UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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 of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17 STEPAR PLACE, HUNTINGTON STATION, NY 11746
--------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(631) 622-4700
--------------
(Telephone Number, Including Area Code)
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No ( X )
As of May 5, 2003, the Registrant had outstanding 8,076,118 shares of Common
Stock, par value $.01 per share.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
MARCH 31, 2003 JUNE 30, 2002
--------------- ---------------
ASSETS (UNAUDITED)
Current assets
Cash (including cash equivalents of $472 and
$3,606, respectively) $ 8,422 $ 7,129
Investments 3,002 3,025
Accounts receivable, net 5,910 6,328
Inventories 15,834 15,417
Deferred income taxes, net 2,284 2,284
Other current assets 884 2,564
--------------- ---------------
TOTAL CURRENT ASSETS 36,336 36,747
--------------- ---------------
Property, plant and equipment, net of accumulated depreciation
and amortization of $35,941 and $32,158, respectively 27,877 29,740
Other assets, net 52 87
--------------- ---------------
TOTAL ASSETS $ 64,265 $ 66,574
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (including related party
debt of $346 and $205, respectively) $ 371 $ 4,276
Accounts payable 1,269 878
Accrued expenses 2,910 3,218
Income taxes payable 629 ---
--------------- ---------------
5,179 8,372
Long-term debt, net of current portion (including related party
debt of $3,382 and $2,338, respectively) 3,393 2,368
Deferred income taxes 3,640 3,642
--------------- ---------------
TOTAL LIABILITIES 12,212 14,382
--------------- ---------------
Commitments and Contingencies
Stockholders' Equity
Common Stock -- $.01 par value; authorized 20,000
shares; issued 8,497 and 8,492 shares, respectively 85 85
Capital in excess of par value 11,415 11,380
Retained earnings 41,880 42,171
Accumulated other comprehensive loss:
Unrealized gain on investments available-for-sale, net 1 5
Cumulative foreign currency translation adjustment 84 (46)
--------------- ---------------
85 (41)
--------------- ---------------
Less: Treasury stock, at cost (421 and 418 shares, respectively) 1,408 1,403
Deferred compensation 4 ---
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 52,053 52,192
--------------- ---------------
$ 64,265 $ 66,574
=============== ===============
See accompanying notes to unaudited consolidated financial statements.
2
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
2003 2002 2003 2002
-------- --------- -------- --------
Net sales $11,930 $11,956 $35,978 $37,443
Cost of sales 8,622 9,412 25,155 28,202
-------- --------- -------- --------
Gross profit 3,308 2,544 10,823 9,241
-------- --------- -------- --------
Selling, general and administrative expenses 3,040 3,158 8,815 9,313
Research and development expenses 694 923 2,027 2,608
Other 93 24 384 (29)
-------- --------- -------- --------
Operating expenses 3,827 4,105 11,226 11,892
-------- --------- -------- --------
-------- --------- -------- --------
Loss from operations (519) (1,561) (403) (2,651)
-------- -------- -------- --------
Other (income) expense:
Interest expense 98 113 262 386
Interest income (22) (22) (80) (158)
Other --- (51) --- (157)
-------- --------- -------- --------
76 40 182 71
-------- -------- -------- --------
Loss before provision for income taxes (595) (1,601) (585) (2,722)
Benefit from income taxes (296) (544) (294) (925)
-------- --------- -------- --------
Net loss $ (299) $(1,057) $ (291) $(1,797)
======== ========= ======== ========
Basic net loss per common share $ (0.04) $ (0.13) $ (0.04) $ (0.22)
======== ========= ======== ========
Diluted net loss per common share $ (0.04) $ (0.13) $ (0.04) $ (0.22)
======== ========= ======== ========
Basic weighted average common
shares outstanding 8,076 8,058 8,073 8,045
======== ========= ======== ========
Diluted weighted average common
shares outstanding 8,076 8,058 8,073 8,045
======== ========= ======== ========
See accompanying notes to unaudited consolidated financial statements.
3
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months
Ended March 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (In thousands)
(unaudited)
Net loss $ (291) $(1,797)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,000 3,849
Loss on disposal of fixed assets 469 28
Stock award compensation expense 12 287
Realized gain on sale of investments --- (160)
Changes in operating assets and liabilities:
Accounts receivable 418 4,907
Inventories (417) 1,964
Other assets 1,724 415
Accounts payable and accrued expenses 82 (3,763)
Income taxes payable 629 (2,080)
-------- --------
Net cash provided by operating activities 6,626 3,650
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,168) (2,926)
Purchase of investments (2,491) (4,325)
Proceeds from sale of investments 2,500 4,898
Proceeds from sale of fixed assets --- 29
-------- --------
Net cash used in investing activities (1,159) (2,324)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (4,317) (2,544)
Proceeds from the exercise of stock options 13 154
Proceeds from issuance of debt --- 2,000
-------- --------
Net cash used in financing activities (4,304) (390)
-------- --------
-------- --------
Effect of exchange rate changes on cash 130 53
-------- --------
Net increase in cash and cash equivalents 1,293 989
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,129 1,659
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,422 $ 2,648
======== ========
Supplemental cash flow information:
Interest paid $ 300 $ 418
Taxes paid $ --- $ 1,165
See accompanying notes to unaudited consolidated financial statements.
