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; difficulties achieving acceptable operating performance at the Company's recently consolidated Anaren Ceramics subsidiary in 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 or have difficulties in successfully executing 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; unanticipated delays and/or difficulties increasing procurement of raw materials in Asia through the Company's Suzhou, China facility; 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 2005 Annual Report, this Form 10-K for the fiscal year ended June 30, 2005 and Anaren's Form 10-Q for the three months ended March 31, 2005, 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
In August 2004, the Company, through a wholly owned subsidiary, Anaren Properties, LLC, purchased a 65,000 square foot building situated on approximately 12 acres in Salem, New Hampshire for $4.8 million. The Company moved its Amitron and RF Power operations to this facility during the second quarter of fiscal 2005 and is presently operating them under its wholly owned subsidiary, Anaren Ceramics, Inc. This facility was acquired to provide adequate space for future growth of these businesses and to achieve administrative cost savings through consolidation of two smaller businesses into one entity. In conjunction with the move to this new facility, the Company negotiated a buyout of the remaining lease of the Amitron facility in North Andover, Massachusetts for a one-time charge of $350,000 and accelerated amortization of leasehold improvements and certain intangibles related to this lease of approximately $500,000. Additionally, the Company negotiated a buyout of the lease of the RF Power facility in Bohemia, New York amounting to $91,000. These expenses were recorded and recognized in the fourth quarter of fiscal 2004 and the first six months of fiscal 2005.
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 for 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 Andrew o Boeing, Inc. o California Amplifier o Ericsson o ITT Aerospace/Communications o Lockheed Martin o Motorola o Nokia o Nortel Networks o Northrop Grumman o Powerwave, Inc. 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 and subsequently leveled off in fiscal 2005.
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. In fiscal 2005 demand and Wireless product sales have remained strong, at or above fiscal 2004 levels.
Wireless Local Area Networking
Wireless local area networks (WLAN) generally referred to as WiFi are unlicensed 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, often 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 wireless home multimedia, wireless e-business, and wireless printers and scanners.
Space and Defense
The Space and Defense industry is currently focused on supporting National Defense programs, Homeland Security, integrated communications systems and technologies that improve the performance and survivability of existing air, land and sea based platforms. As a result of the priorities for these programs, the 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, ceramic circuit technologies and advanced design and modeling techniques, 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 140 engineers (as of June 30, 2005) 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 selected microwave component and subassembly products for wireless infrastructure applications. This local presence also 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 often 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.
Technology
The Company utilizes three basic technologies: Multi-Layer Stripline, Thick Film Ceramics and Ball Grid Array assembly. Additionally, the Company uses outside sources for lower cost and unique process capabilities.
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. 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 Wireless Local Area networks (WLAN), Mobile Handsets, Bluetooth and other related technology such as WiMAX and Ultra Wide Band. 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 Andrew, Ericsson, Huawei Lucent, Motorola, Nokia and Nortel Networks, for wireless communications and Boeing, Lockheed Martin, Northrup Grumman and Raytheon for space and defense. The Company intends to further strengthen its customer relationships by offering complete outsourcing solutions, from research and development through product design and production, thereby increasing the customers' reliance on the Company.
Pursue Technology Leadership Position. The Company intends to use its technological leadership in the mobile wireless and space and defense markets to extend its competitive advantage. Anaren plans to pursue further technological advances through continued investment in research and development, as well as the utilization of a global supplier base. 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 compliment 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 that 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 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 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.
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 conceptually 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.
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, 2005, 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 one customer in fiscal 2005 who accounted for more than 10.0% of net sales, Nokia, who represented approximately 13.8%.
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, 2005:
o Alcatel o Avnet o BAE Optilas o Celestica Corp. o EG Components o MKS Instruments o Motorola o Nokia o Nortel o Richardson Electronics Inc. o Ricoh Printing o RMPI, LLC o Sanmina o St. Jude o Solectron o Telecom International o Venture Manufacturing
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, 2005:
o BAE o Boeing Inc. o ITT o Lockheed Martin o NEX 1 Future, Co., Ltd. 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 27 people as of June 30, 2005. The Company has regional sales offices located in Sacramento, California; Woolwich Township, New Jersey; Waterlooville, England; and Suzhou, China. In addition, as of June 30, 2005, the Company had contracts with three major distributors, with 14 manufacturers' representatives in the United States, and with nine international representatives located in Western Europe, the Middle East and Asia. As part of its marketing efforts, the Company advertises in major trade publications and attends major industry shows. The Company has also invested significantly in its Internet website which contains an electronic version 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 engineering team, comprised of 140 design and engineering professionals as of June 30, 2005, 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 Company has an agreement with Zenetron in Asia for distribution of commercial products. 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.
Backlog
The Company's backlog of orders for the Wireless group was $14.4 million as of June 30, 2005, versus $15.6 million as of June 30, 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 eight to twelve weeks. 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, 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 $47.5 million as of June 30, 2005 versus $37.1 million as of June 30, 2004. The increase in Space and Defense backlog year over year, was due largely to the volume of new Space and Defense product orders in fiscal 2005 ($40.8 million) and fiscal 2004 ($37.6 million). During fiscal year 2006, the Company expects to ship between $34.0 million and $36.0 million of its June 30, 2005 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 $6.3 million in fiscal 2005, $5.9 million in fiscal 2004 and $6.1 million in fiscal 2003. Research and development costs are
charged to expense as incurred.
Manufacturing
The Company currently maintains manufacturing locations in Syracuse, New York; Salem, New Hampshire; and Suzhou, China. During fiscal 2005, the Company consolidated its Amitron operation located in North Andover, Massachusetts and its RF Power operation located in Bohemia, New York into one facility located in Salem, New Hampshire, operating under a wholly owned subsidiary, Anaren Ceramics, Inc. This facility includes significantly more space for future expansion, and a State-of-the-Art Class 10,000 clean room for manufacturing. During fiscal 2004, the Company closed and liquidated its Almelo, Netherlands circuit board facility.
The Company continues to develop capability to produce highly engineered, complex microwave subassemblies to support its Space and Defense business. In fiscal 2004 and 2005, 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. Certain manufacturing product lines from the Syracuse and the Salem operations have been successfully transitioned to Suzhou over the past two years. Manufacturing of newly released products will be initiated in Suzhou going forward. During fiscal 2005 the Suzhou facility also provided support in identifying and qualifying new lower-cost and local Asian sources of parts and raw materials for all of the Company's businesses, and will continue to do so in the future.
All of the Company's facilities (Syracuse, New York; Salem, New Hampshire; and Suzhou, China) are ISO 9001 certified. In addition, the East Syracuse facility is 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 2005, the Company had one vendor from which it purchased more than 10% of its total raw materials, and the Company believes that alternate sources of supply are generally available for all raw materials supplied by this and all other Company vendors.
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 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 area of technical performance 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.
The Company currently has 8 active patents and has filed 9 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, 2005, the Company employed 587 full-time people, including 78 temporary employees. Of these employees, 140 were members of the engineering staff, 378 were in manufacturing positions, 27 were in sales and marketing positions, and 42 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.
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. In May 2004 the Company, through a wholly owned subsidiary, Anaren Properties, LLC, purchased a 65,000 square foot building situated on approximately 12 acres in Salem, New Hampshire for $4.8 million. The Company moved its Amitron and RF Power operations to this facility during the second quarter of fiscal 2005 and is presently operating them under a newly formed, wholly owned subsidiary, Anaren Ceramics, Inc. This facility was acquired to provide adequate space for future growth of these businesses and to achieve administrative cost savings through consolidation of two businesses into one entity. In conjunction with the decision to move to this
new facility, the Company negotiated (a) a buyout of the remaining lease of the Amitron facility in North Andover, Massachusetts for a one-time charge of $350,000 and accelerated amortization of leasehold improvements and certain intangibles related to the lease of approximately $500,000, and (b) a buyout of the lease of the RF Power facility in Bohemia, New York amounting to $91,000. These expenses were recorded and recognized in the fourth quarter of fiscal 2004 and the first six months of fiscal 2005.
In March 2002, the Company's Anaren Suzhou Communications Inc. subsidiary signed a lease for a 12,300 square foot first floor facility in Suzhou, China to begin light manufacturing and assembly activities for the Company's Asian customers. This facility has an annual rent of $23,200. In February 2003 Anaren Suzhou exercised an option to lease the second floor of this same facility (approximately 12,300 square feet) at an annual rent of $23,200. In March 2005, the lease for both floors was renewed for an additional three year period through March 2008.
The Company leases a 20,000 square foot building in Frimley, England. Annual rental cost of this facility is approximately $471,000 and the Company is currently subletting the building. During the fiscal year ended June 30, 2005, payments to the Company under this sublease were more than 95.0% of the full lease value. The existing lease term on this building runs to 2014. There is no assurance that the Company will be able to continuously sublet the building during the remaining lease term so as to offset its rental cost in whole or in part.
