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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, 1999
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 REGISTRANT 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(516) 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 REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- ----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
ON SEPTEMBER 7, 1999, THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S
COMMON STOCK (BASED UPON THE CLOSING SALES PRICE OF THE REGISTRANT'S COMMON
STOCK ON THE AMERICAN STOCK EXCHANGE ON SUCH DATE) HELD BY NONAFFILIATES OF THE
REGISTRANT WAS APPROXIMATELY $ 24,455,000. (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 7, 1999, THE REGISTRANT HAD OUTSTANDING 3,826,034 SHARES
OF COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE REGISTRANT'S PROXY
STATEMENT RELATING TO ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON NOVEMBER
19, 1999 ARE INCORPORATED INTO PART III OF THIS REPORT BY REFERENCE.
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PART 1
ITEM 1. BUSINESS
GENERAL
The Registrant was incorporated in New York in 1966 as Phase Industries,
Inc., and changed its name to American Technical Ceramics Corp. in June 1984.
Unless the context indicates otherwise, references to the Registrant herein
include American Technical Ceramics Corp., a Delaware corporation, and its
subsidiaries, all of which are wholly-owned.
The Registrant designs, develops, manufactures and markets
RF/Microwave/Millimeter-Wave ceramic and porcelain capacitors and thin film
products. Capacitors function within electronic circuits by storing and
discharging precise amounts of electrical power. The Registrant believes that it
is a leading manufacturer of multilayer capacitors ("MLCs") for ultra-high
frequency ("UHF") and microwave applications. Selling prices for the
Registrant's MLCs typically range from $.20 to $7.50 or higher, whereas selling
prices for commodity-type MLC units typically range from $.005 to $.10.
Management believes the Registrant operates primarily in only one industry
segment - the electronic components industry.
During the fiscal year ended June 30, 1999, the electronic components
industry operated in two very different business climates. During the first six
months of the fiscal year, which was marked by the continuing problems within
the Asian economy, the Registrant experienced an overall slowdown in the demand
for its products. During the second half of the fiscal year, the Registrant
experienced an increase in sales, primarily due to a general increase in demand
for technology and electronic products in the United States and abroad. See
"Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS".
PRODUCTS
The Registrant's MLCs are currently available in predominantly four
physical sizes designated "A" (a .055 inch cube), "B" (a .110 inch cube), "C" (a
.250 inch cube) and "E" (a .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 Registrant's basic product line, is
widely used in microwave equipment and is the only product line that accounts
for more than 15% of the Registrant's consolidated revenue, accounting for 50%,
51% and 52% of the Registrant's revenues in fiscal years 1999, 1998 and 1997,
respectively. The 700 Series has a slightly higher dissipation factor than the
100 Series, but because of its lower temperature coefficient is used in certain
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 Registrant'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 Registrant's products are used in commercial and
military applications, including satellite communications, Personal
Communications Systems (PCS) and other wireless communications systems, medical
imaging (i.e., magnetic resonance imaging), radio frequency power sources for
semiconductor manufacturing, numerous aerospace systems, including radar and
electronic warfare, and certain high-speed digital processing equipment. For the
fiscal years ended June 30, 1999, 1998 and 1997, the Registrant estimates that
approximately 14%, 17% and 13% of sales, respectively, were sales of hi-rel
products. The customers for these products included domestic aerospace
contractors, manufacturers of communications satellites and satellite equipment,
the U.S. military and other critically sensitive applications users.
Approximately 55%, 53% and 55% of sales in fiscal years 1999, 1998 and 1997,
respectively, were to other domestic customers; and approximately 30%, 30% and
32% of sales in such fiscal years, respectively, were to foreign customers. See
"Item 1. BUSINESS -- CUSTOMERS AND MARKETING -- FOREIGN SALES" and Note 9 of
Notes to Consolidated Financial Statements.
2
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 Registrant 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 Registrant 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 Registrant does not subject all such
commercial MLCs to environmental tests.
The Registrant has historically pursued the high-performance MLC market
which typically has commanded higher unit selling prices. The MLCs required for
these applications constitute a small part of the circuit cost and, because
performance requirements are stringent and the cost of component failure high,
customers have been willing to pay higher prices associated with higher
performance products.
In recent years, the Registrant has mechanized its manufacturing processes
to enable it to produce certain of its existing MLCs at lower cost for the
growing medium - priced market driven by telecommunications applications. The
Registrant is also developing additional products to service this market. A new
product targeted to emerging communications markets, the 500S Broadband
Microwave Capacitor (BMC), was introduced in June 1998. This product is based on
a patented construction and extends the useful frequency range in certain
applications as compared to similar size MLCs. Its physical configuration is
designed to be compatible with customers' high-volume circuit assembly
technologies. Sales of this product amounted to less than 1% of revenues in the
fiscal year ended June 30, 1999.
The Registrant's Microcap(Registered Trademark), 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 satellite communications, military systems
and other microwave and millimeter-wave applications. In each of the fiscal
years ended June 30, 1999, 1998, and 1997, Microcap(Registered Trademark) sales
amounted to less than 5% of revenues.
The Registrant has diversified its product line in recent years through the
development of custom product capability based on thin film technologies. The
Registrant produces a variety of metallized circuits and passive components on
high-quality ceramic substrates to customers' drawings and specifications. Thin
film products are used by the Registrant's customers in a broad range of
applications, including microwave components, fiber optic repeaters and
high-density packaging of devices. In the fiscal years ended June 30, 1999,
1998, and 1997, thin film sales represented approximately 12%, 6%, and 5%,
respectively, of revenues. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
MANUFACTURING
The manufacturing process for MLCs involves four primary stages. The first
stage, the "white room" stage, involves the inspection of raw ceramic powder,
casting, dicing and firing. In the second stage, the "termination" stage, the
chips are coated with silver. In the third stage, the "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 packing. If the customers'
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 chips are tested electrically and inspected throughout the entire
process.
3
Unlike the manufacture of capacitors, where all products flow through the
same manufacturing sequences, manufacturing processes and sequences for custom
thin film products vary significantly in accordance with each customers'
specifications. As part of its thin film manufacturing operations, the
Registrant has established certain additional requisite technologies, including
"sputtering" deposition of layers of materials and laser machining of ceramic
substrates.
The Registrant currently manufactures capacitors primarily at two
facilities in Huntington Station, New York, which aggregate approximately 46,000
square feet. One of these facilities houses the Registrant's state-of-the-art
chip fabrication operations. This facility, which was placed in operation at the
end of fiscal year 1995, is designed to provide better control of the
Registrant's manufacturing processes and product quality, while substantially
increasing its output capability.
The Registrant operates another white room and a termination operation at
its facility in Jacksonville, Florida, where it produces certain MLC product
series, including the 200 and 500S, its Microcap(Registered Trademark) product
line and pilot lines for other new capacitor products in advanced development.
The Jacksonville facility is also the site of manufacture for all of the
Registrant's thin film products.
The Registrant reassigns production among its facilities from time to time
based on productivity improvements and projected workloads. In the fourth
quarter of fiscal year 1998, the Registrant began the process of moving the
manufacture of most of its larger size MLC from Jacksonville to its New York
facilities, where such products had been produced until fiscal year 1995. The
transfer was completed in the first quarter of fiscal year 1999. This
reassignment was intended to provide additional resources in Jacksonville for
expansion of thin film operations and for the manufacture of anticipated new
products. The Registrant has since completed expansion of its thin film
operations.
During fiscal year 2000, the Registrant expects to start two projects
targeting capacity expansion. The Registrant intends to increase capacity in the
New York facilities for core MLC production in response to increases in market
demand. The Registrant also intends to add additional space to its thin film
operation in the Jacksonville facility to support sales growth.
To complement its own manufacturing efforts and to provide a wide variety
of product offerings to its customers, the Registrant has from time to time
entered into arrangements with other manufacturers to manufacture certain
products to the Registrant's specifications. These products accounted for less
than 1% of the Registrant's revenues in fiscal year 1999.
The historical pattern of industry price declines has largely prevented MLC
producers, including the Registrant, from increasing prices, and has forced the
Registrant and competitors to rely on advances in productivity and efficiency in
order to improve profit margins. Accordingly, the Registrant continuously looks
to improve the production yields and efficiency of its manufacturing processes.
See "Item 1. BUSINESS -- RESEARCH AND DEVELOPMENT".
CUSTOMERS AND MARKETING
The Registrant markets its products primarily to customers in the wireless
telecommunications, military, medical, semiconductor manufacturing and space
industries. The customers included within these industries are manufacturers of
microwave and high frequency systems, subsystems and equipment, including
original equipment manufacturers, government contractors, and subcontractors.
The Registrant promotes its products through specialized trade shows, industry
trade journal advertisements and catalog direct mail programs. The Registrant
also maintains a site on the world-wide web.
In each of the fiscal years 1999, 1998 and 1997, the Registrant shipped
products to approximately 1,700 customers. The top ten customers combined
accounted for approximately 27%, 25% and 26% of net sales in fiscal years 1999,
1998 and 1997, respectively. No customer accounted for more than 10% of net
sales in any of these periods.
4
The Registrant is presently 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 Registrant to
continue to sell its hi-rel military product line. To date, the Registrant has
not encountered any difficulty in maintaining its status as a qualified
producer, and for some of these product types the Registrant believes it is
presently the only supplier with such qualification.
The Registrant typically sells its products through a combination of
long-term contracts, and a large number of individual purchase orders. The
individual purchase orders are often subject to pricing agreements or logistics
arrangements. Neither pricing agreements nor logistics arrangements are firm
purchase orders, but each still requires that the Registrant commit to producing
semi-finished or finished goods inventory in anticipation of receiving a
purchase order for immediate shipment. The impact of this trend on the
Registrant's business is a reduction in backlog and an increase in inventory.
See "Item 1. BUSINESS -- SALES BACKLOG" and "Item 7. LIQUIDITY AND CAPITAL
RESOURCES".
