<PAGE>
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934. For the Quarterly Period ended June 30, 1998.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934. For the transition Period from N/A to .
--- -----
Commission File No. 1-8467
BMC INDUSTRIES, INC.
--------------------
(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0169210
--------- ----------
(State of Incorporation) (IRS Employer Identification No.)
One Meridian Crossings, Suite 850, Minneapolis, Minnesota 55423
---------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(612) 851-6000
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether 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 at least the past 90 days.
X Yes No
---- ----
BMC Industries, Inc. has outstanding 26,932,482 shares of common stock as of
August 11, 1998. There is no other class of stock outstanding.
Exhibit Index Begins at Page 14
<PAGE>
PART I: FINANCIAL INFORMATION
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
Item 1: Financial Statements
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,969 $ 2,383
Trade accounts receivable, net of allowances 45,077 29,824
Inventories 95,881 70,111
Deferred income taxes 8,724 5,881
Other current assets 9,775 13,595
- ------------------------------------------------------------------------------
Total Current Assets 162,426 121,794
- ------------------------------------------------------------------------------
Property, Plant and Equipment 271,775 283,070
Less Accumulated Depreciation 110,381 100,688
-------- --------
Property, Plant and Equipment, Net 161,394 182,382
-------- --------
Deferred Income Taxes 18,529 1,429
Intangible Assets, Net 67,475 2,991
Other Assets 11,139 10,811
- ------------------------------------------------------------------------------
Total Assets $420,963 $319,407
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 979 $ 1,139
Accounts payable 24,458 25,623
Income taxes payable 415 2,830
Accrued expenses and other liabilities 25,955 17,288
- ------------------------------------------------------------------------------
Total Current Liabilities 51,807 46,880
- ------------------------------------------------------------------------------
Long-Term Debt 219,164 73,426
Other Liabilities 17,570 17,718
Deferred Income Taxes 3,757 2,631
Stockholders' Equity
Common stock 46,543 62,263
Retained earnings 84,543 118,693
Accumulated other comprehensive income (1,350) (1,217)
Other (1,071) (987)
- ------------------------------------------------------------------------------
Total Stockholders' Equity 128,665 178,752
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Total Liabilities and Stockholders' Equity $420,963 $319,407
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- ------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 2
<PAGE>
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 84,941 $ 80,257 $165,025 $157,384
Cost of products sold 82,080 58,398 150,535 119,543
- ---------------------------------------------------------------------------------------
Gross margin 2,861 21,859 14,490 37,841
Selling 3,914 2,737 7,203 5,574
Administration 1,529 1,089 2,859 2,628
Impairment of long-lived assets 42,800 - 42,800 -
Acquired research and development 9,500 - 9,500 -
- ---------------------------------------------------------------------------------------
Income from Operations (54,882) 18,033 (47,872) 29,639
- ---------------------------------------------------------------------------------------
Other Income and (Expense)
Interest expense (4,318) (160) (5,701) (304)
Interest income 45 56 77 98
Other income (expense) (389) (33) (533) 229
- ---------------------------------------------------------------------------------------
Earnings before Income Taxes (59,544) 17,896 (54,029) 29,662
Income Taxes (22,392) 5,907 (20,686) 9,790
- ---------------------------------------------------------------------------------------
Net Earnings $(37,152) $ 11,989 $(33,343) $ 19,872
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Net Earnings Per Share:
Basic $ (1.38) $ 0.44 $ (1.24) $ 0.72
Diluted (1.38) 0.42 (1.24) 0.70
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Number of Shares Included in Per Share Computation:
Basic 26,905 27,463 26,949 27,437
Diluted 26,905 28,496 26,949 28,477
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Dividends Declared Per Share $ 0.015 $ 0.015 $ 0.03 $ 0.03
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>
BMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
-------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Cash Provided by (Used in) Operating Activities
Net earnings (loss) $ (33,343) $ 19,872
Depreciation and amortization 10,369 7,088