Management considers the foregoing facilities adequate for the current and anticipated short-term future requirements of the Company, and expects that suitable additional space will be available to the Company, as needed, at reasonable commercial terms.
Item 3.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended June 30, 2005, 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, 2005, and their positions held with the Company are as follows:
Name Age Position Lawrence A. Sala 42 President, Chief Executive Officer, Chairman and Director Carl W. Gerst, Jr 67 Chief Technical Officer, Vice Chairman and Director Gert R. Thygesen 49 Vice President, Technology Joseph E. Porcello 53 Vice President, Finance, Treasurer Mark P. Burdick 47 Vice President and General Manager Timothy P. Ross 45 Vice President, Business Development Amy B. Tewksbury 41 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.
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.
PART II
Item 5.
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.
The Company had approximately 375 holders of record of its common stock at August 16, 2005.
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 May 10, 2005, the Board of Directors increased by 2,000,000 the number of shares that the Company was authorized to repurchase in open market or by privately negotiated transactions through its previously announced stock repurchase program. 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 June 30, 2005, 1,774,464 shares remained authorized for purchase.
Item 6.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below with respect to the Company's statements of operations for each of the years in the three year period ended June 30, 2005, and with respect to the balance sheets at June 30, 2005 and 2004, 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 operations data for the years ended June 30, 2001 and June 30, 2002, and the balance sheet data at June 30, 2001, June 30, 2002 and June 30, 2003, are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The following selected financial data should be read in conjunction with the consolidated financial statements for the Company and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements 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.
Overview
The consolidated financial statements present the financial condition of the Company as of June 30, 2005 and 2004, and the consolidated results of operations and cash flows of the Company for the years ended June 30, 2005, 2004 and 2003.
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 and 2005, 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, Motorola, Nokia, Nortel Networks, and Andrew and to satellite communications and defense electronics companies such as Boeing Satellite, ITT, 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 fixed-price contracts for the sale of engineering design and development efforts for space and defense electronics products. Sales and estimated profits under long-term contracts are recognized according to customer contractual milestones 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 July 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 accounted for as a discontinued operation in the statements of earnings for the three years ended June 30, 2005, 2004 and 2003.
On August 3, 2004, the Company acquired a 65,000 square foot building situated on approximately 12 acres in Salem, New Hampshire for a purchase price of $4.8 million. The Company commenced the move of its Amitron operation to the new facility in September 2004 and is operating the business under the name of Anaren Ceramics, Inc., a wholly owned subsidiary of the Company. The New Hampshire 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 buy out of the remaining lease of the Amitron facility for a one-time charge in fiscal 2004 of $350,000 and the Company also accelerated amortization of the Amitron leasehold improvements and lease related intangibles amounting to $250,000 recognized in the fourth quarter of fiscal 2004, and $250,000 recognized in the first quarter of fiscal 2005.
In October, 2004 the Company announced that in order to accelerate ceramic product growth initiatives and improve operating efficiency, it had decided to consolidate its RF Power
subsidiary with the Company's Amitron subsidiary and close RF Power's facility in Bohemia, New York. The consolidated company, Anaren Ceramics, Inc., operates at the Company's newly acquired Salem, New Hampshire facility, which will fully accommodate the current capacity needs of the combined entity as well as significant future growth. The move of the RF Power operation to the Salem, New Hampshire facility was completed during the second quarter ended December 31, 2004. As a result of the RF Power facility closure and move, the Company recognized consolidation costs of $458,335 for severance and outplacement expenses, $91,000 for lease cancellation and $300,000 for additional inventory write-downs during the second quarter of fiscal 2005. Additionally, the Company incurred further consolidation costs totaling approximately $397,000, including equipment write-downs of $272,000, in the third quarter of fiscal 2005, related to integrating the RF Power operation into the Anaren Ceramics operation.
Results of Operations
Net sales from continuing operations for the year ended June 30, 2005 were $94.5 million, up 11.0% from $85.1 million for fiscal 2004. Income from continuing operations for fiscal 2005 was $7.4 million, or 7.8% of net sales, down $254,000 from income from continuing operations of $7.7 million in fiscal 2004.
The following table sets forth the percentage relationships of certain items from the Company's consolidated statements of operations as a percentage of net sales for the periods indicated:
Years Ended June 30, ------------------------- 2005 2004 2003 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 68.4 64.7 68.6 ----- ----- ----- Gross profit 31.6 35.3 31.4 ----- ----- ----- Operating expenses: Marketing 7.2 7.9 8.2 Research and development 6.7 6.9 8.1 General and administrative 9.2 10.3 11.1 Restructuring 0.5 -- 1.1 ----- ----- ----- Total operating expenses 23.6 25.1 28.5 ----- ----- ----- Operating income 8.0 10.2 2.9 ----- ----- ----- Other income (expense): Interest expense -- -- -- Other, primarily interest income 1.7 2.0 2.9 ----- ----- ----- Total other income 1.7 2.0 2.9 ----- ----- ----- Income from continuing operations before Income taxes 9.7 12.2 5.8 Income taxes 1.9 3.2 1.1 ----- ----- ----- Net income from continuing operations 7.8 9.0 4.7 Discontinued operations: Income (loss) from discontinued operations of Anaren Europe -- (1.8) (10.6) Income tax benefit -- (2.1) (0.9) ----- ----- ----- Net income (loss) from discontinued operations -- .3 (9.7) ----- ----- ----- Net income (loss) 7.8% 9.3% (5.0%) ----- ----- -----
The following table sets forth the Company's net sales by industry segment for the periods indicated:
Years Ended June 30, --------------------------------------- 2005 2004 2003 ---- ---- ---- (In thousands)
Wireless $64,169 $58,078 $46,629 Space & Defense 30,292 27,001 28,891 ------- ------- ------- $94,461 $85,079 $75,520 ======= ======= =======
Year Ended June 30, 2005 Compared to Year Ended June 30, 2004
Net Sales. Net sales increased $9.4 million, or 11.0%, to $94.5 million for the year ended June 30, 2005, compared to $85.1 million for fiscal 2004. This increase resulted from a $6.1 million rise in sales of Wireless infrastructure products and a $3.3 million rise 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 a result of a $6.8 million increase in sales to Nokia of Wireless custom subassemblies due to a design win in fiscal 2004. This new custom assembly contract resulted in total revenue of $9.3 million in fiscal 2005, compared to $2.9 million in fiscal 2004. Sales of standard component Wireless products were flat at $42.1 million in fiscal 2005, compared to $42.7 million in fiscal 2004, reflecting the steady annual worldwide demand for Wireless infrastructure components over the two year period.
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 products rose $3.3 million, or 12.2% in fiscal 2005 compared to the previous fiscal year. This increase consisted of a $6.4 million rise in sales of defense products, which was partially off-set by a $3.1 million decline in Space product shipments during the current fiscal year compared to the same period in fiscal 2004. Defense product sales are increasing due to the higher level of new defense business booked by the Company in fiscal 2004 and 2005, which is now in production. Defense product bookings in fiscal 2004 were $37.7 million compared to $40.9 million in fiscal 2005. Sales of Space and Defense products in fiscal 2006 are expected to range between $8.5 million and $9.0 million, quarterly, as a result of the rise in new order levels over the last two fiscal years.
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 2005 was $29.9 million (31.6% of net sales), compared to $30.0 million (35.3% of net sales) for the prior year. Gross margins as a percent of sales declined 3.7 percentage points due to a change in sales mix from higher margin standard Wireless component products to lower margin custom Wireless products. Additionally, margins were eroded by a one-time write-down of inventory at RF Power in conjunction with the closure of the Bohemia, New York facility and general production inefficiencies during the period of actual consolidation of the two operations in Salem, New Hampshire.
Marketing. Marketing expenses consist mainly of employee related expenses, commissions paid to sales representatives, trade show expenses, advertising expenses and related travel expenses. Marketing expenses increased 2.0% to $6.9 million (7.2% of net sales) for fiscal 2005, from $6.7 million (7.9% of net sales) for fiscal 2004. This increase is a result of higher commission expense caused by the sales increase, and rising travel and support costs due to the higher volume of business.
Research and Development. Research and development expenses consist of material and salaries and related overhead costs of employees engaged in ongoing research, design and development activities associated with new products and technology development. Research and development expenses were $6.3 million (6.7% of net sales) in fiscal 2005, up 7.3% from $5.9 million (6.9% of net sales) for fiscal 2004. Research and development expenditures are supporting further development of Wireless infrastructure products and consumer component opportunities.
Research and Development expenditures have increased in fiscal 2005 over fiscal 2004 levels due to the higher level of opportunities in the marketplace, which the Company has responded to by adding new product development engineering personnel over the past fiscal year. Although quarterly research and development expenditures are expected to fluctuate based on customer funded engineering requirements in our Space and Defense group, the company does not expect to reduce its current research and development efforts and is presently working on a number of new Defense and Wireless products.
