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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
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
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(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: (631) 622-4700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE 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 10, 2002, 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 $12,041,589. (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 10, 2002, THE REGISTRANT HAD OUTSTANDING 8,074,118 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
21, 2002 ARE INCORPORATED INTO PART III OF THIS REPORT BY REFERENCE.
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PART I
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.
The Registrant was merged into a Delaware corporation in 1985 in order to change
its jurisdiction of incorporation. 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 capacitors, thin film products, and other
passive components. The Registrant's products are focused primarily in the high
reliability market for ultra-high frequency ("UHF") and microwave applications,
including wireless electronics, medical electronics, semiconductor equipment,
satellite equipment and fiber optics. Capacitors function within electronic
circuits by storing and discharging precise amounts of electrical power. The
Registrant believes that it is a leading manufacturer of multilayer capacitors
("MLCs") for UHF and microwave applications. Selling prices for the Registrant's
MLCs typically range from $.15 to $7.50 or higher, whereas selling prices for
commodity-type MLC units typically range from $.005 to $.10. Thin film products
are ceramic substrates on which circuit patterns are printed by means of thin
film processes, and are used by customers as building blocks in electronic
circuits. Management believes the Registrant operates in only one industry
segment - the electronic components industry.
Beginning in fiscal year ended June 30, 2001, and continuing into the
fiscal year ended June 30, 2002, the electronic components industry experienced
a significant slowdown in the demand for its products, principally in the
telecommunications, semiconductor manufacturing and fiber optic markets. This
slow-down resulted in the cancellation of certain existing orders and a
substantially reduced rate of incoming orders. The Registrant responded to this
situation by reducing costs, including through significant reductions in the
number of employees. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
PRODUCTS
The Registrant's traditional line of MLCs are available in predominantly
four physical sizes designated "A" (.055 inch cube), "B" (.110 inch cube), "C"
(.250 inch cube) and "E" (.380 inch cube); in three types of dielectrics:
low-loss porcelain (the 100 series), zero temperature coefficient (the 700
series) and high dielectric constant (the 200 series); and in a variety of
capacitance values. The 100 series, the Registrant's basic product line, is
widely used in microwave equipment. The 700 series has a slightly higher
dissipation factor (i.e., is slightly less energy-efficient) than the 100
series. Because of its lower temperature coefficient, it 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 traditional line of MLC's is one of
two product lines that accounts for more than 10% of the Registrant's
consolidated revenue, accounting for approximately 70%, 59% and 67%, of the
Registrant's revenues in fiscal years 2002, 2001 and 2000, respectively.
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 wireless cellular and personal communications
systems (PCS), medical imaging (i.e., magnetic resonance imaging), radio
frequency power sources for semiconductor manufacturing, satellite
communications, numerous aerospace systems, including radar and electronic
warfare, and certain high-speed digital processing equipment.
2
Approximately 88%, 93% and 92% of the Registrant's sales in fiscal years
2002, 2001 and 2000, respectively, were to commercial (i.e., applications other
than hi-rel) customers. For the fiscal years ended June 30, 2002, 2001 and 2000,
the Registrant estimates that approximately 12%, 7% and 8% of the Registrant's
sales, respectively, were sales of hi-rel products. See "Item 1. BUSINESS --
CUSTOMERS AND MARKETING -- FOREIGN SALES" and Note 9 of Notes to Consolidated
Financial Statements.
Hi-rel MLCs are principally utilized in applications such as satellites
(including commercial communications satellites), high performance military
aircraft, spacecraft and missiles, and other defense applications such as radar
and electronic countermeasures. The 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 in
which its products are typically applied in the manufacture of high-value
capital equipment and which has commanded higher unit selling prices. The MLCs
required for many of these applications constitute a small part of the circuit
cost and, because performance requirements are stringent and the cost of
component failure high, customers have been willing to pay the price premium
associated with higher performance products such as those the Registrant makes.
In recent years, the Registrant has automated its manufacturing processes to
enable it to produce certain of its existing MLCs for the medium - priced niche
market driven by wireless base-station infrastructure applications.
Recently, the Registrant began marketing new capacitor products targeted
toward higher volume markets. The first of these new products is the 600S which
is targeted toward the high-performance, lower-priced segment of the wireless
industry. The 600S capacitor is smaller (.06" x .03" rectangle) and lower-priced
(approximately two-thirds the price of the lowest-priced comparable part) than
the Registrant's traditional MLC's, and uses a new ATC-developed ceramic
formulation to optimize performance for cellular and PCS operating frequencies.
Sales from this product line, which was formally launched on June 16, 2000,
amounted to approximately 4% of the Registrant's revenues in fiscal year 2002
and 2001, and less than 1% in the fiscal year ended June 30, 2000.
The Registrant also offers specialized capacitors designed to perform at
frequencies higher than the useful range of typical microwave MLCs. The
Registrant's Microcap(R), a single layer ceramic capacitor, was developed to
meet certain applications where small size is critical and which operate at
frequencies extending higher than those for which MLCs are typically chosen.
Manufactured and sold in both hi-rel and commercial versions, these products are
used in wideband wireless data communications, satellite communications,
military systems and other microwave and millimeter-wave applications. Another
product tailored to the same market, the 500S Broadband Microwave Capacitor
(BMC), was introduced in June 1998. This product is based on a patented
construction designed to be compatible with customers' high-volume surface-mount
assembly technologies. Sales of these two product types combined amounted to
approximately 3%, 6% and 5% of the Registrant's revenues in the fiscal years
ended June 30, 2002, 2001 and 2000, respectively.
3
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 metallized circuits and passive components on high-quality
ceramic substrates to customers' drawings and specifications. Thin film layers
deposited on the ceramic substrate may consist of a variety of materials with
specific conductive, resistive, capacitive, and other properties enabling the
build-up of the desired circuit pattern. As with a typical circuit board, the
customer may then attach discrete components and chips to complete the circuit.
Thin film products are used by the Registrant's customers in a broad range of
applications, including microwave components, fiber optic repeaters and
high-density packaging of devices, typically where requirements for high
reliability, small size and dimensional precision are paramount. In the fiscal
years ended June 30, 2002, 2001 and 2000, thin film sales represented
approximately 17%, 24% and 24% of the Registrant's revenues, respectively.
In June 2000, the Registrant introduced a line of high power, passive
resistive products. In fiscal year 2002, the Registrant added thin film resistor
manufacturing capability to its resistive products line. Typically, thin film
resistors offer a higher degree of reliability and are better able to handle
power than their thick film counterparts. The Registrant's products, including
standard resistors, terminations, attenuators and other customized products,
consist of resistive and conductive layers deposited on a substrate of aluminum
nitride, a base material chosen for its high thermal conductivity and its
non-toxic properties. High power resistive products are used in many of the same
types of equipment as the Registrant's capacitor products. Other applications
for these products, which reflect an expansion of the Registrant's customer
base, include RF and microwave products, including power amplifiers, up and down
converters, and high power combiner/dividers. The markets for these products
include the wireless and telecommunication markets, including base station and
satellite communications, and a broad range of medical, military and other
commercial applications. Resistive product sales represented less than 1% of the
Registrant's revenues in fiscal years 2002, 2001 and 2000.
In fiscal year 2002, the Registrant offered on a limited basis certain
products based upon a new high-density electronic packaging technology for radio
frequency (RF) and microwave frequency broadband applications. This technology,
commonly referred to as Low Temperature Co-fired Ceramic (LTCC), is based on
high performance dielectric ceramic materials, some manufactured by the
Registrant and others purchased from leading electronic materials manufacturers.
Traditional RF and microwave circuits have been limited in size and performance
by the use of only two dimensions to incorporate all RF elements and passive
components, such as inductors, capacitors and resistors. LTCC technology enables
the user to design circuits in the third dimension with the integration of the
RF elements and passive components in the body of the electronic circuit. LTCC
technology also provides the ability to design circuits with integrated RF
components such as couplers, power dividers/combiners, filters and impedance
transformers, and passive devices. In the fiscal year ended June 30, 2002, LTCC
sales accounted for less than 1% of the Registrant's revenues. See "Item 1.
BUSINESS -- MANUFACTURING and -- RESEARCH AND DEVELOPMENT."
MANUFACTURING
The manufacturing process for MLCs involves four primary stages. The first,
or "white room" stage, includes tape casting, multi-layer lamination, dicing and
firing of ceramic chips. In this phase, layers of electrically conducting
material are printed onto ceramic tape in patterns, which eventually form the
electrodes of the capacitor. The screen-printing technology used for the
printing of such layers is referred to as "thick film". In the second, or
"termination" stage, the ceramic chips are coated with silver. In the third, or
"finishing" stage, the parts are then customized to specific order requirements
for commercial applications. This stage includes, but is not limited to, chip
plating, soldering of leads, laser marking and chip packaging. The chips are
tested electrically and inspected throughout the entire process. If the
customer's specifications call for a higher level of performance assurance, the
parts are put through a fourth stage, the hi-rel stage, where additional testing
is performed.
4
The Registrant currently manufactures MLCs at its facilities in Huntington
Station, New York and Jacksonville, Florida. Its primary MLC manufacturing site
is Huntington Station, consisting of three facilities which aggregate
approximately 54,000 square feet. Two of these facilities house the Registrant's
state-of-the-art chip fabrication operations. These facilities are designed to
provide optimum control of the Registrant's manufacturing processes and product
quality, while substantially increasing its output capability.
During fiscal year 2000, the Registrant completed capacity expansion
projects which increased chip unit throughput approximately threefold.
Additional capacity expansion projects completed prior to the third quarter of
fiscal year 2001 increased chip volume production capability by another 50% over
production levels possible at the end of fiscal year 2000. In addition, in
August of fiscal year 2001, the Registrant purchased another building next to
its existing facilities in New York which will add a minimum of 22,000
additional square feet of production space to the New York facility complex when
such space is required to support capacity expansion.
The Registrant also manufactures capacitors at its facility in
Jacksonville, Florida. During fiscal years 2002 and 2001, the Registrant
manufactured the 500S and 600S series capacitors at its Jacksonville facility.
The Jacksonville facility is also the site of manufacture for the Registrant's
thin film, Microcap(R) SLC, resistor and LTCC (Low Temperature Co-fired
Ceramics) product lines, and serves as the Registrant's new product technology
center. During fiscal year 2002, the Registrant brought on line 38,000 square
feet of additional manufacturing space. The expansion included a 22,000 square
foot facility for thin film and 16,000 square feet for other purposes, including
commercial manufacture of the Registrant's new resistive product line.
Portions of the Jacksonville facility have been redesigned over the last
few years in order to accommodate what the Registrant refers to as its "Factory
of the Future". Utilizing recently developed and acquired materials, processes
and equipment, the Registrant can manufacture MLC products at this facility at
higher degrees of precision and control and at a substantially lower cost with
accompanying high output. Moreover, the manufacturing operations at this
facility are flexible, enabling the Registrant to produce ceramic structures of
a wide variety of sizes, shapes and internal configurations.
As differentiated from the "thick film" technology used in MLC manufacture,
the manufacture of thin film circuits involves a method for the deposition of
layers of conducting and other materials using "sputtering" technology. Also key
to the manufacture of these products is the use of laser machining of ceramic
substrates. Unlike the manufacture of capacitors, where all products flow
through the same manufacturing sequences, manufacturing processes for custom
thin film products vary significantly in accordance with each customer's
specifications.
Microcap(R) SLCs, resistive products, LTCC, and BMCs all utilize various
combinations of the production methods described in the preceding discussions.
The manufacture of each of these product lines involves dedicated equipment in
addition to sharing equipment used in connection with the manufacture of the
product lines previously discussed. During fiscal year 2001, the Registrant
expanded its production capabilities for the Microcap(R) SLCs and established an
initial production line for resistive products.
In order to realize the potential of its expanding and diversifying product
lines and to more fully integrate all facets of its operations, the Registrant
is in the process of replacing its existing information system with a modern
Enterprise Resource Planning System. Utilizing modern, commercially available
information technology, the new system is intended to provide improved
functionality and efficiency for better planning, control and responsiveness.
During fiscal year 2002, the Registrant implemented the first phase of this
system, and is currently planning the implementation of the second phase.
The Registrant utilizes a wide variety of specialized equipment for the
fabrication, handling and testing of its products, including equipment that it
has designed and constructed. The Registrant considers its capability to create
its own unique equipment solutions tailored to the particular needs of its
product lines and technologies to be a competitive advantage.