4
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements of
American Technical Ceramics Corp. and subsidiaries (the "Registrant") reflect
all adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of its consolidated
financial position as of March 31, 2003 and the results of its operations for
the three and nine month periods ended March 31, 2003 and 2002. These
consolidated financial statements should be read in conjunction with the summary
of significant accounting policies and notes to consolidated financial
statements included in the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002. Results for the three and nine month periods
ended March 31, 2003 are not necessarily indicative of results which could be
expected for the entire year.
(2) IMPACT OF NEW ACCOUNTING STANDARDS:
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"), which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 applies to
costs associated with an exit activity, including restructuring costs.
Companies will record a liability for exit or disposal activity as such amounts
are incurred and can be measured at fair value. The Registrant adopted SFAS No.
146 in January 2003. Such adoption had no impact on its financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" ("SFAS No. 148"), which provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of FASB Statement 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. SFAS No. 148 is effective for interim periods beginning after
December 15, 2002 and for annual periods ending after December 15, 2002. The
Registrant has elected not to adopt the fair value based method and continues to
apply the intrinsic value-based method to account for stock options. It has
adopted the new disclosure requirements of SFAS No. 148.
In December 2002, the Registrant adopted the Financial Accounting Standards
Board Statement of Financial Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements of Guarantees, Including Indirect Guarantees of
Indebtedness of Others". It requires among other things certain disclosures
about warranty obligations. Although the Registrant does not generally warranty
its products, return of defective product is typically accepted. The Registrant
provides for estimated sales returns when the underlying sale is made. Product
returns and warranty obligations have not historically been significant.
(3) SUPPLEMENTAL CASH FLOW INFORMATION:
During the nine months ended March 31, 2003, the Registrant (i) granted, on
July 1, 2002, $16 in deferred compensation stock awards that vest ratably
throughout fiscal year 2003, and (ii) adjusted a capital lease relating to its
Jacksonville, Florida facility to reflect certain additions to the facility.
The adjustment increased both fixed assets and the related long-term debt by
$1,437. See Note (7).
5
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(4) INVENTORIES:
Inventories included in the accompanying consolidated financial statements
consist of the following:
March 31, June 30,
2003 2002
---------- ---------
(unaudited)
Raw materials $ 7,296 $ 7,753
Work-in-process 4,785 3,968
Finished goods 3,753 3,696
---------- ---------
$ 15,834 $ 15,417
========== =========
(5) EARNINGS PER SHARE:
The following represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computation.
For the Three Months Ended March 31,
2003 2002
---- ----
(Loss) / (Loss)/
Income SHARES PER-SHARE Income SHARES PER-SHARE
(Numerator) (Denominator) AMOUNT (Numerator) (Denominator) AMOUNT
------------ ------------- ----------- ------------ ------------- -----------
Basic EPS $ (299) 8,076 $ (.04) $ (1,057) 8,058 $ (.13)
=========== ===========
Effect of Dilutive Securities:
Stock options --- --- --- ---
Deferred compensation
stock awards --- --- --- ---
------------ ------------- ----------- ------------ ------------- -----------
Diluted EPS $ (299) 8,076 $ (.04) $ (1,057) 8,058 $ (.13)
============ ============= =========== ============ ============= ===========
For the Nine Months Ended March 31,
2003 2002
---- ----
(Loss) / (Loss)/
Income SHARES PER-SHARE Income SHARES PER-SHARE
(Numerator) (Denominator) AMOUNT (Numerator) (Denominator) AMOUNT
------------ ------------- ----------- ------------ ------------- -----------
Basic EPS $ (291) 8,073 $ (.04) $ (1,797) 8,045 $ (.22)
=========== ===========
Effect of Dilutive Securities:
Stock options --- --- --- ---
Deferred compensation
stock awards --- --- --- ---
------------ ------------- ----------- ------------ ------------- -----------
Diluted EPS $ (291) 8,073 $ (.04) $ (1,797) 8,045 $ (.22)
============ ============= =========== ============ ============= ===========
Options covering 1,369 shares have been omitted from the calculation of
dilutive EPS for the three and nine months ended March 31, 2003 because their
inclusion would have been antidilutive.