General and Administrative. General and administrative expenses consist of employee related expenses, professional services, intangible amortization, travel related expenses and other corporate costs. General and administrative expenses were $8.7 million (9.2% of net sales) for fiscal 2005 compared to $8.7 million (10.3% of net sales) for fiscal 2004. General and administrative costs were flat in fiscal 2005 compared with fiscal 2004 despite increased expenditures for compliance with Sarbanes-Oxley regulations and one-time charges associated with the consolidation of the Company's RF Power and Amitron operations due primarily to the cost savings realized from that consolidation in the second half of fiscal 2005. General and administrative costs are expected to decline in fiscal 2006 as a result of further cost savings and the absence of new consolidation charges.
Restructuring. Restructuring costs which consisted of wages, health insurance payroll taxes and outplacement costs were $458,000 (0.5% of net sales) in fiscal 2005. These costs were related to the termination of 79 people in conjunction with the closure of RF Power's facility and the move of that operation to Salem, New Hampshire in December 2004. There were no restructuring costs in fiscal 2004.
Operating Income: Operating income decreased in fiscal 2005 to $7.6 million (8.0% of net sales) from $8.7 million (10.2% of net sales) for fiscal 2004. On a reporting segment basis, Wireless operating income was $2.2 million for fiscal 2005, a decline of $2.2 million from Wireless operating income of $4.4 million for fiscal 2004.
Wireless operating income fell in fiscal 2005 compared to fiscal 2004, (despite the increase in Wireless product sales) due to the $1.5 million of consolidation charges related to the facility closure, and move of the RF Power and Amitron operations to Salem, New Hampshire, and the additional $250,000 first quarter accelerated write-off of certain Amitron lease intangibles.
Space and Defense operating income rose $1.0 million in fiscal 2005 to $5.3 million compared to $4.3 million in fiscal 2004. This increase resulted from higher sales volume in fiscal 2005 compared to fiscal 2004, and better production efficiencies within the Space and Defense group in the current fiscal year.
Other Income. Other income decreased 4.7% to $1.6 million (1.7% of net sales) for fiscal 2005 from $1.7 million (2.0% of net sales) for fiscal 2004. This decrease was caused mainly by a $67,000 loss on the sale of capital equipment and a $343,000 loss on the disposal of 777,300 shares of Celeritek, Inc. common stock owned by the Company. Additionally, Company cash balances were reduced $38.0 million during fiscal 2005 due to $37.9 million used to repurchase treasury shares and the purchase of the Salem, New Hampshire facility for $4.8 million. The decrease in other income caused by the loss on Celeritek stock and the sale of equipment was partially offset by higher interest rates resulting in an increase in interest income of approximately $331,000 in fiscal 2005 compared to fiscal 2004. Interest income fluctuate based on interest rates and the level of investable cash balances.
Interest Expense. The Company does not have any long term debt and interest expense represents interest paid on a deferred obligation. Interest expense for fiscal 2005 was $29,000 (0.0% of net sales) compared to $10,000 (0.0% of net sales) for fiscal 2004.
Income Taxes: Income taxes for fiscal 2005 were $1.7 million (1.9% of net sales), representing an effective tax rate of 19.0%. This compares to income tax expense of $2.7 million (3.2% of net sales) for fiscal 2004, representing an effective tax rate of 26.1%. 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. The decrease in the effective tax rate in fiscal 2005 compared to fiscal 2004 resulted from higher foreign sales benefits due to a rise in foreign export sales levels this year.
Discontinued Operations. In July 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 liquidated the remaining net assets of that operation. The results of operations for Anaren Europe for fiscal 2003 and fiscal 2004 have been classified as discontinued operations in the statements of earnings filed as part of this Annual Report on Form 10-K.
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 products which more than offset a $1.9 million decline in sales of Space and Defense products.
The increase in sales of Wireless products was the result of a significant increase in worldwide demand for wireless base station components during fiscal 2004. This demand generated increased orders from a majority of the Company's base station infrastructure original equipment manufacturing customers. Sales of standard components and custom subassemblies rose $14.7 million, or 47% in fiscal 2004 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 fiscal 2003 as a result of the Company's efforts to eliminate unprofitable and low margin ferrite products.
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 primarily 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.
Gross Profit. 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 a $14.7 million increase in sales of higher margin standard components and custom wireless products in fiscal 2004 compared to fiscal 2003.
Marketing. 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 was the 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 experienced over fiscal 2004.
Research and 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 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.
General and Administrative. 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 fiscal year 2003. This increase resulted primarily from rising administrative costs due to compliance with 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 of Amitron's facility in North Andover, Massachusetts net of offsetting decreases resulting from fiscal 2004 cost cutting initiatives.
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 fiscal 2004 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 fiscal 2004 compared to fiscal 2003.
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 fiscal 2004 compared to fiscal 2003. Fiscal 2004 sales included more volume attributable to military programs, while sales for fiscal 2003 consisted of more profitable shipments for commercial space 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 in fiscal 2004 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.
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. During the first quarter of fiscal 2004, the Company announced its decision to dispose of its Anaren Europe operation, ceased production at the Netherlands facility and liquidated the remaining net assets. 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.
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 and have differed at times from these estimates.
The Company's accounts receivable represent those amounts which have been billed to its customers but not yet collected. The Company analyzes various factors including historical experience, credit worthiness of customers and current market and economic conditions. The allowance for doubtful accounts balance is established based on the portion of those accounts receivable which are deemed to be potentially uncollectible. Changes in judgments on these factors could impact the timing of costs recognized.
The Company states inventories at the lower of cost or market, using a standard cost methodology to determine the cost basis for the inventory. This method approximates actual cost on a first-in-first-out basis. The recoverability of inventories is based on the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology.
The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. The Company evaluates the need for valuation allowances on a regular basis and adjusts the allowance as needed. These adjustments, when made, would have an impact on the Company's financial statements in the period that they were recorded.
Intangible assets with estimable useful lives are amortized to their residual values over those estimated useful lives in proportion to the economic benefit consumed.
Long-lived assets with estimated useful lives are depreciated to their residual values over those useful lives in proportion to the economic value consumed. Long-lived assets are tested for impairment at the group level, which is usually an economic unit such as a manufacturing facility or department, which has a measurable economic output or product. Long-lived assets are tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and exceeds its fair market value. This circumstance exists if the carrying amount of the assets in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value as determined by the discounted cash flow or in the case of negative cash flow, an independent market appraisal of the asset.
Goodwill is tested annually during the fourth fiscal quarter, 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, 2005, 2004 and 2003 was $8.4 million, $15.2 million and $12.2 million, respectively. The positive cash flow from operations was due primarily to profit before depreciation in each year. In both fiscal 2005 and 2004, the positive cash flow from earnings was offset by a combined rise in receivables and inventory in each year of $3.8 million and $6.5 million, respectively. In fiscal 2003, cash flows were increased due to a combined $7.3 million decline in receivables and inventory.
Net cash provided by investing activities for fiscal 2005 was $11.9 million and consisted of net maturities of marketable debt securities of $18.1 million and proceeds from the sale of Celeritek, Inc. equity securities of $2.7 million, net of capital expenditures of $9.1 million, including $4.8 million for the new Salem, New Hampshire facility.
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 Celeritek, Inc. equity securities of $3.5 million, less $4.3 million used to fund capital equipment acquisitions. Additionally, in fiscal 2004, $1.5 million was generated by the discontinued operations in Europe from proceeds from the auction sale of surplus capital equipment. 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 2005, 2004 and 2003 was $37.7 million, $20.5 million and $5.1 million, respectively. In fiscal 2005, $225,000 was provided by the exercise of stock options and $37.9 million was expended to repurchase 3.2 million shares of the Company's common stock under the Board approved repurchase plan.
Of the fiscal 2004 amount, $1.6 million was provided by the exercise of stock options and $22.1 million was used to repurchase 1.6 million shares of the Company's common stock under a previously approved repurchase plan. And in fiscal 2003, $248,000 was generated from the exercise of stock options and $5.4 million was expended to repurchase 643,000 of the Company's common stock.
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, 2005, there were 1,774,464 shares remaining under the current Board repurchase authorization.
At June 30, 2005, the Company had approximately $82.0 million in cash, cash equivalents, and marketable securities and no debt, and has had positive operating cash flow for over nine 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:
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123R, a revision to Statement No. 123, "Accounting for Stock-Based Compensation." This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. The Company is required to adopt SFAS 123R at the beginning of the first quarter of fiscal 2006. The standard provides for a prospective application. Under this method, the Company will begin recognizing compensation cost for equity based compensation for all new or modified grants after July 30, 2005. In addition, the Company will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. At June 30, 2005, the aggregate value of unvested options, as determined using a Black-Scholes option valuation model, was $6,928,000. Upon adoption of SFAS 123R, a majority of this amount will be recognized over the remaining 1-4 year vesting period of these options.
