FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1998
Commission file number 0-14299
SECOM GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 87-0410875
(State or other jurisdiction (IRS Employer I.D. Number)
of incorporation or organization)
46035 GRAND RIVER AVENUE 48374
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 248-305-9410
Indicate by check mark whether the registrant (1) has filed all reports 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
requirement 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 close of the period covered by this report.
Title of Class Number of Shares Outstanding
Common Stock 5,335,400
<PAGE>
SECOM GENERAL CORPORATION
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1998
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets..................................1
Consolidated Statements of Operations........................3
Consolidated Statements of Cash Flows........................4
Notes to Interim Consolidated Financial Statements...........5
Item 2. Management's Discussion & Analysis of Financial Condition and
Results of Operations.......................................10
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................15
Item 2. Changes in Securities............................................15
Item 3. Defaults in Securities...........................................15
Item 4. Submission of Matters to a Vote of Security Holders.............15
Item 5. Other Information................................................15
Item 6. Exhibits and Reports on Form 8-K.................................15
<PAGE>
SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS (Unaudited)
Dec. 31 1998 Sept. 30 1998
------------ -------------
<S> <C> <C>
Current assets
Cash $ 193,000 $ 104,600
Accounts receivable
Trade 3,598,300 4,139,000
Other 530,200 163,500
Inventories 3,600,200 4,044,800
Prepaid expenses 198,400 286,500
Deferred tax assets 658,100 603,900
Property, plant and equipment held for sale 1,440,000 1,440,000
Machinery and equipment of discontinued subsidiary -- 4,200,000
----------- -----------
Total current assets 10,218,200 14,982,300
Property, plant and equipment, net 11,648,000 12,189,200
Intangible assets 134,500 146,700
Other assets 1,632,000 549,500
----------- -----------
Total assets $23,632,700 $27,867,700
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Dec. 31 1998 Sept. 30 1998
------------ -------------
<S> <C> <C>
Current liabilities
Current maturities of long-term debt $ 4,831,400 $ 4,724,900
Long-term debt classified as current 6,274,400 6,623,300
Accounts payable 1,686,200 2,925,800
Accrued wages and benefits 777,400 779,000
Accrued restructuring costs 295,000 416,000
Other accrued expenses 666,700 746,700
Debt secured by assets of discontinued subsidiary -- 2,349,800
------------ ------------
Total current liabilities 14,531,100 18,565,500
Deferred tax liabilities 960,100 960,100
------------ ------------
Total liabilities 15,491,200 19,525,600
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' equity
Common stock, $.10 par value, authorized 10,000,000 shares;
outstanding 5,335,400 shares 533,500 533,500
Additional paid-in capital 18,400,800 18,400,800
Accumulated deficit (10,792,800) (10,592,200)
------------ ------------
Total stockholders' equity 8,141,500 8,342,100
------------ ------------
Total liabilities and stockholders' equity $ 23,632,700 $ 27,867,700
============ ============
<FN>
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Dec. 31,
-----------------------------
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Net sales $ 7,315,700 $ 8,354,100
Cost of sales 6,233,600 7,461,600
----------- -----------
Gross profit 1,082,100 892,500
Selling, general and
administrative expenses 1,145,000 1,230,500
----------- -----------
Loss from operations (62,900) (338,000)
----------- -----------
Other income (expense)
Interest (214,800) (253,300)
Other, net 22,900 47,400
----------- -----------
Other expense - net (191,900) (205,900)
----------- -----------
Loss from continuing
operations before income taxes (254,800) (543,900)
Income tax benefit 54,200 82,000
----------- -----------
Loss from continuing operations (200,600) (461,900)
Discontinued operations
Loss from operations of
discontinued subsidiary -- (450,900)
----------- -----------
Net loss $ (200,600) $ (912,800)
=========== ===========
Loss per common share
(basic and diluted):
Continuing operations $ (0.04) $ (0.09)
Discontinued operations -- (0.08)
----------- -----------
Net loss per common share $ (0.04) $ (0.17)
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Dec. 31,
---------------------------
1 9 9 8 1 9 9 7
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (200,600) $ (912,800)
Adjustments to reconcile net loss to net
cash used in provided by operating activities:
Depreciation and amortization 570,200 728,500
Deferred income taxes benefit (54,200) (92,000)
Provision for doubtful accounts 17,900 17,000
Gain on sale of assets (1,000) --
Changes in operating assets and liabilities
which provided (used) cash:
Trade and other receivables (126,600) 645,100
Inventories 402,900 386,800
Prepaids 88,100 47,300
Other assets -- (8,000)
