registration Statement on Form S-2
(Registration No. 2-86025); (C) Amendment, filed on March 18, 1985, is
incorporated herein by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
June 30, 1987; (D) Amendment, filed on December 14, 1987, is incorporated
herein by reference to Exhibit 4(a)(iv) to the Company's Registration
Statement on
31
Form S-8 (Registration No. 33-19618); (E) Amendment, filed on April 8,
1999, is incorporated herein by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K (Commission File No. 0-6620) for the fiscal
year ended June 30, 1999; (F) Amendment, filed on February 8, 2000, is
incorporated herein reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (Registration No. 333-31460) filed with the
Securities and Exchange Commission on March 2, 2000; and (G) Amendment,
filed on November 22, 2000, is incorporated by reference to Exhibit 3.1 to
the Company's Quarterly Report on Form 10-Q (Commission File No. 0-6620)
for the three months ended December 31, 2000.
(2) Incorporated herein reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-3 (Registration No. 333-31460) filed with the
Securities and Exchange Commission on March 2, 2000.
(3) Incorporated herein reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-3 (Registration No. 333-31460) filed with the
Securities and Exchange Commission on March 2, 2000.
(4) Incorporated herein by reference to Exhibits 4.1 and 4.2 to the Company's
Registration Statement on Form 8-A (Commission File No. 0-6620) filed with
the Securities and Exchange Commission on April 26, 2001.
(5) Incorporated herein by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
June 30, 2001.
(6) Incorporated here