In November 2004, the FASB published Statement of Financial Accounting Standards No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 amends the guidance in Chapter 4, "Inventory Pricing" of ARB No. 43 and clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Statement 151 requires that those items be recognized as current-period charges. Statement 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Statement 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Statement 151 is effective for the Company's 2006 fiscal year and is not expected to have a material impact on the Company's financial statements.
In May 2005, the FASB published Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, Statement 154 replaces APB No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Changes in Interim Financial Statements. The Statement changes the accounting for, and reporting of, a change in accounting principle. Statement 154 requires retrospective application to prior period's financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Statement 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 (the Company's fiscal 2007). Early application is permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005 (the Company's fiscal 2006).
Item 7a.
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, 2005, the Company had cash, cash equivalents and marketable securities of $82.0 million, all of which consisted of highly liquid investments in marketable debt securities. The marketable debt securities at date of purchase normally have maturities between one and 18 months, are exposed to interest rate risk and will decrease in value if market interest rates increase. A hypothetical decrease in market interest rate of 10.0% from June 30, 2005 rates, or 0.225%, would have reduced net income and cash flow by approximately $46,000, or $0.002 per share for the quarter. 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.
Item 8.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
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. Management's Report on Internal Control over Financial Reporting. Anaren's management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. For the fiscal year ended June 30, 2005, the Company engaged the accounting firm of Fust Charles Chambers LLP to help the Company document its internal controls over financial reporting.
A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of inherent limitations due to, for example, the potential for human error or circumvention of controls, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Anaren's management assessed the effectiveness of the Company's internal control over financial reporting as of June 30, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated framework. Based on its assessment, management believes that, as of June 30, 2005, the Company's internal control over financial reporting is effective based on those criteria.
Anaren's independent registered public accounting firm, KPMG LLP, has issued a report on the Company's assessment of its internal control over financial reporting. This report appears below.
3. Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders Anaren, Inc.:
We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that Anaren, Inc. and subsidiaries maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control - - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Anaren, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Anaren, Inc. and subsidiaries maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Anaren, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Anaren, Inc. and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended June 30, 2005, and our report dated August 31, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Syracuse, New York August 31, 2005
4. Changes in internal controls. During the period covered by this Annual Report on Form 10-K, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item is contained in the Company's proxy statement filed with respect to the 2005 Annual Meeting of Shareholders and is incorporated by reference herein. Certain information regarding executive officers of the Company required by this Item is included in Item 4A hereof.
On August 13, 2002, the Board of Directors adopted Anaren's Code of Ethics and Business Conduct, which outlines the ethical principles that provide the foundation for the Company's dealings with customers, suppliers, shareholders, the investment community and employees. The Code is applicable to all employees including officers, and to the Company's directors. The Code 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.
Item 11. Executive Compensation
Information required by this Item is contained in the Company's proxy statement filed with respect to the 2005 Annual Meeting of Shareholders and is incorporated by reference herein.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this Item is contained in the Company's proxy statement filed with respect to the 2005 Annual Meeting of Shareholders and is incorporated by reference herein.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is contained in the Company's proxy statement filed with respect to the 2005 Annual Meeting of Shareholders and is incorporated by reference herein.
Item 14.
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 2005 Annual Meeting of Shareholders and is incorporated by reference herein.
PART IV
Item 15.
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 29, 2005 with respect to its results of operations for the third quarter ended March 31, 2005. The Company filed a Current Report on Form 8-K on May 12, 2005 announcing that the Board of Directors had increased the authorization under the Company's share repurchase program. (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) 10.13 Anaren, Inc. Comprehensive Long-term Incentive Plan (16) 21 Subsidiaries of the Company 23 Consent of KPMG LLP 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications
- ---------- (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 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 herein by reference to Exhibit 4(b) to the Company's Registration Statement on Form S-8 (Registration No. 33-19618).
(7) Incorporated herein by reference to Appendix A to the Company's definitive proxy statement for its 1998 annual meeting of the shareholders (Commission File No. 0-6620), filed with the Securities and Exchange Commission on September 25, 1998.
(8) Incorporated herein by reference to Appendix B to the Company's definitive proxy statement for its 1998 annual meeting of the shareholders (Commission File No. 0-6620), filed with the Securities and Exchange Commission on September 25, 1998.
(9) Incorporated herein by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the three months ended December 31, 1997. (10) Incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the three months ended December 31, 2001. (11) Incorporated herein by reference to Appendix A to the Company's definitive proxy statement for its 2000 annual meeting of the shareholders (Commission File No. 0-6620), filed with the Securities and Exchange Commission on September 18, 2000.
(12) Incorporated herein by reference to Appendix B to the Company's definitive proxy statement for its 2000 annual meeting of the shareholders (Commission File No. 0-6620), filed with the Securities and Exchange Commission on September 18, 2000.
(13) Incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended June 30, 2002.
(14) Incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended June 30, 2002.
(15) Incorporated herein by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2004.
(16) Incorporated herein by reference to Appendix A to the Company's definitive proxy statement for its 2004 annual meeting of the shareholders (Commission File No. 0-6620), filed with the Securities and Exchange Commission on September 17, 2004.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ANAREN, INC.
/s/ LAWRENCE A. SALA ---------------------- Name: Lawrence A. Sala Title: President and Chief Executive Officer
Date: September 12, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Lawrence A. Sala President, Chief Executive Officer September 12, 2005 and Chairman of the Board, Director (Principal Executive Officer)
/s/ Joseph E. Porcello Vice President of Finance and September 12, 2005 Treasurer (Principal Financial and Accounting Officer)
/s/ Carl W. Gerst, Jr. Chief Technical Officer, September 12, 2005 Vice Chairman of the Board and Director
/s/ Herbert I. Corkin Director September 12, 2005
/s/ Dale F. Eck Director September 12, 2005
/s/ Matthew S. Robison Director September 12, 2005
/s/ David Wilemon Director September 12, 2005
/s/James Gould Director September 12, 2005
ANAREN, INC. AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2005 and 2004
(With Report of Independent Registered Public Accounting Firm Thereon)
ANAREN, INC. AND SUBSIDIARIES
Index
Page
Report of Independent Registered Public Accounting Firm 35
Consolidated Balance Sheets as of June 30, 2005 and 2004 36
Consolidated Statements of Operations for the years ended June 30, 2005, 2004, and 2003 37
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years ended June 30, 2005, 2004, and 2003 38
Consolidated Statements of Cash Flows for the years ended June 30, 2005, 2004, and 2003 39
Notes to Consolidated Financial Statements 40 - 70
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders Anaren, Inc and Subsidiaries:
We have audited the consolidated financial statements of Anaren, Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Anaren, Inc. and subsidiaries as of June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Anaren, Inc.'s internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 31, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.
Syracuse, New York August 31, 2005
/s/ KPMG LLP
ANAREN, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2005 and 2004
Assets 2005 2004 ------------- ------------- Current assets: Cash and cash equivalents $ 5,900,841 $ 23,303,263 Securities available for sale (note 5) 16,200,000 27,712,134 Securities held to maturity (note 5) 36,307,880 34,326,499 Receivables, less allowance for doubtful accounts of $213,099 and $145,500 in 2005 and 2004, respectively 14,780,146 13,812,853 Inventories (note 6) 19,403,348 16,608,055 Other receivables 1,144,680 1,040,838 Prepaid expenses 662,247 995,590 Deferred income taxes (note 19) 686,411 1,037,103 Other current assets 423,000 230,784 ------------- ------------- Total current assets 95,508,553 119,067,119
Securities available for sale (note 5) 3,500,000 9,800,000 Securities held to maturity (note 5) 20,100,547 25,313,068 Property, plant, and equipment, net (note 7) 24,983,653 21,342,554 Goodwill (note 3) 30,715,861 30,715,861 Other intangible assets, net of accumulated amortization of $2,351,725 and $1,781,080 in 2005 and 2004, respectively (notes 1 and 3) 673,241 1,243,886 ------------- ------------- Total assets $ 175,481,855 $ 207,482,488 ============= ============= Liabilities and Stockholders' Equity
Current liabilities: Accounts payable $ 6,077,313 $ 7,198,252 Accrued expenses (note 8) 2,331,885 3,092,370 Income taxes payable 1,501,088 1,331,895 Customer advance payments -- 411,486 Other current liabilities (note 10) 1,044,759 1,045,784 ------------- ------------- Total current liabilities 10,955,045 13,079,787
Deferred income taxes (note 19) 1,627,304 1,584,251 Pension and postretirement benefit obligation (notes 17 and 18) 3,253,188 2,012,992 Other liabilities (note 10) 567,755 441,190 ------------- ------------- Total liabilities 16,403,292 17,118,220 ------------- ------------- Commitments and concentrations (notes 20, 21, and 22)
Stockholders' equity: Common stock, $0.01 par value. Authorized 200,000,000 shares (notes 12 and 16); issued 26,070,804 and 25,950,704 in 2005 and 2004, respectively 260,708 259,507 Additional paid-in capital 171,333,975 171,165,180 Unearned compensation (note 14) (248,578) (95,388) Retained earnings 58,659,807 51,247,271 Accumulated other comprehensive income (loss) (note 15) (747,539) 41,110 ------------- ------------- 229,258,373 222,617,680 Less cost of 8,553,058 and 5,400,026 treasury shares in 2005 and 2004, respectively 70,179,810 32,253,412 ------------- ------------- Total stockholders' equity 159,078,563 190,364,268 ------------- ------------- Total liabilities and stockholders' equity $ 175,481,855 $ 207,482,488 ============= =============
See accompanying notes to consolidated financial statements.