Trade accounts payable (1,063,900) 1,155,100
Accrued liabilities (50,500) (83,100)
Net cash provided by (used in)
discontinued operations 371,500 (978,700)
----------- -----------
Net cash (used in) provided by operating activities (46,200) 905,200
----------- -----------
Cash flows from investing activities:
Proceeds from disposal of property, plant
and equipment 2,000 3,000
Collections on notes receivable 37,700 3,100
Capital expenditures (13,000) (687,700)
Net cash provided by (used in) discontinued operations 2,700,000 (76,000)
----------- -----------
Net cash provided by (used in) investing activities 2,726,700 (757,600)
----------- -----------
Cash flows from financing activities:
Net change in bank line of credit 112,800 (759,000)
Proceeds from long-term obligations -- 137,400
Retirements of common stock -- (11,900)
Payments on long-term obligations (355,200) (439,000)
Net cash (used in) provided by discontinued operations (2,349,700) 173,300
----------- -----------
Net cash used in financing activities (2,592,100) (899,200)
----------- -----------
Net increase (decrease) in cash 88,400 (751,600)
Cash, beginning of period 104,600 873,300
----------- -----------
Cash, end of period $ 193,000 $ 121,700
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
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<PAGE>
SECOM GENERAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The consolidated financial statements included herein have been
prepared by Secom General Corporation (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the financial statements as of
December 31, 1998 reflect all adjustments (normal recurring
accruals) which are necessary to present a fair statement of the
results for the period then ended. These financial statements should
be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Form 10-K and
Annual Report for the fiscal year ended September 30, 1998.
Consolidation
The accompanying consolidated financial statements include the
accounts of Secom General Corporation and its wholly-owned
subsidiaries, Form Flow, Inc.; L&H Die, Inc.; Micanol, Inc.; Uniflow
Corporation; and MMC Manufacturing Corp. f/k/a Milford Manufacturing
Corporation ("Milford"). All significant intercompany accounts and
transactions have been eliminated.
Nature of Business
Secom General Corporation (the "Company") is a publicly-traded
holding company with five wholly-owned subsidiaries supplying the
automotive, truck and construction markets. The Company currently
operates in two business segments: metal parts forming and tooling.
In March 1998 the Company discontinued its production machining
segment and in October 1998 completed the disposition of its
remaining assets (see Note 2). Accordingly, results of operations of
Milford for the three months ended December 31, 1998 have been
restated as discontinued operations.
Restructuring and Realignment of Business
During the year ended September 30, 1998, management significantly
reduced the size of the Company's consolidated business in order to
stem negative operating cash flows and reduce secured debt
obligations. Those efforts culminated in the sale of various
operating assets, including the discontinued Milford subsidiary and
various machinery and equipment of Uniflow, as well as revised part
pricing or product discontinuation on low margin sales and
production. Management believes that these efforts have
substantially reduced the operational circumstances which created
the negative cash flows and significant operating losses. As this
trend continues, management believes internally generated cash from
operations and amounts available on the line of credit will be
sufficient to cover scheduled debt payments as well as fund
continuing working capital requirements, and restore normal banking
relations including compliance with ongoing
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<PAGE>
debt covenants. While management is committed to continuing its
efforts to improve operating results in the normal course of
business over the long term, it nevertheless has also engaged an
investment banking firm in October 1998 to assist in the development
of other strategic alternatives, such as the possible sale or merger
of all or part of the Company's continuing business. As such,
although the Company would consider any meaningful offer on
favorable terms, continuing as an independent profitable going
concern is considered a viable alternative to maximizing shareholder
value.
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of income and expenses during the reporting
period. Significant estimates include fair value of assets held for
sale, realization of tax benefits associated with net operating
losses and tax credit carryforwards, and impairment of property and
goodwill assets.
Reclassifications
Certain reclassifications have been made to the prior period
balances for comparative purposes.
Property, Plant and Equipment
Property, plant and equipment used in conducting the business are
stated at cost. Major improvements and renewals are capitalized
while ordinary maintenance and repairs are expensed. Management
reviews these assets on an ongoing basis to determine whether
carrying values have been impaired.
