Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
______TO_______
COMMISSION FILE NUMBER 1-9125
AMERICAN TECHNICAL CERAMICS CORP.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2113382
---------------------------- ----------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17 STEPAR PLACE, HUNTINGTON STATION, NY 11746
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 622-4700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE COMPANY (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE COMPANY
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE COMPANY IS AN ACCELERATED FILER AS
DEFINED IN EXCHANGE ACT RULE (2b-2).
YES [ ] NO [X]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE COMPANY'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
AS OF THE LAST BUSINESS DAY OF THE COMPANY'S MOST RECENTLY COMPLETED SECOND
FISCAL QUARTER ENDED DECEMBER 31, 2003, THE AGGREGATE MARKET VALUE OF THE
COMPANY'S COMMON STOCK (BASED UPON THE CLOSING SALES PRICE OF THE COMPANY'S
COMMON STOCK ON THE AMERICAN STOCK EXCHANGE ON SUCH DATE) HELD BY NONAFFILIATES
OF THE COMPANY WAS APPROXIMATELY $27,718,799. (FOR PURPOSES OF THIS REPORT, ALL
OFFICERS AND DIRECTORS HAVE BEEN CLASSIFIED AS AFFILIATES, WHICH CLASSIFICATION
SHALL NOT BE CONSTRUED AS AN ADMISSION OF THE AFFILIATE STATUS OF ANY SUCH
PERSON.)
ON SEPTEMBER 13, 2004, THE COMPANY HAD OUTSTANDING 8,271,418 SHARES OF
COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE COMPANY'S PROXY
STATEMENT RELATING TO ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON NOVEMBER
17, 2004 ARE INCORPORATED INTO PART III OF THIS REPORT BY REFERENCE.
PART I
ITEM 1. BUSINESS
GENERAL
The Company was incorporated in New York in 1966 as Phase Industries, Inc.,
and changed its name to American Technical Ceramics Corp. in June 1984. The
Company was merged into a Delaware corporation in 1985 in order to change its
jurisdiction of incorporation. Unless the context indicates otherwise,
references to the Company herein include American Technical Ceramics Corp., a
Delaware corporation, and its subsidiaries, all of which are wholly-owned.
The Company designs, develops, manufactures and markets
RF/Microwave/Millimeter-Wave ceramic capacitors, thin film products and other
passive components. The Company's products are focused primarily in the high
reliability market for ultra-high frequency ("UHF") and microwave applications,
including wireless electronics, medical electronics, semiconductor equipment,
satellite equipment and fiber optics. Capacitors function within electronic
circuits by storing and discharging precise amounts of electrical power. The
Company believes that it is a leading manufacturer of multilayer capacitors
("MLCs") for UHF and microwave applications. Selling prices for the Company's
MLCs typically range from $.10 to $7.50 or higher, whereas selling prices for
commodity-type MLC units typically range from $.005 to $.05. Thin film products
are ceramic substrates on which circuit patterns are printed by means of thin
film processes, and are used by customers as building blocks in electronic
circuits. Management believes the Company operates in only one industry segment
- - the electronic components industry.
The slowdown in the technology and telecommunications sectors that began in
the first half of calendar year 2001, combined with the weakness in the global
economy, continued to impact the Company's industry in fiscal year 2004. As the
year progressed, the markets served by the Company's products began to show
signs of a recovery from the extended downturn. The Company experienced
substantial increases in sales and bookings in the second half of fiscal year
2004. Bookings from customers in all of the Company's largest markets increased
during this period.
PRODUCTS
The Company's traditional line of MLCs are available in predominantly four
physical sizes designated "A" (.055 inch cube), "B" (.110 inch cube), "C" (.250
inch cube) and "E" (.380 inch cube); in three types of dielectrics: low-loss
porcelain (the 100 series), zero temperature coefficient (the 700 series) and
high dielectric constant (the 200 series); and in a variety of capacitance
values. The 100 series, the Company's basic product line, is widely used in
microwave equipment. The 700 series, because of its lower temperature
coefficient, is used in tuning circuits in UHF/Microwave and lower frequency
applications. The 200 series has high packaging density and is used in
microcircuits where high capacitance value is needed in a small space. The
Company's traditional line of MLCs is one of two product lines that accounts for
more than 10% of the Company's consolidated revenue, accounting for
approximately 69%, 72% and 70%, of the Company's revenues in fiscal years 2004,
2003 and 2002, respectively.
The Company's MLCs are generally designed for critical performance
applications, and are characterized by a high degree of reliability, low power
dissipation and ruggedness. The MLCs can be broadly classified as either
commercial or "hi-rel", based primarily upon the amount of testing involved. All
are subject to precise measurement of capacitance, dissipation factor and
insulation resistance. The Company's products are used in commercial and
military applications, including wireless cellular and personal communications
systems (PCS), medical imaging (i.e., magnetic resonance imaging), radio
frequency power sources for semiconductor manufacturing, satellite
communications, numerous aerospace systems, including radar and electronic
warfare, and certain high-speed digital processing equipment.
Approximately 92%, 89% and 88% of the Company's sales in fiscal years 2004,
2003 and 2002, respectively, were to commercial (i.e., applications other than
hi-rel) customers. For fiscal years 2004, 2003 and 2002, the Company estimates
that approximately 8%, 11% and 12% of the Company's sales, respectively, were
sales of hi-rel products. See
2
"Item 1. BUSINESS -- CUSTOMERS AND MARKETING -- FOREIGN SALES" and Note 9 of
Notes to Consolidated Financial Statements.
Hi-rel MLCs are principally utilized in applications such as satellites
(including commercial communications satellites), high performance military
aircraft, spacecraft and missiles, and other defense applications such as radar
and electronic countermeasures. The Company produces its hi-rel MLCs to precise
customer specifications and subjects each hi-rel MLC to a battery of performance
and environmental tests. Such performance tests measure capacitance, dissipation
factor, insulation resistance and dielectric withstanding voltage. The
environmental tests are either designated by customers or specified by the
military and include temperature shock tests, humidity tests and tests of life
expectancy at elevated temperature and voltage levels.
For commercial applications, the Company produces MLCs to precise
performance specifications similar to hi-rel MLCs, individually tests them for
certain electrical performance characteristics and conducts additional tests on
samples from production lots. However, the Company does not subject all
commercial MLCs to environmental tests.
The Company has historically pursued the high-performance MLC market in
which its products are typically applied in the manufacture of high-value
capital equipment and which has commanded higher unit selling prices. The MLCs
required for many of these applications constitute a small part of the circuit
cost and, because performance and reliability requirements are stringent and the
cost of component failure high, customers have been willing to pay the price
premium associated with higher performance products such as those the Company
makes. In recent years, the Company has further automated its manufacturing
processes to enable it to produce certain of its existing MLCs for the medium -
priced niche market driven by wireless base-station infrastructure applications.
The Company markets its 600 series products to higher volume markets. These
products are targeted toward the high-performance, lower-priced segment of the
wireless industry. The Company manufactures predominantly three physical sizes
designated "S" (.06" x .03" rectangle), "L" (.04 x .02 rectangle), and "F" (.08
x .05 rectangle). These are lower-priced (approximately two-thirds the price of
the lowest-priced comparable part) than the Company's traditional MLC's, and
uses a newer ceramic proprietary formulation developed by the Company to
optimize performance for cellular and PCS operating frequencies. Sales from this
product line amounted to approximately 9%, 6% and 4% of the Company's revenues
in fiscal years 2004, 2003 and 2002, respectively.
The Company also offers specialized capacitors designed to perform at
frequencies higher than the useful range of typical microwave MLCs. The
Company's Microcap(R), a single layer ceramic capacitor, was developed to meet
certain applications where small size is critical and which operate at
frequencies extending higher than those for which MLCs are typically chosen.
Manufactured and sold in both hi-rel and commercial versions, these products are
used in wideband wireless data communications, satellite communications,
military systems and other microwave and millimeter-wave applications. Another
product tailored to the same market, the 500S Broadband Microwave Capacitor
(BMC), is based on a patented construction designed to be compatible with
customers' high-volume surface-mount assembly technologies. Sales of these two
product types combined amounted to approximately 3% of the Company's revenues in
fiscal years 2004, 2003 and 2002.
The Company has diversified its product line through the development of
custom product capability based on thin film technologies. The Company produces
metallized circuits and passive components on high-quality ceramic substrates to
customers' drawings and specifications. Thin film layers deposited on the
ceramic substrate may consist of a variety of materials with specific
conductive, resistive, capacitive, and other properties enabling the build-up of
the desired circuit pattern. As with a typical circuit board, the customer may
then attach discrete components and chips to complete the circuit. Thin film
products are used by the Company's customers in a broad range of applications,
including microwave components, fiber optic repeaters and high-density packaging
of devices, typically where requirements for high reliability, small size and
dimensional precision are paramount. In fiscal years 2004, 2003 and 2002, thin
film sales represented approximately 14%, 13% and 17% of the Company's revenues,
respectively.
3
In June 2000, the Company introduced a line of high power, passive
resistive products. In fiscal year 2002, the Company added thin film resistor
manufacturing capability to its resistive products line. Typically, thin film
resistors offer a higher degree of reliability and are better able to handle
power than their thick film counterparts. The Company's products, including
standard resistors, terminations, attenuators and other customized products,
consist of resistive and conductive layers deposited on a substrate of aluminum
nitride, a base material chosen for its high thermal conductivity and its
non-toxic properties. High power resistive products are used in many of the same
types of equipment as the Company's capacitor products. Other applications for
these products, which reflect an expansion of the Company's customer base,
include RF and microwave products, including power amplifiers, up and down
converters, and high power combiner/dividers. The markets for these products
include the wireless and telecommunication markets, including base station and
satellite communications, and a broad range of medical, military and other
commercial applications. Resistive product sales represented less than 1% of the
Company's revenues in fiscal years 2004, 2003 and 2002.
Since fiscal year 2002, the Company has offered on a limited basis certain
products based upon a new high-density electronic packaging technology for radio
frequency (RF) and microwave frequency broadband applications. This technology,
commonly referred to as Low Temperature Co-fired Ceramic ("LTCC"), is based on
high performance dielectric ceramic materials, some manufactured by the Company
and others purchased from leading electronic materials manufacturers. The
Company markets this technology under the name Co-fired Ceramic Packaging
("CCP"). Traditional RF and microwave circuits have been limited in size and
performance by the use of only two dimensions to incorporate all RF elements and
passive components, such as inductors, capacitors and resistors. LTCC technology
enables the user to design circuits in the third dimension with the integration
of the RF elements and passive components in the body of the electronic circuit.
LTCC technology also provides the ability to design circuits with integrated RF
components such as couplers, power dividers/combiners, filters and impedance
transformers, and passive devices. CCP sales accounted for less than 1% of the
Company's revenues in fiscal years 2004, 2003 and 2002. See "Item 1. BUSINESS --
MANUFACTURING and -- RESEARCH AND DEVELOPMENT."
MANUFACTURING
The manufacturing process for MLCs involves four primary stages. The first,
or "white room" stage, includes tape casting, multi-layer lamination, dicing and
firing of ceramic chips. In this phase, layers of electrically conducting
material are printed onto ceramic tape in patterns, which eventually form the
electrodes of the capacitor. The screen-printing technology used for the
printing of such layers is referred to as "thick film". In the second, or
"termination" stage, the ceramic chips are coated with silver. In the third, or
"finishing" stage, the parts are then customized to specific order requirements
for commercial applications. This stage includes, but is not limited to, chip
plating, soldering of leads, laser marking and chip packaging. The chips are
tested electrically and inspected throughout the entire process. If the
customer's specifications call for a higher level of performance assurance, the
parts are put through a fourth stage, the hi-rel stage, where additional testing
is performed.
The Company currently manufactures MLCs at its facilities in Huntington
Station, New York and Jacksonville, Florida. Its primary MLC manufacturing site
is Huntington Station, consisting of three manufacturing facilities which
aggregate approximately 53,000 square feet. Two of these facilities house the
Company's state-of-the-art chip fabrication operations. These facilities are
designed to provide optimum control of the Company's manufacturing processes and
product quality, while substantially increasing its output capability.
In August 2000, the Company purchased another building next to its existing
facilities in New York. The facility is currently being converted to add 20,000
additional square feet of production and production support space to the New
York facility complex to support capacity expansion. See "Item 2. PROPERTIES."
The Company manufactures its 500 and 600 series capacitors at its facility
in Jacksonville, Florida. During fiscal years 2003 and 2004, the Company
expanded the offering of the 600 series to include an additional case size each
year to better serve the EIA (Electronic Industry Association) product
standardization use by its customers. The Jacksonville facility is also the site
of manufacture for the Company's thin film, Microcap(R) SLC, resistor and CCP
4
product lines, and serves as the Company's new product technology center. The
Jacksonville facilities aggregate over 99,000 square feet of space with 37,000
square feet committed to custom circuit operations.
Portions of the Jacksonville facility have been redesigned over the last
few years in order to accommodate what the Company refers to as its "Factory of
the Future". Utilizing recently developed and acquired materials, processes and
equipment, the Company can manufacture MLC products at this facility at higher
degrees of precision and control and at a substantially lower cost with
accompanying high output. Moreover, the manufacturing operations at this
facility are flexible, enabling the Company to produce ceramic structures of a
wide variety of sizes, shapes and internal configurations.
As differentiated from the "thick film" technology used in MLC
manufacturing, the manufacture of thin film circuits involves a method for the
deposition of layers of conducting and other materials using "sputtering"
technology. Unlike the manufacture of capacitors, where all products flow
through the same manufacturing sequences, manufacturing processes for custom
thin film products vary significantly in accordance with each customer's
specifications.
Utilizing its core competencies in the manufacture of MLC devices, over the
past two years the Company has developed the capability to manufacture
microelectronic ceramic circuits. During fiscal year 2004, the Company has been
using this technology in connection with its CCP product line. Similar to
commercial printed circuit board manufacturing, the Company can manufacture
multiple layer boards with layer-to-layer interconnects and circuitry on each
layer in a ceramic structure. The CCP product line, much like the Company's thin
film product line, operates in a build-to-order format. The Company typically
receives drawings for custom devices and packages from its customers and builds
products to their specification, utilizing multiple layer circuit technology.
Microcap(R) SLCs, resistive products and BMCs all utilize various
combinations of the production methods described in the preceding paragraphs.
The manufacture of each of these product lines involves dedicated equipment in
addition to the equipment used in connection with the manufacture of the product
lines previously discussed.
In order to realize the potential of its expanding and diversifying product
lines and to more fully integrate all facets of its operations, the Company is
in the process of replacing its existing information system with a modern
Enterprise Resource Planning System. Utilizing commercially available
information technology, the new system is intended to provide improved
functionality and efficiency for better planning, control and responsiveness.
During fiscal year 2002, the Company implemented the first phase of this system
and is on schedule to implement the second phase during fiscal year 2005.
