UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2005 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO_______ COMMISSION FILE NUMBER 1-9125 AMERICAN TECHNICAL CERAMICS CORP. (EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER) DELAWARE 11-2113382 ------------------------------ --------------------- (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1 NORDEN LANE, HUNTINGTON STATION, NY 11746 ---------------------------------------- ----------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 622-4700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED -------------------------------------- ----------------------------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE COMPANY (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE COMPANY WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [ X ] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE COMPANY'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ X ] INDICATE BY CHECK MARK WHETHER THE COMPANY IS AN ACCELERATED FILER AS DEFINED IN EXCHANGE ACT RULE (2b-2). YES [ ] NO [ X ] INDICATE BY CHECK MARK WHETHER THE COMPANY IS A SHELL COMPANY AS DEFINED IN EXCHANGE ACT RULE (12b-2). YES [ ] NO [ X ] AS OF THE LAST BUSINESS DAY OF THE COMPANY'S MOST RECENTLY COMPLETED SECOND FISCAL QUARTER ENDED DECEMBER 31, 2004, THE AGGREGATE MARKET VALUE OF THE COMPANY'S COMMON STOCK (BASED UPON THE CLOSING SALES PRICE OF THE COMPANY'S COMMON STOCK ON THE AMERICAN STOCK EXCHANGE ON SUCH DATE) HELD BY NONAFFILIATES OF THE COMPANY WAS APPROXIMATELY $36,685,572. (FOR PURPOSES OF THIS REPORT, ALL OFFICERS AND DIRECTORS HAVE BEEN CLASSIFIED AS AFFILIATES, WHICH CLASSIFICATION SHALL NOT BE CONSTRUED AS AN ADMISSION OF THE AFFILIATE STATUS OF ANY SUCH PERSON.) ON SEPTEMBER 12, 2005, THE COMPANY HAD OUTSTANDING 8,523,923 SHARES OF COMMON STOCK. DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE COMPANY'S PROXY STATEMENT RELATING TO ITS ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON NOVEMBER 15, 2005, ARE INCORPORATED INTO PART III OF THIS REPORT BY REFERENCE. PART I ITEM 1. BUSINESS GENERAL The Company was incorporated in New York in 1966 as Phase Industries, Inc., and changed its name to American Technical Ceramics Corp. in June 1984. The Company was merged into a Delaware corporation in 1985 in order to change its jurisdiction of incorporation. Unless the context indicates otherwise, references to the Company herein include American Technical Ceramics Corp., a Delaware corporation, and its subsidiaries, all of which are wholly-owned. The Company designs, develops, manufactures and markets RF/Microwave/Millimeter-Wave ceramic capacitors, thin film products and other passive components. The Company's products are focused primarily in the high reliability market for ultra-high frequency ("UHF") and microwave applications, including wireless electronics, medical electronics, semiconductor equipment, satellite equipment and fiber optics. Capacitors function within electronic circuits by storing and discharging precise amounts of electrical power. The Company believes that it is a leading manufacturer of multilayer capacitors ("MLCs") for UHF and microwave applications. Selling prices for the Company's MLCs typically range from $.10 to $7.50 or higher, whereas selling prices for commodity-type MLC units typically range from $.005 to $.05. Thin film products are ceramic substrates on which circuit patterns are printed by means of thin film processes, and are used by customers as building blocks in electronic circuits. Management believes the Company operates in only one industry segment - the electronic components industry. The recovery in the technology and telecommunications sectors that began in the second half of fiscal year 2004 continued in fiscal year 2005. The Company experienced substantial increases in sales and bookings in fiscal year 2005. 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 three product lines that accounts for more than 10% of the Company's consolidated revenue, accounting for approximately 69%, 70% and 73%, of the Company's revenues in fiscal years 2005, 2004 and 2003, 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% of the Company's sales in each of fiscal years 2005 and 2004 and approximately 89% of sales in fiscal year 2003 were to commercial (i.e., applications other than Hi-Rel) customers. The Company estimates that approximately 8% of the Company's sales in fiscal years 2005 and 2004 and approximately 11% of sales in fiscal year 2003 were sales of Hi-Rel products. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING -- FOREIGN SALES." 2 Hi-Rel MLCs are principally utilized in applications such as satellites (including commercial communications satellites), high performance military aircraft, spacecraft and missiles, and other defense applications such as radar and electronic countermeasures. The 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 than the Company's traditional MLCs (approximately two-thirds the price of the lowest-priced comparable part), and use 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 13%, 10% and 6% of the Company's revenues in fiscal years 2005, 2004 and 2003, 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 2% of the Company's revenues in each of fiscal years 2005, 2004 and 2003. 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 2005, 2004 and 2003, thin film sales represented approximately 11%, 14% and 13% of the Company's revenues, respectively. 3 In June 2000, the Company introduced a line of high power, passive resistive products. In fiscal year 2002, the Company added thin film resistor manufacturing capability to its resistive products line. Typically, thin film resistors offer a higher degree of reliability and are better able to handle power than their thick film counterparts. The Company's products, including standard resistors, terminations, attenuators and other customized products, consist of resistive and conductive layers deposited on a substrate of aluminum nitride, a base material chosen for its high thermal conductivity and its non-toxic properties. High power resistive products are used in many of the same types of equipment as the Company's capacitor products. Other applications for these products, which reflect an expansion of the Company's customer base, include RF and microwave products, including power amplifiers, up and down converters, and high power combiner/dividers. The markets for these products include the wireless and telecommunication markets, including base station and satellite communications, and a broad range of medical, military and other commercial applications. Resistive product sales represented 2% of the Company's revenues in fiscal year 2005 and less than 1% in each of the fiscal years 2004 and 2003. 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 2% of the Company's revenues in fiscal year 2005 and less than 1% of the Company's revenues in fiscal years 2004 and 2003. See "Item 1. BUSINESS -- MANUFACTURING and -- RESEARCH AND DEVELOPMENT." MANUFACTURING The manufacturing process for MLC's 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 MLC's at its facilities in Huntington Station, New York and Jacksonville, Florida. Its primary MLC manufacturing site is Huntington Station, consisting of four manufacturing facilities which aggregate approximately 76,000 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. The other two facilities provide "finishing" process steps or key manufacturing support activities. The Company manufactures its 500 and 600 series capacitors at its facility in Jacksonville, Florida. Over the past three fiscal years the Company expanded the offering of the 600 series to include an additional case size each year to better serve the EIA (Electronic Industry Association) product standardization used by its customers. The Jacksonville facility is also the site of manufacture for the Company's thin film, Microcap(R) SLC, resistor and CCP product lines, and serves as the Company's new product technology center. The Jacksonville facilities aggregate over 109,000 square feet of space with 37,000 square feet committed to custom circuit operations. 4 Portions of the Jacksonville facility have been redesigned over the last few years in order to accommodate what the Company refers to as its "Factory of the Future". Utilizing recently developed and acquired materials, processes and equipment, the Company can manufacture MLC products at this facility at higher degrees of precision and control and at a substantially lower cost with accompanying high output. Moreover, the manufacturing operations at this facility are flexible, enabling the Company to produce ceramic structures of a wide variety of sizes, shapes and internal configurations. The Company installed several high speed test and packaging systems currently processing in excess of 100,000 units per hour, which is a several fold increase compared to the previous systems. As differentiated from the "thick film" technology used in MLC manufacturing, the manufacture of thin film circuits involves a method for the deposition of layers of conducting and other materials using "sputtering" technology. Unlike the manufacture of capacitors, where all products flow through the same manufacturing sequences, manufacturing processes for custom thin film products vary significantly in accordance with each customer's specifications. Utilizing its core competencies in the manufacture of MLC devices, over the past two years the Company has developed the capability to manufacture microelectronic ceramic circuits. Starting in fiscal year 2004, the Company has been using this technology in connection with its CCP product line. Similar to commercial printed circuit board manufacturing, the Company can manufacture multiple layer boards with layer-to-layer interconnects and circuitry on each layer in a ceramic structure. The CCP product line, much like the Company's thin film product line, operates in a build-to-order format. The Company typically receives drawings for custom devices and packages from its customers and builds products to their specification, utilizing multiple layer circuit technology. Microcap(R) SLCs, resistive products and BMCs all utilize various combinations of the production methods described in the preceding paragraphs. The manufacture of each of these product lines involves dedicated equipment in addition to the equipment used in connection with the manufacture of the product lines previously discussed. The Company utilizes a wide variety of specialized equipment for the fabrication, handling and testing of its products, including equipment that it has designed and constructed. The Company considers its capability to create its own unique equipment solutions tailored to the particular needs of its product lines and technologies to be a competitive advantage. Before full market introduction of a new product, the Company generally establishes a production line for the product and manufactures substantial quantities to evaluate and verify its ability to consistently meet quality and performance standards. Such efforts involve the dedication of equipment, materials and labor, and, to the extent that these efforts do not result in saleable product, all costs are expensed. During fiscal years 2003 and 2004, the Company's CCP product line was in the development phase. During fiscal year 2005, the Company completed the development of this product line. To complement its own manufacturing efforts and to provide a wide variety of product offerings to its customers, the Company has from time to time entered into arrangements with other manufacturers to produce certain products to the Company's specifications. These products accounted for approximately 1%, 3% and 5% of the Company's consolidated revenues in fiscal years 2005, 2004 and 2003, respectively. The historical pattern of industry price declines has largely prevented MLC producers, including the Company, from increasing prices and has forced the Company and competitors to rely on advances in productivity and efficiency in order to improve profit margins. Accordingly, the Company continuously looks to improve the production yields and efficiency of its manufacturing processes. The Company conducts continuous improvement programs targeted at streamlining manufacturing processes and increasing yields, and has established statistical process control techniques for maintaining key process steps within specified bounds and providing data to support continuous improvement. For additional information with respect to yields and efficiencies, see "Item 1. BUSINESS -- RESEARCH AND DEVELOPMENT." 