<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 June 30, 2000
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 June 30, 2000
----------------------------------- --------------------------------------
Common Stock, $.01 par value 8,238,623 Shares
Page 1 of 18 Pages
<PAGE>
CERADYNE, INC.
<TABLE>
<CAPTION>
INDEX PAGE NO.
----- --------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information.............. 3
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999................................ 4-5
Consolidated Statements of Income -
Three and Six months ended June 30, 2000 and 1999...... 6
Consolidated Statements of Cash Flow -
Six months ended June 30, 2000 and 1999................ 7
Condensed Notes to Consolidated Financial Statements... 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition & Results of Operations...................... 12-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................... 15-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 16
Items 2, N/A.................................................... 17
3 and 5
Item 4. Submission of Matters to Vote of Security Holders...... 17
Item 6. Exhibits and Reports on Form 8-K....................... 17
SIGNATURE.......................................................... 18
</TABLE>
2
<PAGE>
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
June 30, 2000
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 the disclosures are adequate to make the information
presented not misleading. The Financial Statements should 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, 1999, as filed with the Securities and Exchange
Commission on March 30, 2000.
3
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
--------------------------------------------------------------------------------
June 30, 2000 December 31, 1999
(Unaudited)
--------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,344 $ 1,407
Accounts receivable, net of
allowances for doubtful accounts
of approximately $85 and $39
at June 30, 2000 and December 31,
1999, respectively. 8,071 5,837
Other receivables 93 98
Inventories 8,902 8,452
Production tooling 1,541 1,343
Prepaid expenses and other 705 1,147
-------- --------
TOTAL CURRENT ASSETS 21,656 18,284
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 422 422
Buildings and improvements 1,825 1,825
Machinery and equipment 24,244 23,462
Leasehold improvements 2,173 1,870
Office equipment 2,789 2,456
Construction in progress 279 700
-------- --------
31,732 30,735
Less accumulated depreciation and amortization (20,676) (19,733)
-------- --------
11,056 11,002
-------- --------
COSTS IN EXCESS OF NET ASSETS ACQUIRED, 1,762 1,846
net of accumulated amortization of $2,155
and $2,071 at June 30, 2000 and December
31, 1999, respectively.
OTHER ASSETS, net of accumulated amortization 1,748 1,761
of $658 and $645 at June 30, 2000 and -------- --------
December 31, 1999, respectively.
TOTAL ASSETS $ 36,222 $ 32,893
======== ========
</TABLE>
See accompanying condensed notes to
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
--------------------------------------------------------------------------------
June 30, 2000 December 31, 1999
(Unaudited)
--------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 100 $ 100
Accounts payable 2,205 2,214
Accrued expenses:
Payroll and payroll related 921 665
Other 285 149
-------- --------
Total current liabilities 3,511 3,128
-------- --------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 308 358
-------- --------
DEFERRED REVENUE 135 270
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
Authorized - 12,000,000 shares,
Outstanding - 8,238,623 shares
and 8,095,848 shares at June 30, 2000
and December 31, 1999, respectively. 38,537 37,900
Accumulated deficit (6,269) (8,763)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 32,268 29,137
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,222 $ 32,893
======== ========
</TABLE>
See accompanying condensed notes to
consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $11,699 $7,331 $22,847 $13,636
COST OF PRODUCT SALES 8,535 5,643 16,798 10,769
------- ------ ------- -------
Gross profit 3,164 1,688 6,049 2,867
------- ------ ------- -------
OPERATING EXPENSES
General and administrative 1,082 841 2,229 1,665
Selling 397 334 753 680
Research and development 350 181 619 316
------- ------ ------- -------
1,829 1,356 3,601 2,661
------- ------ ------- -------
Income from operations 1,335 332 2,448 206
------- ------ ------- -------
OTHER (INCOME) EXPENSE:
Other (income) (40) (78) (115) (169)
Interest expense 9 --- 18 ---
------- ------
(31) (78) (97) (169)
------- ------
Income before provision
(benefit) for income taxes 1,366 410 2,545 375
PROVISION (BENEFIT) FOR INCOME
TAXES 28 9 51 (74)
------- ------ ------- -------
NET INCOME $ 1,338 $ 401 $ 2,494 $ 449
======= ====== ======= =======
BASIC INCOME PER SHARE $ 0.16 $ 0.05 $ 0.31 $ 0.06
======= ====== ======= =======
DILUTED INCOME PER SHARE $ 0.16 $ 0.05 $ 0.30 $ 0.06
======= ====== ======= =======
</TABLE>
See accompanying condensed notes
consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED
(Amounts in thousands) JUNE 30,
--------------------------------------------------------------------------------
<S> <C> <C>
2000 1999
(Unaudited) (Unaudited)
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,494 $ 449
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED FROM OPERATING
ACTIVITIES:
Depreciation and amortization 1,039 872
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in accounts receivable, net (2,234) (290)
Decrease in other receivables 5 82
Increase in inventories (450) (720)
Increase in production tooling (198) (9)
Decrease (increase) in prepaid expenses
and other assets 442 (289)
(Decrease) increase in accounts payable (9) 997
Increase in accrued expenses 392 126
Decrease in deferred revenue (135) (135)
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,347 1,083
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (997) (1,818)
NET CASH USED IN INVESTING ACTIVITIES (997) (1,818)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 637 14
Payments on long-term debt (50) ---
------- -------
Net cash provided by financing activities 587 14
------- -------
Increase (decrease) in cash and cash equivalents 937 (721)
------- -------
Cash and cash equivalents, beginning of period 1,407 2,870
------- -------
Cash and cash equivalents, end of period $ 2,344 $ 2,149
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 18 $ ---
Income taxes paid $ 16 $ ---
======= =======
</TABLE>
See accompanying condensed notes to
consolidated financial statements.
