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: JUNE 30, 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 August 11, 2000
was 5,345,261.
<PAGE>
ADVANCED TECHNICAL PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
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......................13
Discontinued Operations......................................................13
Results of Operations........................................................13
Financial Condition and Liquidity............................................14
Year 2000 Issues.............................................................16
Recent Accounting Pronouncements.............................................16
Forward Looking Statements - Cautionary Factors..............................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................18
Item 2. Changes in Securities and Use of Proceeds....................................19
Item 3. Defaults Upon Senior Securities..............................................19
Item 4. Submission of Matters to a Vote of Security Holders..........................19
Item 5. Other Information............................................................19
Item 6. Exhibits and Reports on Form 8-K.............................................19
</TABLE>
<PAGE>
ADVANCED TECHNICAL PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
--------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................................. $ 1,181 $ 547
Accounts receivable (net of allowance for doubtful accounts of $372 and $349 at
June 30, 2000 and December 31, 1999, respectively) ..................................... 20,920 16,248
Inventories and costs relating to long-term contracts and programs in
process, net of progress payments ...................................................... 43,806 41,576
Prepaid income taxes ....................................................................... 1,789 2,054
Other prepaid expenses ..................................................................... 506 378
Deferred income taxes ...................................................................... 3,900 3,900
--------- ------------
Total current assets ................................................... 72,102 64,703
--------- ------------
NONCURRENT ASSETS:
Property, plant and equipment ............................................................... 19,029 18,912
Less-accumulated depreciation ............................................................... (9,583) (8,196)
--------- ------------
Net property, plant and equipment ...................................... 9,446 10,716
--------- ------------
Deferred income taxes ....................................................................... 778 778
Other noncurrent assets ..................................................................... 2,840 2,908
Net assets of discontinued operations ....................................................... 15,604 17,638
--------- ------------
Total assets ........................................................... $ 100,770 $ 96,743
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................................ $ 15,581 $ 13,078
Accrued expenses ............................................................................ 11,366 8,666
Short-term debt ............................................................................. 25,650 25,265
Current portion of capital lease obligations ................................................ 67 67
--------- ------------
Total current liabilities .............................................. 52,664 47,076
LONG-TERM LIABILITIES:
Long-term debt, net of current portion ...................................................... 17,278 19,084
Capital lease obligations, net of current portion ........................................... 33 74
Other liabilities ........................................................................... 1,693 1,693
--------- ------------
Total liabilities ...................................................... 71,668 67,927
Mandatorily redeemable preferred stock, $1.00 par value, 1,000,000 shares
authorized, issued and outstanding; redemption amount of $1.00 per share .................... 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, 5,328,146 and
5,306,438 shares issued and outstanding as of June 30, 2000 and December
31, 1999, respectively ................................................................. 53 53
Additional paid-in capital ................................................................. 16,921 16,816
Retained earnings .......................................................................... 11,275 11,055
Notes receivable from officers ............................................................. (135) (135)
Accumulated other comprehensive income (loss) .............................................. (12) 27
--------- ------------
Total shareholders' equity ............................................. 28,102 27,816
--------- ------------
Total liabilities and shareholders' equity ............................. $ 100,770 $ 96,743
========= ============
</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 AND SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX
QUARTER MONTHS
ENDED ENDED
-------------------- --------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
-------- -------- -------- --------
(As restated (As restated
-note 2) -note 2)
<S> <C> <C> <C> <C>
Revenues ....................................................................... $ 44,709 $ 43,108 $ 86,068 $ 80,008
Cost of revenues ............................................................... 33,894 33,100 66,207 61,999
-------- -------- -------- --------
Gross profit ............................................................ 10,815 10,008 19,861 18,009