Write-down of impaired long-lived assets 42,800 -
Acquired in-process research and development 9,500 -
Deferred income taxes (18,798) (142)
Changes in operating assets and liabilities (23,862) (11,583)
- ----------------------------------------------------------------------------------------------------
Total (13,334) 15,235
- ----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities
Additions to property, plant and equipment (11,532) (54,048)
Business acquisitions, net of cash acquired (101,000) (1,817)
- ----------------------------------------------------------------------------------------------------
Total (112,532) (55,865)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities
Increase (decrease) in short-term borrowings (158) 211
Increase in long-term debt 143,251 39,343
Common stock issued (repurchased), net (15,720) 1,225
Cash dividends paid (820) (822)
Other (84) 294
- ----------------------------------------------------------------------------------------------------
Total 126,469 40,251
- ----------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (17) (73)
- ----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 586 (452)
Cash and Cash Equivalents at Beginning of Period 2,383 2,544
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Cash and Cash Equivalents at End of Period $ 2,969 $ 2,092
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
Page 4
<PAGE>
BMC INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
1. Financial Statements
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of June 30, 1998,
and the results of operations and the cash flows for the periods ended June
30, 1998 and 1997. Except for the special charges discussed in footnote 3
and in Management's Discussion and Analysis of Financial Condition and
Results of Operations, such adjustments are of a normal recurring nature.
Certain items in the financial statements for the periods ended June 30,
1997 have been reclassified to conform to the presentation for the periods
ended June 30, 1998. The results of operations for the three-month and
six-month periods ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year. The balance sheet as of December
31, 1997 is derived from the audited balance sheet as of that date. For
further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
2. Restatement of 1998 Financial Statements
The accompanying financial statements for the three and six month
periods ended June 30, 1998 have been restated to give effect to the
restatement of the charge taken in the quarter ended June 30, 1998 for
acquired in-process research and development (IPR&D) purchased as part of
the acquisition of Orcolite (see footnote 9). This charge, originally
recorded at $11 million (pre-tax), was reduced by $1.5 million and restated
to $9.5 million (pre-tax) in order to comply with Securities and Exchange
Commission intrepretations regarding techniques used to value IPR&D issued
later in 1998. The effect of the restatement reduced the net loss from
amounts previously reported by $970 and the net loss per share by $0.03 for
both the three and six month periods ended June 30, 1998. The pro forma
amounts reflected in footnote 9 have also been restated to reflect the
above restatement and to be consistent with the pro forma amounts presented
in the 1998 year-end financial statements.
3. Impairment of Long-Lived Assets/Acquired Research and Development
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121 (Statement No. 121), ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS, the Company recorded a charge of $26.7 million
($42.8 million pre-tax) during the quarter for the write-down of
certain Precision Imaged Products (PIP) operations fixed assets,
primarily those related to the production of computer monitor masks.
Statement No. 121 prescribes that an impairment loss should be
recognized in the event that facts and circumstances indicate that the
carrying amount of an asset may not be recoverable, and the estimated
future undiscounted cash flows related to the asset are less than the
carrying amount of the asset. After careful assessment of various
factors relevant to these assets, including the computer monitor mask
market, management determined it was appropriate to write-down the
value of these assets and, accordingly, such assets were written down
to estimated fair value in accordance with Statement No. 121.
In addition, in accordance with generally accepted accounting
principles, the independently appraised value of acquired in-process
research and development purchased in conjunction with the Orcolite
acquisition, was written-off as a charge of $6.0 million ($9.5 million
pre-tax) during the quarter ended June 30, 1998. See footnote 9 for
further discussion.
