UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: MARCH 31, 2000
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 0-1298
ADVANCED TECHNICAL PRODUCTS, INC.
------------------------------------------------
(Exact name of Issuer as Specified in Its Charter)
DELAWARE 11-1581582
- - ------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
200 Mansell Ct. East, Suite 505, Roswell, Georgia 30076
(Address of Principal Executive Offices)
(770) 993-0291
--------------
(Issuer's Telephone Number, Including Area Code)
--------------------------------------------
(Former Address, if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES [ ] NO [X]
The aggregate number of shares of Common Stock outstanding as of May 22, 2000
was 5,325,583.
1
<PAGE>
ADVANCED TECHNICAL PRODUCTS, INC.
INDEX
PART I. FINANCIAL INFORMATION0
Item 1. Financial Statements (unaudited)..............................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Restatement of Previously Reported Financial Statements......11
Results of Operations........................................11
Financial Condition and Liquidity............................12
Year 2000 Issues.............................................14
Recent Accounting Pronouncements.............................14
Forward Looking Statements - Cautionary Factors..............14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................16
Item 2. Changes in Securities and Use of Proceeds....................16
Item 3. Defaults Upon Senior Securities..............................16
Item 4. Submission of Matters to a Vote of Security Holders..........16
Item 5. Other Information............................................16
Item 6. Exhibits and Reports on Form 8-K.............................17
<PAGE>
ADVANCED TECHNICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
--------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 807 $ 655
Accounts receivable (net of allowance for doubtful
accounts of $748 and $658 at March 31, 2000 and
December 31, 1999, respectively) ................. 24,938 21,373
Inventories and costs relating to long-term
contracts and programs in process, net of
progress payments ................................ 45,009 44,783
Prepaid income taxes ............................... 1,785 2,054
Other prepaid expenses ............................. 601 468
Deferred income taxes .............................. 3,900 3,900
--------- ------------
Total current assets ................... 77,040 73,233
--------- ------------
NONCURRENT ASSETS:
Property, plant and equipment ....................... 39,705 39,510
Less-accumulated depreciation ....................... (16,530) (15,330)
--------- ------------
Net property, plant and equipment ...... 23,175 24,180
--------- ------------
Deferred income taxes ................................ 778 778
Other noncurrent assets .............................. 8,463 8,361
--------- ------------
Total assets ........................... $ 109,456 $ 106,552
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................... $ 18,739 $ 15,560
Accrued expenses ................................... 10,877 10,224
Short-term debt .................................... 28,346 28,211
Current portion of capital lease obligations ....... 364 364
--------- ------------
Total current liabilities .............. 58,326 54,359
LONG-TERM LIABILITIES:
Long-term debt, net of current portion ............. 19,165 20,168
Capital lease obligations, net of current portion .. 1,355 1,516
Other liabilities .................................. 1,693 1,693
--------- ------------
Total liabilities ...................... 80,539 77,736
Mandatorily redeemable preferred stock, $1.00 par value,
1,000,000 shares authorized, issued and outstanding..... 1,000 1,000
SHAREHOLDERS' EQUITY:
Preferred stock, undesignated, 1,000,000 shares
authorized, no shares issued and outstanding ..... -- --
Common stock, $.01 par value, 30,000,000 shares
authorized, 5,312,423 and 5,306,438 shares issued
and outstanding as of March 31, 2000 and
December 31, 1999, respectively .................. 53 53
Additional paid-in capital ......................... 16,867 16,816
Retained earnings .................................. 11,142 11,055
Notes receivable from officers ..................... (135) (135)
Accumulated other comprehensive income (loss) ...... (10) 27
--------- ------------
Total shareholders' equity ............. 27,917 27,816
--------- ------------
Total liabilities and shareholders'
equity ............................... $ 109,456 $ 106,552
========= ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ADVANCED TECHNICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 2000 AND APRIL 2, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
(As restated
-note 2)
<S> <C> <C>
Revenues ......................................... $ 46,648 $ 41,882
