<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999 Commission file number 1-5951
CMI CORPORATION
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-0519810
- ------------------------------ --------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
I-40 & Morgan Road, P.O. Box 1985
Oklahoma City, Oklahoma 73101
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 787-6020
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.
Voting Class A Common Stock Par Value $.10
and Voting Common Stock Par Value $.10 21,549,485
- ------------------------------------------ ------------------------------
(Title of each class) (Outstanding at May 13, 1999)
-1 of 18-
<PAGE>
CMI CORPORATION
Index to Form 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
Condensed Consolidated Balance Sheets -
March 31, 1999(Unaudited), December 31, 1998
and March 31, 1998(Unaudited) 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998(Unaudited) 4
Condensed Consolidated Statements of Changes in Common
Stock and Other Capital -
Three Months Ended March 31, 1999 (Unaudited), and the
Years Ended December 31, 1998 and December 31, 1997 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998(Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Quantitative and Qualitative Disclosure About Market Risk 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of 18
Security Holders
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
</TABLE>
-2 of 18-
<PAGE>
PART I - FINANCIAL INFORMATION
CMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31 December 31 March 31
1999 1998 1998
(Unaudited) * (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Current assets:
Cash & cash equivalents $ 12,131 13,559 9,242
Receivables, net 35,944 28,013 28,950
Inventories
Finished equipment 30,651 37,409 30,762
Work-in-process 24,210 14,189 10,754
Raw materials & parts 50,856 51,293 39,756
----------- ----------- ----------
Total inventories 105,717 102,891 81,272
Other current assets 825 923 695
Deferred tax asset 6,358 7,200 5,633
----------- ----------- ----------
Total current assets 160,975 152,586 125,792
Property, plant & equipment 69,926 69,239 58,358
Less accumulated depreciation 40,681 39,692 37,862
----------- ----------- ----------
Net property, plant & equipment 29,245 29,547 20,496
Long-term receivables 331 356 2,068
Other assets, principally goodwill 5,209 5,322 7,433
Deferred tax assets 1,900 1,900 6,900
----------- ----------- ----------
$197,660 189,711 162,689
=========== =========== ==========
Current liabilities:
Current maturities of long-term debt $ 265 268 208
Accounts payable 19,825 21,551 18,078
Accrued liabilities 12,915 14,617 13,423
----------- ----------- ----------
Total current liabilities 33,005 36,436 31,709
Long-term debt 86,984 77,049 61,269
Common stock & other capital:
Class A common stock & common stock 2,155 2,155 2,151
Other capital 75,516 74,071 67,560
----------- ----------- ----------
Total common stock & other capital 77,671 76,226 69,711
----------- ----------- ----------
$197,660 189,711 162,689
=========== =========== ==========
</TABLE>
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
-3 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars and shares in tchousands, except per share data)
<TABLE>
<CAPTION>
Three Months End
March 31
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net revenues $ 57,200 44,022
--------- ---------
Costs and expenses:
Cost of goods sold 42,858 34,283
Marketing and administrative 8,418 7,124
Engineering and product development 1,839 1,796
Product line relocation costs - 940
--------- ---------
53,115 44,143
--------- ---------
Operating earnings (loss) 4,085 (121)
--------- ---------
Other expense (income):
Interest expense 1,090
Interest income (102) (202)
Other, net - (16)
--------- ---------
Earnings (loss) before income taxes 2,653 (993)
Income tax expense (benefit) 993 (326)
--------- ---------
Net earnings (loss) $ 1,660 (667)
========= =========
Share data:
Weighted average outstanding common shares:
Basic 21,549 21,501
Diluted 21,740 21,501
Net earnings (loss) per average outstanding
share:
Basic $ .08 (.03)
========= =========
Diluted $ .08 (.03)
========= ========
Dividends per common share $ .01 .01
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
-4 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK
AND OTHER CAPITAL
(dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Class A Common Stock Paid-in Treasury Retained
------------------ --------------------
Shares Amount Shares Amount Capital Stock Earnings
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1996 621 $ - 20,467,383 $2,047 $46,112 - $16,344