4. Inventories
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials $ 26,657 $ 24,542
Work in process 16,438 15,971
Finished goods 52,786 29,598
---------- ----------
Total Inventories $ 95,881 $ 70,111
---------- ----------
---------- ----------
</TABLE>
Page 5
<PAGE>
5. Credit Facilities
During the second quarter of 1998, the Company entered into a new credit
agreement, as amended in July 1998 (the Agreement), with a syndicate of
banks for secured borrowings totaling up to $250 million. Borrowings
under the Agreement bear interest at the Eurodollar Rate plus 0.5% to
1.625% (7.0625% at June 30, 1998). The rate spread is dependent upon
the Company's ratio of debt to cash flow, as defined. In addition, the
Company pays a facility fee on unborrowed funds at rates ranging from
0.225% to 0.475% (0.425% at June 30, 1998), depending on the Company's
debt to cash flow ratio. Under terms of the Agreement, the Company must
meet certain financial covenants, including maintaining a specified
consolidated net worth, leverage ratio (debt to cash flow), interest
coverage ratio and level of capital expenditures. The Company is in
compliance with all covenants under the Agreement and had borrowings of
$206 million under the Agreement at June 30, 1998.
At June 30, 1998, the Company also had long-term and short-term borrowings
of $10.7 million under the credit facilities of approximately $19.0
million maintained by the Company's German subsidiary and other debt
totaling approximately $3.4 million. The German and other debt amounts
are more completely described in the Company's Annual Report on Form 10-K
as of December 31, 1997.
6. Earnings Per Share
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, EARNINGS PER SHARE (Statement No. 128). Statement No. 128 replaced
the calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes the dilutive effects of stock options and any
other dilutive securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. For the
Company's earnings per share calculations, the basic and diluted weighted
average outstanding shares differ only due to the dilutive impact of stock
options. All earnings per share amounts for all periods have been restated
to conform to the Statement No. 128 requirements.
7. Derivative Financial Instruments
In January 1997, the SEC issued new rules related to disclosures about
derivative financial instruments. The new rules, effective for all
financial statements issued for periods ending after June 15, 1997, require
accounting policy disclosures about derivative financial instruments used
by the Company. Effective for fiscal years ending after June 15, 1998, the
new rules also require quantitative and qualitative disclosures about
exposures to market risk from derivative financial instruments.
Derivative financial instruments are used by the Company to reduce foreign
exchange and interest rate risks.
Foreign Currency Exchange Options - As of June 30, 1998, there were no
outstanding foreign currency exchange options. As of December 31, 1997,
the Company had approximately $3.6 million of outstanding foreign currency
exchange options to exchange U.S. dollars for German marks at a set
exchange rate. These foreign exchange options do not expose the Company to
financial risk as the contracts provide an option to exchange the
currencies, but do not obligate the Company to make a foreign currency
exchange. Premiums paid for foreign currency exchange options are
amortized to Other Expense over the life of the options. Upon exercise of
foreign currency exchange options, gains are included in income.
Page 6
<PAGE>
Interest Rate Swaps - In March 1997, the Company entered into an
interest rate swap agreement that allows the Company to swap a variable
interest rate for a fixed interest rate of 6.365% (7.74% including
current spread of 1.375%) on $15 million of notional debt during a
period ending March, 1999. Subsequent to June 30, 1998, the Company
entered into multiple interest rate swap agreements for a total of
$100 million of notional debt which provide for the Company to swap a
variable interest rate for fixed interest rates ranging from 5.74% to
5.76% plus a specified spread depending on the swap involved (7.12% to
7.14% including current spread of 1.375%). These swaps expire at
various dates ranging from July 1999 to August 2000.
The notional amount of debt is not a measure of the Company's exposure to
credit or market risks and is not included in the condensed consolidated
balance sheet. Fixing the interest rate minimizes the Company's exposure
to the uncertainty of floating interest rates during this period. Amounts
to be paid or received under the interest rate swap agreements are accrued
and recorded as an adjustment to Interest Expense during the term of the
interest rate swap agreement.
8. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME (Statement No. 130). Statement No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement No. 130 requires
foreign currency translation adjustments, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement No. 130.
