<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- --- EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File No. 000-13059
CERADYNE, INC.
--------------
(Exact name of Registrant as specified in its charter)
Delaware 33-0055414
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3169 Redhill Avenue, Costa Mesa, CA 92626
- -------------------------------------------------------------------------------
(Address of principal executive) (Zip Code)
Registrant's telephone number, including area code (714) 549-0421
---------------------------
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1998
- ---------------------------------- -------------------------------------
Common Stock, $.01 par value 8,038,138 Shares
Page 1 of 15 Pages
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CERADYNE, INC.
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information.........................3
Consolidated Balance Sheets - September 30, 1998................4-5
and December 31, 1997
Consolidated Statements of Income -...............................6
Three and nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flow -............................7
Nine months ended September 30, 1998 and 1997
Condensed Notes to Consolidated Financial......................8-10
Statements
Item 2. Management's Discussion and Analysis of.......................10-13
Financial Condition & Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................13-14
Items 2, 3, N/A..............................................................14
4 and 5
Item 6. Exhibits and Reports on Form 8-K.................................14
SIGNATURE.....................................................................14
Exhibit Index.................................................................15
2
<PAGE>
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED September 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
The Financial Statements included herein have been prepared by Ceradyne, Inc.
(the "Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information normally included in the
Financial Statements prepared in accordance with generally accepted accounting
principles has been omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that the Financial Statements be read
in conjunction with the Financial Statements and notes thereto included in the
Company's Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997,
as filed with the Securities and Exchange Commission on March 31, 1998.
3
<PAGE>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9-30-1998 12-31-1997
(Unaudited) (Audited)
=========================================================================================
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $ 3,756 $ 3,569
- -----------------------------------------------------------------------------------------
Accounts receivable, net of allowances of $ 4,416 $ 4,685
approximately $65 & $179 for doubtful accts
at 9-30-1998 & 12-31-1997, respectively
Other Receivables $ 208 $ 96
- -----------------------------------------------------------------------------------------
Inventories $ 7,897 $ 7,366
- -----------------------------------------------------------------------------------------
Production Tooling $ 1,008 $ 882
- -----------------------------------------------------------------------------------------
Prepaid expenses and other $ 997 $ 716
-------- --------
- -----------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS $ 18,282 $ 17,314
-------- --------
- -----------------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT, at cost:
- -----------------------------------------------------------------------------------------
Land $ 422 $ 422
- -----------------------------------------------------------------------------------------
Buildings & improvements $ 1,825 $ 1,825
- -----------------------------------------------------------------------------------------
Lease rights $ --- $ 2,659
- -----------------------------------------------------------------------------------------
Machinery & equipment $ 19,605 $ 18,456
- -----------------------------------------------------------------------------------------
Leasehold improvements $ 1,716 $ 1,629
- -----------------------------------------------------------------------------------------
Office equipment $ 2,147 $ 2,001
- -----------------------------------------------------------------------------------------
Construction in progress $ 317 $ 401
-------- --------
- -----------------------------------------------------------------------------------------
$ 26,032 $ 27,393
- -----------------------------------------------------------------------------------------
Less accumulated depreciation & amortization $(17,723) $(19,427)
-------- --------
- -----------------------------------------------------------------------------------------
$ 8,309 $ 7,966
- -----------------------------------------------------------------------------------------
COSTS IN EXCESS OF NET ASSETS ACQUIRED, $ 1,807 $ 1,923
net of accumulated amortization of $1,867 &
$1,751 at 9-30-1998 & 12-31-1997, respectively
- -----------------------------------------------------------------------------------------
OTHER ASSETS, net of accumulated amortization $ 1,795 $ 1,814
of $611 and $592 at 9-30-1998 & 12-31-1997, -------- --------
respectively
- -----------------------------------------------------------------------------------------
TOTAL ASSETS $ 30,193 $ 29,017
======== ========
=========================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
4
<PAGE>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
9-30-1998 12-31-1997
(Unaudited) (Audited)
==============================================================================
<S> <C> <C>
CURRENT LIABILITIES:
- ------------------------------------------------------------------------------
Current portion of long-term debt $ --- $ ---
- ------------------------------------------------------------------------------
Accounts payable $ 1,302 $ 1,197
- ------------------------------------------------------------------------------
Accrued expenses:
- ------------------------------------------------------------------------------
Payroll and payroll related $ 529 $ 622
- ------------------------------------------------------------------------------
Other $ 128 $ 168
------- --------
- ------------------------------------------------------------------------------
Total current liabilities $ 1,959 $ 1,987
------- --------
- ------------------------------------------------------------------------------