5 In fiscal year 2003, the Company attained ISO-9001:2000 status, which includes product design capability. It is a higher level certification than the Company previously had. The Company's European sales and distribution office achieved ISO-9001:2000 certification status during fiscal year 2003. During fiscal year 2004, the Company established an Environmental Management System in accordance with ISO-14001 requirements, and the New York manufacturing facility received certification to ISO-14001 during fiscal year 2005. CUSTOMERS AND MARKETING The Company markets its products primarily to customers in the wireless infrastructure, fiber optic telecommunications, military, medical, semiconductor equipment manufacturing and aerospace industries. The customers included within these industries are manufacturers of microwave, high frequency and fiber optic systems, subsystems and equipment, including original equipment manufacturers (OEMs) and Electronics Manufacturing Services (EMS) companies and suppliers thereto, and government contractors and subcontractors. Most of the Company's products are used in the manufacture of capital equipment. The Company promotes its products through specialized trade shows, industry trade journal advertisements, a site on the Internet's World Wide Web and catalog direct mail programs. In fiscal year 2000, the Company started taking orders, on a limited basis, via its web site. In fiscal year 2004, the Company increased the list of products available for sale via its web site and plans to further expand these offerings in the future. The Company shipped to approximately 2,000 customers in fiscal years 2005, 2004 and 2003. The top ten customers combined accounted for approximately 29%, 30% and 29% of net sales in fiscal years 2005, 2004 and 2003, respectively. No customer accounted for more than 10% of the Company's net sales in fiscal years 2005, 2004 or 2003. The Company is a qualified producer of capacitors with the Defense Logistics Agency of the United States Department of Defense. This qualified status covers several varieties and types of capacitors. Maintenance of its qualified producer status is critical in order for the Company to continue to sell its Hi-Rel military product line. To date, the Company has not encountered any difficulty in maintaining its status as a qualified producer, and the Company believes it is presently the only supplier with such qualification for some of these product types. The Company typically sells its products through a combination of logistics arrangements and a large number of individual purchase orders. Certain individual purchase orders are subject to pricing agreements. Neither pricing agreements nor logistics arrangements are firm purchase orders, but each still requires that the Company commit to produce semi-finished or finished goods inventory in anticipation of receiving a purchase order for immediate shipment. See "Item 1. BUSINESS -- SALES BACKLOG" and "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Customers are invoiced simultaneously with merchandise shipments. The Company sells to a majority of its customers on 30-day terms. A small number of the Company's larger volume customers have terms ranging from 45 days to 120 days. Customers may also charge their purchases through the use of a credit/debit card. Sales returns are authorized and accepted by the Company in the normal course of business. An evaluation of the returned product is performed and typically results in either a credit or a shipment of replacement product to customers. The Company believes that it has provided an adequate reserve for returns in the accompanying consolidated financial statements. 6 In the United States, the Company principally sells its products through independent sales representatives who are compensated on a commission basis. In foreign countries, the Company historically has utilized both resellers, who purchase products from the Company for resale, and sales representatives. During fiscal year 2002, the Company elected to dissolve its subsidiary in the United Kingdom and expanded the scope of its subsidiary in Stockholm, Sweden to serve most of the Company's customers in Europe, thereby reducing the Company's reliance on resellers in this area. The Company continues to rely primarily on local, independently-owned resellers and independent sales representatives in all other foreign markets. See "Item 1. BUSINESS -- FOREIGN SALES" and Note 9 of Notes to Consolidated Financial Statements. During fiscal year 2002, the Company established a wholly-owned subsidiary in the United States which established a representative office in the People's Republic of China to service the growing market in China. During fiscal year 2005, the Company's wholly-owned subsidiary in Sweden, through its own wholly-owned subsidiary, established a representative office within the Russian Federation to service the growing market there. At June 30, 2005, the Company utilized approximately 17 sales representative organizations in the United States and approximately six sales representative and reseller organizations in foreign countries, principally Europe, Canada and the Far East. The Company's sales representatives and resellers generally have substantial engineering expertise, which enables them to assist the Company in providing a high level of service to assist customers in generating product specifications and in providing applications assistance and maintaining contact with key customers. The Company employs regional sales managers to supervise its sales representatives and resellers and a staff of sales and applications specialists to provide direct contact with and support to customers. FOREIGN SALES In fiscal years 2005, 2004 and 2003, sales to customers located outside the United States constituted 47%, 47% and 41% of net sales, respectively. The Company's foreign customers are located primarily in Europe, Canada and the Far East. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING" and Note 9 of Notes to Consolidated Financial Statements. All foreign sales, except sales by the Company's wholly-owned subsidiary in Stockholm, Sweden, are denominated in United States dollars. The Company attempts to reduce the risk of doing business in foreign countries through the use, in certain circumstances, of prepayment or sight drafts, and by working closely with its foreign representatives and distributors in assessing business environments. SALES BACKLOG The Company's sales backlog was $13,958,000, $13,472,000 and $9,129,000 at June 30, 2005, 2004 and 2003, respectively. Backlog generally consists of a combination of the Company's standard products and custom manufactured parts that require a longer lead time to produce. The long-term trend in customer requirements for the Company's standard products has been toward shorter lead times. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING." The Company offers its Quik-Pick 48 Hour System(R) program pursuant to which products are shipped within 48 hours from the time the order is placed. This program has consistently been popular with its customers. In order to offer this program, the Company has to maintain higher inventory levels of certain products in proportion to total sales than it would otherwise and higher than those maintained by some other capacitor manufacturers. The contribution of the Quik-Pick(R) program to the financial results of the Company depends critically on the Company's ability to accurately predict customer demand for the various products offered through the program. 7 RESEARCH AND DEVELOPMENT The technology upon which the Company's products are based is subject to continued development of materials and processes to meet the demands of new applications and increased competition. The Company pursues a process-oriented strategy in which it conducts efforts aimed at developing integrated sets of materials and associated processes and equipment to provide the capability to create new or enhanced classes of products. Once a new set of technologies is established, the Company then seeks to develop and introduce various products using such technologies. The Company believes its future successes depend upon its ability to identify the requirements for future products and product enhancements, and to define, implement and successfully employ the technologies needed to meet those requirements. Accordingly, the Company believes that its research and development efforts are critical to its continued success. The Company conducts most of its research and development activities at its facility in Jacksonville, Florida. Activities are focused on the development of new products and improvement of existing products. Improvements in materials and process technology, and the development of specialized production equipment, are directed toward reducing product cost, as well as enhancing performance requirements that are identified through frequent customer contacts by the Company's sales and technical personnel. Products are introduced after extensive in-house testing and evaluations at selected customer sites. See "Item 1. BUSINESS - MANUFACTURING." The Company often pursues programs with individual customers whom it considers to be leaders in their respective industries to develop special products to meet their specific requirements. The Company typically conducts such programs when it believes such products have potential applications reaching well beyond the initial customer's requirements. The Company's expansion of the 600 Series product line arose from one such program conducted in past years. The Company's research and development efforts remain focused on the development of new products and processes related to its core product lines. For example, during fiscal year 2004, the Company continued its efforts on developing enhancements to its line of specialty higher frequency capacitors. The Company also continued development activities on its new resistive product line by adding thin film resistor manufacturing capability. Typically thin film resistors offer a higher degree of reliability and are better able to handle power than their thick film counterparts. The thin film capability also allows for the development of finer line width and resolution, which is used in the manufacture of higher frequency terminations and attenuators. See "Item 1. BUSINESS - PRODUCTS." The initial phases of the CCP process were completed during fiscal year 2003, and during fiscal year 2004 the Company started to sell these products. In fiscal year 2005, the Company sold in excess of $1,500,000 of these products. The Company continues to believe in the long-term prospects for this technology, and intends to continue the enhancement of its capabilities along with additional processes that further expand its offering of products during fiscal year 2006. In this regard, the Company has entered into an agreement to purchase from CTS Corporation certain equipment and inventory used by CTS in the manufacture of LTCC products. It is anticipated that the closing of the transaction will occur in the second quarter of fiscal year 2006. The Company intends to transfer the equipment and inventory to its facility in Jacksonville, Florida, where it will be used, among other things, in the production of LTCC products and certain of the Company's specialty MLCs. Expenditures for research and development were approximately $2,161,000, $3,067,000 and $2,766,000 in fiscal years 2005, 2004 and 2003, respectively, representing approximately 3%, 5% and 6% of net sales, respectively. The Company anticipates that research and development expenditures in fiscal year 2006, expressed as a percentage of net sales, will be comparable to fiscal year 2005. 8 RAW MATERIALS The principal raw materials used by the Company include silver, palladium, gold, platinum, titanate, and other powders that are used in ceramic manufacture. Precious metals are available from many sources, although palladium is generally available only from a limited number of metal dealers who obtain their product requirements from the Republic of South Africa or the Russian Federation. The major consumers of palladium are the automotive and electronics industries. In April 2005, the Company fulfilled a commitment to purchase $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. Currently, the Company does not have any open orders to purchase additional precious metal inventory. 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 certain of these metals. The Company believes that, based upon its current levels of production, it owns a sufficient supply of precious metals such that the Company would not have to buy any additional quantities for the next six months. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." COMPETITION Competition in the broad MLC industry continues to be intense and, in general, is based primarily on price. In the UHF/Microwave market segment, where price has historically been less important, competition has been based primarily on high performance product specifications, achieving consistent product reliability, fast deliveries and high levels of customer service. The Company believes any competitive advantage it may have results from its ability to achieve consistent quality and reliability, fast deliveries and high levels of customer service. Potential growth of some market applications may in the future increase the competitive importance of price in this market. The Company believes it competes in the UHF/Microwave capacitor market with several other manufacturers, both domestically and abroad, including AVX Corporation, Dover Corporation, Tekelec, Spectrum Control, Inc., Murata Manufacturing Co. Ltd and Taiyo Yuden, most of which are larger and have broader product lines and greater financial, marketing and technical resources than the Company. There are other large commodity-type MLC manufacturers who have attempted to develop products for the UHF/Microwave market segment. While the Company believes these efforts have not produced significant results to date, there can be no assurance that such efforts will not be successful in the future. New product developments may lead the Company into markets where there are existing competitors that may have significantly greater financial and technical resources and greater expertise in mass production techniques than the Company. Competition in the Company's other product areas is similar in nature to that of the capacitor market. The primary competition for the Company's thin film products is Reinhardt Microtech AG. The primary competition for the Company's resistive products are Anaren Inc., EMC Technologies and Florida RF Labs Inc., the last two of which are both subsidiaries of Smiths Group PLC. ENVIRONMENTAL COMPLIANCE The Company produces hazardous waste in limited quantities in the production of its products. Accordingly, the Company's manufacturing operations are subject to various federal, state and local laws restricting the discharge of such waste into the environment. The Company recycles some of its hazardous wastes and disposes of the remainder through licensed carriers, which are required to deposit such waste at licensed waste sites. The Company is also subject to various federal, state, local and foreign laws regulating or prohibiting the use of certain materials in the manufacture of its products. As part of its research and development efforts, the Company continues to develop and test new materials and products designed to comply with these laws. 9 The Company believes that it is in material compliance with all applicable federal, state and local environment laws and does not currently anticipate having to make material capital expenditures to remain in material compliance therewith. However, more stringent requirements may be enacted in the future and the Company can not predict whether it will be able to comply with them. Moreover, there can be no assurance that the Company will be able to develop replacement materials or products for those which may become prohibited in the future, or that competitors will not develop superior compliant products. See "Item 1. BUSINESS -- CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS." During fiscal year 2004, the Company established an Environmental Management System in accordance with ISO-14001 requirements, and during fiscal year 2005, the Company's New York facility achieved ISO-14001 certification. PATENTS AND PROPRIETARY INFORMATION Although the Company has manufacturing and design patents and pending patent applications, and although the Company will continue to seek the supplemental protection afforded by patents, the Company generally considers protection of its products, processes and materials to be more dependent upon proprietary knowledge and on rapid assimilation of innovations than on patent protection. The Company's porcelain and ceramic formulations are considered trade secrets which are protected by internal non-disclosure safeguards and employee confidentiality agreements. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to deter misappropriation, or that an independent third party will not develop functionally equivalent technology. EMPLOYEES At June 30, 2005, the Company employed 452 persons at its facilities in New York, of which 23 were employed on a part-time basis; 284 persons at its facilities in Florida, of which one was employed on a part-time basis; ten persons in sales offices in Asia and 14 persons in sales offices in Europe of which one was employed on a part-time basis. Of the 760 persons employed by the Company, 638 were involved in manufacturing and testing activities and as support personnel, 104 were involved in selling, general and administrative activities, and 18 were involved in research and development activities. None of the Company's employees are covered by collective bargaining agreements. The Company considers its relations with its employees to be satisfactory. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS Statements in this Annual Report on Form 10-K under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as statements made in press releases and oral statements that may be made by the Company or by officers, directors or employees of the Company acting on the Company's behalf that are not statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. The cautionary statements set forth below identify certain factors that could cause such differences. In addition to statements which explicitly describe risks and uncertainties, readers are urged to consider statements labeled with terms such as "believes", "belief", "expects", "plans", "anticipates", or "intends" to be uncertain and forward-looking. All cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear. Any forward-looking statement represents the Company's expectations or forecasts only as of the date it was made and should not be relied upon as representing its expectations or forecasts as of any subsequent date. The Company undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise, even if its expectations or forecasts change. 10 The Company's products are used in the production of a variety of highly complex electronic products manufactured for the military and for commercial use. Accordingly, demand for the Company's products is highly dependent upon demand for the products in which they are used. From time to time, including the first half of fiscal year 2004, the Company's results have been negatively impacted by a general decrease in demand for technology and electronic products in the United States and abroad. There can be no assurance that the demand for such products will increase or that, even if it does increase, the demand for the Company's products will increase. In addition, there can be no assurance that the Company will not receive order cancellations after orders are booked into backlog. Moreover, a majority of the Company's costs are fixed, and the Company may not be able to reduce costs if sales volumes were to decline. The Company produces and ships product based upon orders received from its customers. If these orders are cancelled prior to shipment it could affect the Company's profitability. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING." The Company offers a broad variety of products to its customers. Gross margins can vary significantly from product to product and across product lines. Accordingly, a change in the mix of products sold by the Company during a particular period could lead to distinctly different financial results for that period as compared to other periods. The Company expects that international sales will continue to constitute a substantial portion of its total sales. These sales expose the Company to certain risks, including, without limitation, barriers to trade, fluctuations in foreign currency exchange rates (which may make the Company's products less price competitive), political and economic instability, changes in monetary policy, tariff regulations and other United States and foreign laws and regulations that may apply to the export of the Company's products, as well as the generally greater difficulties of doing business abroad. During fiscal year 2005, the Company's ten largest customers accounted for approximately 29% of net sales. The Company expects that sales to a relatively small number of customers will continue to account for a significant portion of its net sales for the foreseeable future. A loss of one or more of such key customers could affect the Company's profitability. See "Item 1. BUSINESS -- CUSTOMERS AND MARKETING." The technology upon which the Company's products are based is subject to continuous development of materials and processes. The Company's business is in large part contingent upon the continuous refinement of its technological and engineering expertise and the development of new or enhanced products and technologies to meet the rapidly developing demands of new applications and increased competition. There can be no assurance that the Company will continue to be successful in its efforts to develop new or refine existing products, that such new products will meet with anticipated levels of market acceptance or that the Company will otherwise be able to timely identify and respond to technological improvements made by its competitors. Significant technological breakthroughs by others could also have a material adverse effect on the Company's business. The Company's business may be adversely affected by difficulties in obtaining raw materials and other items needed for the production of its products, the effects of quality deviations in raw materials and fluctuations in prices of such materials. Palladium, a precious metal used in the production of the Company's capacitors, is currently available from a limited number of metal dealers who obtain product from the Republic of South Africa or the Russian Federation. A prolonged cessation or reduction of exports of palladium by the Republic of South Africa or the Russian Federation, or a significant increase in the price of palladium, could have a material adverse effect on the Company's business. See "Item 1. BUSINESS -- RAW MATERIALS" and "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 11 Certain raw materials used by the Company may fluctuate in price. To the extent that the Company is unable to pass on increases in the costs of such materials to its customers, this may adversely affect the gross profit margins of those products using such materials. At times, the Company will enter into contracts to purchase certain raw materials in the future at agreed upon prices in order to protect against shortages and rising prices. If the Company were to do so and prices were to decline, the Company would be required to purchase such raw materials at or above market prices which would also negatively impact gross profit margins. Competition in the MLC industry is intense and, in general, is based primarily on price. In the UHF/Microwave market segments, where price has historically been less important, competition has been based primarily on high performance product specifications, achieving consistent product reliability, fast deliveries and high levels of customer service. The Company competes with a number of large MLC manufacturers who have broader product lines and greater financial, marketing and technical resources than the Company. Growth of some commercial market applications has increased, and is expected to continue to increase the competitive importance of price. There can be no assurance that the Company will be able to improve the productivity and efficiency of its manufacturing processes in order to respond to pricing pressures, or to successfully design new processes and products; and the failure to do so could have a material adverse effect on the Company's business. The Company produces limited quantities of hazardous wastes in the production of its capacitors. Accordingly, the inherent risks of environmental liability and remediation costs associated with the Company's manufacturing operations may result in substantial unforeseen liabilities. The Company is also subject to various federal, state, local and foreign laws regulating or prohibiting the use of certain materials in the manufacture of its products. As part of its research and development efforts, the Company continues to develop and test new materials and products designed to comply with these laws. However, there can be no assurance that the Company will be able to develop replacement materials or products for those which may become prohibited in the future, or that competitors will not develop superior compliant products. See "Item 1. BUSINESS -- ENVIRONMENTAL COMPLIANCE." The Company has not received any claims that its products or the technologies upon which they are based infringe the intellectual property rights of others. Any such claims in the future may result in the Company being required to enter into royalty arrangements, cease manufacturing the infringing products or utilizing the infringing technologies, pay damages or defend litigation, any of which could have a material adverse effect on the Company's business. The Company's business may also be adversely affected by matters and events affecting businesses generally, including, without limitation, political and economic events, labor unrest, acts of God, war, acts of terrorism and other events outside of the Company's control. 12 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 Production and Huntington Station, New York production support (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 Sales and administration 18,000 Owned 2201 Corporate Square Blvd. Production, research 99,700 Leased from Principal Jacksonville, Florida and development Stockholder (2) 8810 Corporate Square Court Jacksonville, Florida Production (3) 10,000 Owned Ellipsvaegen 5 SE-141 75 Sales and 3,400 Leased Kungens Kurva, Sweden distribution office 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 was placed into operation during fiscal year 2005 and houses production and production support activities. (2) See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and Notes 4 and 7 of Notes to Consolidated Financial Statements. (3) In fiscal year 2004, the Company purchased this 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. 