Net earnings - - - - - - 3,165
Purchase of treasury
stock - - - - - (32) -
Dividends paid,
common stock
($.04 per share) - - - - - - (851)
Common stock issued - - 75,000 8 367 - -
Exercise of stock
warrants - - 600,000 60 2,190 - -
Exercise of stock
options - - 364,000 36 1,147 - -
------ ------ ----------- ------- --------- ------- -------
Balance December 31,
1997 621 - 21,506,383 2,151 49,816 (32) 18,658
Net earnings - - - - - - 6,217
Retirement of voting
common stock (19) - (20) - - - -
Retirement of treasury
stock - - (6,340) - (32) 32 -
Exercise of stock
options - - 48,860 4 273 - -
Dividends paid,
common stock
($.04 per share) - - - - - - (861)
------ ------ ----------- ------- -------- ------- -------
Balance December 31,
1998 602 - 21,548,883 2,155 50,057 - 24,014
(The information which
follows is unaudited)
Net earnings - - - - - - 1,660
Dividends paid,
common stock
($.01 per share) - - - - - - (215)
------ ------ ----------- ------- --------- ------- -------
Balance March 31,
1999 (unaudited) 602 $ - 21,548,883 $2,155 $50,057 $ - $25,459
====== ====== =========== ======= ========== ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
-5 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings(loss)
Adjustments to reconcile net earnings (loss) to net $ 1,660 (667)
cash provided by (used in) operating activities:
Depreciation
Amortization 997 617
Gain on sale of assets 73 75
Change in assets and liabilities: - (15)
Receivables
Inventories (7,931) (2,033)
Other current assets (2,826) (12,601)
Accounts payable 98 (116)
Accrued liabilities (1,726) 3,423
Deferred income taxes (1,702) 3,776
Long-term receivables 842 (333)
Other non-current assets, excluding amortization 25 441
of goodwill
40 (539)
Net cash and cash equivalents used in operating -------- -------
activities
(10,450) (7,972)
-------- -------
INVESTING ACTIVITIES
Proceeds from sale of assets
Capital expenditures - 21
(695) (1,667)
Net cash and cash equivalents used in investing -------- ------
activities
(695) (1,646)
-------- -------
FINANCING ACTIVITIES
Payments on long-term debt
Net borrowings on revolving credit note (68) (56)
Payment of common stock dividends 10,000 12,000
(215) (215)
Net cash and cash equivalents provided by -------- -------
financing activities
9,717 11,729
-------- -------
Increase (decrease) in cash and cash equivalents
(1,428) 2,111
Cash and cash equivalents at beginning of period
13,559 7,131
-------- -------
Cash and cash equivalents at end of period
$ 12,131 9,242
======== =======
</TABLE>
See notes to condensed consolidated financial statements.
-6 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The interim condensed consolidated financial information has been
prepared in conformity with generally accepted accounting principles
applied, in all material respects, on a basis consistent with the
consolidated financial statements included in the Company's annual report
filed with the Securities Exchange Commission for the preceding fiscal
year. The financial information as of March 31, 1999 and 1998 and for the
interim periods ended March 31, 1999 and 1998 included herein is
unaudited; however, such information reflects all adjustments consisting
of only normal recurring adjustments, which are, in the opinion of
management, necessary to a fair presentation of the results for the
interim periods.
(2) The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the full
year as the Company is in a seasonal business.
(3) Reclassifications
-----------------
Certain reclassifications have been made to the prior interim period to
conform to the 1999 presentation.
(4) Related Party Transactions
--------------------------
There have been no material changes in related party transactions since
the annual report filed for the preceding fiscal year.
(5) Commitments and Contingencies
-----------------------------
The Company and its subsidiaries are parties to various leases relating
to plants, warehouses, office facilities, transportation vehicles, and
certain other equipment. Real estate taxes, insurance, and maintenance
expenses are normally obligations of the Company. It is expected that in
the normal course of business, the majority of the leases will be renewed
or replaced by other leases. Leases do not provide for dividend
restrictions, debt, or future leasing arrangements. All leasing
arrangements contain normal leasing terms without unusual purchase
options or escalation clauses.
At March 31, 1999, the Company was contingently liable as guarantor for
certain accounts receivable sold with recourse of approximately
$2,839,000 through September 2006.
