<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 March 31, 1999
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 March 31, 1999
- ------------------------------------ --------------------------------
Common Stock, $.01 par value 8,054,838 Shares
Page 1 of 15 Pages
<PAGE>
CERADYNE, INC.
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information................... 3
Consolidated Balance Sheets - March 31, 1999................4-5
and December 31, 1998
Consolidated Statements of Income -......................... 6
Three months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flow -...................... 7
Three months ended March 31, 1999 and 1998
Condensed Notes to Consolidated Financial................ 8-11
Statements
Item 2. Management's Discussion and Analysis of.................. 11-14
Financial Condition & Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 14-15
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURE.................................................................. 15
</TABLE>
2
<PAGE>
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
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, 1998, as filed with the Securities and Exchange Commission on March
31, 1999.
3
<PAGE>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
3-31-1999 12-31-1998
(Unaudited) (Audited)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
- -----------------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents $ 2,258 $ 2,870
- -----------------------------------------------------------------------------------------------------------------------------
Accounts receivable, net of allowances for 4,553 4,381
doubtful accounts of approximately $66 and $92
at 3-31-1999 and 12-31-1998
- -----------------------------------------------------------------------------------------------------------------------------
Other Receivables 76 167
- -----------------------------------------------------------------------------------------------------------------------------
Inventories 7,766 7,520
- -----------------------------------------------------------------------------------------------------------------------------
Production Tooling 1,075 1,104
- -----------------------------------------------------------------------------------------------------------------------------
Prepaid expenses and other 1,041 880
---------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 16,769 16,922
---------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT, at cost:
- -----------------------------------------------------------------------------------------------------------------------------
Land 422 422
- -----------------------------------------------------------------------------------------------------------------------------
Buildings & improvements 1,825 1,825
- -----------------------------------------------------------------------------------------------------------------------------
Machinery & equipment 21,224 20,664
- -----------------------------------------------------------------------------------------------------------------------------
Leasehold improvements 1,750 1,723
- -----------------------------------------------------------------------------------------------------------------------------
Office equipment 2,278 2,210
- -----------------------------------------------------------------------------------------------------------------------------
Construction in progress 329 103
---------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
27,828 26,947
- -----------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation & amortization (18,459) (18,090)
---------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
9,369 8,857
---------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
COSTS IN EXCESS OF NET ASSETS ACQUIRED, 1,967 2,009
net of accumulated amortization of $1,950 & $1,908 at
3-31-1999 & 12-31-1998
- -----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS, net of accumulated amortization 1,781 1,705
of $625 and $618 at 3-31-1999 & 12-31-1998 ---------- -----------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 29,886 $ 29,493
========== ===========
=============================================================================================================================
</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>
- ----------------------------------------------------------------------------------------------------------------------------
3-31-1999 12-31-1998
(Unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
- ----------------------------------------------------------------------------------------------------------------------------
Accounts payable $ 1,382 $ 1,084
- ----------------------------------------------------------------------------------------------------------------------------
Accrued expenses:
- ----------------------------------------------------------------------------------------------------------------------------
Payroll and payroll related 679 553
- ----------------------------------------------------------------------------------------------------------------------------
Other 223 234
---------- -----------
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,284 1,871
---------- -----------
- ----------------------------------------------------------------------------------------------------------------------------
DEFERRED REVENUE 202 270
---------- -----------
- ----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, $.01 par value:
Authorized - 12,000,000 shares;
Outstanding - 8,054,838 shares
at 3-31-1999 & 12-31-1998. 37,718 37,718
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated deficit (10,318) (10,366)
---------- -----------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 27,400 27,352
---------- -----------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 29,886 $ 29,493
========== ===========
============================================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
5
<PAGE>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED 3-31-1999 & 1998
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
==============================================================================================
THREE MONTHS
ENDED MARCH 31
- ----------------------------------------------------------------------------------------------
1999 1998
----------------------------------
Unaudited
==============================================================================================
<S> <C> <C>
NET SALES $6,305 $7,341