The Company utilizes a wide variety of specialized equipment for the
fabrication, handling and testing of its products, including equipment that it
has designed and constructed. The Company considers its capability to create its
own unique equipment solutions tailored to the particular needs of its product
lines and technologies to be a competitive advantage.
Before full market introduction of a new product, the Company generally
establishes a production line for the product and manufactures substantial
quantities to evaluate and verify its ability to consistently meet quality and
performance standards. Such efforts involve the dedication of equipment,
materials and labor, and, to the extent that these efforts do not result in
saleable product, all costs are expensed. During fiscal years 2001 and 2002, the
Company's resistive product line was in this phase of development. During fiscal
year 2003, the Company completed development of this product line. Resistive
products are currently being shipped to various customers and are qualified at
major commercial users. During fiscal years 2002 and 2003, the Company's CCP
product line was in the development phase.
To complement its own manufacturing efforts and to provide a wide variety
of product offerings to its customers, the Company has from time to time entered
into arrangements with other manufacturers to produce certain products to the
Company's specifications. These products accounted for approximately 3% of the
Company's consolidated revenues in fiscal year 2004 and 5% in each of fiscal
years 2003 and 2002.
5
The historical pattern of industry price declines has largely prevented MLC
producers, including the Company, from increasing prices and has forced the
Company and competitors to rely on advances in productivity and efficiency in
order to improve profit margins. Accordingly, the Company continuously looks to
improve the production yields and efficiency of its manufacturing processes. The
Company conducts continuous improvement programs targeted at streamlining
manufacturing processes and increasing yields, and has established statistical
process control techniques for maintaining key process steps within specified
bounds and providing data to support continuous improvement. For additional
information with respect to yields and efficiencies, see "Item 1. BUSINESS --
RESEARCH AND DEVELOPMENT".
During fiscal year 2002, the Company's manufacturing facilities were
operated under ISO-9002 registration. In fiscal year 2003, the Company attained
ISO-9001 status, a higher level certification which includes product design
capability. In addition, in fiscal year 2003, the Company's European sales and
distribution office achieved ISO-9001:2000 certification status. During fiscal
year 2004, the Company established an Environmental Management System in
accordance with ISO-14001 requirements and is planning to pursue ISO-14001
registration during fiscal year 2005.
CUSTOMERS AND MARKETING
The Company markets its products primarily to customers in the wireless
infrastructure, fiber optic telecommunications, military, medical, semiconductor
equipment manufacturing and aerospace industries. The customers included within
these industries are manufacturers of microwave, high frequency and fiber optic
systems, subsystems and equipment, including original equipment manufacturers
(OEMs) and suppliers thereto, and government contractors and subcontractors.
Most of the Company's products are used in the manufacture of capital equipment.
The Company promotes its products through specialized trade shows, industry
trade journal advertisements, a site on the Internet's World Wide Web and
catalog direct mail programs. In fiscal year 2000, the Company started taking
orders, on a limited basis, via its web site. In fiscal year 2004, the Company
increased the list of products available for sale via its web site and plans to
further expand that offering in fiscal year 2005.
The Company shipped to over 2,000 customers in fiscal year 2004 as compared
to approximately 2,100 and 1,800 customers in fiscal years 2003 and 2002,
respectively. The top ten customers combined accounted for approximately 30% of
net sales in fiscal year 2004 and 29% in each of fiscal years 2003 and 2002. No
customer accounted for more than 10% of the Company's net sales in fiscal years
2004 and 2003. Sales to various divisions of General Electric Company, a major
medical electronics OEM, accounted for approximately 10% of the Company's net
sales in fiscal year 2002.
The Company is a qualified producer of capacitors with the Defense
Logistics Agency of the United States Department of Defense. This qualified
status covers several varieties and types of capacitors. Maintenance of its
qualified producer status is critical in order for the Company to continue to
sell its hi-rel military product line. To date, the Company has not encountered
any difficulty in maintaining its status as a qualified producer, and the
Company believes it is presently the only supplier with such qualification for
some of these product types.
The Company typically sells its products through a combination of logistics
arrangements and a large number of individual purchase orders. Certain
individual purchase orders are subject to pricing agreements. Neither pricing
agreements nor logistics arrangements are firm purchase orders, but each still
requires that the Company commit to produce semi-finished or finished goods
inventory in anticipation of receiving a purchase order for immediate shipment.
See "Item 1. BUSINESS -- SALES BACKLOG" and "Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
6
Customers are invoiced simultaneously with merchandise shipments. The
Company sells to a majority of its customers on 30-day terms. A small number of
the Company's larger volume customers have terms ranging from 45 days to 120
days. Customers may also charge their purchases through the use of a
credit/debit card. Sales returns are authorized and accepted by the Company in
the normal course of business. An evaluation of the returned product is
performed and typically results in either a credit or a shipment of replacement
product to customers. The Company believes that it has provided an adequate
reserve for returns in the accompanying consolidated financial statements.
In the United States, the Company principally sells its products through
independent sales representatives who are compensated on a commission basis. In
foreign countries, the Company historically has utilized both resellers, who
purchase products from the Company for resale, and sales representatives. During
fiscal year 2002, the Company elected to dissolve its subsidiary in the United
Kingdom and expanded the scope of its subsidiary in Stockholm, Sweden to serve
most of the Company's customers in Europe, thereby reducing the Company's
reliance on resellers in this area. The Company continues to rely primarily on
local, independently-owned resellers and independent sales representatives in
all other foreign markets. See "Item 1. BUSINESS -- FOREIGN SALES" and Note 9 of
Notes to Consolidated Financial Statements.
During fiscal year 2002, the Company established a wholly-owned subsidiary
in the United States which established a representative office in the People's
Republic of China to service the growing market in China.
At June 30, 2004, the Company utilized approximately sixteen sales
representative organizations in the United States and approximately eleven sales
representative and reseller organizations in foreign countries, principally
Europe, Canada and the Far East. The Company's sales representatives and
resellers generally have substantial engineering expertise, which enables them
to assist the Company in providing a high level of service to assist customers
in generating product specifications and in providing applications assistance
and maintaining contact with key customers. The Company employs regional sales
managers to supervise its sales representatives and resellers and a staff of
sales and applications specialists to provide direct contact with and support to
customers.
FOREIGN SALES
In fiscal years 2004, 2003 and 2002, sales to customers located outside the
United States constituted 47%, 41% and 35% of net sales, respectively. The
Company's foreign customers are located primarily in Europe, Canada and the Far
East. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING" and Note 9 of Notes to
Consolidated Financial Statements. Export sales were made through the Company's
foreign sales corporation subsidiary until January 2002, at which time the
subsidiary was liquidated. All foreign sales, except sales by the Company's
wholly-owned subsidiary in Stockholm, Sweden (and, until its dissolution in
fiscal year 2002, its subsidiary in Sussex, England), are denominated in United
States dollars. In certain circumstances, the Company attempts to reduce the
risk of doing business in foreign countries through the use of prepayment or
sight drafts and by working closely with its foreign representatives and
distributors in assessing business environments.
SALES BACKLOG
The Company's sales backlog was $13,472,000, $9,129,000 and $9,325,000 at
June 30, 2004, 2003 and 2002, respectively. Backlog generally consists of a
combination of the Company's standard products and custom manufactured parts
that require a longer lead time to produce. Historically, the long-term trend in
customer requirements for the Company's standard products has been toward
shorter lead times. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING".
The Company offers its Quik-Pick 48 Hour System(R) program pursuant to
which products are shipped within 48 hours from the time the order is placed.
This program has consistently been popular with its customers. In order to offer
this program, the Company has to maintain higher inventory levels of certain
products in proportion to total sales than it would otherwise and higher than
those maintained by some other capacitor manufacturers. The future contribution
of the Quik-Pick(R) program to the financial results of the Company depends
critically on the Company's ability to accurately predict customer demand for
the various products offered through the program.
7
RESEARCH AND DEVELOPMENT
The technology upon which the Company's products are based is subject to
continued development of materials and processes to meet the demands of new
applications and increased competition. The Company pursues a process-oriented
strategy in which it conducts efforts aimed at developing integrated sets of
materials and associated processes and equipment to provide the capability to
create new or enhanced classes of products. Once a new set of technologies is
established, the Company then seeks to develop and introduce various products
using such technologies. The Company believes its future successes depend upon
its ability to identify the requirements for future products and product
enhancements, and to define, implement and successfully employ the technologies
needed to meet those requirements. Accordingly, the Company believes that its
research and development efforts are critical to its continued success.
The Company conducts most of its research and development activities at its
facility in Jacksonville, Florida. Activities are focused on the development of
new products and improvement of existing products. Improvements in materials and
process technology, and the development of specialized production equipment, are
directed toward reducing product cost, as well as enhancing performance
requirements that are identified through frequent customer contacts by the
Company's sales and technical personnel. Products are introduced after extensive
in-house testing and evaluations at selected customer sites. See "Item 1.
BUSINESS -- MANUFACTURING".
The Company often pursues programs with individual customers whom it
considers to be leaders in their respective industries to develop special
products to meet their specific requirements. The Company typically conducts
such programs when it believes such products have potential applications
reaching well beyond the initial customer's requirements. The Company's
expansion of the 600 Series product line arose from one such program conducted
in past years.
The Company's research and development efforts remain focused on
enhancements and extensions to its core product lines. For example, during
fiscal year 2004, the Company continued its efforts on developing enhancements
to its line of specialty higher frequency capacitors. The Company also continued
development activities on its new resistive product line by adding thin film
resistor manufacturing capability. Typically thin film resistors offer a higher
degree of reliability and are better able to handle power than their thick film
counterparts. The thin film capability also allows for the development of finer
line width and resolution, which is used in the manufacture of higher frequency
terminations and attenuators. See "Item 1. BUSINESS -- PRODUCTS".
The Company has also completed the first phase of development of the
technology underlying its CCP initiative. While the Company believes in the
long-term prospects for this technology, CCP is an extremely complicated project
that requires the development and refinement of new processes. The initial
phases of the CCP process were completed during fiscal year 2003, and during
fiscal year 2004, the Company started to sell these products. The Company
intends to continue to enhance its capabilities and expand its offering of these
products during fiscal year 2005.
Expenditures for research and development were approximately $3,067,000,
$2,766,000 and $3,644,000 in fiscal years 2004, 2003 and 2002, respectively,
representing approximately 5%, 6% and 7% of net sales, respectively. The Company
anticipates that research and development expenditures in fiscal year 2005,
expressed as a percentage of net sales, will be comparable to fiscal year 2004.
RAW MATERIALS
The principal raw materials used by the Company include silver, palladium,
gold, platinum, titanate, and other powders that are used in ceramic
manufacture. Precious metals are available from many sources, although palladium
is generally available only from a limited number of metal dealers who obtain
their product requirements from the Republic of South Africa or the Russian
Federation. The major consumers of palladium are the automotive and electronics
industries.
8
In fiscal year 2002, in an effort to align its inventory of palladium with
current and anticipated demand, the Company sold a substantial portion of its
palladium inventory to one of its vendors in an arms-length transaction for
approximately $3.3 million.
As of June 30, 2004, the Company is committed to purchase an additional
$4.5 million of precious metals (primarily palladium and silver) through the
third quarter of fiscal year 2005 to protect against shortages and rising
prices. As economic conditions improve, the demand for the precious metals the
Company uses in its manufacturing processes is increasing throughout the
electronics industry and other industries. As a result, the Company has seen a
rise in the market prices of these metals. However, there are no assurances that
the price of the precious metals will not decline and that, as a result of its
current commitments, the Company will be purchasing the precious metals at above
market prices. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
COMPETITION
Competition in the broad MLC industry continues to be intense and, in
general, is based primarily on price. In the UHF/Microwave market segment, where
price has historically been less important, competition has been based primarily
on high performance product specifications, achieving consistent product
reliability, fast deliveries and high levels of customer service. The Company
believes any competitive advantage it may have results from its ability to
achieve consistent quality and reliability, fast deliveries and high levels of
customer service. Potential growth of some commercial market applications may in
the future increase the competitive importance of price in this market. The
Company believes it competes in the UHF/Microwave capacitor market with several
other manufacturers, both domestically and abroad, including AVX Corporation,
Dover Corporation, Tekelec, Spectrum Control, Inc., Murata Manufacturing Co. Ltd
and Taiyo Yuden, most of which are larger and have broader product lines and
greater financial, marketing and technical resources than the Company. There are
other large commodity-type MLC manufacturers who have attempted to develop
products for the UHF/Microwave market segment. While the Company believes these
efforts have not produced significant results to date, there can be no assurance
that such efforts will not be successful in the future. New product developments
may lead the Company into markets where there are existing competitors that may
have significantly greater financial and technical resources and greater
expertise in mass production techniques than the Company. Competition in the
Company's other product areas is similar in nature to that of the capacitor
market. The primary competition for the Company's thin film products are
Aeroflex Incorporated and Reinhardt Microtech AG. The primary competition for
the Company's resistive products are Aeroflex Incorporated - formerly MCE
Technologies, Anaren Inc., and EMC Technologies and Florida RF Labs Inc., both
subsidiaries of Smiths Group PLC.
ENVIRONMENTAL COMPLIANCE
The Company produces hazardous waste in limited quantities in the
production of its products. Accordingly, the Company's manufacturing operations
are subject to various federal, state and local laws restricting the discharge
of such waste into the environment. The Company recycles some of its hazardous
wastes and disposes of the remainder through licensed carriers, which are
required to deposit such waste at licensed waste sites.
The Company is also subject to various federal, state, local and foreign
laws regulating or prohibiting the use of certain materials in the manufacture
of its products. As part of its research and development efforts, the Company
continues to develop and test new materials and products designed to comply with
these laws.
The Company believes that it is in material compliance with all applicable
federal, state and local environment laws and does not currently anticipate
having to make material capital expenditures to remain in material compliance
therewith. However, more stringent requirements may be enacted in the future and
the Company can not predict whether it will be able to comply with them.
Moreover, there can be no assurance that the Company will be able to develop
replacement materials or products for those which may become prohibited in the
future, or that competitors will not develop superior compliant products. See
"Item 1. BUSINESS -- CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMEN."
9
Certain products the Company manufactures and sells contain material that
is, or will be in the near future, prohibited in certain geographic areas. The
Company continues to develop environmentally safe products to replace existing
products. There is no guarantee that the Company will successfully develop
replacement products or that competitors will not develop superior
environmentally safe products.
During fiscal year 2004, the Company established an Environmental
Management System in accordance with ISO-14001 requirements and is planning to
pursue ISO-14001 registration during fiscal year 2005.
PATENTS AND PROPRIETARY INFORMATION
Although the Company has manufacturing and design patents and pending
patent applications, and although the Company will continue to seek the
supplemental protection afforded by patents, the Company generally considers
protection of its products, processes and materials to be more dependent upon
proprietary knowledge and on rapid assimilation of innovations than on patent
protection. The Company's porcelain and ceramic formulations are considered
trade secrets which are protected by internal non-disclosure safeguards and
employee confidentiality agreements. There can be no assurance that the steps
taken by the Company to protect its rights will be adequate to deter
misappropriation, or that an independent third party will not develop
functionally equivalent technology.