The components of comprehensive income, net of related tax, for
the three-month and six-month periods ended June 30, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $(37,152) $11,989 $(33,343) $19,872
Foreign currency translation adjustments 344 (685) (133) (3,812)
-------- ------- -------- -------
Comprehensive income $(36,808) $11,304 $(33,476) $16,060
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
9. Business Acquisition
On May 15, 1998, the Company, through a wholly-owned subsidiary,
acquired the Orcolite business unit of the Monsanto Company for the cash
purchase price of $101 million. For financial statement purposes, the
acquisition has been accounted for under the purchase method of accounting
with the excess of the purchase price over the fair value of the net
tangible assets acquired recorded as intangible assets which are being
amortized over periods ranging from 7 to 30 years. In addition, as a
result of the acquisition, a $9.5 million (pre-tax) charge was taken after
the close of the acquisition in the second quarter of 1998 related to the
write-off of acquired in-process research and development. The following
unaudited pro forma information presents a summary of consolidated results
of operations of the Company and the Orcolite business unit as if the
acquisition had occurred at the beginning of fiscal 1997, with pro forma
adjustments to give effect to amortization of goodwill and other intangible
assets, depreciation expense on the fair value of property, plant and
equipment and interest expense on acquisition debt, together with the
related income tax effects. The pro forma adjustments do not include the
$9.5 million write-off of acquired in-process research and development
mentioned above.
Page 7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues $90,151 $86,715 $179,243 $170,909
Net earnings (loss) (37,692) 11,196 (34,961) 17,936
Diluted earnings per share (1.40) 0.39 (1.30) 0.63
</TABLE>
The unaudited pro forma condensed combined financial information above is
not necessarily indicative of what actual results would have been had the
acquisition occurred at the date indicated or indicative of the results
that may be expected for the full year ended December 31, 1998. Also,
numerous business synergies are projected as a result of the acquisition,
including the following: consolidation of selling, marketing,
distribution, customer service and administrative functions; consolidation
of research and development and technical services functions; optimization
of combined production capacity; and improved purchasing leverage. The
anticipated financial impact resulting from such synergies has not been
reflected in the above pro forma financial information. See the
Company's Current Reports on Form 8-K as filed on April 3, 1998 and
May 29, 1998, and Current Reports on Form 8-K/A filed on July 29, 1998,
for additional information regarding the acquisition.
10. New Accounting Standards
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement requires additional
disclosure only, and as such, is not expected to change net income or
stockholders' equity as previously reported by the Company. The statement
is effective for the Company's fiscal year ended December 31, 1998.
11. Legal Matters
There are no material changes in the status of the Barth Industries legal
proceeding or any other legal proceeding or environmental matter described
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
Page 8
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BMC INDUSTRIES, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Total revenues for the second quarter of 1998 increased $4.7 million or 6%
from the second quarter of 1997. Revenues of the Precision Imaged Products
(PIP) group for the second quarter decreased 4% from the prior year period.
Television mask unit sales were up slightly over second quarter 1997; however
sales dollars were down 22% from the prior year period due primarily to a
sales mix shift from invar to AK masks and overall price reductions. Computer
monitor mask sales increased to $10.2 million in the second quarter of 1998
compared to $2.3 million in the second quarter of 1997. For the quarter,
sales of jumbo (30" and larger) television masks were down 29% and large (25"
to 29") television masks were down 22% from the prior year period. Invar
television mask sales were down 48% for the quarter. Including the impact of
the Orcolite acquisition, which was completed in May, revenues of the Optical
Products group increased 34% over the same quarter in the prior year driven
by continued strong sales of high-end products (polycarbonate, high-index,
progressive and polarizing sun lenses) which increased 83% in the second
quarter of 1998 compared to the second quarter of 1997. Excluding Orcolite,
sales of high-end products grew 34% during the same period.
Cost of sales were 97% and 73% of revenues for the second quarter of 1998 and
1997, respectively. The increased cost of sales percentage was due
primarily to Mask Operations and includes unusual charges of $9.7 million
pre-tax primarily to establish additional inventory reserves, move certain
mask inspection operations and for early mask line shutdowns and layoffs. In
addition, soft market conditions experienced by Mask Operations resulted in
pricing pressure in the mask marketplace and lower demand than expected for
both television and computer monitor masks.