Cost of revenues ................................. 37,807 33,733
------------ ------------
Gross profit ............................. 8,841 8,149
General and administrative expenses .............. 6,993 6,948
------------ ------------
Operating income ......................... 1,848 1,201
Expenses relating to a governmental
investigation (see notes 2 and 8) .............. 628 --
------------ ------------
Income before interest and taxes ......... 1,220 1,201
Interest expense ................................. 1,046 952
------------ ------------
Income before income taxes ............... 174 249
Income taxes ..................................... 67 63
------------ ------------
Net income ............................... $ 107 $ 186
============ ============
Earnings per share:
Basic .................................... $ 0.02 $ 0.03
============ ============
Diluted .................................. $ 0.02 $ 0.03
============ ============
Weighted average number of common and
common equivalent shares outstanding:
Basic .................................... 5,311 5,249
============ ============
Diluted .................................. 5,500 5,467
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ADVANCED TECHNICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2000 AND APRIL 2, 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
------- ------------
(As restated
-note 2)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 107 $ 186
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................... 1,268 1,043
Changes in operating assets and liabilities:
Accounts receivable ........................... (3,565) 3,300
Inventories ................................... (226) (4,365)
Other assets .................................. (71) 34
Accounts payable .............................. 3,179 --
Accrued expenses .............................. 633 (1,142)
------- ------------
Net cash provided by (used in)
operating activities ........................ 1,325 (944)
------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................ (195) (1,081)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of borrowings .......................... 186 928
Repayments of borrowings ........................ (1,054) (98)
Proceeds from exercise of stock
options and warrants .......................... 1 3
Common stock issued under employee
stock purchase plan ........................... 50 38
Cash dividends paid ........................... -- (40)
Payments under capital lease
obligations ................................... (161) (49)
------- ------------
Net cash provided by (used in)
financing activities ........................ (978) 782
------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .... 152 (1,243)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......... 655 2,030
------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................ $ 807 $ 787
======= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .......................... $ 1,078 $ 1,249
Cash paid for income taxes ...................... $ -- $ 1,126
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
ADVANCED TECHNICAL PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of
Advanced Technical Products, Inc. and Subsidiaries (the "Company" or "ATP") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the quarter ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended December 31, 1999.
2. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
During January 2000, the Company learned of possible accounting and
financial reporting irregularities at its subsidiary, Alcore, Inc. ("Alcore"),
when certain financial records were seized in connection with a search warrant
issued by the United States District Court - District of Maryland as part of a
governmental investigation. Additionally, the Company has been notified of an
investigation by the United States Securities and Exchange Commission regarding
these matters.
After becoming aware of the possible irregularities, the Company engaged
special counsel and, through such counsel, such other advisors as deemed
necessary to assist in its investigation of the possible irregularities. As a
result of its investigation, the Company has determined to restate its
consolidated financial statements for each of the first, second, and third
quarters of 1999.
The effects of the adjustments to the consolidated financial statements
for the quarter ended April 2, 1999, are as follows:
1) A reduction of revenues of $456,000,
2) An increase in cost of revenues of $819,000,
3) An increase in general and administrative expenses of $278,000, and
4) A reduction in income tax expense of $631,000 to reflect the effect
of the above adjustments.
The aggregate effect of such adjustments was to reduce income before
income taxes by $1,553,000, net income by $922,000, and basic and diluted
earnings per share by $0.18 and $0.17, respectively.