General and administrative expenses ............................................ 7,480 6,276 12,966 11,878
-------- -------- -------- --------
Operating income ........................................................ 3,335 3,732 6,895 6,131
Interest expense ............................................................... 791 625 1,552 1,247
-------- -------- -------- --------
Income before income taxes .............................................. 2,544 3,107 5,343 4,884
Income taxes ................................................................... 979 1,196 2,057 1,880
-------- -------- -------- --------
Income from continuing operations ....................................... 1,565 1,911 3,286 3,004
-------- -------- -------- --------
Discontinued operations:
Loss from operations of segment to be disposed of ....................... 708 1,398 2,322 2,305
Provision for future operating losses during the
phase-out period .................................................... 704 -- 704 --
-------- -------- -------- --------
Loss from discontinued operations (net of income tax benefit) ........... 1,412 1,398 3,026 2,305
-------- -------- -------- --------
Net income .............................................................. $ 153 $ 513 $ 260 $ 699
======== ======== ======== ========
Net income (loss) per share:
Basic: Income from continuing operations .............................. $ 0.29 $ 0.36 $ 0.61 $ 0.57
Loss from discontinued operations .............................. (0.27) (0.27) (0.57) (0.44)
-------- -------- -------- --------
Net income ..................................................... $ 0.02 $ 0.09 $ 0.04 $ 0.13
======== ======== ======== ========
Diluted: Income from continuing operations .............................. $ 0.28 $ 0.34 $ 0.59 $ 0.54
Loss from discontinued operations .............................. (0.26) (0.25) (0.55) (0.42)
-------- -------- -------- --------
Net income ..................................................... $ 0.02 $ 0.09 $ 0.04 $ 0.12
======== ======== ======== ========
Weighted average number of common and common equivalent shares outstanding:
Basic ................................................................... 5,326 5,261 5,319 5,255
======== ======== ======== ========
Diluted ................................................................. 5,465 5,510 5,482 5,490
======== ======== ======== ========
</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 SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
(As restated
-note 2)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 260 $ 699
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ...................................... 1,492 1,421
Changes in operating assets and liabilities:
Accounts receivable ............................................ (4,672) 1,943
Inventories .................................................... (2,230) (1,911)
Other assets ................................................... 62 559
Accounts payable ............................................... 2,503 (1,414)
Accrued expenses ............................................... 2,660 (1,225)
Net assets of discontinued operations .......................... 2,556 1,533
-------- --------
Net cash provided by operating activities ......... 2,631 1,605
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (118) (1,488)
Net investing activities of discontinued operations ................ (305) (1,095)
-------- --------
Net cash used in investing activities ............. (423) (2,583)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of borrowings ............................................. 385 244
Repayments of borrowings ........................................... (1,806) --
Proceeds from exercise of stock options and warrants ............... 2 27
Common stock issued under employee stock purchase plan ............. 103 155
Cash dividends paid ................................................ -- (40)
Payments under capital lease obligations ........................... (41) (23)
Net financing activities of discontinued operations ................ (217) (270)
-------- --------
Net cash provided by (used in) financing activities (1,574) 93
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 634 (885)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................... 547 1,047
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................... $ 1,181 $ 162
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................. $ 2,122 $ 2,218
Cash paid for income taxes ......................................... $ -- $ 2,046
</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 and six months ended June
30, 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 restated 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 and six months ended July 2, 1999, are as follows (in
thousands):
QUARTER SIX MONTHS
------- ----------
Reduction in revenues ........................... $ 1,134 $ 1,590
Increase in cost of revenues .................... 1,036 1,855
Increase in general and administrative expenses . 331 609
------- ----------
Reduction in income before income taxes ......... 2,501 4,054
Reduction in income tax expense ................. 1,053 1,684
------- ----------
Reduction in net income ......................... $ 1,448 $ 2,370
======= ==========
Reduction in net income per share:
Basic ...................................... $ 0.28 $ 0.45
======= ==========
Diluted .................................... $ 0.26 $ 0.43
======= ==========
6
<PAGE>
Substantially all of the adjustments relate to operations which have been
subsequently classified as discontinued by the Company and are contained in the
restated results of discontinued operations in the accompanying Condensed
Consolidated Financial Statements (see Note 3).