ANAREN, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended June 30, 2005, 2004, and 2003
See accompanying notes to consolidated financial statements.
ANAREN, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) Years ended June 30, 2005, 2004, and 2003
See accompanying notes to consolidated financial statements.
ANAREN, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2005, 2004, and 2003
See accompanying notes to consolidated financial statements.
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Anaren, Inc. and its wholly owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Operations
The Company is engaged in the design, development, and manufacture of microwave and radio frequency components, assemblies, and subsystems which receive, process, and transmit radar, wireless communications, and other wireless signals and other microwave transmissions. Its primary products include devices and systems used in the wireless communications, satellite communications, and defense electronics markets.
(c) Revenue Recognition
The Company generally recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Payments received from customers in advance of products delivered are recorded as customer advance payments until earned. A small percentage of sales are derived from fixed-price contracts for the sale of engineering design and development efforts for space and defense electronics products. Sales and estimated profits under long-term contracts are recognized according to customer contractual milestones 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.
(d) Cash Equivalents
Cash equivalents of $3,470,927 and $20,407,660 at June 30, 2005 and 2004, respectively, consist of certificates of deposit and money market instruments having original maturities of three months or less. Cash equivalents are stated at cost which approximates fair value.
(e) Marketable Securities
The Company classifies its securities as either available-for-sale or held to maturity, as the Company does not hold any securities considered to be trading. Held to maturity securities are those debt securities for which the Company has the positive intent and the ability to hold until maturity. All other securities not included in held to maturity are classified as available-for-sale. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date.
Held to maturity securities are recorded at amortized cost adjusted for the amortization of accretion of premiums or discounts. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as accumulated other comprehensive income or loss until realized.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
The Company invests its excess cash principally in municipal bonds, commercial paper, corporate bonds and notes, and U.S. government agency securities. The Company also invests in auction rate securities. Auction rate securities have long-term underlying maturities. However, the market is highly liquid and the interest rates reset ever 7, 28, or 35 days. In prior years, the Company classified a portion of its auction rate securities as cash equivalents; however, such amounts have been reclassified as available-for-sale securities for all periods presented in this report.
A decline in the fair value of any available-for-sale or held to maturity security, that is deemed other than temporary, is charged to earnings resulting in the establishment of a new cost basis for the security, and dividend and interest income are recognized when earned.
(f) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
(g) Inventories
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis.
(h) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation of land improvements and buildings is calculated by the straight-line method over an estimated service life of 25 years. Machinery and equipment are depreciated primarily by the straight-line method based on estimated useful lives of 5 to 10 years.
(i) Goodwill
Goodwill represents the excess of cost over the fair value of the net tangible assets and identifiable intangible assets of businesses acquired.
Goodwill is tested annually for impairment at the reporting unit level in the fourth quarter of the Company's fiscal year, 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 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. No impairment losses were recorded through June 30, 2005.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(j) Long-Lived Assets
The Company accounts for long-lived assets, excluding goodwill, in accordance with the provisions of Statement 144, Impairment on Disposal of Long-Lived Assets. Statement 144 sets forth criteria to determine when a long-lived asset is held for sale. Such criteria specify that the asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets. In addition, the sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale, generally within one year. Statement 144 requires recognition of an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows. An impairment loss is measured as the difference between the carrying amount and fair value of the asset. The Company evaluates its long-lived assets if impairment indicators arise.
(k) Net Income Per Share
Basic income per share is based on the weighted average number of common shares outstanding. Diluted income per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company's case, comprise shares issuable under the stock option and restricted stock plans described in notes 13 and 14. The weighted average number of common shares utilized in the calculation of the diluted income per share does not include antidilutive shares aggregating 1,927,922, 583,582, and 1,868,680 at June 30, 2005, 2004, and 2003, respectively. The treasury stock method is used to calculate dilutive shares which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised.
The following table sets forth the computation of basic and diluted earnings per share as of June 30:
2005 2004 2003 ------------ ------------ ------------ Numerator: Earnings (loss) available to common stockholders $ 7,412,536 $ 7,957,128 $ (3,792,454) ============ ============ ============ Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 19,346,491 21,026,001 22,214,181 ============ ============ ============ Denominator for diluted earnings per share: Weighted average shares outstanding 19,346,491 21,026,001 22,214,181 Common stock options and restricted stock 485,219 781,537 487,064 ------------ ------------ ------------ Weighted average shares and conversions 19,831,710 21,807,538 22,701,245 ============ ============ ============
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(l) Research and Development Costs
Research and development costs are expensed as incurred.
(m) Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(n) Financial Instruments
The Company's financial instruments, which include cash and cash equivalents, receivables, and accounts payable, are stated at cost which approximates fair value at June 30, 2005 and 2004. The Company's available-for-sale equity securities are stated at their fair value, as determined by quoted market prices on June 30, 2005. The Company's marketable debt securities are stated at amortized cost, and their fair values, as determined by quoted market prices, are presented in note 5.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(o) Stock-Based Compensation
At June 30, 2005 the Company had a stock-option based employee compensation plan, which is described more fully in note 13. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-option based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-option based employee compensation.
Year ended June 30 ----------------------------------------------- 2005 2004 2003 ------------- ------------- ------------- Net income (loss), as reported $ 7,412,536 $ 7,957,128 $ (3,792,454) Deduct total stock option based employee compensation expense determined under fair value based method for all awards, net of related tax effects (5,523,596) (7,114,460) (5,919,733) ------------- ------------- ------------- Pro forma net income (loss) $ 1,888,940 $ 842,668 $ (9,712,187) ============= ============= ============= Earnings (loss) per share: Basic - as reported $ 0.38 $ 0.38 $ (0.17) Basic - pro forma 0.10 0.04 (0.44) Diluted - as reported 0.37 0.36 (0.17) Diluted - pro forma 0.10 0.04 (0.43)
In the aforementioned table, the stock-option-based employee compensation expense amounts for fiscal years June 30, 2004 and 2003 have been reduced by $2,216,713 and $2,828,924, respectively, to reflect prior years' forfeitures and cancellations.
Upon issuance of shares of stock pursuant to the Company's Restricted Stock Program, an unearned compensation charge equivalent to the market value of the shares on the date of grant is charged to stockholders' equity and is amortized over the related share restriction period.
(p) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(q) Recent Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, a revision to Statement No. 123, Accounting for Stock-Based Compensation. This standard requires the Company to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. The Company is required to adopt SFAS 123R at the beginning of the first quarter of fiscal 2006. The standard provides for a prospective application. Under this method, the Company will begin recognizing compensation cost for equity-based compensation for all new or modified grants after July 30, 2005. In addition, the Company will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. At June 30, 2005, the aggregate value of unvested options, as determined using a Black-Scholes option valuation model, was $6,928,000. Upon adoption of SFAS 123R, a majority of this amount will be recognized over the remaining 1-4 year vesting period of these options.
In November 2004, the FASB published Statement of Financial Accounting Standards No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 amends the guidance in Chapter 4, "Inventory Pricing" of ARB No. 43 and clarifies the accounting for abnormal amounts of idle facility expense, freight handling costs, and wasted material (spoilage). Statement 151 requires that those items be recognized as current-period charges. Statement 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Statement 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Statement 151 is effective for the Company's 2006 fiscal year and is not expected to have a material impact on the Company's financial statements.
In May 2005, the FASB published SFAS No. 154, Accounting Changes and Error Corrections. Statement 154 replaces APB No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Changes in Interim Financial Statements. The Statement changes the accounting for, and reporting of, a change in accounting principle.
Statement 154 requires retrospective application to prior period's financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Statement 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 (the Company's fiscal 2007). Early application is permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005 (the Company's fiscal 2006).
(r) Reclassifications
Certain 2004 amounts have been reclassified to conform with the 2005 presentation.