7
<PAGE>
CERADYNE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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 June 30, 2000 and December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
--------------------- -------------------------- -------------------------
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- -------------------------- -------------------------
<S> <C> <C>
Raw Materials $4,856 $4,454
Work-in-Process 3,150 3,198
Finished Goods 896 800
Total Inventories $8,902 $8,452
====== ======
===================== ========================== ========================
</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 table below reconciles the weighted shares outstanding in the
computation of basic net income per share to diluted net income per share.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------------------------------------------------------------------------------
Weighted average number
of shares outstanding 8,188,023 8,056,149 8,150,832 8,055,494
Dilutive stock options and
common stock warrants 189,023 88,126 174,966 75,740
--------- --------- --------- ---------
Number of shares used in
diluted computations 8,377,046 8,144,275 8,325,798 8,131,234
========= ========= ========= =========
</TABLE>
8
<PAGE>
4. Long-Term Debt
--------------
<TABLE>
<S> <C>
========================================================
Capital equipment loan bearing $ 408,000
interest at 8.18% APR.
Payable in monthly installments
of $8,333, expiring August 2004.
--------------------------------------------------------
Less Current Portion (100,000)
--------------------------------------------------------
Long-Term Debt $ 308,000
========================================================
</TABLE>
5. 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 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> <C>
Advance Ceramic Operations . Semiconductor equipment Components
Costa Mesa, California . Lightweight ceramic armor
Approximately 74,000 . Orthodontic ceramic brackets
square feet . Ceralloy/R/ 147 SRBSN wear parts
. Precission ceramics
. Ceralloy/R/ 147 SRBSN diesel/automotive
engine parts
--------------------------------------------------------------------------------
Semicon Associates . Microwave ceramic-impregnated dispenser
Lexington, Kentucky cathodes
Approximately 35,000 . Ion laser ceramic-impregnated dispenser
square feet cathodes
. Samarium cobalt magnets
--------------------------------------------------------------------------------
Thermo Materials . Glass tempering rolls
Scottdale, Georgia (fused silica ceramics)
Approximately 85,000 . Metallurgical tooling
square feet (fused silica ceramics)
. Missile radomes (fused silica ceramics)
. Castable and other fused silica product
================================================================================
</TABLE>
9
<PAGE>
Ceradyne, Inc.