Customers are invoiced simultaneously with merchandise shipments, and
invoices are generally payable on a 30-day basis. Customers may also charge
their purchases through the use of a credit/debit card or Electronic Data
Interchange. Sales returns are authorized and accepted by the Registrant in the
normal course of business. An evaluation of the returned product is performed
which typically results in either a credit or a shipment of replacement product
to customers. The Registrant believes that it has provided an adequate reserve
for returns in the accompanying consolidated financial statements.
In the United States, the Registrant principally sells its products through
independent sales representatives who are compensated on a commission basis. In
foreign countries, the Registrant utilizes both resellers, who purchase products
from the Registrant for resale, and sales representatives. Sales in the United
Kingdom are made through a wholly-owned subsidiary of the Registrant. In July
1999, the Registrant formed a wholly-owned Swedish subsidiary to serve the
Nordic countries (Sweden, Finland, Denmark and Norway). The Registrant utilizes
local independently-owned resellers in all other foreign markets.
At June 30, 1999, the Registrant utilized approximately 15 sales
representative organizations in the United States and approximately 19 sales
representative and reseller organizations in foreign countries, principally
Western Europe, Canada and the Far East. The Registrant's sales representatives
and resellers generally have substantial engineering expertise which enables
them to assist the Registrant 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 Registrant 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. See "Item 1. BUSINESS -- FOREIGN SALES" and Note 9 of
Notes to Consolidated Financial Statements.
FOREIGN SALES
In fiscal years 1999, 1998 and 1997, sales to customers located outside the
United States constituted 30%, 30% and 32% of net sales, respectively. The
Registrant's overseas customers are located primarily in Western Europe, Canada
and the Far East. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING" and Note 9
of Notes to Consolidated Financial Statements. Export sales are made through the
Registrant's foreign sales corporation subsidiary. All foreign sales, except
sales by the Registrant's wholly-owned subsidiaries in Sussex, England, and
Stockholm, Sweden, are or are anticipated to be denominated in United States
dollars. In certain circumstances, the Registrant attempts to reduce the risk of
doing business in foreign countries through the use of irrevocable letters of
credit and by working closely with its foreign representatives and distributors
in assessing business environments.
5
SALES BACKLOG
The Registrant's sales backlog was $10,370,000, $6,308,000, and $7,721,000
at June 30, 1999, 1998 and 1997, respectively. Backlog generally represents a
combination of custom manufactured parts, which require a longer lead time to
produce, then the Registrant's standard products. Customer requirements for the
Registrant's standard products have been trending towards shorter lead times
which generally results in lower backlog for these products. See "Item 1.
BUSINESS -- CUSTOMERS AND MARKETING". The Registrant offers its Quik-Pick 48
Hour System(Registered Trademark) program pursuant to which products are
shipped within 48 hours from the time the order is placed. This program has
consistently gained in popularity with its customers. In order to offer this
program, the Registrant has to maintain higher inventory levels of certain
products in proportion to total sales than it had in the past and higher than
those maintained by some other capacitor manufacturers. The future contribution
of the Quik-Pick program to the financial results of the Registrant depends
critically on the Registrant's ability to accurately predict customer demand for
the various products offered through the program.
RESEARCH AND DEVELOPMENT
The technology upon which the Registrant's products are based is subject to
continued development of materials and processes to meet the demands of new
applications and increased competition. The Registrant's business position 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. Accordingly, the Registrant believes that its research and
development efforts are critical to its continued success.
The Registrant conducts most of its research and development activities at
its facility in Jacksonville, Florida. Activities are focused on the development
of new product lines as well as improvement of existing products. Improvements
in materials and process technology, as well as in specialized production
equipment, are directed towards reducing product size and cost, as well as
meeting new performance requirements that are developed from frequent customer
contacts by the Registrant's sales and technical personnel. Products are
introduced after extensive in-house testing as well as evaluations at selected
customer sites.
In fiscal year 1998, the Registrant completed construction of, and began
operations in, a new research and development facility at its Jacksonville site
housing development and pilot production lines for new products. The first new
product line to be produced in the new facility, the Series 500S Broadband
Microwave Capacitor, was introduced at the International Microwave Symposium in
Baltimore, Maryland in June 1998. See "Item 1. BUSINESS -- PRODUCTS". This
product was the result of several years of development of new materials and
processes suited to higher-frequency performance and lower manufacturing cost.
During the quarter ended June 30, 1999, pilot production commenced on a
second new product line designed to offer a unique combination of efficiency,
voltage capability and energy storage capacity for newer, more price-sensitive
applications in an industry standard package. Market introduction is planned for
early fiscal year 2000.
Expenditures for research and development were approximately $1,981,000,
$1,813,000 and $1,433,000 in fiscal years 1999, 1998 and 1997, respectively,
representing approximately 5% of net sales for fiscal years 1999 and 1998 and 4%
of net sales for fiscal year 1997. The Registrant anticipates that research and
development expenditures, expressed as a percentage of net sales, will increase
somewhat compared to that of the latest fiscal year.
RAW MATERIALS
The principal raw materials used by the Registrant include silver,
palladium, other precious metals and titanate powders which are used in
ceramics. Precious metals are available from many sources, although palladium is
generally available from a limited number of metal dealers who obtain their
product requirements from the Republic of South Africa or Russia.
6
In fiscal year 1999, the Registrant experienced large increases in the
price of palladium, similar to those experienced in fiscal year 1998,
principally due to the unavailability of new product shipments from Russia. The
Registrant anticipates that the price of palladium will remain volatile, with
the likelihood of further price increases in fiscal year 2000. At current levels
of production, the Registrant believes it has sufficient inventories to meet its
palladium needs.
COMPETITION
Competition in the broad MLC industry continues to be intense with added
pressures resulting from a market saturation in calendar years 1998 and 1999
and, in general, is based primarily on price. In the hi-rel and 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 Registrant believes any competitive advantage it may have results
from its ability to achieve consistent 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 Registrant believes it competes in the UHF/Microwave market
with several other manufacturers, both domestically and abroad, including AVX
Corporation, Dover Corporation, Tekelek, Spectrum Control and Murata Electronics
North America, most of which are larger and have broader product lines and
greater financial, marketing and technical resources than the Registrant. There
are other large commodity-type MLC manufacturers who have attempted to develop
products for the UHF/Microwave market segment. While the Registrant 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 it into markets where there are existing competitors which
may have significantly greater financial and technical resources and greater
expertise in mass production techniques than the Registrant.
ENVIRONMENTAL COMPLIANCE
The Registrant produces hazardous waste in limited quantities in the
production of capacitors. Accordingly, the Registrant's manufacturing operations
are subject to various federal, state and local laws restricting the discharge
of such waste into the environment. The Registrant 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 Registrant
believes that it is in material compliance with all applicable federal, state
and local environmental laws and does not currently anticipate having to make
material capital expenditures to remain in compliance therewith.
PATENTS AND PROPRIETARY INFORMATION
Although the Registrant has manufacturing and design patents and pending
patent applications, and although the Registrant will continue to seek the
supplemental protection afforded by patents, the Registrant 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 Registrant'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 Registrant 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, 1999, the Registrant employed 324 persons at its facilities in
New York, of which nine were employed on a part-time basis; 163 persons at its
facility in Florida, of which three were employed on a part-time basis; and five
persons at its facility in the United Kingdom. Of the 492 persons employed by
the Registrant, 36 were involved in research and development activities, 393 in
manufacturing, testing and as support personnel and 63 in selling and general
administrative activities. None of the Registrant's employees are covered by
collective bargaining agreements. The Registrant considers its relations with
its employees to be satisfactory.
7
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 Registrant or by officers, directors or employees of the
Registrant acting on the Registrant'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 Registrant 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 the terms "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.
The Registrant'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 Registrant's products is highly dependent upon
demand for the products in which they are used. The Registrant's results, from
time to time, have been impacted negatively by the general decrease in demand
for technology and electronic products in the United States and abroad. There
can be no assurance that the demand will continue to increase or that, even if
it does continue to increase, the demand for the Registrant's products will
continue to increase.
The Registrant 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 Registrant during a
particular period could lead to distinctly different financial results for that
period as compared to other periods.
The Registrant expects that international sales will continue to constitute
a substantial portion of its total sales. These sales expose the Registrant to
certain risks, including, without limitation, barriers to trade, fluctuations in
foreign currency exchange rates (which may make the Registrant'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 Registrant's products, as well
as the generally greater difficulties of doing business abroad.
The Registrant sells a significant amount of hi-rel products to the United
States military. Such sales require the Registrant to be qualified with the
Defense Logistics Agency of the United States Department of Defense. The failure
to maintain such qualification would have a materially adverse effect on the
Registrant's military business. Sales to the military are also subject to
various risks, including, without limitation, unpredictable reductions in the
funds available to purchase products and contract termination for the
convenience of the government.
The technology upon which the Registrant's products are based is subject to
continuous development of materials and processes. The Registrant'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 Registrant 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 Registrant 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 Registrant's business.
8
The Registrant'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 Registrant's capacitors, is currently available from a limited number of
metal dealers who obtain product from the Republic of South Africa or Russia. A
prolonged cessation or reduction of exports of palladium by the Republic of
South Africa or Russia could have a material adverse effect on the Registrant's
business.
Certain raw materials used by the Registrant may fluctuate in price. To the
extent that the Registrant 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.
Competition in the MLC industry is intense and, in general, is based
primarily on price. In the hi-rel and 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 Registrant
competes with a number of large MLC manufacturers who have broader product lines
and greater financial, marketing and technical resources than the Registrant.
Growth of some commercial market applications has increased, and is expected to
continue to increase, the competitive importance of price. There can be no
assurance that the Registrant will be able to improve the productivity and
efficiency of its manufacturing processes in order to respond to pricing
pressures and the failure to do so could have a material adverse effect on the
Registrant's business.
The Registrant 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 Registrant's manufacturing
operations may result in substantial unforeseen liabilities.
The Registrant 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 Registrant 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
Registrant's business.