EMPLOYEES
At June 30, 2004, the Company employed 440 persons at its facilities in New
York, of which 17 were employed on a part-time basis; 248 persons at its
facilities in Florida, of which one was employed on a part-time basis; eight
persons in sales offices in Asia and 12 persons in sales offices in Europe. Of
the 708 persons employed by the Company, 581 were involved in manufacturing and
testing activities and as support personnel, 101 were involved in selling,
general and administrative activities, and 26 were involved in research and
development activities. None of the Company's employees are covered by
collective bargaining agreements. The Company considers its relations with its
employees to be satisfactory.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K under the captions "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as statements made in press releases and oral statements
that may be made by the Company or by officers, directors or employees of the
Company acting on the Company's behalf that are not statements of historical
fact, constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the actual results of the Company to be materially different from the
historical results or from any future results expressed or implied by such
forward-looking statements. The cautionary statements set forth below identify
certain factors that could cause such differences. In addition to statements
which explicitly describe risks and uncertainties, readers are urged to consider
statements labeled with terms such as "believes", "belief", "expects", "plans",
"anticipates", or "intends" to be uncertain and forward-looking. All cautionary
statements made in this Annual Report on Form 10-K should be read as being
applicable to all related forward-looking statements wherever they appear. Any
forward-looking statement represents the Company's expectations or forecasts
only as of the date it was made and should not be relied upon as representing
its expectations or forecasts as of any subsequent date. The Company undertakes
no obligation to correct or update any forward-looking statements, whether as a
result of new information, future events or otherwise, even if its expectations
or forecasts change.
The Company's products are used in the production of a variety of highly
complex electronic products manufactured for the military and for commercial
use. Accordingly, demand for the Company's products is highly dependent upon
demand for the products in which they are used. From time to time, including the
first half of fiscal year 2004, the Company's results have been negatively
impacted by a general decrease in demand for technology and electronic products
in the United States and abroad. There can be no assurance that the demand for
such products will increase or that, even if it does increase, the demand for
the Company's products will increase. In addition, there can be no assurance
that the Company will not receive order cancellations after orders are booked
into backlog. Moreover, a
10
majority of the Company's costs are fixed, and the Company may not be able to
reduce costs if sales volumes were to decline.
The Company produces and ships product based upon orders received from its
customers. If these orders are cancelled prior to shipment it could affect the
Company's profitability. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING."
The Company offers a broad variety of products to its customers. Gross
margins can vary significantly from product to product and across product lines.
Accordingly, a change in the mix of products sold by the Company during a
particular period could lead to distinctly different financial results for that
period as compared to other periods.
The Company expects that international sales will continue to constitute a
substantial portion of its total sales. These sales expose the Company to
certain risks, including, without limitation, barriers to trade, fluctuations in
foreign currency exchange rates (which may make the Company's products less
price competitive), political and economic instability, changes in monetary
policy, tariff regulations and other United States and foreign laws and
regulations that may apply to the export of the Company's products, as well as
the generally greater difficulties of doing business abroad.
During fiscal year 2004, the Company's ten largest customers accounted for
approximately 30% of net sales. The Company expects that sales to a relatively
small number of customers will continue to account for a significant portion of
its net sales for the foreseeable future. A loss of one or more of such key
customers could affect the Company's profitability. See "Item 1. BUSINESS --
CUSTOMERS AND MARKETING".
The technology upon which the Company's products are based is subject to
continuous development of materials and processes. The Company's business is in
large part contingent upon the continuous refinement of its technological and
engineering expertise and the development of new or enhanced products and
technologies to meet the rapidly developing demands of new applications and
increased competition. There can be no assurance that the Company will continue
to be successful in its efforts to develop new or refine existing products, that
such new products will meet with anticipated levels of market acceptance or that
the Company will otherwise be able to timely identify and respond to
technological improvements made by its competitors. Significant technological
breakthroughs by others could also have a material adverse effect on the
Company's business.
The Company's business may be adversely affected by difficulties in
obtaining raw materials and other items needed for the production of its
products, the effects of quality deviations in raw materials and fluctuations in
prices of such materials. Palladium, a precious metal used in the production of
the Company's capacitors, is currently available from a limited number of metal
dealers who obtain product from the Republic of South Africa or the Russian
Federation. A prolonged cessation or reduction of exports of palladium by the
Republic of South Africa or the Russian Federation, or a significant increase in
the price of palladium, could have a material adverse effect on the Company's
business. See "Item 1. BUSINESS -- RAW MATERIALS" and "Item 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Certain raw materials used by the Company may fluctuate in price. To the
extent that the Company is unable to pass on increases in the costs of such
materials to its customers, this may adversely affect the gross profit margins
of those products using such materials. At times, the Company will enter into
contracts to purchase certain raw materials in the future at agreed upon prices
in order to protect against shortages and rising prices. If the Company were to
do so and prices were to decline, the Company would be required to purchase such
raw materials at or above market prices which would also negatively impact gross
profit margins.
Competition in the MLC industry is intense and, in general, is based
primarily on price. In the UHF/Microwave market segments, where price has
historically been less important, competition has been based primarily on high
performance product specifications, achieving consistent product reliability,
fast deliveries and high levels of customer service. The Company competes with a
number of large MLC manufacturers who have broader product lines and greater
financial, marketing and technical resources than the Company. Growth of some
commercial market applications has increased, and is expected to continue to
increase the competitive importance of price. There can be no
11
assurance that the Company will be able to improve the productivity and
efficiency of its manufacturing processes in order to respond to pricing
pressures, or to successfully design new processes and products; and the failure
to do so could have a material adverse effect on the Company's business.
The Company produces limited quantities of hazardous wastes in the
production of its capacitors. Accordingly, the inherent risks of environmental
liability and remediation costs associated with the Company's manufacturing
operations may result in substantial unforeseen liabilities.
The Company is also subject to various federal, state, local and foreign
laws regulating or prohibiting the use of certain materials in the manufacture
of its products. As part of its research and development efforts, the Company
continues to develop and test new materials and products designed to comply with
these laws. However, there can be no assurance that the Company will be able to
develop replacement materials or products for those which may become prohibited
in the future, or that competitors will not develop superior compliant products.
See "Item 1. BUSINESS -- ENVIRONMENTAL COMPLIANCE".
The Company has not received any claims that its products or the
technologies upon which they are based infringe the intellectual property rights
of others. Any such claims in the future may result in the Company being
required to enter into royalty arrangements, cease manufacturing the infringing
products or utilizing the infringing technologies, pay damages or defend
litigation, any of which could have a material adverse effect on the Company's
business.
The Company's business may also be adversely affected by matters and events
affecting businesses generally, including, without limitation, political and
economic events, labor unrest, acts of God, war, acts of terrorism and other
events outside of the Company's control.
ITEM 2. PROPERTIES
The Company's primary production facilities are located in Huntington
Station, New York and Jacksonville, Florida. The Company's principal executive
office is located in Huntington Station, New York, and its principal research
and development facility is located in Jacksonville, Florida. The following
table sets forth the address of each facility, its primary function, the square
footage occupied by the Company and whether the facility is leased or owned.
ADDRESS OF FACILITY PRIMARY FUNCTION SQUARE FOOTAGE OCCUPIED TYPE OF OCCUPANCY
------------------- ---------------- ----------------------- -----------------
10 Stepar Place
Huntington Station, New York Production 11,200 Owned
11 - 13 Stepar Place
Huntington Station, New York Future production use (1) 20,000 Owned
15 Stepar Place 35,700 Leased from Principal
Huntington Station, New York Production Stockholder (2)
One Norden Lane
Huntington Station, New York Production 8,700 Owned
17 Stepar Place
Huntington Station, New York Corporate, sales, administration 18,000 Owned
2201 Corporate Square Blvd. Production, research 99,700 Leased from Principal
Jacksonville, Florida and development (3) Stockholder (2)
8810 Corporate Square Court
Jacksonville, Florida Production (4) 10,000 Owned
Ellipsvaegen 5
SE-141 75 Sales and 3,400 Leased
Kungens Kurva, Sweden distribution office (5)
12
Rm. 621-623, International
Culture Building, No. 3039
Shennan Centre Rd., Futian
District, Shenzhen, PR China Sales office 1,950 Leased
(1) In fiscal year 2001, the Company purchased a 20,000 square foot
facility adjacent to its existing New York facilities. This facility is
currently under renovation and is expected to be used for future
production and product support capacity starting in fiscal year 2005.
(2) See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and Notes
4 and 7 of Notes to Consolidated Financial Statements.
(3) In fiscal year 2002, the Company added approximately 38,000 square feet
to its Jacksonville facilities for various purposes, including
expansion of its thin film capacity and to accommodate commercial
manufacture of its new resistive product line. See "Item 1. BUSINESS --
MANUFACTURING".
(4) In fiscal year 2004, the Company purchased a 10,000 square foot
facility in Jacksonville, Florida that it had been leasing. The Company
was utilizing the majority of the building under the lease. As a result
of the purchase, the Company added a small amount of additional space
which it is reserving for future use.
(5) In fiscal year 2003, the Company moved into larger space in the same
Kungens Kurva facility to enable it to handle the increased activity
due to the closing of the Company's facility in Sussex, England. See
"Item 1. BUSINESS -- CUSTOMERS AND MARKETING".
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended June 30, 2004.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
Victor Insetta, age 64, co-founded the Company in 1966 and has served as
President and Chief Executive Officer and a director of the Company since its
organization.
Richard Monsorno, age 52, has been employed by the Company in various
capacities since 1983. In August 1996, he was appointed Senior Vice President -
Technology.
Kathleen M. Kelly, age 50, has been employed by the Company in various
capacities since 1974. She has served as Vice President - Administration and as
corporate Secretary since November 1989.
David B. Ott, age 62, joined the Company in June 1999 as Vice President -
New York Manufacturing. In December 2000, he was appointed Senior Vice
President, New York Manufacturing. In April 2004, he was appointed Senior Vice
President, New York Operations.
Judah Wolf, age 58, has been managing the Company's thin film operations in
Jacksonville, Florida since 1993. In 1999, he was appointed Vice President -
Thin Film Operations. In August 2001, he was appointed Senior Vice President,
Thin Film Products.
13
Andrew R. Perz, age 45, has been with the Company as Controller since 1998,
and was appointed Vice President, Controller in November 2000.
Harrison Tarver, age 58, has been employed by the Company in various
capacities since 1973, principally in positions relating to quality assurance.
He was appointed Vice President, Quality Assurance in December 2000.
The officers serve at the discretion of the Board of Directors and there
are no family relationships among the officers listed and any directors of the
Company.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's common stock is traded on the American Stock Exchange
("AMEX") under the symbol "AMK". The table below sets forth the quarterly high
and low sales prices for the common stock on the AMEX for the fiscal years ended
June 30, 2004 and June 30, 2003.
FISCAL 2004 FISCAL 2003
----------------- ------------------
Quarter Ended: High Low High Low
- -------------- ------- ------- ------- -------
September $ 7.65 $ 4.90 $ 5.10 $ 2.10
December 7.93 5.97 6.00 2.75
March 11.59 7.80 5.03 3.51
June 10.24 7.92 5.63 3.78
NUMBER OF STOCKHOLDERS
As of September 13, 2004, there were approximately 332 holders of record of
the Company's common stock. The Company believes numerous shares are held of
record by brokerage and other institutional firms for their customers.
DIVIDENDS
The Company has not paid any cash dividends on its common stock during the
past two fiscal years. It is the present policy of the Company's Board of
Directors to retain earnings to finance the expansion of the Company's
operations and not to pay cash dividends on its common stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table details securities authorized for issuance under equity
compensation plans as of June 30, 2004:
Number of securities
remaining available for
Number of securities to future issuance under
be issued upon exercise Weighted-average exercise price equity compensation plans
of outstanding options, of outstanding options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan category (a) (b) (c)
- --------------------------------- --------------------------- ---------------------------------- ----------------------------
Equity compensation plans
approved by security holders 1,257,400 $ 6.97 226,500
14
The Company has no securities authorized for issuance under equity
compensation plans that have not been approved by security holders. In the past,
the Company has issued treasury shares in payment of stock bonuses which were
not granted pursuant to plans approved by stockholders. See "SALES OF
UNREGISTERED SECURITIES" below. It is the Company's current intention that any
future stock awards or bonuses will be made pursuant to the terms of its 2000
Incentive Stock Plan (which was approved by stockholders) or another plan
approved by stockholders.
SALES OF UNREGISTERED SECURITIES
In June 2001 and again in July 2002, pursuant to the terms of employment
agreements between the Company and three key employees, the Company issued 1,000
shares of common stock, in each month, to each of such employees.
In June 2001, the Company awarded 1,000 shares of common stock to each of
its five non-employee directors and 1,000 shares of common stock to each of six
officers as stock bonuses. The shares were issued in July 2001.
In June 2002, pursuant to the terms of an employment agreement between the
Company and a key employee, the Company issued 2,000 shares of common stock to
such employee.
In June 2002, the Company issued 1,000 shares of common stock to each of
seven officers as stock bonuses. The bonuses were awarded in June 2001 and were
contingent upon each such officer remaining employed by the Company on June 30,
2002.
In June 2003, the Company issued 1,000 shares of common stock to each of
seven officers as stock bonuses. The bonuses were awarded in August 2002 and
were contingent upon each such officer remaining employed by the Company on June
30, 2003.
None of the shares listed above were registered under the Securities Act of
1933 in reliance on the exemption provided by Section 4(2) thereunder or because
they were issued in a transaction that did not constitute a sale requiring
registration under the Securities Act of 1933.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and other information set
forth following Item 14 of this report.