6
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(6) COMPREHENSIVE LOSS:
The Registrant's comprehensive loss is as follows:
Three Months Ended Nine Months Ended
------------------------ ------------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss $ (299) $ (1,057) $ (291) $ (1,797)
----------- ----------- ----------- -----------
Other comprehensive income/(loss):
Foreign currency translation
adjustments 32 (13) 130 54
Unrealized losses on investments,
net of tax (4) (34) (4) (64)
----------- ----------- ----------- -----------
Other comprehensive income/(loss) 28 (47) 126 (10)
----------- ----------- ----------- -----------
Comprehensive loss $ (271) $ (1,104) $ (165) $ (1,807)
=========== =========== =========== ===========
(7) INDEBTEDNESS:
Prior to August 2002, the Registrant maintained two credit facilities with
Bank of America, N.A., a revolving line of credit and an equipment facility.
Each of these facilities was subject to certain financial covenants, including a
requirement to maintain a certain level of annualized earnings before interest,
taxes, depreciation and amortization (EBITDA) to current debt plus annual
interest payments. As of June 30, 2002, due to the losses incurred by the
Registrant during fiscal year 2002, the Registrant was not in compliance with
this covenant. The Registrant held discussions with Bank of America, N.A.
concerning possible amendments to the terms of the facilities which proved to be
unsuccessful. Accordingly, in August 2002, the Registrant repaid the
outstanding balance under the equipment facility and terminated both facilities.
The Registrant leases a facility in Jacksonville, Florida from a
partnership controlled by the Registrant's President, Chief Executive Officer
and principal stockholder under a capital lease. The rental payments under this
lease have been adjusted several times, most recently as of September 2002,
primarily to reflect fair market rental adjustments as a result of certain
additions or improvements to the facility as required by the terms of the lease.
Each such adjustment has been based upon an independent appraisal of the fair
market rental of the facility giving effect to the addition or improvement at
issue. Effective September 1, 2002, the Registrant is obligated to pay
approximately $720 per annum under this lease, an increase from $461 per annum
during fiscal year 2002. The payments due over the remaining eight years of
this capital lease, including the portion related to interest, total
approximately $5,393.
7
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(8) STOCK BASED COMPENSATION:
On January 16, 2002, the Registrant filed a Schedule TO with the Securities
and Exchange Commission, and commenced an offer to exchange outstanding options
under its existing stock option plans having an exercise price per share of
$19.50 or more for new options. The offer expired on February 13, 2002. The
Registrant accepted for exchange options to purchase an aggregate of 432 shares
of Common Stock. On August 15, 2002, the Registrant issued 407 new options in
exchange for the options tendered and accepted for exchange. The new options
were issued at the closing price of the Registrant's Common Stock on August 15,
2002, which was $2.35 per share.
The Registrant 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. Had compensation expense for the Registrant's stock option plans
been determined based on the fair value method at the grant date for awards
under these plans, consistent with the methodology prescribed under SFAS No.
123, the Registrant's net income (loss) and earnings (loss) per share would have
approximated the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
------------------------ -----------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
------------------------ -----------------------
(In millions except per share amounts)
Reported net loss $ (299) $ (1,057) $ (291) $ (1,797)
Reported basic loss per share (0.04) (0.13) (0.04) (0.22)
Reported diluted loss per share (0.04) (0.13) (0.04) (0.22)
Adjustment to compensation expense
for stock-based awards, net of tax $ (376) $ (594) $ (1,082) $ (1,691)
Pro forma net loss $ (675) $ (1,651) $ (1,373) $ (3,488)
Pro forma basic loss per share (0.08) (0.20) (0.17) (0.43)
Pro forma diluted loss per share (0.08) (0.20) (0.17) (0.43)
The weighted-average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes option pricing
model and is amortized over an expected grant life of 5 years.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share data)
The following discussion and analysis should be read in conjunction with
the consolidated financial statements, related notes and other information
included in this Quarterly Report on Form 10-Q.
Statements in this Quarterly Report on Form 10-Q that are not historical
fact may constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements are subject to risks and uncertainties, including, but not limited
to, market and economic conditions, the impact of competitive products, product
demand and market acceptance risks, changes in product mix, costs and
availability of raw materials, fluctuations in operating results, delays in
development of highly complex products, risks associated with international
sales and sales to the U.S. military, risk of customer contract or sales order
cancellations and other risks detailed from time to time in the Registrant's
filings with the Securities and Exchange Commission, including, without
limitation, those contained under the caption "Item 1. BUSINESS - CAUTIONARY
STATEMENTS REGARDING FORWARD - LOOKING STATEMENTS" in the Registrant's Annual
Report on Form 10-K. These risks could cause the Registrant's actual results for
future periods to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Registrant. Any forward-looking
statement represents the Registrant's expectations or forecasts only as of the
date it was made and should not be relied upon as representing its expectations
or forecasts as of any subsequent date. The Registrant undertakes no obligation
to correct or update any forward-looking statement, whether as a result of new
information, future events or otherwise, even if its expectations or forecasts
change.