Segment Disclosures
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
----------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 8,026 $ 4,307 $1,971 $1,643 $1,702 $1,381 $11,699 $ 7,331
from ------- ------- ------ ------ ------ ------ ------- -------
External
Customers
Depreciation $ 399 $ 309 $ 47 $ 83 $ 70 $ 63 $ 516 $ 455
and ------- ------- ------ ------ ------ ------ ------- -------
Amortization
Segment $ 916 $ 247 $ 311 $ 152 $ 139 $ 2 $ 1,366 $ 401
Income ------- ------- ------ ------ ------ ------ ------- -------
before
provision
(benefit)
for income
taxes
Segment $26,205 $20,820 $5,982 $6,457 $4,035 $3,667 $36,222 $30,944
Assets ------- ------- ------ ------ ------ ------ ------- -------
Expenditures $ 329 $ 614 $ 142 $ 117 $ 129 $ 206 $ 600 $ 937
for PP&E ------- ------- ------ ------ ------ ------ ------- -------
<CAPTION>
Six Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
-------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $15,550 $7,553 $3,740 $3,205 $3,557 $2,878 $22,847 $13,636
from ------- ------ ------ ------ ------ ------ ------- -------
External
Customers
Depreciation $ 769 $ 585 $ 143 $ 164 $ 128 $ 123 $ 1,040 $ 872
and ------- ------ ------ ------ ------ ------ ------- -------
Amortization
Segment $ 1,577 $ 81 $ 619 $ 233 $ 349 $ 135 $ 2,545 $ 449
Income ------- ------ ------ ------ ------ ------ ------- -------
before
provision
(benefit)
for income
taxes
Expenditures for $ 587 $1,270 $ 156 $ 224 $ 254 $ 324 $ 997 $ 1,818
PP&E ------- ------ ------ ------ ------ ------ ------- -------
</TABLE>
10
<PAGE>
Segment Statement for Net Sales by Area
Three Months Ended June 30,
<TABLE>
<CAPTION>
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
---------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Net 64% 54% 14% 19% 11% 16% 89% 89%
Sales
Western 3% 2% 2% 2% 1% 2% 6% 6%
Europe
Net Sales
Asia Net 1% 1% 1% 1% 2% 1% 4% 3%
Sales
Israel Net --- --- --- --- --- --- --- ---
Sales
Canada Net 1% --- --- 1% --- 1% 1% 2%
Sales
Other --- --- --- --- --- --- --- ---
---- ---- ---- ---- ---- ---- ---- ----
Total Net 69% 57% 17% 23% 14% 20% 100% 100%
Sales ==== ==== ==== ==== ==== ==== ==== ====
---------------------------------------------------------------------------------------
Six Months Ended June 30,
<CAPTION>
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
----------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Net 63% 51% 14% 20% 12% 17% 89% 88%
Sales
Western 4% 3% 2% 2% 1% 2% 7% 7%
Europe
Net Sales
Asia Net 1% 1% --- 1% 2% 1% 3% 3%
Sales
Israel Net --- --- --- --- --- --- --- ---
Sales
Canada Net --- --- --- 1% 1% --- 1% 1%
Sales
Other --- --- --- --- --- 1% --- 1%
---- ---- ---- ---- ---- ---- ---- ----
Total Net 68% 55% 16% 24% 16% 21% 100% 100%
Sales ==== ==== ==== ==== ==== ==== ==== ====
----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
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, 1999, as
filed with the Securities and Exchange Commission, under "Item 1-
Business", including the section therein entitled "Risk Factors", and
"Item 7-Management's Discussion and Analysis of Financial Condition and
Result of Operations".
Results of Operations for Quarter and Six Months Ended June 30, 2000
--------------------------------------------------------------------
Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, 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 June 30, 2000 were $11.7
---------
million, which represents a 60% or a $4.4 million increase over the
corresponding quarter of the prior year. For the six months ended June
30, 2000, net sales were $22.8 million, and this represents a 68% or
$9.2 million increase from the prior year's six months.
The increase in sales as stated above was primarily attributable to the
Company's Advanced Ceramic Operations in Costa Mesa, California for
both the second quarter and six months compared with the like periods
one year ago. The increase for the second quarter was $3.7 million, and
for the six month period was $8.0 million. The major increase was in
armor products due to increasing demand for protective body armor for
both the quarter and six month periods. The industrial/automotive
products denoted strong increases in sales for both the quarter and six
months, mainly due to demand for ceramic cam rollers for diesel
engines. Additionally, orthodontic products also contributed to the
increase over the prior year periods due to the increased demand by
orthodontists for the Clarity orthodontic brackets.
The Company's Semicon Associates Division in Lexington, Kentucky,
posted a sales increase for the quarter of $.4 million and a six month
increase of $.5 million as compared to the prior year periods. The
increases were due to an increase in demand by the Company's customers
for dispenser cathodes, which are used in microwave tubes for radar and
satellite communications. In addition, sales increases were due to
modest price increases.
12
<PAGE>
Additionally, the Company's Thermo Materials Division in Scottdale,
Georgia, posted a sales increase for the quarter of $.3 million, and a six
month increase of $.7 million as compared to the prior year periods. The
increases were attributable to increased demand from a major customer
because of their low supply of fused silica inventory. Also contributing
was an increase in demand from existing and new customers for the fused
silica product line that the Company acquired from Harbison Walker
Refractories Company in 1998.
International sales have been, and are expected to continue to be, an
important part of the Company's business, representing 11% of total sales
for the second quarter of 2000, which was the same for the comparable
period of the prior year. For the six months of 2000, international sales
were 11% of total sales versus 12% for the prior year.