Selling expenses were $3.9 million or 4.6% of revenues and $2.7 million or
3.4% of revenues for the second quarter of 1998 and 1997, respectively. The
increase is primarily due to higher selling costs associated with the Optical
Products group, principally for selling expenses related to the new premium
line of Tegra-Registered Trademark- polycarbonate lenses.
The impairment of long-lived assets of $42.8 million reflects the write-down
of the value of certain PIP Operations fixed assets, primarily those related
to the production of computer monitor masks. In accordance with Statement of
Financial Accounting Standards No. 121 (Statement No. 121) ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS, the Company recorded a charge of $26.7
million ($42.8 million pre-tax) during the quarter for write-down of these
fixed assets. After careful assessment of various factors relevant to these
assets, including the computer monitor mask market, management determined it
was appropriate to write-down the value of these assets and, accordingly,
such assets were written down to estimated fair value in accordance with
Statement No. 121.
In accordance with generally accepted accounting principles, the
independently appraised value of acquired in-process research and development
purchased in conjunction with the Orcolite acquisition, was written-off as a
charge of $6.0 million ($9.5 million pre-tax) during the quarter. See
footnote 9 for further discussion.
Interest expense in the second quarter of 1998 was $4.3 million compared to
$0.2 million in the second quarter of 1997. This increase was due primarily
to the increased debt level, debt placement underwriting fees associated with
Page 9
<PAGE>
the Orcolite acquisition and the completion of major capital projects that no
longer qualify for the capitalization of interest. The increased debt level
resulted primarily from the cash purchase of Orcolite for $101.0 million and
capital spending for expansion projects which were completed in 1997.
The provision for income taxes was 38% and 33% of pre-tax income in the
second quarter of 1998 and 1997, respectively. The second quarter 1998 tax
rate reflects the effective rate for pre-tax losses plus the benefit of a
foreign tax credit for dividends received from the Company's German
subsidiary. The second quarter 1997 tax rate was lower because it reflects the
effective tax rate on pre-tax income less the benefit of a foreign tax credit
for dividends received from the Company's German subsidiary as well as the
benefit from the reduction of the deferred tax asset valuation allowance. The
tax rate for the remainder of 1998 is currently anticipated to be
approximately 38%.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Total revenues for the first six months of 1998 increased $7.6 million or 5%
from the first six months of 1997. Revenues of the PIP group were down $1.1
million or less than 1% during the same period. Television mask unit sales
were up 9% over the first six months of 1997; however sales dollars were down
17% from the prior year due primarily to a sales mix shift from invar to AK
masks and overall price reductions. Computer monitor mask sales increased to
$18.0 million in the first six months of 1998 compared to $5.5 million in the
first six months of 1997. For the first six months of 1998, sales of jumbo
(30" and larger) television masks were down 10% and large (25" to 29")
television masks were down 24% from the prior year period. Invar mask sales
were down 46% during the same period. The weakening of the German mark
relative to the U.S. dollar had virtually no impact on earnings but reduced
sales, as compared with the prior year, by $2.6 million. Including the
impact of the Orcolite acquisition, which was completed in May, revenues of
the Optical Products group increased 21% over the same period in the prior
year driven by continued strong sales of high-end products (polycarbonate,
high-index, progressive and polarizing sun lenses) which increased 55% in the
first half of 1998 compared to the first half of 1997. Excluding Orcolite,
sales of high-end products grew 30% during the same period.
Cost of sales were 91% and 76% of revenues for the first six months of 1998
and 1997, respectively. The increased cost of sales percentage was due
primarily to Mask Operations and includes unusual charges of $9.7 million
pre-tax primarily to establish additional inventory reserves, move certain
mask inspection operations and for early mask line shutdowns and layoffs.
In addition, significant start-up costs were incurred on the new computer
monitor mask line in Cortland, New York in the first quarter of 1998. This,
combined with soft market conditions experienced by Mask Operations which
resulted in pricing pressure in the mask marketplace, contributed to the
increased cost of sales percentage. The Optical Products group gross margins
were consistent with the prior year period.