Overview
- --------
Although year-to-year sales are lower for the nine months ended March 31,
2003 compared to the nine months ended March 31, 2002, sales have remained in a
narrow range for the past six quarters. The decline in year-to-year comparative
sales is mainly due to a weaker first quarter of fiscal year 2003 compared to
the first quarter of fiscal year 2002. Bottom-line results, however, are
significantly better than the comparative periods from the prior year due in
large part to cost reduction efforts taken last fiscal year and to the absence
of write-downs of certain inventories to net realizable value as occurred during
the first half of last fiscal year. These benefits were partially offset by
pretax charges of $469 in the first nine months of fiscal year 2003 relating to
the disposal of certain assets no longer used in the Registrant's manufacturing
process.
The market price for palladium, a raw material used in the manufacture of
the Registrant's capacitors, has decreased significantly in recent months. This
decrease will benefit the Registrant in future quarters. Currently the
Registrant is utilizing palladium in inventory purchased at higher costs. At
current business levels, it will take three to six months to utilize the
remainder of this higher-cost inventory. As such, and provided there is no
material increase in the market price for palladium or material change in the
usage level, the benefit of lower cost palladium will not be realized until the
first half of the next fiscal year.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
RESULTS OF OPERATIONS
- -----------------------
Three Months Ended March 31, 2003 Compared with Three Months Ended March 31,
- --------------------------------------------------------------------------------
2002
- ----
Net sales for the three months ended March 31, 2003 were $11,930,
essentially level compared to the $11,956 recorded in the comparable period in
the prior fiscal year. Although sales have been level, the mix of products has
changed somewhat from small case size capacitors and thin film products toward
larger case size capacitors and to the Registrant's newer 600 series capacitors.
Gross margin for the three months ended March 31, 2003 was 27.7% of net
sales, compared to 21.3% for the comparable period in the prior fiscal year.
The increase in gross margin was primarily due to lower overhead costs and
higher precious metal recovery than in the comparable period last year. Lower
overhead costs were the result of cost cutting measures the Registrant had taken
during fiscal year 2002 in response to the industry downturn. The increased
precious metal recovery was primarily due to a shift in product mix to larger
case size capacitors (which use a greater amount of precious metal), as well as
the timing of the recovery process.
Selling, general and administrative expenses for the three months ended
March 31, 2003 decreased 4% to $3,040, compared to $3,158 in the comparable
period in the prior fiscal year. The decrease was due to decreased bonuses and
the absence of expenses associated with the Registrant's former sales office in
England, which was closed during the second quarter of the prior fiscal year.
These benefits were partially offset by increased professional fees and travel
expenses and costs related to the recently established representative sales
office in China.
Research and development expenses for the three months ended March 31, 2003
decreased 25% to $694, compared to $923 in the comparable period in the prior
fiscal year. A reduction in research and development spending (in the form of
reduced headcount and discretionary spending) was among the cost reduction
measures put into place last fiscal year.
The Registrant recorded other expense of $93 for the three months ended
March 31, 2003, compared to other expense of $24 in the comparable period in the
prior fiscal year. The other expense for the current three month period related
primarily to a pretax charge of $74 due to the disposal of certain assets no
longer used in the Registrant's manufacturing process.
Interest expense for the three months ended March 31, 2003 decreased 13% to
$98, compared to $113 in the comparable period in the prior fiscal year. The
Registrant retired its bank debt during the first quarter of the current fiscal
year resulting in reduced interest expense. This reduction was partially offset
by increased interest expense on additional capital lease obligations.
Other income was zero during the three months ended March 31, 2003. In
comparison, during the three months ended March 31, 2002, the Registrant
recorded a gain on the sale of investments of $51.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Bookings for the three months ended March 31, 2003 were $11,818, compared
to $11,803 for the three months ended March 31, 2002. Although bookings were
essentially flat period to period, there was a shift in product mix from small
case size capacitors and thin film products toward larger case size capacitors
and to the Registrant's newer 600 series capacitors. Delivery times and price
are key factors in obtaining orders. The Registrant believes its current levels
of inventories should enable it to meet customer delivery requirements in the
time frames currently required by customers.
The backlog of unfilled orders was $10,718 at March 31, 2003, compared to
$9,745 at March 31, 2002, and $9,325 at June 30, 2002. The increase in backlog
was primarily due to the increase in orders from the military market which the
Registrant expects to ship over the next several quarters. However, the
Registrant anticipates that, in general, customers will continue to place orders
with short delivery requirements for the foreseeable future resulting in backlog
becoming a less important indicator of the Registrant's business.