Property, plant and equipment held for sale are reported at
estimated fair value less estimated costs to sell.
Intangible Assets
Intangible assets consisting of goodwill (cost in excess of net
assets acquired) is currently amortized on a straight-line basis
over 5 years. Accumulated amortization was $520,800 as of December
31, 1998 and $508,600 as of September 30, 1998. Management reviews
the carrying value of goodwill on an ongoing basis to assess its
recoverability.
Earnings (Loss) Per Common Share
Earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the year. The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share", effective October 1, 1997. This statement
requires a dual presentation and reconciliation of "basic" and
"diluted" per share amounts. Diluted reflects the potential dilution
of all common stock equivalents. At December 31, 1998 and 1997
options to purchase 414,000 and 638,500 shares, respectively, were
excluded from the computation of earnings per share because the
options' exercise prices were greater than the average market price
of the common shares. A reconciliation of the denominators used in
the basic and diluted share calculation for continuing operations
follows for the three months ended December 31:
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<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
1 9 9 8 1 9 9 7
--------- ---------
<S> <C> <C>
Denominator:
Weighted average shares outstanding, basic 5,335,400 5,335,400
Incremental shares from assumed
Conversion of options -- 500
--------- ---------
Weighted average shares outstanding, diluted 5,335,400 5,335,900
========= =========
</TABLE>
2. DISCONTINUED OPERATIONS - PRODUCTION MACHINING SEGMENT
Effective March 18, 1998, the Company sold all of its assets
relating to Milford's machined brake valve parts business in
transactions with Varity Kelsey-Hayes Corporation ("VKH") and PGK
Acquisition Corp. ("PGK"). VKH was Milford's primary customer and
Secom had acquired the assets and business of Milford from VKH
effective November 1, 1996. Milford sold back to VKH, for $3 million
in cash, the machinery, equipment and tooling used in connection
with the manufacture of machined brake valve body parts along with
its industrial facility. In addition to the cash portion of the
purchase price, VKH also assumed any funding contributions required
to be made to the Milford pension plan.
PGK acquired other machined valve related assets in exchange for the
assumption of approximately $1.2 million in accounts payable, other
accruals of approximately $700,000, and the bargaining unit employee
retiree health care obligation, recorded at $3.4 million. PGK now
operates the Milford business and also assumed Milford's obligations
under a supply agreement with VKH. In July 1998, the Company also
received $450,000 for the sale of certain Milford equipment
associated with the machining of various automotive seating
components.
On October 27, 1998, the Company sold the remaining assets and
business of Milford to Delco Remy America, Inc. ("DRA"), for the
purchase price of $4.2 million dollars, receiving $2.7 million in
cash and a $1.5 million promissory note. DRA purchased all of
Milford's machinery, equipment and certain inventories that were
used to produce machined starter motor shafts for DRA. The remaining
inventory was sold to Horizon Technology Group, L.L.C. in a separate
transaction. Accordingly, these assets were recorded at their net
realizable values as of September 30, 1998.
The $2.7 million in cash received from the sale was used to payoff
$2.3 million in term debt secured by those assets and the balance
was used to reduce accounts payable and the line of credit. Terms of
the $1.5 million promissory note require four annual installments of
$375,000, plus interest at 8.5%, beginning September 1, 1999.
3. INVENTORIES
Inventories at December 31, 1998 and September 30, 1998 consist of
the following components (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
Dec. 31 1998 Sept. 30, 1998
------------ --------------
<S> <C> <C>
Raw materials $ 303 $ 562
Work-in-process 1,265 1,366
Finished goods 2,032 2,117
------ ------
Total $3,600 $4,045
====== ======
</TABLE>
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<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following assets at
December 31, 1998 and September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
Dec. 31 1998 Sept. 30, 1998 Life
------------- -------------- -------------
<S> <C> <C> <C>
Machinery and equipment $ 14,309 $ 14,344 2 to 20 years
Building and improvements 4,705 4,705 3 to 30 years
Land and improvements 448 448
Furniture and fixtures 1,724 1,716 3 to 7 years
Vehicles 123 123 3 years
------------- ------------
Total 21,309 21,336
Less accumulated depreciation 9,661 9,147
------------- ------------
Net book value $ 11,648 $ 12,189
============= ============
</TABLE>
5. LONG-TERM DEBT
Long-term debt principally consists of a bank line of credit, real
estate mortgages, equipment term notes and industrial revenue bonds.