13 ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended June 30, 2005. EXECUTIVE OFFICERS The executive officers of the Company are as follows: Victor Insetta, age 65, co-founded the Company in 1966 and has served as President, Chief Executive Officer and a director of the Company since its organization. Richard Monsorno, age 53, 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 51, 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 63, 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 59, 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 46, has been with the Company as Controller since 1998, and was appointed Vice President, Controller in November 2000. In August 2005, he was appointed Vice President, Finance. Harrison Tarver, age 59, 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. William Johnson, age 53, joined the Company in June 2005, as Vice President of Sales. From 2003 until his employment by the Company, he served as Vice President of Sales for Precision Technology USA, Inc., a manufacturer of linear actuation and power transmission equipment. From 1996 to 2003, he was the Vice President of Worldwide Sales for Kemet Corporation, a manufacturer of electronic components. 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. 14 PART II ITEM 5. MARKET FOR COMPANY'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION The Company's common stock is traded on the American Stock Exchange ("AMEX") under the symbol "AMK". The table below sets forth the quarterly high and low sales prices for the common stock on the AMEX for the fiscal years ended June 30, 2005 and June 30, 2004. FISCAL 2005 FISCAL 2004 ----------- ----------- Quarter Ended: High Low High Low -------------- ---- --- ---- --- September $ 9.30 $6.53 $ 7.65 $4.90 December 12.00 8.90 7.93 5.97 March 10.58 7.50 11.59 7.80 June 11.09 7.77 10.24 7.92 NUMBER OF STOCKHOLDERS As of September 12, 2005, there were approximately 315 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, 2005: 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 990,945 $ 7.91 226,550 15 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 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 transactions listed above were registered under the Securities Act of 1933 in reliance on the exemption provided by Section 4(2) thereunder or because they did not constitute sales requiring registration under the Securities Act of 1933. ISSUER PURCHASES OF EQUITY SECURITIES None. ITEM 6. SELECTED FINANCIAL DATA The following information should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other information set forth following Item 15 of this report. FISCAL YEARS ENDED JUNE 30, --------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- ---------- --------- INCOME STATEMENT DATA: Net sales $ 72,965 $ 61,183 $ 49,048 $ 49,585 $ 84,585 Gross profit $ 24,582 $ 20,437 $ 14,332 $ 9,624 $ 36,721 Income/(loss) from operations $ 6,467 $ 2,528 $ (755) $ (6,596) $ 16,122 Net income/(loss) $ 4,268 $ 2,176 $ (501) $ (4,243) $ 10,332 Basic net income/(loss) per common share $ 0.51 $ 0.27 $ (0.06) $ (0.53) $ 1.30 Diluted net income/(loss) per common share $ 0.49 $ 0.25 $ (0.06) $ (0.53) $ 1.24 Cash dividends paid per common share $ - $ - $ - $ - $ - BALANCE SHEET DATA: Property, plant and equipment, net $ 29,502 $ 26,141 $ 27,174 $ 29,740 $ 32,089 Total assets $ 77,872 $ 69,853 $ 63,548 $ 66,574 $ 76,576 Long-term debt, net of current portion $ 5,276 $ 2,896 $ 3,290 $ 2,368 $ 7,211 Working capital $ 39,032 $ 34,900 $ 31,332 $ 28,375 $ 33,662 16 QUARTERLY FINANCIAL DATA: (unaudited) (In thousands, except per share amounts) BASIC DILUTED NET (LOSS) NET INCOME/ (LOSS) NET INCOME/ (LOSS) QUARTER ENDED NET SALES GROSS PROFIT /INCOME PER SHARE (1) PER SHARE (1) ------------- --------- ------------ ------- --------- ---------- Fiscal 2005 ----------- September $ 16,928 $ 5,292 $ 600 $ 0.07 $ 0.07 December 16,229 5,670 766 0.09 0.09 March 18,991 6,667 1,380 0.16 0.16 June 20,817 6,953 1,522 0.18 0.17 --------------- ----------------- --------------- ---------------------- ----------------------- Fiscal Year $ 72,965 $ 24,582 $ 4,268 $ 0.51 $ 0.49 --------------- ----------------- --------------- ---------------------- ----------------------- 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 --------------- ----------------- --------------- ---------------------- ----------------------- (1) Earnings per share amounts for each quarter are required to be computed independently. As a result, the sum may differ from the total year earnings per share amounts. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other information set forth following Item 15 of this Report. See also "CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS" in Part I of this Report. GENERAL Sales for fiscal year 2005 reached the highest levels since fiscal year 2001, increasing by 19% over the levels recorded in fiscal year 2004. The Company experienced increased sales to customers in all of the Company's major markets, particularly the wireless infrastructure and medical equipment markets. Management believes that these increases resulted from improved market conditions, increased market share and the growth in sales of new products. In response to customers' requirements for shorter lead times and faster deliveries, the Company has increased its inventories of finished goods of certain products. The Company believes that this practice has led to increased orders from certain customers and greater market share. Gross margins improved in fiscal year 2005 compared to fiscal year 2004, as operating at higher volumes enabled the Company to realize efficiencies of scale. Some of the increased demand was met using available capacity on existing machinery. However, the Company also expanded capacity to meet some of the increased demand and to position itself for additional growth. As a result, fixed overhead increased which offset some of the improvement in gross margin. Gross margin improvements were also tempered by increased levels of scrap during fiscal year 2005. 17 The increase in sales and production efficiencies have resulted in six straight quarters of profitability. Newer product lines continue to grow and become more significant contributors to the Company's revenues with several now operating at or above breakeven. The Company continues to look for ways to grow all product lines by finding new markets and applications, improving their performance or reducing the cost to manufacture them. Pricing continues to be an important factor in obtaining orders for certain products. To the extent the Company can reduce the costs to produce these products, it can compete more effectively. The Company devotes considerable effort to research and development designed to effect process improvements. Research and development expense decreased in fiscal year 2005 compared to fiscal year 2004, due to certain personnel being redesignated as production support as certain projects entered the production stage. Bookings continued to grow during fiscal year 2005, particularly with respect to our newer product lines. The increases in bookings resulted from strong demand from the wireless infrastructure, semiconductor equipment, military and medical markets. The Company has funded its expansion with funds from operations and borrowings against its credit facilities. During fiscal year 2005, the Company expanded its credit facility with General Electric Capital Corporation ("GECC") from $4,000,000 to $6,000,000, of which $5,000,000 remains available for the purchase of equipment, and secured an additional $5,000,000 line of credit with Commerce Bank N.A. against which $2,000,000 has been borrowed and repaid. RESULTS OF OPERATIONS KEY COMPARATIVE PERFORMANCE INDICATORS Fiscal Year Ended ------------------------------------------- June 30, 2005 June 30, 2004 ------------------- -------------------- Sales $ 72,965,000 $ 61,183,000 Bookings $ 73,419,000 $ 65,517,000 Gross Margin $ 24,582,000 $ 20,437,000 Gross Margin 33.7 % 33.4 % Operating Expenses $ 18,115,000 $ 17,909,000 Operating Expenses 24.8 % 29.3 % SIGNIFICANT HIGHLIGHTS Sales and Bookings for the twelve months ended June 30, 2005 increased 19% and 12%, respectively, over the prior fiscal year. 18 FISCAL YEAR 2005 COMPARED WITH FISCAL YEAR 2004 Net sales for the fiscal year ended June 30, 2005 were $72,965,000, an increase of 19% from the $61,183,000 recorded in the fiscal year ended June 30, 2004. Domestic sales increased by 20% to $38,819,000 in fiscal year 2005 from $32,234,000 in fiscal year 2004. International sales increased by 18% to $34,146,000 in fiscal year 2005 from $28,949,000 in fiscal year 2004. The increase in sales is due to the improved business climate in a majority of the markets the Company serves, increased market penetration and growth in sales of newer product lines. Sales growth was particularly significant in the wireless infrastructure and semiconductor equipment markets in the second half of fiscal year 2005. Bookings have improved significantly from the levels experienced in fiscal year 2004. Total bookings in fiscal year 2005 were $73,419,000, compared to $65,517,000 in fiscal year 2004, representing an increase of approximately 12%. 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 34% of net sales in fiscal year 2005, compared to 33% in fiscal year 2004. The increase in gross margins is attributable to higher sales volume and the economics associated with higher production volumes, offset in part by increased fixed overhead and increased levels of scrap. During fiscal year 2005, the Company continued to expand its capacity in order to meet the increased demand for its products and to accommodate expected future growth resulting in increased fixed costs. Operating expenses totaled $18,115,000, or 25% of net sales, in fiscal year 2005, compared to $17,909,000, or 29% of net sales, in fiscal year 2004. 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, partially offset by lower research and development expense. 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, 2005 decreased 30% to $2,161,000, compared to $3,067,000 in the prior fiscal year. The decrease was primarily the result of redesignation of certain research and development personnel to production support in connection with the maturation of certain new products from the development stage to commercial acceptance. The effective income tax rate for fiscal year 2005 was approximately 29%, as compared to 2% for fiscal year 2004. In fiscal year 2005, the Company's effective tax rate was favorably impacted primarily by Extraterritorial Income Exclusion benefits and benefits from State tax law changes. In fiscal year 2004, the Company benefited from the reduction of tax reserves due to audit settlements and updated evaluations and the impact of foreign tax benefits in relation to the lower level of pre-tax income. As a result of the foregoing, the Company reported a net income of $4,268,000, or $0.51 per common share and $0.49 per common share assuming dilution, for fiscal year 2005, compared to 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. 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 was 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. 19 Bookings 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 came 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 was 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, 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 was 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 the development of new products and processes related to its core product lines. 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 was 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. LIQUIDITY AND CAPITAL RESOURCES June 30, 2005 June 30, 2004 -------------------- ----------------- Cash and Investments $ 6,950,000 $ 7,042,000 Working Capital $ 39,032,000 $ 34,900,000 Operating Cash Flow $ 4,741,000 $ (93,000) Capital Expenditures $ 8,784,000 $ 4,506,000 Depreciation and Amortization $ 5,383,000 $ 5,152,000 Current Ratio 5.3:1 5.1:1 Quick Ratio 1.9:1 2.0:1 The Company's financial position at June 30, 2005 remains strong as evidenced by working capital of $39,032,000, compared to working capital of $34,900,000 at June 30, 2004. The Company's current ratio and quick ratio at June 30, 2005 remain strong although the quick ratio is slightly lower than at June 30, 2004. The increase in the current ratio is primarily due to an increase in inventory to support higher sales levels. The decline in the quick ratio is primarily due to a small decline in accounts receivable combined with a small increase in current liabilities. 20 Cash and investments decreased to $6,950,000 at June 30, 2005, compared to $7,042,000 at June 30, 2004. 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 in excess of borrowings. Accounts receivable decreased by $555,000 to $10,008,000 at June 30 2005, compared to $10,563,000 at June 30, 2004. The decrease is primarily due to improved collection efforts. Inventories increased by $5,272,000 to $27,540,000 at June 30, 2005, compared to $22,268,000 at June 30, 2004, primarily as a result of precious metal purchases during the year and increases to finished goods inventories to support higher sales levels. The precious metal 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 $384,000, to $2,449,000 at June 30, 2005 compared to $2,065,000 at June 30, 2004, due in part to increased purchasing activity to keep pace with higher production levels and in part to capital expenditures. Accrued expenses increased by $482,000 to $5,589,000 at June 30, 2005, compared to $5,107,000 at June 30, 2004, 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. Income taxes payable decreased $1,070,000 to $14,000 income tax receivable at June 30, 2005 compared to $1,049,000 income tax payable at June 30, 2004, primarily due to estimated tax payments. 