FISCAL YEARS ENDED JUNE 30,
---------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- --------- --------
INCOME STATEMENT DATA:
Net sales $ 61,183 $ 49,048 $ 49,585 $ 84,585 $ 66,692
Gross profit $ 20,437 $ 14,332 $ 9,624 $ 36,721 $ 29,946
Income/(loss) from operations $ 2,528 $ (755) $ (6,596) $ 16,122 $ 13,989
Net income/(loss) $ 2,176 $ (501) $ (4,243) $ 10,332 $ 9,071
Basic net income/(loss) per common share $ 0.27 $ (0.06) $ (0.53) $ 1.30 $ 1.18
Diluted net income/(loss) per common share $ 0.25 $ (0.06) $ (0.53) $ 1.24 $ 1.11
Cash dividends paid per common share $ - $ - $ - $ - $ -
BALANCE SHEET DATA:
Property, plant and equipment, net $ 26,141 $ 27,174 $ 29,740 $ 32,089 $ 22,902
Total assets $ 69,853 $ 63,548 $ 66,574 $ 76,576 $ 59,787
Long-term debt, less current portion $ 2,896 $ 3,290 $ 2,368 $ 7,211 $ 3,486
Working capital $ 34,900 $ 31,332 $ 28,375 $ 33,662 $ 27,087
15
QUARTERLY FINANCIAL DATA:
(unaudited) (In thousands, except per share amounts)
BASIC DILUTED
NET (LOSS) NET (LOSS) /INCOME NET (LOSS) /INCOME
QUARTER ENDED NET SALES GROSS PROFIT /INCOME PER SHARE (1) PER SHARE (1)
------------- --------- ------------ ------- ------------- -------------
Fiscal 2004
- -----------
September $ 12,549 $ 2,876 $ (783) $ (0.10) $ (0.10)
December 13,516 3,643 (446) (0.05) (0.05)
March 16,109 5,313 315 0.04 0.04
June 19,009 8,605 3,090 0.38 0.36
--------- --------- --------- ---------- ----------
Fiscal Year $ 61,183 $ 20,437 $ 2,176 $ 0.27 $ 0.25
--------- --------- --------- ---------- ----------
Fiscal 2003
- -----------
September $ 12,487 $ 4,086 $ 338 $ 0.04 $ 0.04
December 11,561 3,429 (330) (0.04) (0.04)
March 11,930 3,308 (299) (0.04) (0.04)
June 13,070 3,509 (210) (0.03) (0.03)
--------- --------- --------- ---------- ----------
Fiscal Year $ 49,048 $ 14,332 $ (501) $ (0.06) $ (0.06)
--------- --------- --------- ---------- ----------
(1) Earnings per share amounts for each quarter are required to be computed
independently. As a result, the sum may differ from the total year earnings
per share amounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and other information set
forth following Item 15 of this Report. See also "CAUTIONARY STATEMENTS
REGARDING FORWARD-LOOKING STATEMENTS" in Part I of this Report.
GENERAL
During fiscal years 2002 and 2003 and the first half of fiscal year 2004,
the Company experienced a lower (compared to fiscal years 2001 and 2000) but
consistent level of business. The wireless infrastructure market, the Company's
largest market, and the semiconductor equipment market, another significant
market for the Company, were adversely impacted by the economic downturn. At the
beginning of fiscal year 2002, the Company was downsizing to maintain its core
strengths while continuing to operate with positive cash flow.
During fiscal year 2003, the Company began to add personnel in areas such
as engineering, manufacturing and sales, and began making other investments
designed to improve customer service, enhance existing products, add line
extensions and accelerate the development of new products. Management believed
that these steps would position the Company to take advantage of opportunities
and capture additional market share as the economy improved.
During the first two quarters of the current fiscal year, the markets
served by the Company began to show signs of breaking out of the extended
downturn. In the third and fourth quarter, the Company experienced substantial
increases in sales and bookings in all the major markets it serves. Booking
levels for the second half of fiscal year 2004 increased 68% over the comparable
period of fiscal year 2003. The wireless infrastructure and semiconductor
equipment markets exhibited the strongest growth. Based on information obtained
from selected customers, and subject to the usual uncertainties in forecasting,
the Company expects a downturn in orders driven by customers' inventory
rationalization during the early part of fiscal year 2005, followed by a
recovery in the latter part of the year driven by continued high manufacturing
levels of equipment incorporating the Company's products.
16
The Company returned to profitability in the second half of fiscal 2004 as
a result of higher sales, lower precious metal costs and the effects of
operating at higher, more efficient production volumes, partially offset by
higher medical expenses. Sales of new products developed by the Company
contributed to the sales growth. Many of these new products are sold into the
same markets as the Company's traditional products. Accordingly, as activity
increases in these markets, the Company expects to realize the benefits of
increased sales of traditional products and sales of products that have been
introduced during the past three years.
Prices have remained relatively stable during most of the economic
downturn. However, as volume from selected wireless infrastructure customers
increases, the Company expects that price pressure in this market will increase.
In addition, in order to reduce costs, many customers in the telecommunications
market are outsourcing production to contract manufacturers who often attempt to
renegotiate the prices previously agreed to by the customer, creating another
source of price pressure.
The Company has benefited from lower precious metal costs in the current
fiscal year. As economic conditions continue to improve, the demand for precious
metals used in the Company's manufacturing processes has increased. Recently the
Company has seen an increase in the market prices of these metals and has
purchased quantities of them to protect against rising prices. Given current
levels of demand, additional purchases will be necessary in the near future. In
response to the increased demand, as of June 30, 2004, the Company is committed
to purchase an additional $4.5 million of precious metals (primarily palladium
and silver) through the third quarter of fiscal year 2005 to protect against
shortages and rising prices.
During the fiscal year ended June 30, 2004, the Company incurred unusually
high medical expenses. Medical expenses for the year were 54%, or approximately
$1,750,000, higher than last fiscal year. In contrast, the Company's headcount
increased 32% over the past year. The increase in medical expenses was due
primarily to an increase in claims for which the Company is self-insured. The
Company believes that self-insurance is a cost effective option for providing
employees with health coverage; however, it results in fluctuations in costs
from period to period.
The ability to deliver product rapidly remains important to securing
orders. As demand for the Company's products increased, the Company initially
benefited from maintaining a high level of inventory. The sharp increase in
business quickly depleted this inventory and the Company relied on higher levels
of production to maintain quick turn delivery to its customers. In response to
increased booking and quoting activity, the Company began increasing headcount
in production and sales as early as the end of fiscal year 2003. As bookings and
sales volume sharply increased in the second half of fiscal year 2004, the
Company rapidly escalated the rate of hiring to increase capacity to keep pace
with the increased bookings. This initially decreased gross margins and
increased operating expenses. However, the Company believes that the additions
to personnel preserved delivery lead times and improved customer service. This
positioned the Company to take advantage of opportunities that arose in the
second half of fiscal year 2004 and should continue to do so in the coming
quarters as demand remains strong and opportunities arise in the markets the
Company serves.
In response to growing volume, the Company has begun renovating the
building it purchased three years ago next to its other facilities in Huntington
Station, New York. The Company has also purchased the building that houses its
Microcap(R) product line in Florida which it previously leased. These actions
are designed to improve flexibility for future product expansion. They will also
result in an increase in capacity which will enable the Company to produce
certain products in higher volumes.
The combination of increased capital expenditures, increased working
capital requirements and unprofitable operations during the economic downturn
required the Company to draw upon its cash reserves. In response, the Company
has secured a $4 million line of credit from General Electric Capital
Corporation ("GECC") to help fund future capital expenditures.
17
RESULTS OF OPERATIONS
KEY COMPARATIVE PERFORMANCE INDICATORS
Three Months Ended Fiscal Year Ended
------------------------------------- --------------------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Sales ($) 19,009,000 13,070,000 61,183,000 49,048,000
Bookings ($) 20,336,000 11,468,000 65,517,000 48,767,000
Gross Margin ($) 8,605,000 3,509,000 20,437,000 14,332,000
Gross Margin (%) 45.3 26.8 33.4 29.2
Operating Expenses ($) 5,050,000 3,861,000 17,909,000 15,087,000
Operating Expenses (%) 26.6 29.5 29.3 30.8
SIGNIFICANT HIGHLIGHTS
Sales for the three and twelve months ended June 30, 2004 increased 45% and
25%, respectively, over the comparable periods in the prior fiscal year.
Bookings for the three and twelve months ended June 30, 2004 increased 77%
and 34%, respectively, over the comparable periods in the prior fiscal year.
FISCAL YEAR 2004 COMPARED WITH FISCAL YEAR 2003
Net sales for the fiscal year ended June 30, 2004 were $61,183,000, an
increase of 25% from the $49,048,000 recorded in the fiscal year ended June 30,
2003. Domestic sales increased by 12% to $32,234,000 in fiscal year 2004 from
$28,697,000 in fiscal year 2003. International sales increased by 42% to
$28,949,000 in fiscal year 2004 from $20,351,000 in fiscal year 2003. The
increase in sales is due to the improved business climate in a majority of the
markets the Company serves. Sales growth was particularly significant in the
wireless infrastructure and semiconductor equipment markets in the second half
of fiscal year 2004.
Bookings have improved significantly from the levels experienced in fiscal
year 2003. Total bookings in fiscal year 2004 were $65,517,000, compared to
$48,767,000 in fiscal year 2003, representing an increase of approximately 34%.
Growth has come from a majority of the markets the Company serves, but was
particularly strong in the wireless infrastructure and semiconductor equipment
markets.
Gross margins were 33% of net sales in fiscal year 2004, compared to 29% in
fiscal year 2003. The increase in gross margins is attributable to higher sales
volume and the economics associated with higher production volumes, partially
offset by increased labor and medical expenses and decreased precious metal
recovery. In response to increased booking and quoting activity, the Company
began increasing headcount in production and sales toward the end of fiscal year
2003 in order to increase capacity. The additions to headcount accelerated as
bookings and quoting activity increased throughout fiscal year 2004. In
addition, during fiscal year 2004, the Company incurred unusually high medical
expenses, the majority of which reduced gross margins.
Operating expenses totaled $17,909,000, or 29% of net sales, in fiscal year
2004, compared to $15,087,000, or 31% of net sales, in fiscal year 2003. The
increase in operating expenses in absolute terms compared to the prior fiscal
year is attributable to increased sales staff in response to increased booking
and quoting activity and increased commissions. The trend toward customers
moving production offshore has continued. Accordingly, a growing portion of the
Company's sales are to customers in Asia and Europe. Consequently, the Company
continues to expand its foreign sales offices in China and Europe to better
service its customers.
18
Research and development expenses for the fiscal year ended June 30, 2004
increased 11% to $3,067,000, compared to $2,766,000 in the prior fiscal year.
The Company has put additional emphasis on enhancements and extensions of its
core product lines as well as improving the performance of its existing products
and its manufacturing processes.
The effective income tax rate for fiscal year 2004 was approximately 2%, as
compared to 50% for fiscal year 2003. The decrease in the effective income tax
rate is primarily due to the impact of foreign tax benefits in relation to the
level of pre-tax income and the reduction of tax reserves due to audit
settlements and updated evaluations.
As a result of the foregoing, the Company reported a net income of
$2,176,000, or $0.27 per common share and $0.25 per common share assuming
dilution, for fiscal year 2004, compared to a net loss of $501,000, or $0.06 per
common (and diluted) share, for fiscal year 2003.
FISCAL YEAR 2003 COMPARED WITH FISCAL YEAR 2002
Net sales for the fiscal year ended June 30, 2003 were $49,048,000, a
decrease of 1% from the $49,585,000 recorded in the fiscal year ended June 30,
2002. Domestic sales decreased by 12% to $28,697,000 in fiscal year 2003 from
$32,459,000 in fiscal year 2002. International sales increased by 19% to
$20,351,000 in fiscal year 2003 from $17,126,000 in fiscal year 2002. Although
overall sales remained at levels comparable to the prior year, there was an
increase in sales of larger case size capacitors and EIA case capacitors and a
decline in sales of thin film products. The increase in foreign sales is
indicative of the Company's customers migrating production overseas, penetration
into the Asian market and improved sales in Europe.
Orders have improved significantly from the lows experienced in the second
quarter of fiscal year 2002. Total bookings in fiscal year 2003 were
$48,767,000, compared to $42,976,000 in fiscal year 2002, representing an
increase of approximately 13%. Growth has come from the military and wireless
infrastructure markets, offset partially by a decrease in orders from the
medical electronics market.
Gross margins were 29% of net sales in fiscal year 2003, compared to 19% in
fiscal year 2002. The increase in gross margins is attributable in part to cost
reduction measures implemented by the Company in fiscal year 2002 in response to
the industry downturn and increased precious metal recovery, as well as the lack
of inventory write-downs to net realizable value and a loss on the sale of
palladium (a precious metal used in the manufacture of certain core products)
both of which occurred in fiscal year 2002. In June 2002, the Company sold a
portion of its palladium inventory to align inventory levels with anticipated
demand.
Operating expenses totaled $15,087,000, or 31% of net sales, in fiscal year
2003, compared to $16,220,000, or 33% of net sales, in fiscal year 2002. The
decrease in operating expenses from the prior fiscal year is attributable to
decreased staff as a result of the cost reduction measures discussed above,
lower severance costs and other restructuring costs, and decreased research and
development spending. Operating expenses also decreased as a percentage of sales
for the same reasons.
Net interest expense was $250,000 in fiscal year 2003, compared to net
interest expense of $305,000 in fiscal year 2002. The decrease in net interest
expense is attributable primarily to the retiring of all outstanding bank debt
in the first quarter of fiscal year 2003.
The effective income tax benefit rate for fiscal year 2003 was
approximately 50%, as compared to 37% for fiscal year 2002. The increase in the
effective income tax rate is primarily due to the impact of foreign tax benefits
in relation to the low level of pre-tax loss.
As a result of the foregoing, the Company reported a net loss of $501,000,
or $0.06 per common (and diluted) share, for fiscal year 2003, compared to a net
loss of $4,243,000, or $0.53 per common (and diluted) share, for fiscal year
2002.
19
LIQUIDITY AND CAPITAL RESOURCES
June 30, 2004 March 31, 2004 June 30, 2003
------------- -------------- -------------
Cash and Investments ($) 7,042,000 7,082,000 11,696,000
Working Capital ($) 34,900,000 31,388,000 31,332,000
Quarter Ended:
Operating Cash Flow ($) 1,142,000 (1,687,000) 893,000
Capital Expenditures ($) 1,130,000 1,804,000 620,000
Depreciation and Amortization ($) 1,306,000 1,317,000 1,391,000
Current Ratio 5.1:1 5.8:1 7.3:1
Quick Ratio 2.0:1 2.5:1 3.7:1
The Company's financial position at June 30, 2004 remains strong as
evidenced by working capital of $34,900,000, compared to working capital of
$31,332,000 at June 30, 2003. The Company's current ratio and quick ratio at
June 30, 2004 remain strong although lower than June 30, 2003. The decline in
the current and quick ratios is primarily due to higher percentage growth in
accounts payable and accrued expense compared to current assets, and to capital
expenditures, primarily due to bonus and commission accruals and timing of
payments against accounts payable.
Cash and investments decreased to $7,042,000 at June 30, 2004, compared to
$11,696,000 at June 30, 2003. The decrease in cash and investments is primarily
the result of capital expenditures and cash used for working capital to support
increased levels of business. Accounts receivable increased by $3,842,000 to
$10,563,000 at June 30 2004, compared to $6,721,000 at June 30, 2003. The
increase is primarily due to increased sales revenue and, to a lesser extent, to
certain large customers negotiating extended payment terms. Inventories
increased by $7,124,000 to $22,268,000 at June 30, 2004, compared to $15,144,000
at June 30, 2003 primarily as a result of precious metal purchases during the
year. These purchases were made in anticipation of future production
requirements and potential price increases. The Company continues to maintain
high finished goods inventory levels to keep customer lead times to a minimum
and maintain good customer service.