LONG-TERM DEBT $ --- $ ---
------- --------
- ------------------------------------------------------------------------------
DEFERRED REVENUE $ 345 $ 270
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
- ------------------------------------------------------------------------------
Common stock, $.01 par value:
Authorized - 12,000,000 shares;
Outstanding - 8,038,138 shares &
7,963,459 shares at 9-30-1998 &
12-31-1997, respectively $37,684 $ 37,408
- ------------------------------------------------------------------------------
Accumulated deficit $(9,795) $(10,648)
------- --------
- ------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $27,889 $ 26,760
------- --------
- ------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $30,193 $ 29,017
======= ========
==============================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED 9-30-1998 & 1997
AND NINE MONTHS ENDED 9-30-98 AND 1997
(Amounts in thousands, except per share data)
=============================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------
1998 1997 1998 1997
=============================================================================
Unaudited Unaudited
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $6,290 $7,100 $19,975 $21,001
- -----------------------------------------------------------------------------
COST OF PRODUCT SALES $5,129 $5,271 $15,888 $15,747
- -----------------------------------------------------------------------------
Gross Profit $1,161 $1,829 $ 4,087 $ 5,254
- -----------------------------------------------------------------------------
OPERATING EXPENSES:
- -----------------------------------------------------------------------------
R&D $ 87 $ --- $ 243 $ ---
- -----------------------------------------------------------------------------
Selling $ 350 $ 395 $ 1,128 $ 1,215
- -----------------------------------------------------------------------------
General/ Admin./Other $ 776 $1,032 $ 2,141 $ 2,668
- -----------------------------------------------------------------------------
$1,213 $1,427 $ 3,512 $ 3,883
- -----------------------------------------------------------------------------
Income from operations $ (52) $ 402 $ 575 $ 1,371
- -----------------------------------------------------------------------------
OTHER (INCOME) EXPENSE:
- -----------------------------------------------------------------------------
Other (income) $ (96) $ (82) $ (286) $ (290)
- -----------------------------------------------------------------------------
Interest expense $ --- $ 36 $ --- $ 109
- -----------------------------------------------------------------------------
$ (96) $ (46) $ (286) $ (181)
- -----------------------------------------------------------------------------
Income before provision $ 44 $ 448 $ 861 $ 1,552
for income taxes
- -----------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $ --- $ (60) $ 10 $ ---
- -----------------------------------------------------------------------------
NET INCOME $ 44 $ 508 $ 851 $ 1,552
- -----------------------------------------------------------------------------
BASIC & DILUTED INCOME $ .01 $ .06 $ .11 $ .19
PER SHARE ==== ==== ==== ====
=============================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
===============================================================================
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED 9-30 1998 & 1997 NINE MONTHS ENDED
(Amounts in thousands) SEPTEMBER 30
- -------------------------------------------------------------------------------
1998 1997
Unaudited Unaudited
===============================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------
Net Income $851 $ 1,552
- -------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------
Depreciation and amortization $ 1,093 $ 1,199
- -------------------------------------------------------------------------------
(Increase) decrease in accounts receivable, net $ 286 $ (15)
- -------------------------------------------------------------------------------
(Increase) decrease in other receivables $ (129) $ 1,383
- -------------------------------------------------------------------------------
Increase in inventories $ (533) $(1,401)
- -------------------------------------------------------------------------------
Increase in production tooling $ (128) $ (216)
- -------------------------------------------------------------------------------
Increase in prepaid expenses & other assets $ (279) $ (358)
- -------------------------------------------------------------------------------
Increase in accounts payable $ 110 $ 64
- -------------------------------------------------------------------------------
Decrease in accrued expenses $ (135) $ (258)
- -------------------------------------------------------------------------------
Increase (decrease) in deferred revenue $ 75 $ (194)
------- -------
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,211 $ 1,756
------- -------
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------------------------------------------------
Purchases of property, plant & equipment $(1,300) $(2,089)
------- -------
- -------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $(1,300) $(2,089)
------- -------
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------------------------------------------------
Issuance of common stock, net $ 276 $ 248
- -------------------------------------------------------------------------------
Net payments on long-term debt $ --- $ ---
------- -------
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 276 $ 248
------- -------
- -------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 187 $ (85)
- -------------------------------------------------------------------------------
Cash & cash equivalents, beginning of period $ 3,569 $ 4,643
- -------------------------------------------------------------------------------
Cash & cash equivalents, end of period $ 3,756 $ 4,558
======= =======
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -------------------------------------------------------------------------------
Interest paid $ --- $ 109
- -------------------------------------------------------------------------------
Income taxes paid $ --- $ 72
===============================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
7
<PAGE>
CERADYNE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated financial statements include the financial statements of
Ceradyne, Inc. (the Company) and its divisions. All material intercompany
accounts and transactions have been eliminated.