The Registrant'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 and other events outside of
the Registrant's control.
9
ITEM 2. PROPERTIES
The Registrant's primary production facilities are located in Huntington
Station, New York and Jacksonville, Florida. An additional production facility
in Huntington Station, New York is currently under renovation. The Registrant'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 Registrant and whether the facility
is leased or owned.
ADDRESS OF FACILITY PRIMARY FUNCTION SQUARE FOOTAGE OCCUPIED TYPE OF OCCUPANCY
------------------- ---------------- ----------------------- -----------------
10 Stepar Place Production 10,900 Owned
Huntington Station, N.Y.
15 Stepar Place Production 35,000 Leased from Principal
Huntington Station, N.Y. Stockholder (1)
One Norden Lane Production support 8,400 Owned
Huntington Station, N.Y.
17 Stepar Place Corporate, sales, 18,000 Owned
Huntington Station, N.Y. administration
2201 Corporate Square Blvd. Production, research 61,500 Leased from Principal
Jacksonville, Florida and development Stockholder (1)
Unit 5, Redkiln Way Sales and distribution 2,400 Owned
Sussex, England office
(1) See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and Notes
4 and 7 of Notes to Consolidated Financial Statements.
In fiscal year 1998, the Registrant added 10,000 square feet at the
Jacksonville facility through new construction and renovation which houses,
among other things, a pilot product production line for use in product
development and refinement. In fiscal year 1999, the Registrant renovated part
of its facility at One Norden Lane which will provide increased capabilities for
its manufacturing operations. See "Item 1. BUSINESS -- PRODUCTS -- RESEARCH AND
DEVELOPMENT -- MANUFACTURING".
The Registrant believes that its present facilities provide adequate
capability to meet its current and near term manufacturing requirements.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not currently a party to any significant legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
EXECUTIVE OFFICERS
The executive officers of the Registrant are as follows:
Victor Insetta, age 59, co-founded the Registrant in 1966 and has served as
President and Chief Executive Officer and a director of the Registrant since its
organization.
Richard Monsorno, age 47, has been employed by the Registrant in various
capacities since 1983. In August 1996, he was appointed Senior Vice President -
Technology.
Stuart P. Litt, age 58, joined the Registrant in September 1996 as Senior
Vice President - Operations. From 1992 until his employment by the Registrant,
he served as an associate of OEM Capital, an investment banking firm
specializing in the electronics industry. Mr. Litt has also served as a director
of the Registrant since 1993.
Kathleen M. Kelly, age 45, has been employed by the Registrant in various
capacities since 1974. She has served as Vice President - Administration and as
corporate Secretary since November 1989.
Michael C. Giacalone, age 61, joined the Registrant in March 1999 as Vice
President - Advanced Products Operations. From 1985 until his employment by the
Registrant, he served as President and Director of Res-Net Microwave, Inc., a
manufacturer of resistive products.
David P. Ott, age 57, joined the Registrant in June 1999 as Vice President
- - New York Manufacturing. From 1997 until his employment by the Registrant, he
served as Chief Operating Officer of Great Lakes Industries, LLC, a manufacturer
of metal and ceramic materials. In 1997, prior to joining Great Lakes he was a
Senior Management Consultant for Murak and Associates, LLC, an executive
consulting firm. From 1985 to 1996 he was the Vice President of Operations for
the Tam Ceramics unit of Cookson, plc (UK), a manufacturer of ceramic capacitor
materials.
Judah Wolf, age 53, has been managing the Registrant's thin film operations
in Jacksonville, Florida since 1993. In 1999, he was appointed Vice President -
Thin Film Operations.
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
Registrant.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Registrant'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, 1999 and June 30, 1998.
FISCAL 1999 FISCAL 1998
----------- -----------
Quarter Ended: High Low High Low
-------------- ---- --- ---- ---
September $9 5/16 $ 6 1/2 $19 $13 1/2
December 8 1/8 5 7/8 22 1/4 14 1/4
March 7 5/8 5 3/8 17 3/8 10 1/2
June 9 1/8 5 5/8 12 1/8 9 1/14
11
NUMBER OF STOCKHOLDERS
As of September 7, 1999, there were approximately 345 holders of record of
the Registrant's common stock. The Registrant believes numerous shares are held
of record by brokerage and other institutional firms for their customers.
DIVIDENDS
The Registrant has not paid dividends on its common stock during the past
two fiscal years. It is the present policy of the Registrant's Board of
Directors to retain earnings to finance the expansion of the Registrant's
operations and not to pay cash dividends on its common stock.
SALES OF UNREGISTERED SECURITIES
Pursuant to an employment agreement with an officer entered into in 1996 in
connection with the commencement of his employment, in July, August and
September 1998, the Registrant issued to the officer an aggregate of 2,852
shares of common stock.
Pursuant to the employment agreement between the Registrant and its
President and Chief Executive Officer, the officer is entitled to an annual
bonus based upon the Registrant's net income. In September 1998, the Registrant
amended the employment agreement, effective for fiscal years beginning with the
fiscal year ended June 30, 1998, to allow the Registrant, at its option, to pay
such bonus in stock, cash or a combination thereof, subject to certain
limitations. For the fiscal year ended June 30, 1998, the Registrant elected to
pay 50% of such bonus in shares of common stock. Accordingly, on September 11,
1998, the Registrant issued 20,454 shares of common stock to this officer in
partial payment of such bonus.
Pursuant to the terms of an employment agreement with another officer, in
September 1998, the Registrant elected to purchase from the officer certain
inventories of ceramic substrate owned by the officer and to pay for such
inventories in part by the issuance of 12,700 shares of common stock.
In November 1998, the Registrant issued 1,000 shares of common stock to
each of four employees as a stock bonus.
In March 1999, and again in June 1999, the Registrant issued 10,000 shares
of common stock to each of two officers as a stock bonus.
In May 1999, the Registrant issued 750 shares of common stock to one
employee, and 500 shares of common stock to each of two employees, as a stock
bonus.
In June 1999, the Registrant issued 2,000 shares of common stock to an
employee as a stock bonus.
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.
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. The Consolidated Financial Statements
include the operations of the Registrant and its wholly-owned subsidiaries,
American Technical Ceramics (Florida), Inc., ATC International Technical
Ceramics, Inc. and Phase Components Ltd.
12
FISCAL YEARS ENDED JUNE 30,
---------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales ...................................... $37,565 $40,399 $36,529 $33,884 $28,630
------- ------- ------- ------- -------
Gross profit ................................... $13,923 $17,032 $14,260 $11,350 $11,178
------- ------- ------- ------- -------
Income from operations ......................... $ 3,136 $ 6,499 $ 5,578 $ 3,178 $ 2,855
------- ------- ------- ------- -------
Net income (1) ................................. $ 2,129 $ 4,202 $ 3,429 $ 2,063 $ 1,880
------- ------- ------- ------- -------
Basic net income per common share (1) .......... $ 0.56 $ 1.08 $ 0.88 $ 0.53 $ 0.48
------- ------- ------- ------- -------
Diluted net income per common share (1)......... $ 0.56 $ 1.05 $ 0.87 $ 0.53 $ 0.48
------- ------- ------- ------- -------
Cash dividends paid per common share ........... $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Property, plant and equipment, net ............. $18,791 $17,703 $15,404 $14,152 $13,379
------- ------- ------- ------- -------
Total assets ................................... $43,622 $42,329 $37,124 $33,058 $31,624
------- ------- ------- ------- -------
Long-term debt, less current portion ........... $ 3,691 $ 3,338 $ 3,825 $ 3,642 $ 4,497
------- ------- ------- ------- -------
Working capital ................................ $19,160 $18,119 $16,293 $13,557 $12,979
------- ------- ------- ------- -------
QUARTERLY FINANCIAL DATA:
(unaudited) (In thousands, except per share amounts)
BASIC DILUTED
NET INCOME NET INCOME
QUARTER ENDED NET SALES GROSS PROFIT NET INCOME PER SHARE PER SHARE
- ------------- --------- ------------ ---------- --------- ---------
Fiscal 1999
- -----------
September $ 8,639 $ 2,417 $ (82) $(0.02) $(0.02)
December 8,504 3,038 516 0.13 0.13
March 9,954 4,288 966 0.25 0.25
June 10,468 4,180 729 0.20 0.20
------- ------- ------- ------ ------
Total $37,565 $13,923 $ 2,129 $ 0.56 $ 0.56
------- ------- ------- ------ ------
Fiscal 1998
- -----------
September $ 9,958 $ 4,051 $ 1,044 $ 0.27 $ 0.26
December 10,822 4,996 1,517 0.39 0.38
March 9,924 3,809 792 0.20 0.20
June 9,695 4,176 849 0.22 0.21
------- ------- ------- ------ ------
Total $40,399 $17,032 $ 4,202 $ 1.08 $ 1.05
------- ------- ------- ------ ------
(1) Net income and net income per common and common equivalent share for fiscal
year 1995 include the cumulative effect of a change in accounting to adopt
the provisions of Statement of Financial Accounting Standards No. 115, for
certain investments in debt and equity securities effective July 1, 1994,
amounting to $152,000, or $.03 per share.
13
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 14 of this report.
RESULTS OF OPERATIONS
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998
Net sales for the fiscal year ended June 30, 1999 were $37,565,000, a
decrease of 7% from the $40,399,000 recorded in the fiscal year ended June 30,
1998. Domestic sales decreased by 6% to $26,445,000 in fiscal year 1999 from
$28,248,000 in fiscal year 1998. International sales decreased by 8% to
$11,120,000 in fiscal year 1999 from $12,151,000 in fiscal year 1998. The
decrease in total net sales resulted primarily from a decline in demand during
the first six months of the fiscal year for the Registrant's core capacitor
products in both foreign and domestic markets. Sales of thin film products
increased by 88% to $4,555,000 in fiscal year 1999 from $2,423,000 in fiscal
year 1998. Thin film products experienced consistent growth throughout each
quarter of the fiscal year.