As a result of the foregoing, net loss for the three months ended March 31,
2003 was $299, or ($.04) per common share and common share assuming dilution,
compared to a net loss of $1,057, or ($.13) per common share and common share
assuming dilution, for the comparable period in the prior fiscal year.
Nine Months Ended March 31, 2003 Compared with Nine Months Ended March 31, 2002
- --------------------------------------------------------------------------------
Net sales for the nine months ended March 31, 2003 decreased 4% to $35,978,
compared to $37,443 in the comparable period in the prior fiscal year. The
decrease in net sales was primarily the result of decreased sales volume due to
the economic downturn, particularly as it has affected the telecommunications
industry. Nearly the entire sales decline for the nine month period was the
result of a weak first quarter of the fiscal year as compared to the first
quarter of last fiscal year.
Gross margin for the nine months ended March 31, 2003 was 30.1% of net
sales, compared to 24.7% for the comparable period in the prior fiscal year. The
increase in gross margin was principally due to the absence of inventory
write-downs to net realizable value as occurred in the comparable period last
year, cost reductions and higher precious metal recovery. Cost reductions were
due to measures taken last fiscal year due to the economic downturn. Increased
precious metal recovery for the nine months ended March 31, 2003 was due in part
to the shift in product mix and in part to the timing of the recovery process.
Conversely, cost of sales for the nine months ended March 31, 2002 was
negatively impacted by a charge of $1,368 to reduce certain inventory to net
realizable value.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Selling, general and administrative expenses for the nine months ended
March 31, 2003 decreased 5% to $8,815, compared to $9,313 in the comparable
period in the prior fiscal year. The decrease was due in part to decreased
stock bonus accruals as a result of a lower market price for the Registrant's
Common Stock and decreased payroll related expenses due to headcount reductions
instituted throughout fiscal year 2002. In addition, during the comparable
period in the prior fiscal year, the Registrant incurred severance costs of $203
in connection with the headcount reductions in the United States and England,
and professional fees in connection with closing the Registrant's sales office
in England during the second quarter of last fiscal year. The effects of these
costs (plus the costs associated with operating the sales office in England
prior to its closure) were offset partially by increased professional fees and
expenses incurred during the first nine months of the current fiscal year
related to opening and operating a sales office in China.
Research and development expenses for the nine months ended March 31, 2003
decreased 22% to $2,027, compared to $2,608 in the comparable period in the
prior fiscal year. The decrease in research and development spending was due to
the cost reduction measures referred to above, partially offset by a pretax
charge of $33 relating to the disposal of certain internally designed equipment.
The Registrant recorded other expense of $384 for the nine months ended
March 31, 2003, compared to other income of $29 in the comparable period in the
prior fiscal year. The other expense for the current nine month period related
primarily to a pretax charge of $436 due to the disposal of certain assets no
longer used in the Registrant's manufacturing process.
Interest expense for the nine months ended March 31, 2003 decreased 32% to
$262, compared to $386 in the comparable period in the prior fiscal year. The
Registrant retired its bank debt during the first quarter of the current fiscal
year resulting in reduced interest expense. This reduction was partially offset
by additional interest expense on expanded capital lease obligations.
Interest income for the nine months ended March 31, 2003 decreased 49% to
$80, compared to $158 in the comparable period in the prior fiscal year. The
decrease was due to a decline in cash available for investment as a result of
the retiring of bank debt (partially offset by cash provided by operations in
excess of capital expenditures), as well as lower prevailing interest rates
during the period.
Other income was zero for the nine months ended March 31, 2003. In
comparison, during the nine months ended March 31, 2002, the Registrant recorded
a gain on the sale of investments of $160.
As a result of the foregoing, the net loss for the nine months ended March
31, 2003 was $291, or ($.04) per common share and common share assuming
dilution, compared to a net loss of $1,797, or ($.22) per common share and
common share assuming dilution, for the comparable period in the prior fiscal
year.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Registrant's financial position at March 31, 2003 remains strong as
evidenced by working capital of $31,157, and stockholders' equity of $52,053.
The Registrant's current ratio at March 31, 2003 was 7.0:1, compared to a
current ratio of 4.4:1 at June 30, 2002. The Registrant's quick ratio at March
31, 2003 was 3.3:1, compared to 2.0:1 at June 30, 2002. The improvement in the
Registrant's current and quick ratios was primarily due to the use of available
cash to pay off bank debt (all of which was recorded as current liabilities at
June 30, 2002), positive operating cash flow and the receipt of tax refunds.