6
<PAGE>
3. INVENTORIES
Inventories at March 31, 2000 and December 31, 1999 consisted of the
following (in thousands):
March 31, Dec. 31,
2000 1999
--------- ---------
Finished goods ....................... $ 1,364 $ 1,433
Work in process ...................... 31,623 29,555
Raw materials ........................ 16,348 18,711
Progress payments .................... (4,326) (4,916)
--------- ---------
Total inventories .............. $ 45,009 $ 44,783
========= =========
4. DEBT
Debt is summarized as follows (in thousands):
March 31, Dec. 31,
2000 1999
--------- ---------
Short-term debt:
Revolving loans ......................... $21,839 $21,653
Current portion of long-term debt ....... 6,507 6,558
------- -------
$28,346 $28,211
======= =======
Long-term debt:
Term loans .............................. $18,715 $19,408
Equipment loans ......................... 3,078 3,288
Deferred obligation ..................... 334 334
Bond payable ............................ 2,150 2,200
Other long-term debt .................... 1,395 1,496
------- -------
Total long-term debt ................. 25,672 26,726
Less current portion .................... 6,507 6,558
------- -------
Long-term debt, net of current portion $19,165 $20,168
======= =======
At December 31, 1999 the company had a $50.0 million credit facility
consisting of: (1) $27.0 million of revolving credit against eligible receivable
and inventory balances, (2) a $19.4 million term loan and (3) a $3.6 million
capital expenditure facility. As of March 31, 2000, the Company had
approximately $3.2 million of unused borrowing availability on this credit
facility.
The revolving, term and equipment loans are secured by collateral
consisting of substantially all of the Company's assets including inventory,
equipment, receivables, general intangibles, investment property and real
property. The interest rates on the loans are set quarterly based on the
Company's performance against debt-to-earnings ratios specified in the
agreement. Interest rates can range from LIBOR (the London Interbank Offered
Rates) plus 2.75% to LIBOR plus 1.0% on the revolving loan and from LIBOR plus
3.25% to LIBOR plus 1.5% on the term and equipment loans. Alternatively, the
Company may elect interest rates based on the lending institution's prime rate
with the revolving loan ranging from prime plus 0.5% to prime plus 0.25% and the
term and equipment loans ranging from prime plus 0.75% to prime plus 0.50%.
Interest is paid monthly in arrears on all loans. The credit facility, as
amended on May 16, 2000 extends to December 31, 2002.
7
<PAGE>
The Company is subject to several financial and nonfinancial covenants
under the $50.0 million credit facility. At March 31, 2000, the Company was in
violation of certain financial covenants. Such violations were cured as a result
of an amendment to the agreement dated May 16, 2000.
Bonds payable result from a financing agreement with the State of Maryland
dated May 14, 1997 to provide $2.6 million in 15 year tax-exempt industrial
development bonds bearing interest at a variable rate adjusted weekly to finance
the purchase of the Belcamp, Maryland honeycomb manufacturing facility and an
adjacent 3.2 acre parcel of land. The Company has entered into an interest rate
hedge agreement with a financial institution to fix the interest rate on the tax
exempt bonds at 5.07% through the year 2012. The bonds payable require annual
principal payments of $200,000 and are secured by a letter of credit agreement
between the Company and a bank. On May 12, 2000, the agreement was amended for a
period extending to May 15, 2001. Conditions of the amended agreement include a
requirement that the Company deliver collateral to the bank in the form of
qualified investment securities as defined with a value of $100,000 as of the
date of execution of the amendment. Additional collateral in $150,000 increments
is required to be delivered on or before each of July 1, August 1, September 1,
and October 1, 2000. The Company is subject to several financial and
nonfinancial covenants under this financing agreement. At March 31, 2000, the
Company was in violation of certain financial covenants. Such violations were
cured as a result of the amendment to the agreement dated May 12, 2000. It is
anticipated that the lender will waive future violations, which are expected by
the Company during 2000. However, since such future waivers are not assured, the
Company has classified the total amount of the bonds as current at March 31,
2000 and December 31, 1999.