2. Inventories
-----------
Inventories are valued at the lower of cost (first in, first out) or
market. Inventory costs include the cost of material, labor and
manufacturing overhead. The following is a summary of the inventory
components as of September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
===============================================================================
SEPTEMBER 30, 1998 DECEMBER 31, 1997
===============================================================================
<S> <C> <C>
Raw Materials $4,329,000 $3,338,000
- -------------------------------------------------------------------------------
Finished Goods $ 420,000 $ 411,000
- -------------------------------------------------------------------------------
Work-in-Process $3,148,000 $3,617,000
- -------------------------------------------------------------------------------
Total Inventories $7,897,000 $7,366,000
========== ==========
===============================================================================
</TABLE>
3. Net Income Per Share
--------------------
The Company accounts for net income per share in accordance with the
Financial Accounting Standards Board (FASB) Statement of Accounting
Standards (SFAS) No. 128 "Earnings Per Share". Basic net income per share
is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding. Diluted net income
per share is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding plus the effect
of any dilutive stock options and common stock warrants using the treasury
stock method. The following is a summary of the number of shares entering
into the computation of net income per common and common equivalent share:
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
===============================================================================
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding 8,029,215 7,944,488 7,991,016 7,921,285
Common stock equivalents 47,974 116,618 76,773 110,655
--------- --------- --------- ---------
Number of shares 8,077,189 8,061,106 8,067,789 8,031,940
========= ========= ========= =========
===============================================================================
</TABLE>
4. Debt and Bank Borrowing Arrangements
------------------------------------
In November, 1997 the Company terminated its revolving credit agreement with an
asset based lender, and entered into a revolving credit agreement with Comerica
Bank. The new credit facility amount remains at $4,000,000 and no collateral is
required of the Company. During the transition of changing financial
institutions, the Company paid off its short-term minimum borrowing requirement
debt of $1,000,000. As of September 30, 1998 there had been no borrowing under
the new credit facility.
5. Income Tax
----------
The Company, in conformance with its adopted Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes", has reversed a portion
of the valuation allowance previously established applicable to the net deferred
tax asset. The income tax benefit resulting from the reversal results from the
Company's recent history of profitable operations. The Company has available
net operating loss carryforwards of approximately $10.6 million as of September
30, 1998 for federal income tax purposes.
6. Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established standards for the reporting and display
of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in stockholder's equity
except those resulting from investments by and distributions to owners.
Currently, no difference exists between the Company's net income and its
comprehensive net income.
7. Disclosure About Segments of Enterprise and Related Information
---------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. The Company will adopt SFAS No. 131 in fiscal 1998, as required.
This statement will affect disclosure and presentation in the financial
statements, but will not have a material impact on the Company's consolidated
financial position, liquidity cash flows or results of operations.
9
<PAGE>
8. Reclass
-------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Preliminary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which may constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.
Forward-looking statements regarding future events and the future performance of
the Company involve risks and uncertainties that could cause actual results to
differ materially. These risks and uncertainties are described in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as filed
with the Securities and Exchange Commission, under "Item 1-Business," including
the section therein entitled "Certain Factors That May Affect the Company's
Business and Future Results," and "Item 7-Management's Discussion and Analysis
of Financial Condition and Result of Operations."
Results of Operations for Quarter and Nine Months Ended SEPTEMBER 30, 1998.
- --------------------------------------------------------------------------
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, for an analysis and detailed discussion of the
Company's financial condition and results of operations for the period covered
by that report.
Net Sales. Net sales for the quarter ended September 30, 1998 were $6.3
- ---------
million, which represents an 11.4% or $810,000 decrease over the corresponding
quarter of the prior year. For the nine months ended September 30, 1998, net
sales were $20.0 million, and this represents a decrease of 4.9% or $1,026,000
from the prior year's nine months.
The comments reflected below are for both the three and nine months ended
September 30, 1998 compared to the corresponding periods of 1997. Sales have
declined in the major product lines except for the Company's Thermo Materials
division. Thermo Materials had increased sales despite the temporary work
interruption caused by defective raw material which reduced its shipments in the
second quarter of 1998. The turnaround for Thermo Materials is due to missile
radome shipments that are a result of the prior year pilot production, and an
increase in fused silica ceramic components due to an aggressive sales effort.
The decrease in sales of the Company was in the following product lines.