5
Before full market introduction of a new product, the Registrant generally
establishes a production line for the product and manufactures substantial
quantities to evaluate and verify its ability to consistently meet quality and
performance standards. Such efforts involve the dedication of equipment,
materials and labor, and, to the extent that these efforts do not result in
saleable product, all costs are expensed. During fiscal years 2001 and 2002, the
Registrant's resistive product line was in this phase of development. During
fiscal year 2002, the Registrant's LTCC product line was in this phase. In light
of current economic conditions and the complexity of the technology upon which
the LTCC product line is based, the Registrant has scaled back it efforts with
respect to the development of this product line. See "Item 1. BUSINESS --
RESEARCH AND DEVELOPMENT."
In fiscal year 2001, the Registrant completed the qualification of the 600S
product line, and established a complete inventory staged for 24 hour delivery.
In addition, the Registrant added to its resistor product line a thin film
manufacturing method to better produce high power resistors. The Registrant also
extended its offering of resistor products to include terminations and
attenuators, products which complement the Registrant's overall product
offering.
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 produce certain products
to the Registrant's specifications. These products accounted for approximately
5% of the Registrant's consolidated revenues in fiscal years 2002 and 2001,
respectively, and 2% of its consolidated revenues in fiscal year 2000.
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.
The Registrant conducts continuous improvement programs targeted at streamlining
manufacturing processes and increasing yields, and has established statistical
process control techniques for maintaining key process steps within specified
bounds and providing data to support continuous improvement. For additional
information with respect to yields and efficiencies, see "Item 1. BUSINESS --
RESEARCH AND DEVELOPMENT".
During fiscal year 2002, the Registrant's manufacturing facilities were
operated under ISO-9002 registration.
CUSTOMERS AND MARKETING
The Registrant markets its products primarily to customers in the wireless
base-station infrastructure, fiber optic telecommunications, military, medical,
semiconductor manufacturing and aerospace industries. The customers included
within these industries are manufacturers of microwave, high frequency and fiber
optic systems, subsystems and equipment, including original equipment
manufacturers (OEMs) and suppliers thereto, and government contractors and
subcontractors. Most of the Registrant's products are used in the manufacture of
capital equipment.
The Registrant promotes its products through specialized trade shows,
industry trade journal advertisements, a site on the Internet's World Wide Web
and catalog direct mail programs. In fiscal year 2000, the Registrant started
taking orders, on a limited basis, via its web site.
The Registrant shipped to over 1,800 customers in fiscal year 2002 as
compared to approximately 1,900 and 1,800 customers in fiscal years 2001 and
2000, respectively. The top ten customers combined accounted for approximately
29% of net sales in fiscal years 2002, 2001, and 35% of net sales in fiscal year
2000. Sales to General Electric Company, a major medical electronics OEM,
accounted for approximately 10% of the Registrant's net sales in fiscal year
2002. No customer accounted for more than 10% of the Registrant's net sales in
fiscal year 2001. Sales to Tyco International LTD., a major telecommunications
OEM, accounted for approximately 15% of the Registrant's net sales in fiscal
year 2000.
6
The Registrant is a qualified producer of capacitors with the Defense
Logistics Agency of the United States Department of Defense. This qualified
status covers several varieties and types of capacitors. Maintenance of its
qualified producer status is critical in order for the 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 the Registrant believes it is presently the only supplier with such
qualification for some of these product types.
The Registrant typically sells its products through a combination of
logistics arrangements and a large number of individual purchase orders. The
individual purchase orders are often subject to pricing agreements. Neither
pricing agreements nor logistics arrangements are firm purchase orders, but each
still requires that the Registrant commit to produce semi-finished or finished
goods inventory in anticipation of receiving a purchase order for immediate
shipment. The supply shortage for electronic components that had begun during
fiscal year 2000 continued into the first half of fiscal year 2001. The
shortage, which was exacerbated by historically high capital expenditure
spending as a percentage of revenue by telecommunications service providers,
caused customers to alter their buying behaviors in an attempt to ensure a
source of supply. As the shortage eased in the second half of fiscal year 2001,
customers began to utilize their inventories of parts resulting in a decline in
orders. In fiscal year 2002, customers reverted to their preferred method of
ordering under very short lead times using pricing agreements and logistics
arrangements. See "Item 1. BUSINESS -- SALES BACKLOG" and "Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
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. Sales returns are
authorized and accepted by the Registrant in the normal course of business. An
evaluation of the returned product is performed and typically results in either
a credit or a shipment of replacement product to customers. The 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 historically has utilized both resellers, who
purchase products from the Registrant for resale, and sales representatives. In
fiscal year 2000, the Registrant established a wholly-owned subsidiary in
Stockholm, Sweden. During fiscal year 2002, the Registrant elected to dissolve
its subsidiary in the United Kingdom and expanded the scope of the Swedish
subsidiary's activities to serving most of the Registrant's customers in Europe,
thereby reducing the Registrant's reliance on resellers and sales
representatives in this area. The Registrant continues to rely primarily on
local, independently-owned resellers and independent sales representatives in
all other foreign markets.
During fiscal year 2002, the Registrant established a wholly-owned
subsidiary in the United States which will in turn establish a representative's
office in the People's Republic of China. This representative's office is
intended to service the growing market in China.
At June 30, 2002, the Registrant utilized approximately 16 sales
representative organizations in the United States and approximately 16 sales
representative and reseller organizations in foreign countries, principally
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.
7
FOREIGN SALES
In fiscal years 2002, 2001 and 2000, sales to customers located outside the
United States constituted 35%, 28% and 26% of net sales, respectively. The
Registrant's foreign customers are located primarily in Europe, Canada and the
Far East. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING" and Note 9. of Notes
to Consolidated Financial Statements. Export sales were made through the
Registrant's foreign sales corporation subsidiary until January 2002, at which
time the subsidiary was liquidated. All foreign sales, except sales by the
Registrant's wholly-owned subsidiary in Stockholm, Sweden (and, until its
dissolution in fiscal year 2002, its subsidiary in Sussex, England), are
denominated in United States dollars. In certain circumstances, the Registrant
attempts to reduce the risk of doing business in foreign countries through the
use of prepayment and by working closely with its foreign representatives and
distributors in assessing business environments.
SALES BACKLOG
The Registrant's sales backlog was $9,310,000, $16,153,000 and $26,130,000
at June 30, 2002, 2001 and 2000, respectively. Backlog generally consists of a
combination of the Registrant's standard products and custom manufactured parts
that require a longer lead time to produce. Historically, the long-term trend in
customer requirements for the Registrant's standard products was toward shorter
lead times. However, during fiscal year 2000 and the first half of fiscal year
2001, a supply shortage in the electronics component marketplace caused
customers to change their typical buying behavior to ensure an adequate source
of supply. This buying pattern changed abruptly in the latter half of fiscal
year 2001, primarily as a result of the slowdown in the wireless infrastructure,
fiber optic and semiconductor manufacturing equipment sectors. The Registrant
experienced order cancellations and decreased bookings from its customers in
these industries as they attempted to rationalize their inventory levels to the
demand for their products. In fiscal year 2002, customers returned to historical
patterns of ordering with shorter lead times, and this trend is expected to
continue for the foreseeable future. See "Item 1. BUSINESS -- CUSTOMERS AND
MARKETING".
The Registrant offers its Quik-Pick 48 Hour System(R) program pursuant to
which products are shipped within 48 hours from the time the order is placed.
This program has consistently 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 pursues a
process-oriented strategy in which it conducts efforts aimed at developing
integrated sets of materials and associated processes and equipment to provide
the capability to create new or enhanced classes of products. Once a new set of
technologies is established, the Registrant then seeks to develop and introduce
various products using such technologies. The Registrant believes its future
successes depend upon its ability to identify the requirements for future
products and product enhancements, and to define, implement and successfully
employ the technologies needed to meet those requirements. Accordingly, the
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 products and improvement of existing products. Improvements in materials
and process technology, and the development of specialized production equipment,
are directed toward reducing product cost, as well as enhancing performance
requirements that are identified through frequent customer contacts by the
Registrant's sales and technical personnel. Products are introduced after
extensive in-house testing and evaluations at selected customer sites. See "Item
1. BUSINESS -- MANUFACTURING".
8
The Registrant often pursues programs with individual customers whom it
considers to be leaders in their respective industries to develop special
products to meet their specific requirements. The Registrant typically conducts
such programs when it believes such products have potential applications
reaching well beyond the initial customer's requirements. The Registrant's
expansion of the 600S product line arose from one such program conducted in past
years.
In light of the downturn in the economy, during fiscal year 2002, the
Registrant focused its research and development efforts on enhancements and
extensions to its core product lines. For example, the Registrant continued its
efforts on developing enhancements to its line of specialty higher frequency
capacitors. The Registrant also continued development activities on its new
resistive product line by adding thin film resistor manufacturing capability to
its resistive products line. Typically thin film resistors offer a higher degree
of reliability and are better able to handle power than their thick film
counterparts. The thin film capability also allows for the development of finer
line width and resolution, which is used in the manufacture of higher frequency
termination and attenuators. See "Item 1. BUSINESS -- PRODUCTS".
The Registrant also continued the development of the technology underlying
its LTCC initiative, albeit at a slower pace. While the Registrant continues to
believe in the long-term prospects for this technology, LTCC is an extremely
complicated project that will require the development and refinement of new
processes before products using this technology can be commercialized.
Expenditures for research and development were approximately $3,652,000,
$4,180,000 and $2,770,000 in fiscal years 2002, 2001 and 2000, respectively,
representing approximately 7%, 5% and 4% of net sales, respectively. The
Registrant anticipates that research and development expenditures in fiscal year
2003, expressed as a percentage of net sales, will decrease somewhat compared to
fiscal year 2002.
RAW MATERIALS
The principal raw materials used by the Registrant include silver,
palladium, gold, other precious metals and titanate, and other powders that are
used in ceramic manufacture. Precious metals are available from many sources,
although palladium is generally available only from a limited number of metal
dealers who obtain their product requirements from the Republic of South Africa
or the Russian Federation. The major consumers of palladium are the automotive
and electronics industries.
In fiscal year 2002, in an effort to align its inventory of palladium with
current and anticipated demand, the Registrant sold a substantial portion of its
palladium inventory to one of its vendors in an arms-length transaction for
approximately $3.3 million. The Registrant believes that it maintains adequate
inventories of palladium and believes it will be able to purchase additional
quantities of palladium in the ordinary course of business. In addition, the
Registrant's newer products are being designed to minimize or eliminate the
usage of palladium. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
9
COMPETITION
Competition in the broad MLC industry continues to be intense 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 quality and reliability, fast deliveries and high
levels of customer service. Potential growth of some commercial market
applications may in the future increase the competitive importance of price in
this market. The 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, Murata Electronics
North America and Taiyo Yuden, 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 the Registrant into markets where
there are existing competitors that may have significantly greater financial and
technical resources and greater expertise in mass production techniques than the
Registrant.
ENVIRONMENTAL COMPLIANCE
The Registrant produces hazardous waste in limited quantities in the
production of its products. 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 material 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, 2002, the Registrant employed 309 persons at its facilities in
New York, of which five were employed on a part-time basis; 161 persons at its
facilities in Florida, of which three were employed on a part-time basis; and
nine persons in sales offices in Europe. Of the 479 persons employed by the
Registrant, 386 were involved in manufacturing and testing activities and as
support personnel, 69 were involved in selling, general and administrative
activities, and 24 were involved in research and development activities. None of
the Registrant's employees are covered by collective bargaining agreements. The
Registrant considers its relations with its employees to be satisfactory.
10
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 terms such as "believes", "belief", "expects", "plans",
"anticipates", or "intends" to be uncertain and forward-looking. All cautionary
statements made in this Annual Report on Form 10-K should be read as being
applicable to all related forward-looking statements wherever they appear. Any
forward-looking statement represents the 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 statements,
whether as a result of new information, future events or otherwise, even if its
expectations or forecasts change.
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. From time to time, including the
present, the Registrant's results have been negatively impacted by a general
decrease in demand for technology and electronic products in the United States
and abroad. There can be no assurance that the demand for such products will
increase or that, even if it does increase, the demand for the Registrant's
products will increase. In addition, there can be no assurance that the
Registrant will not receive order cancellations after orders are booked into
backlog.