(s) Statement of Cash Flows
Included in the June 30, 2004 net cash used in investing activities is an $847,216 write-off of fully depreciated fixed assets and its related accumulated depreciation.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(2) Adoption of Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, Accounting for Restructuring Costs (SFAS 146). SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 was effective prospectively for exit or disposal activities initiated after December 31, 2002. The Company accounted for all of its exit activities initiated after December 31, 2002 under the requirements of SFAS 146 as described in note 9. The new Statement grandfathers the accounting for liabilities that a company had previously recorded under EITF 94-3.
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 148, Accounting for Stock Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123 (SFAS 148). SFAS 148 addresses the various methods of transition for voluntary change to the fair value based method of accounting for stock compensation, and amends the disclosure provisions of that statement. SFAS 148 is required for fiscal years ending after December 15, 2002. The Company has reviewed the provisions of SFAS 148 and while they have not adopted fair value accounting, they have complied with the disclosure requirements of the standard.
During 2004, the FASB issued FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2). FSP 106-2 relates to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act), signed into law in December 2003. The Act introduced a prescription drug benefit under Medicare known as Medicare Part D. The Act also established a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. During fiscal year 2005, the Company adopted the provisions of FSP 106-2. The reduction in the accumulated postretirement benefit for the subsidy related to benefits attributed to past service as of June 30, 2005 is $547,592.
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.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
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 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is 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 the Company's 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. The Company has provided the required disclosures.
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. The Company has complied with the disclosure requirements.
(3) Other Intangible Assets
Other intangible assets as of June 30 are as follows:
During fiscal year 2004, the Company entered an agreement to terminate the lease at its Amitron facility as of August 31, 2004. There was a $600,000 intangible asset associated with this lease due to favorable lease terms that existed when the Company purchased Amitron. The amortization associated with the favorable lease intangible has been accelerated such that it was fully amortized at the termination of the lease.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
Intangible asset amortization expense for the years ended June 30, 2005, 2004, and 2003 aggregated $570,645, $709,539, and $499,539, respectively. Amortization expense related to intangible assets for the next five years is as follows:
Year ending June 30: 2006 $332,869 2007 302,874 2008 37,498 2009 -- 2010 --
(4) Discontinued Operations
On July 10, 2003, the Company announced its decision to dispose of its Anaren Europe operation. After completing production of the remaining customer orders under contract during the first quarter of fiscal 2004, production at Anaren Europe ceased and the remaining net assets of that operations were liquidated through the sale of equipment via auction. The results of operations for Anaren Europe for the prior years have been reclassified as discontinued operations in the statement of operations. Components of the loss from discontinued operations of Anaren Europe for the years ended June 30 are as follows:
2005 2004 2003 ------- ----------- ----------- Net sales $ -- $ 675,340 $ 4,433,989 Income (expense) -- (1,402,737) (9,742,585) Impairment charges -- -- (2,720,626) Loss on sale of equipment -- (782,289) -- ------- ----------- ----------- Net losses from discontinued operations $ -- $(1,509,686) $(8,029,222) ======= =========== ===========
Included in losses from discontinued operations are impairment charges in the amount of $2,720,626 for the year ending June 30, 2003 attributable to certain assets of Anaren Europe, B.V. The Company performed an evaluation to determine if the fixed assets used by Anaren Europe were subject to an impairment loss as required by FAS 144. It was determined that a possible impairment existed and as a result, the Company had an independent appraisal performed of the assets of Anaren Europe. The basis of this appraisal was current market value in an arm's-length transaction between a willing buyer and seller in an unforced sale. An impairment loss of $2,720,626 was identified, which was recorded as a charge for the year ended June 30, 2003.
The Company also recorded income tax benefits related to discontinued operations of $1,800,000 and $662,268 for fiscal years ended June 30, 2004 and 2003, respectively.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(5) Securities
The amortized cost and fair value of securities are as follows:
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
Contractual maturities of marketable debt securities held to maturity at June 30 are summarized as follows:
Contractual maturities of auction rate securities available for sale at June 30 are summarized as follows:
The Company invests in auction rate securities. Auction rate securities have long-term underlying maturities; however, the market is highly liquid and the interest rates reset every 7, 28, or 35 days. In prior years, the Company classified a portion of its auction rate securities as cash equivalents; however, such amounts have been reclassified as available-for-sale securities for all periods presented in this report.
On July 11, 2002, the Company filed a Schedule 13D with the Securities and Exchange Commission to disclose that it had, through open market purchases, acquired an ownership position of approximately 6.35% of the common stock of Celeritek, Inc. The Company's original investment in Celeritek common stock averaged $8.47 a share and totaled $6.6 million. In March 2004, the Company received a non-taxable return of capital dividend of $4.50 per share reducing the Company's basis in Celeritek to $3.97 per share. On June 30, 2004 the Company's cost basis in Celeritek totaled approximately $3.1 million. The investment had a market value of $3.0 million on June 30, 2004, an increase of $777,300, for the year ended June 30, 2004, which has been recorded as a component of accumulated other comprehensive loss.
During the first half of fiscal year 2005, the remaining shares of Celeritek were sold and the Company recorded a realized loss of $342,715 that is included in other income in the Company's fiscal 2005 statement of operations. The Company used the average cost method in order to determine the realized loss.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(6) Inventories
Inventories at June 30 are summarized as follows:
2005 2004 ------------ ------------ Component parts $ 10,369,049 $ 9,136,401 Work in process 7,709,465 6,138,068 Finished goods 2,766,157 2,349,585 ------------ ------------ 20,844,671 17,624,054 Reserve for obsolescence (1,441,323) (1,015,999) ------------ ------------ Net inventories $ 19,403,348 $ 16,608,055 ============ ============
(7) Property, Plant, and Equipment
Components of property, plant, and equipment at June 30 consist of the following:
2005 2004 ------------ ------------ Land and land improvements $ 2,207,823 $ 1,874,323 Buildings, furniture, and fixtures 16,654,351 13,200,633 Machinery and equipment 51,680,883 48,213,982 ------------ ------------ 70,543,057 63,288,938 Less accumulated depreciation and amortization 45,559,404 41,946,384 ------------ ------------ $ 24,983,653 $ 21,342,554 ============ ============
(8) Accrued Expenses
Accrued expenses at June 30 consist of the following:
2005 2004 ------------ ------------ Compensation $ 1,222,891 $ 1,698,411 Commissions 620,990 386,075 Restructuring (note 9) 19,863 32,870 Health insurance 271,561 371,010 Lease buyout -- 350,000 Other 196,580 254,004 ------------ ------------ $ 2,331,885 $ 3,092,370 ============ ============
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(9) Restructuring and Impairment
Fiscal 2003 Restructuring
In September 2002, March 2003, April 2003 and June 2003, the Company recorded restructuring and other nonrecurring charges at its Anaren Europe, RF Power and Anaren Microwave, Inc. subsidiaries associated with the Company's strategic restructuring plan. The restructuring plan is designed to improve both financial results and the long-term value of the business. The restructuring charges consisted of workforce reductions and asset write-offs.
As a result of this plan, the Company recorded total pretax restructuring charges of $2,537,291 for the year ended June 30, 2003, as follows:
RF Power $ 295,706 Anaren Microwave, Inc. 498,821 ---------- Restructuring costs included in continuing operations 794,527
Anaren Europe 1,742,764 ---------- $2,537,291 ==========
Anaren Europe includes charges related to employee separation costs (91 position), and inventory write-offs. On July 10, 2003, the Company announced its decision to dispose of its Anaren Europe operation. Anaren Europe operations were discontinued during the first quarter of fiscal 2004, as described in note 4.
RF Power and Anaren Microwave, Inc. include employee separation costs (16 and 30 positions, respectively).
Additionally, the Company recognized asset impairment charges (included in discontinued operations) in the amount of $2,720,626 for the year ending June 30, 2003 attributable to certain assets of Anaren Europe, as discussed in note 4.
Reconciliation of the restructuring liability is as follows:
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
Fiscal 2005 Restructuring
RF Power Components, Inc.
On October 26, 2004, the Company announced that in order to accelerate ceramic product growth initiatives and improve operating efficiency, it had decided to consolidate its RF Power operation with the Company's Amitron operation and close RF Power's facility in Bohemia, New York. The consolidated operation, Anaren Ceramics, Inc., operates at the Company's newly acquired Salem, NH facility, which will fully accommodate the current capacity needs of the combined entity as well as significant future growth. The move of the RF Power operation to the Salem, NH facility was completed during the second quarter ended December 31, 2004. As a result of the facility closure and move, the Company recognized consolidation costs of $458,335 for severance and outplacement, $91,000 for lease cancellation (included in general and administrative expense) and $300,000 for additional inventory write-downs (included in cost of sales) during the second quarter. All of RF Power's employees were either terminated or transferred to the New Hampshire facility.