(6) Earnings Per Share
------------------
Basic earnings (loss) per share is computed by dividing net earnings
(loss) applicable to common stock by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if the Company's
outstanding stock options were exercised (calculated using the treasury
stock method).
-7 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
The following table reconciles the weighted average common shares
outstanding used in the calculation of basic earnings (loss) per common
share to the number of shares used in the calculation of diluted earnings
(loss) per share (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------
1999 1998
---- ----
<S> <C> <C>
Net earnings(loss) - basic and diluted $ 1,660 (667)
======= =======
Weighted average number of common shares
outstanding - basic 21,549 21,501
Dilutive effect of potential common shares
issuable upon exercise of employee stock
options and stock purchase warrants 191 -
------- ------
Weighted average number of common shares
outstanding - diluted 21,740 21,501
======= ======
Earnings (loss) per share:
Basic $ .08 (.03)
======= ======
Diluted $ .08 (.03)
======= ======
</TABLE>
Options to purchase 435,000 shares of common stock at $4.13 to $6.13 per
share were outstanding during the three months ended March 31, 1998, but
were not included in the computation of diluted earnings per share
because the effect would be anti-dilutive.
(7) Litigation
----------
As previously disclosed, on November 22, 1995, a Chicago law firm
previously engaged by the Company in connection with prior patent
litigation filed suit against the Company in the Circuit Court of Cook
County, Illinois. On December 20, 1995, the case was removed to the
United States District Court for the Northern District of Illinois,
Eastern Division. The law firm is seeking to recover approximately $1.4
million of legal fees and costs alleged to be owing by the Company,
together with prejudgment and postjudgment interest and other costs. The
Company has denied these allegations and will continue to defend this
lawsuit.
-8 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
Since 1996, the Company has been involved in litigation in the U.S.
District Court for the Western District of Oklahoma with Cedarapids, Inc.
The Company sued Cedarapids seeking a declaratory judgement that a patent
held by Cedarapids is invalid or, in the alternative, that the Company
was not infringing upon the patent. Cedarapids subsequently filed a
counterclaim against the Company alleging that the Company was infringing
Cedarapids' patent and seeking unspecified monetary damages. In January
1997, the District Court issued an order staying this lawsuit pending the
resolution of litigation between Cedarapids and Gencor, Industries
involving the same patent. This stay was lifted in December 1997 upon
settlement of patent and other non-related litigation between Cedarapids
and Gencor, Industries. The Company anticipates this lawsuit going to
trial in mid 1999.
In September 1998, Cedarapids filed suit against the Company in the U.S.
District Court for the Northern District of Iowa alleging that the
Company has infringed a second patent held by Cedarapids. Cedarapids is
seeking unspecified monetary damages. The Company intends to vigorously
defend both lawsuits involving Cedarapids.
There are other claims and pending legal proceedings that generally
involve product liability and employment issues. These cases are, in the
opinion of management, ordinary routine matters incidental to the normal
business conducted by the Company. In the opinion of the Company's
management after consultation with outside legal counsel, the ultimate
disposition of such proceedings, including the cases above, will not have
a materially adverse effect on the Company's consolidated financial
position, liquidity or future results of operations.
(8) Segment Information
-------------------
The Company currently manages its business by operating location. As
such, the Company identifies its segments based on the geographic
locations of its manufacturing facilities. The Company has one reportable
segment, its Oklahoma City manufacturing facility. The manufacturing
facilities manufacture and market products in the mobile and materials
processing equipment categories as well as parts for the products. The
specific products manufactured at the Oklahoma City plant are as follows:
(1) mobile equipment - the Company's primary line of concrete paving
systems, and pavement profiling and reclaiming/ stabilizing equipment,
specific lines of heavy-duty trailers, weighing equipment, municipal
landfill compactors, and industrial and waste recycling grinders; (2)
materials processing equipment - hot-mix asphalt
-9 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
production systems, and thermal systems for remediating contaminated soils
and sanitizing medical waste. The specific products manufactured at the
other geographic locations are as follows: (1) mobile equipment -
lightweight grading and concrete paving and finishing machines, and custom
heavy hauling trailers; (2) materials processing equipment -concrete
batching plants.