- ----------------------------------------------------------------------------------------------
COST OF PRODUCT SALES 5,126 5,580
------ ------
- ----------------------------------------------------------------------------------------------
Gross Profit 1,179 1,761
------ ------
- ----------------------------------------------------------------------------------------------
OPERATING EXPENSES:
- ----------------------------------------------------------------------------------------------
Selling 346 358
- ----------------------------------------------------------------------------------------------
General & Administration 823 934
- ----------------------------------------------------------------------------------------------
Research & Development 135 67
------ ------
- ----------------------------------------------------------------------------------------------
1,304 1,359
------ ------
- ----------------------------------------------------------------------------------------------
Income (loss) from operations (125) 402
------ ------
- ----------------------------------------------------------------------------------------------
OTHER INCOME 90 91
------ ------
- ----------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) (35) 493
for income taxes
- ----------------------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR INCOME TAXES ( 83) 10
------ ------
- ----------------------------------------------------------------------------------------------
NET INCOME $ 48 $ 483
------ ------
- ----------------------------------------------------------------------------------------------
BASIC & DILUTED INCOME PER SHARE $.01 $.06
====== ======
==============================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================================
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED
FOR THE THREE MONTHS ENDED 3-31-1999 & 1998 MARCH 31
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998
Unaudited Unaudited
===============================================================================================================================
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $ 48 $ 483
- -------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED FROM (USED IN)
OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 418 371
- -------------------------------------------------------------------------------------------------------------------------------
Increase in accounts receivable, net ( 172) ( 710)
- -------------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in other receivables 91 ( 7)
- -------------------------------------------------------------------------------------------------------------------------------
Increase in inventories ( 246) ( 127)
- -------------------------------------------------------------------------------------------------------------------------------
Decrease in production tooling 29 47
- -------------------------------------------------------------------------------------------------------------------------------
Increase in prepaid expenses & other assets ( 244) ( 63)
- -------------------------------------------------------------------------------------------------------------------------------
Increase in accounts payable 298 312
- -------------------------------------------------------------------------------------------------------------------------------
Increase in accrued expenses 115 28
- -------------------------------------------------------------------------------------------------------------------------------
Decrease in deferred revenue ( 68) ( 69)
------ ------
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 269 265
------ ------
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------------------------
Purchases of property, plant & equipment ( 881) ( 441)
------ ------
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ( 881) ( 441)
------ ------
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net --- 6
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities --- 6
------ ------
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents ( 612) ( 170)
- -------------------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents, beginning of period 2,870 3,569
- -------------------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents, end of period $2,258 $3,399
====== ======
- -------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -------------------------------------------------------------------------------------------------------------------------------
Income taxes paid $ --- $ 2
------ ======
===============================================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
7
<PAGE>
CERADYNE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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 March 31, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
========================================================================
MARCH 31, 1999 DECEMBER 31, 1998
========================================================================
<S> <C> <C>
Raw Materials $4,190 $4,098
Work-in-Process 2,609 2,413
Finished Goods 967 1,009
Total Inventories $7,766 $7,520
====== ======
========================================================================
</TABLE>
3. Net Income Per Share
--------------------
The Company accounts for net income per share in accordance with 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:
<TABLE>
<CAPTION>
========================================================================================
THREE MONTHS ENDED
MARCH 31
- ----------------------------------------------------------------------------------------
1999 1998
========================================================================================
<S> <C> <C>
Weighted average number of shares outstanding 8,054,838 7,963,847
- ----------------------------------------------------------------------------------------
Dilutive stock options and common stock warrants 55,207 92,324
--------- ---------
- ----------------------------------------------------------------------------------------
Number of shares used in diluted computations 8,110,045 8,056,171
========= =========
========================================================================================
</TABLE>
8
<PAGE>
4. Disclosure About Segments of Enterprise and Related Information
---------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial 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 has adopted No. 131 in
fiscal 1998, as required.