5. EARNINGS PER SHARE
Earnings per share ("EPS") are calculated as follows (in thousands,
except per share amounts):
QUARTER ENDED
------------------------
March 31, April 2,
2000 1999
--------- ------------
(as restated
-note 2)
Net income .......................................... $ 107 $ 186
Less: preferred stock dividends accrued ............ (20) (20)
--------- ------------
Net income available for common shares
(same for both basic and diluted
EPS calculation) ................................. $ 87 $ 166
========= ============
Weighted average number of common shares outstanding:
--Basic .......................................... 5,311 5,249
Add: assumed stock conversions, net of
assumed treasury stock purchases:
--stock options ............................. 158 188
--stock warrants ............................ 31 30
--------- ------------
--Diluted ........................................ 5,500 5,467
========= ============
Basic EPS ........................................... $ 0.02 $ 0.03
========= ============
Diluted EPS ......................................... $ 0.02 $ 0.03
========= ============
8
<PAGE>
6. SEGMENT REPORTING
Segment financial information for the quarterly periods ended March 31, 2000
and April 2, 1999 is as follows (in thousands):
2000 1999
--------- ------------
(As restated
-note 2)
REVENUES
Aerospace and Defense:
-from external customers .................. $ 33,216 $ 29,599
Commercial Composites:
-from external customers .................. 5,384 4,697
Structural Core Materials:
-from external customers .................. 5,289 4,982
-intersegment revenues .................... 181 123
Other operating segments:
-from external customers .................. 2,759 2,604
Elimination of intersegment revenues .......... (181) (123)
--------- ------------
Total ..................................... $ 46,648 $ 41,882
========= ============
OPERATING INCOME (LOSS)
Aerospace and Defense ......................... $ 2,461 $ 1,955
Commercial Composites ......................... 1,538 733
Structural Core Materials ..................... (1,735) (1,208)
Other operating segments ...................... 241 364
Corporate ..................................... (657) (643)
--------- ------------
Total ..................................... $ 1,848 $ 1,201
========= ============
7. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
establishes items that are required to be recognized under accounting standards
as components of comprehensive income. Statement 130 requires, among other
things, that an enterprise report a total for comprehensive income in financial
statements of interim periods issued to shareholders. The Company's other
comprehensive loss for the first quarter of 2000 consisted of foreign currency
translation adjustments totaling $37,000, resulting in comprehensive income of
$70,000. There was no other comprehensiveincome or loss in the first quarter
of 1999.
9
<PAGE>
8. CONTINGENCIES
On October 7, 1999, the New York Office of the Attorney General, on behalf
of the New York State Department of Environmental Conservation ("NYSDEC"), sent
a letter to the Company, claiming that Lunn is a potentially responsible party
("PRP") with respect to contamination at the Babylon Landfill in Babylon, New
York. NYSDEC alleges that Lunn sent waste to the Babylon Landfill and that Lunn
is jointly and severally liable under the Comprehensive Environmental Response,
Compensation and Liability Act for NYSDEC's response costs in addition to
interest, enforcement and future costs. According to NYSDEC, there are currently
15 PRPs identified for the Babylon Landfill. Lunn is seeking access to NYSDEC's
files to determine the extent of its liability, if any. The Company has not
recorded any liability for the contingency as of March 31, 2000. See "Legal
Proceedings" (Part II, Item 1 of this report) for additional discussion of this
matter.
On January 28, 2000, ATP and affiliates of Veritas Capital Fund, L.P.
("Veritas") entered into an Agreement and Plan of Merger pursuant to which
Veritas would acquire 100% of the outstanding stock of the Company (the
"Merger"). The agreement provides that the amount paid for each share of the
Company's stock shall be $12.75 in cash without interest and gives Veritas the
right to terminate the Merger at any time during a ten day period (the "Optional
Termination Period") after delivery of the audited financial statements of ATP
for the year ended December 31, 1999 (the "Audited Financials"). ATP delivered
the Audited Financials together with updated disclosures regarding the Company
and its business to representatives of Veritas on May 18, 2000. If Veritas
terminates the Merger during the Optional Termination Period, the Company must
reimburse Veritas for its expenses incurred in connection with the Merger up to
a maximum amount of $750,000. The Company has not recorded any liability for
this contingency as of March 31, 2000.
The Company has been notified of an investigation by the United States
Securities and Exchange Commission as a result of possible accounting and
financial reporting irregularities at Alcore. The Company and management are
cooperating fully, and because this investigation and the governmental
investigation referred to in note 2 are in the early stages, their outcome is
uncertain at this time.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto included
elsewhere herein.
RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
During January 2000, the Company learned of possible accounting and
financial reporting irregularities at its subsidiary, Alcore, when certain
financial records were seized in connection with a search warrant issued by the
United States District Court - District of Maryland as part of a governmental
investigation.
After becoming aware of the possible irregularities, the Company engaged
special counsel and, through such counsel, such other advisors as deemed
necessary to assist in its investigation of the possible irregularities. As a
result of its investigation, the Company has determined to restate its 1999
consolidated financial statements for each of the first, second, and third
quarters of 1999. The following discussion of 1999 amounts relates to the
Company's results of operations as restated for the adjustments determined
necessary by the Company's investigation. See Notes 2 and 8 to the Condensed
Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED WITH THE QUARTER ENDED APRIL 2, 1999
Revenues for the quarter ended March 31, 2000 increased $4.7 million
compared to the quarter ended April 2, 1999, or 11.4%, from $41.9 million in
1999 to $46.6 million in 2000. The increase in revenues was primarily
attributable to the following factors: (i) increased deliveries of composite
components on several long-term aerospace and defense programs, including the
F-18E/F and C-17 military aircraft and the Airbus A330 and A340 commercial
aircraft, (ii) increased revenues on chemical defense contracts, primarily from
the Joint Services Lightweight Standoff Chemical Agent Detector (JSLSCAD)
program and (iii) increased shipments of the Company's commercial products,
including natural gas vehicle fuel tanks and specialty vehicle electronics.
These increases were partially offset by a decrease in shipments on shelter
contracts and lower sales at Alcore.
Gross profit as a percentage of revenues was 19.0% in the first quarter of
2000, compared to 19.5% in the first quarter of 1999. The decrease was primarily
attributable to increased costs relating to production inefficiencies at Alcore,
including an abnormally high production scrap rate and unabsorbed overhead
resulting from reduced sales volume. Excluding Alcore operations for both 2000
and 1999, the gross profit percentage has increased to 22.0% in 2000 from 21.7%
in 1999 primarily because of cost efficiencies generated by the higher sales
volume.
11
<PAGE>
General and administrative expenses for the quarter ended March 31, 2000
increased $0.1 million compared to the quarter ended April 2, 1999, or 0.6%,
from $6.9 million to $7.0 million. As a percentage of revenues, general and
administrative expenses decreased from 16.6% in 1999 to 15.0% in 2000. The
percentage decrease is primarily the result of the increased sales volume, as
the dollar level of general and administrative expenses has not changed
substantially.
Operating income was $1.8 million, or 4.0% of sales, for the first quarter
of 2000, compared to $1.2 million, or 2.9% of sales, for the first quarter of
1999. Excluding the Alcore operating losses for both 2000 and 1999, operating
income was $3.8 million, or 8.8% of sales, for the first quarter of 2000,
compared to $2.4 million, or 6.4% of sales, for the first quarter of 1999. The
increase relates primarily to the higher sales volume. In an effort to improve
future Alcore operating results, the Company began a review and evaluation of
cost reduction opportunities during the first quarter of 2000. As part of an
ongoing process started in the first quarter, all key phases of the Alcore
manufacturing operation are being reviewed and altered where considered
cost-beneficial in an attempt to improve production yields and efficiency. In
addition, reductions in the work force were implemented late in the first
quarter and early in the second quarter of 2000. Management anticipates that
these actions will result in a decrease in future direct manufacturing and
overhead costs and general and administrative expenses.
Expenses relating to a governmental investigation consist of costs
incurred in connection with the Alcore investigation, including fees for special
counsel and other advisors (See notes 2 and 8 to the Condensed Consolidated
Financial Statements of the Company). The Company was notified of the
investigation on January 7, 2000, and no costs were incurred by the Company
prior to the first quarter of 2000.
Interest expense for the quarter was $1.0 million in 2000 compared to
$952,000 in 1999. The increase principally reflects higher interest rates in
effect during 2000 compared to the same period of 1999.