3. DISCONTINUED OPERATIONS
On June 30, 2000, the Company adopted a formal plan to sell its structural
core materials segment, which consists of the operations of the Alcore, Inc. and
Alcore Brigantine S. A. subsidiaries. The Company anticipates disposal of the
segment by December 31, 2000. To date, the Company has not entered into any
agreement or arrangement with any third party to purchase the subsidiaries. The
assets to be sold consist primarily of accounts receivable, inventories,
property, plant and equipment. Operating results of the structural core
materials segment for the quarter and six months ended June 30, 2000 are shown
separately as a discontinued operation in the accompanying Condensed
Consolidated Financial Statements. In addition, operating results for the
quarter and six months ended July 2, 1999 have been restated to show results of
the structural core materials segment separately. Net revenues of the structural
core materials segment were approximately $5.3 million and $4.5 million for the
quarters ending June 30, 2000 and July 2, 1999, respectively, and $11.1 million
and $9.5 million for the six months ending June 30, 2000 and July 2, 1999,
respectively. These amounts are not included in revenues in the accompanying
Condensed Consolidated Statements of Income.
Discontinued operation results, including income tax impact, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX
QUARTER MONTHS
ENDED ENDED
------------------- -------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
-------- -------- -------- --------
(As restated (As restated
-note 2) -note 2)
<S> <C> <C> <C> <C>
LOSS FROM OPERATIONS OF SEGMENT TO BE DISPOSED:
Loss before taxes .................................................. $ 1,150 $ 2,420 $ 3,775 $ 3,948
Income tax benefit ................................................. 442 1,022 1,453 1,643
-------- -------- -------- --------
Net loss after tax ................................................. $ 708 $ 1,398 $ 2,322 $ 2,305
======== ======== ======== ========
PROVISION FOR FUTURE OPERATING LOSS DURING THE PHASE-OUT PERIOD:
Loss before taxes .................................................. $ 1,145 $ -- $ 1,145 $ --
Income tax benefit ................................................. 441 -- 441 --
-------- -------- -------- --------
Net loss after tax ................................................. $ 704 $ -- $ 704 $ --
======== ======== ======== ========
TOTAL LOSS FROM DISCONTINUED OPERATIONS:
Loss before taxes .................................................. $ 2,295 $ 2,420 $ 4,920 $ 3,948
Income tax benefit ................................................. 883 1,022 1,894 1,643
-------- -------- -------- --------
Net loss after tax ................................................. $ 1,412 $ 1,398 $ 3,026 $ 2,305
======== ======== ======== ========
</TABLE>
7
<PAGE>
4. INVENTORIES
Inventories at June 30, 2000 and December 31, 1999 consisted of the
following (in thousands):
June 30, Dec. 31,
2000 1999
-------- --------
Finished goods ............................. $ 1,084 $ 1,433
Work in process ............................ 29,920 28,591
Raw materials .............................. 14,616 16,468
Progress payments .......................... (1,813) (4,916)
-------- --------
Total inventories ................ $ 43,806 $ 41,576
======== ========
5. DEBT
Debt is summarized as follows (in thousands):
June 30, Dec. 31,
2000 1999
-------- --------
Short-term debt:
Revolving loans .............................. $ 22,038 $ 21,653
Current portion of long-term debt ............ 3,612 3,612
-------- --------
$ 25,650 $ 25,265
======== ========
Long-term debt:
Term loans ................................... $ 18,022 $ 19,408
Equipment loans .............................. 2,868 3,288
-------- --------
Total long-term debt .................... 20,890 22,696
Less current portion ......................... 3,612 3,612
-------- --------
Long-term debt, net of current portion .. $ 17,278 $ 19,084
======== ========
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 June 30, 2000, the Company had approximately
$2.5 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.
The Company is subject to several financial and nonfinancial covenants
under the $50.0 million credit facility. At June 30, 2000, the Company was in
violation of certain financial covenants. The violations resulted primarily from
the charges associated with estimated future losses of discontinued operations
recorded in the second quarter of 2000 upon the Company's
8
<PAGE>
adoption of a plan to dispose of the structural core materials segment (see Note
3). The violations were cured as a result of an amendment to the agreement dated
August 14, 2000.
The following debt balances represent obligations relating to operations
of the discontinued structural core materials segment (see Note 3). The balances
are combined along with all of the assets and liabilities of the segment and
reported as net assets of discontinued operations on the accompanying Condensed
Consolidated Balance Sheets.