Gross Profit. The Company's gross profit was $3.2 million or 27% of sales
------------
for the second quarter ended June 30, 2000, compared to $1.7 million or 23%
of sales for the prior year's second quarter. For the six months ended June
30, 2000, gross profit was $6.0 million or 27% of sales, compared to $2.9
million or 21% of sales in the six months of 1999.
The Company's Advanced Ceramic Operations posted gross profit of $2.2
million compared to $1.1 million, or a 100% increase over the year ago
quarter. For the six month period gross profit was $4.1 million compared
to $1.7 million, or a 141% increase over the year ago period. The
favorable results for both periods were mainly due to higher volume and
higher capacity utilization resulting in economies of scale.
Semicon Associates in Lexington, Kentucky, posted gross profit of $.6
million compared to $.4 million, or a 50% increase over the year ago
quarter. For the six month period, gross profit was $1.0 million compared
to $.6 million, or a 67% increase over the year ago period. The increase
in the gross margin for both periods are attributed to slightly higher
volume and greater capacity utilization. Additionally, price increases and
greater production yields were contributing factors.
Thermo Materials in Scottdale, Georgia, posted gross profit of $.4 million
compared to $.2 million, or a 100% increase over the year ago quarter. For
the six month period, gross profit was $.9 million compared to $.6 million,
or a 50% increase over the year ago period. The favorable increases in
both periods were attributable to volume and the product mix of larger
quantities yielding better manufacturing efficiencies than in the prior
year periods.
Research and Development Expenses. Ceradyne's engineering and research
----------------------------------
efforts consist primarily of ongoing Application Engineering in response to
customer requirements, and to the Research and Development Department's
focus on new materials technology. All of 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.
13
<PAGE>
Cost associated with Application Engineering and the Research and
Development Departments are expensed as incurred. Expenses for the second
quarter ended June 30, 2000 and 1999 for the Research and Development
Department were $350,000 and $181,000 respectively, and for the six months
period ended June 30, 2000 and 1999 were $619,000 and $316,000
respectively. The increases for the current year periods related to
salaries, travel, outside services, materials and small tools. Expenses
for the second quarter ended June 30, 2000 and 1999 for the Application
Engineering Department were $83,000 and $62,000 respectively, and for the
six months period ended June 30, 2000 and 1999 were $170,000 and $147,000
respectively, and are included in cost of product sales. The increases for
both current year periods were mainly attributable to an additional
engineer and salary increases.
Selling Expenses. Selling expenses were $397,000 for the quarter, and
----------------
$753,000 for the six months ended June 30, 2000. The above compares to
prior year amounts of $334,000 for the quarter, and $680,000 for the six
months ended June 30, 1999. Travel, salaries, product literature, and the
addition of a direct salesperson in the United Kingdom contributed to the
increase in the quarter and six month period over the prior year periods.
General and Administrative Expenses. General and Administrative expenses
-----------------------------------
were $1,082,000 for the quarter, and $2,229,000 for the six months ended
June 30, 2000. The above compares to prior year amounts of $841,000 for
the quarter and $1,665,000 for the six months ended June 30, 1999. The
statements below account for both the quarter and six months' increase over
the year ago periods. Approximately forty percent of the increase was
attributable to employee profit sharing, which was charged to general and
administrative expense. Profit sharing was resumed in fiscal 2000 because
of the increased profitability of the Company. The other increases
involved 2 additional personnel at the Thermo Materials division,
organizational reclassifications from other departments at the Advanced
Ceramic Operations, and investor relations consulting fees, salary
increases, and fringe benefits.
Other Income. Other income for the quarters ended June 30, 2000 and 1999
------------
was $40,000 and $78,000 respectively. For the six months ended June 30,
2000 and 1999, other income was $115,000 and $169,000 respectively. The
decrease in quarterly and six month totals reflect an expense for profit
sharing with employees.
Interest Expense. Interest expense for the quarter ended June 30, 2000 was
----------------
$9,000 as compared to none in the prior year period. For the six months
ended June 30, 2000 interest expense was $18,000 compared to none in the
year ago period. The increase was caused by entering into a capital
equipment loan during the third quarter of the prior year.
Income Taxes. The Company recorded a $28,000 provision for taxes for the
------------
quarter ended June 30, 2000 resulting in a provision of $51,000 for the six
months that ended June 30, 2000. The Company has available net operating
loss carry forwards of approximately $8.1 million as of June 30, 2000 for
federal income tax purposes. It is anticipated that the Company will
utilize all of the net operating loss carry forwards for
14
<PAGE>
Federal income tax purposes during fiscal year 2001.