Income taxes in total were substantially unchanged in the first quarter of
2000 compared to 1999. This is the result of lower pre-tax earnings offset by a
higher effective tax rate in 2000. The effective tax rate was 38.5% for 2000,
compared to 25.4% in 1999. The lower effective rate in 1999 resulted from the
loss before income taxes for 1999 generating an income tax benefit that was
reduced by a valuation allowance for the state income tax effect for all of the
net deferred tax assets generated by the Alcore operating losses in 1999.
FINANCIAL CONDITION AND LIQUIDITY
Cash flow provided by operations was $1.3 million for the first quarter of
2000 compared to $0.9 million used in operations for the same period in 1999.
Working capital, excluding short-term debt balances, was $47.1 million at March
31, 2000, substantially unchanged from the balance at December 31, 1999.
Significant changes in working capital during the first quarter of 2000
included: (i) an increase of $3.6 million in accounts receivable, resulting
primarily from an increase in revenues during the first quarter of 2000 compared
to the fourth quarter of 1999 and (ii) an increase of $3.8 million in accounts
payable and accrued expenses, reflecting accrued costs incurred during the first
quarter of 2000 in connection with the Alcore investigation (See notes 2 and 8
to the Condensed Consolidated Financial Statements of the Company), increased
inventory levels and extended payment terms negotiated with several major
suppliers. Net cash used in investing activities totaled $0.2 million in the
first quarter of 2000 and resulted exclusively from capital expenditures.
12
<PAGE>
The Company's primary loan agreement, as amended on May 16, 2000, includes
a total credit facility of $50.0 million consisting of: (i) $27.0 million of
revolving credit against eligible receivable and inventory balances, (ii) a
$19.4 million term loan and (iii) a $3.6 million capital expenditure facility.
The term loan is payable quarterly based on a seven-year amortization period.
The interest rates on the loans are set quarterly based on the Company's
performance against debt-to-earnings ratios specified in the agreement. Interest
rates can range from LIBOR (the London Interbank Offered Rates) plus 2.75% to
LIBOR plus 1.0% on the revolving loan and from LIBOR plus 3.25% to LIBOR plus
1.5% on the term and equipment loans. Alternatively, the Company may elect
interest rates based on the lending institution's prime rate with the revolving
loan ranging from prime plus 0.5% to prime plus 0.25% and the term and equipment
loans ranging from prime plus 0.75% to prime plus 0.50%. Interest is paid
monthly in arrears on all loans. The credit facility, as amended, matures on
December 31, 2002. As of March 31, 2000, the Company had approximately $3.2
million of unused borrowing availability on this credit facility. The Company is
subject to several financial and nonfinancial covenants under the $50.0 million
credit facility. At March 31, 2000, the Company was in violation of certain
financial covenants. Such violations were cured as a result of an amendment to
the agreement dated May 16, 2000.
At March 31, 2000, the Company's backlog of orders and long-term contracts
was approximately $584 million, compared to $591 million at December 31, 1999.
The backlog includes unreleased orders of approximately $438 million and $433
million at March 31, 2000 and December 31, 1999, respectively.
As discussed above, the Company has made capital expenditures totaling
$0.2 million during the first quarter of 2000, which have been financed by a
combination of cash flows from operations and increased borrowings under the
revolving loan portion of the Company's credit facility. The Company invested
approximately $14.7 million in capital equipment and facility improvements
during the two-year period ending December 31, 1999. These investments were made
primarily in support of several new long-term aerospace and defense contracts
that are now in full production, and facility and equipment upgrades relating to
NGV and Alcore production. As a result, management believes that future
short-term capital spending requirements will be limited to a normal sustaining
maintenance level plus a relatively low amount of expenditures that will be cost
justified by anticipated incremental program revenues. However, the Company will
consider other future capital expenditure investments beyond the maintenance
level when such investments are deemed to be strategic or critical to the
Company's growth.