During fiscal 1998, the Company violated certain bank debt covenants.
As a result, in November 1998 the Company's primary lender required
the Company to replace its current credit facilities with an
amendment and extension agreement, which extended continuing credit,
up to $3 million at prime plus 1%, through February 1, 1999. In
February 1999 the Company signed another extension agreement, with
terms similar to that of the November 1998 agreement, that provides
financing through May 1, 1999. Borrowings on the bank line of credit
are collateralized by accounts receivable and inventory and limited
to stated advance rate percentages. Interest is payable monthly. The
agreement prohibits the payment of cash dividends and requires the
Company to maintain specific financial covenants including a minimum
total equity, current ratio and EBITDA. The Company is working with
its secured lenders closely and has continued to make all scheduled
debt payments through January 1999. Management believes it can
extend current debt facilities with existing lenders or refinance
with other lenders on a continuing basis.
6. COMMITMENTS AND CONTINGENCIES
Trading of Common Stock
In November 1998, the Company's common stock was scheduled to be
delisted from trading on the National Association of Securities
Dealers Automated Quotation System (NASDAQ) National Market System
as a result of the Company failing to meet certain minimum listing
requirements. The Company requested a hearing to appeal the proposed
delisting action and the delisting action has been stayed pending
the outcome of the Company's appeal. The appeal was heard January
21, 1999 and no decision has been received from the NASDAQ.
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<PAGE>
7. SUPPLEMENTAL CASH FLOWS INFORMATION
Cash payments for interest and income taxes for the three months
ended December 31, 1998 and 1997, respectively, were (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
1 9 9 8 1 9 9 7
--------- ---------
<S> <C> <C>
Interest:
Continuing operations $ 191 $ 168
Discontinued operations 27 147
Income taxes:
Continuing operations -- 10
Discontinued operations -- --
</TABLE>
During the quarter ended December 31, 1998, the Company received a
$1.5 million note as partial consideration in connection with the
sale of the remaining Milford assets (see Note 2).
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
This management's discussion and analysis of financial condition and
results of operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to
certain risks and uncertainties, including those discussed below, that may
cause results to differ materially from historical results or those
anticipated. In this report the words "expects", "anticipates", "believes",
and similar expressions identify forward-looking statements, which speak only
as to the date hereof.
The Company operates in two business segments: Metal Parts Forming
and Tooling. The Metal Parts Forming Segment manufactures cold forged and
cold headed parts, while the Tooling Segment provides perishable tooling for
the cold heading industry.
Although sales for the quarter ended December 31, 1998 declined by
12.4% over the same quarter last year, the Company recorded a significantly
reduced loss from continuing operations in the current period. The Company
recorded a loss from continuing operations of ($201,000), or ($0.04) per
share, for the quarter ended December 31, 1998 compared to a loss from
continuing operations of ($462,000), or ($0.09) per share, in the December
31, 1997 quarter. The reduction in the loss from continuing operations was
primarily due to Uniflow, as results of the part price increases implemented
in October 1998 as part of Uniflow's restructuring plan, were realized.
Uniflow's improvement in results was offset by a decline in the Tooling
Groups' operating results attributable to their decline in sales. The
decrease in consolidated sales for the comparative periods was due to the
discontinuance of unprofitable product lines at Uniflow and lower sales
primarily to the Tooling Group's larger customers.
The Company's cash flows from operations, amounts available on
its line of credit combined with cash generated from the sales of the Milford
production machining line assets was sufficient to fund operations through
the end of the fiscal quarter ended December 31, 1998, including the timely
payment of all scheduled debt obligations. The Company is working with its
secured lenders closely and has continued to make all scheduled debt payments
through January 1999. In November 1998, the Company entered into an extension
agreement with its primary lender, which provided financing through February
1, 1999. A new extension agreement, with terms similar to the November 1998
agreement, was signed in February 1999 and provides financing through May 1,
1999.
Management believes it can extend current debt facilities with
existing lenders or refinance with other lenders on a continuing basis. The
Company believes that cash flows from operations and amounts available on its
line of credit will be sufficient to fund continuing operations through
fiscal 1999.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS BY SEGMENT
METAL PARTS FORMING SEGMENT
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
Dec. 31, 1998 Dec. 31. 1997
--------------------- ---------------------
Amount % Amount %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Net Sales ................. $ 3,858 100.0 $ 4,448 100.0
Gross Profit (Differential) 145 3.8 (379) (8.5)
Operating expenses ........ 251 6.5 415 9.3
Operating loss (1) ........ (106) (2.7) (794) (17.9)
<FN>
- --------------------
(1) Before interest, bad debt and corporate overhead expense.