Accounts payable increased by $1,040,000, to $2,065,000 at June 30, 2004
compared to $1,025,000 at June 30, 2003 due in part to increased purchasing
activity to keep pace with higher production levels and in part to capital
expenditures. Accrued expenses increased by $2,264,000 to $5,107,000 at June 30,
2004, compared to $2,843,000 at June 30, 2003, due to the timing of payments
relating to vacation pay and payroll taxes as well as increased commission
accruals as the result of increased bookings and sales and increased bonus
accruals as a result of improved profits.
The Company leases its facility in Jacksonville, Florida from a partnership
controlled by the Company's President, Chief Executive Officer and principal
stockholder under a capital lease. The rental payments under this lease have
been adjusted several times, most recently as of September 2002, primarily to
reflect certain additions to the facility and market value adjustments as
required by the terms of the lease based upon independent appraisals. See "Item
2. PROPERTIES". Effective September 1, 2002, the Company is obligated to pay
approximately $719,000 per annum under this lease, an increase from $461,000 per
annum during fiscal year 2002. The payments due over the remaining seven years
of this capital lease, including the portion related to interest, total
approximately $4,494,000. See "Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" and Note 4 of Notes to Consolidated Financial Statements.
In April 2004, the Company entered into a $4,000,000 credit facility with
General Electric Capital Corporation for the purchase of equipment. The line
bears interest, at the Company's option, at either a fixed rate of 3.47% above
the five year Treasury Bond yield or a floating rate of 3.65% above LIBOR.
Borrowings under the line are secured by the equipment purchased thereunder.
Each separate borrowing under the line will be a fully amortizing term loan with
a maturity of five years from the date the funds are drawn down. The line of
credit will expire on March 31, 2005. As of June 30, 2004, the Company had not
incurred any borrowing under the credit facility. In August 2004, the Company
incurred $1,013,000 of borrowings under this facility.
20
The Company is negotiating the terms of a one year credit facility with a
major bank. Under the terms being discussed, the Company may request advances
under the facility from time to time up to an aggregate of $5,000,000. Any
advance made would bear interest at the Prime Rate as reported in the Wall
Street Journal. Borrowings under the facility would be secured by a lien on the
Company's accounts receivable and inventory. The facility would be subject to
certain financial covenants, including minimum tangible net worth and liability
percentage ratios. There can be no assurance that theses negotiations will
result in the Company obtaining a new credit facility or that, if obtained, the
bank will approve any request by the Company for an advance thereunder.
Capital expenditures for the fiscal year ended June 30, 2004, totaled
$4,506,000, including expenditures for buildings, machinery and equipment and
planned leasehold improvements. The Company intends to use cash on hand, cash
generated through operations and available credit to finance budgeted capital
expenditures, primarily for equipment acquisition, of approximately $6,600,000
in fiscal year 2005.
Aggregate contractual obligations as of June 30, 2004 mature as follows:
Payments Due by Period (in 000's)
-------------------------------------------------------------------------------------------
Less
than 1 1- 3 4- 5 After 5
Contractual Obligations Total year years years years
- ----------------------------- ------------ ------------ ------------ ------------ ------------
Bank Debt $ --- $ --- $ --- $ --- $ ---
Capital Lease Obligations 4,494,000 719,000 2,157,000 1,438,000 180,000
Operating Leases 1,444,000 479,000 965,000 --- ---
Purchase Obligations 6,565,000 6,565,000 --- --- ---
------------ ------------ ------------ ------------ ------------
Total Contractual Obligations $ 12,503,000 $ 7,763,000 $ 3,122,000 $ 1,438,000 $ 180,000
============ ============ ============ ============ ============
The Company committed to purchase an additional $4,500,000 of precious
metals (primarily palladium and silver) over the next twelve months to protect
against shortages and rising prices. The Company has benefited from lower
precious metal costs during the last fiscal year. However, as economic
conditions improve, the demand for the precious metals the Company uses in its
manufacturing processes is increasing throughout the electronics industry and
other industries. As a result, the Company has seen a rise in the market prices
of these metals.
The Company routinely enters into binding and non-binding purchase
obligations in the ordinary course of business, primarily covering anticipated
purchases of inventory and equipment. The terms of these commitments generally
do not extend beyond six months. None of these obligations are individually
significant. The Company does not expect that these commitments will materially
adversely affect its liquidity in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") has issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require the application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. The Company's significant accounting policies are
described in Note 1 to its consolidated financial statements contained in "Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this report. The Company
believes that the following accounting policies require the application of
management's most difficult, subjective or complex judgments:
21
ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and a customer's current
creditworthiness, as determined by its review of the customer's current credit
information. The Company continuously monitors collections and payments from its
customers and maintains an allowance for estimated credit losses based upon its
historical experience and any specific customer collection issues that the
Company has identified. While such credit losses have historically been within
the Company's expectations and the allowances established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that it
has in the past. Should the financial position of its customers deteriorate
resulting in an impairment of their ability to pay amounts due, the Company's
revised estimate of such losses and any actual losses in excess of previous
estimates may negatively impact its operating results.
SALES RETURNS AND ALLOWANCES
In the ordinary course of business, the Company accepts returns of products
sold for various reasons and grants sales allowances to customers. While the
Company engages in extensive product quality control programs and processes, its
level of sales returns is affected by, among other things, the quality of its
manufacturing processes. The Company maintains an allowance for sales returns
and allowances based upon historical returns and allowances granted. While such
returns and allowances have historically been within the Company's expectations,
actual return and allowance rates in the future may differ from current
estimates, which could negatively impact its operating results.
INVENTORY VALUATION
The Company values inventory at the lower of aggregate cost (first-in,
first-out) or market. When the cost of inventory is determined by management to
be in excess of its market value, such inventory is written down to its
estimated net realizable value. This requires the Company to make estimates and
assumptions about several factors (e.g., future sales quantities and selling
prices, and percentage complete and failure rates for work in process) based
upon historical experience and its projections for future periods. Changes in
factors such as the level of order bookings, the product mix of order bookings
and the Company's manufacturing processes could have a material impact on the
Company's assessment of the net realizable value of inventory in the future.
VALUATION OF DEFERRED TAX ASSETS
The Company regularly evaluates its ability to recover the reported amount
of its deferred income taxes considering several factors, including its estimate
of the likelihood of the Company generating sufficient taxable income in future
years during the period over which temporary differences reverse. Presently, the
Company believes that it is more likely than not that it will realize the
benefits of its deferred tax assets based primarily on its history of taxable
income and projections for taxable income in the future. In the event that
actual results differ from its estimates or the Company adjusts these estimates
in future periods, the Company may need to establish a valuation allowance
against a portion or all of its deferred tax assets, which could materially
impact its financial position or results of operations in future periods.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
The Company assesses the recoverability of long-lived assets whenever the
Company determines that events or changes in circumstances indicate that the
carrying amount may not be recoverable. Its assessment is primarily based upon
its estimate of future cash flows associated with these assets. The Company
believes that the carrying amount of its long-lived assets is recoverable.
However, should its operating results deteriorate, or anticipated new product
launches not occur or not attain the commercial acceptance that the Company
anticipates, the Company may determine that some portion of its long-lived
assets are impaired. Such determination could result in non-cash charges to
income that could materially affect its financial position or results of
operations for that period.
22
INFLATION
The Company does not expect the effects of inflation to have a significant
impact on its liquidity or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has identified four market risks relative to its business:
foreign currency exchange rate risk, commodity price risk, security price risk
and interest rate risk. The Company has managed its market risk exposures in
order to minimize their potential impact on its consolidated financial condition
and results of operations. Specifically:
a) Foreign currency exchange rate risk. With the exception of sales by
the Company's wholly-owned subsidiary in Sweden (which are denominated
in Krona), all transactions are, and are anticipated to be,
denominated in U.S. Dollars. Fluctuations in exchange rates could
impact revenues with an offsetting impact on costs and expenses. The
impact on net earnings at the present time would not be material.
b) Commodity price risk. The Company uses certain precious metals in the
manufacturing of its products (primarily palladium, gold and silver),
and is therefore subject to certain commodity price risks. The Company
believes that, based upon its current levels of production and
inventories of precious metals, it will need to buy additional
quantities of precious metals during the next year. The price of
precious metals have begun to rise due to the higher demand coming
from the electronics industry and other industries. Consequently, the
Company has purchased a quantity of these metals to protect against
rising prices and has committed to purchasing additional amounts of
palladium and silver over the next year in order to lock in current
market prices. If the market price of silver or palladium were to
decrease, the Company would be required to purchase the palladium or
silver at above market prices. Should the Company need to buy gold
during the next year it will do so at the prevailing market price.
c) Security price risk. The Company's current portfolio of marketable
securities consists of U.S. Treasury notes and other government
securities with varying maturities of up to three years. The Company
believes it can effectively manage any exposure resulting from
declining prices by holding any securities which decline substantially
in value until maturity.
d) Interest rate risk. The Company earns interest income on cash and
investment balances and pays interest on debt incurred. In light of
the Company's existing cash, results of operations, the terms of its
debt obligations and projected capital needs, it does not believe that
a significant change in interest rates would have a significant impact
on its consolidated financial position. See "Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCE." of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and the Notes thereto begin
on page F-2 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
23
Evaluation of Disclosure Controls and Procedures. In response to the
requirements of the Sarbanes-Oxley Act of 2002, within 90 days prior to the date
of this report (the "Evaluation Date"), the Company's President and Chief
Executive Officer and Vice President - Controller carried out an evaluation of
the effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)).
Based on that evaluation, these officers concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and the
Company's consolidated subsidiaries was made known to them by others within
those entities, particularly during the period in which this report was being
prepared.
Changes in Internal Controls. There were no changes in the Company's
internal controls over financial reporting, identified in connection with the
evaluation of such internal controls that occurred during the Company's last
fiscal quarter, that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information set forth under the caption "Election of Directors" in the
Company's Proxy Statement to be furnished in connection with its Annual Meeting
of Stockholders to be held November 17, 2004 is hereby incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Company's Proxy Statement to be furnished in connection with its Annual Meeting
of Stockholders to be held November 17, 2004 is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" and the information relating to beneficial
ownership of the Company's common stock in the table under the caption "Election
of Directors" in the Company's Proxy Statement to be furnished in connection
with its Annual Meeting of Stockholders to be held November 17, 2004 is hereby
incorporated by reference. See also "Item 5. MARKET FOR COMPANY'S COMMON STOCK,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES -- EQUITY
COMPENSATION PLAN INFORMATION".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Company's Proxy Statement to be furnished in
connection with its Annual Meeting of Stockholders to be held November 17, 2004
is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the caption "Principal Accounting Fees and
Services" in the Company's Proxy Statement to be furnished in connection with
its Annual Meeting of Stockholders to be held November 17, 2004 is hereby
incorporated by reference.
24
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) FINANCIAL STATEMENTS PAGE NO.
-------------------- --------
Index to Consolidated Financial Statements ..................................... F
Report of Independent Registered Public Accounting Firm ....................... F-1
Consolidated Financial Statements
Balance Sheets as of June 30, 2004 and 2003 ............................... F-2
Statements of Operations
Fiscal Years Ended June 30, 2004, 2003 and 2002 ....................... F-3
Statements of Stockholders' Equity and Comprehensive Income/(Loss)
Fiscal Years Ended June 30, 2004, 2003 and 2002 ....................... F-4
Statements of Cash Flows
Fiscal Years Ended June 30, 2004, 2003 and 2002 ....................... F-5
Notes to Consolidated Financial Statements ............................... F-6
(B) EXHIBITS
Unless otherwise indicated, the following exhibits were filed as part of
the Company's Registration Statement on Form S-18 (No. 2-96925-NY) (the
"Registration Statement") and are incorporated herein by reference to the same
exhibit thereto:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3(a)(i) - Certificate of Incorporation of the Company.
3(a)(ii) - Amendment to Certificate of Incorporation. (3)
3(b)(i) - By-laws of the Company.
9(a)(i) - Restated Shareholders' Agreement, dated April 15, 1985, among
Victor Insetta, Joseph Mezey, Joseph Colandrea and the
Company.
10(b) - Lease, dated September 1, 2002, between Stepar Leasing, LLC
and the Company for premises at 15 Stepar Place, Huntington
Station, N.Y. (10)
10(c)(i) - Form of 1985 Employee Stock Sale Agreement between the Company
and various employees.
10(c)(ii) - Form of Employee Stock Bonus Agreement, dated as of July 1,
1993, between the Company and various employees. (2)
10(c)(iii) - Form of Employee Stock Bonus Agreement, dated as of April 19,
1994, between the Company and various employees. (2)
10(c)(iv) - Form of Employee Stock Bonus Agreement, dated as of April 20,
1995, between the Company and various employees. (3)
25
10(e)(i) - Second Amended and Restated Lease, dated as of May 16, 2000,
between V.P.I. Properties Associates, d/b/a V.P.I. Properties
Associates, Ltd., and American Technical Ceramics (Florida),
Inc. (7)
10(g)(iii) - Profit Bonus Plan, dated April 19, 1995, and effective for the
fiscal years beginning July 1, 1994. (3)
10(g)(iv) - Employment Agreement, dated April 3, 1985, between Victor
Insetta and the Company, and Amendments No. 1 through 4
thereto. (1)
10(g)(v) - Amendment No. 5, dated as of September 11, 1998, to Employment
Agreement between Victor Insetta and the Company. (5)
10(g)(vi) - Amendment No. 6, dated as of January 3, 2001, to Employment
Agreement between Victor Insetta and the Company. (11)
10(h) - Employment Agreement, dated October 1, 2003, between the
Company and Richard Monsorno. (12)
10(i) - Managers Profit Bonus Plan, dated December 7, 1999 and
effective January 1, 2000. (6)
10(ii) - Officers Profit Bonus Plan, dated October 30, 2003 and
effective June 30, 1992. (12)
10(k) - Consulting Agreement, dated January 1, 2004, between the
Company and Stuart P. Litt. (13)
10(m) (i) - American Technical Ceramics Corp. 1997 Stock Option Plan. (4)
10(m) (ii) - American Technical Ceramics Corp. 2000 Incentive Stock Plan.
(6)
10(o) - Master Loan Agreement, dated April 2, 2004, between the
Company and General Electric Capital Corporation. (13)
10(p) - Second Amended and Restated Employment Agreement, dated as of
December 31, 2001, between Judah Wolf and the Company. (8)
10(r) - Employment Agreement, dated April 10, 2001, between the
Company and David Ott. (13)
10(s) - Severance Agreement, dated November 1, 2003, between the
Company and Kathleen Kelly. (12)
10(t) - Severance Agreement, dated November 1, 2003, between the
Company and Andrew Perz. (12)
10(u) - Severance Agreement, dated November 1, 2003, between the
Company and Harrison Tarver. (12)
21 - Subsidiaries of the Company. (9)
23 - Consent of KPMG LLP. (14)
31.1 - Section 302 Certification of Chief Executive Officer. (14)
26
31.2 - Section 302 Certification of Principal Accounting Officer.
(14)
32 - Section 906 Certifications. (14)
- ------------------------------------------------
1. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993.
2. Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1994.
3. Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1995.
4. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997.
5. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998.
6. Incorporated by reference to the Company's Annual Report on Form 10-K/A for
the fiscal year ended June 30, 2000.
7. Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000.
8. Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A
for the quarterly period ended March 31, 2002.
9. Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002.
10. Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2002.
11. Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2003.
12. Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2003.
13. Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2004.
14. Filed herewith.
(C) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted since they either are not applicable, not
required or the information is included elsewhere herein.
27
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AMERICAN TECHNICAL CERAMICS CORP.
BY: /S/ VICTOR INSETTA
------------------
VICTOR INSETTA
President
Dated: September 24, 2004
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 COMPANY
IN THE CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
---- ----- ----
/S/ VICTOR INSETTA President and Director September 24, 2004
- ------------------ (Principal Executive Officer)
Victor Insetta
/S/ ANDREW R. PERZ Vice President, Controller September 24, 2004
- ------------------- (Principal Accounting Officer)
Andrew R. Perz
/S/ STUART P. LITT Director September 24, 2004
- ------------------
Stuart P. Litt
/S/ O. JULIAN GARRARD III Director September 24, 2004
- -------------------------
O. Julian Garrard III
/S/ CHESTER E. SPENCE Director September 24, 2004
- ---------------------
Chester E. Spence
/S/ THOMAS J. VOLPE Director September 24, 2004
- -------------------
Thomas J. Volpe
/S/ DOV S. BACHARACH Director September 24, 2004
- --------------------
Dov S. Bacharach
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Report of Independent Registered Public Accounting Firm ........ F-1
Consolidated Balance Sheets as of June 30, 2004 and 2003 ........ F-2
Consolidated Statements of Operations
Fiscal Years Ended June 30, 2004, 2003 and 2002 .............. F-3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income/(Loss)
Fiscal Years Ended June 30, 2004, 2003 and 2002 .............. F-4
Consolidated Statements of Cash Flows
Fiscal Years Ended June 30, 2004, 2003 and 2002 .............. F-5
Notes to Consolidated Financial Statements ...................... F-6
F
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Technical Ceramics Corp.:
We have audited the accompanying consolidated balance sheets of American
Technical Ceramics Corp. and subsidiaries ("the Company") as of June 30, 2004
and 2003, 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, 2004. 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Technical
Ceramics Corp. and subsidiaries as of June 30, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2004, in conformity with accounting principles generally
accepted in the United States of America.
/S/ KPMG LLP
Melville, New York
September 9, 2004
F-1
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, 2004 JUNE 30, 2003
---------------- ----------------
CURRENT ASSETS
Cash (including cash equivalents of $502,000 and
$996,000, respectively) $ 4,534,000 $ 8,685,000
Investments 2,508,000 3,011,000
Accounts receivable, net 10,563,000 6,721,000
Inventories 22,268,000 15,144,000
Deferred income taxes, net 2,777,000 1,989,000
Other current assets 865,000 787,000
---------------- ----------------
TOTAL CURRENT ASSETS 43,515,000 36,337,000
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Land 738,000 738,000
Buildings 10,902,000 10,115,000
Leasehold improvements 5,183,000 5,167,000
Machinery and equipment 43,350,000 41,389,000
Computer equipment and software 6,309,000 5,349,000
Furniture, fixtures and other 1,751,000 1,629,000
---------------- ----------------
68,233,000 64,387,000
Less: Accumulated depreciation and amortization 42,092,000 37,213,000
---------------- ----------------
26,141,000 27,174,000
---------------- ----------------
OTHER ASSETS 197,000 37,000
---------------- ----------------
TOTAL ASSETS $ 69,853,000 $ 63,548,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term related party debt $ 394,000 $ 355,000
Accounts payable 2,065,000 1,025,000
Accrued expenses 5,107,000 2,843,000
Income taxes payable 1,049,000 782,000
---------------- ----------------
TOTAL CURRENT LIABILITIES 8,615,000 5,005,000
LONG-TERM RELATED PARTY DEBT, NET OF CURRENT PORTION 2,896,000 3,290,000
DEFERRED INCOME TAXES 3,515,000 3,300,000
---------------- ----------------
TOTAL LIABILITIES 15,026,000 11,595,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock -- $0.01 par value; authorized 20,000,000 shares; issued
8,644,058 and 8,502,758 shares,
outstanding 8,229,918 and 8,088,618 shares, respectively 86,000 85,000
Capital in excess of par value 12,051,000 11,418,000
Retained earnings 43,846,000 41,670,000
Accumulated other comprehensive income:
Unrealized loss on investments available-for-sale, net (5,000) --
Cumulative foreign currency translation adjustment 282,000 176,000
---------------- ----------------
277,000 176,000
---------------- ----------------
Less: Treasury stock, at cost (414,140 and 414,140 shares, respectively) 1,396,000 1,396,000
---------------- ----------------
Deferred compensation 37,000 --
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 54,827,000 51,953,000
---------------- ----------------
$ 69,853,000 $ 63,548,000
================ ================
See accompanying notes to consolidated financial statements.
F-2
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
2004 2003 2002
---- ---- ----
Net sales $ 61,183,000 $ 49,048,000 $ 49,585,000
Cost of sales 40,746,000 34,716,000 39,961,000
------------ ------------ ------------
Gross profit 20,437,000 14,332,000 9,624,000
------------ ------------ ------------
Selling, general and administrative expenses 14,815,000 11,972,000 12,403,000
Research and development expenses 3,067,000 2,766,000 3,644,000
Other 27,000 349,000 173,000
------------ ------------ ------------
Operating expenses 17,909,000 15,087,000 16,220,000
------------ ------------ ------------
Income/(loss) from operations 2,528,000 (755,000) (6,596,000)
------------ ------------ ------------
Other expense (income)
Interest expense 365,000 359,000 496,000
Interest income (68,000) (109,000) (191,000)
Other 2,000 -- (160,000)
------------ ------------ ------------
299,000 250,000 145,000
------------ ------------ ------------
Income/(loss) before provision for income taxes 2,229,000 (1,005,000) (6,741,000)
Provision for income taxes 53,000 (504,000) (2,498,000)
------------ ------------ ------------
Net Income/(loss) $ 2,176,000 $ (501,000) $ (4,243,000)
============ ============ ============
Basic net income/(loss) per common share $ 0.27 $ (0.06) $ (0.53)
Diluted net income/(loss) per common share $ 0.25 $ (0.06) $ (0.53)
------------ ------------ ------------
Basic weighted average common shares outstanding 8,132,000 8,074,000 8,050,000
============ ============ ============
------------ ------------ ------------
Diluted weighted average common shares outstanding 8,583,000 8,074,000 8,050,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
Common Stock Capital in
Comprehensive -------------------- Excess of Par Retained
Income / (Loss) Shares Amount Value Earnings
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 8,451,433 $ 85,000 $11,260,000 $46,414,000
Net loss $ (4,243,000) --- --- --- (4,243,000)
Tax benefit of stock options exercised --- --- --- 57,000 ---
Stock award compensation --- --- --- (112,000) ---
Exercise of stock options --- 40,825 --- 175,000 ---
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of reclassification
adjustment (51,000)
Foreign currency translation adjustment 248,000
----------------
Other comprehensive income, net of tax 197,000 --- --- --- ---
----------------
Comprehensive loss $ (4,046,000)
================ --------------------------------------------------------
BALANCE AT JUNE 30, 2002 8,492,258 $ 85,000 $11,380,000 $42,171,000
Net loss $ (501,000) --- --- --- (501,000)
Tax benefit of stock options exercised --- --- --- 2,000 ---
Stock award compensation expense --- --- --- 10,000 ---
Exercise of stock options --- 10,500 --- 26,000 ---
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of reclassification
adjustment (5,000)
Foreign currency translation adjustment 222,000
----------------
Other comprehensive Income, net of tax 217,000 --- --- --- ---
----------------
Comprehensive loss $ (284,000)
================ --------------------------------------------------------
BALANCE AT JUNE 30, 2003 8,502,758 $ 85,000 $11,418,000 $41,670,000
Net income $ 2,176,000 --- --- --- 2,176,000
Tax benefit of stock options exercised --- --- --- 55,000 ---
Stock award compensation expense --- --- --- 41,000 ---
Stock awards granted --- 21,350 --- 149,000 ---
Stock option compensation expense --- --- --- 47,000 ---
Exercise of stock options --- 119,950 1,000 341,000 ---
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of reclassification
adjustment (5,000)
Foreign currency translation adjustment 106,000
----------------
Other comprehensive Income, net of tax 101,000 --- --- --- ---
----------------
Comprehensive income $ 2,277,000
================ --------------------------------------------------------
BALANCE AT JUNE 30, 2004 8,644,058 $ 86,000 $ 12,051,000 $43,846,000
========================================================
Accumulated Other
Comprehensive Deferred
Income (Loss) Treasury Stock Compensation Total
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 $ (238,000) $ (1,447,000) $ (245,000) $ 55,829,000
Net loss --- --- --- (4,243,000)
Tax benefit of stock options exercised --- --- --- 57,000
Stock award compensation --- 44,000 245,000 177,000
Exercise of stock options --- -- -- 175,000
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of reclassification
adjustment
Foreign currency translation adjustment
Other comprehensive income, net of tax 197,000 --- --- 197,000
Comprehensive loss
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ (41,000) $ (1,403,000) --- $ 52,192,000
Net loss --- --- --- (501,000)
Tax benefit of stock options exercised --- --- --- 2,000
Stock award compensation expense --- 7,000 --- 17,000
Exercise of stock options --- --- --- 26,000
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of reclassification
adjustment
Foreign currency translation adjustment
Other comprehensive Income, net of tax 217,000 --- --- 217,000
Comprehensive loss
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $ 176,000 $ (1,396,000) --- $ 51,953,000
Net income --- --- --- 2,176,000
Tax benefit of stock options exercised --- --- --- 55,000
Stock award compensation expense --- --- --- 41,000
Stock awards granted --- --- --- 149,000
Stock option compensation expense --- --- (37,000) 10,000
Exercise of stock options --- --- --- 342,000
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of reclassification
adjustment
Foreign currency translation adjustment
Other comprehensive Income, net of tax 101,000 --- --- 101,000
Comprehensive income
-------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 $ 277,000 $ (1,396,000) $ (37,000) $ 54,827,000
=========================================================================
See accompanying notes to consolidated financial statements.
F-4
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2004, 2003 AND 2002
CASH FLOWS FROM OPERATING ACTIVITIES: 2004 2003 2002
----------- ----------- -----------
Net income/(loss) $ 2,176,000 $ (501,000) $(4,243,000)
Adjustments to reconcile net income/(loss) to net cash
(used in)/provided by operating activities:
Depreciation and amortization 5,152,000 5,391,000 5,061,000
Loss on disposal of fixed assets 373,000 459,000 98,000
Stock award compensation expense 200,000 17,000 177,000
Deferred income taxes (570,000) (45,000) 198,000
Investment interest accretion, net (21,000) (8,000) --
Realized loss/(gain) on sale of investments 2,000 -- (160,000)
Changes in operating assets and liabilities:
Accounts receivable, net (3,749,000) (393,000) 5,202,000
Inventories (7,038,000) 273,000 9,151,000
Other assets (224,000) 1,843,000 632,000
Accounts payable, accrued expenses and
income taxes payable 3,606,000 556,000 (7,389,000)
----------- ----------- -----------
Net cash (used in)/ provided by operating activities (93,000) 7,592,000 8,727,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,506,000) (1,861,000) (3,156,000)
Purchase of investments (3,482,000) (5,001,000) (4,325,000)
Proceeds from sale of investments 3,997,000 5,000,000 4,900,000
Proceeds from sale of fixed assets 22,000 18,000 376,000
----------- ----------- -----------
Net cash used in investing activities (3,969,000) (1,844,000) (2,205,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (355,000) (4,436,000) (3,444,000)
Proceeds from exercise of stock options 342,000 26,000 175,000
Proceeds from issuance of debt --- --- 2,000,000
----------- ----------- -----------
Net cash used in financing activities (13,000) (4,410,000) (1,269,000)
----------- ----------- -----------
Effect of exchange rate changes on cash (76,000) 218,000 217,000
----------- ----------- -----------
Net (decrease)/increase in cash and cash equivalents (4,151,000) 1,556,000 5,470,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,685,000 7,129,000 1,659,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,534,000 $ 8,685,000 $ 7,129,000
=========== =========== ===========
Supplemental cash flow information:
Interest paid $ 364,000 $ 397,000 $ 459,000
Income taxes paid $ 237,000 $ --- $ 1,177,000
See accompanying notes to consolidated financial statements.
F-5
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
American Technical Ceramics Corp. and its wholly-owned subsidiaries (the
"Company") are engaged in the design, development, manufacture and sale of
ceramic multilayer capacitors for commercial and military purposes in the United
States and for export, primarily to Western Europe, Canada and the Far East. In
fiscal years 2004 and 2003, no one customer accounted for more than 10% of
consolidated net sales. In fiscal year 2002, sales to various divisions of
General Electric Company accounted for approximately 10% of consolidated
revenues. The Company operates in one industry segment - the electronic
components industry.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
American Technical Ceramics Corp. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
REVENUE RECOGNITION
The Company generates revenue from product sales to original equipment
manufacturers and resellers. The Company recognizes revenue when persuasive
evidence of an arrangement exists (which is evidenced by written purchase
arrangements), delivery has occurred and title has passed to the customer, the
selling price is fixed or determinable and collectibility of the resulting
receivable is reasonably assured. The Company does not perform any installation
services and does not have any post-shipment obligations. The Company typically
warranties that its products will be free from defects in material and
workmanship for 90 days. However, defective product may be accepted beyond this
period. The Company provides for estimated sales returns when the underlying
sale is made, based upon historical experience and known events or trends, in
accordance with Statement of Financial Accounting Standards No. 48, "Revenue
Recognition when Right of Return Exists". Historically, product returns and
associated warranty costs have not been significant. The Company generally does
not grant price protection.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents, including money
market accounts and certificates of deposit.
INVESTMENTS
The Company classifies its investments in debt and equity securities as
available-for-sale. Accordingly, these investments are reported at fair value
with unrealized holding gains and losses excluded from earnings and reported as
a component of accumulated other comprehensive income/loss within stockholders'
equity, net of tax. Classification of investments is determined at acquisition
and reassessed at each reporting date. Realized gains and losses are included in
the determination of net earnings at the time of sale and are derived using the
specific identification method for determining cost of securities sold.
INVENTORIES
Inventories are stated at the lower of aggregate cost (first-in, first-out)
or market.