(in thousands)
June 30, Dec. 31,
2000 1999
-------- --------
Bonds payable .......................................... $ 2,100 $ 2,200
Deferred obligation ............................... -- 334
Other long-term debt ................................... 1,632 1,496
-------- --------
Total long-term debt .............................. 3,732 4,030
Less current portion ................................... 2,512 2,946
-------- --------
Long-term debt, net of current portion ............ $ 1,220 $ 1,084
======== ========
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 letter of credit agreement
was amended for a period extending to May 15, 2001. As a condition of the
amended agreement, ATP delivered 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 June 30, 2000, the Company was in
violation of a financial covenant. The violation was cured as a result of an
amendment to the agreement dated July 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 June 30, 2000 and
December 31, 1999 as summarized above.
9
<PAGE>
6. EARNINGS PER SHARE
Earnings per share ("EPS") are calculated as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(as restated (as restated
-note 2) -note 2)
<S> <C> <C> <C> <C>
Income from continuing operations ..................... $ 1,565 $ 1,911 $ 3,286 $ 3,004
Less: preferred stock dividends accrued .............. (20) (20) (40) (40)
---------- ---------- ---------- ----------
Income from continuing operations available
for common shares (same for both basic
and diluted EPS calculation) .................... $ 1,545 $ 1,891 $ 3,246 $ 2,964
========== ========== ========== ==========
Loss from discontinued operations (same for
both basic and diluted EPS calculation) .......... $ 1,412 $ 1,398 $ 3,026 $ 2,305
========== ========== ========== ==========
Net income ............................................ $ 153 $ 513 $ 260 $ 699
Less: preferred stock dividends accrued .............. (20) (20) (40) (40)
---------- ---------- ---------- ----------
Net income available for common shares
(same for both basic and diluted EPS
calculation) .................................... $ 133 $ 493 $ 220 $ 659
========== ========== ========== ==========
Weighted average number of common shares outstanding:
--Basic .................................. 5,326 5,261 5,319 5,255
Add: assumed stock conversions, net of
assumed treasury stock purchases:
--stock options ..................... 131 212 144 201
--stock warrants .................... 8 37 19 34
---------- ---------- ---------- ----------
--Diluted ................................ 5,465 5,510 5,482 5,490
========== ========== ========== ==========
Basic EPS:
Income from continuing operations ............. $ 0.29 $ 0.36 $ 0.61 $ 0.57
Loss from discontinued operations ........... (0.27) (0.27) (0.57) (0.44)
---------- ---------- ---------- ----------
Net income .................................... $ 0.02 $ 0.09 $ 0.04 $ 0.13
========== ========== ========== ==========
Diluted EPS:
Income from continuing operations ............. $ 0.28 $ 0.34 $ 0.59 $ 0.54
Loss from discontinued operations ............. (0.26) (0.25) (0.55) (0.42)
---------- ---------- ---------- ----------
Net income .................................... $ 0.02 $ 0.09 $ 0.04 $ 0.12
========== ========== ========== ==========
</TABLE>
10
<PAGE>
7. SEGMENT REPORTING
Segment financial information is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX
QUARTER MONTHS
ENDED ENDED
------------------------ ------------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(As restated (As restated
-note 2) -note 2)
<S> <C> <C> <C> <C>
REVENUES (ALL FROM EXTERNAL CUSTOMERS):
Aerospace and Defense ............. $ 36,310 $ 34,958 $ 69,526 $ 64,557
Commercial Composites ............. 6,044 5,591 11,428 10,288
Other operating segments .......... 2,355 2,559 5,114 5,163
---------- ---------- ---------- ----------
Total ................... $ 44,709 $ 43,108 $ 86,068 $ 80,008
========== ========== ========== ==========
OPERATING INCOME (LOSS):
Aerospace and Defense ............. $ 3,090 $ 3,266 $ 5,550 $ 5,221
Commercial Composites ............. 2,263 1,175 3,801 1,908
Other operating segments .......... 69 311 310 675
Corporate ......................... (2,087) (1,020) (2,766) (1,673)
---------- ---------- ---------- ----------
Total ................... $ 3,335 $ 3,732 $ 6,895 $ 6,131
========== ========== ========== ==========
</TABLE>
8. 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 quarter and six months ended June 30, 2000 consisted
of foreign currency translation adjustments totaling $2,000 and $39,000,
respectively. Comprehensive income totaled $151,000 and $221,000 for the quarter
and six months ended June 30, 2000, respectively. There was no other
comprehensive income or loss for the quarter and six months periods ended July
2, 1999.