Selling expenses were $7.2 million or 4.4% of revenues and $5.6 million or
3.5% of revenues for the first six months of 1998 and 1997, respectively.
The increase is primarily due to higher selling costs associated with the
Optical Products group, principally for selling expenses related to the
new premium line of Tegra-Registered Trademark- polycarbonate lenses.
The impairment of long-lived assets of $42.8 million reflects the write-down
of the value of certain PIP Operations fixed assets as discussed above.
The charge of $9.5 million represents the value of acquired in-process
research and development purchased in conjunction with the Orcolite
acquisition as discussed above.
Page 10
<PAGE>
Interest expense in the first six months of 1998 was $5.7 million compared to
$0.3 million in the first six months of 1997. This increase is due primarily
to the increased debt level, debt placement underwriting fees associated with
the Orcolite acquisition and the completion of major capital projects that no
longer qualify for the capitalization of interest. The increased debt level
resulted primarily from the cash purchase of Orcolite for $101 million and
capital spending for expansion projects which were completed in 1997.
The provision for income taxes was 38% and 33% of pre-tax income for the
first six months of 1998 and 1997, respectively. The first half 1998 tax
rate reflects the effective rate for pre-tax losses plus the benefit of a
foreign tax credit for dividends received from the Company's German
subsidiary. The first half 1997 tax rate was lower because it reflects the
standard tax rate on pre-tax income less the benefit of a foreign tax credit
for dividends received from the Company's German subsidiary as well as the
benefit from the reduction of the deferred tax asset valuation allowance. The
tax rate for the remainder of 1998 is currently anticipated to be
approximately 38%.
FINANCIAL POSITION AND LIQUIDITY
Debt, net of cash and cash equivalents, increased $145.0 million during the
first six months of 1998. The increased debt level was due primarily to the
acquisition of Orcolite, the $16.6 million stock repurchase in January 1998,
capital spending and increased levels of working capital. Due primarily to the
increases in accounts receivable and inventory, working capital was $110.6
million at June 30, 1998 compared to $74.9 million at December 31, 1997. The
increased inventory was due primarily to the Orcolite acquisition, increased
raw material levels to support a broader product line at Mask Operations and
lower Mask Operations sales than forecast which resulted in an unfavorable
build in Mask Operations inventories. The increased accounts receivable
levels were due primarily to the acquisition of Orcolite and increased sales
in the second quarter of 1998 versus the fourth quarter of 1997. The current
ratio was 3.1 at June 30, 1998, compared to 2.6 at December 31, 1997. The
ratio of debt to equity increased to 1.7 at June 30, 1998 compared to 0.4 at
December 31, 1997 due to the increased debt levels, the reduction in equity
resulting from second quarter 1998 charges and the January 1998 stock
repurchase.
During the six months ended June 30, 1998, the Company had $11.5 million of
capital spending and expects a total of $25.0 to $30.0 million of capital
spending for the full year of 1998. The Company has a total of approximately
$270.0 million in revolving credit facilities. The unused portion of these
facilities, along with cash generated from operations, is currently expected
to be sufficient to meet the Company's future capital and operating
requirements. See footnote 4 for details of current credit facilities.
FOREIGN CURRENCY
Fluctuations in foreign currency exchange rates, principally the German mark
versus the U.S. dollar and to a lesser extent, the Indonesia rupiah and the
Hungarian forint, may affect the Company's financial results. The Company's
German subsidiary has a large portion of its sales denominated in U.S.
dollars. As most of the German subsidiary's expenses are denominated in the
German mark, this represents the most significant element of the Company's
exposure to currency rate fluctuations. This exposure is generally addressed
as needed through the purchase of forward contracts and options. As of June
30, 1998, the Company had no forward options or contracts.
Exposure to foreign currency exchange rate fluctuations also may exist with
respect to intercompany transactions with the Company's German, Indonesian
and Hungarian operations.