The Registrant produces and ships product based upon orders received from
its customers. If these orders are cancelled prior to shipment it could affect
the Registrant's profitability. See "Item 1. BUSINESS -- CUSTOMERS AND
MARKETING."
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.
During the Registrant's fiscal year ended June 30, 2002, the Registrant's
ten largest customers accounted for approximately 29% of net sales. The
Registrant expects that sales to a relatively small number of customers will
continue to account for a significant portion of its net sales for the
foreseeable future. A loss of one or more of such key customers could affect the
Registrant's profitability. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING."
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
11
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.
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 the
Russian Federation. Recently, the Registrant reduced the level of its
inventories of palladium on hand. See "Item 1. BUSINESS -- RAW MATERIALS" and
"Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS". Accordingly, a prolonged cessation or reduction of exports of
palladium by the Republic of South Africa or the Russian Federation, or a
significant increase in the price of palladium, could have a material adverse
effect on the 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, or to successfully design new processes and products, 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.
12
ITEM 2. PROPERTIES
The Registrant's primary production facilities are located in Huntington
Station, New York and Jacksonville, Florida. 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
Huntington Station, New York Production 10,900 Owned
11 - 13 Stepar Place
Huntington Station, New York Future production use 22,000 Owned
15 Stepar Place Production
Huntington Station, New York 35,000 Leased from Principal
Stockholder (1)
One Norden Lane
Huntington Station, New York Production 8,400 Owned
17 Stepar Place
Huntington Station, New York Corporate, sales, administration 18,000 Owned
2201 Corporate Square Blvd. Production, research
Jacksonville, Florida and development 99,700 Leased from Principal
Stockholder (1)
8810 Corporate Square Court
Jacksonville, Florida Production 7,500 Leased
Ellipsvaegen 5
SE-141 75 Sales and
Kugens Kurva, Sweden distribution office 2,400 Leased
Leihen Mansion 2307
No. 40 Fuming Road,
Futian Dist. Shenzhen Sales office 863 Leased
(1) See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and Notes 4.
and 7. of Notes to Consolidated Financial Statements.
In fiscal year 2001, the Registrant purchased a 22,000 square foot facility
adjacent to its existing New York facilities. This new facility is currently
idle, but is expected to be used for future production capacity.
In fiscal year 2002, the Registrant added approximately 38,000 square feet
to its Jacksonville facilities for various purposes, including expansion of its
thin film capacity and to accommodate commercial manufacture of its new
resistive product line. See "Item 1. BUSINESS -- MANUFACTURING".
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not currently a party to any material legal proceedings.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended June 30, 2002.
EXECUTIVE OFFICERS
The executive officers of the Registrant are as follows:
Victor Insetta, age 62, 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 50, has been employed by the Registrant in various
capacities since 1983. In August 1996, he was appointed Senior Vice President -
Technology.
Kathleen M. Kelly, age 48, 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.
David P. Ott, age 60, joined the Registrant in June 1999 as Vice President
- New York Manufacturing, and in December 2000, was appointed Senior 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.
Judah Wolf, age 56, has been managing the Registrant's thin film operations
in Jacksonville, Florida since 1993. In 1999, he was appointed Vice President -
Thin Film Operations. In August 2001, he was appointed Senior Vice President,
Thin Film Products.
Stephen Beyel, age 38, joined the Registrant as a RF Engineer in 1988.
Since 1991, he has held various managerial positions within the Registrant's
Sales Department. He was appointed Vice President, Sales in November 2000.
Andrew R. Perz, age 43, has been with the Registrant as Controller since
1998, and was appointed Vice President, Controller in November 2000. Prior to
his employment by the Registrant, he held a financial management position at
Lumex Inc. from July 1989 to January 1998.
Harrison Tarver, age 56, has been employed by the Registrant in various
capacities since 1973, principally in positions relating to quality assurance.
He was appointed Vice President, Quality Assurance in December 2000.
The officers serve at the discretion of the Board of Directors and there
are no family relationships among the officers listed and any directors of the
Registrant.
14
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, 2002 and June 30, 2001.
FISCAL 2002 FISCAL 2001
--------------- ---------------
Quarter Ended: High Low High Low
-------------- ------ ------- ------ -------
September $10.85 $ 7.50 $35.88 $ 11.50
December 10.85 8.00 18.60 8.40
March 11.50 7.60 18.50 8.70
June 8.90 5.00 13.40 6.65
NUMBER OF STOCKHOLDERS
As of September 10, 2002, there were approximately 313 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 any cash 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
In July 2000, the Registrant issued an aggregate of 18,000 shares of common
stock to seven officers and two other employees as stock bonuses.
In July 2000, the Registrant issued 2,000 shares of common stock to each of
its five non-employee directors as a stock bonus.
In March 2001 and in June 2001, the Registrant issued an aggregate of 9,750
shares, of common stock to twelve employees as a stock bonus.
In June 2001 and again in July 2002, pursuant to the terms of employment
agreements between the Registrant and three key employees, the Registrant issued
1,000 shares of common stock, in each month, to each of such employees.
In June 2001, the Registrant awarded 1,000 shares of common stock to each
of its five non-employee directors and 1,000 shares of common stock to each of
six officers as stock bonuses. The shares were issued in July 2001.
In June 2002, pursuant to the terms of employment agreement between the
Registrant and a key employee, the Registrant issued 2,000 shares of common
stock to such employee.
In June 2002, the Registrant awarded 1,000 shares of common stock to each
of seven officers as stock bonuses.
15
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., American Technical Ceramics Europe
AB, Phase Components Ltd. and American Technical Ceramics China Ltd.
FISCAL YEARS ENDED JUNE 30,
---------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- -------
INCOME STATEMENT DATA:
Net sales (1). . . . . . . . . . . . . . . . . $49,585 $84,585 $66,692 $37,688 $40,516
-------- ------- ------- ------- -------
Gross profit (1) . . . . . . . . . . . . . . . $ 9,528 $36,350 $29,946 $13,838 $16,941
-------- ------- ------- ------- -------
(Loss)/income from operations. . . . . . . . . $(6,529) $16,167 $14,065 $ 3,136 $ 6,499
-------- ------- ------- ------- -------
Net (loss)/income. . . . . . . . . . . . . . . $(4,243) $10,332 $ 9,071 $ 2,129 $ 4,202
-------- ------- ------- ------- -------
Basic net (loss)/income per common share . . . $ (0.53) $ 1.30 $ 1.18 $ 0.28 $ 0.54
-------- ------- ------- ------- -------
Diluted net (loss)/income per common share . . $ (0.53) $ 1.24 $ 1.11 $ 0.28 $ 0.52
-------- ------- ------- ------- -------
Cash dividends paid per common share . . . . . $ - $ - $ - $ - $ -
-------- ------- ------- ------- -------
BALANCE SHEET DATA:
Property, plant and equipment, . . . . . . . . $29,740 $32,089 $22,902 $18,791 $17,703
-------- ------- ------- ------- -------
Total assets . . . . . . . . . . . . . . . . . $66,574 $76,576 $59,787 $43,622 $42,329
-------- ------- ------- ------- -------
Long-term debt, less current portion . . . . . $ 2,368 $ 7,211 $ 3,486 $ 3,691 $ 3,338
-------- ------- ------- ------- -------
Working capital. . . . . . . . . . . . . . . . $28,375 $33,662 $27,087 $19,160 $18,119
-------- ------- ------- ------- -------
(1) Amounts for periods prior to fiscal year 2001 have been restated to reflect
the adoption of Emerging Issues Task Force Issue No. 00-10, "Accounting for
Shipping and Handling Fees and Costs" ("EITF No. 00-10"), effective July 1,
2000.
(2) Per share data was revised to reflect the 2-for-1 stock split of the
Registrant's common stock effected in the form of a 100 percent stock
dividend effective April 24, 2000.
16
QUARTERLY FINANCIAL DATA:
(unaudited) (In thousands, except per share amounts)
BASIC DILUTED
NET (LOSS) NET (LOSS)
NET INCOME /INCOME /INCOME
QUARTER ENDED NET SALES GROSS PROFIT /(LOSS) PER SHARE (1) PER SHARE (1)
------------- ---------- ------------- ------------ --------------- --------------
Fiscal 2002
-------------
September $ 13,905 $ 4,361 $ 298 $ 0.04 $ 0.04
December 11,582 2,336 (1,038) (0.13) (0.13)
March 11,956 2,544 (1,057) (0.13) (0.13)
June 12,142 287 (2,446) (0.30) (0.30)
---------- ------------- ------------ --------------- --------------
Total $ 49,585 $ 9,528 $ (4,243) $ (0.53) $ (0.53)
---------- ------------- ------------ --------------- --------------
Fiscal 2001
-------------
September $ 20,897 $ 9,139 $ 2,595 $ 0.33 $ 0.31
December 21,326 8,858 2,445 0.31 0.30
March 23,359 9,974 2,959 0.37 0.35
June 19,003 8,379 2,333 0.29 0.28
---------- ------------- ------------ --------------- --------------
Total $ 84,585 $ 36,350 $ 10,332 $ 1.30 $ 1.24
---------- ------------- ------------ --------------- --------------
(1) Earnings per share amounts for each quarter are required to be computed
independently. As a result, their sum does not equal the total year
earnings per share amounts for basic and diluted earnings per share in
fiscal year 2002.
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. Net sales for fiscal year 2000 has been
restated to reflect the adoption of EITF 00-10 as discussed in Item 6. See also
"CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS" in Part I of this
Report.
The Registrant's financial results have varied widely over the past three
fiscal years. Fiscal year 2000 began with a rapid increase in revenues,
primarily as a result of the explosive growth in markets that the Registrant
serves, such as the wireless infrastructure and fiber optics markets. The
Registrant undertook a rapid and substantial capacity expansion program in an
attempt to keep up with market demand. As customers in these markets purchased
more and more product from the electronic components industry, strong demand
from other market sectors followed as customers in these sectors reacted in
order to reserve capacity for their needs. This continued through the first half
of fiscal year 2001.
In the second half of fiscal year 2001, demand from the wireless
infrastructure and fiber optics markets plummeted. The Registrant and its
competitors experienced not only a decline in order intake, but also a
significant increase in order cancellations. As capacity became available,
customers in other industries no longer needed to place orders months into the
future, and drastically cut back their orders, setting off a massive inventory
correction across virtually all of the industries the Registrant serves. By the
end of fiscal year 2001, the Registrant began cost control measures to
compensate for the resultant downturn.
During the second half of fiscal year 2001, the Registrant was able to
maintain a relatively high level of sales due to a strong backlog of orders.
However, its book-to-bill ratio (the ratio of net order bookings divided by net
sales) was below 1.0 and, as a result, over time, the backlog declined.
17
The industry's inventory correction continued through fiscal year 2002.
Price competition increased as all companies in the electronics components
industry had increased capacity in a now much smaller market. As a result, the
Registrant took further steps to control costs during fiscal year 2002.
RESULTS OF OPERATIONS
FISCAL YEAR 2002 COMPARED WITH FISCAL YEAR 2001
Net sales for the fiscal year ended June 30, 2002 were $49,585,000, a
decrease of 41% from the $84,585,000 recorded in the fiscal year ended June 30,
2001. Domestic sales decreased by 47% to $32,459,000 in fiscal year 2002 from
$60,964,000 in fiscal year 2001. International sales decreased by 27% to
$17,126,000 in fiscal year 2002 from $23,621,000 in fiscal year 2001. The
decrease in total net sales resulted primarily from a decrease in demand for the
Registrant's products in both foreign and domestic markets across virtually all
product lines.
Following the dramatic decrease in orders in the second half of fiscal year
2001, orders remained low throughout fiscal year 2002. Although the rate of
cancellations has returned to historical levels, the Registrant has not
experienced any significant increase in order levels. Total bookings in fiscal
year 2002 were $42,976,000, compared to $76,286,000 in fiscal year 2001,
representing a decline of approximately 44%. Orders from customers in the
wireless infrastructure, fiber optic and semiconductor manufacturing equipment
markets remain significantly below the levels obtained in the first half of
fiscal year 2001. These customers are heavily dependent on activity in the
telecommunications industry which remains depressed. Accordingly, it is unclear
when orders may be expected to increase.