9. 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 June 30, 2000. See "Legal
Proceedings" (Part II, Item 1 of this report) for additional discussion of this
matter.
11
<PAGE>
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.
On July 6, 2000, a suit was brought in the United States District Court,
District of Connecticut by plaintiffs seeking to recover damages in connection
with the July 8, 1997 crash of a U.S. Army Blackhawk helicopter in Fort Bragg,
North Carolina. The defendants in such suit include the alleged designer,
manufacturer and installer of the external fuel tank system, purportedly
including the Company. Plaintiffs have alleged that the helicopter was equipped
with external 230 gallon fuel tanks that are alleged to have been designed and
built by either the Company's Lincoln Composites division, or one of two other
defendants, or by more than one of the defendants. Plaintiffs seek to recover
from the defendants on various claims alleging total damages aggregating
approximately $40 million. The Company is in the process of reviewing the
allegations made in such suit, and expects to defend itself vigorously. At this
time, it is not anticipated that this matter will have a material adverse effect
upon the cash flows, earnings or competitive position of ATP.
The Company and certain of its Officers and Directors have been named in a
number of lawsuits recently filed in the United States District Court for the
Northern District of Georgia. The lawsuits assert securities fraud claims based
on, among other things, alleged misstatements and omissions concerning the
Company's 1998 and 1999 financial results and condition, including various
violations of generally accepted accounting principles. The lawsuits purport to
be brought on behalf of a class consisting of all persons who purchased the
Company's Common Stock in the period from April, 1998 through April, 2000. The
Company is reviewing the allegations made in these lawsuits, and intends to
defend itself vigorously. It is not possible to predict the impact that these
lawsuits may have on the Company, nor is it possible to predict whether any
other suits or claims may arise out of these matters in the future. However, it
is possible that the present or future lawsuits, and any investigations or
proceedings arising out of the same or related facts, depending on their
outcome, could have a material adverse impact of the Company's financial
condition or results of operations in one or more future periods.
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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 restated 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 9 of the Condensed Consolidated Financial
Statements of the Company.
DISCONTINUED OPERATIONS
On June 30, 2000, the Company adopted a formal plan to sell its structural
core materials segment, which consists of the operations of the Alcore, Inc. and
Alcore Brigantine S. A. subsidiaries. Operating results of the structural core
materials segment are shown separately as a discontinued operation in the
accompanying Condensed Consolidated Financial Statements. See Note 3 of the
Condensed Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE QUARTER AND SIX
MONTHS ENDED JULY 2, 1999
Revenues for the quarter ended June 30, 2000 increased $1.6 million
compared to the quarter ended July 2, 1999, or 3.7%, from $43.1 million in 1999
to $44.7 million in 2000. Revenues for the six months ended June 30, 2000
increased $6.1 million over the six months ended July 2, 1999, or 7.6%, from
$80.0 million in 1999 to $86.1 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
composites products.
Gross profit as a percentage of revenues was 24.2% in the second quarter
of 2000, compared to 23.2% in the second quarter of 1999. The gross profit
percentage for the first six months increased from 22.5% in 1999 to 23.1% in
2000. The increase was primarily attributable to improved profitability of the
commercial composites segment resulting from material cost reductions.
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General and administrative expenses increased $1.2 million, or 19.2%, for
the quarter and $1.1 million, or 9.2%, for the first six months of 2000 compared
to 1999. As a percentage of revenues, general and administrative expenses
increased from 14.6% in 1999 to 16.7% in 2000 for the quarter, and from 14.8% in
1999 to 15.1% in 2000 for the six months. The increase is primarily the result
of non-recurring charges of $1.3 million recorded in the second quarter of 2000,
including costs incurred in connection with the termination of the January 2000
Merger Agreement and severance costs.