Following is certain financial information regarding the Company's
segments. The specific lines of heavy-duty trailers manufactured in
Oklahoma City are transferred to another operating segment through
intercompany accounts at cost and are excluded from net revenues. As a
result, the revenues reported below are all from external customers and all
dollar amounts are in thousands. General corporate expenses are not
allocated to the other operating segments; therefore, are included as a
reconciling item to reported operating earnings.
<TABLE>
<CAPTION>
OKLAHOMA ALL
City Other Total
-------- ------- -------
<S> <C> <C> <C>
AS OF MARCH 31, 1999:
Total assets $167,056 30,604 197,660
======== ====== =======
THREE MONTHS ENDED MARCH 31, 1999:
Net revenues $ 49,026 8,174 57,200
Costs and expenses 43,240 8,450 51,690
-------- ------ -------
Segment measure of operating
profit (loss) $ 5,786 (276) 5,510
======== ======
General corporate expenses (1,425)
-------
Operating earnings 4,085
Interest expense (1,534)
Interest income 102
-------
Earnings before income taxes 2,653
Income tax expense 993
-------
Net earnings $ 1,660
=======
Capital expenditures $ 519 176 695
======= ===== =======
Depreciation and amortization $ 896 174 1,070
======= ===== =======
</TABLE>
-10 of 18-
<PAGE>
CMI CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
OKLAHOMA ALL
City Other Total
--------------------------
<S> <C> <C> <C>
AS OF MARCH 31, 1998:
Total assets $134,640 28,049 162,689
======= ======= =======
THREE MONTHS ENDED MARCH 31, 1998:
Net revenues $35,563 8,459 44,022
Costs and expenses 33,813 8,337 42,150
------- ------- -------
Segment measure of operating profit $ 1,750 122 1,872
======= =======
General corporate expenses (1,993)
-------
Operating loss (121)
Interest expense (1,090)
Interest income 202
Other, net 16
-------
Loss before income taxes (993)
Income tax benefit (326)
-------
Net loss $ (667)
=======
Capital expenditures $ 1,575 92 1,667
======= ======= =======
Depreciation and amortization $ 462 230 692
======= ======= =======
</TABLE>
The Company has one operating location in the United Kingdom. The location
serves as a sales office and has approximately $600,000 of assets comprised
primarily of inventory, receivables, and property, plant and equipment. All
remaining assets are located in the United States.
Revenues for products for the three months ended March 31, 1999 and 1998 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Mobile Equipment $16,727 15,729
Materials Processing Equipment 33,350 21,244
Parts and Used Equipment 7,123 7,049
------- ------
$57,200 44,022
======= ======
</TABLE>
-11 of 18-
<PAGE>
CMI CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Revenues increased 30 percent to $57,200,000 for the three months ended March
31, 1999, compared to $44,022,000 for the three months ended March 31, 1998. Net
revenues for international shipments increased 62 percent to $4.6 million for
the three months ended March 31, 1999 compared to $2.8 million for the three
months ended March 31, 1998. Net revenues for domestic shipments increased 27.7
percent to $52.6 million for the three months ended March 31, 1999 compared to
$41.2 million for the three months ended March 31, 1998. Net earnings were
$1,660,000, or eight cents per share, for the three months ended March 31, 1999,
compared to a net loss of $667,000, or three cents per share, for the comparable
three months ended March 31, 1998.
The Company's revenue increase consisted of a $10.5 million increase in the
Company's hot mix asphalt production systems and a $2.0 million increase in the
Company's pavement profiling and reclaiming/stabilizing equipment.
During the first quarter of 1999 the Company experienced increased revenues in
its concrete batching plants and a decrease in custom heavy-hauling trailers.
The decrease in custom heavy-hauling trailers was primarily due to the union
strike which is resulting in lost production at the Company's South Dakota
manufacturing location. These factors impacted the all other segment measure of
operating profit period over period as noted in note 8.
Gross margins for the three months ended March 31, 1999 averaged 25.1% compared
to 22.1% for the three months ended March 31, 1998. The improvements in margins
for the three months ended March 31, 1999 is the result of the overall
production and cost benefits from our recent capital investments.