The Company serves its markets and manages its business through three
divisions, each of which has its own manufacturing facilities and
administrative and selling functions. The Company's Advanced Ceramic
Operations, located in Costa Mesa, California, primarily produces armor and
orthodontic products, components for semiconductor equipment, and houses the
Company's SRBSN research and development activities. The Company's cathode
development and production are handled through its Semicon Associates
division located in Lexington, Kentucky. Fused silica products, including
missile radomes, are produced at the Company's Thermo Materials division
located in Scottdale, Georgia. Ceradyne's manufacturing structure is
summarized in the following table:
<TABLE>
<CAPTION>
======================================================================================================================
FACILITY LOCATION PRODUCTS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Advanced Ceramic Operations . Semiconductor Equipment Components
Costa Mesa, California . Lightweight ceramic armor
Approximately 74,000 square feet . Orthodontic ceramic brackets
. Ceralloy(R) 147 SRBSN wear parts
. Precision ceramics
. Ceralloy(R) 147 SRBSN diesel/automotive engine parts (R&D)
- ----------------------------------------------------------------------------------------------------------------------
Semicon Associates . Microwave ceramic-impregnated dispenser cathodes
Lexington, Kentucky . Ion laser ceramic-impregnated dispenser cathodes
Approximately 35,000 square feet . Samarium cobalt magnets
- ----------------------------------------------------------------------------------------------------------------------
Thermo Materials . Glass tempering rolls (fused silica ceramics)
Scottdale, Georgia . Metallurgical tooling (fused silica ceramics)
Approximately 85,000 square feet . Missile radomes (fused silica ceramics)
. Castable and other fused silica product
======================================================================================================================
</TABLE>
9
<PAGE>
Ceradyne, Inc.
Segment Statement of Operations for the Three Months Ended
March 31, 1999 and 1998
(amounts in thousands)
Three Months Ended March 31,
<TABLE>
<CAPTION>
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- ------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from $ 3,246 $ 4,075 $1,562 $1,525 $1,497 $ 1,741 $ 6,305 $ 7,341
External ------- ------- ------ ------ ------ ------------ ------- -------
Customers
Depreciation $ 277 $ 241 $ 81 74 $ 60 56 $ 418 $ 371
and ------- ------- ------ ------ ------ ------------ ------- -------
Amortization
Segment Income $ (250) $ 257 $ 81 $ 50 $ 134 $ 186 $ (35) $ 493
(loss) before ------- ------- ------ ------ ------ ------------ ------- -------
provision
(benefit) for
income taxes
Segment Assets $19,774 $19,380 $6,627 $6,558 $3,485 $ 3,837 $29,886 $29,775
------- ------- ------ ------ ------ ------------ ------- -------
Expenditures $ 656 $ 398 $ 108 $ 94 $ 117 $(51)/(1)/ $ 881 $ 441
for PP&E ------- ------- ------ ------ ------ ------------ ------- -------
---------------------------------------------------------------------------------------------
</TABLE>
/(1)/Reclassification
10
<PAGE>
Segment Statement for Net Sales by Area
for the Three Months Ended
March 31, 1999 and 1998
Three Months Ended March 31,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Advanced Semicon Thermo
Ceramic Ops Associates Materials TOTAL
- -------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Net Sales 47% 42% 21% 15% 19% 20% 87% 77%
Western Europe 4% 2% 2% 3% 2% 2% 8% 7%
Net Sales
Asia Net Sales --- 11% 1% 2% 2% --- 3% 13%
Israel Net --- 1% --- --- --- 1% --- 2%
Sales
Canada Net --- --- --- 1% 1% --- 1% 1%
Sales
Other --- --- --- --- 1% --- 1% ---
---- ---- ---- ---- ---- ---- ---- ----
Total Net Sales 51% 56% 24% 21% 25% 23% 100% 100%
==== ==== ==== ==== ==== ==== ==== ====
---------------------------------------------------------------
</TABLE>
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, 1998, as
filled 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 Ended March 31, 1999
- ------------------------------------------------------
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, for an analysis and detailed discussion of the
Company's financial condition and results of operations for the period covered
by that report.
11
<PAGE>
Net Sales. Net sales for the quarter ended March 31, 1999 were $6.3 million,
- ---------
which represents a 14.1% or a $1,036,000 decrease in net sales in comparison to
the corresponding period of the prior year. The decrease in sales related to
the Advanced Ceramic Operations in Costa Mesa, California was $829,000. Wear
resistant component sales decreased because of the downturn in capital equipment
procurement and the reduced demand for oil exploration ceramic components.