The Registrant has responded to the decrease in business levels by
instituting a series of cost reduction initiatives. During fiscal year 2002, the
Registrant implemented a series of workforce reductions, scaled back its
research and development efforts and significantly reduced capital spending. In
addition, in the fourth quarter of fiscal year 2002, the Registrant sold a large
portion of its palladium raw material inventory (a precious metal used in the
manufacture of certain core products) that it deemed to be excess based on
anticipated business levels for $3.3 million. The Registrant recognized a loss
of $1,360,000 (after tax), or $.17 per share, during the fourth quarter of
fiscal year 2002 as a result of this transaction.
The Registrant expects sales to continue at lower levels in future quarters
until bookings increase. The Registrant currently expects that bookings will
gradually increase over the next few quarters, but will remain at significantly
lower levels in fiscal year 2003 compared to the peak levels in the first half
of fiscal year 2001. The increases are anticipated to be in part from an
increase in orders for existing products, and in part due to sales of new
product offerings which the Registrant expects to introduce in the coming
quarters.
Gross margins were 19% of net sales in fiscal year 2002, compared to 43% in
fiscal year 2001. The decrease in gross margins was primarily attributable to
lower sales in relation to fixed costs, the loss on the sale of palladium,
inventory write-downs to net realizable value as a result of excess quantities,
customer requirements and other causes, and a reduction of benefits from
reclaiming activity, offset partially by the net effect of the workforce
reductions and other cost controls discussed above.
Operating expenses totaled $16,057,000, or 32% of net sales, in fiscal year
2002, compared to $20,183,000, or 24% of net sales, in fiscal year 2001. The
decrease in operating expenses from the prior fiscal year was attributable to
decreased staff as a result of the cost reduction measures discussed above,
lower commissions related to the lower sales volume, lower bonus accruals due to
decreased profitability, and decreased research and development spending,
partially offset by severance costs and other restructuring costs of
approximately $406,000. As a percentage of sales, operating expenses increased
due to the lower level of sales and the fixed nature of certain expenses.
18
Net interest expense was $305,000 in fiscal year 2002, compared to net
interest expense of $226,000 in fiscal year 2001. The increase in net interest
expense was attributable to decreased interest income due to lower prevailing
interest rates, offset partially by an increase in cash available for investing
and lower interest expense on loans.
The effective income tax rate for fiscal year 2002 was 37.1%, as compared
to 35.0% for fiscal year 2001. The increase in the effective income tax rate was
due to operating losses and the impact of certain credits.
As a result of the foregoing, the Registrant reported a net loss of
$4,243,000, or ($.53) per common share (($.53) per common share assuming
dilution), for fiscal year 2002, compared to net income of $10,332,000, or $1.30
per common share ($1.24 per common share assuming dilution), for fiscal year
2001.
FISCAL YEAR 2001 COMPARED WITH FISCAL YEAR 2000
Net sales for the fiscal year ended June 30, 2001 were $84,585,000, an
increase of 27% from the $66,692,000 recorded in the fiscal year ended June 30,
2000. Domestic sales increased by 23% to $60,964,000 in fiscal year 2001 from
$49,646,000 in fiscal year 2000. International sales increased by 39% to
$23,621,000 in fiscal year 2001 from $17,046,000 in fiscal year 2000. The
increase in total net sales resulted primarily from an increase in demand for
the Registrant's core capacitor products in both foreign and domestic markets,
primarily in the first six months of fiscal year 2001.
During the first half of fiscal year 2001, the significant increase in
customer orders which began during fiscal year 2000 continued. This increase was
evident in all market sectors, but was most pronounced in the wireless
infrastructure, fiber optic and semiconductor manufacturing equipment sectors.
In the second half of fiscal year 2001, customer orders declined significantly
due to slowdowns in these markets. As a result, total bookings in fiscal year
2001 were $76,286,000 compared to record bookings in fiscal year 2000 of
$82,521,000, a decline of approximately 8%.
During the first half of the fiscal year ended June 30, 2001, many of the
Registrant's customers changed their ordering patterns to protect themselves
against potential supply shortages. These customers reverted back to prior
practices of placing long-term orders to lock in supplier commitments (in recent
years, customer ordering patterns have trended toward smaller volume orders with
shorter lead times). This trend changed abruptly in the latter half of the
fiscal year, primarily as a result of the slowdown in the wireless
infrastructure, fiber optic and semiconductor manufacturing equipment sectors.
The Registrant experienced order cancellations and decreased bookings from its
customers in these industries as they attempted to rationalize their inventory
levels to the demand for their products.
Gross margins were 43% of net sales in fiscal year 2001, compared to 45% in
fiscal year 2000. The decrease in gross margins was primarily attributable to
higher costs for palladium, costs associated with initial production of several
new product initiatives and inventory write-downs to net realizable value as a
result of the economic slowdown during the second half of fiscal year 2001, and
to a lesser extent, certain non-recurring charges primarily related to the
retirement of certain equipment.
Operating expenses totaled $20,183,000, or 24% of net sales, in fiscal year
2001, compared to $15,881,000, or 24% of net sales, in fiscal year 2000. The
increase in operating expenses from the prior fiscal year was primarily
attributable to increased staff to support the higher volume of transactions,
higher commissions related to the higher sales volume, and increased research
and development spending for the development of new products.
Net interest expense was $226,000 in fiscal year 2001, compared to net
interest expense of $40,000 in fiscal year 2000. The increase in net interest
expense was attributable to increases in loan balances during fiscal year 2001
in support of capital expansion as compared to fiscal year 2000, and a decrease
in interest income on cash and investments due to lower cash available for
investing.
The effective income tax rate for both fiscal year 2001 and fiscal year
2000 was 35.0%.
As a result of the foregoing, the Registrant reported net income of
$10,332,000, or $1.30 per common share ($1.24 per common share assuming
dilution), for fiscal year 2001, compared to net income of $9,071,000, or $1.18
per common share ($1.11 per common share assuming dilution), for fiscal year
2000.
19
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's financial position at June 30, 2002 remains strong as
evidenced by working capital of $28,375,000, compared to working capital of
$33,662,000 at June 30, 2001. The Registrant's current ratio at June 30, 2002
was 4.4:1, compared to 4.2:1 at June 30, 2001. The Registrant's quick ratio at
June 30, 2002 increased to 2.0:1, compared to 1.6:1 at June 30, 2001.
Cash and investments increased to $10,154,000 at June 30, 2002, compared to
$5,179,000 at June 30, 2001. The increase in cash and investments was primarily
the result of the sale of excess palladium described above, lower capital
expenditures and collections of accounts receivable. Accounts receivable
decreased by $5,202,000 to $6,328,000 at June 30, 2002, compared to $11,530,000
at June 30, 2001. The decrease in accounts receivable was attributable to lower
sales volume throughout fiscal year 2002. Inventories decreased by $9,151,000 to
$15,417,000 at June 30, 2002, compared to $24,568,000 at June 30, 2001. The
decrease is primarily the result of the sale of excess palladium, planned
reductions commensurate with lower business levels and the writedown of certain
inventory to net realizable value. The Registrant continues to maintain high
finished goods inventory levels to keep customer lead times to a minimum and
maintain good customer service. Other current assets increased by $1,275,000
primarily due to increased income tax receivables as a result of losses incurred
in fiscal 2002.
Current portion of long-term debt increased $3,399,000 to $4,276,000, at
June 30, 2002 compared to $877,000 at June 30, 2001. The increase in the current
portion of long-term debt is due to bank debt becoming due as the result of
covenant violations as discussed below. Accounts payable decreased by $877,000
to $878,000 at June 30, 2002, compared to $1,755,000 at June 30, 2001. The
decrease in accounts payable was the result of reduced spending for capital
expenditures and raw material due to the economic slowdown. Accrued expenses
decreased by $3,017,000 to $3,218,000 at June 30, 2002, compared to $6,235,000
at June 30, 2001. The decrease in accrued expenses was due to lower commissions
and bonuses payable due to declining sales and income. The Registrant has an
income tax receivable of $1,795,000 at June 30, 2002, compared to a payable of
$1,759,000 at June 30, 2001, due to losses incurred in fiscal year 2002.
The Registrant leases its 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 certain additions to the facility and market value
adjustments as required by the terms of the lease based upon independent
appraisals. See "Item 2. PROPERTIES". Effective September 1, 2002, the
Registrant is obligated to pay approximately $720,000 per annum under this
lease, an increase from $461,000 per annum during fiscal year 2002. The payments
due over the remaining nine years of this capital lease, including the portion
related to interest, total approximately $6,480,000. See "Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" and Note 4. of Notes to Consolidated
Financial Statements.
At June 30, 2002, the Registrant had available two credit facilities with
Bank of America, N.A. ("Bank of America"): a $4,000,000 revolving line of credit
against which no borrowings were incurred, and an $8,500,000 equipment line of
credit against which the Registrant had borrowings of $4,047,000 outstanding.
Both lines bore interest at 1 % above the one month LIBOR rate or approximately
3.3% at June 30, 2002. The outstanding principal balance of the equipment line
rolled over periodically into a self-amortizing term note of not less than four
nor more than seven years.
Each of these credit facilities was subject to certain financial covenants,
including maintenance of asset and liability percentage ratios. One such
covenant required the Registrant 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 concerning possible amendments to the terms of these facilities which
proved to be unsuccessful. Accordingly, in July 2002, the Registrant repaid the
outstanding balance of the equipment facility and terminated both of these
facilities.
20
In May 2001, the Registrant entered into an uncommitted credit facility
with European American Bank ("EAB"), which was succeeded by Citibank, N.A.
("Citibank"). The facility contemplated a $5,000,000 equipment line of credit
and a $2,000,000 unsecured term loan line. Both lines bore interest at the
Registrant's option at either the Citibank prime rate or 1 % above the Reserve
Adjusted LIBOR (as defined), were subject to certain financial covenants and
required approval from Citibank prior to any borrowing. Any outstanding balance
six months after the term loan line was made available and at expiration of the
line was to automatically convert into fully amortizing term loans with a
maturity of five years bearing interest at the same rate as the equipment loan.
This facility was scheduled to expire in January 2002 but was extended
month-to-month until May 2002, at which time it was not renewed. The Registrant
had not incurred any borrowings under this facility.
In August 2000, the Registrant secured a $795,000 mortgage loan form EAB in
connection with its purchase of the facility at 11-13 Stepar Place, Huntington
Station, New York. Citibank succeeded to this loan as successor to EAB. The
loan was to be repaid in 120 equal monthly installments over 10 years and bore
interest at 1 % above the six month LIBOR rate. The mortgage was subject to
certain financial covenants, including maintenance of asset and liability
percentage ratios. In June 2002, the Registrant repaid the remaining balance
due under this loan.
The Registrant is negotiating the terms of a one year uncommitted credit
facility with a major bank. Under the terms being discussed, the Registrant may
request advances under the facility from time to time up to an aggregate of
$5,000,000. The bank would have the right, in its sole discretion, to approve or
reject any such advance. Any advance made would bear interest, at the
Registrant's option, at the bank's prime rate or 1 3/4% above LIBOR (as
defined). There can be no assurance that these negotiations will result in the
Registrant obtaining a new credit facility or that, if obtained, the bank will
approve any request by the Registrant for an advance thereunder. The Registrant
believes that cash on hand, investments and cash flow from operations, will be
sufficient to fund its ongoing cash requirements, in the event we are unable to
negotiate a new facility.
Capital expenditures for the fiscal year ended June 30, 2002 totaled
$3,156,000, including expenditures for machinery and equipment and planned
leasehold improvements. The Registrant intends to use cash on hand, cash
generated through operations, and available credit, if any, to finance budgeted
capital expenditures, primarily for equipment acquisition, of approximately
$3,000,000 in fiscal year 2003.
Aggregate contractual obligations as of June 30, 2002 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 $4,047 $ 4,047 $ --- $ --- $ ---
Capital Lease Obligations 2,597 229 791 656 921
Operating Leases 189 146 43 --- ---
------ ------- ------ ------ --------
Total Contractual Obligations $6,833 $ 4,422 $ 834 $ 656 $ 921
====== ======= ====== ====== ========
As described above, in July 2002, the Registrant repaid the outstanding
balance of its equipment line from Bank of America. Accordingly, the Registrant
currently has no outstanding long-term debt, or available committed lines of
credit.