Cash, cash equivalents and investments increased by $1,270 to $11,424 at
March 31, 2003 from $10,154 at June 30, 2002, primarily as a result of positive
operating cash flows in excess of capital expenditures and the receipt of tax
refunds, offset partially by the use of cash to retire bank debt. Accounts
receivable decreased by $418 to $5,910 at March 31, 2003 from $6,328 at June 30,
2002, due to lower sales in the quarter ended March 31, 2003. Inventories
increased by $417 to $15,834 at March 31, 2003 from $15,417 at June 30, 2002.
Other current assets decreased by $1,680 to $884 at March 31, 2003 from $2,564
at June 30, 2002 due to the receipt of tax refunds as the result of net
operating losses incurred last fiscal year. Accounts payable and accrued
expenses increased by $83 to $4,179 at March 31, 2003 from $4,096 at June 30,
2002.
The Registrant leases a facility in Jacksonville, Florida from a
partnership controlled by the Registrant's President, Chief Executive Officer
and principal stockholder under a capital lease. The rental payments under this
lease have been adjusted several times, most recently as of September 2002,
primarily to reflect fair market rental adjustments as a result of certain
additions or improvements to the facility as required by the terms of the lease.
Each such adjustment has been based upon an independent appraisal of the fair
market rental of the facility giving effect to the addition or improvement at
issue. Effective September 1, 2002, the Registrant is obligated to pay
approximately $720 per annum under this lease, an increase from $461 per annum
during fiscal year 2002. The payments due over the remaining eight years of
this capital lease, including the portion related to interest, total
approximately $5,393.
Capital expenditures for the nine months ended March 31, 2003 totaled
$1,168, including expenditures for machinery and equipment and planned leasehold
improvements, but excluding the adjustment to the capital lease discussed above.
The Registrant intends to use cash on hand to finance budgeted capital
expenditures of approximately $400 for the remainder of fiscal year 2003,
primarily for equipment acquisitions.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Aggregate contractual obligations as of March 31, 2003 mature as follows:
Payments Due by Period (in 000's)
-----------------------------------------
Less
than 1 1- 3 4- 5 After 5
Contractual Obligations Total year years years years
- ----------------------------- ------ ------- ------ ------ --------
Bank Debt $ --- $ --- $ --- $ --- $ ---
Capital Lease Obligations 3,764 371 1,293 1,106 994
Operating Leases 2,341 496 1,230 615 ---
------ ------- ------ ------ --------
Total Contractual Obligations $6,105 $ 867 $2,523 $1,721 $ 994
====== ======= ====== ====== ========
As described previously, in August 2002, the Registrant repaid the
outstanding balance of its equipment line from Bank of America, N.A.
Accordingly, the Registrant currently has no outstanding long-term bank debt or
available committed lines of credit.
The Registrant routinely enters into binding and non-binding purchase
obligations in the ordinary course of business, primarily covering anticipated
purchases of inventory and equipment. The terms of these commitments generally
do not extend beyond six months. None of these obligations are individually
significant. The Registrant does not expect that these commitments will
materially adversely affect its liquidity in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
The SEC defines "critical accounting policies" as those that require the
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods. The Registrant's
significant accounting policies are described in Note 1 to its consolidated
financial statements contained in its Annual Report on Form 10-K for the fiscal
year ended June 30, 2002. The Registrant believes that the following accounting
policies require the application of management's most difficult, subjective or
complex judgments:
Allowances for Doubtful Accounts Receivable
- -----------------------------------------------
The Registrant performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and customer's current
creditworthiness, as determined by its review of the customer's current credit
information. The Registrant continuously monitors collections and payments from
its customers and maintains an allowance for estimated credit losses based upon
its historical experience and any specific customer collection issues that the
Registrant has identified. While such credit losses have historically been
within the Registrant's expectations and the allowances established, the
Registrant can not guarantee that it will continue to experience the same credit
loss rates that it has in the past. Should the financial position of its
customers deteriorate resulting in an impairment of their ability to pay amounts
due, the Registrant's revised estimate of such losses may negatively impact the
Registrant's operating results in the future.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Sales Returns and Allowances
- -------------------------------
In the ordinary course of business, the Registrant accepts returns of
products sold for various reasons and grants sales allowances to customers.
While the Registrant engages in extensive product quality control programs and
processes, its level of sales returns is affected by, among other things, the
quality of its manufacturing processes. The Registrant maintains an allowance
for sales returns and allowances based upon historical returns and allowances
granted. While such returns and allowances have historically been within the
Registrant's expectations, actual return and allowance rates in the future may
differ from current estimates, which could negatively impact its operating
results in the future.
Inventory Valuation
- --------------------
The Registrant values inventory at the lower of aggregate cost (First-in,
First-out) or market for its finished product. When the cost of inventory is
determined by management to be in excess of its market value, inventory is
written down to its estimated net realizable value. This requires the
Registrant to make estimates and assumptions about several factors (e.g., future
sales quantities and selling prices, and percentage complete and failure rates
for work in process) based upon historical experience and its projections for
future periods. Changes in factors such as the level of order bookings, the
product mix of order bookings and the Registrant's manufacturing processes could
have a material impact on the Registrant's assessment of the net realizable
value of inventory in the future.