Operating income was $3.3 million, or 7.5% of sales, for the second
quarter of 2000, compared to $3.7 million, or 8.7% of sales, for the second
quarter of 1999. Operating income was $6.9 million, or 8.0% of sales, for the
first six months of 2000, compared to $6.1 million, or 7.7% of sales, for the
first six months of 1999. The lower operating income for the second quarter of
2000 compared to 1999 results primarily from the non-recurring general and
administrative costs of $1.3 million discussed in the previous paragraph.
Excluding these non-recurring charges, operating income increased $0.9 million
for the quarter and $2.0 million for the six months of 2000 compared to 1999,
primarily because of the improved operating results of the commercial composites
segment, and increased profits on advanced composite components delivered on the
F-18 E/F program.
Interest expense in 2000 increased $166,000 for the quarter and $305,000
for the six months, primarily the result of higher interest rates in effect
during 2000 compared to the same period of 1999.
Income taxes decreased $217,000 for the quarter and decreased $177,000 for
the six months in 2000, reflecting the relative change in income before taxes.
The effective income tax rate for continuing operations was 38.5% for all
periods reported.
Total loss from discontinued operations was substantially unchanged for
the quarter and increased $0.7 million for the first six months of 2000 compared
to 1999. The second quarter of 2000 includes a provision of $0.7 million for
estimated future operating losses during the phase-out period of the structural
core materials segment. Excluding the provision, the total loss decreased $0.7
million for the quarter, reflecting improvement in the operating results of the
Alcore operation resulting from overhead cost reductions and production process
improvements implemented in the first half of 2000.
FINANCIAL CONDITION AND LIQUIDITY
Cash flow provided by operations was $2.6 million for the first six months
of 2000 compared to $1.6 million for the same period in 1999. Working capital,
excluding short-term debt balances, increased $2.2 million in the first six
months of 2000 to $45.1 million. Significant changes in working capital during
the six months ended June 30, 2000 included: (i) an increase of $4.7 million in
accounts receivable, resulting primarily from an increase in revenues during the
first six months of 2000 compared to the last half of 1999, (ii) an increase of
$5.2 million in accounts payable and accrued expenses, reflecting accrued
expenses incurred during the second quarter of 2000 for non-recurring general
and administrative expenses, increased inventory levels and extended payment
terms negotiated with several major suppliers and (3) an increase of $2.2
million in inventories, reflecting generally higher business activity levels.
Net cash used in investing activities totaled $0.4 million in the first six
months of 2000 and resulted exclusively from capital expenditures.
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The Company's primary loan agreement 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 equipment loans are
payable monthly based on a five-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 June
30, 2000, the Company had approximately $2.5 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
June 30, 2000, the Company was in violation of certain financial covenants. The
violations resulted primarily from the charges associated with estimated future
losses of discontinued operations recorded in the second quarter of 2000 upon
the Company's adoption of a plan to dispose of the structural core materials
segment. The violations were cured as a result of an amendment to the agreement
dated August 14, 2000.
At June 30, 2000, the Company's backlog (continuing operations) of orders
and long-term contracts was approximately $512 million, compared to $549 million
at December 31, 1999. The backlog includes unreleased orders of approximately
$377 million and $403 million at June 30, 2000 and December 31, 1999,
respectively.
As discussed above, the Company has made capital expenditures totaling
$0.4 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 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 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 was terminated by Veritas on May 24, 2000. As a result
of the termination, the Company must reimburse Veritas for its expenses incurred
in connection with the Merger up to a maximum amount of $750,000. The Company
recorded a charge to general and administrative expenses in the amount of
$750,000 in the second quarter of 2000 to reflect this liability.
15
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ATP is actively exploring alternatives for additional financing to meet
the working capital and other resource requirements of its growing operations.
During July of 2000, ATP agreed to preliminary terms and conditions with a
financial institution for a $7.0 million loan in the form of subordinated debt.
The agreement is subject to approval by the lender upon the completion of due
diligence, and approvals by certain existing lenders. The Company anticipates
this additional financing to be in place by the end of the third quarter of
2000. The Company also anticipates its plan to sell its structural core
materials segment will generate additional future cash proceeds. The Company
presently anticipates disposal of the segment by December 31, 2000. To date, the
Company has not entered into any agreement or arrangement with any third party
to purchase the segment.