21
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 Securities and Exchange Commission ("SEC") issued disclosure guidance
for "critical accounting policies." The SEC defines "critical accounting
policies" as those that require the application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. The Registrant's significant accounting policies are
described in Note 1. to its consolidated financial statements contained in "Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this report. The 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 a 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 cannot guarantee that it will continue to experience the same credit
loss rates that it has in the past. Should the financial position of its
customers deteriorate resulting in an impairment of their ability to pay amounts
due, the Registrant's revised estimate of such losses and any actual losses in
excess of previous estimates may negatively impact its operating results.
SALES RETURNS AND ALLOWANCES
In the ordinary course of business, the 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 process. 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.
INVENTORY VALUATION
The Registrant values inventory at the lower of aggregate cost (first-in,
first-out) or market. When the cost of inventory is determined by management to
be in excess of its market value such inventory, is written down to its
estimated net realizable value. This requires the 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.
22
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 estimates or
the Registrant adjusts these estimates 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 its estimate of future cash flows associated with these assets. The
Registrant believes that the carrying amount of its long lived assets is
recoverable. However, should its operating results continue to 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.
INFLATION
The Registrant does not expect the effects of inflation to have a
significant impact on its liquidity or results of operations.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting
requirements for retirement obligations associated with retirement of tangible
long-lived assets and for the associated asset retirement costs. SFAS No. 143
requires a company to record the fair value of an asset retirement obligation in
the period in which it incurred a legal obligation associated with the
retirement of tangible long-lived assets that results from the acquisition,
construction development and/or normal use of the asset. The company is also to
record a corresponding increase to the carrying amount of the related asset and
to depreciate that cost over the life of the asset. The amount of the liability
is changed at the end of each period to reflect the passage of time and changes
in estimated future cash flows. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Registrant adopted SFAS No. 143, effective
July 1, 2002. Such adoption had no impact on its consolidated financial
statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets" ("SFAS No. 144"), which supercedes statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"). Although it retains the basic
requirements of SFAS No. 121 regarding when and how to measure an impairment
loss, SFAS No. 144 provides additional implementation guidance. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Registrant
adopted SFAS No. 144, effective July 1, 2002. Such adoption had no impact on its
consolidated financial statements.
23
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) or with a
disposal of long-lived assets. Companies will record exit or disposal costs as
incurred and such liabilities will be at fair value. The Registrant does not
expect the adoption of SFAS No. 146 to have a material impact on its
consolidated results of operations or financial position.
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 consolidated financial condition
and results of operations. Specifically:
a) Interest rate risk. In light of the Registrant's existing cash balances,
--------------------
and that the Registrant's bank debt was paid in full shortly after the end
of the fiscal year, 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 Sweden (which are denominated in
Krona), all transactions are, or are anticipated to be, denominated in U.S.
Dollars. At the present time, the contribution of this subsidiary 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. 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. Accordingly, the
Registrant has sold a majority of its stock of this raw material. See "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 and inventories of
palladium, it will need to buy additional quantities of palladium later in
the next fiscal year at prevailing market prices. Additionally, the
Registrant believes that the price of palladium will remain stable due to
the lower demand coming from the electronics industry.
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 believes it can effectively 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.
24
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 21, 2002 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 21, 2002 is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table details securities authorized for issuance under equity
compensation plans as of:
Number of securities
remaining available for
future issuance under
Number of securities to equity compensation
be issued upon exercise Weighted-average exercise plans (excluding
of outstanding options, price of outstanding securities reflected in
warrants and rights options, warrants and rights column (a))
Plan category (a) (b) (c)
Equity compensation plans
approved by security holders 919,800 $ 8.98 722,900
The Registrant has no securities authorized for issuance under equity
compensation plans that have not been approved by security holders.
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 21, 2002
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 21, 2002
is hereby incorporated by reference.
ITEM 14. CONTROLS AND PROCEDURES
Not applicable.
25
PART IV
ITEM 15. 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, 2002 and 2001 . . . . . . . . F-2
Statements of Operations
Fiscal Years Ended June 30, 2002, 2001 and 2000 . . . . . F-3
Statements of Stockholders' Equity and Comprehensive Income (Loss)
Fiscal Years Ended June 30, 2002, 2001 and 2000 . . . . . F-4
Statements of Cash Flows
Fiscal Years Ended June 30, 2002, 2001 and 2000 . . . . . 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) - 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. (3)
10(c)(iii) - Form of Employee Stock Bonus Agreement, dated as of April
19, 1994, between the Registrant and various employees. (3)
26
10(c)(iv) - Form of Employee Stock Bonus Agreement, dated as of April
20, 1995, between the Registrant and various employees. (4)
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. (13)
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(g)(vi) - Managers Profit Bonus Plan, dated December 7, 1999, and
effective January 1, 2000. (12)
10(h) - Employment Agreement, dated September 1, 2000, between the
Registrant and Richard Monsorno. (14)
10(k) - Consulting Agreement, dated October 2000, between the
Registrant and Stuart P. Litt. (14)
10(m)(i) - American Technical Ceramics Corp. 1997 Stock Option Plan. (7)
10(m)(ii) - American Technical Ceramics Corp. 2000 Incentive Stock
Plan. (12)
10(o)(i) - Loan Agreement, dated November 25, 1998, between the
Registrant and NationsBank, N.A. (10)
10(o)(ii) - Amendment to Loan Agreement, dated February 4, 1999, between
the Registrant and NationsBank, N.A. (12)
10(o)(iii) - Second Amendment to Loan Agreement, dated April 13, 2000,
between the Registrant and Bank of America, N.A., as
successor to NationsBank, N.A. (12)
10(o)(iv) - Third Amendment to Loan Agreement, dated October 26, 2000,
between the Registrant and Bank of America, N.A., as
successor to NationsBank, N.A. (15)
10(o)(v) - Fourth Amendment to Loan Agreement, dated March 30, 2001,
between the Registrant and Bank of America, N.A., as
successor to NationsBank, N.A. (15)
10(p) - Second Amended and Restated Employment Agreement, dated as of
December 31, 2001, between Judah Wolf and the Registrant. (17)
10(q) - Mortgage Note between American Technical Ceramics Corp. and
European American Bank, N.A., dated as of August 17, 2000.(13)
10(r) - Employment Agreement, dated April 10, 2001, between the
Registrant and David Ott. (15)
27
10(r)(i) - Amendment to Employment Agreement, dated as of January 1,
2001, between David Ott and the Registrant. (17)
10(s) - Loan Agreement, dated May 8, 2001, between the Registrant
and European American Bank, N.A. (16)
21 - Subsidiaries of the Registrant. (18)
23 - Consent of KPMG LLP (18)
-------------------------------
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 fiscal year 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. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1999.
12. Incorporated by reference to the Registrant's Annual Report on Form 10-K/A
for the fiscal year ended June 30, 2000.
13. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000.
14. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2000.
28
15. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001.
16. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001.
17. Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q/A for the quarterly period ended March 31, 2002.
18. Filed herewith.
(d) FINANCIAL STATEMENT SCHEDULES
-----------------------------
Schedules have been omitted since they either are not applicable, not
required or the information is included elsewhere herein.
29
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 27, 2002
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 27,2002
-------------------
Victor Insetta (Principal Executive Officer)
/S/ ANDREW R. PERZ Vice President, Controller September 27,2002
--------------------
Andrew R. Perz (Principal Accounting Officer)
/S/ STUART P. LITT Director September 27, 2002
-------------------
Stuart P. Litt
/S/ O. JULIAN GARRARD III Director September 27,2002
-----------------------------
O. Julian Garrard III
/S/ CHESTER E. SPENCE Director September 27,2002
------------------------
Chester E. Spence
/S/ THOMAS J. VOLPE Director September 27,2002
----------------------
Thomas J. Volpe
/S/ DOV S. BACHARACH Director September 27,2002
-----------------------
Dov S. Bacharach
30
I, Andrew R. Perz, certify that:
1. I have reviewed this annual report on Form 10-K of American Technical
Ceramics Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report.
Dated: September 27, 2002
/S/ ANDREW R. PERZ
-----------------------------
Vice President, Controller
(Principal Accounting Officer)
31
I, Victor Insetta, certify that:
1. I have reviewed this annual report on Form 10-K of American Technical
Ceramics Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this annual report.
Dated: September 27 2002
/S/ VICTOR INSETTA
-----------------------------
President and Director
(Principal Executive Officer)
32
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, 2002 and 2001 . F-2
Consolidated Statements of Operations
Fiscal Years Ended June 30, 2002, 2001 and 2000 . . . . F-3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss)
Fiscal Years Ended June 30, 2002, 2001 and 2000 . . . . F-4
Consolidated Statements of Cash Flows
Fiscal Years Ended June 30, 2002, 2001 and 2000 . . . . 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, 2002
and 2001, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss) and cash flows for each of the years in
the three-year period ended June 30, 2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Technical
Ceramics Corp. and subsidiaries as of June 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/S/ KPMG LLP
Melville, New York
August 29, 2002
F-1
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30, 2002 JUNE 30, 2001
--------------- ---------------
CURRENT ASSETS
Cash (including cash equivalents of $3,606,000 and
$552,000, respectively) $ 7,129,000 $ 1,659,000
Investments 3,025,000 3,520,000
Accounts receivable, net 6,328,000 11,530,000
Inventories 15,417,000 24,568,000
Deferred income taxes, net 2,284,000 1,722,000
Other current assets 2,564,000 1,289,000
--------------- ---------------
TOTAL CURRENT ASSETS 36,747,000 44,288,000
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT
Land 738,000 738,000
Buildings 8,678,000 9,101,000
Leasehold improvements 5,019,000 4,600,000
Machinery and equipment 40,880,000 39,258,000
Computer equipment and software 5,078,000 4,509,000
Furniture, fixtures and other 1,505,000 1,522,000
--------------- ---------------
61,898,000 59,728,000
Less: Accumulated depreciation and amortization 32,158,000 27,639,000
--------------- ---------------
29,740,000 32,089,000
--------------- ---------------
OTHER ASSETS 87,000 199,000
--------------- ---------------
TOTAL ASSETS $ 66,574,000 $ 76,576,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 4,276,000 $ 877,000
Accounts payable 878,000 1,755,000
Accrued expenses 3,218,000 6,235,000
Income taxes payable --- 1,759,000
--------------- ---------------
TOTAL CURRENT LIABILITIES 8,372,000 10,626,000
LONG-TERM DEBT, NET OF CURRENT PORTION 2,368,000 7,211,000
DEFERRED INCOME TAXES 3,642,000 2,910,000
--------------- ---------------
TOTAL LIABILITIES 14,382,000 20,747,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock -- $.01 par value; authorized 20,000,000
shares; issued 8,492,258 and 8,451,433 shares,
outstanding 8,074,118 and 8,007,293 shares, respectively 85,000 85,000
Capital in excess of par value 11,380,000 11,260,000
Retained earnings 42,171,000 46,414,000
Accumulated other comprehensive income (loss):
Unrealized gain on investments available-for-sale, net 5,000 56,000
Cumulative foreign currency translation adjustment (46,000) (294,000)
--------------- ---------------
(41,000) (238,000)
--------------- ---------------
Less: Treasury stock, at cost (418,140 and 444,140 shares, respectively) 1,403,000 1,447,000
Deferred compensation --- 245,000
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 52,192,000 55,829,000
--------------- ---------------
$ 66,574,000 $ 76,576,000
=============== ===============
See accompanying notes to consolidated financial statements
F-2
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2002, 2001, 2000
2002 2001 2000
------------ ------------ ------------
Net sales $49,585,000 $84,585,000 $66,692,000
Cost of sales 40,057,000 48,235,000 36,746,000
------------ ------------ ------------
Gross profit 9,528,000 36,350,000 29,946,000
Selling, general and administrative expenses 12,405,000 16,003,000 13,111,000