Marketing and administrative expenses increased $1,294,000 for the three months
ended March 31, 1999. There were two primary factors that impacted the increase
in marketing and administrative expenses. First, the Company incurred
nonrecurring costs approximating $350,000 related to a restructuring of its
Oklahoma City manufacturing operations. Second, the Company participated in the
CONEXPO-CON/AGG tradeshow in Las Vegas, Nevada. As a percentage of net revenues,
marketing and administrative expenses were 14.7 percent for the three months
ended March 31, 1999, compared to 16.2 percent for the three months ended March
31, 1998.
Engineering and product development expenses increased $43,000 for the three
months ended March 31, 1999. As a percentage of net revenues, engineering and
product development expenses were 3.2 percent for the three months ended March
31, 1999, compared to 4.1 percent for the three months ended March 31, 1998.
Engineering and product development expenses do not increase proportionately
with revenue increases.
-12 of 18-
<PAGE>
Included in the Company's first quarter 1998 results were $940,000 of product
line relocation costs. These costs were incurred moving the compactor and
grinder products acquired from Rexworks, Inc. in December 1997 from Milwaukee to
Oklahoma City. These costs are included in the general corporate expenses (see
table in note 8).
Interest expense increased to $1,534,000 for the three months ended March 31,
1999, compared to $1,090,000 for the three months ended March 31, 1998. The
Company's effective interest rate was comparable period-to-period. The increase
in interest expense is due to additional borrowings on the Company's revolving
line of credit, primarily for the increased working capital requirements and
capital spending.
The Company's effective tax rate for the three months ended March 31, 1999 and
1998 was approximately 37 percent. The Company's quarterly tax rates are
estimates of its expected annual effective federal and state income tax rates.
The combined effective income tax rate for 1998 was approximately 37 percent and
the Company expects a comparable annual effective rate in 1999.
Liquidity and Capital Resources
- -------------------------------
The current ratio at March 31, 1999 was 4.88-to-1 compared to 4.19-to-1 at
December 31, 1998. Working capital at March 31, 1999 was $127,970,000 compared
to $116,150,000 at December 31, 1998, an increase of $11,820,000. The increase
in working capital is due to an increase in receivables of $7,931,000, an
increase in inventories of $2,826,000, and a decrease in current liabilities of
$3,431,000.
Cash used in operating activities for the three months ended March 31, 1999 was
$10,450,000 compared to cash used in operating activities of $7,972,000 for the
three months ended March 31, 1998. This increase was due to increased
receivables, increased inventories, and a decrease in current liabilities. The
receivable increase from December 31, 1998 is due to the $10,288,000 increase in
net revenues quarter over quarter. As noted in note 2, the Company operates in a
seasonal business which normally results in increased working capital
requirements and thus cash being used in operations to fund increased inventory
levels and outstanding receivable balances during the early part of each year.
Financing activities for the three months ended March 31, 1999 provided an
additional $9,717,000, which included $10,000,000 of borrowings from the
Company's revolving line of credit which was primarily used to fund the increase
in receivables from December 31, 1998.
Capital expenditures for the three months ended March 31, 1999 were $695,000
compared to $1,667,000 for the comparable three months ended March 31, 1998.
Capital expenditures are budgeted at $6,000,000 for 1999 and are expected to be
financed using internally generated funds and leasing arrangements. These
capital expenditures are being used to improve the Company's manufacturing and
product support efficiencies.
-13 of 18-
<PAGE>
The Company amended its unsecured revolving line of credit agreement on October
13, 1998. The amendment provides for an increase in the Company's borrowing
capacity from $40,000,000 to $60,000,000. On March 12, 1999, the borrowing line
of credit was increased to $70,000,000 for a period of 120 days, but will return
to $60,000,000 at the end of this period. The Company's $30,000,000 unsecured
senior notes mature from September 2000 to September 2006. The Company's
unsecured revolving line of credit matures September 2001. As of March 31, 1999,
the Company had utilized $53,000,000 of the unsecured revolving line of credit.
Other long-term debts have maturity dates through September 2010 and are
expected to be paid or refinanced when due. As of March 31, 1999, the Company
was in compliance with all debt covenants.