F-6
COMPREHENSIVE INCOME
The following table sets forth the components of the change in net
unrealized gains/(losses) on investments available-for-sale for the fiscal years
ended June 30, 2004, 2003 and 2002:
2004 2003 2002
--------- --------- ---------
Unrealized holding (losses)/gains
arising during the period, net of tax $ (7,000) $ (5,000) $ 50,000
Less: reclassification adjustment for
losses/(gains) included in net income, net of tax 2,000 -- (101,000)
--------- --------- ---------
Change in net unrealized losses on investments
available-for-sale $ (5,000) $ (5,000) $ (51,000)
========= ========= =========
The deferred tax (benefit)/liability associated with unrealized holding
gains/(losses) arising during the fiscal years 2004, 2003 and 2002 was ($3,000),
($2,000) and ($29,000), respectively. The tax benefit of the reclassification
adjustments for gains on sales of investments included in net income during
fiscal years 2004 and 2003 was nil, and for fiscal year 2002 was ($59,000).
LONG-LIVED ASSETS
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided primarily using the straight-line method over the
estimated useful lives of the related assets as follows:
Buildings 30 years
Leasehold improvements Lesser of the remaining lease term or 5 years
Machinery and equipment 10 years
Furniture, fixtures and other 3 to 8 years
Computer equipment and software 3 years
The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value.
INCOME TAXES
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. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. 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.
F-7
FOREIGN CURRENCY TRANSLATION
The Company translates the financial statements of its foreign subsidiaries
(located in Sweden and China) by applying the current exchange rate as of the
balance sheet date to the assets and liabilities of the subsidiary and a
weighted average rate to such subsidiary's results of operations. The resulting
translation adjustment is recorded as a component of stockholders' equity.
STOCK-BASED COMPENSATION
On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"),
using the prospective method for the transition as permitted by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS No. 148"). Under the prospective method,
stock compensation expense will be recognized for any option grant or stock
award granted on or after July 1, 2003 based upon the award's fair value.
Outstanding stock options granted prior to July 1, 2003 will continue to be
accounted for under the intrinsic value method. Stock compensation expense for
new awards will be calculated using the Black-Scholes option pricing model to
estimate fair value.
The average per-share fair value of stock options granted during fiscal
years 2004, 2003 and 2002 was $5.85, $2.50 and $5.11, respectively, as
determined by the Black-Scholes option pricing model (assuming a risk-free
interest rate of 3.30%, 3.23% and 4.19%, respectively, expected life of five
years, expected volatility of 71.5%, 71.5% and 68.0%, respectively, and no
dividends). The weighted average remaining contractual life of options
outstanding as of June 30, 2004 was 6.0 years.
Had compensation expense with respect to options and awards been determined
based on the fair value method on the date of grant consistent with the
methodology prescribed under SFAS No. 123 prior to July 1, 2003, the Company's
net income/(loss) and earnings/(loss) per share would have approximated the pro
forma amounts indicated below:
Year Ended June 30,
----------------------------------------------
2004 2003 2002
----------- ------------- -----------
Net income/(loss), as reported $ 2,176,000 $ (501,000) $(4,243,000)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 254,000 19,000 115,000
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all
awards, net of related tax effects (1,510,000) (1,112,000) (942,000)
----------- ------------- -----------
Pro forma net income/(loss) $ 920,000 $ (1,594,000) $(5,070,000)
=========== ============ ===========
Income/(loss) per share:
Basic - as reported $ 0.27 $ (0.06) $ (0.53)
Basic - pro forma $ 0.11 $ (0.20) $ (0.63)
Diluted - as reported $ 0.25 $ (0.06) $ (0.53)
Diluted - pro forma $ 0.11 $ (0.20) $ (0.63)
The weighted-average fair value of each stock option included in the
preceding pro forma amounts is estimated using the Black-Scholes option pricing
model and is amortized over an expected grant life of five years.
F-8
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income
available to common stockholders (which for the Company equals its net income)
by the weighted average number of common shares outstanding, and dilutive EPS
adds the dilutive effect of stock options and other common stock equivalents.
Antidilutive shares aggregating 520,000, 1,381,000 and 920,000, respectively,
have been omitted from the calculation of dilutive EPS for the fiscal years
ended June 30, 2004, 2003 and 2002, respectively. A reconciliation between
numerators and denominators of the basic and diluted earnings per share is as
follows:
YEAR ENDED JUNE 30, 2004 YEAR ENDED JUNE 30, 2003 YEAR ENDED JUNE 30, 2002
------------------------ ------------------------ ------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
Basic EPS $2,176,000 8,132,000 $ 0.27 ($501,000) 8,074,000 ($0.06) ($4,243,000) 8,050,000 ($0.53)
Effect of Dilutive
Securities:
Stock Options -- 444,000 (0.02) -- -- -- -- -- --
Stock Awards -- 7,000 -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Diluted EPS $2,176,000 8,583,000 $ 0.25 ($501,000) 8,074,000 ($0.06) ($4,243,000) 8,050,000 ($0.53)
=================================================================================================================
IMPACT OF NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transaction and Disclosure"
("SFAS No. 148"), an amendment of FASB Statement No. 123", which provides
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of FASB Statement 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The Company adopted the disclosure
provisions of SFAS No. 148 effective, January 1, 2003. The Company continued to
apply the intrinsic value-based method to account for stock options through
fiscal year 2003.
In July 2003, the Company elected to adopt SFAS No. 123 and to transition
to a fair value-based method of accounting for stock-based employee
compensation. The Company will use the prospective method for the transition as
permitted by SFAS 148. Under the prospective method, stock compensation expense
for new awards will be recognized for any new option grants or stock awards
granted on or after July 1, 2003 based upon the award's fair value. Outstanding
stock options granted prior to July 1, 2003 will continue to be accounted for
under the intrinsic value method. Stock compensation expense for new awards will
be calculated using the Black-Scholes Pricing Model to estimate fair value. The
adoption of this standard will increase recognized stock compensation expense to
the extent stock options or awards are granted after June 30, 2003.
During fiscal 2004, the Company adopted the Financial Accounting Standards
Board Interpretation No. 46(R), "Consolidation of Variable Interest Entities"
(FIN No. 46). Previously, consolidation of variable interest entities was
largely based on controlling voting rights. This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to entities where the Company is vulnerable to a majority of the
entity's risk of loss or is entitled to receive a majority of the entity's
residual returns even if there is no controlling voting interest. The adoption
of FIN No. 46 did not have any impact on the Company's consolidated results of
operations or financial position.
F-9
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include, but are not limited to, provisions for
doubtful accounts receivable and sales returns, net realizable value of
inventory, and assessments of the recoverability of the Company's long lived
assets (including deferred taxes). Actual results could differ from those
estimates.
SUPPLEMENTAL CASH FLOW INFORMATION
During fiscal year 2004, significant non-cash activities included (i) a tax
benefit of $55,000 resulting from stock options exercised, (ii) deferred
compensation expense of $41,000 in connection with awards of an aggregate of
7,000 shares of common stock, (iii) compensation expense of $149,000 recognized
in connection with awards of an aggregate of 21,350 shares of common stock, and
(iv) compensation expense of $10,000 recognized in connection with 13,000 stock
options which will also result in compensation expense of $37,000 to be
recognized ratably over the next four years.
During fiscal year 2003, significant non-cash activities included (i) a tax
benefit of $2,000 resulting from stock options exercised, (ii) deferred
compensation expense of $17,000 in connection with awards of an aggregate of
7,000 shares of common stock with a cost basis of $7,000, (iii) amortization of
interest income of $8,000 related to net premiums on purchases of securities
available for sale, and (iv) the adjustment of a capital lease relating to the
Company's Jacksonville, Florida facility to reflect certain additions to the
facility. The adjustment increased both fixed assets and the related long-term
debt by $1,437,000.
During fiscal year 2002, significant non-cash activities included (i) a tax
benefit of $57,000 resulting from stock options exercised, and (ii) deferred
compensation expense of $67,000 in connection with awards of an aggregate of
7,000 shares of common stock with a cost basis of $44,000.
NOTE 2. INVESTMENTS
Investments consist of the following:
Gross Unrealized Gross Unrealized
June 30, 2004 Cost Gains Losses Fair Value
- ------------- ------------- --------------- -------------- -------------
U.S. Government obligations $ 2,016,000 $ --- $ 8,000 $ 2,008,000
Bank Time Deposits 500,000 --- --- 500,000
------------- --------------- -------------- -------------
$ 2,516,000 $ --- $ 8,000 $ 2,508,000
============= =============== ============== =============
Gross Unrealized Gross Unrealized
June 30, 2003 Cost Gains Losses Fair Value
- ------------- ------------- --------------- -------------- -------------
U.S. Government obligations $ 3,011,000 $ --- $ --- $ 3,011,000
------------- --------------- -------------- -------------
The Company's investments at June 30, 2004 contractually mature as follows:
Cost Fair Value
------------ ------------
Within one year $ 2,016,000 $ 2,015,000
Between one and five years 500,000 493,000
------------ ------------
$ 2,516,000 $ 2,508,000
============ ============
F-10
NOTE 3. INVENTORIES
Inventories consist of the following:
June 30, 2004 June 30, 2003
-------------- --------------
Raw materials $ 11,772,000 $ 7,055,000
Work in process 6,722,000 4,361,000
Finished goods 3,774,000 3,728,000
-------------- --------------
$ 22,268,000 $ 15,144,000
============== ==============
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 2004 June 30, 2003
-------------- --------------
Notes payable to banks $ -- $ --
Obligations under capital leases 3,290,000 3,645,000
-------------- --------------
3,290,000 3,645,000
Less: Current portion 394,000 355,000
-------------- --------------
Long-term debt $ 2,896,000 $ 3,290,000
============== ==============
NOTES PAYABLE TO BANKS
In April 2004, the Company entered into a $4,000,000 credit facility with
General Electric Capital Corporation for the purchase of equipment. The line
bears interest, at the Company's option, at either a fixed rate of 3.47% above
the five year Treasury Bond yield or a floating rate of 3.65% above LIBOR.
Borrowings under the line are secured by the equipment purchased thereunder.
Each separate borrowing under the line will be a fully amortizing term loan with
a maturity of five years from the date the funds are drawn down. The line of
credit will expire on March 31, 2005. As of June 30, 2004, the Company had not
incurred any borrowing under the credit facility.
OBLIGATIONS UNDER CAPITAL LEASES
The Company leases an administrative office, manufacturing and research and
development complex located in Jacksonville, Florida (the "Jacksonville
Facility") from a partnership controlled by the Company's President, Chief
Executive Officer and principal stockholder under a capital lease. At June 30,
2004, the Jacksonville Facility has an aggregate cost of $5,104,000 and a net
book value of $2,332,000. The lease is for a period of 30 years, was capitalized
using an interest rate of 10.5% and expires on September 30, 2010. The lease
currently provides for base rent of approximately $719,000 per annum. The lease
further provides for annual increases in base rent for years beginning after May
1, 1999, based on the increase in the Consumer Price Index ("CPI") since May 1,
1998 applied to base rent. The lease also provides for increases to the base
rent in connection with any new construction at the Jacksonville Facility. Under
the lease, upon any new construction being placed into use, the base rental is
subject to increase to the fair market rental of the Jacksonville Facility,
including the new construction. In August 2002, the base monthly rental was
increased to approximately $60,000 for fiscal year 2003, effective September 1,
2002, to reflect the addition of a new manufacturing facility at the
Jacksonville Facility. In fiscal year 2002, the base rental was approximately
$43,000 per month.
F-11
The following table sets forth the future minimum lease payments (excluding
rental adjustments) under this capital lease by fiscal year and the present
value of the minimum lease payments as of June 30, 2004:
2005 $ 719,000
2006 719,000
2007 719,000
2008 719,000
2009 719,000
2010 and thereafter 899,000
-----------------
Total minimum lease payments 4,494,000
Less: Amount representing interest 1,204,000
-----------------
Present value at June 30, 2004 3,290,000
Less: Current portion 394,000
-----------------
$ 2,896,000
=================
NOTE 5. INCOME TAXES
The components of income/(loss) before income taxes are as follows:
Fiscal Years Ended June 30,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Domestic $ 1,940,000 $ (931,000) $(6,784,000)
Foreign 289,000 (74,000) 43,000
----------- ----------- -----------
$ 2,229,000 $(1,005,000) $(6,741,000)
=========== =========== ===========
The provision for income taxes consists of the following:
Years Ended June 30,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
CURRENT:
Federal $ 951,000 $ (464,000) $(2,716,000)
State (110,000) 5,000 26,000
Foreign (218,000) -- (6,000)
----------- ----------- -----------
Total current 623,000 (459,000) (2,696,000)
----------- ----------- -----------
DEFERRED:
Federal (561,000) (5,000) 446,000
State -- (40,000) (248,000)
Foreign (9,000) -- --
----------- ----------- -----------
Total deferred (570,000) (45,000) 198,000
----------- ----------- -----------
$ 53,000 $ (504,000) $(2,498,000)
=========== =========== ===========
F-12
The following table reconciles the Federal statutory rate to the Company's
effective tax rate:
Years Ended June 30,
-----------------------------------------------
2004 2003 2002
---------- ---------- ----------
Tax provision computed at statutory rate 34.0% 34.0% 34.0%
State tax and State tax credit, net of Federal tax effect 1.1 2.3 2.1
FSC/EIE benefit (7.5) 12.4 1.1
Foreign tax (4.9) --- ---
Changes in tax contingency estimates
and audit settlements (1) (19.9) --- ---
Tax credits and other, net (0.4) 1.4 (0.1)
---------- ---------- ----------
2.4% 50.1% 37.1%
========== ========== ==========
(1) The Company has undergone tax audits in various jurisdictions which are
substantially complete. In fiscal year 2004, the Company recognized a gain as a
result of audit issue settlements and the reevaluation of certain tax
contingency estimates relating to these jurisdictions.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
2004 and 2003, are presented below.
June 30,
--------------------------
2004 2003
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts receivable
and sales returns $ 169,000 $ 155,000
Inventories 1,755,000 1,476,000
Accrued expenses 606,000 399,000
Unrealized loss on investments available for sale 3,000 --
Net operating loss
and tax credit carry forwards 1,553,000 1,598,000
Other 6,000 --
Valuation allowance (1,309,000) (1,419,000)
----------- -----------
Total deferred tax assets 2,783,000 2,209,000
----------- -----------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capital leases (3,521,000) (3,512,000)
Other -- (8,000)
----------- -----------
Total deferred tax liabilities (3,521,000) (3,520,000)
----------- -----------
Net deferred tax liability $ (738,000) $(1,311,000)
=========== ===========
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
expected reversal of deferred tax liabilities, expected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income, expected future taxable income over the periods in
which the deferred tax assets are deductible, and reversals of deferred tax
liabilities, management believes (although there can be no assurance) that it is
more likely than not that the Company will realize the benefits of these
deductible differences in the United States. The Company has available state net
operating loss carryforwards which expire in various years through 2024.
However, due to the uncertainties of realizing certain tax loss carryforwards, a
valuation allowance has been provided against the associated deferred tax asset.
At June 30, 2003, the Company had a valuation allowance of $159,000 relating to
net operating losses at its Swedish subsidiary. Current year earnings at this
subsidiary have entirely utilized the net operating losses. As such, the
valuation allowance as it relates to the net operating losses has been reversed.