Research and development expenses 3,652,000 4,180,000 2,770,000
------------ ------------ ------------
Operating expenses 16,057,000 20,183,000 15,881,000
------------ ------------ ------------
(Loss)/income from operations (6,529,000) 16,167,000 14,065,000
------------ ------------ ------------
Other expense (income)
Interest expense 496,000 559,000 406,000
Interest income (191,000) (333,000) (366,000)
Other (93,000) 45,000 69,000
------------ ------------ ------------
212,000 271,000 109,000
------------ ------------ ------------
(Loss)/income before provision for income taxes (6,741,000) 15,896,000 13,956,000
Provision for income taxes (2,498,000) 5,564,000 4,885,000
------------ ------------ ------------
Net (loss)/income $(4,243,000) $10,332,000 $ 9,071,000
============ ============ ============
Basic net (loss)/income per common share $ (0.53) $ 1.30 $ 1.18
Diluted net (loss)/income per common share $ (0.53) $ 1.24 $ 1.11
------------ ------------ ------------
Basic weighted average common shares outstanding 8,050,000 7,962,000 7,706,000
============ ============ ============
------------ ------------ ------------
Diluted weighted average common shares outstanding 8,050,000 8,315,000 8,186,000
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
FISCAL YEARS ENDED JUNE 30, 2002, 2001, AND 2000
Accumulated
Capital in Other
Comprehensive Common Stock Excess of Par Retained Comprehensive
Income / (Loss) Shares Amount Value Earnings Income (Loss)
--------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 | 8,135,958 $82,000 $ 6,903,000 $27,011,000 $ (96,000)
|
|
Net income $ 9,071,000 | --- --- --- 9,071,000 ---
Tax benefit of stock options exercised --- | --- --- 1,366,000 --- ---
Stock award compensation --- | --- --- 1,137,000 --- ---
Exercise of stock options --- | 233,570 2,000 960,000 --- ---
Other comprehensive income, net of tax: |
|
Unrealized losses on investments |
available-for-sale, net of |
reclassification adjustment (58,000) | --- --- --- --- ---
Foreign currency translation adjustment (14,000) | --- --- --- --- ---
---------------- |
Other comprehensive loss, net of tax (72,000) | --- --- --- --- (72,000)
|
---------------- |
Comprehensive income $ 8,999,000 |
================-|--------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 | 8,369,528 $84,000 $ 10,366,000 $36,082,000 $ (168,000)
|
|
Net income $ 10,332,000 | --- --- --- 10,332,000 ---
Tax benefit of stock options exercised --- | --- --- 182,000 --- ---
Stock award compensation --- | --- --- 369,000 --- ---
|
Exercise of stock options --- | 81,905 1,000 343,000 --- ---
Other comprehensive income, net of tax: |
Unrealized losses on investments |
available-for-sale, net of |
reclassification adjustment 112,000 | --- --- --- --- ---
Foreign currency translation adjustment (182,000) | --- --- --- --- ---
---------------- |
Other comprehensive loss, net of tax (70,000) | --- --- --- --- (70,000)
|
---------------- |
Comprehensive income $ 10,262,000 | --- --- --- --- ---
================-|--------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 | 8,451,433 $85,000 $ 11,260,000 $46,414,000 $ (238,000)
|
|
Net (loss) $ (4,243,000) | --- --- --- (4,243,000) ---
Tax benefit of stock options exercised --- | --- --- 57,000 --- ---
Stock award compensation expense --- | --- --- (112,000) --- ---
Exercise of stock options --- | 40,825 --- 175,000 --- ---
Other comprehensive income, net of tax: |
Unrealized losses on investments |
available-for-sale, net of |
reclassification adjustment (51,000) | --- --- --- --- ---
Foreign currency translation adjustment 248,000 | --- --- --- --- ---
---------------- |
Other comprehensive Income, net of tax 197,000 | --- --- --- --- 197,000
---------------- |
Comprehensive (loss) $ (4,046,000) | --- --- --- --- ---
================-|--------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 | 8,492,258 $85,000 $ 11,380,000 $42,171,000 $ (41,000)
|
|--------------------------------------------------------------------
Deferred
Treasury Stock Compensation Total
----------------------------------------------
BALANCE AT JUNE 30, 1999 $ (1,515,000) $ --- $32,385,000
Net income --- --- 9,071,000
Tax benefit of stock options exercised --- --- 1,366,000
Stock award compensation --- (528,000) 609,000
Exercise of stock options --- --- 962,000
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of
reclassification adjustment --- --- ---
Foreign currency translation adjustment --- --- ---
Other comprehensive loss, net of tax --- --- (72,000)
Comprehensive income
----------------------------------------------
BALANCE AT JUNE 30, 2000 $ (1,515,000) $ (528,000) $44,321,000
Net income --- --- 10,332,000
Tax benefit of stock options exercised --- --- 182,000
Stock award compensation 68,000 283,000 720,000
Exercise of stock options --- --- 344,000
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of
reclassification adjustment --- --- ---
Foreign currency translation adjustment --- --- ---
Other comprehensive loss, net of tax --- --- (70,000)
Comprehensive income --- --- ---
----------------------------------------------
BALANCE AT JUNE 30, 2001 $ (1,447,000) $ (245,000) $55,829,000
Net (loss) --- --- (4,243,000)
Tax benefit of stock options exercised --- --- 57,000
Stock award compensation expense 44,000 245,000 177,000
Exercise of stock options --- --- 175,000
Other comprehensive income, net of tax:
Unrealized losses on investments
available-for-sale, net of
reclassification adjustment --- --- ---
Foreign currency translation adjustment --- --- ---
Other comprehensive Income, net of tax --- --- 197,000
Comprehensive (loss) --- --- ---
----------------------------------------------
BALANCE AT JUNE 30, 2002 $ (1,403,000) --- $52,192,000
----------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2002, 2001, 2000
2002 2001 2000
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(4,243,000) $ 10,332,000 $ 9,071,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,061,000 4,367,000 3,062,000
Loss on disposal of fixed assets 98,000 114,000 69,000
Stock award compensation expense 177,000 720,000 609,000
Provision for deferred income taxes 198,000 (550,000) 163,000
Provision for doubtful accounts receivable 219,000 74,000 140,000
Realized gain on sale of investments (160,000) --- (7,000)
Changes in operating assets and liabilities:
Accounts receivable 4,983,000 1,082,000 (7,552,000)
Inventories 9,151,000 (8,435,000) (3,697,000)
Other assets 632,000 362,000 (1,295,000)
Accounts payable, accrued expenses and
income taxes payable (7,389,000) 810,000 5,568,000
------------ ------------- ------------
Net cash provided by operating activities 8,727,000 8,876,000 6,131,000
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,156,000) (12,973,000) (7,262,000)
Purchase of investments (4,325,000) (102,000) (1,810,000)
Proceeds from sale of investments 4,900,000 --- 1,611,000
Proceeds from sale of fixed assets 376,000 64,000 20,000
------------ ------------- ------------
Net cash used in investing activities (2,205,000) (13,011,000) (7,441,000)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (3,444,000) (465,000) (447,000)
Proceeds from exercise of stock options 175,000 344,000 962,000
Proceeds from issuance of debt 2,000,000 3,784,000 188,000
------------ ------------- ------------
Net cash (used in) provided by financing activities (1,269,000) 3,663,000 703,000
------------ ------------- ------------
Effect of exchange rate changes on cash 217,000 (146,000) (14,000)
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 5,470,000 (618,000) (621,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,659,000 2,277,000 2,898,000
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,129,000 $ 1,659,000 $ 2,277,000
============ ============= ============
Supplemental cash flow information:
Interest paid $ 459,000 $ 486,000 $ 406,000
Taxes paid $ 1,177,000 $ 4,757,000 $ 3,854,000
See accompanying notes to consolidated financial statements.
F-5
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
American Technical Ceramics Corp. and its wholly-owned subsidiaries (the
"Company") are engaged in the design, development, manufacture and sale of
ceramic multilayer capacitors for commercial and military purposes in the United
States and for export, primarily to Western Europe, Canada and the Far East. In
fiscal year 2002, General Electric Company accounted for approximately 10% of
consolidated revenues. In fiscal year 2001, no customer accounted for more than
10% of consolidated net sales. During fiscal year 2000, Tyco International LTD.
accounted for 15% of consolidated net sales. The Company operates in one
industry segment - the electronic components industry.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
American Technical Ceramics Corp. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
REVENUE RECOGNITION
The Company generates revenue from product sales. Revenue is recognized
when title of products sold passes to the customer, which occurs either upon
shipment or delivery. The Company provides for (as a reduction of revenue) an
allowance for sales returns based upon an analysis of historical experience and
current conditions.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents, including money
market accounts and certificates of deposit.
INVESTMENTS
The Company classifies its investments in debt and equity securities as
available-for-sale. Accordingly, these investments are reported at fair value
with unrealized holding gains and losses excluded from earnings and reported as
a component of accumulated other comprehensive income (loss) within
stockholders' equity, net of tax. Classification of investments is determined at
acquisition and reassessed at each reporting date. Realized gains and losses are
included in the determination of net earnings at the time of sale and are
derived using the specific identification method for determining cost of
securities sold.
INVENTORIES
Inventories are stated at the lower of aggregate cost (first-in, first-out)
or market.
F-6
COMPREHENSIVE INCOME
The following table sets forth the components of the change in net
unrealized gains (losses) on investments available-for-sale for the fiscal years
ended June 30, 2002, 2001 and 2000:
2002 2001 2000
-------------------------------
Unrealized holding gains (losses)
arising during the period, net of tax $ 50,000 $112,000 $(53,000)
Less: reclassification adjustment for
gains included in net income, net of tax (101,000) --- (5,000)
-------------------------------
Change in net unrealized (losses) gains on investments
available-for-sale $ (51,000) $112,000 $(58,000)
===============================
The deferred tax liability (benefit) associated with unrealized holding
(losses) gains arising during the fiscal years 2002, 2001 and 2000 was
($29,000), $60,000 and ($21,000), respectively. The tax benefit of the
reclassification adjustments for gains on sales of investments included in net
income during fiscal years 2002 and 2000 were ($59,000) and ($3,000),
respectively.
LONG-LIVED ASSETS
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided primarily using the straight-line method over the
estimated useful lives of the related assets as follows:
Buildings 30 years
Leasehold improvements Lesser of the remaining lease term
or 5 years
Machinery and equipment 10 years
Furniture, fixtures and other 3 to 8 years
Computer equipment and software 3 years
The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. During fiscal 2001, the Company recognized impairment losses
related to its decision to abandon certain machinery and equipment of $371,000,
which was recorded as a component of depreciation expense.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-7
FOREIGN CURRENCY TRANSLATION
The Company translates the financial statements of its foreign subsidiaries
(located in England and Sweden) 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
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders (which for the Company equals its net income) by the
weighted average number of common shares outstanding, and dilutive EPS adds the
dilutive effect of stock options and other common stock equivalents.
Antidilutive shares aggregating 920,000, 798,000 and 378,000, respectively, have
been omitted from the calculation of dilutive EPS for the fiscal years ended
June 30, 2002, 2001 and 2000, respectively. A reconciliation between numerators
and denominators of the basic and diluted earnings per share is as follows:
YEAR ENDED JUNE 30, 2002 YEAR ENDED JUNE 30, 2001 YEAR ENDED JUNE 30, 2000
------------------------ ------------------------ ------------------------
PER- PER- PER-
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ------- ------------ ------------- ------- ------------ ------------- -------
Basic EPS ($4,243,000) 8,050,000 ($0.53) $ 10,332,000 7,962,000 $ 1.30 $ 9,071,000 7,706,000 $ 1.18
======= ======= =======
Effect of
Dilutive
Securities:
Stock Options -- -- -- -- 331,000 -- -- 440,000 --
Stock Awards -- -- -- -- 22,000 -- -- 40,000 --
-----------------------------------------------------------------------------------------------------------------
Diluted EPS ($4,243,000) 8,050,000 ($0.53) $ 10,332,000 8,315,000 $ 1.24 $ 9,071,000 8,186,000 $ 1.11
=================================================================================================================
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting
requirements for retirement obligations associated with retirement of tangible
long-lived assets and for the associated asset retirement costs. SFAS No. 143
requires a company to record the fair value of an asset retirement obligation in
the period in which it incurred a legal obligation associated with the
retirement of tangible long-lived assets that results from the acquisition,
construction development and/or normal use of the asset. The company is also to
record a corresponding increase to the carrying amount of the related asset and
to depreciate that cost over the life of the asset. The amount of the liability
is changed at the end of each period to reflect the passage of time and changes
in estimated future cash flows. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company adopted SFAS No. 143, effective July
1, 2002. Such adoption had no impact on its consolidated financial statements.
F-8
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets" ("SFAS No. 144"), which supercedes statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"). Although it retains the basic
requirements of SFAS No. 121, regarding when and how to measure an impairment
loss, SFAS No. 144 provides additional implementation guidance. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 144 effective July 1, 2002. Such adoption had no impact on its
consolidated financial statements.