During the first quarter of 1999, the Company continued to pay a quarterly cash
dividend of one cent per share. It is the Board of Directors' current intention
to continue paying cash dividends.
Income Taxes
- ------------
The benefits of future tax deductions and credits not utilized by the Company in
the past are reflected as an asset to the extent the Company assesses that
future operations will "more likely than not" be sufficient to realize such
benefits. For the period ended March 31, 1999, the Company has assessed its past
earnings history and trends, sales backlog, budgeted sales, and expiration dates
of future tax deductions and credits. As a result, the company has determined it
is "more likely than not" that the $8,258,000 tax effect of future tax
deductions and credits will be utilized. The ultimate realization of the
deferred tax assets will require aggregate taxable income of approximately $15
million to $20 million in future years.
Impact of Recently Issued Accounting Standards Not Yet Adopted
- --------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes standards for accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in fair value of a derivative depends on the intended use
of the derivative and the resulting designation. Adoption of SFAS No. 133 is not
expected to impact the Company.
Impact of Year 2000 Issue
- -------------------------
An issue exists for all companies that rely on computers as the Year 2000 (Y2K)
approaches. The Y2K problem is the result of past practices in the computer
industry of using two digits rather than four to identify the applicable year.
-14 of 18-
<PAGE>
The Company is addressing the need to ensure that its operations will not be
adversely impacted by software or other system failures related to Y2K. The
Company formed an oversight committee made up of key management and developed a
plan to coordinate identification, evaluation and implementation of any
necessary changes to internal computer systems, applications, and business
processes.
As of March 31, 1999, the Y2K committee had identified the Company's information
systems (IT) and non-information systems (non IT) that could potentially be
impacted by Y2K. The Company plans to complete all of its Y2K readiness and
contingency planning by June 1999.
The Y2K process began in early 1996 when the Company began the software and
hardware evaluation and selection process for manufacturing and financial
reporting applications. During the third quarter of 1998 the Company replaced
the primary IT systems at the Oklahoma City location. The Company spent
approximately $2 million on this phase of the Y2K project for new computer
software and hardware which was also part of the Company's factory modernization
plan. These costs were capitalized and will be amortized over future periods.
The Company has also obtained vendor readiness statements from approximately 99%
of the Company's active vendors. These statements indicate that 95% are either
Y2K compliant or will be by June 1999. The Company has determined that an
alternative supply source exists for the vendors who do not appear to be
addressing the Y2K problem.
The Company has determined its telephone systems require certain upgrades to
meet Y2K requirements. The Company anticipates Y2K compliance in this area by
June 1999 at an estimated cost of $75,000.
The Company has been testing its systems using internal programming staff and
outside computer consultants and intends to continue making any necessary
modifications to prevent disruption to its operations. The Company has not
identified the most reasonably likely worst case scenario in the event the
Company does not obtain Y2K readiness. This will be performed during contingency
planning which is currently being performed. The Company does not anticipate
incurring any material outside costs for future Y2K activities. All remaining
remediation efforts will be performed primarily utilizing existing employees.
The Company does not separately identify internal costs related to Y2K efforts.
No assurances can be given that the Company will be able to completely identify
or address all Year 2000 compliance issues. Additionally, no assurances can be
given that third parties with whom the Company does business will not experience
system failures as a result of the Year 2000 issue, nor can the Company fully
predict the consequences of noncompliance.
This is a Year 2000 readiness disclosure statement within the meaning of the
Year 2000 Information and Readiness Disclosure Act (P.L. 105-271).
-15 of 18-
<PAGE>
Federal Highway Legislation
- ---------------------------
The Company has assessed the longer-range impact of the $217 billion national
highway bill (TEA-21) which currently has guaranteed appropriations over the
next five to six years. The Company's investment in capital improvements and
plant modernization efforts should have the Company positioned to take advantage
of the anticipated increased business as a result of this new legislation.