Management of ATP believes that cash flows from operations, available
borrowings under its current credit facility and the additional subordinated
financing currently being reviewed are adequate to sustain the Company's current
operating level for the next twelve months. 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.
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, liabilities, income and
expenses, and disclosure of contingent assets and contingent liabilities at the
date of the financial statements and during the reporting period. Actual results
could differ materially from those estimates.
The Company believes that inflation has not had a material effect on the
results of its operations in the periods covered by this report.
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,
although there can be no assurance that the Company will not be adversely
affected by Y2K 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 quarters and six months ended June 30, 2000 and July 2, 1999.
16
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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 include, without limitation,
statements about the Company's expectations, beliefs, intentions, or strategies
regarding the future, and are based on current expectations and information
available to the Company. Such forward-looking statements entail various risks
and uncertainties which could cause actual results to differ materially from
those projected in such forward-looking statements. Such risks and
uncertainties, which can cause actual results to differ materially from those
described herein, include the risks and uncertainties associated with the
pending governmental investigations and litigation involving the Company. 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").
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 June 30, 2000, the Company had $42.9
million outstanding under the credit facility at a weighted-average interest
rate of 9.7%.
The Company has not entered into transactions which subject it to material
foreign currency transaction gains and losses.
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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.
On July 6, 2000, a suit was brought in the United States District Court,
District of Connecticut by plaintiffs seeking to recover damages in connection
with the July 8, 1997 crash of a U.S. Army Blackhawk helicopter in Fort Bragg,
North Carolina. The defendants in such suit include the alleged designer,
manufacturer and installer of the external fuel tank system, purportedly
including the Company. Plaintiffs have alleged that the helicopter was equipped
with external 230 gallon fuel tanks that are alleged to have been designed and
built by either the Company's Lincoln Composites division, or one of two other
defendants, or by more than one of the defendants. Plaintiffs seek to recover
from the defendants on various claims alleging total damages aggregating
approximately $40 million. The Company is in the process of reviewing the
allegations made in such suit, and expects to defend itself vigorously. At this
time, it is not anticipated that this matter will have a material adverse effect
upon the cash flows, earnings or competitive position of ATP.
The Company and certain of its Officers and Directors have been named in a
number of lawsuits recently filed in the United States District Court for the
Northern District of Georgia. The lawsuits assert securities fraud claims based
on, among other things, alleged misstatements and omissions concerning the
Company's 1998 and 1999 financial results and condition, including various
violations of generally accepted accounting principles. The lawsuits purport to
be brought on behalf of a class consisting of all persons who purchased the
Company's Common Stock in the period from April, 1998 through April, 2000. The
Company is reviewing the allegations made in these lawsuits, and intends to
defend itself vigorously. It is not possible to predict the impact that these
lawsuits may have on the Company, nor is it possible to predict whether any
other suits or claims may arise out of these matters in the future. However, it
is possible that the present or future lawsuits, and any investigations or
proceedings arising out of the same or related facts, depending on their
outcome, could have a material adverse impact of the Company's financial
condition or results of operations in one or more future periods.
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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 adverse 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.
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 May 24, 2000 reporting under Item 5 -
Other Events was filed announcing (i) the termination by Veritas of the
Merger Agreement dated January 28, 2000 by and among the Company and two
affiliates of Veritas, (ii) the Company's receipt of alternative
transaction proposals from Veritas which the Company's Board of Directors
unanimously determined not to pursue and (iii) the election of James P.
Hobt as Vice President, Chief Financial Officer and Treasurer of the
Company.
A current report on Form 8-K dated June 30, 2000 reporting under Item 5 -
Other Events was filed announcing the Company has a plan to sell its
Alcore and Alcore Brigantine subsidiaries and that for financial reporting
purposes, these business units will be treated as discontinued operations.
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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: August 14, 2000 By: /S/ JAMES P. HOBT
------------------
James P. Hobt, Chief Financial and
Accounting Officer, Treasurer and
Secretary
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EXHIBIT INDEX
27.1 Financial Data Schedule (for SEC use only).