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, primarily to reflect certain additions to the facility and market value adjustments as required by the terms of the lease based upon independent appraisals and for Consumer Price Index adjustments. See "Item 2. PROPERTIES." The Company is currently obligated to pay approximately $756,000 per annum under this lease. The payments due over the remaining six years of this capital lease, including the portion related to interest, total approximately $3,969,000. 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. In May 2005, the credit facility was increased to $6,000,000. Borrowings under the line bear interest, at the Company's option, at either a fixed rate of 3.47% above the five year Treasury Bond yield at the time of election 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 10, 2006. GECC has the option to securitize these loans with a third party. Loans securitized with a third party increase the available line of credit to the Company. As of June 30, 2005, the Company had $3,483,000 of borrowings outstanding under this facility and, as a result of third party securitizations, $5,000,000 available to borrow. In December 2004, the Company entered into a credit facility with Commerce Bank, N.A. Under the terms of this facility, the Company may request advances from time to time up to an aggregate of $5,000,000. Any advance made bears interest at the Prime Rate as reported in the Wall Street Journal. Borrowings under the facility are secured by a lien on the Company's accounts receivable and inventory. Each borrowing under the line will expire on November 30, 2005. The facility is subject to certain financial covenants, including minimum tangible net worth and liability percentage ratios. As of June 30, 2005, the Company had no outstanding borrowings under this credit facility. In September 2005, the Company's wholly-owned subsidiary in Sweden obtained a series of five term loans aggregating 12,000,000 Swedish Krona ("SEK") (approximately $1,700,000) from Svenska Handelsbanken, AB ("Handelsbanken"). The loans are unsecured and bear interest at fixed rates ranging from 3.56% to 4.59%. The five loans are each for a principal amount of 2,400,000 SEK and are fully amortizing. The loans mature in one to five years with the first maturing on September 30, 2006 and one other maturing on each succeeding September 30th through 2010. In connection with, and as an inducement to Handelsbanken to make the loans, the Company entered into a Guaranty and Agreement with the Handelsbanken whereby the Company has agreed to guarantee the payment of all its Swedish subsidiary's obligations under the loans. 21 Capital expenditures for the fiscal year ended June 30, 2005, totaled $8,784,000, 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 $6,500,000 in fiscal year 2006. Aggregate contractual obligations as of June 30, 2005 mature as follows: Payments Due by Period ------------------------------------------------------------------------------------------- Less than 1 1- 3 4- 5 After 5 Contractual Obligations Total year years years years ------------------------------------- --------------- --------------- ---------------- ---------------- ------------ Bank Debt $ 4,102,000 $ 895,000 $ 1,791,000 $ 1,416,000 $ --- Capital Lease Obligations $ 3,969,000 $ 756,000 $ 1,512,000 $ 1,512,000 $ 189,000 Operating Leases $ 1,135,000 $ 493,000 $ 627,000 $ 15,000 $ --- Purchase Obligations $ 3,365,000 $ 3,365,000 $ --- $ --- $ --- --------------- --------------- ---------------- ---------------- ------------ Total Contractual Obligations $ 12,571,000 $ 5,509,000 $ 3,930,000 $ 2,943,000 $ 189,000 =============== =============== ================ ================ ============ 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. 22 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. Management also considers the expected reversal of deferred tax liabilities, the Company's historic taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and the expected future taxable income over the periods in which the deferred tax assets are deductible as well as 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 net benefits of these deductible differences. The Company has available State net operating loss carry forwards in Florida, which expire in various years through 2025. Due to uncertainties about the realization of these loss carryforwards, a valuation allowance has been provided against the associated deferred tax asset. 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 additional valuation allowances 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 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 the Company's 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. 23 ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED In December 2004, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123 (R)"). This Statement is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 (R) supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and its related implementation guidance. SFAS No. 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments, or that may be settled by the issuance of those equity instruments. The provisions of SFAS No. 123 (R) shall be effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company will adopt SFAS No. 123 (R) effective July 1, 2005. The adoption of this standard will increase compensation expense to the extent the requisite service has not yet been rendered for options granted prior to July 1, 2003 that are accounted for under the intrinsic value method. Management has not yet determined the effect SFAS No. 123 (R) will have on the Company's consolidated results of operations or financial position. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS No. 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 151 effective July 1, 2005. The adoption of this standard is not expected to have a material impact on the Company's consolidated results of operations or financial position. On December 31, 2004, the FASB issued Staff Position No. FAS 109-2, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP No. 109-1"), and Staff Position No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP No. 109-2"). These staff positions provide accounting guidance on how companies should account for the effects for the American Jobs Creation Act of 2004 ("AJCA") that was signed into law on October 22, 2004. FSP No. 109-1 states that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a "special deduction" instead of a tax rate reduction. FSP No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company is currently assessing the repatriation provision to determine whether it might repatriate extraordinary dividends, as defined in the AJCA. The Company expects to complete this evaluation within a reasonable amount of time after additional guidance from the United States Treasury is published. 24 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 transactions 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 Company does not believe that the impact on net earnings of a 10% shift in exchange rates would 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 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. The Company believes that, based upon its current levels of production and inventories of precious metals, it has a sufficient supply of precious metals such that the Company would not have to buy any additional quantities for the next six months. c) Security price risk. The Company's current portfolio of marketable securities consists of U.S. Treasury notes and other government securities with maturities of less than one year. 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 10% change in interest rates would have a significant impact on its consolidated financial position. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements and the Notes thereto begin on page F-2 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES 25 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 - Finance carried out an evaluation of the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, these officers concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and the Company's consolidated subsidiaries was made known to them by others within those entities, particularly during the period in which this report was being prepared. Changes in Internal Controls. There were no changes in the Company's internal controls over financial reporting, identified in connection with the evaluation of such internal controls that occurred during the Company's last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information set forth under the captions "Election of Directors", "Compliance with Section 16(a) of the "Exchange Act" and "Code of Ethics" in the Company's Proxy Statement to be furnished in connection with its Annual Meeting of Stockholders to be held November 15, 2005 is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" in the Company's Proxy Statement to be furnished in connection with its Annual Meeting of Stockholders to be held November 15, 2005 is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" and the information relating to beneficial ownership of the Company's common stock in the table under the caption "Election of Directors" in the Company's Proxy Statement to be furnished in connection with its Annual Meeting of Stockholders to be held November 15, 2005 is hereby incorporated by reference. See also "Item 5. MARKET FOR COMPANY'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES -- EQUITY COMPENSATION PLAN INFORMATION." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement to be furnished in connection with its Annual Meeting of Stockholders to be held November 15, 2005 is hereby incorporated by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information set forth under the caption "Principal Accounting Fees and Services" in the Company's Proxy Statement to be furnished in connection with its Annual Meeting of Stockholders to be held November 15, 2005 is hereby incorporated by reference. 26 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) FINANCIAL STATEMENTS PAGE NO. -------------------- -------- Index to Consolidated Financial Statements ..................................... F Report of Independent Registered Public Accounting Firm ...................... F-1 Consolidated Financial Statements Balance Sheets as of June 30, 2005 and 2004 .............................. F-2 Statements of Operations Fiscal Years Ended June 30, 2005, 2004 and 2003 ....................... F-3 Statements of Stockholders' Equity and Comprehensive Income (Loss) Fiscal Years Ended June 30, 2005, 2004 and 2003 ....................... F-4 Statements of Cash Flows Fiscal Years Ended June 30, 2005, 2004 and 2003 ....................... F-5 Notes to Consolidated Financial Statements ............................... F-6 (B) EXHIBITS Unless otherwise indicated, the following exhibits were filed as part of the Company's Registration Statement on Form S-18 (No. 2-96925-NY) and are incorporated herein by reference to the same exhibit thereto: EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 - Certificate of Incorporation of the Company. 3.2 - Amendment to Certificate of Incorporation. (3) 3.3 - By-laws of the Company. 9.1 - Restated Shareholders' Agreement, dated April 15, 1985, among Victor Insetta, Joseph Mezey, Joseph Colandrea and the Company. 10.1 - Lease, dated September 1, 2002, between Stepar Leasing, LLC and the Company for premises at 15 Stepar Place, Huntington Station, N.Y. (11) 10.2 - Form of 1985 Employee Stock Sale Agreement between the Company and various employees. 