Valuation of Deferred Tax Assets
- ------------------------------------
The Registrant regularly evaluates its ability to recover the reported
amount of its deferred income taxes considering several factors, including its
estimate of the likelihood of the Registrant generating sufficient taxable
income in future years during the period over which temporary differences
reverse. Presently, the Registrant believes that it is more likely than not
that it will realize the benefits of its deferred tax assets based primarily on
its history of and projections for taxable income in the future, and its
intention to carry back net operating losses to generate refunds of income taxes
previously paid. In the event that actual results differ from its projections
or the Registrant adjusts these projections in future periods, the Registrant
may need to establish a valuation allowance against a portion or all of its
deferred tax assets, which could materially impact its financial position or
results of operations in future periods.
Valuation of Long-lived and Intangible Assets
- ---------------------------------------------
The Registrant assesses the recoverability of long-lived assets whenever
the Registrant determines that events or changes in circumstances indicate that
the carrying amount may not be recoverable. Its assessment is primarily based
upon an asset's usefulness in the manufacturing process or management's estimate
of the future cash flows associated with the asset. The Registrant believes
that the carrying amount of its long-lived assets are recoverable. However,
should its operating results deteriorate, or anticipated new product launches
not occur or not attain the commercial acceptance that the Registrant
anticipates, the Registrant may determine that some portion of its long-lived
assets are impaired. Such determination could result in non-cash charges to
income that could materially affect its financial position or results of
operations for that period.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
IMPACT OF NEW ACCOUNTING STANDARDS
- --------------------------------------
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"), which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 applies to
costs associated with an exit activity, including restructuring costs.
Companies will record a liability for exit or disposal activity as such amounts
are incurred and can be measured at fair value. The Registrant adopted SFAS No.
146 in January 2003. Such adoption had no impact on its financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" ("SFAS No. 148"), which provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of FASB Statement 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. SFAS No. 148 is effective for interim periods beginning after
December 15, 2002 and for annual periods ending after December 15, 2002. The
Registrant has elected not to adopt the fair value based method and continues to
apply the intrinsic value-based method to account for stock options. It has
adopted the new disclosure requirements of SFAS No. 148.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant has identified two market risks relative to its business:
foreign currency exchange rate risk and commodity price risk. The Registrant
has managed its market risk exposures in order to minimize their potential
impact on its consolidated financial condition and results of operations.
Specifically:
a) Foreign currency exchange rate risk. Certain transactions by the
---------------------------------------
Registrant's wholly-owned subsidiary in Sweden and the Registrant's
sales office in China are denominated in currencies other than U.S.
Dollars. The Registrant's foreign operations incur expenses in their
respective local currencies. Sales are incurred in varying currencies.
The Registrant does not hedge foreign currency transactions but limits
payment terms to minimize foreign currency exchange exposure.
Additionally, the Registrant intends to reinvest earnings from foreign
operations into the operations that generate those earnings. The
Registrant has not experienced any significant impact from exchange
rate fluctuation in the past, and does not anticipate a significant
impact due to exchange rate fluctuation in the foreseeable future.
b) Commodity price risk. Following substantial reductions in the price
---------------------
of palladium, prices for this precious metal, which is used in the
manufacture of the Registrant's capacitors, have stabilized. The
Registrant believes that, based upon its current levels of production
and inventories of palladium, it will need to buy additional
quantities of palladium later in the fiscal year at prevailing market
prices. The Registrant believes that the price of palladium will
remain stable in the near term due to the lower demand coming from the
electronics industry. Should the Registrant anticipate an increase in
the market price of palladium, it may revert to purchasing additional
inventories of palladium to protect against future unavailability and
unstable pricing.
16
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK (CONTINUED)
The Registrant had identified two other market risks in its Annual Report
on Form 10-K for the fiscal year ended June 30, 2002: interest rate risk and
security price risk. During the quarter ended September 30, 2002, the
Registrant repaid all of its outstanding bank debt. See Note 7 to Notes to
Unaudited Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Consequently, at the present time, the Registrant does not
consider interest rate risk to be a market risk relative to its business. In
addition, all of the securities currently held by the Registrant for investment
are government securities with maturities of less than one year. Accordingly,
at the present time, the Registrant does not consider security price risk to be
a market risk relative to its business.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
In response to the requirements of the Sarbanes-Oxley Act of 2002, the
Registrant reviewed and modified its "disclosure controls and procedures" (as
defined in Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)-4(c)).