Structural ceramic sales for semiconductor equipment decreased because of the
worldwide downturn in the semiconductor industry. Also, in the first quarter of
1998, the company shipped a large order to an international customer of ceramic
components for the microwave tube business. This was a one-time shipment and the
Company is no longer making these components.
The Company's Thermo Materials Division in Scottdale, Georgia posted a decrease
in sales of $244,000. This decrease was due to a major customer's timing of
placing orders for the glass making industry.
The Company's Semicon Associates Division in Lexington, Kentucky posted a modest
increase in net sales of $37,000.
International sales have and are expected to continue to be an important part of
the Company's business, representing 13.0% of the Company's net sales for the
quarter ending March 31, 1999, down from 22.7% for the comparable period of the
prior year. The change was mainly attributable to the one-time shipment of
ceramic components for the microwave tube business in last year's first quarter.
Gross Profit. The Company's gross profit was $1.2 million or 18.7% of net sales
- ------------
for the first quarter ended March 31, 1999, compared to $1.8 million or 24.0% of
the prior year first quarter. All of the major product lines at the Company's
Advanced Ceramics Operations in Costa Mesa, California, except one, had a
decrease in gross profit as compared to the prior year period due to lower
volume and lower capacity utilization resulting in unfavorable overhead
absorption. This resulted in a gross profit decrease of $885,000 as compared to
the prior year period. The semiconductor product line had an increased gross
profit of $327,000 over the prior year period due to a favorable product mix.
Gross profit for Thermo Materials in Scottdale, Georgia decreased by $68,000
from the comparable prior year period due to lower volume and lower capacity
utilization resulting in unfavorable overhead absorption.
Gross profit for Semicon Associates in Lexington, Kentucky had an increase of
$44,000 from the comparable prior year period due to slightly higher volume and
to a modest price increase of products.
Research and Development Expenses. Ceradyne's engineering and research efforts
- ----------------------------------
consist primarily of application engineering in response to customer
requirements and to a new Research and Development Department to focus on new
materials technology. These efforts are directed to the creation of new
products, the modification of existing products to fit specific customer needs,
or the development of enhanced ceramic process technology. The Company is also
engaged in internally-funded research to improve and reduce the cost of
production and to develop new products. Costs associated with application
engineering and internally-funded research are generally expensed as incurred.
Costs associated with Company-funded research were approximately $244,000 for
the first quarter ended March 31, 1999 compared to $161,000 of the prior year
first quarter. The increase was related to increases in salaries, travel,
outside services, materials and small
12
<PAGE>
tools. Costs for the first quarters ended March 31, 1999 and 1998 for the
Research and Development Department were $135,000 and $67,000, respectively, and
for the Application Engineering Department were $109,000 and $94,000,
respectively.
Selling Expenses. Selling expenses were $346,000 for the quarter ended March
- ----------------
31, 1999 compared to $358,000 for the same period one year ago.
General and Administrative Expenses. General and administrative expenses were
- -----------------------------------
$823,000 for the quarter ended March 31, 1999, compared to $934,000 for the
corresponding quarter of last year. The decrease was primarily due to a
reduction in legal and temporary personnel expenses.
Other Income. Other income was $90,000 for the quarter ended March 31, 1999
- ------------
compared to $91,000 for the quarter ended in the prior year.
Income Taxes. The Company recorded an $83,000 benefit for income taxes for the
- ------------
quarter ended March 31, 1999. The benefit was due to a refund of Federal and
State taxes. The Company has available net operating loss carryforwards of
approximately $12.4 million as of March 31, 1999 for federal income tax
purposes.
Net Income. Reflecting all of the matters discussed above, net income was
- ----------
$48,000 (or $.01 per share basic and diluted) for the quarter ended March 31,
1999 compared to net income of $483,000 (or $.06 per share basic and diluted)
for the comparable period of the prior year.
Year 2000 Disclosure. Many currently installed computer systems and software
- --------------------
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21/st/ century dates from 20/th/ century dates. This inability to recognize or
properly treat the Year 2000 may cause the company's systems and applications to
process critical financial and operational information incorrectly. The Company
continues to assess the impact of the Year 2000 issue on its reporting systems
and operations.