Page 11
<PAGE>
The Company also has an indirect exposure to Asian currencies, primarily the
Japanese yen and the Korean won, because the Mask Operations' most
significant competitors are Japanese and Korean manufacturers.
INTEREST RATE SWAPS
In March 1997, the Company entered into an interest rate swap agreement that
allows the Company to swap a variable interest rate for a fixed interest rate
of 6.365% (7.74% including current spread of 1.375%) on $15.0 million of
notional debt during the period ending March 1999. Subsequent to June 30,
1998, the Company entered into multiple interest rate swap agreements for a
total of $100 million of notional debt which provide for the Company to swap
a variable interest rate for fixed interest rates ranging from 5.74% to 5.76%
plus a specified spread depending on the swap involved (7.12% to 7.14%
including current spread of 1.375%). These swaps expire at various dates
ranging from July 1999 to August 2000. These swaps are discussed more fully
in footnote 6.
ENVIRONMENTAL
There are no material changes in the status of the legal proceedings and
environmental matters described in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
ACQUISITIONS
On May 15, 1998, the Company, through a wholly-owned subsidiary, acquired
Orcolite, a division of Monsanto Company which produces polycarbonate and
plastic ophthalmic lenses, for $101.0 million in cash. Orcolite,
headquartered in Azusa, California, had sales of $38.0 million for the twelve
months ended March 31, 1998 and is well regarded in the ophthalmic lens
industry for its manufacturing abilities, product innovation and customer
service. See footnote 9 and the Company's Current Reports on Form 8-K as
filed on April 3, 1998 and May 29, 1998, and Current Report on Form 8-K/A
filed on July 29, 1998, for additional information regarding the acquisition.
MASK OPERATIONS EXTENDED SHUTDOWN
During the second quarter of 1998, the Company announced plans to shut down
certain Mask Operations production lines for an extended period of time.
These shutdowns are being done in conjunction with the Company's normal
summer maintenance shutdowns to avoid additional ramp-up time. The actual
shutdown time for these lines will depend on customer order levels.
CAUTIONARY STATEMENTS
Certain statements included in this Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this Form 10-Q by the
Company or its representatives, as well as other communications, including
reports to shareholders, news releases and presentations to securities
analysts or investors, contain forward-looking statements made in good faith
by the Company pursuant to the "Safe Harbor" provisions of the PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. These statements relate to
non-historical information which are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
presently anticipated or projected. The Company wishes to caution the reader
Page 12
<PAGE>
not to place undo reliance on any such forward-looking statements. These
statements are qualified by important factors listed separately in "Item 1 -
Business" of the Company's Form 10-K for the year ended December 31, 1997,
which in some cases have affected and in the future could adversely affect
the Company's actual results and could cause the Company's actual financial
performance to differ materially from that expressed in any forward-looking
statement. In addition to those factors listed in the Company's Form 10-K for
the year ended December 31, 1997, the Company's future performance may be
subject to additional risks, including integration of the Orcolite
acquisition, lower demand for televisions and computer monitors, further mask
price declines, inability to penetrate the lead frame market, higher
operating expenses and lower yields associated with production start-up,
foreign currency fluctuations, successful customer part qualifications and
the effect of the economic uncertainty in Asia. These factors should not,
however, be considered an exhaustive list. The Company does not undertake
the responsibility to update any forward-looking statement that may be made
from time to time by or on behalf of the Company.
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<PAGE>
Part II: OTHER INFORMATION
ITEM 1. With regard to legal proceedings and certain environmental matters,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which begins on page 9 and Note 11 of the
"Notes to Condensed Consolidated Financial Statements" on page 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
The Company's 1998 Annual Meeting of Stockholders was held on May 8,
1998. One matter was submitted to a vote of stockholders: Election
of certain members of the Company's Board of Directors.