F-13
The Company had $58,000 of undistributed earnings of foreign subsidiaries
as of June 30, 2004. No accrual of U.S. income taxes on the earnings of these
subsidiaries has been recorded because it is management's intention to reinvest
such earnings in the operations of such subsidiaries. Determination of the
amount of unrecognized deferred U.S. income tax liabilities is not practicable
to calculate because of the complexity of this hypothetical calculation.
NOTE 6. STOCK-BASED COMPENSATION
STOCK OPTIONS
On April 1, 1997, the Board of Directors approved the American Technical
Ceramics Corp. 1997 Stock Option Plan (the "1997 Option Plan") pursuant to which
the Company may grant options to purchase up to 800,000 shares of the Company's
common stock. On April 11, 2000, the Board of Directors approved the American
Technical Ceramics Corp. 2000 Incentive Stock Plan (the "2000 Plan", and
collectively with the 1997 Option Plan, the "Plans") pursuant to which the
Company may grant options or stock awards covering up to 1,200,000 shares of the
Company's common stock. Options granted under the Plans may be either incentive
or non-qualified stock options. The term of each incentive stock option shall
not exceed ten years from the date of grant (five years for grants to employees
who own 10% or more of the voting power of the Company's common stock), and
options may vest in accordance with a vesting schedule established by the plan
administrator (typically 25% per year during the first four years of their
term). Unless terminated earlier by the Board, the 1997 Option Plan will
terminate on March 31, 2007. Unless terminated earlier by the Board, the 2000
Plan will terminate on April 10, 2010.
Disposition of shares acquired pursuant to the exercise of incentive stock
options under both Plans may not be made by the optionees within two years
following the date that the option is granted, nor within one year after the
exercise of the option, without the written consent of the Company.
Prior to fiscal year 2004, the Company has not recognized compensation cost
for these options upon grant as the exercise price was equal to or greater than
the fair market value of the underlying stock at the date of grant. In July
2003, the Company adopted Statement of Financial Accounting Standard No. 123
("SFAS No. 123"), using the prospective method as prescribed in Statement of
Financial Accounting Standard No. 148 ("SFAS No. 148"). The Company applies SFAS
No. 123 in accounting for employee stock-based compensation awarded or granted
after June 30, 2003, and applies Accounting Principals Board Opinion No. 25,
Accounting for Stock Issued to Employees ("Opinion No. 25"), in accounting for
employee stock-based compensation awarded or granted prior to July 1, 2003, and
makes pro-forma disclosures of net income and net income per share as if the
fair value method under SFAS No. 123, as amended by SFAS No. 148, had been
applied. The Company has recorded $10,000 in compensation expense for the twelve
months ended June 30, 2004 for options granted after June 30, 2003.
On January 16, 2002, the Company filed a Schedule TO with the Securities
and Exchange Commission and commenced an offer to exchange outstanding options
under the Plans having an exercise price per share of $19.50 or more for new
options. The offer expired on February 13, 2002. The Company accepted for
exchange options to purchase an aggregate of 432,000 shares of common stock. On
August 15, 2002, the Company issued 407,000 new options in exchange for the
options tendered and accepted for exchange. The new options were issued at the
closing price of the Company's common stock on August 15, 2002, which was $2.35
per share. No compensation expense was recognized as a result of these
exchanges.
F-14
Stock option activity for fiscal years 2004, 2003 and 2002 is as follows:
2004 2003 2002
------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Subject to Exercise Subject to Exercise Subject Exercise
Options Price Options Price to Options Price
------- ----- ------- ----- ---------- -----
Outstanding, beginning of year 1,380,200 $ 6.63 918,800 $ 8.98 1,346,025 $ 14.23
Granted 13,000 5.85 504,000 2.50 227,000 8.53
Canceled (6,250) 9.11 (19,850) 8.34 (469,750) 20.53
Expired (9,600) 7.35 (12,250) 12.35 (143,650) 21.13
Exercised (119,950) 2.84 (10,500) 2.60 (40,825) 4.29
--------- --------- -------
Outstanding, end of year 1,257,400 $ 6.97 1,380,200 $ 6.63 918,800 $ 8.98
========= ========= =======
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 2004:
Options Outstanding Options Exercisable
-------------------------------------------------- ------------------------------
Actual Range of Weighted-Average Weighted- Weighted-
Exercise Prices 150% Number Remaining Average Number Average
Increment Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------- ----------- ---------------- -------------- ----------- --------------
$ 2.35 - 2.59 374,500 6.2 $ 2.35 353,500 $ 2.35
4.00 - 5.85 337,400 4.6 $ 4.38 290,650 $ 4.22
6.44 - 9.09 199,500 7.2 $ 8.60 113,500 $ 8.34
11.40 - 15.75 300,000 6.4 $11.98 224,250 $11.98
19.50 - 19.50 38,000 5.8 $19.50 38,000 $19.50
44.00 - 44.00 8,000 5.9 $44.00 8,000 $44.00
- ------------------ --------- --- ------ --------- ------
$ 2.35 - 44.00 1,257,400 6.0 $ 6.97 1,027,900 $ 6.60
========= ========= ------
At June 30, 2004, an aggregate of 226,500 shares were available for option
grants or awards under the Plans.
OTHER STOCK-BASED COMPENSATION
In fiscal years 2004, 2003 and 2002, the Company awarded an aggregate of
28,350, 7,000 and 7,000 shares of common stock, respectively, to officers and
certain other employees. These awards resulted in compensation expense of
$317,000, $38,000 and $88,000, respectively (including $127,000, $21,000 and
$21,000 of payments made to offset tax liabilities associated with these
awards), measured by the market value of the shares at June 30, 2004, June 28,
2003 and June 29, 2002, respectively.
Treasury shares with an aggregate cost basis of $7,000 and $44,000 were
issued in connection with the awards granted in fiscal years 2003 and 2002,
respectively. Accordingly, treasury stock was reduced for the cost of the shares
on a specific identification, first-in first-out, basis.
F-15
NOTE 7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company had a related party operating lease with the Company's
President, Chief Executive Officer and principal stockholder, for a rented
facility which expired December 31, 2001. The Company and the related party
agreed to continue the lease on a month-to-month basis under the existing terms
until a new agreement was finalized. In September 2002, the Company and an
entity owned by the related party to which the related party had transferred the
facility reached a new agreement on a long-term lease pursuant to which the
Company pays $410,000 per annum, subject to annual increases based upon
increases in the CPI. The lease expires in September 2007, subject to two
five-year renewal options. Rent expense under this related party operating lease
was approximately $413,000, $429,000 and $523,000 for the fiscal years ended
June 30, 2004, 2003 and 2002, respectively.
Rent expense to unrelated parties was approximately $157,000, $93,000 and
$181,000 for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.
Minimum rent payments under existing lease commitments extending through the
year ended June 30, 2005 are approximately $40,000.
CONTINGENCIES
The Company is party to certain legal proceedings that arose in the normal
course of its business. The Company does not believe that the resolution of such
matters will have a significant effect on the Company's financial position or
results of operations.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its President and Chief
Executive Officer which provides for annual base compensation of $323,000 as
well as additional annual compensation equal to 2.5% of net income before such
additional compensation and income taxes. The Company, at its option, may pay
the additional annual compensation in stock, cash or a combination thereof,
subject to certain limitations.
The agreement expires March 1st of each year but is renewed automatically
for an additional one year in the absence of written notice to the contrary by
either party at least 120 days prior to the March 1st renewal date. In addition,
if there is a change in control of the Company or the employee's employment is
terminated by the Company before the expiration of the agreement other than for
cause (as defined in the agreement), the employee is entitled to the greater of
(a) all compensation due under the remaining term of the agreement, or (b) a
payment equal to three times his average annual compensation (including any
incentives) over the last five years.
In December 2001, the Company renewed a four year employment agreement with
an executive officer. The agreement provides for annual base compensation of
$125,000, with annual increases of 8% over the rate in effect during the
immediately preceding year, plus additional compensation based upon specific
performance measures. The agreement includes termination provisions providing
for payments depending on the nature of the termination.
In April 2003, the Company entered into a three year agreement with another
executive officer. The agreement provides for annual base compensation of
$160,000, plus additional compensation based upon specific performance measures.
If the officer is terminated by the Company during the term of the agreement
other than for cause (as defined in the agreement), the officer will be entitled
to receive his base salary for one year from the date of termination.
F-16
In October 2003, the Company entered into a three year employment agreement
with an executive officer. The agreement provides initially for annual base
compensation of $208,428 and participation in the Company's Officers' Bonus
Plan. If the officer is terminated by the Company during the term of the
agreement other than for cause (as defined in the agreement), (i) the officer
will be entitled to receive his base salary for a period of 15 months, (ii) the
Company shall continue to provide family medical coverage for a period of 18
months, and (iii) all exercisable options may be exercised for a period of one
year after termination.
In November 2003, the Company entered into three severance agreements with
three executive officers. If the officer is terminated by the Company during the
term of the agreement other than for cause (as defined in the agreement), (i)
the officers will be entitled to receive his or her base salary for a period of
months equal to the number of years the employee has been an executive officer
plus three months up to a maximum of 15 months, (ii) the Company shall continue
to provide family medical coverage for the severance period, and (iii) all
exercisable options may be exercised for the lesser of the severance period or
the expiration of the options.
In January 2004, the Company entered into a two year agreement with another
executive officer. The agreement provides for annual base compensation of
$165,500 and participation in the Company's Officers' Bonus Plan. In April 2004,
the annual compensation was increased to $200,000 in connection with a
promotion. If the officer is terminated by the Company during the term of the
agreement other than for cause (as defined in the agreement), the officer will
be entitled to receive his base salary for one year.
NOTE 8. OTHER DATA
ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, 2004 June 30, 2003
------------- -------------
Accrued commissions and bonuses $ 1,402,000 $ 520,000
Accrued payroll and related expenses 2,984,000 2,015,000
Other 721,000 308,000
------------- -------------
$ 5,107,000 $ 2,843,000
============= =============
VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included in the accompanying consolidated
financial statements consist of the following:
Balance - Additions Deductions / Balance -
Beginning of Charged to Other End of
Classification Period Expense Additions Period
- ---------------------------------------------- ----------------- ------------------ ----------------- ---------------
For the year ended June 30, 2004: $ 438,000 1,192,000 1,160,000 $ 470,000
Allowance for doubtful accounts receivable
and sales returns
For the year ended June 30, 2003:
Allowance for doubtful accounts receivable
and sales returns $ 665,000 1,597,000 1,824,000 $ 438,000
For the year ended June 30, 2002:
Allowance for doubtful accounts receivable
and sales returns $ 444,000 1,737,000 1,516,000 $ 665,000
F-17
EMPLOYEE BENEFIT DEFINED CONTRIBUTION PLAN
Effective November 1, 1985, the Company established a voluntary savings and
defined contribution plan under Section 401(k) of the Internal Revenue Code.
This Plan covers all U.S. employees meeting certain eligibility requirements and
allows participants to contribute a portion of their annual compensation. For
the fiscal years ended June 30, 2004, 2003 and 2002, the Company provided a
matching contribution of $575,000, $542,000 and $539,000, respectively, which
was equal to 50% of each participant's contribution up to a maximum of 6% of
annual compensation. Employees are 100% vested in their own contributions and
become fully vested in the employer contributions over five years.
PROFIT BONUS PLAN
Effective commencing in fiscal year 1995, the Company adopted a Profit
Bonus Plan for the benefit of eligible employees, as defined. The plan provides
that, for each fiscal year, the Board of Directors, in its discretion, may
establish a bonus pool not to exceed 10% of pretax income of the Company for the
subject fiscal year. The bonus pool is then allocated among eligible employees
in accordance with the terms of the plan. For fiscal year 2004, $224,000 was
recognized pursuant to this plan. No compensation expense was recognized in
respect of this plan for fiscal years 2003 and 2002.
Effective January 1, 2000, the Company adopted a Managers' Profit Bonus
Plan for the benefit of eligible employees, as defined. The plan provides that,
for each fiscal year, the Board of Directors, in its discretion, may allocate a
percentage of the Company's pre-tax profits (not to exceed 2.5% of such profits)
for equal distribution among participants in the plan. Participants in the
Managers' Profit Bonus Plan are no longer eligible to participate in the Profit
Bonus Plan described above. For fiscal years 2004, 2003 and 2002, the Company
recognized compensation expense of $56,000, $12,000 and $11,000, respectively,
in respect of this plan.
The Company has a bonus plan for executive officers. This plan provides for
a majority of the eligible employees to receive a cash bonus equal to at least
0.5% of the Company's pre tax income. In addition, two of the employees have
different plans that provide for bonus calculations based upon other factors,
including product line profitability and achievement of bookings quotas. For
fiscal years 2004, 2003 and 2002, the Company recognized compensation expense of
$294,000, $67,000 and $145,000, respectively, in respect of this plan.
NOTE 9. FOREIGN OPERATIONS
The Company markets and distributes a portion of its products sold abroad
through its wholly-owned subsidiary, American Technical Ceramics Europe AB,
located in Sweden. During fiscal year 2002, the Company closed its wholly-owned
subsidiary located in the United Kingdom as part of cost reduction measures
instituted during fiscal year 2002. The business activity from the United
Kingdom has been moved to the Company's wholly-owned subsidiary in Sweden.
During fiscal year 2002, the Company established a wholly-owned subsidiary in
the United States which established a representative office in the People's
Republic of China to service the Asian market. The following table summarizes
certain financial information covering the Company's operations by geographic
area for fiscal years 2004, 2003 and 2002. Net sales information is based upon
country of origin.
F-18
2004 2003 2002
------------------ ------------------ ------------------
Net sales
United States $ 51,831,000 $ 42,204,000 $ 44,359,000
Sweden 9,352,000 6,844,000 4,539,000
United Kingdom --- --- 687,000
------------------ ------------------ ------------------
Total $ 61,183,000 $ 49,048,000 $ 49,585,000
================== ================== ==================
Long-lived assets
United States $ 26,209,000 $ 27,127,000 $ 29,768,000
Sweden 90,000 67,000 59,000
China 39,000 17,000 ---
------------------ ------------------ ------------------
Total $ 26,338,000 $ 27,211,000 $ 29,827,000
================== ================== ==================
U.S. sales include $19,597,000, $13,507,000 and $11,900,000 for export in
fiscal years 2004, 2003 and 2002, respectively. Export sales were primarily to
customers in Western Europe, Canada and the Far East.
NOTE 10. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, AND
ACCRUED EXPENSES
The carrying amount approximates fair value due to the short maturity of
these instruments.
INVESTMENTS
Cost and fair value of the Company's investments is presented in Note 2.
Fair value is based upon quoted market prices.
LONG-TERM DEBT
At June 30, 2004, the fair value of the Company's capital lease obligation
with respect to its Jacksonville, Florida facility was $4,207,000 based on the
present value of future cash flows and the Company's estimated incremental
borrowing rate of 2.9%.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-19