Additionally, included in general and administrative expenses for the wireless segment is a $272,000 write-down of RF Power Custom automated equipment that became impaired in the third quarter of fiscal year 2005. The remaining market value of the custom equipment was determined based upon quoted values of similar types of equipment.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(10) Other Liabilities
Other liabilities as of June 30 consist of the following:
2005 2004 ------------ ------------ Deferred compensation $ 650,064 $ 506,190 Pension liability 675,000 750,000 Other 287,450 230,784 ------------ ------------ 1,612,514 1,486,974 Less current portion 1,044,759 1,045,784 ------------ ------------ $ 567,755 $ 441,190 ============ ============
During fiscal 1998, the Company implemented a deferred compensation plan for an employee. Under the plan, the Company will pay $65,000 annually for fifteen years upon the employee's retirement or, in the event of death, to the employee's beneficiary. During fiscal 2002, the employee was deceased and the annual compensation is being paid to the former employee's beneficiary.
In fiscal year 2004, the Company began accruing for a deferred compensation agreement that the Company entered into with an employee in March 2004. Under the terms of this contract the Company has agreed to pay $250,000, annually, to this employee beginning in July 2007.
(11) Long-Term Debt
The Company had a $10,000,000 unsecured working capital revolving line of credit bearing interest at prime. The line of credit was cancelled by the Company on September 30, 2002.
Cash payments for annual fees relating to maintaining the line of credit were $9,375 during fiscal 2003.
(12) Common Stock
On December 2, 2000, the Company's shareholders approved an amendment to the Certificate of Incorporation to increase the total number of shares of common stock from 25,000,000 to 200,000,000.
(13) Stock Option Plans
Under the Company's Key Employee Incentive Stock Option Plan (Key Employee Plan), options are granted at a price not less than fair market value of shares at the date of grant, become exercisable 20% six months from the date of grant and 20% per year thereafter, and must be exercised within ten years of the date of grant.
In November 2000, the Company established the Company-Wide Stock Option Plan (Company-Wide Plan). All Company employees are eligible to participate in the Company-Wide Plan in any given fiscal year, except for employees who have been granted options under the Key Employee Plan in any given fiscal year. Options are granted at a price not less than the fair market value of shares at the date of grant, become exercisable 36 months from the date of grant, and must be exercised within five years of the date of grant.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
The Company also has a Nonstatutory Stock Option Plan (NSO) which allows for the granting of options to Board members and nonemployees. Under the Plan, shares of common stock were reserved for the granting of options at prices to be determined by the Board (options granted to Board members may not be less than the fair market value on the date of grant). Options become exercisable immediately and must be exercised within five years of the date of grant.
In November 2004, the shareholders approved the amendment and restatement of the Company's three existing stock option plans, which combined these plans under one single consolidated equity compensation plan, the Anaren, Inc. Comprehensive Long-Term Incentive Plan. The effect of the amendment and restatement was to combine the separate shares pools available for grant under the three existing plans into a single grant pool, expand the type of equity-based awards the Company may grant and extend the term of the combined plan to October 31, 2014. Under the restated plan, the Company may issue incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, performance shares, and performance units. At June 30, 2005, the Company had 1,652,318 shares available for grant under the restated plan.
Information for the three years ended June 30, 2005 with respect to these plans are as follows:
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
The following table summarizes significant ranges of outstanding and exercisable options at June 30, 2005:
Options outstanding Options exercisable - ---------------------------------------------------------- ------------------- Weighted Weighted Weighted Range of average average average exercise remaining exercise exercise prices Shares life in years price Shares price - ---------------- --------- ------------- -------- --------- -------- $ 1.00 - $5.00 182,800 1.48 $ 2.45 182,800 $ 2.45 $ 5.01 - $15.00 2,207,250 5.70 11.42 1,212,390 10.62 $ 15.01 - $40.00 198,630 5.80 22.22 149,598 20.37 $ 40.01 - $65.00 194,100 4.93 54.48 164,400 53.11 --------- --------- 2,782,780 1,709,188 ========= =========
The per share weighted average fair value of stock options granted during fiscal years 2005, 2004, and 2003 was $7.79, $10.78, and $6.48, respectively. The fair value of options at the date of the grant was estimated using the Black-Scholes model with the following assumptions for the respective fiscal year:
2005 2004 2003 ------ ------ ------ Expected option life - key employee plan 5 5 5 Expected option life - company-wide plan 3 3 3 Weighted average risk-free interest rate 3.22% 3.15% 3.20% Weighted average expected volatility 87.57% 98.00% 89.00% Expected dividend yield -- -- --
(14) Restricted Stock Program
On November 17, 2004, the Company issued a new grant of 23,500 shares of restricted stock. The per-share price of the grant was $13.60. The shares of restricted stock vest after a 36-month period.
As of June 30, 2005, 2004, and 2003, the Company has issued shares aggregating 23,500, 21,600, and 21,600, respectively, under its Restricted Stock Program. During fiscal year 2005, there were 1,900 shares forfeited and 19,700 shares that matured. There were 5,888 shares forfeited and 75,488 shares that matured during 2003. The shares of restricted stock vest after a period of 36 and 48 months. For the years ended June 30, 2005, 2004, and 2003 the Company recognized compensation expense associated with the lapse of restrictions (net of forfeitures) aggregating $65,710, $286,200, and $451,331, respectively.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(15) Accumulated Other Comprehensive Income (Loss)
The cumulative balance of each component of accumulated other comprehensive income (loss) is as follows:
(16) Shareholder Protection Rights Plan
In April 2001, the board of directors adopted a Shareholder Protection Rights Plan. The plan provides for a dividend distribution of one right on each outstanding share of the Company's stock, distributed to shareholders of record on April 27, 2001. The rights will be exercisable and will allow the shareholders to acquire common stock at a discounted price if a person or group acquires 20% or more of the outstanding shares of common stock. Rights held by persons who exceed the 20% threshold will be void. In certain circumstances, the rights will entitle the holder to buy shares in an acquiring entity at a discounted price. The board of directors may, at its option, redeem all rights for $0.001 per right at any time prior to the rights becoming exercisable. The rights will expire on April 27, 2011, unless earlier redeemed, exchanged or amended by the Board.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(17) Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan covering substantially all of its employees. Effective August 15, 2000 the plan was closed for new participants. Benefits under this plan generally are based on the employee's years of service and compensation. The following table presents the changes in the defined benefit pension plan and the fair value of the Plan's assets for the years ended June 30:
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
Components of net periodic pension cost for the years ended June 30 are as follows:
Plan Assets
Plan's Investment Policy: Investments shall be made pursuant to the following objectives: 1) preserve purchasing power of plan's assets base adjusted for inflation; 2) provide long term growth; 3) avoid significant volatility. Asset allocation shall be determined based on a long term target allocation having 30% of assets invested in Large-Cap domestic equities, 12% in mid-cap domestic equities, 12% in small-cap domestic equities, 8% in international equities, and 40% in the broad bond market, with little or none invested in cash. Both investment allocation and performance shall be reviewed periodically.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
Determination of Assumed Rate of Return
The Corporation has selected the assumed rate of return based on the following:
Expected compound Target annualized Expected percentage 5-year weighted allocation (index) return average return ---------- -------------- -------------- Large-cap stocks 30.00% 11.30% 3.39% Mid-cap stocks 11.00 12.80 1.41 Small-cap stocks 11.00 13.10 1.44 International common stocks 8.00 10.40 0.83 Broad bond market 40.00 4.70 1.88 ------ ---- Total 100.00% 8.95% ====== ====
The Company estimated investment expenses of approximately 1% of the portfolio annually.
Expected Contributions
Expected contributions for fiscal 2006 are $675,000.
Estimated Future Benefit Payments
The following estimated benefit payments, which reflect future service, as appropriate, are expected to be paid:
July 1, 2005 - June 30, 2006 $ 402,899 July 1, 2006 - June 30, 2007 405,260 July 1, 2007 - June 30, 2008 472,452 July 1, 2008 - June 30, 2009 483,474 July 1, 2009 - June 30, 2010 521,588 Years 2010-2014 2,981,761
The Company maintains a voluntary contributory salary savings plan to which participants may contribute up to 15% of their total compensation. The Company's matching contribution is 75% of the participants' contribution up to a maximum of 5% of the participants' compensation. During fiscal 2005, 2004, and 2003, the Company contributed $530,626, $445,766, and $568,721 respectively, to this plan.
The Company maintains a profit sharing plan which provides an annual contribution by the Company based upon a percentage of operating earnings, as defined. Eligible employees are allocated amounts under the profit sharing plan based upon their respective earnings, as defined. Contributions under the plan were approximately $176,000, $258,947, and $240,500 in fiscal 2005, 2004, and 2003, respectively. While the Company intends to continue this plan, it reserves the right to terminate or amend the Plan at any time.