10.3 - Form of Employee Stock Bonus Agreement, dated as of July 1, 1993, between the Company and various employees. (2) 10.4 - Form of Employee Stock Bonus Agreement, dated as of April 19, 1994, between the Company and various employees. (2) 10.5 - Form of Employee Stock Bonus Agreement, dated as of April 20, 1995, between the Company and various employees. (3) 10.6 - 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. (8) 10.7 - Profit Bonus Plan, dated April 19, 1995, and effective for the fiscal years beginning July 1, 1994. (3) 27 10.8 - Employment Agreement, dated April 3, 1985, between Victor Insetta and the Company, and Amendments No. 1 through 4 thereto. (1) 10.9 - Amendment No. 5, dated as of September 11, 1998, to Employment Agreement between Victor Insetta and the Company. (4) 10.10 - Amendment No. 6, dated as of January 3, 2001, to Employment Agreement between Victor Insetta and the Company. (7) 10.11 - Employment Agreement, dated October 1, 2003, between the Company and Richard Monsorno. (13) 10.12 - Managers Profit Bonus Plan, dated December 7, 1999 and effective January 1, 2000. (6) 10.13 - Officers Profit Bonus Plan, dated October 30, 2003 and effective June 30, 1992. (13) 10.14 - Consulting Agreement, dated January 1, 2004, between the Company and Stuart P. Litt. (14) 10.15 - Extension of Consulting Agreement, dated January 1, 2004, between the Company and Stuart P. Litt. (17) 10.16 - American Technical Ceramics Corp. 1997 Stock Option Plan. (4) 10.17 - American Technical Ceramics Corp. 2000 Incentive Stock Plan. (6) 10.18 - Master Loan Agreement, dated April 2, 2004, between the Company and General Electric Capital Corporation. (14) 10.19 - Letter from General Electric Capital Corporation, dated as of March 14, 2005. (16) 10.20 - Second Amended and Restated Employment Agreement, dated as of December 31, 2001, between Judah Wolf and the Company. (9) 10.21 - Employment Agreement, dated January 1, 2004, between the Company and David Ott. (14) 10.22 - Severance Agreement, dated November 1, 2003, between the Company and Kathleen Kelly. (13) 10.23 - Severance Agreement, dated November 1, 2003, between the Company and Andrew Perz. (13) 10.24 - Severance Agreement, dated November 1, 2003, between the Company and Harrison Tarver. (13) 10.25 - Loan and Security Agreement, dated November 30, 2004, between the Company and Commerce Bank N.A. (15) 10.26 - Security Agreement, dated November 30, 2004, between American Technical Ceramics (Florida) Inc., and Commerce Bank N.A. (15) 10.27 - Surety Agreement, dated November 30, 2004, between American Technical Ceramics (Florida) Inc., and Commerce Bank N.A. (15) 10.28 - Victor Insetta Compensation Arrangement. (16) 28 10.29 - Stuart Litt Consulting Arrangement. (16) 10.30 - Executive Compensation Arrangement. (16) 10.31 - Director Compensation Arrangement. (16) 10.32 - William Johnson Compensation Arrangement. (17) 10.33 - Financial Obligation, dated as of September 16, 2005, between American Technical Ceramics Europe AB and Svenska Handelsbanken, AB. (17) * 10.34 - Guaranty and Agreement, dated as of September 9, 2005, between the Company and Svenska Handelsbanken, AB. (17) 21.1 - Subsidiaries of the Company. (10) 23.1 - Consent of KPMG LLP. (17) 31.1 - Section 302 Certification of Chief Executive Officer. (17) 31.2 - Section 302 Certification of Principal Accounting Officer. (17) 32.1 - Section 906 Certification of Chief Executive Officer. (17) 32.2 - Section 906 Certification of Principal Accounting Officer. (17) -------------------------------------------------------------------------------- 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 Annual Report on Form 10-Q for the quarterly period ended December 31, 2000. 8. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000. 9. Incorporated by reference to the Company's Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2002. 29 10. Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. 11. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002. 12. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003. 13. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003. 14. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. 15. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004. 16. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005. 17. Filed herewith. * Summary of document written in Swedish. (C) FINANCIAL STATEMENT SCHEDULES Schedules have been omitted since they either are not applicable, not required or the information is included elsewhere herein. 30 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: October 4, 2005 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 October 4, 2005 --------------------------- (Principal Executive Officer) Victor Insetta /S/ ANDREW R. PERZ Vice President - Finance October 4, 2005 ------------------- (Principal Accounting Officer) Andrew R. Perz /S/ STUART P. LITT Director October 4, 2005 ------------------ Stuart P. Litt /S/ O. JULIAN GARRARD III Director October 4, 2005 ------------------------- O. Julian Garrard III /S/ CHESTER E. SPENCE Director October 4, 2005 --------------------- Chester E. Spence /S/ THOMAS J. VOLPE Director October 4, 2005 ------------------- Thomas J. Volpe /S/ DOV S. BACHARACH Director October 4, 2005 -------------------- Dov S. Bacharach 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number ----------- Report of Independent Registered Public Accounting Firm ................. F-1 Consolidated Balance Sheets as of June 30, 2005 and 2004 ................. F-2 Consolidated Statements of Operations Fiscal Years Ended June 30, 2005, 2004 and 2003 ......................... F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) Fiscal Years Ended June 30, 2005, 2004 and 2003 ......................... F-4 Consolidated Statements of Cash Flows Fiscal Years Ended June 30, 2005, 2004 and 2003 ......................... F-5 Notes to Consolidated Financial Statements ................................. F-6 F REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders American Technical Ceramics Corp.: We have audited the accompanying consolidated balance sheets of American Technical Ceramics Corp. and subsidiaries (the Company) as of June 30, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America. /S/ KPMG, LLP Melville, New York October 4, 2005 F-1 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS JUNE 30, 2005 JUNE 30, 2004 ------------------ ------------------ CURRENT ASSETS Cash (including cash equivalents of $4,000 and $502,000, respectively) $ 4,927,000 $ 4,534,000 Investments 2,023,000 2,508,000 Accounts receivable, (net of allowance for doubtful accounts of $300,000 and $470,000, respectively) 10,008,000 10,563,000 Inventories 27,540,000 22,268,000 Deferred income taxes, net 2,668,000 2,777,000 Prepaid and other current assets 1,007,000 865,000 ------------------ ------------------ TOTAL CURRENT ASSETS 48,173,000 43,515,000 ------------------ ------------------ PROPERTY, PLANT AND EQUIPMENT Land 738,000 738,000 Buildings and leasehold improvements 18,426,000 16,085,000 Machinery and equipment 47,038,000 43,350,000 Computer equipment and software 7,187,000 6,309,000 Furniture, fixtures and other 3,256,000 1,751,000 ------------------ ------------------ 76,645,000 68,233,000 Less: Accumulated depreciation and amortization 47,143,000 42,092,000 ------------------ ------------------ 29,502,000 26,141,000 ------------------ ------------------ OTHER ASSETS 197,000 197,000 ------------------ ------------------ TOTAL ASSETS $ 77,872,000 $ 69,853,000 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt (including related party debt of $437,000 and $394,000, respectively) $ 1,103,000 $ 394,000 Accounts payable 2,449,000 2,065,000 Accrued expenses 5,589,000 5,107,000 Income taxes payable --- 1,049,000 ------------------ ------------------ TOTAL CURRENT LIABILITIES 9,141,000 8,615,000 LONG-TERM DEBT, NET OF CURRENT PORTION (including related party debt of $2,459,000 and $2,896,000, respectively) 5,276,000 2,896,000 DEFERRED INCOME TAXES 3,308,000 3,515,000 ------------------ ------------------ TOTAL LIABILITIES 17,725,000 15,026,000 ------------------ ------------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common Stock -- $0.01 par value; authorized 20,000,000 shares; issued 8,917,463 and 8,644,058 shares, outstanding 8,503,323 and 8,229,918 shares, respectively 89,000 86,000 Capital in excess of par value 13,466,000 12,051,000 Retained earnings 48,114,000 43,846,000 Accumulated other comprehensive income: Unrealized loss on investments available-for-sale, net --- (5,000) Cumulative foreign currency translation adjustment 145,000 282,000 ------------------ ------------------ 145,000 277,000 ------------------ ------------------ Less: Treasury stock, at cost (414,140 and 414,140 shares, respectively) 1,396,000 1,396,000 ------------------ ------------------ Deferred compensation 271,000 37,000 ------------------ ------------------ TOTAL STOCKHOLDERS' EQUITY 60,147,000 54,827,000 ------------------ ------------------ $ 77,872,000 $ 69,853,000 ================== ================== See accompanying notes to consolidated financial statements. F-2 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003 2005 2004 2003 ---- ---- ---- Net sales $ 72,965,000 $ 61,183,000 $ 49,048,000 Cost of sales 48,383,000 40,746,000 34,716,000 ------------------- ----------------- --------------- Gross profit 24,582,000 20,437,000 14,332,000 ------------------- ----------------- --------------- Selling, general and administrative expenses 15,935,000 14,815,000 11,972,000 Research and development expenses 2,161,000 3,067,000 2,766,000 Other 19,000 27,000 349,000 ------------------- ----------------- --------------- Operating expenses 18,115,000 17,909,000 15,087,000 ------------------- ----------------- --------------- Income/(loss) from operations 6,467,000 2,528,000 (755,000) ------------------- ----------------- --------------- Other expense (income) Interest expense 475,000 365,000 359,000 Interest income (57,000) (68,000) (109,000) Other 8,000 2,000 --- ------------------- ----------------- --------------- 426,000 299,000 250,000 ------------------- ----------------- --------------- Income/(loss) before provision for income taxes 6,041,000 2,229,000 (1,005,000) Provision for income taxes 1,773,000 53,000 (504,000) ------------------- ----------------- --------------- Net Income/(loss) $ 4,268,000 $ 2,176,000 $ (501,000) =================== ================= =============== Basic net income/(loss) per common share $ 0.51 $ 0.27 $ (0.06) Diluted net income/(loss) per common share $ 0.49 $ 0.25 $ (0.06) ------------------- ----------------- --------------- Basic weighted average common shares outstanding 8,402,000 8,132,000 8,074,000 =================== ================= =============== ------------------- ----------------- --------------- Diluted weighted average common shares outstanding 8,738,000 8,583,000 8,074,000 =================== ================= =============== See accompanying notes to consolidated financial statements. F-3 Accumulated Capital in Other Comprehensive Common Stock Excess of Retained Comprehensive Income/(Loss) Shares Amount Par Value Earnings Income/(Loss) --------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2002 8,492,258 $ 85,000 $11,380,000 $42,171,000 $ (41,000) 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 --- --- --- --- 217,000 ----------- Comprehensive loss $ (284,000) ===========---------------------------------------------------------------------------- BALANCE AT JUNE 30, 2003 8,502,758 $ 85,000 $11,418,000 $41,670,000 $ 176,000 Net income $2,176,000 --- --- --- 2,176,000 --- Tax benefit of stock options exercised --- --- --- 55,000 --- --- Stock awards --- 21,350 --- 190,000 --- --- 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 --- --- --- --- 101,000 ----------- Comprehensive income $ 2,277,000 ============---------------------------------------------------------------------------- BALANCE AT JUNE 30, 2004 8,644,058 $ 86,000 $ 12,051,000 $43,846,000 $ 277,00 Net income $ 4,268,000 --- --- --- 4,268,000 --- Tax benefit of stock options exercised --- --- --- 215,000 --- --- Stock awards --- 22,000 --- 120,000 --- --- Stock option compensation expense --- --- --- 278,000 --- --- Exercise of stock options --- 251,405 3,000 802,000 --- --- Other comprehensive income, net of tax: Unrealized gain on investments available-for-sale, net of reclassification adjustment 5,000 Foreign currency translation adjustment (137,000) ----------- Other comprehensive income, net of tax (132,000) --- --- --- --- (132,000) ----------- Comprehensive income $ 4,136,000 ===========----------------------------------------------------------------------------- BALANCE AT JUNE 30, 2005 8,917,463 $ 89,000 $13,466,000 $ 48,114,000 $ 145,000 ======================================================================================== Deferred Treasury Stock Compensation Total --------------------------------------------------- BALANCE AT JUNE 30, 2002 $ (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 Comprehensive loss ----------------------------------------------- BALANCE AT JUNE 30, 2003 $ (1,396,000) $ --- $ 51,953,000 Net income --- --- 2,176,000 Tax benefit of stock options exercised --- --- 55,000 Stock awards --- --- 190,000 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 Comprehensive income ----------------------------------------------- BALANCE AT JUNE 30, 2004 $ (1,396,000) $ (37,000) $ 54,827,000 Net income --- --- 4,268,000 Tax benefit of stock options exercised --- --- 215,000 Stock awards --- --- 120,000 Stock option compensation expense --- (234,000) 44,000 Exercise of stock options --- --- 805,000 Other comprehensive income, net of tax: Unrealized gain on investments available-for-sale, net of reclassification adjustment Foreign currency translation adjustment Other comprehensive income, net of tax --- --- (132,000) Comprehensive income ---------------------------------------------- BALANCE AT JUNE 30, 2005 $ (1,396,000) $ (271,000) $ 60,147,000 ============================================== See accompanying notes to consolidated financial statements. F-4 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED JUNE 30, 2005, 2004 AND 2003 CASH FLOWS FROM OPERATING ACTIVITIES: 2005 2004 2003 ----------------- ------------------- ------------------ Net income/(loss) $ 4,268,000 $ 2,176,000 $ (501,000) Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Depreciation and amortization 5,383,000 5,152,000 5,391,000 (Gain)/loss on disposal of fixed assets (12,000) 373,000 459,000 Stock based compensation expense 164,000 200,000 17,000 Deferred income taxes (99,000) (570,000) (45,000) Investment interest accretion, net (17,000) (21,000) (8,000) Realized loss on sale of investments 7,000 2,000 --- Changes in operating assets and liabilities: Accounts receivable, net 481,000 (3,749,000) (393,000) Inventories (5,348,000) (7,038,000) 273,000 Other assets (147,000) (224,000) 1,843,000 Accounts payable, accrued expenses and income taxes payable 61,000 3,606,000 556,000 ----------------- ------------------- ------------------ Net cash provided by/(used in) operating activities 4,741,000 (93,000) 7,592,000 ----------------- ------------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,784,000) (4,506,000) (1,861,000) Purchase