Net Income. Reflecting all of the matters discussed above, net income
----------
was $1,338,000 (or $0.16 per share basic and diluted) for the quarter
ended June 30, 2000, and $2,494,000 (or $0.31 per share basic and 0.30
diluted) for the six months ended June 30, 2000.
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 21st century dates from 20th 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 has and continues to
assess any impact of the Year 2000 issue on its reporting systems and
operations. The Company did not experience any Year 2000 issues within
or outside the Company in the millennium change or the leap year day of
February 29, 2000. The costs associated with getting prepared for Year
2000 issues were as previously stated, approximately $150,000. Also,
the Company has not experienced any unusual patterns or trends from the
Year 2000 issue. The Company will continue to monitor this issue and
any changes or trends will be disclosed. There were no changes or
trends to report as of June 30, 2000.
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 credit facility amount remains at $4,000,000 as
of quarter ended June 30, 2000 and no collateral is required of the
Company. As of June 30, 2000 there had been no borrowing under this
credit facility. Under a separate credit facility with Comerica Bank,
the Company entered into a $500,000 capital equipment loan agreement
during the third quarter of 1999. The term of the loan is for 60 months
with no prepayment penalty.
Management believes that its current cash and cash equivalents on hand,
cash generated from operations, and the ability to borrow under the
existing credit facilities, 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
----------------------------------------------------------
The Company is exposed to market risks related to fluctuations in
interest rates on its debt. Currently, the Company does not utilize
interest rate swaps, forward or option contracts on foreign currencies
or commodities, or other types of derivative financial instruments. The
purpose of the following analysis is to provide a framework to
understand the Company's sensitivity to hypothetical changes in
interest rates as of June 30, 2000.
15
<PAGE>
The Company utilized debt financing during 1999 primarily for the
purpose of acquiring manufacturing equipment. For fixed rate debt,
changes in interest rates generally affect the fair market value of the
debt instrument, but not the carrying value of the debt instrument or
the Company's earnings or cash flow. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a
result, interest rate risk and changes in fair market value should not
have a significant impact on the fixed rate debt until the Company
would be required to refinance such debt. The fair market value
estimates for debt securities are based on discounting future cash
flows utilizing current rates offered to the Company for debt of the
same type and remaining maturity.
As of June 30, 2000, the Company's debt consisted of a $408,000 capital
equipment loan at a fixed interest rate of 8.18% due June 28, 2004. The
carrying amount is a reasonable estimate of fair value as the rate of
interest paid on the note approximates the current rate available for
financing with similar terms and maturities.
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, February 1999 and December
1999, the Company, along with others, was served with six different
complaints that were filed by nine former employees of one of the
Company's customers, and eight spouses. The complaints, filed in the
United States District Court, Eastern District of Tennessee, allege
that the customers' employees contracted chronic beryllium disease as a
result of their exposure to beryllium-containing products sold by
Ceradyne and others. One complaint seeks compensatory damages in the
amount of $3.0 million for the husbands, $1.0 million for the four
spouses, and punitive damages in the amount of $5.0 million. Four other
complaints each seek compensatory damages in the amount of $5.0 million
for the four husbands, $1.0 million for the spouses, and punitive
damages in the amount of $10.0 million. The final complaint seeks
compensatory damages in the amount of $5.0 million for an individual
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 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.
16
<PAGE>
Item 2. N/A
Item 3. N/A
Item 4. Submission of Matter to Vote of Security Holders
------------------------------------------------
The following matters were voted upon at the Annual Meeting of
Stockholders held on July 28, 2000.
(A) The following seven persons were elected as Directors of the
Company to serve until the next annual meeting of stockholders or
until their successors are elected and have qualified:
<TABLE>
<CAPTION>
_______________________________________________________________________________________________
NUMBER OF SHARES
FOR AUTHORITY WITHHELD
_______________________________________________________________________________________________
<S> <C> <C>
J.P. Moskowitz 7,150,707 23,743
L.M. Allenstein 7,150,948 23,502
R.A. Alliegro 7,150,948 23,502
P.N. Blumberg 7,150,948 23,502
F. Edelstein 7,150,948 23,502
W.D. Godbold, Jr. 7,150,448 24,002
M.L. Lohr 7,150,948 23,502
_______________________________________________________________________________________________
</TABLE>
(B) The approval of an amendment to increase the number of shares of
Common Stock authorized for issuance by 150,000 shares to 800,000
shares of Common Stock under the Company's 1994 Stock Incentive Plan.
Item 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
17
<PAGE>
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: August 12, 2000
18