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) or with a
disposal of long-lived assets. Companies will record a liability for exit or
disposal activity as incurred and can be measured at fair value. The Company
does not expect the adoption of SFAS No. 146 to have a material impact on its
consolidated results of operations or financial position.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include, but are not limited to, provisions for
doubtful accounts receivable and sales returns, net realizable value of
inventory, and assessments of the recoverability of the Company's deferred tax
assets. Actual results could differ from those estimates.
SUPPLEMENTAL CASH FLOW INFORMATION
During fiscal year 2002, significant non-cash activities included (i) a tax
benefit of $57,000 resulting from stock options exercised, and (ii) deferred
compensation expense of $67,000 in connection with awards of an aggregate of
7,000 shares of common stock with a cost basis of $44,000.
During fiscal year 2001, significant non-cash activities included (i) a tax
benefit of $182,000 resulting from stock options exercised, and (ii) securing a
$795,000 mortgage to finance the acquisition of a building.
During fiscal year 2000, significant non-cash activities included (i) a tax
benefit of $1,366,000 resulting from stock options exercised, and (ii) the
accrual of $528,000 of deferred compensation expense in connection with awards
of an aggregate of 12,000 shares of common stock.
F-9
NOTE 2. INVESTMENTS
Investments consist of the following:
Gross Gross
Unrealized Unrealized
June 30, 2002 Cost Gains Losses Fair Value
------------- ---------- ----------- ----------- -----------
U.S. Government obligations $3,018,000 $ 7,000 $ --- $ 3,025,000
---------- ----------- ----------- -----------
Gross Gross
Unrealized Unrealized
June 30, 2001 Cost Gains Losses Fair Value
------------- ---------- ----------- ----------- -----------
U.S. Government obligations $3,433,000 $ 89,000 $ 2,000 $ 3,520,000
---------- ----------- ----------- -----------
Gross realized gains of approximately $160,000 is included in other income
for fiscal year 2002.
At June 30, 2002 all of the Company's investments in U. S. Government
obligations contractually mature within one year.
NOTE 3. INVENTORIES
Inventories consist of the following:
June 30, 2002 June 30, 2001
-------------- --------------
Raw materials $ 7,753,000 $ 13,388,000
Work in process 3,968,000 4,717,000
Finished goods 3,696,000 6,463,000
-------------- --------------
$ 15,417,000 $ 24,568,000
============== ==============
In June 2002, the Company sold a substantial portion of its palladium
inventory to one of its vendors, for approximately $3,290,000, which resulted in
a loss of $2,160,000 which was recognized as a component of cost of sales.
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, 2002 June 30, 2001
-------------- --------------
Notes payable to banks $ 4,047,000 $ 5,285,000
Obligations under capital leases 2,597,000 2,803,000
-------------- --------------
6,644,000 8,088,000
Less: Current portion 4,276,000 877,000
-------------- --------------
Long-term debt $ 2,368,000 $ 7,211,000
=============== =============
F-10
NOTES PAYABLE TO BANKS
At June 30, 2002, the Company had available two credit facilities with Bank
of America, N.A. ("Bank of America"): a $4,000,000 revolving line of credit
against which no borrowings were incurred, and an $8,500,000 equipment line of
credit against which the Company had borrowings of $4,047,000. Both lines bore
interest at 1 % above the one month LIBOR rate or approximately 3.3% at June 30,
2002. The outstanding principal balance of the equipment line rolled over
periodically into a self-amortizing term note of not less than four nor more
than seven years.
Each of these credit facilities was subject to certain financial covenants,
including maintenance of asset and liability percentage ratios. One such
covenant required the Company 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 Company during fiscal year 2002, the Company was not in compliance with
this covenant. The Company held discussions with Bank of America concerning
possible amendments to the terms of these facilities which proved to be
unsuccessful. Accordingly, in July 2002, the Company repaid the outstanding
balance of the equipment facility and terminated both of these facilities.
In May 2001, the Company entered into an uncommitted credit facility with
European American Bank ("EAB"), which was succeeded by Citibank, N.A.
("Citibank"). The facility contemplated a $5,000,000 equipment line of credit
and a $2,000,000 unsecured term loan line. Both lines bore interest at the
Company's option at either the Citibank prime rate or 1 % above the Reserve
Adjusted LIBOR (as defined), were subject to certain financial covenants and
required approval from Citibank prior to any borrowing. Any outstanding
balance six months after the term loan line was made available and at expiration
of the line was to automatically convert into fully amortizing term loans with a
maturity of five years bearing interest at the same rate as the equipment loan.
This facility was scheduled to expire in January 2002, but was extended
month-to-month until May 2002, at which time it was not renewed. The Company
had not incurred any borrowings under this facility.
In August 2000, the Registrant secured a $795,000 mortgage loan form EAB in
connection with its purchase of the facility at 11-13 Stepar Place, Huntington
Station, New York. Citibank succeeded to this loan as successor to EAB. The
loan was to be repaid in 120 equal monthly installments over 10 years and bore
interest at 1 % above the six month LIBOR rate. The mortgage was subject to
certain financial covenants, including maintenance of asset and liability
percentage ratios. In June 2002, the Company repaid the remaining balance due
under this loan.
OBLIGATIONS UNDER CAPITAL LEASES
The Company leases an administrative office, manufacturing and research and
development complex located in Jacksonville, Florida (the "Jacksonville
Facility") from a partnership controlled by the Company's President, Chief
Executive Officer and principal stockholder under a capital lease. At June 30,
2002, the Jacksonville Facility has an aggregate cost of $3,666,000 and a net
book value of $1,611,000. The lease is for a period of 30 years and was
capitalized using an interest rate of 10.5% and expires on September 30, 2010.
The lease provides for base rent of approximately $461,000 per annum. The lease
further provides for annual increases in base rent for years beginning after May
1, 1999 based on the increase in the CPI since May 1, 1998 applied to base rent.
The annual increase resulted in monthly payments of approximately $43,000 per
month and $42,000 per month for fiscal years 2002 and 2001, respectively.
The lease also provides for increases to the base rent in connection with
any new construction at the Jacksonville Facility. Under the lease, upon any new
construction being placed into use, the base rental is subject to increase to
the fair market rental of the Jacksonville Facility, including the new
construction. In August 2002, the base rental was increased to approximately
$60,000 for fiscal year 2003, effective September 1, 2002, to reflect the
addition of a new manufacturing facility at the Jacksonville Facility. All other
provisions remain unchanged.
F-11
The Company leases computer equipment with an unrelated party. At June 30,
2002, the equipment had an original cost of $111,000 and a net book value of
$48,000. The lease is for a period of five years beginning September 1999 and
is being capitalized using an interest rate of 8.8%.
The following table 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, 2002:
2003 $ 489,000
2004 489,000
2005 466,000
2006 461,000
2007 461,000
2008 and thereafter 1,500,000
----------
Total minimum lease payments 3,866,000
Less: Amount representing interest 1,269,000
----------
Present value at June 30, 2002 2,597,000
Less: Current portion 229,000
----------
$2,368,000
==========
NOTE 5. INCOME TAXES
The components of income (loss) before income taxes is as follows:
Fiscal Years Ended June 30,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Domestic $(6,784,000) $16,085,000 $14,107,000
Foreign 43,000 (189,000) (151,000)
------------ ------------ ------------
$(6,741,000) $15,896,000 $13,956,000
============ ============ ============
The provision for income taxes consists of the following:
Years Ended June 30,
-------------------------------------
2002 2001 2000
------------ ----------- ----------
CURRENT:
Federal $(2,716,000) $5,714,000 $4,283,000
State 26,000 304,000 272,000
Foreign (6,000) 96,000 167,000
------------ ----------- ----------
Total Current (2,696,000) 6,114,000 4,722,000
------------ ----------- ----------
DEFERRED:
Federal 446,000 (470,000) 142,000
tate (248,000) (80,000) 21,000
------------ ----------- ----------
Total Deferred 198,000 (550,000) 163,000
------------ ----------- ----------
$(2,498,000) $5,564,000 $4,885,000
============ =========== ==========
Other current assets include a $1,795,000 for income tax receivables as of
June 30, 2002.
F-12
The following table reconciles the Federal statutory rate to the Company's
effective tax rate:
Years Ended June 30,
--------------------
2002 2001 2000
----- ----- -----
Tax provision computed at statutory rate 34.0% 35.0% 34.0%
State tax and State tax credit, net of Federal tax effect 2.1 0.9 1.4
FSC/EIE benefit 1.1 (2.8) (1.3)
Tax credits and other, net (0.1) 1.9 0.9
----- ----- -----
37.1% 35.0% 35.0%
===== ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
2002, 2001 and 2000, are presented below.
2002 2001
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts receivable and sales
returns $ 234,000 $ 150,000
Inventories 1,581,000 1,168,000
Accrued expenses 471,000 472,000
State tax net operating loss
and tax credit carry forwards 235,000 ---
Unrealized depreciation on investments available-for-sale --- ---
------------ ------------
Total deferred tax assets 2,521,000 1,790,000
------------ ------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capital leases (3,817,000) (2,910,000)
Unrealized appreciation on investments available-for-sale (2,000) (30,000)
Other (60,000) (38,000)
------------ ------------
Total deferred tax liabilities (3,879,000) (2,978,000)
------------ ------------
Net deferred tax liability $(1,358,000) $(1,188,000)
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
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 in
which the deferred tax assets are deductible, and reversals of deferred tax
liabilities, management believes (although there can be no assurance) that it is
more likely than not that the Company will realize the benefits of these
deductible differences.
The Company intends that undistributed earnings of the Company's foreign
subsidiaries amounting to $1,177,000, as of June 30, 2002, will be indefinitely
reinvested in these subsidiaries resulting in no accrual of U.S. income taxes on
the earnings of these subsidiaries.
F-13
NOTE 6. STOCK-BASED COMPENSATION
STOCK OPTIONS
On April 1, 1997, the Board of Directors approved the American Technical
Ceramics Corp. 1997 Stock Option Plan (the "1997 Option Plan") pursuant to which
the Company may grant options to purchase up to 800,000 shares of the Company's
common stock. 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. Unless terminated earlier by the Board, the 1997 Option Plan will
terminate on March 31, 2007.
Options currently outstanding under the 1997 Option Plan may be exercised
for a period of 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 vest 25% per year during the first four years of their term (except
for the options granted in November 1998, which vest 50% per year during the
first two years of their term).
On April 11, 2000, the Board of Directors approved the American Technical
Ceramics Corp. 2000 Incentive Stock Plan (the "2000 Plan") pursuant to which the
Company may grant options or stock awards covering up to 1,200,000 shares of the
Company's common stock. Options granted under the 2000 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. Unless terminated earlier by the Board, the 2000 Plan
will terminate on April 10, 2010.
Options currently outstanding under the 2000 Plan may be exercised for a
period of 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 vest
25% per year during the first four years of their term.
Disposition of shares acquired pursuant to the exercise of options under
both plans may not be made by the optionees within two years following the date
that the option is granted, nor within one year after the exercise of the
option, without the written consent of the Company. Since the Company measures
compensation cost under Opinion No. 25, the Company has not recognized
compensation cost for these options upon grant as the exercise price was equal
to the fair market value of the stock at the date of grant.
On January 16, 2002, the Board of Directors filed a schedule TO; with the
Securities and Exchange Commission, and commenced an offer to exchange
outstanding options under the 1997 Option Plan and 2000 Plan having an exercise
price per share of $19.50 or more for new options. The offer expired on February
13, 2002. The Company accepted for exchange options to purchase an aggregate of
432,000 shares of Common Stock. On August 15, 2002, the Company issued 407,000
new options in exchange of the options tendered and accepted for exchange. The
new options were issued at the closing price of the Company's Common Stock on
August 15, 2002, which was $2.35 per share.