</TABLE>
The Metal Parts Forming Segment is comprised of the Company's
Uniflow subsidiary. Uniflow currently manufactures suspension ball-joint
housings, truck wheel fasteners, transmission shaft parts and a variety of
OEM cold-formed and forged parts. Customers are primarily automotive and
trucking-related original equipment manufacturers ("OEM") and service part
manufacturers ("after-market").
Uniflow's sales decreased 13.3% in the current quarter compared to
the same period last year. The sales decrease was primarily related to the
discontinuation of various cold headed parts, primarily automotive starter
motor shafts. Management is continuing to review all of its sales efforts
with the objectives of retaining only profitable product lines and obtaining
new sales that fit within its current production capability.
Uniflow's gross margin was 3.8% of sales in the current quarter,
compared to a gross differential of (8.5%) of sales in the prior year
comparative period. The significant improvement in the current period is due
principally to the parts repricing Uniflow instituted in October 1998. The
Company also benefited from lower direct labor, supply and certain other
overhead costs as a result of the restructuring begun during the second
fiscal quarter of 1998.
The Uniflow restructuring is still in process as the Company
continues to try to improve its production efficiencies, reduce labor and
overhead costs and conclude ongoing negotiations with an automotive OEM
customer to recoup its fiscal year 1996 investment of over $3 million in new
equipment. Although the full impact of the parts repricing is not known,
management believes that this effort has and will continue to significantly
narrow Uniflow's operating losses. Should Uniflow continue to experience
lower sales, the Company believes the above steps would substantially
mitigate the impact on its gross margin.
Operating expenses were 6.5% of sales in the current quarter,
compared to 9.3% in the prior comparative period. The decrease in operating
expenses was due primarily to lower personnel and sales related costs due to
the reduced administrative resources necessary to support the decreased sales
volume. Management anticipates operating expenses to remain similar or
decline as a percentage of sales.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
TOOLING SEGMENT
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
Dec. 31, 1998 Dec. 31. 1997
------------------- -------------------
Amount % Amount %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Net Sales (1) ...... $3,672 100.0 $4,493 100.0
Gross Profit ....... 783 21.3 1,105 24.6
Operating expenses . 506 13.8 526 11.7
Operating profit (2) 277 7.5 579 12.9
<FN>
- --------------------
(1) Before elimination of intercompany sales.
(2) Before interest, bad debt and corporate overhead expense.
</TABLE>
The Tooling Segment is comprised of the Form Flow, L&H and Micanol
units. The Tooling operations manufacture and sell customized tools and dies
for use in the production of hot and cold-formed metal parts.
Tooling sales decreased by 18.3% in the current quarter compared to
the same quarter last year. The decline in sales in the current quarter is
primarily attributed to lower sales orders from a few of its larger accounts
and slower orders across the entire cold heading industry, compared to the
prior year period. The largest component of the decline was L&H sales to
Uniflow, as Uniflow's tooling requirements were reduced because of the sale
of its National FX 1250 parts former in connection with restructuring efforts
begun in the second fiscal quarter of 1998. Sales to Form Flow and Micanol
customers were also down. Management is aggressively pursuing additional
orders and believes future sales will increase moderately over sales for the
quarter ended December 1998.
Tooling gross profit declined to 21.3% in the current period,
compared to 24.6% in 1997. The 1998 gross profit percentage decreased
principally because of the lower sales volume combined with higher direct
labor costs. Management intends to more closely match its direct labor costs
to its sales volumes so as to achieve a higher gross margin.
Operating expense increased to 13.8% of sales in the current quarter
compared to 11.7% in the prior year period. The increase in the percentage is
due to the decline in sales.
DISCONTINUED SEGMENT - PRODUCTION MACHINING
During the second fiscal quarter of 1998, the Company discontinued
its Milford operation due to ongoing adverse operating results. Accordingly,
first fiscal quarter 1998 results of operations have been restated.