Lightweight armor sales decreased due to delays in new Government procurement
activity. Wear resistant component sales decreased because of the downturn in
capital equipment shipments, and due to the low price of crude oil for
exploration components. Orthodontic bracket sales decreased because the
Company's customer was increasing its inventory levels in the prior year periods
due to the introduction of a new orthodontic bracket, and are reducing that
level of inventory this year because of "just in time" inventory practices.
Dispenser cathodes and samarium cobalt permanent magnets also posted a sales
decrease due to reduced demands for the nine month comparable periods; however,
for
10
<PAGE>
the three month comparable periods, net sales increased slightly in the current
quarter.
International sales represented 18.2% and 19.1% for the three and nine months
ending September 30, 1998, respectively. This compares to 18.0% and 19.0% in
the prior year three and nine months periods, respectively.
Gross Profit. The Company's gross profit was $1.2 million or 18.5% of net sales
- ------------
for the third quarter ended September 30, 1998, compared to $1.8 million or
25.8% of the prior year's third quarter. For the nine months ended September
30, 1998, gross profit was $4.1 million or 20.5%, compared to $5.3 million or
25.0% one year ago.
The comments reflected below are for both the three and nine months ended
September 30, 1998 compared to last year. Gross profit has decreased in each of
the product lines, except for Thermo Materials Division. The turnaround at
Thermo Materials from the prior year periods was due to increased volume and
production yields and greater capacity utilization, and this contributed to
increases of $143,000 and $591,000 over the comparable prior year's three and
nine month periods, respectively. All other major product lines have decreases
in gross profit as compared to prior year periods due to lower volume and lower
capacity utilization resulting in unfavorable overhead absorption, and this
contributed to decreases of $905,000 and $1,852,000 over the comparable prior
year's three and nine month periods, respectively. Other key elements that
contributed to changes in the comparable three and nine month periods were an
incurred charge in September 1998 of $118,000 for start-up costs associated with
the semiconductor product line. The other element was a business interruption
insurance settlement in September 1998 that netted the Company approximately
$212,000. These insurance issues involved the contaminated material that
occurred at the Thermo Materials division in the second quarter of 1998, and a
pressure disturbance to one of the sintering furnaces that occurred in the third
quarter of 1998 at the Company's California facility.
Research and Development Expenses. Research and development expenses were
- ---------------------------------
$87,000 and $243,000 for the third quarter and nine months ended September 30,
1998, respectively. This is a new department established this year to focus on
new materials technology. The expenses were salaries, travel, outside services,
material and small tools related.
In addition, the Company historically has and continues to engage in application
engineering and internally-funded research to improve and reduce the cost of
production and to develop new products. The costs associated with application
engineering and internally-funded research are generally expensed as incurred
and are included in cost of product sales.
Selling Expenses. Selling expenses were $350,000 for the quarter, and
- ----------------
$1,128,000 for the nine months ended September 30, 1998. The above compares to
prior year amounts of $395,000 for the quarter, and $1,215,000 for the nine
months ended September 30, 1997. Increases in direct salaries and travel
expenses for the quarter and nine months ended September 30, 1998 were offset by
a reduction in commission expense.
11
<PAGE>
General, Administrative and Other. General, administrative and other was
- ---------------------------------
$776,000 for the quarter and $2,141,000 for the nine months ended September 30,
1998. The above compares to the prior year's quarter total of $1,032,000 and
$2,668,000 for the nine months ended September 30, 1997. A key element for the
decrease between the comparable quarters was a non-recurring charge in the prior
year's quarter for $220,000 related to legal fees associated with a legal
settlement. The key elements for the decrease between the comparable nine month
periods was the above comment and the second quarter of 1998 settlement with a
customer which netted the Company $354,000.
Other Income. Other income was $96,000 for the quarter, and $286,000 for the
- ------------
nine months ended September 30, 1998. This compares to last year's total of
$82,000 for the quarter and $290,000 for the nine months ended September 30,
1997. There were no significant differences for the quarter and nine months
ended September 30, 1998. Other income consists of two main elements which are
interest income, and royalty income.
Interest Expense. The Company has no interest expense for the quarter and nine
- ----------------
months ended September 30, 1998. The prior quarter and nine months were $36,000
and $109,000, respectively. The reason for the decrease is the reduction of
debt.
Income Taxes. No provision was necessary for the quarter ended September 30,
- ------------
1998. For the nine months' period, the Company has recorded a $10,000
provision. The Company has reversed a portion of the previously established
valuation allowance, primarily related to net operating losses from prior years
to offset tax provisions at statutory rates. The Company has approximately
$10.6 million remaining in net operating loss carryforwards.