Beginning in the second half of fiscal year 1999, the Registrant
experienced a significant increase in customer orders. This increase has been
most pronounced in the wireless infrastructure and semiconductor manufacturing
equipment sectors. Those two sectors had been observed to be among the hardest
hit during the economic turmoil in Asia in the immediately preceding twelve
months. As a result of the second half increase in demand for core products and
a strong twelve months for thin film products, the Registrant recorded bookings
of $41,580,000 in fiscal year 1999, the highest level of bookings it has ever
achieved.
Gross margins were 37% of net sales in fiscal year 1999 compared with 42%
in fiscal year 1998. The decrease in gross margins was primarily attributable to
the lower average selling prices of the Registrant's core products and raw
material price increases, which principally occurred in the first six months of
fiscal year 1999. The lower average selling prices were a result of competitive
pressures and an increase for some product lines in the proportion of larger
volume orders which were priced at substantial discounts.
Operating expenses totaled $10,787,000, or 29% of net sales, in fiscal year
1999 compared with $10,533,000, or 26% of net sales, in fiscal year 1998. The
increase in operating expenses was primarily attributable to increases in (i)
research and development staff, (ii) advertising and promotional expenses, and
(iii) expenses related to stock awards granted during the fiscal year.
Net interest expense was $111,000 in fiscal year 1999 compared to net
interest income of $55,000 in fiscal year 1998. The increase in net interest
expense was attributable to lower interest income as a result of decreased cash
available for investment, and decreased income from marketable securities.
The Registrant recorded other income of $251,000 in fiscal year 1999 as
compared to other income of $12,000 in fiscal year 1998. Other income in fiscal
year 1999 consisted of realized gains on the sale of securities.
The effective income tax rate for fiscal year 1999 was approximately 35% as
compared to an effective rate of approximately 36% in fiscal year 1998.
As a result of the foregoing, the Registrant reported net income of
$2,129,000, or $0.56 per common share ($0.56 per common share assuming
dilution), for fiscal year 1999 as compared with net income of $4,202,000, or
$1.08 per common share ($1.05 per common share assuming dilution), for fiscal
year 1998.
14
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
Net sales for the fiscal year ended June 30, 1998 were $40,399,000, an
increase of 11% over the $36,529,000 recorded in fiscal year 1997. Domestic
sales increased by 13% to $28,248,000 in fiscal year 1998 from $24,977,000 in
fiscal year 1997. International sales increased by 5% to $12,151,000 in fiscal
year 1998 from $11,552,000 in fiscal year 1997. The increase in total net sales
resulted primarily from strong growth in sales of the Registrant's core
commercial capacitors and its thin film products. Sales of thin film products
increased by 27% to $2,423,000 in fiscal year 1998 from $1,910,000 in fiscal
year 1997. The growth in sales for the Registrant's core commercial products
occurred entirely in the first half of the fiscal year. In the second half of
the fiscal year, the sales growth for these products substantially declined.
Thin film products experienced relatively consistent growth throughout the year.
Beginning in the second half of fiscal year 1998, the Registrant
experienced a slowdown in orders from foreign customers for its core commercial
products. The Registrant believes that this slowdown was primarily the result of
the deferral or reduction of several customers' manufacturing programs in
response to the economic turmoil in several foreign countries (particularly in
Asia) and increased competition in foreign markets (particularly in Europe).
Gross margins were 42% of net sales in fiscal year 1998 compared with 39%
in fiscal year 1997. The increase in gross margins was attributable to the fact
that the general manufacturing process problems that negatively affected margins
for a large part of the 1996 fiscal year were not fully resolved until the
second quarter of fiscal year 1997, and the favorable effect of greater
production and sales volumes in the first half of the fiscal year 1998 combined
with a generally fixed cost manufacturing base. The increase was somewhat offset
by continued erosion in prices for the Registrant's core products and higher
fixed costs in the second half of fiscal year 1998 relative to sales volume.
Operating expenses totaled $10,533,000, or 26% of net sales, in fiscal year
1998 compared with $8,682,000, or 24% of net sales, in fiscal year 1997. The
increase in operating expenses was primarily attributable to increases in (i)
sales staff, (ii) advertising and promotional expenses, (iii) sales
representatives' commissions incurred on higher levels of sales, principally in
the first six months of the fiscal year, (iv) bonus expense based upon the
increase in profits earned in the first six months of the fiscal year, (v)
professional fees, and (vi) research and development expenses resulting from
increased staff and the related supporting expenditures.
Net interest income was $55,000 in fiscal year 1998 compared to net
interest expense of $234,000 in fiscal year 1997. The decrease in net interest
expense was attributable to higher interest income as a result of increased cash
available for investment, increased income from marketable securities and lower
interest expense as a result of lower average outstanding loan balances.
The Registrant recorded other income of $12,000 in fiscal year 1998 as
compared to other expense of $6,000 in fiscal year 1997. Other income consisted
of realized gains on the sale of assets.
The effective income tax rate for fiscal year 1998 was approximately 36% as
compared to an effective rate of approximately 35.8% for fiscal year 1997.
As a result of the foregoing, the Registrant reported net income of
$4,202,000, or $1.08 per common share ($1.05 per common share assuming
dilution), for fiscal year 1998 as compared with net income of $3,429,000, or
$.88 per common share ($.87 per common share assuming dilution), for fiscal year
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's financial position at June 30, 1999 remains strong as
evidenced by working capital of $19,160,000 as compared to working capital of
$18,119,000 at June 30, 1998. The Registrant's current ratio at June 30, 1999
was 4.5:1 compared to 3.9:1 at June 30, 1998. The Registrant's quick ratio at
June 30, 1999 was 2.2:1 compared to 2.2:1 at June 30, 1998.
15
Cash and investments decreased to $6,027,000 at June 30, 1999 compared to
$8,376,000 at June 30, 1998. The decrease in cash and investments was primarily
the result of $1,198,000 utilized to buy back Company stock, funding $3,569,000
of additions to property, plant, and equipment and purchasing raw materials,
principally palladium. Accounts receivable increased by $854,000 to $5,274,000
at June 30, 1999 as compared to $4,420,000 at June 30, 1998. The increase in
accounts receivable was attributable to slightly slower collections of customer
accounts and the increased sales volume in the fourth quarter of fiscal year
1999. Inventories increased by $1,552,000 to $12,436,000 at June 30, 1999 as
compared to $10,884,000 at June 30, 1998. This increase was attributable to an
increase in work in process in order for the Registrant to fill customer orders
and increased inventories of raw materials, particularly palladium, as a hedge
against unavailability and unstable pricing for this primary raw material for
the Registrant's products. See "Item 1. BUSINESS -- RAW MATERIALS".
Accounts payable decreased by $42,000 to $1,315,000 at June 30, 1999 as
compared to $1,357,000 at June 30, 1998. The decrease in accounts payable was
the result of slightly lower spending for general operating purposes. Accrued
expenses decreased by $407,000 to $ 2,877,000 at June 30, 1999 as compared to
$3,284,000 at June 30, 1998 as a result of lower accrued bonuses for executives,
managers and employees due to lower pretax profits in fiscal year 1999 as
compared to fiscal year 1998.
The Registrant leases a manufacturing facility from a partnership
controlled by the Registrant's President and Chief Executive Officer and
principal stockholder under a capital lease. The lease was amended as of
September 30, 1998, primarily to reflect certain additions to the facility which
were placed into service in fiscal year 1997. See "Item 2. PROPERTIES". Under
the amended lease, the Registrant is obligated to pay approximately $461,000 per
annum. The payments due over the remaining eleven years of this capital lease,
including the portion related to interest, total approximately $5,188,000 See
"Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and Note 4 of Notes to
Consolidated Financial Statements.
In November 1998, the Registrant renewed a $2,000,000 revolving
line-of-credit with NationsBank, NA ("NationsBank") and secured a $3,500,000
line-of-credit with NationsBank for equipment purchases. Both lines bear
interest at 2% above the three month rate for U. S. Dollar deposits on the
London Interbank Market. Principal under the revolving line-of-credit will be
repayable in eight quarterly installments commencing upon expiration of the
revolving period. The outstanding principal under the equipment line-of-credit
will be rolled over every six months into a self amortizing term note of not
less than four nor more than seven years. The equipment loan is secured by the
equipment purchases. Borrowing under both lines will be subject to compliance
with certain financial covenants, including maintenance of asset and liability
percentage ratios. As of June 30, 1999, the Registrant did not incur any
borrowings under the revolving line-of-credit and has borrowed an aggregate of
$796,000 under the equipment line.
In February 1995, the Registrant entered into two separate loan agreements
with European American Bank ("EAB") pursuant to which the Registrant borrowed
$2.0 million. Each loan was for $1.0 million, is secured by capital equipment,
is subject to certain financial covenants and is payable over a five-year
period. The agreement representing the first such loan with EAB provides for
payment of 60 monthly installments of a fixed principal payment amount and
accrued interest at a fixed rate of 6.85% per annum for the first two years and
8.85% per annum thereafter. The agreement representing the second such loan with
EAB provides for payment of 60 equal monthly installments of principal and
accrued interest at a fixed rate of 8.85% per annum for the term of the loan.
The aggregate remaining principal balances on these two loans at June 30, 1999
was $292,000. The two loan agreements require monthly payments of principal
aggregating approximately $37,000 through February 2000.
See Note 4 of Notes to Consolidated Financial Statements.
In September 1994, the Registrant entered into a term loan agreement with
Barnett Bank of Jacksonville, N.A. ("Barnett Bank") pursuant to which the
Registrant borrowed $1.9 million. The loan is unsecured, is subject to certain
financial covenants and is payable over five years in equal monthly installments
of principal plus accrued interest at Barnett Bank's prime rate. The remaining
principal balance on the term loan at June 30, 1999 was $95,000. The term loan
agreement requires monthly installments of principal of approximately $32,000
through September 1999. See Note 4 of Notes to Consolidated Financial
Statements.