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(18) Postretirement Benefits
The Company provides medical coverage for current and future eligible retirees of the Company plus their eligible dependents. Employees generally become eligible for retiree medical coverage by retiring from the Company after attaining at least age 55 with 15 years of service (active employees at June 27, 1993 were eligible by retiring after attaining at least age 55 with 10 years of service). Retirees at June 27, 1993 pay approximately $30 per month for health care coverage and the Company is responsible for paying the remaining costs. For this group, any increase in health care coverage costs for retired employees will be shared by the Company and retirees on a fifty-fifty basis, while any increase in coverage costs for retiree dependents will be totally paid by the retirees. For eligible employees retiring after June 26, 1993, the Company contributes a fixed dollar amount towards the cost of the medical plan. Any future cost increases for the retiree medical program for these participants will be charged to the retiree.
The following table presents the changes in the postretirement benefit obligation and the funded status of the Plan at June 30:
Net periodic postretirement benefit cost includes the following components:
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 5.25%, 6.25%, and 6.00%, at the end of fiscal 2005, 2004, and 2003, respectively. For measurement purposes, the annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed to be 5% for 2005, 2004, and 2003. The health care cost trend rate assumption may have a significant effect on the amounts reported. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1% increase 1% decrease ----------- ----------- Effect on total of service and interest cost components $ 19,246 $ (16,995) Effect on postretirement benefit obligation 247,000 (218,169)
Estimated Future Benefit Payments
Shown below are the expected gross benefit payments (including prescription drug benefits) and the expected gross amount of subsidy receipts.
Gross Subsidy payments receipts ---------- --------- 2006 $ 193,340 (17,501) 2007 204,568 (39,381) 2008 199,315 (48,950) 2009 214,433 (53,689) 2010 216,942 (59,938) 2010-2015 1,127,470 (402,612)
(Continued)
ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
(19) Income Taxes
The following table presents the Domestic and Foreign components of income (loss) before income taxes and discontinued operations and the expense (benefit) for income taxes as well as the taxes charged or credited to stockholders' equity:
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
A reconciliation of the expected consolidated income tax expense, computed by applying the U.S. Federal corporate income tax rate of 34% to income before income taxes and discontinued operations, to income tax expense, is as follows:
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at June 30 are presented below:
2005 2004 ------------ ------------ Deferred tax assets: Inventories $ 800,096 $ 535,459 Deferred compensation 362,833 280,050 Retirement benefits 554,509 396,046 Postretirement benefits 665,179 592,204 Restricted stock 26,988 398,772 Nondeductible reserves 94,019 418,548 Net unrealized loss on investments -- 48,311 Federal and state tax attribute carryforwards 1,073,508 1,268,463 Foreign and state net operating loss carryforwards 184,748 327,574 ------------ ------------ Gross deferred tax assets 3,761,880 4,265,427
Valuation allowance (368,400) (375,884) ------------ ------------ Net deferred tax assets 3,393,480 3,889,543 ------------ ------------ Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation (2,361,348) (2,647,279) Intangible assets including goodwill (1,973,025) (1,789,412) ------------ ------------ Net deferred tax liabilities (4,334,373) (4,436,691) ------------ ------------ Net deferred taxes $ (940,893) $ (547,148) ============ ============
2005 2004 ------------ ------------ Presented as: Current deferred tax asset $ 686,411 $ 1,037,103 Long-term deferred tax liability (1,627,304) (1,584,251) ------------ ------------ $ (940,893) $ (547,148) ============ ============
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
At June 30, 2005, the Company has a valuation allowance of $368,400 with respect to capital loss carryforwards and foreign and state net operating loss carryforwards, representing a decrease of $7,484 from June 30, 2004.
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
At June 30, 2004, the Company had unrealized losses on securities available-for-sale of $127,135 and a related valuation allowance of $48,311. During 2005, the securities were sold resulting in $342,715 of losses characterized for income tax purposes as capital losses, which may only be used to offset capital gains and expire in 2010. As a result of these limitations, at June 30, 2005 the Company has a valuation allowance of $130,231 with respect to these losses.
The Company has state net operating loss carryforwards of $2,478,742, which begin to expire in 2007. At June 30, 2005, the Company had a valuation allowance of $139,057 with respect to these losses representing an increase of $96,613 from June 30, 2004. As a result of relocating its Amitron operation from Massachusetts to New Hampshire, management believes it is more likely than not that the Company will not realize these deferred tax benefits.
The Company's subsidiary in China has net operating loss carryforwards of $304,609. At June 30, 2005 the Company has a valuation allowance of $99,112 with respect to the net operating loss carryforwards, representing a decrease of $186,017. The subsidiary will be eligible for a tax holiday for five years beginning with the first year taxable income exceeds the net operating loss carryforwards. The tax benefit varies during the five-year holiday once it begins.
Based upon the level of historical taxable income and projections for future taxable income, management believes it is more likely than not the Company will realize the benefits of the deferred tax assets, net of the existing valuation allowance.
At June 30, 2005, the Company has Federal and State tax attribute carryforwards of $1,064,083, the majority of which expire at various dates from 2010 through 2025. Cash payments (receipts) for income taxes (net of refunds) were $890,601, $(1,903,464), and $678,329 in fiscal 2005, 2004, and 2003, respectively.
(20) Segment and Related Information
(a) Segments
The Company operates predominately in the wireless communications, satellite communications, and space and defense electronics markets. The Company's two reportable segments are the Wireless Group and the Space and Defense Group. These segments have been determined based upon the nature of the products and services offered, customer base, technology, availability of discrete internal financial information, homogeneity of products, and delivery channel, and are consistent with the way the Company organizes and evaluates financial information internally for purposes of making operating decisions and assessing performance.
The wireless segment designs, manufactures, and markets commercial products used mainly by the wireless communications market. The space and defense segment of the business designs, manufactures, and markets specialized products for the radar and satellite communications markets. The revenue disclosures for the Company's reportable segments depict products that are similar in nature.
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
The following table reflects the operating results of the segments consistent with the Company's internal financial reporting process. The following results are used in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments:
* Segment assets primarily include receivables, and inventories. The Company does not segregate other assets on a products and services basis for internal management reporting and, therefore, such information is not presented. Assets included in corporate and unallocated principally are cash and cash equivalents, marketable securities, other receivables, prepaid expenses, deferred income taxes, and property, and plant and equipment not specific to business acquisitions and assets associated with discontinued operations of Anaren Europe.
** Depreciation expense related to acquisition - specific property, plant, and equipment is included in the segment classification of the acquired business. Depreciation expense related to nonbusiness combination assets is allocated departmentally based on an estimate of capital equipment employed by each department. Depreciation expense is then further allocated within the department as it relates to the specific business segment impacted by the consumption of the capital resources utilized. Due to the similarity of the property, plant, and
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
equipment utilized, the Company does not specifically identify these assets by individual business segment for internal reporting purposes.
*** Amortization of intangible assets arising from business combinations, and patent amortization, is allocated to the segments based on the segment classification of the acquired or applicable operation.
(b) Geographic Information
Net sales by geographic region are as follows:
(c) Customers
In 2005, sales to one customer totaled approximately $13,023,652 (related to the wireless segment) and exceeded 10% of consolidated net sales. In 2004, sales to two customers totaled approximately $21,800,000, ($12,100,000 related to the space and defense electronics segment and $9,700,000 related to the wireless segment) and exceeded 10% of consolidated net sales. In 2003, sales to one customer (approximately $9,427,000, related to the space and defense electronics segment) exceeded 10% of consolidated net sales.
(21) Commitments
The Company is obligated under contractual obligations and commitments to make future payments such as lease agreements and contingent commitments. The Company's obligations and commitments are as follows:
Year ending June 30: 2006 $ 582,450 2007 582,450 2008 570,851 2009 536,053 2010 536,053 Thereafter 1,833,484 ----------- 4,641,341
Less sublease income 1,131,948 ----------- $ 3,509,393 ===========
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
Rent expense for the years ended June 30, 2005, 2004, and 2003 was $760,410, $874,965, and $932,033, respectively. Rent expense for fiscal 2005, 2004, and 2003 was offset by sublease income of $485,121, $430,311, and $399,930, respectively.
(22) Concentrations
The Company and others, which are engaged in supplying defense-related equipment to the United States Government (the Government), are subject to certain business risks peculiar to the defense industry. Sales to the Government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad, and other factors. Sales to the Government accounted for approximately 22%, 26%, and 20% of consolidated net sales in fiscal 2005, 2004, and 2003, respectively. While management believes there is a high probability of continuation of the Company's current defense-related programs, it is attempting to reduce its dependence on sales to the Government through development of its commercial electronics business.
(23) Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial information for the years ended June 30, 2005 and 2004:
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ANAREN, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2005, 2004, and 2003
Income per share amounts for each quarter are required to be computed independently. As a result, their sum does not necessarily equal the total year income per share amounts.