Net Income. Reflecting all of the matters discussed above, net income was
- ----------
$44,000 (or $.01 per share basic and diluted) for the quarter, and $851,000 (or
$.11 per share basic and diluted) for the nine months ended September 30, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company meets its operating and capital requirements for cash flow from
operating activities and borrowings under its credit facilities.
In November 1997, the Company terminated its revolving credit agreement with an
asset based lender, and entered into a revolving credit agreement with Comerica
Bank. The new credit facility amount remains at $4,000,000 and no collateral is
required of the Company. During the transition of changing financial
institutions, the Company paid off its short term minimum borrowing requirement
debt of $1,000,000. As of September 30, 1998, there had been no borrowing under
the new credit facility.
Management believes that its current cash and cash equivalents on hand, as well
as cash generated from operations and the ability to borrow under the existing
credit facility, will be sufficient to finance anticipated capital and operating
requirements for at least the next 12 months.
12
<PAGE>
New Accounting Pronouncements
- -----------------------------
Statement of Position (SOP 98-5) "Reporting on the Cost of Start-up Activities"
was issued in April 1998, and is effective for fiscal years beginning after
December 15, 1998. The Company will adopt SOP 98-5 for the period beginning
January 1, 1999 and anticipates that such adoption will not materially impact
the Company's financial statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is, from time to time, involved in various legal and other
proceedings that relate to the ordinary course of operating its business,
including, but not limited to, employment-related actions and workers'
compensation claims.
In October 1995 the Company was served with a complaint that was filed by four
persons and the spouses of those persons, who are/were employed by one of the
Company's customers. The complaint, filed in the United States District Court,
Eastern District of Tennessee, alleges that the employees contracted chronic
beryllium disease as a result of their exposure, during the course of their
employment with the Company's customer, to beryllium-containing products sold by
Ceradyne. The complaint seeks compensatory damages in the amount of $3.0 million
for each of the four plaintiffs who were employed by the Company's customer,
compensatory damages of $1.0 million each for the two spouses, and punitive
damages in the amount of $5.0 million. Based upon information currently
available, the Company believes that the plaintiffs' claims are without merit
and that the resolution of this matter will not have a material adverse effect
on the financial condition or operations of the Company. Defense of this case
has been tendered to the Company's insurance carriers, some of which are
providing a defense subject to a reservation of rights. There can be no
assurance, however, that this claim or any of the claims related to exposure to
beryllium oxide will be covered by insurance, or that, if covered, the amount of
insurance will be sufficient to cover any potential judgment.
In February 1997 the Company was served with a complaint that was filed by a
former employee of one of the Company's customers and his wife. The complaint,
filed in the United States District Court, Eastern District of Tennessee,
alleges that the husband contracted chronic beryllium disease as a result of his
exposure to beryllium-containing products sold by Ceradyne. The complaint seeks
compensatory damages in the amount of $5.0 million for the husband, $1.0 million
for the wife, and punitive damages in the amount of $10.0 million. The Company
believes that the plaintiffs' claims are without merit and that the resolution
of this matter will not have a material adverse effect on the financial
condition or operations of the Company. Defense of this case has been tendered
to the Company's insurance carriers, some of which are providing a defense
subject to a reservation of rights. There can be no assurances, however, that
this claim will be covered by insurance, or that, if covered, the amount of
insurance will be sufficient to cover any potential judgment.
In August 1997 the Company was served with a complaint filed by a former
employee of one of the Company's customers and his wife. The complaint, filed
in the United States District Court, Eastern District of Tennessee, alleges that
the husband contracted chronic
13
<PAGE>
beryllium disease as a result of his exposure to beryllium-containing products
sold by Ceradyne. The complaint seeks compensatory damages in the amount of $5.0
million for the husband, $1.0 million for the wife, and punitive damages in the
amount of $10.0 million. The Company believes that the plaintiffs' claims are
without merit and that the resolution of this matter will not have a material
adverse effect on the financial condition or operations of the Company. Defense
of this case has been tendered to the Company's insurance carriers, some of
which are providing defense and indemnification subject to a reservation of
rights. There can be no assurances, however, that this claim will be covered by
insurance, or that, if covered, the amount of insurance will be sufficient to
cover any potential judgment.
Items 2, 3, 4 and 5. N/A
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CERADYNE, INC.
By: /s/ HOWARD F. GEORGE
Howard F. George
Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 13, 1998
14
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit # Description
- --------- -----------
27 Financial Data Schedule
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 10-Q - QUARTER ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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