16
The Registrant intends to use cash on hand as well as funds generated from
operations to finance budgeted capital expenditures, primarily for equipment, of
approximately $4.5 million in fiscal year 2000.
In June 1990, the registrant announced its first stock purchase program
pursuant to which it was authorized to purchase up to $1,000,000 of its Common
Stock. In September 1998, the Board of Directors authorized the purchase of up
to an additional $1,000,000 of the Registrant's Common Stock under a second
stock purchase program. As of June 30, 1999, the Registrant had expended the
entire amount available under both programs and had purchased an aggregate of
475,000 shares.
YEAR 2000
The Registrant has completed all internal remediation and testing efforts
of computer systems that it believes could be affected by the "Year 2000"
problem. The Registrant did not incur significant incremental expenditures
related to its Year 2000 activities. The Registrant is also presently obtaining
representations from its key suppliers and customers relative to their efforts
to deal with the Year 2000 problem. Based upon the representations obtained to
date, the Registrant does not anticipate significant additional expenditures or
lost revenues from Year 2000 failures of its key suppliers and customers.
However, no assurances can be made as to whether key suppliers and customers
will become Year 2000 compliant in a timely manner, if at all.
IMPACT OF NEW ACCOUNTING STANDARDS
In fiscal year 2001, the Registrant will be required to adopt SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Registrant has not yet completed its evaluation of the impact of this statement
on its financial statements.
MARKET RISKS
The Registrant has identified four market risks relative to its business:
interest rate risk, foreign currency exchange rate risk, commodity price risk
and security price risk. The Registrant has managed its market risk exposures in
order to minimize their potential impact on its financial conditions and results
of operations.
Specifically:
a) Interest rate risk. In light of the Registrant's existing cash
balances, the results of its operations, the terms of its debt
obligations and its 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 RESOURCES"
b) Foreign currency exchange rate risk. With the exception of sales by
the Registrant's wholly-owned subsidiary in the United Kingdom (which
are denominated in pounds), all transactions are denominated in U.S.
Dollars. At the present time, this contribution to the Registrant's
consolidated results of operations is not significant. See Note 9 of
Notes to Consolidated Financial Statements. Accordingly, fluctuations
in exchange rates would not presently have a material adverse effect
on the Registrant's operations.
c) Commodity price risk. In light of recent increases in the price of
palladium, the Registrant has purchased additional inventories of this
raw material as a hedge against future unavailability and unstable
pricing. See "Item 1. BUSINESS -- RAW MATERIALS" and "Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES". The
Registrant believes that, based upon its current levels of production,
it owns a sufficient supply of palladium, such that the Registrant
would not have to buy any additional quantities should there be a
short term increase in price. In addition, the Registrant's inventory
carrying cost of palladium would not be materially impacted by a 10%
decline in current market prices.
17
d) Security price risk. The Registrant's current portfolio of marketable
securities consists of U.S. Treasury notes with varying maturities of
up to ten years. The Registrant currently plans to manage any exposure
resulting from declining prices by holding any securities which
decline substantially in value until maturity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant'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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of Directors" in the
Registrant's Proxy Statement to be furnished in connection with its Annual
Meeting of Stockholders to be held November 19, 1999 is hereby incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" in the
Registrant's Proxy Statement to be furnished in connection with its Annual
Meeting of Stockholders to be held November 19, 1999 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 Registrant's common stock in the table under the caption
"Election of Directors" in the Registrant's Proxy Statement to be furnished in
connection with its Annual Meeting of Stockholders to be held November 19, 1999
is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Registrant's Proxy Statement to be furnished in
connection with its Annual Meeting of Stockholders to be held November 19, 1999
is hereby incorporated by reference.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS PAGE NO.
-------------------- --------
Index to Consolidated Financial Statements ........................ F
Independent Auditors' Report ...................................... F-1
Consolidated Financial Statements
Balance Sheets as of June 30, 1999 and 1998 ................. F-2
Statements of Earnings
Years Ended June 30, 1999, 1998 and 1997 ................. F-3
Statements of Stockholders' Equity
Years Ended June 30, 1999, 1998 and 1997 ................. F-4
Statements of Cash Flows
Years Ended June 30, 1999, 1998 and 1997 ................. F-5
Notes to Consolidated Financial Statements ........................ F-6
(B) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
(C) EXHIBITS
Unless otherwise indicated, the following exhibits were filed as part of the
Registrant'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 Registrant.
3(a)(ii) - Amendment to Certificate of Incorporation. (4)
3(b)(i) - By-laws of the Registrant.
9(a)(i) - Restated Shareholders' Agreement, dated April 15, 1985,
among Victor Insetta, Joseph Mezey, Joseph Colandrea and the
Registrant.
10(b)(i) - Amended and Restated Lease, dated September 25, 1998, between
Victor Insetta, d/b/a Stepar Leasing Company, and the
Registrant for premises at 15 Stepar Place, Huntington
Station, N.Y.(9)
10(c)(i) - 1985 Employee Stock Sale Agreement between the Registrant and
various employees.
10(c)(ii) - Form of Employee Stock Bonus Agreement, dated as of July 1,
1993, between the Registrant and various employees. (3)
10(c)(iii) - Form of Employee Stock Bonus Agreement, dated as of April 19,
1994, between the Registrant and various employees. (3)
10(c)(iv) - Form of Employee Stock Bonus Agreement, dated as of April 20,
1995, between the Registrant and various employees. (4)
19
10(e)(i) - Amended and Restated Lease, effective as of July 1, 1996,
between V.P.I. Properties Associates, d/b/a V.P.I. Properties
Associates, Ltd., and American Technical Ceramics (Florida),
Inc. (6)
10(e)(ii) - First Amendment to Amended and Restated Lease, dated as of May
1, 1998, between V.P.I. Properties Associates, d/b/a V.P.I.
Properties Associates, Ltd., and American Technical Ceramics
(Florida), Inc. (8)
10(e)(iii) - Second Amendment to Amended and Restated Lease, dated as of
September 30, 1998, but effective as of May 1, 1998 between,
V.P.I. Properties Associates, d/b/a V.P.I. Properties
Associates, Ltd., and American Technical Ceramics (Florida),
Inc. (9)
10(f) - Purchase Agreement, dated May 31, 1989, by and among Diane
LaFond Insetta and/or Victor D. Insetta, as custodians for
Danielle and Jonathan Insetta, and American Technical Ceramics
Corp., and amendment thereto, dated July 31, 1989. (4)
10(g)(iii) - Profit Bonus Plan, dated April 19, 1995, and effective for the
fiscal years beginning July 1, 1994. (4)
10(g)(iv) - Employment Agreement, dated April 3, 1985, between Victor
Insetta and the Registrant, and Amendments No. 1 through 4
thereto. (2)
10(g)(v) - Amendment No. 5, dated as of September 11, 1998, to Employment
Agreement between Victor Insetta and the Registrant. (8)
10(h) - Loan Agreement, dated September 27, 1994, between the
Registrant and Barnett Bank of Jacksonville, N.A. (3)
10(i) - Secured Commercial Note, dated as of February 17, 1995,
between the Registrant and European American Bank. (4)
10(j) - Secured Commercial Note, dated as of February 17, 1995,
between the Registrant and European American Bank. (4)
10(k)(i) - Letters of Agreement, dated June 26, 1996 and August 22, 1996,
between the Registrant and Stuart P. Litt.(5)
10(k)(ii) - Letter Agreement, dated September 11, 1997, between the
Registrant and Stuart P. Litt. (7)
10(m) - American Technical Ceramics Corp. 1997 Stock Option Plan. (7)
10(n) - Consulting Agreement, dated as of May 1, 1998, between Chester
E. Spence and the Registrant. (8)
10(o) - Loan Agreement, dated November 25, 1998, between the
Registrant and NationsBank, N.A. (10)
10(p) - Amended and Restated Employment Agreement, dated as of January
1, 1998, between Judah Wolf and the Registrant. (11)
21 - Subsidiaries of the Registrant. (2)
23 - Consent of KPMG LLP (11)
27 - Financial Data Schedule. (11)
20
- -------------------
1. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1989.
2. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993.
3. Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1994.
4. Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1995.
5. Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1996.
6. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1997.
7. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the quarterly period ended June 30, 1997.
8. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998.
9. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998.
10. Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1998.
11. Filed herewith.
21
(D) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted since they either are not applicable, not
required or the information is included elsewhere herein.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AMERICAN TECHNICAL CERAMICS CORP.