Forward Looking Statements
- --------------------------
Statements of the Company's or management's intentions, beliefs, anticipations,
expectations and similar expressions concerning future events contained in this
report constitute "forward looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," and "continue" or similar words. As with any future event, there can
be no assurance that the events described in forward looking statements made in
this report will occur or that the results of future events will not vary
materially from those described in the forward looking statements made in this
report. Important factors that could cause the Company's actual performance and
operating results to differ materially from the forward looking statements
include, but are not limited to, highway funding, adverse weather conditions,
general economic conditions and political changes both domestically and
overseas.
Quantitative and Qualitative Disclosure About Market Risk
- ---------------------------------------------------------
The primary objective of the following information is to provide forward-looking
quantitative and qualitative information about the Company's potential exposure
to market risks. The term "market risk" for the Company refers to the risk of
increased interest expense and decreased earnings arising from adverse changes
in interest rates. These disclosures are not meant to be precise indicators of
expected future decreases in earnings, but rather indicators of reasonably
possible decreases in earnings. This forward-looking information provides
indicators of how the Company views and manages its ongoing market risk
exposures.
At March 31, 1999, the Company had long-term debt outstanding of $87.2 million.
Of this amount, $30 million bears interest at a fixed rate of 7.68%, and $4.3
million bears interest at fixed rates averaging approximately 8%. The remaining
$53 million bears interest at variable rates which averaged approximately 7.15%
at March 31, 1999. A 10% increase in short-term interest rates on the variable
rate debt outstanding at March 31, 1999 would approximate 72 basis points. Such
an increase in interest rates would increase the Company's interest expense by
approximately $286,000 for the remainder of the year ended December 31, 1999
assuming borrowed amounts remain outstanding.
The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the short-term
maturity of such instruments. The analysis does not consider the effect this
movement may have on other variables including changes in revenue volumes that
could be indirectly attributed to changes in interest rates. The actions that
management would take in response to such a change are also not considered. If
it were possible to quantify this impact, the results could well be different
than the sensitivity effects shown above.
-16 of 18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously disclosed, on November 22, 1995, a Chicago law firm previously
engaged by the Company in connection with prior patent litigation filed suit
against the Company in the Circuit Court of Cook County, Illinois. On December
20, 1995, the case was removed to the United States District Court for the
Northern District of Illinois, Eastern Division. The law firm is seeking to
recover approximately $1.4 million of legal fees and costs alleged to be owing
by the Company, together with prejudgment and postjudgment interest and other
costs. The Company has denied these allegations and will continue to defend this
lawsuit.
Since 1996, the Company has been involved in litigation in the U.S. District
Court for the Western District of Oklahoma with Cedarapids, Inc. The Company
sued Cedarapids seeking a declaratory judgement that a patent held by Cedarapids
is invalid or, in the alternative, that the Company was not infringing upon the
patent. Cedarapids subsequently filed a counterclaim against the Company
alleging that the Company was infringing Cedarapids' patent and seeking
unspecified monetary damages. In January 1997, the District Court issued an
order staying this lawsuit pending the resolution of litigation between
Cedarapids and Gencor, Industries involving the same patent. This stay was
lifted in December 1997 upon settlement of patent and other non-related
litigation between Cedarapids and Gencor, Industries. The Company anticipates
this lawsuit going to trial in mid 1999.
In September 1998, Cedarapids filed suit against the Company in the U.S.
District Court for the Northern District of Iowa alleging that the Company has
infringed a second patent held by Cedarapids. Cedarapids is seeking unspecified
monetary damages. The Company intends to vigorously defend both lawsuits
involving Cedarapids.
There are other claims and pending legal proceedings that generally involve
product liability and employment issues. These cases are, in the opinion of
management, ordinary routine matters incidental to the normal business conducted
by the Company. In the opinion of the Company's management after consultation
with outside legal counsel, the ultimate disposition of such proceedings,
including the cases above, will not have a materially adverse effect on the
Company's consolidated financial position, liquidity or future results of
operations.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
-17 of 18-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-K are as follows:
Exhibit No.
-----------
27 Financial Data Schedule
(b) The Company did not file any report on a Form 8-K during the fiscal
quarter ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1999 /s/ Jim D. Holland
----------------- -------------------------------------
Jim D. Holland
Senior Vice President,
Chief Financial Officer & Treasurer
-18 of 18-
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