On January 28, 2000, ATP and affilates of Veritas Capital Fund,
L.P.("Veritas") entered into an agreement and Plan of Merger to which Veritas
would acquire 100% of the outstanding stock of the Company (the "Merger"). The
agreement provides that the amount paid for each share of the Company's stock
shall be $12.75 in cash without interest and gives Veritas the right to
terminate the Merger at any time during a ten day period (the "Optional
Termination Period") after delivery of the audited financial statements of ATP
for the year ended December 31, 1999(the "Audited Financials"). ATP delivered
the Audited Financials together with updated disclosures regarding the Company
and its business to representatives of Veritas on May 18, 2000. If Veritas
terminates the Merger during the Optional Termination Period, the Company must
reimburse Veritas for its expenses incurred in connection with the Merger up to
a maximum amount of $750,000. The Company has not recorded any liability for
this contingency as of March 31, 2000. There can be no assurance that merger
will be completed.
Management of ATP believes that cash flows from operations and available
borrowings under its credit facility are adequate to sustain the Company's
current operating level. The Company is exploring alternatives for additional
financing in order to more fully take advantage of potential future business
growth opportunities that may require significant capital investments. However,
there can be no assurance that ATP can secure such additional financing if and
when it is needed or on terms deemed acceptable to the Company.
13
<PAGE>
YEAR 2000 ISSUES
ATP completed its year 2000 (Y2K) preparation plan which included the
following steps: assessment, modification / implementation and testing. The
Company has not experienced any significant malfunctions or errors in its
internal information technology ("IT") and non-IT systems that are critical to
its operations since January 1, 2000. A few minor application problems were
identified and resolved early in the year 2000. The Company is not aware of any
significant Y2K issues or problems that may have arisen for its significant
customers and suppliers. Based on currently available information, the Company
is not aware of any significant continued exposure to Y2K systems issues.
ATP's Y2K costs have not been budgeted and tracked as independent
projects, but have been incurred in conjunction with normal sustaining
activities. ATP estimates that such costs, including the replacement or
upgrading of outdated, noncompliant hardware and software were less than
$250,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 1999, the Financial Accounting Standards Board issued
Emerging Issues Task Force ("EITF") Issue No. 99-5, ACCOUNTING FOR
PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS. Among other
things, EITF Issue No. 99-5 provides additional guidance on how entities should
account for costs incurred to design and develop molds, dies, and tooling that
will be used to produce products that will be sold under long-term supply
arrangements. The Company adopted the provisions of EITF Issue No. 99-5 on
January 1, 2000. As a result, there was no material impact on the results of
operations for the first quarter of 2000 and 1999.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which
clarifies certain conditions to be met in order to recognize revenue. The
Company does not anticipate any material impact on the results of operations as
a result of this Staff Accounting Bulletin.
FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are those that do
not state historical fact and are inherently subject to risk and uncertainties.
The forward-looking statements contained herein are based on current
expectations and entail various risks and uncertainties which could cause actual
results to differ materially from those projected in such forward-looking
statements. For additional information identifying such risks and uncertainties,
see the Company's 1999 Annual Report on Form 10-K (Item 7, under the heading
"Factors Affecting Future Operating Results").
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily relating to
its $50 million credit facility. However, the carrying value of borrowings under
the credit facility generally approximate fair value due to the variable rate
nature of such borrowings. The interest rates are set quarterly based on the
Company's performance against debt-to-earnings ratios specified in the
agreement. Interest rates can range from LIBOR plus 2.75% to LIBOR plus 1.0% on
the revolving loan and from LIBOR plus 3.25% to LIBOR plus 1.5% on the term and
equipment loans. Alternatively, the Company may elect interest rates based on
the lending institution's prime rate with the revolving loan ranging from prime
plus 0.5% to prime plus 0.25% and the term and equipment loans ranging from
prime plus 0.75% to prime plus 0.50%. At March 31, 2000, the Company had $43.6
million outstanding under the credit facility at a weighted-average interest
rate of 8.62%.