of investments (3,508,000) (3,482,000) (5,001,000) Proceeds from sale of investments 4,010,000 3,997,000 5,000,000 Proceeds from sale of fixed assets 49,000 22,000 18,000 ----------------- ------------------- ------------------ Net cash used in investing activities (8,233,000) (3,969,000) (1,844,000) ----------------- ------------------- ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (2,661,000) (355,000) (4,436,000) Proceeds from exercise of stock options 805,000 342,000 26,000 Proceeds from issuance of debt 5,750,000 --- --- ----------------- ------------------- ------------------ Net cash provided by/(used in) financing activities 3,894,000 (13,000) (4,410,000) ----------------- ------------------- ------------------ Effect of exchange rate changes on cash (9,000) (76,000) 218,000 ----------------- ------------------- ------------------ Net increase/(decrease) in cash and cash equivalents 393,000 (4,151,000) 1,556,000 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,534,000 8,685,000 7,129,000 ----------------- ------------------- ------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,927,000 $ 4,534,000 $ 8,685,000 ================= =================== ================== Supplemental cash flow information: Interest paid $ 468,000 $ 364,000 $ 397,000 Income taxes paid $ 2,764,000 $ 237,000 $ --- See accompanying notes to consolidated financial statements. F-5 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS American Technical Ceramics Corp. and its wholly-owned subsidiaries (the "Company") are engaged in the design, development, manufacture and sale of electronic components, including ceramic multilayer capacitors and custom thin film circuits. These products are primarily used for commercial and military purposes in the United States and for export, primarily to Western Europe, Canada and the Far East. In fiscal years 2005, 2004 and 2003, no one customer accounted for more than 10% of consolidated net sales. The Company operates in one industry segment - the electronic components industry. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of American Technical Ceramics Corp. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain insignificant reclassifications have been made to prior period financial information or disclosure 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. Shipping and handling fees charged to customers are included in net sales, and related costs are included in cost of sales. 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. F-6 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, 2005, 2004 and 2003: 2005 2004 2003 ---------------- --------------- ---------------- Unrealized holding losses arising during the period, net of tax $ --- $ (7,000) $ (5,000) Less: reclassification adjustment for losses included in net income, net of tax 5,000 2,000 --- ---------------- --------------- ---------------- Change in net unrealized gains/(losses) on investments available-for-sale $ 5,000 $ (5,000) $ (5,000) ================ =============== ================ The deferred tax (benefit)/liability associated with unrealized holding gains/(losses) arising during the fiscal years 2005, 2004 and 2003 was nil, ($3,000) and ($2,000), respectively. The tax benefit of the reclassification adjustments for gains on sales of investments included in net income during fiscal year 2005 was $3,000 and was nil for fiscal years 2004 and 2003. LONG-LIVED ASSETS Property, plant and equipment are stated at cost. Repairs and maintenance costs are expensed as incurred. 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 Computer equipment and software 2 to 5 years Furniture, fixtures and other 3 to 8 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. F-7 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 2005, 2004 and 2003 was $5.68, $5.85 and $2.50, respectively, as determined by the Black-Scholes option pricing model (assuming a risk-free interest rate of 3.79%, 3.30% and 3.23%, respectively, expected life of five years, expected volatility of 69.3%, 71.5% and 71.5%, respectively, and no dividends). The weighted average remaining contractual life of options outstanding as of June 30, 2005 was 5.0 years. F-8 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, ---------------------------------------------------------------------- 2005 2004 2003 ---------------------- -------------------- ------------------- Net income/(loss), as reported $ 4,268,000 $ 2,176,000 $ (501,000) Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 117,000 154,000 19,000 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (424,000) (1,410,000) (1,112,000) --------------------- -------------------- ------------------- Pro forma net income/(loss) $ 3,961,000 $ 920,000 $ (1,594,000) ===================== ==================== =================== Income/(loss) per share: Basic - as reported $ 0.51 $ 0.27 $ (0.06) Basic - pro forma $ 0.47 $ 0.11 $ (0.20) Diluted - as reported $ 0.49 $ 0.25 $ (0.06) Diluted - pro forma $ 0.45 $ 0.11 $ (0.20) 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 ratably over the vesting period of the options which is typically four 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 372,000, 520,000 and 1,381,000, respectively, have been omitted from the calculation of dilutive EPS for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. A reconciliation between numerators and denominators of the basic and diluted earnings per share is as follows: YEAR ENDED JUNE 30, 2005 YEAR ENDED JUNE 30, 2004 YEAR ENDED JUNE 30, 2003 ------------------------ ------------------------ ------------------------ INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- -------------------- ----------- -------------------- ----------- ------------------- Basic EPS $4,268,000 8,402,000 $ 0.51 $2,176,000 8,132,000 $ 0.27 $(501,000) 8,074,000 $(0.06) Effect of Dilutive Securities: Stock Options -- 328,000 (0.02) -- 444,000 (0.02) -- -- -- Stock Awards -- 8,000 -- -- 7,000 -- -- -- -- ------------- ------------ --------- -------------- ------------ --------- -------------- ----------- --------- Diluted EPS $4,268,000 8,738,000 $ 0.49 $2,176,000 8,583,000 $ 0.25 $(501,000) 8,074,000 $(0.06) ============= ============ ========= ============== ============ ========= ============== =========== ========= F-9 IMPACT OF NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123 (R)"). This Statement is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 (R) supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and its related implementation guidance. SFAS No. 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments, or that may be settled by the issuance of those equity instruments. The provisions of SFAS No. 123 (R) shall be effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company will adopt SFAS No. 123 (R) effective July 1, 2005. The adoption of this standard will increase compensation expense to the extent the requisite service has not yet been rendered for options granted prior to July 1, 2003 that are accounted for under the intrinsic value method. Management has not yet determined the effect SFAS No. 123 (R) will have on the Company's consolidated results of operations or financial position. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS No. 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 151 effective July 1, 2005. The adoption of this standard is not expected to have a material impact on the Company's consolidated results of operations or financial position. On December 31, 2004, the FASB issued Staff Position No. FAS 109-2, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP No. 109-1"), and Staff Position No. 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP No. 109-2"). These staff positions provide accounting guidance on how companies should account for the effects for the American Jobs Creation Act of 2004 ("AJCA") that was signed into law on October 22, 2004. FSP No. 109-1 states that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a "special deduction" instead of a tax rate reduction. FSP No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company is currently assessing the repatriation provision to determine whether it might repatriate extraordinary dividends, as defined in the AJCA. The Company expects to complete this evaluation within a reasonable amount of time after additional guidance from the United States Treasury is published. 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 consolidated 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. F-10 SUPPLEMENTAL CASH FLOW INFORMATION During fiscal year 2005, significant non-cash activities included (i) a tax benefit of $215,000 resulting from stock options exercised, (ii) compensation expense of $120,000 in connection with awards of an aggregate of 15,000 shares of common stock, and (iii) compensation expense of $44,000 recognized in connection with 38,000 stock options which will also result in compensation expense of $122,000 to be recognized ratably over the next three years. During fiscal year 2004, significant non-cash activities included (i) a tax benefit of $55,000 resulting from stock options exercised, (ii) compensation expense of $190,000 in connection with awards of an aggregate of 28,350 shares of common stock, and (iii) 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) compensation expense of $17,000 in connection with awards of an aggregate of 7,000 shares of common stock, (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. NOTE 2. INVESTMENTS Investments consist of the following: Gross Unrealized Gross Unrealized June 30, 2005 Cost Gains Losses Fair Value ------------- ----------------- ------------------- --------------------- --------------------- U.S. Government obligations $ 1,024,000 $ --- $ 1,000 $ 1,023,000 N.J. Municipal bonds 1,000,000 --- --- 1,000,000 ----------------- ------------------- --------------------- --------------------- $ 2,024,000 $ --- $ 1,000 $ 2,023,000 ================= =================== ===================== ===================== 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 ================= =================== ===================== ===================== All of the Company's investments at June 30, 2005 contractually mature within one year. NOTE 3. INVENTORIES Inventories consist of the following: June 30, 2005 June 30, 2004 ------------- ------------- Raw materials $ 14,122,000 $ 11,772,000 Work in process 7,382,000 6,722,000 Finished goods 6,036,000 3,774,000 ------------------ ------------------ $ 27,540,000 $ 22,268,000 ================== ================== F-11 NOTE 4. LONG-TERM DEBT Long-term debt consists of the following: June 30, 2005 June 30, 2004 ------------- ------------- Notes payable to banks $ 3,483,000 $ --- Obligations under capital leases 2,896,000 3,290,000 ------------------ ------------------ 6,379,000 3,290,000 Less: Current portion 1,103,000 394,000 ------------------ ------------------ Long-term debt $ 5,276,000 $ 2,896,000 ================== ================== 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. In May 2005, the credit facility was increased to $6,000,000. Borrowings under the line bear interest, at the Company's option, at either a fixed rate of 3.47% above the five year Treasury Bond yield at the time of election 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 10, 2006. GECC has the option to securitize these loans with a third party. Loans securitized with a third party increase the available line of credit to the Company. As of June 30, 2005, the Company had $3,483,000 of borrowings outstanding under this facility at fixed interest rates ranging from 7.15% and 7.31%. At June 30, 2005, the Company has $5,000,000 available to borrow under this credit facility. In December 2004, the Company entered into a credit facility with Commerce Bank, N.A. Under the terms of this facility, the Company may request advances from time to time up to an aggregate of $5,000,000. Any advance made bears interest at the Prime Rate as reported in the Wall Street Journal. Borrowings under the facility are secured by a lien on the Company's accounts receivable and inventory. Borrowings under the line expire on November 30, 2005. The facility is subject to certain financial covenants, including minimum tangible net worth and liability percentage ratios. As of June 30, 2005, the Company had no outstanding borrowings under this credit facility. The following table sets forth the contractual maturity of notes payable to banks as of June 30, 2005: 2006 $ 666,000 2007 716,000 2008 769,000 2009 826,000 2010 506,000 ----------------- Total minimum debt payments 3,483,000 Less: Current portion 666,000 ----------------- $ 2,817,000 ================= F-12 In September 2005, the Company's wholly-owned subsidiary in Sweden obtained a series of five term loans aggregating 12,000,000 Swedish Krona ("SEK") (approximately $1,700,000) from Svenska Handelsbanken, AB ("Handelsbanken"). The loans are unsecured and bear interest at fixed rates ranging from 3.56% to 4.59%. The five loans are each for a principal amount of 2,400,000 SEK and are fully amortizing. The loans mature in one to five years with the first maturing on September 30, 2006 and one other maturing on each succeeding September 30th through 2010. In connection with, and as an inducement to Handelsbanken to make the loans, the Company entered into a Guaranty and Agreement with Handelsbanken whereby the Company has agreed to guarantee the payment of all its Swedish subsidiary's obligations under the loans. 