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