CORPORATE EXPENSES
Unallocated corporate overhead was $405,000 in the current quarter,
compared to $302,000 in 1997. The increase in 1998 primarily reflects higher
professional fees associated with the hiring of an investment banker and fees
associated with refinancing the line of credit and other term debt held by
the Company's primary lender.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
INTEREST EXPENSE
Interest expense was $215,000 in the current quarter, compared to
$253,000 in the prior year period. The decrease in interest expense in 1998
compared to 1997 resulted principally from a reduction of secured debt due to
various asset sales for cash.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position was a negative $4.3 million
at December 31, 1998 and a negative $3.6 million at September 30, 1998. The
negative working capital position results from the classification of
long-term debt to current, as the Company was in default of certain bank
covenants as of December 31 and September 30, 1998, respectively. Management
believes that it will be able to refinance this debt on a continuing basis in
the coming months.
The increase in the working capital deficit was due to the
reclassification of $1.1 million, of the $1.5 million note, received from the
sale the Milford starter motor machining line from "Machinery and equipment
of discontinued subsidiary" (a current asset) to "Other assets" (a noncurrent
asset), in accordance with generally accepted accounting principles. The
Company received the $1.5 million note and $2.7 million in cash from the sale
of the Milford starter motor machining line assets and business in October
1998. The Company used $2.3 million of the cash to payoff a term loan secured
by those assets and the balance was used to reduce accounts payable and the
line of credit.
Management believes that internally generated cash from operations
and amounts available on the bank line of credit will be sufficient to cover
scheduled debt payments as well as fund continuing working capital
requirements. Additionally, the Company expects to improve its liquidity and
reduce outstanding debt by selling noncore assets. These assets include the
$1.4 million classified as "Property, plant and equipment held for sale" on
the balance sheet.
Net cash provided by operating activities, before changes in
working capital items, was $332,000 in the quarter ended December 31, 1998,
while working capital changes and discontinued operations used $378,000 of
cash, for a net use of cash from operating activities of $46,000. The working
capital use of cash resulted from a reduction in accounts payable of $1.06
million, offset by a reduction in inventories of $403,000 and cash provided
by discontinued operations of $371,000. In the prior year quarter, net cash
used by operating activities, before changes in working capital items, was
$259,000, while working capital changes and discontinued operations provided
$1.16 million in cash, for net cash provided by operating activities of
$905,000. An accounts payable increase combined with accounts receivable and
inventory decreases generated $2.1 million of cash, while discontinued
operations used $979,000 primarily from an increase in accounts receivable.
Net cash provided by investing activities was $2.73 million in the
current quarter, of which $2.7 million was from the sale of the remaining
Milford machinery, equipment and business. In the prior year period, net cash
used in investing activities was $758,000, of which $688,000 was for capital
expenditures. The 1997 capital expenditures included the expansion of the L&H
Die building and production equipment in all segments, including the new
corporate wide computer systems.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net cash used by financing activities was $2.59 million. Continuing
operations used $242,000, principally for scheduled debt payments, and
discontinued operations used $2.35 million to extinguish term debt. In the
prior year comparative period, cash used in financing activities was
$899,000, of which $759,000 represented a paydown on the Company's bank line
of credit and scheduled debt payments required $439,000, offset by proceeds
from long term obligations of $137,000. Cash provided by discontinued
operations of $173,000.
YEAR 2000 DATE CONVERSION
The Company has engaged a consultant who has reviewed all of the
Company's software and hardware to determine that such systems are capable of
processing date and transactions pertaining to the year 2000. The initiative
utilizes both Company resources and external resources to identify systems
and applications affected, to correct existing systems or to acquire
replacement systems, and to test the systems and applications for compliance
with the requirements for processing year 2000 information. In addition, the
Company is seeking certification of Year 2000 compliance from its significant
third party vendors. The Company is in the process of determining the total
cost associated with the required modifications and conversions but does not
believe such costs will be material.
-14-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults in Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Two Form 8-K's were filed, the first was dated November 11, 1998
regarding the sale of the remaining assets and business of Milford to Delco
Remy America, Inc., and the second was dated November 23, 1998 regarding the
change in the Company's independent accountants from Deloitte & Touche, LLP
to Rehmann Robson, P.C.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
SECOM GENERAL CORPORATION
(Registrant)
By: /s/ Paul Clemente February 12, 1999
--------------------------------
Paul Clemente
Vice President
By: /s/ Scott J. Konieczny February 12, 1999
-------------------------------
Chief Financial Officer
-16-
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