(1) The nominees for election to the Company's Board of Directors,
as listed in the Company's Proxy Statement dated March 31,
1998, were elected for two year terms at that meeting. Voting
for the individual nominees was as follows:
<TABLE>
<CAPTION>
Votes Withheld
Nominee Votes For or Against
------- --------- --------------
<S> <C> <C>
Mr. Lyle D. Altman 20,403,203 246,365
Mr. Paul B. Burke 20,403,203 246,365
Mr. Harry A. Hammerly 20,403,203 246,365
</TABLE>
The following directors did not stand for election this year
because their terms of office continued after the meeting: Mr.
John W. Castro and Mr. Joe E. Davis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<S> <C>
2.1 Asset Purchase Agreement, dated as of March 25, 1998,
between Monsanto Company and VIS-ORC, Inc. (incorporated
by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated March 25, 1998 and filed with the
commission on April 3, 1998 (File No. 1-8467)).
2.2 Amendment No. 1 to Asset Purchase Agreement, dated as of
May 15, 1998, between Monsanto Company and Vision-Ease
Lens Azusa, Inc. f/k/a VIS-ORC, Inc. (incorporated by
reference to Exhibit 2.2 of the Company's Current Report
on Form 8-K dated May 15, 1998 and filed with the
commission on May 29, 1998 (File No. 1-8467)).
</TABLE>
Page 14
<PAGE>
<TABLE>
<S> <C>
4.1 Form of Share Rights Agreement, dated as of June 30, 1998,
between the Company and Norwest Bank Minnesota, National
Association, as Rights Agent (incorporated by reference to
Exhibit 1 to the Company's Registration Statement on Form 8-A,
dated July 14, 1998).
10.1 Credit Agreement, dated as of May 15, 1998, between the
Company, Bankers Trust Company as Administrative Agent, NBD
Bank as Documentation Agent and Various Lending Institutions*.
10.2 Amended and Restated Credit Agreement, dated as of June 25,
1998, among the Company, Several Banks, Bankers Trust Company
as the Agent and a Lender and NBD Bank as Documentation Agent
and a Lender*.
10.3 Amendment No. 1 to Amended and Restated Credit Agreement, dated
as of July 23, 1998, among the Company, Several Banks, Bankers
Trust Company as Agent and a Lender, NBD Bank as Documentation
Agent and Lender*.
10.4 BMC Stock Option Exercise Loan Program, as amended June 12,
1998*.
27. Financial Data Schedule (filed only in electronic format)
99.1 News Release, dated July 24, 1998, announcing the second
quarter 1998 operating results*.
99.2 News Release, dated June 30, 1998, announcing the adoption
of a Share Rights Plan*.
99.3 News Release, dated June 9, 1998, announcing expected
operating earnings shortfall for second quarter and total
year 1998*.
99.4 News Release, dated June 4, 1998, announcing quarterly
dividend*.
99.5 News Release, dated May 18, 1998, announcing new
Controller*.
99.6 News Release, dated May 18, 1998, announcing completion of
the acquisition of Orcolite operations*.
</TABLE>
* Incorporated by reference to corresponding exhibit to the
Company's Current Report on Form 10-Q dated and filed with the
commission on August 14, 1998 (File No. 1-8467)
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<PAGE>
(b) REPORTS ON FORM 8-K.
1. The Company filed a Form 8-K, dated as of March 25, 1998, on
April 3, 1998, reporting the acquisition of Monsanto
Company's Orcolite business unit.
2. The Company filed a Form 8-K, dated as of May 15, 1998, on
May 29, 1998 reporting the closing of the acquisition of
Monsanto Company's Orcolite business unit.
3. The Company filed a Form 8-K, dated as of June 20, 1998, on
July 14, 1998 reporting the adoption of a Share Rights Plan.
4. The Company filed a Form 8-K/A, dated as of May 15, 1998, on
July 29, 1998, providing financial information for the
business acquired and pro forma financial information related
to the acquisition of Monsanto's Orcolite business unit.
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.
BMC INDUSTRIES, INC.
/s/ Steven E. Opdahl
------------------------------------------
Steven E. Opdahl
Controller (Principal Accounting Officer)
Dated: March 26, 1999
Page 16
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