The Company is currently in the process of investigating and determining whether
its internal accounting systems and other operational systems are Year 2000
compliant. A new software system which is Year 2000 compliant was installed at
the Corporate Headquarters and its Advanced Ceramic Operations located in Costa
Mesa, California in 1996. The Company expects to complete the conversion of
its internal accounting system at its Kentucky and Georgia divisions to such
upgraded software in 1999. The costs associated with these conversions are
approximately $150,000. As of March 31, 1999, the conversion plans were
underway at the Kentucky and Georgia locations. The estimated completion date
is set for September 30, 1999. The Company is taking steps to ensure that all of
its customers, suppliers, associates and affiliates will be in compliance with
the Year 2000 issue. This process includes a questionnaire confirming the
status of compliance with the Year 2000 criteria set forth by the Company. The
criteria that the Company will use to determine compliance with the Year 2000 is
the accurate processing of date/time information from, into, and between the
twentieth and twentieth-first centuries, and the years 1999 and 2000, including
leap year calculations that will affect the processing of information,
scheduling, manufacturing, and the quality of all products. Also, the Company
is in the process of developing a contingency plan to minimize the risks
associated with non Year 2000 readiness. This plan is to be completed by 3/rd/
Quarter 1999.
The Company is exposed to the following worst case Year 2000 scenario: That
several of
13
<PAGE>
the Company's customers and suppliers may experience Year 2000 noncompliance
issues that affect the Company. However, as the Company does have a wide
customer base, and no sole source suppliers, it believes the non-compliance
issue to be minimal. However, there can be no assurance that certain of the
Company's internal computer systems or networks or those of its key vendors and
customers will not be adversely affected by such Year 2000 issues, which could
have a material adverse effect on the Company's business, operating results or
financial condition.
Liquidity and Capital Resources
- -------------------------------
The Company generally meets its operating and capital requirements for cash flow
from operating activities and borrowings under its credit facilities.
In November, 1997 the Company entered into a revolving credit agreement with
Comerica Bank. The new credit facility amount remains at $4,000,000 as of
quarter ended March 31, 1999 and no collateral is required of the company. As
of March 31, 1999 there had been no borrowing under the 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
SEC Regulation S-K, Rule 3-05 requires expanded disclosure related to market
risk. The Company as of quarter ended March 31, 1999 has no debt borrowing and
does not intend to borrow in the next twelve months. However, the Company does
have assets in cash and cash equivalents, and changes in interest rates would
affect earnings on these assets. As of March 31, 1999, the Company had $2.2
million in a money market account based upon U.S. Treasury Bonds. The interest
on this amount has earned 5.40% APR for quarter ended March 31, 1999, and this
interest has been recorded in the Company's financial statements as part of
other income in the amount of $31,000. If the interest rate were to decrease by
10% to 4.86% APR, the effect on other income and cash flow would result in
decreases of approximately $3,000.
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, February 1997, August 1997 and February 1999, the Company was
served with four different complaints that were filed by seven former employees
of one of the Company's customers, and their spouses. The complaints, filed in
the United States District Court, Eastern District of Tennessee, allege that the
husbands contracted chronic beryllium disease as a result of their exposure to
beryllium-containing products sold by Ceradyne. One complaint seeks
compensatory damages in the amount of $3.0 million for the husbands, $1.0
million for the spouses, and punitive damages in the amount of $5.0 million.
The other three complaints each seek compensatory damages in the amount of $5.0
million for the husbands, $1.0 million for the spouses, and punitive damages in
the amount of $10.0 million. The Company believes that the plaintiffs' claims
are without merit
14
<PAGE>
and that the resolution of these matters will not have a material adverse effect
on the financial condition or operations of the Company. Defense of these cases
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 these claims will be covered by insurance, or that, if
covered, the amount of insurance will be sufficient to cover any potential
judgments.
Items 2-5. 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: May 12, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q -
QUARTER ENDED MARCH 31, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,258
<SECURITIES> 0
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0
0
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</TABLE>