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, 2005, the Jacksonville Facility has an aggregate cost of $5,104,000 and a net book value of $1,959,000. 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 $756,000 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 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 contingent rental adjustments) under this capital lease by fiscal year and the present value of the minimum lease payments as of June 30, 2005: 2006 $ 719,000 2007 719,000 2008 719,000 2009 719,000 2010 719,000 2011 and thereafter 180,000 -------------------- Total minimum lease payments 3,775,000 Less: Amount representing interest 879,000 -------------------- Present value at June 30, 2005 2,896,000 Less: Current portion 437,000 -------------------- $ 2,459,000 ==================== Contingent rentals of $32,000, $11,000 and nil were expensed during fiscal years 2005, 2004 and 2003, respectively. NOTE 5. INCOME TAXES The components of income/(loss) before income taxes are as follows: Fiscal Years Ended June 30, -------------------------------------------------------- 2005 2004 2003 --------------- --------------- ---------------- Domestic $ 5,577,000 $ 1,940,000 $ (931,000) Foreign 464,000 289,000 (74,000) --------------- --------------- ---------------- $ 6,041,000 $ 2,229,000 $ (1,005,000) =============== =============== ================ F-13 The provision for income taxes consists of the following: Years Ended June 30, ------------------------------------------------------ 2005 2004 2003 --------------- --------------- --------------- CURRENT: Federal $ 1,737,000 $ 951,000 $ (464,000) State 13,000 (110,000) 5,000 Foreign 122,000 (218,000) --- --------------- --------------- --------------- Total current 1,872,000 623,000 (459,000) --------------- --------------- --------------- DEFERRED: Federal (95,000) (561,000) (5,000) State (38,000) --- (40,000) Foreign 34,000 (9,000) --- --------------- --------------- --------------- Total deferred (99,000) (570,000) (45,000) --------------- --------------- --------------- $ 1,773,000 $ 53,000 $ (504,000) =============== =============== =============== The following table reconciles the Federal statutory rate to the Company's effective tax rate: Years Ended June 30, --------------------------------------------------- 2005 2004 2003 -------------- ------------- ------------- Tax provision computed at statutory rate 34.0% 34.0% 34.0% State tax and State tax credit, net of Federal tax effect 0.9 1.1 2.3 FSC/EIE benefit (4.0) (7.5) 12.4 Foreign tax (0.7) (4.9) --- Changes in tax contingency estimates and audit settlements (1) (0.5) (19.9) --- Deferred tax benefit from State tax law change (1.9) --- --- Tax credits and other, net 1.5 (0.4) 1.4 -------------- ------------- ------------- 29.3% 2.4% 50.1% ============== ============= ============= (1) The Company has undergone tax audits in various jurisdictions which are substantially complete. In fiscal years 2005 and 2004, the Company recognized benefits as a result of audit settlements and the reevaluation of certain tax contingency estimates relating to these jurisdictions. F-14 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 2005 and 2004, are presented below. June 30, -------------------------------------- 2005 2004 ----------------- ---------------- Deferred tax assets: Allowance for doubtful accounts receivable and sales returns $ 106,000 $ 169,000 Inventories 1,715,000 1,755,000 Accrued expenses 737,000 606,000 Unrealized loss on investments available for sale --- 3,000 Net operating loss and tax credit carry forwards 1,457,000 1,553,000 Other --- 6,000 ------------------ ----------------- Total deferred tax assets 4,015,000 4,092,000 ------------------ ----------------- Valuation allowance (1,347,000) (1,309,000) ------------------ ----------------- Net deferred tax assets 2,668,000 2,783,000 ------------------ ----------------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capital leases (3,308,000) (3,521,000) ------------------ ----------------- Total deferred tax liabilities (3,308,000) (3,521,000) ------------------ ----------------- Net deferred tax liability $ (640,000) $ (738,000) ================== ================= 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 2025. However, due to the uncertainties of realizing certain tax loss carryforwards, a valuation allowance of $1,347,000 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. Fiscal year 2004 earnings at this subsidiary have entirely utilized the net operating losses. As such, the valuation allowance as it relates to the net operating losses, have been reversed in fiscal year 2004. The Company had $780,000 of undistributed earnings of foreign subsidiaries as of June 30, 2005. No accrual of U.S. income taxes on the earnings of these subsidiaries has been recorded because at June 30, 2005, management's intention is to reinvest such earnings in the operations of such subsidiaries. Management is currently evaluating the potential benefits of repatriating foreign earnings under the repatriations provisions of the American Jobs Creation Act of 2004. 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. F-15 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 did not recognize 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 recognized $44,000 and $10,000 in compensation expense for the fiscal years ended June 30, 2005 and 2004, respectively, for options granted after June 30, 2003. On January 16, 2002, the Company filed a Schedule TO with the Securities and Exchange Commission and commenced an offer to exchange outstanding options under the Plans having an exercise price per share of $19.50 or more for new options. The offer expired on February 13, 2002. The Company accepted for exchange options to purchase an aggregate of 432,000 shares of common stock. On August 15, 2002, the Company issued 407,000 new options in exchange for the options tendered and accepted for exchange. The new options were issued at the closing price of the Company's common stock on August 15, 2002, which was $2.35 per share. No compensation expense was recognized as a result of these exchanges. F-16 Stock option activity for fiscal years 2005, 2004 and 2003 is as follows: 2005 2004 2003 ------------------------------------------------------------ ------------------------------- Weighted Weighted Weighted Shares Average Shares Average Average Subject to Exercise Subject to Exercise Shares Subject Exercise Options Price Options Price to Options Price -------------- ----------------------------- --------------- ------------------------------- Outstanding, beginning of year 1,257,400 $ 6.97 1,380,200 $ 6.63 918,800 $ 8.98 Granted 50,000 9.45 13,000 5.85 504,000 2.50 Canceled (32,250) 8.08 (6,250) 9.11 (19,850) 8.34 Expired (32,800) 9.95 (9,600) 7.35 (12,250) 12.35 Exercised (251,405) 3.20 (119,950) 2.84 (10,500) 2.60 -------------- --------------- ---------------- Outstanding, end of year 990,945 $ 7.91 1,257,400 $ 6.97 1,380,200 $ 6.63 ============== =============== ================ The following table summarizes significant ranges of outstanding and exercisable options at June 30, 2005: Options Outstanding Options Exercisable --------------------------------------------------------------- ------------------------------------- Actual Range of Weighted-Average Exercise Prices 150% Number Remaining Weighted-Average Number Weighted-Average Increment Outstanding Contractual Life Exercise Price Exercisable Exercise Price ----------------------- --------------- ---------------------- ----------------- ------------------ ---------------- $ 2.35 - 2.35 176,950 5.0 $ 2.35 167,950 $ 2.35 4.00 - 5.85 284,245 3.7 $ 4.42 255,745 $ 4.30 6.44 - 9.09 182,750 6.5 $ 8.56 125,000 $ 8.41 10.10 - 11.40 269,000 5.8 $ 11.28 243,250 $ 11.40 15.75 - 19.50 70,000 5.1 $ 17.36 70,000 $ 17.36 44.00 - 44.00 8,000 4.9 $ 44.00 8,000 $ 44.00 ----------------------- --------------- ---------------------- ----------------- ------------------ ---------------- $ 2.35 - 44.00 990,945 5.1 $ 7.91 869,945 $ 7.92 =============== ================== At June 30, 2005, an aggregate of 226,550 shares were available for option grants or awards under the Plans. OTHER STOCK-BASED COMPENSATION In fiscal years 2005, 2004 and 2003, the Company awarded an aggregate of 15,000, 28,350 and 7,000 shares of common stock, respectively, to officers and certain other employees. These awards resulted in compensation expense of $197,000, $317,000 and $38,000, respectively (including $77,000, $127,000 and $21,000 of payments made to offset tax liabilities associated with these awards), measured by the market value of the shares on their respective grant dates. Treasury shares with an aggregate cost basis of $7,000 were issued in connection with the awards granted in fiscal year 2003. Accordingly, treasury stock was reduced for the cost of the shares on a specific identification, first-in first-out, basis. F-17 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 Consumer Price Index. The lease expires in September 2007, subject to two five-year renewal options. Rent expense under this related party operating lease was approximately $424,000, $413,000 and $429,000 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. Rent expense to unrelated parties, primarily for office space, was approximately $180,000, $157,000 and $181,000 for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. Minimum rent payments under existing lease commitments with unrelated parties extending through the year ending June 30, 2006 are approximately $5,000 per month. 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 $390,000 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 conditional 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 September 2004, the officer was terminated and, as per the terms of the agreement, is receiving severance payments. F-18 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 officer 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. In June 2005, the Company entered into an employment arrangement with an executive officer. The arrangement provides for annual base compensation of $175,000 plus additional compensation based upon specific performance measures. NOTE 8. OTHER DATA ACCRUED EXPENSES Accrued expenses consist of the following: June 30, 2005 June 30, 2004 ------------- ------------- Accrued commissions $ 784,000 $ 851,000 Accrued salaries 392,000 659,000 Accrued bonus 928,000 550,000 Accrued vacation 977,000 914,000 Accrued medical expenses 1,219,000 883,000 Other 1,289,000 1,250,000 ----------------- ------------------ $ 5,589,000 $ 5,107,000 ================= ================== F-19 VALUATION AND QUALIFYING ACCOUNTS Valuation and qualifying accounts included in the accompanying consolidated financial statements consist of the following: Balance - Additions Deductions / Balance - Beginning Charged to Other End of Classification of Period Expense Additions Period ---------------------------------------------------------------- ------------- -------------- -------------- ------------ For the year ended June 30, 2005: $ 470,000 968,000 1,138,000 $ 300,000 Allowance for doubtful accounts receivable and sales returns For the year ended June 30, 2004: Allowance for doubtful accounts receivable and sales returns $ 438,000 1,192,000 1,160,000 $ 470,000 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 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, 2005, 2004 and 2003, the Company provided a matching contribution of $602,000, $575,000 and $542,000, 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. As of June 30, 2005 and 2004, $610,000 and $224,000, respectively, was accrued pursuant to this plan. No compensation expense was recognized in respect of this plan for fiscal year 2003. 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 2005, 2004 and 2003, the Company recognized compensation expense of $152,000, $56,000 and $12,000, 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 2005, 2004 and 2003, the Company recognized compensation expense of $381,000, $294,000 and $67,000, respectively, in respect of this plan. F-20 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 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 2005, 2004 and 2003. Net sales information is based upon country of origin. 2005 2004 2003 ------------------ ------------------ ------------------ Net sales United States $ 60,739,000 $ 51,831,000 $ 42,204,000 Sweden 12,226,000 9,352,000 6,844,000 ------------------ ------------------ ------------------ Total $ 72,965,000 $ 61,183,000 $ 49,048,000 ================== ================== ================== Long-lived assets United States $ 29,593,000 $ 26,209,000 $ 27,127,000 Sweden 70,000 90,000 67,000 China 36,000 39,000 17,000 ------------------ ------------------ ------------------ Total $ 29,699,000 $ 26,338,000 $ 27,211,000 ================== ================== ================== U.S. sales include $21,920,000, $19,597,000 and $13,507,000 for export in fiscal years 2005, 2004 and 2003, 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, 2005, the fair value of (i) the Company's debt obligation at June 30, 2005 was $3,576,000, and (ii) the Company's capital lease obligation with respect to its Jacksonville, Florida facility was $3,395,000 based on the present value of future cash flows and the Company's estimated incremental borrowing rate of 6.25%. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. F-21