F-14
Stock option activity for fiscal years 2002, 2001 and 2000 is as follows:
2002 2001 2000
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Subject to Exercise Subject to Exercise Subject to Exercise
Options Price Options Price Options Price
------------ --------- ----------- --------- ----------- ---------
Outstanding, beginning of year 1,347,025 $ 14.22 1,263,930 $ 15.28 631,000 $ 4.12
Granted 227,000 8.53 435,000 11.80 912,000 19.56
Canceled (469,750) 20.53 (246,000) 18.47 (42,000) 5.61
Expired (143,650) 21.13 (24,000) 16.94 (3,500) 4.13
Exercised (40,825) 4.30 (81,905) 4.20 (233,570) 4.12
----------- ----------- -----------
Outstanding, end of year 919,800 $ 8.98 1,347,025 $ 14.22 1,263,930 $ 15.28
=========== =========== ===========
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 2002:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Actual Range of Weighted-Average Weighted- Weighted-
Exercise Prices Number Remaining Life in Average Number Average
150% increment Outstanding Years Exercise Price Outstanding Exercise Price
---------------- ----------- ----------------- --------------- ----------- ---------------
$4.00 - 5.63 341,800 5.9 $ 4.22 255,800 $ 4.14
5.64 - 9.09 209,500 9.2 $ 8.63 12,500 $ 6.44
9.10 - 15.75 316,250 8.4 $ 11.95 78,500 $ 11.95
15.76 - 23.50 44,000 7.6 $ 19.50 22,000 $ 19.50
44.00 8,250 7.7 $ 44.00 4,250 $ 44.00
---------------- ----------- ----------------- --------------- ----------- ---------------
$4.00 - 44.00 919,800 7.6 $ 8.98 373,050 $ 7.22
=========== ===========
At June 30, 2002, an aggregate of 722,900 shares were available for option
grants or awards under the 1997 Option Plan and 2000 Plan.
The average per-share fair value of stock options granted during fiscal
years 2002, 2001 and 2000 was $5.11, $7.74 and $12.15, respectively, as
determined by the Black-Scholes option pricing model (assuming a risk-free
interest rate of 4.19%, 5.33% and 6.28%, respectively, expected life of five
years, expected volatility of 68%, 76% and 68%, respectively, and no dividends).
The weighted average remaining contractual life of options outstanding as of
June 30, 2002 was 7.6 years.
On a pro-forma basis, net (loss) income would have been ($3,558,000),
$8,293,000 and $8,790,000; basic net (loss) income per share would have been
($0.44), $1.04 and $1.11 per share; and dilutive net (loss) income per share
would have been ($0.44), $1.00 and $1.04 per share, respectively, for fiscal
years 2002, 2001 and 2000 had the Company measured compensation cost using the
fair value method of SFAS No. 123.
F-15
OTHER STOCK BASED COMPENSATION
In fiscal year 2001, the Company awarded 9,750 shares, of its common stock
to employees for services rendered. These awards resulted in compensation
expense of $172,000 (including payments made to offset tax liabilities
associated with these awards of $67,000), measured by the market value of the
shares on the date of grant.
In fiscal years 2001 and 2000, the Company awarded an aggregate of 5,000
and 10,000 shares of common stock, respectively, to its non-employee directors.
These awards resulted in compensation expense of $286,000 and $163,000,
respectively (including $218,000 and $56,000, respectively, of payments made to
offset tax liabilities associated with these awards), measured by the market
value of the shares on the date of grant.
In addition, in fiscal years 2002, 2001 and 2000, the Company awarded an
aggregate of 7,000, 6,000 and 18,000 shares of common stock, respectively, to
officers and certain other employees. These awards resulted in compensation
expense of $88,000, $309,000 and $777,000, respectively (including $21,000,
$45,000 and $275,000 of payments made to offset tax liabilities associated with
these awards), measured by the market value of the shares at June 28, 2002, June
29, 2001 and June 30, 2000, respectively.
In fiscal year 2000, the Company awarded an aggregate of 12,000 shares of
common stock to three employees. These awards resulted in an accrual of deferred
compensation of $528,000 to be amortized to compensation expense over the 24
month period these shares will be earned. In fiscal years 2002 and 2001, these
awards resulted in compensation expense of $95,000 and $312,000, respectively
(including payments made to offset tax liabilities associated with these awards
of $7,000 and $29,000, respectively).
Treasury shares with an aggregate cost basis of $44,000 and $68,000 were
issued in connection with awards (described above) during fiscal years 2002, and
2001, respectively. There were no issuances of treasury stock in fiscal year
2000. Accordingly, treasury stock was reduced for the cost of the shares on a
specific identification, first-in first-out, basis.
NOTE 7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company had a related party operating lease with the Company's
President, Chief Executive Officer and principal stockholder, for a rented
facility which expired December 31, 2001. The Company and the related party
agreed to continue the lease on a month-to-month basis under the existing terms
until a new agreement is finalized. Rent expense under this related party
operating lease was approximately $523,000, $511,000 and $495,000 for the fiscal
years ended June 30, 2002, 2001 and 2000, respectively. In September 2002, the
Company and the related party reached a new agreement in principle on a
long-term lease. Under the agreement the Company will pay $410,000 per annum,
subject to annual increases based upon increases in the consumer price index.
The lease will expire in August 2007, subject to two five-year renewal options.
Rent expense to unrelated parties was approximately $157,000, $118,000 and
$11,000 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.
Minimum rent payments under existing lease commitments (which extend through
2004) are as follows for each of the years ended June 30:
2003 $ 146,000
2004 43,000
------------
$ 189,000
============
F-16
CONTINGENCIES
The Company is party to certain legal proceedings that arose in the normal
course of its business. The Company does not believe that the resolution of such
matters will have a significant effect on the Company's financial position or
results of operations.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its President and Chief
Executive Officer, which provides for annual base compensation of $323,000 as
well as additional annual compensation equal to 5% of net income before such
additional compensation and income taxes. In August 2000, the Company amended
the employment agreement, effective for fiscal years beginning with the fiscal
year ending June 30, 2001, to reduce the additional annual compensation
component to 2.5% of net income before such bonus and income taxes. In September
1998, the Company amended the employment agreement, effective for fiscal years
beginning with 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, subject to certain limitations. Such compensation for
fiscal year 1998 was paid by the issuance of 40,908 treasury shares in fiscal
year 1999.
The agreement expires March 1st of each year but is renewed automatically
for an additional one year in the absence of written notice to the contrary by
either party at least 120 days prior to the March 1st renewal date. In addition,
if there is a change in control of the Company or the employees employment is
terminated by the Company before the expiration of the agreement other than for
cause (as defined in the agreement), the employee is entitled to the greater of
(a) all compensation due under the remaining term of the agreement, or (b) a
payment equal to three times his average annual compensation (including any
incentives) over the last five years.
In September 2000, the Company entered into a three year employment
agreement with an executive officer. The agreement provides initially for annual
base compensation of $175,000 and participation in the Company's Officers' Bonus
Plan. If the officer is terminated by the Company during the term of the
agreement, (i) the officer will be entitled to receive his base salary for a
period of one year, (ii) the Company shall continue to provide family medical
coverage for a period of eighteen months, and (iii) all exercisable options may
be exercised for a period of one year after termination.
In April 2000, the Company entered into a three-year employment agreement
with a manager. The agreement provides for annual base compensation of $110,000
and additional quarterly incentive compensation based upon specific performance
measures, and awards 4,000 shares of the Company's common stock to the manager.
In April 2001, the Company entered into a three year agreement with another
executive officer. The agreement provides for annual base compensation of
$150,000 and participation in the Company's Officers' Bonus Plan. If the officer
is terminated by the Company during the term of the agreement, the officer will
be entitled to receive his base salary for the lesser of one year or remainder
of the term.
In December 2001, the Company renewed a four year employment agreement with
an officer. The agreement provides for annual base compensation of $125,000,
plus additional compensation based upon specific performance measures. The
agreement includes termination provisions providing for payments depending on
the nature of the termination.
F-17
NOTE 8. OTHER DATA
ACCRUED EXPENSES
Accrued expenses consist of the following:
June 30, 2002 June 30, 2001
-------------- --------------
Accrued commissions and bonuses $ 499,000 $ 3,105,000
Accrued payroll and related expenses 2,386,000 2,742,000
Other 333,000 388,000
-------------- --------------
$ 3,218,000 $ 6,235,000
============== ==============
VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included in the accompanying consolidated
financial statements consist of the following:
Balance - Additions Deductions / Balance -
Beginning of Charged to Other End of
Classification Period Expense Additions Period
------------------------------------------- ------------- ---------- ------------ ----------
For the year ended June 30, 2002:
Allowance for doubtful accounts receivable
and sales returns $ 446,000 1,735,000 1,530,000 $ 651,000
For the year ended June 30, 2001:
Allowance for doubtful accounts receivable
and sales returns $ 530,000 909,000 993,000 $ 446,000
For the year ended June 30, 2000:
Allowance for doubtful accounts receivable
and sales returns $ 390,000 1,142,000 1,002,000 $ 530,000
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 U.S. employees meeting certain eligibility requirements and
allows participants to contribute a portion of their annual compensation. For
the fiscal years ended June 30, 2002, 2001 and 2000, the Company provided a
matching contribution of $539,000, $555,000 and $467,000, respectively, which
was equal to 50% of each participant's contribution up to a maximum of 6% of
annual compensation. Employees are 100% vested in their own contributions and
become fully vested in the employer contributions over five years.
PROFIT BONUS PLAN
Effective commencing in fiscal year 1995, the Company adopted a Profit
Bonus Plan for the benefit of eligible employees, as defined. The plan provides
that, for each fiscal year, the Board of Directors, in its discretion, may
establish a bonus pool not to exceed 10% of pretax income of the Company for the
subject fiscal year. The bonus pool is then allocated among eligible employees
in accordance with the terms of the plan. For fiscal year 2002, no compensation
expense was recognized pursuant to this plan. For fiscal years 2001 and 2000,
the Company recognized related compensation expense of $1,590,000 and
$1,414,000, respectively, pursuant to this plan.
F-18
Effective January 1, 2000, the Company adopted a Managers Profit Bonus Plan
for the benefit of eligible employees, as defined. The plan provides that, for
each fiscal year, the Board of Directors, in its discretion, may allocate a
percentage of the Company's pre-tax profits (not to exceed 2.5% of such profits)
for equal distribution among participants in the plan. Participants in the
Managers Profit Bonus Plan are no longer eligible to participate in the Profit
Bonus Plan described above. For fiscal years 2002, 2001 and 2000, the Company
recognized compensation expense of $11,000, $397,000 and $258,000, respectively,
in respect of this plan.
The Company has a bonus plan for executive officers. This plan provides for
a majority of the eligible employees to receive a cash bonus equal to at least
0.5% of the Company's pre tax income. In addition two of the employees have
different plans that provide for bonus calculations based upon other factors
including product line profitability and achievement of bookings quotas. For
fiscal years 2002, 2001 and 2000, the Company recognized compensation expense of
$145,000, $1,624,000 and $1,987,000, respectively, pursuant to this plan.
NOTE 9. FOREIGN OPERATIONS
The Company markets and distributes a portion of its foreign sales through
its wholly-owned subsidiaries, Phase Components Ltd., located in the United
Kingdom, and ATC Nordic AB, located in Sweden. During the fiscal year ended June
30 2002, the Company closed its wholly-owned subsidiary located in the United
Kingdom as part of cost reduction measures instituted during the year. The
business activity has been moved to the Company's wholly-owned subsidiary in
Sweden. The following table summarizes certain financial information covering
the Company's operations in the United States, the United Kingdom and Sweden for
fiscal years 2002, 2001 and 2000. Net sales information is based upon country of
origin.
2002 2001 2000
----------- ----------- -----------
Net sales
United States $44,359,000 $77,235,000 $63,070,000
United Kingdom 687,000 2,549,000 2,992,000
Sweden 4,539,000 4,801,000 630,000
----------- ----------- -----------
Total $49,585,000 $84,585,000 $66,692,000
=========== =========== ===========
Long-lived assets
United States $29,768,000 $31,934,000 $22,745,000
United Kingdom --- 292,000 334,000
Sweden 59,000 62,000 12,000
----------- ----------- -----------
Total $29,827,000 $32,288,000 $23,091,000
=========== =========== ===========
U.S. sales include $11,900,000, $16,271,000 and $13,424,000 for export in
fiscal years 2002, 2001 and 2000, respectively. Export sales were primarily to
customers in Western Europe, Canada and the Far East.
F-19
NOTE 10. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, AND
ACCRUED EXPENSES
The carrying amount approximates fair value due to the short maturity of
these instruments.
INVESTMENTS
Cost and fair value of the Company's investments is presented in Note
2. Fair value is based upon quoted market prices.
LONG-TERM DEBT
At June 30, 2002, the fair value of the capital lease obligation was
$3,400,000 based on the present value of future cash flows and the Company's
estimated incremental borrowing rate of 3.3%. The fair value of the bank loans
approximate fair value as the underlying variable 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 judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-20