BY: /S/ VICTOR INSETTA
--------------------------------
VICTOR INSETTA
President
Dated: September 20, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
---- ----- ----
/S/ VICTOR INSETTA President and Director September 20, 1999
- ------------------- (Principal Executive Officer)
Victor Insetta
/S/ ANDREW R. PERZ Controller September 20, 1999
- ------------------- (Principal Accounting Officer)
Andrew R. Perz
/S/ STUART P. LITT Director September 20, 1999
- ------------------
Stuart P. Litt
/S/ O. JULIAN GARRARD III Director September 20, 1999
- -------------------------
O. Julian Garrard III
/S/ O. RUBIN BLUMKIN Director September 20, 1999
- --------------------
Rubin Blumkin
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Independent Auditors' Report .................................. F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 ...... F-2
Consolidated Statements of Earnings
Years Ended June 30, 1999, 1998 and 1997 ................... F-3
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1999, 1998 and 1997 ................... F-4
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998 and 1997 ................... F-5
Notes to Consolidated Financial Statements .................... F-6
F
Independent Auditors' Report
----------------------------
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, 1999 and
1998, and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
Melville, New York
August 24, 1999
F-1
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, 1999 JUNE 30, 1998
-------------- -------------
CURRENT ASSETS
Cash (including cash equivalents of approximately $786,000
and $681,000, respectively) $ 2,898,000 $ 2,069,000
Investments 3,129,000 6,307,000
Accounts receivable, net 5,274,000 4,420,000
Inventories 12,436,000 10,884,000
Deferred income taxes 539,000 373,000
Other 344,000 281,000
-------------- ------------
TOTAL CURRENT ASSETS 24,620,000 24,334,000
-------------- ------------
PROPERTY, PLANT AND EQUIPMENT
Land 738,000 738,000
Buildings 7,506,000 7,422,000
Leasehold improvements 3,124,000 2,744,000
Machinery and equipment 26,361,000 23,813,000
Furniture, fixtures and other 2,341,000 1,839,000
-------------- ------------
40,070,000 36,556,000
Less: Accumulated depreciation 21,279,000 18,853,000
-------------- ------------
18,791,000 17,703,000
-------------- ------------
OTHER ASSETS 211,000 292,000
-------------- ------------
TOTAL ASSETS $ 43,622,000 $ 42,329,000
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 542,000 $ 917,000
Accounts payable 1,315,000 1,357,000
Accrued expenses 2,877,000 3,284,000
Income taxes payable 726,000 657,000
-------------- ------------
TOTAL CURRENT LIABILITIES 5,460,000 6,215,000
-------------- ------------
Long-term debt 3,691,000 3,338,000
Deferred income taxes 2,086,000 1,703,000
-------------- ------------
TOTAL LIABILITIES 11,237,000 11,256,000
-------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock -- $.01 par value; authorized 20,000,000
shares; issued 4,067,979 shares 41,000 41,000
Capital in excess of par value 6,944,000 6,601,000
Retained earnings 27,011,000 24,882,000
Accumulated comprehensive income:
Unrealized gain on investments available-for-sale, net 2,000 183,000
Cumulative foreign currency translation adjustment (98,000) (9,000)
-------------- ------------
(96,000) 174,000
-------------- ------------
Less: Treasury stock, at cost (242,445 and
165,301 shares, respectively) 1,515,000 611,000
Deferred compensation -- 14,000
-------------- ------------
TOTAL STOCKHOLDERS' EQUITY 32,385,000 31,073,000
-------------- ------------
$ 43,622,000 $ 42,329,000
============== ============
See accompanying notes to consolidated financial statements
F-2
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JUNE 30, 1999, 1998, 1997
1999 1998 1997
---- ---- ----
Net sales $ 37,565,000 $ 40,399,000 $ 36,529,000
Cost of sales 23,642,000 23,367,000 22,269,000
------------ ------------ ------------
Gross profit 13,923,000 17,032,000 14,260,000
------------ ------------ ------------
Selling, general and administrative expenses 8,806,000 8,720,000 7,249,000
Research and development expenses 1,981,000 1,813,000 1,433,000
------------ ------------ ------------
Operating expenses 10,787,000 10,533,000 8,682,000
------------ ------------ ------------
------------ ------------ ------------
Income from operations 3,136,000 6,499,000 5,578,000
------------ ------------ ------------
Other expense (income):
Interest expense 420,000 428,000 493,000
Interest income (309,000) (483,000) (259,000)
Other (251,000) (12,000) 6,000
------------ ------------ ------------
(140,000) (67,000) 240,000
------------ ------------ ------------
Income before provision for income taxes 3,276,000 6,566,000 5,338,000
Provision for income taxes 1,147,000 2,364,000 1,909,000
------------ ------------ ------------
Net income $ 2,129,000 $ 4,202,000 $ 3,429,000
============ ============ ============
Basic net income per common share $ 0.56 $ 1.08 $ 0.88
Diluted net income per common share $ 0.56 $ 1.05 $ 0.87
------------ ------------ ------------
Basic weighted average common shares outstanding 3,829,000 3,897,000 3,887,000
============ ============ ============
------------ ------------ ------------
Diluted weighted average common shares outstanding 3,829,000 4,009,000 3,920,000
============ ============ ============
See accompanying notes to consolidated financial statements
F-3
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998, AND 1997
| Capital in
Comprehensive | Common Stock Excess of Par Retained
Income/(Loss) | Shares Amount Value Earnings
------------- | ------ ------ ----- --------
--------------|-----------------------------------------------------
BALANCE AT JUNE 30, 1996 |4,067,501 $ 41,000 $ 6,439,000 $17,251,000
|
|
Net income $ 3,429,000 | --- --- --- 3,429,000
|
Purchase of treasury stock --- | --- --- --- ---
|
Deferred compensation --- | --- --- 92,000 ---
|
Stock award compensation expense --- | --- --- --- ---
|
Exercise of stock options --- | 478 --- 2,000 ---
Other comprehensive income, net of tax: |
Unrealized gains on investments |
available-for-sale, net of |
reclassification adjustment 53,000 | --- --- --- ---
|
Foreign currency translation adjustment 68,000 | --- --- --- ---
--------------|
Other comprehensive income, net of tax 121,000 | --- --- --- ---
--------------|
Comprehensive income $ 3,550,000 |
==============|-----------------------------------------------------
BALANCE AT JUNE 30, 1997 |4,067,979 $ 41,000 $ 6,533,000 $20,680,000
|
Net income $ 4,202,000 | --- --- --- 4,202,000
|
Purchase of treasury stock --- | --- --- --- ---
|
Issuance of shares for deferred compensation --- | --- --- 65,000 ---
|
Stock award compensation expense --- | --- --- --- ---
|
Exercise of stock options --- | --- --- 3,000 ---
Other comprehensive income, net of tax: |
Unrealized gains on investments |
available-for-sale, net of |
reclassification adjustment 118,000 | --- --- --- ---
|
Foreign currency translation adjustment 2,000 | --- --- --- ---
--------------|
Other comprehensive income, net of tax 120,000 | --- --- --- ---
--------------|
Comprehensive income $ 4,322,000 |
==============|-----------------------------------------------------
BALANCE AT JUNE 30, 1998 |4,067,979 $ 41,000 $ 6,601,000 $24,882,000
|
Net income $ 2,129,000 | --- --- --- 2,129,000
|
Purchase of treasury stock --- | --- --- --- ---
|
Issuance of shares for compensation --- | --- --- 130,000 ---
|
Stock award compensation expense --- | --- --- 162,000 ---
|
Issuance of shares for inventory purchase --- | --- --- 51,000 ---
Other comprehensive income, net of tax: |
Unrealized losses on investments |
available-for-sale, net of |
reclassification adjustment (181,000) | --- --- --- ---
|
Foreign currency translation adjustment (89,000) | --- --- --- ---
--------------|
Other comprehensive income, net of tax (270,000) | --- --- --- ---
--------------|
Comprehensive income $ 1,859,000 |
==============|-----------------------------------------------------
BALANCE AT JUNE 30, 1999 |4,067,979 $ 41,000 $ 6,944,000 $27,011,000
|-----------------------------------------------------
continued
F-4
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999, 1998, AND 1997 (CONTINUED)
Accumulated
Comprehensive Deferred
Income Treasury Stock Compensation Total
------ -------------- ------------ -----
----------------------------------------------------------------
BALANCE AT JUNE 30, 1996 ($67,000) ($572,000) --- $ 23,092,000
Net income --- --- --- 3,429,000
Purchase of treasury stock --- (63,000) --- (63,000)
Deferred compensation --- 36,000 (241,000) (113,000)
Stock award compensation expense --- --- 135,000 135,000
Exercise of stock options --- --- --- 2,000
Other comprehensive income, net of tax:
Unrealized gains on investments
available-for-sale, net of
reclassification adjustment --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Other comprehensive income, net of tax 121,000 --- --- 121,000
Comprehensive income
----------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $ 54,000 ($599,000) (106,000) $26,603,000
Net income --- --- --- 4,202,000
Purchase of treasury stock --- (41,000) --- (41,000)
Issuance of shares for deferred compensation --- 28,000 --- 93,000
Stock award compensation expense --- --- 92,000 92,000
Exercise of stock options --- 1,000 --- 4,000
Other comprehensive income, net of tax:
Unrealized gains on investments
available-for-sale, net of
reclassification adjustment --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Other comprehensive income, net of tax 120,000 --- --- 120,000
Comprehensive income
----------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $ 174,000 ($611,000) ($14,000) $31,073,000
Net income --- --- --- 2,129,000
Purchase of treasury stock --- (1,198,000) --- (1,198,000)
Issuance of shares for compensation --- 84,000 --- 214,000
Stock award compensation expense --- 161,000 14,000 337,000
Issuance of shares for inventory purchase --- 49,000 --- 100,000
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 (270,000) --- --- (270,000)
Comprehensive income
----------------------------------------------------------------
BALANCE AT JUNE 30, 1999 ($96,000) ($1,515,000) --- $32,385,000
----------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-4
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998 1997
------------ ----------- -----------
Net income $ 2,129,000 $ 4,202,000 $ 3,429,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,542,000 2,064,000 1,918,000
(Gain) loss on disposal of fixed assets (10,000) (16,000) 3,000
Stock award compensation expense 337,000 92,000 135,000
Provision for deferred income taxes 318,000 205,000 522,000
Provision for doubtful accounts receivable --- 50,000 35,000
Realized gain on sale of investments (257,000) --- ---
Changes in operating assets and liabilities:
Accounts receivable, net (854,000) 50,000 395,000
Inventories (1,452,000) (1,857,000) 59,000
Other assets, net 18,000 181,000 (135,000)
Accounts payable, accrued expenses
and income taxes payable (166,000) 1,087,000 (78,000)
------------ ----------- -----------
Net cash provided by operating activities 2,605,000 6,058,000 6,283,000
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,570,000) (4,085,000) (2,029,000)
Purchase of investments (203,000) (2,659,000) (2,494,000)
Proceeds from sale of investments 3,356,000 --- ---
Proceeds from sale of fixed assets 55,000 50,000 3,000
------------ ----------- -----------
Net cash provided by (used in) investing activities (362,000) (6,694,000) (4,520,000)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (923,000) (760,000) (876,000)
Payments to acquire treasury stock (1,198,000) (41,000) (63,000)
Proceeds from exercise of stock options --- 4,000 2,000
Proceeds from issuance of long-term debt 796,000 --- ---
------------ ----------- -----------
Net cash used in financing activities (1,325,000) (797,000) (937,000)
------------ ----------- -----------
Effect of exchange rate changes on cash (89,000) 2,000 13,000
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 829,000 (1,431,000) 839,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,069,000 3,500,000 2,661,000
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,898,000 $ 2,069,000 $ 3,500,000
============ =========== ===========
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.