The Company has not entered into transactions which subject it to material
foreign currency transaction gains and losses.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of December 31, 1999, Lunn Industries, Inc., a division of the Company,
in conjunction with numerous other parties, has been identified as a potentially
responsible party (PRP) at an inactive landfill site in Babylon, New York
identified by the New York State Department of Environmental Conservation for
remediation under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA). As a PRP, the Company may be required to pay a
portion of the costs of evaluation and cleanup of this site. Lawsuits and claims
involving additional environmental matters may arise from time to time. The New
York Attorney General's investigation of the inactive CERCLA site in Babylon,
New York is in a very preliminary stage, and as a result, management has based
its assessment of potential liability and remediation costs on currently
available facts, the number of PRPs identified, documentation available,
currently anticipated and reasonably identifiable remediation costs, existing
technology, presently enacted laws and regulations and other factors. While the
Company may have rights of contribution or reimbursement under insurance
policies, such issues are not factors in management's estimation of liability.
Based on the foregoing factors, management believes that it is unlikely that the
identified matter at the inactive Babylon, New York site will have a material
adverse affect on the Company's consolidated financial position, results of
operations or cash flows.
During January 2000, the Company learned of possible accounting and
financial reporting irregularities at its subsidiary, Alcore, when certain
financial records were seized in connection with a search warrant issued by the
United States District Court - District of Maryland as part of a governmental
investigation. Additionally, the Company has been notified of an investigation
by the United States Securities and Exchange Commission regarding these matters.
The Company and management are cooperating fully, and because the investigations
are in the early stages, their outcomes are uncertain at this time.
ATP is not a party to any other legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of its business. ATP does not
believe that such claims and lawsuits, individually or in the aggregate, will
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows. Compliance with federal, state, local and
foreign laws and regulations pertaining to the discharge of materials into the
environment, or otherwise relating to the protection of the environment, has not
had, and is not anticipated to have, a material effect upon the cash flows,
earnings or competitive position of ATP.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
A current report on Form 8-K dated February 16, 2000 reporting under
Item 5 - Other Events was filed announcing (i) the termination of
the Agreement and Plan of Merger, dated September 3, 1999 among the
Company and two affiliates of Veritas Capital Fund, LP: ATP
Acquisition Corp. and ATP Holding Corp., and (ii) the Company's
entering into the January 2000 Agreement and Plan of Merger with two
affiliates of Veritas Capital Fund, LP: ATP Acquisition Corp. and
ATP Holding Corp.
A current report on Form 8-K dated March 9, 2000 reporting under
Item 5 - Other Events was filed announcing the Company's Board of
Directors' adoption of a stockholders' rights plan.
A current report on Form 8-K dated May 18, 2000 reporting under Item
5 - Other Events was filed announcing (i) the Company's adjustments
to its financial statements for 1998 and the first three quarters of
1999 and (ii) the Company's delivering audited financial statements
to Veritas pursuant to the January 2000 Merger Agreement.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED TECHNICAL PRODUCTS, INC.
(Registrant)
Dated: May 22, 2000 By: /S/ GARRETT L. DOMINY
Garrett L. Dominy, Chief Executive
Officer and President, Chief Financial
and Accounting Officer, Treasurer and
Assistant Secretary
18
<PAGE>
EXHIBIT INDEX
27.1 -- Financial Data Schedule (for SEC use only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM CONDENSED CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 807
<SECURITIES> 0
<RECEIVABLES> 25,686
<ALLOWANCES> 748
<INVENTORY> 45,009
<CURRENT-ASSETS> 77,040
<PP&E> 39,705
<DEPRECIATION> 16,530
<TOTAL-ASSETS> 109,456
<CURRENT-LIABILITIES> 58,326
<BONDS> 2,150
1,000
0
<COMMON> 53
<OTHER-SE> 27,864
<TOTAL-LIABILITY-AND-EQUITY> 109,456
<SALES> 46,648
<TOTAL-REVENUES> 46,648
<CGS> 37,807
<TOTAL-COSTS> 45,428
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,046
<INCOME-PRETAX> 174
<INCOME-TAX> 67
<INCOME-CONTINUING> 107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