Within 90 days prior to the date of this report (the "Evaluation Date"), the
Registrant's President and Chief Executive Officer and Vice President,
Controller carried out an evaluation of the effectiveness of these disclosure
controls and procedures. Based on that evaluation, these officers concluded
that, as of the Evaluation Date, the Registrant's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Registrant and the Registrant's consolidated subsidiaries would
be made known to them by others within those entities.
Changes in Internal Controls
- -------------------------------
Subsequent to the Evaluation Date, there were no significant changes in the
Registrant's internal controls, or to the Registrant's knowledge, in other
factors that could significantly affect these controls.
PART II - OTHER INFORMATION
ITEMS 1. THROUGH 5. Not Applicable
--------------
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) 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:
17
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3(a)(i) - Certificate of Incorporation of the Registrant.
3(a)(ii) - Amendment to Certificate of Incorporation. (1)
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) - Lease, dated September 1, 2002, between Stepar Leasing, LLC and
the Registrant for premises at 15 Stepar Place, Huntington
Station, N.Y. (12)
10(c)(i) - Form of 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. (2)
10(c)(iii) - Form of Employee Stock Bonus Agreement, dated as of April 19,
1994, between the Registrant and various employees. (2)
10(c)(iv) - Form of Employee Stock Bonus Agreement, dated as of April 20,
1995, between the Registrant and various employees. (3)
10(e)(i) - Second Amended and Restated Lease, dated as of May 16, 2000,
between V.P.I. Properties Associates, d/b/a V.P.I. Properties
Associates, Ltd., and American Technical Ceramics (Florida), Inc.
(7)
10(g)(iii) - Profit Bonus Plan, dated April 19, 1995, and effective for the
fiscal years beginning July 1, 1994. (3)
10(g)(iv) - Employment Agreement, dated April 3, 1985, between the
Registrant and Victor Insetta, and Amendments No. 1 through 4
thereto. (1)
10(g)(v) - Amendment No. 5, dated as of September 11, 1998, to Employment
Agreement between the Registrant and Victor Insetta. (5)
10(g)(vi) - Amendment No. 6, dated as of January 3, 2001, to Employment
Agreement between the Registrant and Victor Insetta. (13)
10(h) - Employment Agreement, dated September 1, 2000, between the
Registrant and Richard Monsorno. (8)
18
10(i) - Managers Profit Bonus Plan, dated December 7, 1999, and
effective January 1, 2000. (6)
10(k) - Consulting Agreement, dated October 2000, between the Registrant
and Stuart P. Litt. (8)
10(m)(i) - American Technical Ceramics Corp. 1997 Stock Option Plan. (4)
10(m)(ii) - American Technical Ceramics Corp. 2000 Incentive Stock Plan. (6)
10(p) - Second Amended and Restated Employment Agreement, dated as of
December 31, 2001, between the Registrant and Judah Wolf. (10)
10(r) - Employment Agreement, dated April 10, 2001, between the
Registrant and David Ott. (9)
10(r)(i) - Amendment to Employment Agreement, dated as of January 1, 2001,
between the Registrant and David Ott. (10)
10(s) - Employment Agreement, dated April 1, 2003, between the Registrant
and Stephen Beyel. (13)
21 - Subsidiaries of the Registrant. (11)
99.1 - Section 302 Certification of Chief Executive Officer. (13)
99.2 - Section 302 Certification of Principal Accounting Officer. (13)
99.3 - Section 906 Certifications. (13)
_______________________________
1. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993.
2. Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1994.
3. Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1995.
4. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997.
5. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998.
6. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2000.
19
7. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000.
8. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2000.
9. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001.
10. Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q/A for the quarterly period ended March 31, 2002.
11. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2002.
12. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2002.
13. Filed herewith.
(b) REPORTS ON FORM 8-K
-------------------
1. On February 13, 2003, the Registrant furnished a report on Form 8-K
together with the Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2002. The report on Form 8-K contained the
certification required by Section 906 of the Sarbanes-Oxley Act of 2002.
2. On May 6, 2003, the Registrant furnished a report on Form 8-K together with
the Registrant's Press Release announcing it's third quarter financial
results for the period ended March 31, 2003. The Form 8-K contained the
information required by "Item 9. Regulation FD Disclosure" and Item 12.
Disclosure of Results of Operations and Financial Condition," in accordance
with SEC Release 33-8216.
20
SIGNATURES
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:
AMERICAN TECHNICAL CERAMICS CORP.
(Registrant)
DATE: May 13, 2003 BY: /s/ VICTOR INSETTA
------------------
Victor Insetta
President and Director
(Principal Executive Officer)
DATE: May 13, 2003 BY: /s/ ANDREW R. PERZ
------------------
Andrew R. Perz
Vice President, Controller
(Principal Accounting Officer)
21