During fiscal years 1999, 1998 and 1997, there were no customers which accounted
for 10% or more of consolidated revenues. In the fiscal years ended June 30,
1999, 1998 and 1997, approximately 7%, 10%, and 13% respectively, of the
Company's net sales were to United States military and aerospace contractors.
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
Revenue is recognized as products are shipped.
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 separate component of 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
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 Reporting Comprehensive Income ("SFAS No. 130").
SFAS No. 130 presents standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The components of the change in the net unrealized (losses)/gains on investments
available-for-sale, net of tax for the fiscal years ended June 30, 1999, 1998
and 1997 are as follows:
Year Ended June 30,
1999 1998 1997
-------------------------------------------------------
Unrealized holding (losses)/gains
arising during the period, net $ (14,000) $ 118,000 $ 53,000
Less: reclassification adjustment for
gains included in net income, net (167,000) -- --
-------------------------------------------------------
Change in investments available-for-sale,
net unrealized (losses)/gains $ (181,000) $ 118,000 $ 53,000
=======================================================
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 3 to 10 years
Furniture, fixtures and other 3 to 8 years
The Company reviews its long-lived assets (property, plant and
equipment, and related intangible assets that arose from business combinations
accounted for under the purchase method) 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 subsidiary
(located in England) 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
The Company applies Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees in accounting for employee stock-based
compensation and makes pro-forma disclosures of net income and net income per
share as if the fair value method under Statement of Financial Accounting
Standards No. 123 Accounting for Stock Based Compensation had been applied.
EARNINGS PER SHARE:
The Company applies Statement of Financial Accounting Standards No. 128
Earnings Per Share in computing and presenting basic and diluted earnings per
share ("EPS"). Basic EPS is computed by dividing income available to common
shareholders (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. A reconciliation
between numerators and denominators of the basic and diluted earnings per share
is as follows:
YEAR ENDED JUNE 30, 1999 YEAR ENDED JUNE 30, 1998 YEAR ENDED JUNE 30, 1997
------------------------ ------------------------ ------------------------
PER- PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
Basic EPS $2,129,000 3,829,000 $.56 $4,202,000 3,897,000 $1.08 $3,429,000 3,897,000 $.88
==== ===== ====
Effect of Dilutive
Securities:
Stock Options -- -- -- -- 109,000 -- -- 7,000 --
Stock Awards -- -- -- -- 3,000 -- -- 16,000 --
-----------------------------------------------------------------------------------------------------------
Diluted EPS $2,129,000 3,829,000 $.56 $4,202,000 4,009,000 $1.05 $3,429,000 3,920,000 $.87
===========================================================================================================
IMPACT OF NEW ACCOUNTING STANDARDS
In fiscal year 2001, the Registrant will be required to adopt SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Registrant has not yet completed its evaluation of the impact of this statement
on its financial statements.
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. Actual results could differ from those estimates.
F-8
SUPPLEMENTAL CASH FLOW INFORMATION
During fiscal year 1999, significant non-cash activities included (i) the
purchase of approximately $100,000 of inventory from an officer of the Company
in exchange for 12,700 shares of common stock issued from treasury, (ii) the
issuance of 23,454 shares of treasury stock to pay approximately $214,000 in
accrued compensation, (iii) the purchase of property, plant and equipment
through an increase in capital lease obligations of approximately $105,000 and
(iv) the issuance of 47,750 shares of treasury stock to pay $337,000 in stock
awards.
NOTE 2. INVESTMENTS
Investments consist of the following:
Gross Gross
Unrealized Unrealized
June 30, 1999 Cost Gains Losses Fair Value
------------- ---------------- ----------------- ----------------- -----------------
U.S. Government obligations $ 3,125,000 $ 28,000 $ 24,000 $ 3,129,000
$ 3,125,000 $ 28,000 $ 24,000 $ 3,129,000
---------------- ----------------- ----------------- -----------------
Gross Gross
Unrealized Unrealized
June 30, 1998 Cost Gains Losses Fair Value
------------- ---------------- ----------------- ----------------- -----------------
Mutual funds $ 269,000 $ 25,000 $ -- $ 294,000
Equity securities 310,000 177,000 2,000 485,000
U.S. Government obligations 5,442,000 92,000 6,000 5,528,000
---------------- ----------------- ----------------- -----------------
$ 6,021,000 $ 294,000 $ 8,000 $ 6,307,000
---------------- ----------------- ----------------- -----------------
Gross realized gains of approximately $257,000 are included in other income
for fiscal year 1999. There were no gross realized gains or losses in fiscal
years 1998 and 1997.
The Company's investments in U. S. Government obligations at June 30, 1999
contractually mature as follows:
COST FAIR VALUE
---- ----------
Within one year $ 701,000 $ 703,000
Between one and five years 1,402,000 1,414,000
Between five and ten years 1,022,000 1,012,000
------------ --------------
$ 3,125,000 $ 3,129,000
------------ --------------
NOTE 3. INVENTORIES
Inventories consist of the following:
June 30, 1999 June 30, 1998
------------- -------------
Raw materials $ 5,874,000 $ 4,142,000
Work in process 3,551,000 2,216,000
Finished goods 3,011,000 4,526,000
-------------- --------------
$ 12,436,000 $ 10,884,000
-------------- --------------
F-9
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 1999 June 30, 1998
------------- -------------
Notes payable to banks $ 1,183,000 $ 1,155,000
Obligations under capital leases 3,050,000 3,100,000
-------------- --------------
4,233,000 4,255,000
Less: Current portion 542,000 917,000
-------------- --------------
Long-term debt $ 3,691,000 $ 3,338,000
-------------- --------------
Interest payments during fiscal years 1999, 1998 and 1997 approximated
interest expense for those years.
NOTES PAYABLE TO BANKS
Notes payable to banks at June 30, 1999 consists of:
(i) an unsecured term loan with a remaining balance of $95,000 payable
in equal monthly installments of principal of approximately $32,000
through September 1999, plus accrued interest at the bank's prime rate
(7.75% at June 30, 1999). The loan is subject to certain financial
covenants which require, among other things, a minimum level of
tangible net worth;
(ii) two term loans, with a remaining principal balance aggregating
$292,000, secured by capital equipment with an approximate net book
value of $1,100,000 at June 30, 1999. The remaining balance of the
loans are payable in equal monthly principal installments of
approximately $37,000 through February 2000, and bear interest at
8.85%. Both loans are subject to certain financial covenants which
require, among other things, the maintenance of certain financial
ratios; and
(iii) a $3,500,00 equipment line of credit secured by capital equipment
with NationsBank, NA. As of June 30, 1999, $796,000 has been borrowed
against the line of credit. The line bears interest at 2% above the
three month rate for U.S. Dollar deposits on the London Interbank
Market. The outstanding principal under the equipment line-of-credit
will be rolled over every six months into a self amortizing term note
of not less than four nor more than seven years. Borrowing under the
line will be subject to compliance with certain financial covenants,
including maintenance of asset and liability percentage ratios.
The Company also has $2,000,000 available under a revolving line-of-credit
with a bank. The line contains certain financial covenants and a facility fee of
1/4% of the average unused amount. As of June 30, 1999, the Company had no
borrowings outstanding under this line.
As of June 30, 1999, the Company was in compliance with all financial
covenants of its notes payable to banks.
F-10
The following table presents aggregate annual maturities of notes payable
to banks after fiscal year 1999:
2000 $ 387,000
2001 796,000
------------
$ 1,183,000
------------
OBLIGATIONS UNDER CAPITAL LEASES
The Company leases a manufacturing facility located in Jacksonville,
Florida from a partnership controlled by the Company's President and Chief
Executive Officer and principal stockholder under a capital lease. The leased
facility has an aggregate cost of $3,666,000 and a net book value of $2,233,000
at June 30, 1999. The lease is for a period of 30 years and was capitalized
using an interest rate of 10.5%. The lease provides for base rent of
approximately $461,000 payable in twelve monthly installments of approximately
$38,000 for the fiscal year ending June 30, 1999. The lease further provides for
annual increases in total annual rent for years beginning after May 1, 1999,
based on the increase in the CPI since May 1, 1998, applied to base rent. The
annual increase for fiscal year 2000 results in monthly payments of
approximately $39,000 per month.
The Company leases computer equipment from an unrelated party. At June 30,
1999, the equipment had an original cost of $83,000 and a net book value of
$3,000. The lease is for a period of five years beginning October 1994 and was
capitalized using an interest rate of 10%. The remaining balance will be paid in
equal monthly installments through September 1999.
The following sets forth the future minimum lease payments (excluding
rental adjustments) under these capital leases by fiscal year and the present
value of the minimum lease payments as of June 30, 1999:
2000 $ 466,000
2001 461,000
2002 461,000
2003 461,000
2004 461,000
2005 and thereafter 2,883,000
------------
Total minimum lease payments 5,193,000
Less: Amount representing interest 2,143,000
------------
Present value at June 30, 1999 3,050,000
Less: Current portion 155,000
------------
$ 2,895,000
------------
F-11
NOTE 5. INCOME TAXES
The provision for income taxes consists of the following:
Years Ended June 30,
--------------------
1999 1998 1997
---- ---- ----
CURRENT:
Federal $ 645,000 $ 1,875,000 $ 1,110,000
State 103,000 116,000 85,000
Foreign 81,000 168,000 192,000
------------- -------------- -------------
Total Current 829,000 2,159,000 1,387,000
------------- -------------- -------------
DEFERRED:
Federal 272,000 178,000 462,000
State 46,000 27,000 60,000
------------- -------------- -------------
Total Deferred 318,000 205,000 522,000
------------- -------------- -------------
$ 1,147,000 $ 2,364,000 $ 1,909,000
------------- -------------- -------------
The following table reconciles the Federal statutory rate to the Company's
effective tax rate:
Years Ended June 30,
--------------------
1999 1998 1997
---- ---- ----
Tax provision computed at statutory rate 34.0% 34.0% 34.0%
State tax, net of Federal tax effect 3.0 1.4 1.8
FSC benefit (1.3) (1.0) (1.0)
Tax credits and other, net (0.7) 1.6 1.0
-------- --------- --------
35.0% 36.0% 35.8%
======== ========= ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1999 and 1998, are presented below.
1999 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts receivable and sales returns $ 137,000 $ 140,000
Inventories, principally due to additional costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986 178,000 142,000
Accrued expenses 257,000 225,000
--------------- -------------
Total deferred tax assets 572,000 507,000
--------------- -------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capital leases (2,086,000) (1,703,000)
Unrealized appreciation on investments available-for-sale (1,000) (102,000)
Other (32,000) (32,000)
--------------- -------------
Total deferred tax liabilities (2,119,000) (1,837,000)
--------------- -------------
Net deferred tax liability $ (1,547,000) $ (1,330,000)
=============== =============
F-12
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, 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 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 the Company will realize the benefits of these deductible
differences. Income taxes paid were approximately $648,000, $1,982,000, and
$1,735,000 for fiscal years 1999, 1998 and 1997, respectively.
NOTE 6. COMMON STOCK AND STOCK-BASED COMPENSATION
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 400,000 shares of the Company's
common stock. Options granted under the 1997 Option Plan 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. The 1997 Option Plan will terminate on March 31, 2007.
On April 1, 1997, the Board of Directors granted incentive stock options
under the 1997 Option Plan to purchase 266,000 shares of common stock at an
exercise price of $8.25 per share. On July 29, 1998, the Board of Directors
granted incentive stock options under the 1997 Option Plan to purchase 61,000
shares of Common Stock at an exercise price of $8.125 per share and 4,000 shares
of Common Stock at an exercise price of $8.988 per share. On November 20, 1998,
the Board of Directors granted incentive stock options under the 1997 Option
Plan to purchase 18,000 shares of Common Stock at an exercise price of $8.00 per
share and 2,000 shares of Common Stock at an exercise price of $8.80 per share.
These options may be exercised for a period of ten years from the date of grant
and vest 25% per year during the first four years of their term. No disposition
of shares acquired pursuant to the exercise of these options may 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. Since the Company measures compensation cost under Opinion No. 25,
the Company has not recognized compensation cost for these options as the
exercise price was equal to the fair market value of the stock at the date of
grant. No options were granted during fiscal year 1998.
The average per-share value of stock options granted during fiscal years
1999 and 1997 was $3.75 and $3.61, respectively, as determined by the
Black-Scholes option pricing model (assuming a risk-free interest rate of 5.15%,
and 7.09%, respectively, expected life of five years, expected volatility of 45%
and 37%, respectively, and no dividends).
F-13
The Company's stock option activity for fiscal years 1999, 1998, and
1997 is as follows:
1999 1998 1997
------------------------------ ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Price Amount Price Amount Price
----- ----- -----
Outstanding, beginning of year 248,500 $ 8.25 266,000 $ 8.25 478 $ 5.50
Granted 85,000 8.15 - - 266,000 8.25
Canceled (19,000) 8.21 (17,000) 8.25 - -
Exercised - (500) 8.25 (478) 5.50
---------------- -------------- --------------
Outstanding, end of year 314,500 $ 8.24 248,500 $ 8.25 266,000 $ 8.25
================ ============== ==============
At June 30, 1999, 118,000 options are exercisable.
In fiscal year 1997, the Company agreed to award 34,000 shares of its
common stock to an employee as part of his employment agreement. The shares were
earned over a 24 month period. The market value of the shares awarded was
recorded as deferred compensation, and was amortized to compensation expense
over the 24 month period that the shares were earned. During fiscal years 1999,
1998 and 1997, 2,852, 10,417 and 18,000 shares were released from treasury stock
to the employee under the agreement, respectively. In fiscal years 1999 and
1998, such amount is net of 148 and 2,583 common shares, respectively, for tax
withholdings. The fair value of the withheld shares, amounting to $1,000, and
$41,000, respectively, was recorded as an addition to treasury stock for fiscal
years 1999 and 1998, respectively. Compensation expense related to these stock
awards was $14,000, $92,000, and $135,000 for fiscal years 1999, 1998 and 1997,
respectively.
In fiscal year 1999, the Company awarded 47,750 shares of its common stock
to employees for services rendered. This award resulted in compensation expense
of $323,000, measured by the market value of the shares on the date of grant.
Treasury shares have been utilized for all stock awards and, accordingly,
treasury stock has been reduced for the cost of the shares on a specific
identification basis, first-in first-out.
On a pro-forma basis, net income and basic net income per share would have
been $1,855,000, $3,976,000 and $3,390,000 and $.48, $1.02 and $.87,
respectively, for fiscal years 1999, 1998 and 1997, respectively, had the
Company measured compensation cost using the fair value method of SFAS No. 123.
The full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro-forma amounts because compensation cost is
calculated over the option vesting periods and compensation costs for options
granted prior to July 1995 are not considered.
In June 1990, the Registrant announced its first stock purchase program
pursuant to which it was authorized to purchase up to $1,000,000 of its common
stock. In September 1998, the Board of Directors authorized the purchase of up
to an additional $1,000,000 of the Registrant's common stock under a second
stock purchase program. As of March 31, 1999, the Registrant had expended the
entire amount available under both programs and had purchased an aggregate of
475,000 shares. No shares were purchased under this program in fiscal year 1998.
In fiscal years 1999 and 1997 160,900 and 10,700 shares, respectively, were
acquired for $1,198,000 and $63,000, respectively.
F-14
NOTE 7. COMMITMENTS
OPERATING LEASES
The Company has a related party operating lease for a rented facility
which, as amended, expires December 31, 2001. Rent expense under this related
party operating lease was approximately $484,000, $462,000 and $452,000 for the
fiscal years ended June 30, 1999, 1998, and 1997, respectively. Under this lease
future minimum rent payments will be approximately $489,000 per year.
Rent expense to unrelated parties was approximately $10,000, $13,000 and
$12,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its President, which provides
for annual base compensation of $297,000 as well as additional annual
compensation equal to 5% of net income before such bonus and income taxes. The
agreement expires March 1 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 President's employment is
terminated by the Company before the expiration of the agreement other than for
cause (as defined in the agreement), the President 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 September 1998, the Company amended the
employment agreement effective for the fiscal year ending June 30, 1998 to allow
the Company, at its option, to pay the additional annual compensation in stock,
cash or a combination thereof. Such compensation for fiscal 1998 was paid by the
issuance of 20,454 treasury shares in fiscal 1999.
In September 1996, the Company entered into a three year employment
agreement with another executive officer. The agreement provides for annual base
compensation of $165,000, additional annual compensation equal to .5% of pretax
profits, and an award of 34,000 shares of the Company's common stock, (see Note
6). If after three years of employment, the officer is terminated by the
Company, he is entitled to a severance payment of $100,000.
In January 1998, the Company entered into a four year employment agreement
with an officer. The agreement provides for annual base compensation of $90,000,
plus additional compensation based upon specific performance measures. The
agreement includes termination provisions providing for payout arrangements
depending on the nature of the termination.
NOTE 8. OTHER DATA
ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, 1999 June 30, 1998
------------- -------------
Accrued commissions $ 1,102,000 $ 1,588,000
Accrued payroll and related expenses 1,671,000 1,530,000
Other 104,000 166,000
------------- -------------
$ 2,877,000 $ 3,284,000
------------- -------------
F-15
VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included in the accompanying consolidated
financial statements consist of the following:
June 30, 1999 June 30, 1998
------------- -------------
Allowance for doubtful accounts receivable and sales returns $ 390,000 $ 390,000
============= =============
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 employees meeting certain eligibility requirements and
allows participants to contribute an amount not to exceed 15% of annual
compensation. For the fiscal years ended June 30, 1999, 1998 and 1997, the
Company provided a matching contribution of $371,000, $350,000 and $303,000,
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 years 1999, 1998 and 1997,
the Company recognized related compensation expense of $338,000, $657,000 and
$538,000, respectively.
NOTE 9. FOREIGN OPERATIONS
The Company markets and distributes a portion of its foreign sales through
Phase Components Ltd., a wholly-owned subsidiary in the United Kingdom. The
following table summarizes certain financial information covering the Company's
operations in the U.S. and U.K. for fiscal years 1999, 1998 and 1997. Net sales
information is based upon country of origin.
1999 1998 1997
---- ---- ----
Net sales
U.S. $35,680,000 $37,893,000 $33,730,000
U.K. 1,885,000 2,506,000 2,799,000
---------------- ---------------- ---------------
Total $37,565,000 $40,399,000 $36,529,000
================ ================ ===============
Pretax income
U.S. $ 3,013,000 $ 6,024,000 $ 4,869,000
U.K. 263,000 542,000 469,000
---------------- ---------------- ---------------
Total $3,276,000 $ 6,566,000 $ 5,338,000
================ ================ ===============
Identifiable Assets
U.S. $42,009,000 $40,814,000 $35,176,000
U.K. 1,613,000 1,695,000 1,948,000
---------------- ---------------- ---------------
Total $43,622,000 $42,509,000 $37,124,000
================ ================ ===============
U.S. sales include $9,235,000, $9,645,000 and $8,753,000 for export in
fiscal years 1999, 1998 and 1997, respectively. Export sales were primarily to
customers in Western Europe, Canada and the Far East.
F-16
NOTE 10. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, NET, 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
The carrying amounts of each of the Company's long-term debt instruments
approximate fair value as the underlying interest rates approximate rates which
would be offered to the Company for the same or similar instruments.
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 judgement and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-17