UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
----------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 3, 1999
Commission File No. 0-25390
SMC CORPORATION
(Exact name of Registrant as specified in its charter)
Oregon 93-0939076
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20545 Murray Road
Bend, Oregon 97701
(Address of principal executive offices) (Zip Code)
(541) 995-8214
(Registrant's telephone number, including area code)
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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
The number of outstanding shares of Common Stock at May 1, 1999: 5,880,708
<PAGE>
SMC CORPORATION
INDEX TO FORM 10-Q
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - December 31, 1998 and
April 3, 1999................................................ 3
Consolidated Statement of Income - Three Months
Ended March 31, 1998 and April 3, 1999....................... 4
Consolidated Statement of Changes in Shareholders'
Equity - Year Ended December 31, 1998 and Three
Months Ended April 3, 1999................................... 5
Consolidated Statement of Cash Flows - Three Months
Ended March 31, 1998 and April 3, 1999....................... 6
Notes to Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K............................. 13
Signatures ............................................................. 14
Exhibit Index ............................................................. 15
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
SMC Corporation
Consolidated Balance Sheet
(in thousands)
- ------------------------------------------------------------------------------------------
<CAPTION>
December 31, April 3,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,310 $ 238
Accounts receivable, net 12,857 9,654
Inventories (Note 2) 26,715 31,967
Prepaid expenses and other 530 303
Prepaid taxes 897 833
Deferred tax asset 3,144 3,144
----------- ----------
Total current assets 45,453 46,139
Property, plant and equipment, net 20,551 19,141
Intangible assets, net 1,942 1,896
Other assets 74 64
----------- ----------
Total assets $ 68,020 $ 67,240
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ -- $ 3,377
Current portion of long-term debt 953 1,050
Accounts payable 24,789 19,703
Product warranty liabilities 3,766 3,776
Current portion of capital lease obligation 19 14
Accrued liabilities 6,965 8,001
----------- ----------
Total current liabilities 36,492 35,921
Long-term debt, net of current portion 7,353 7,036
Capital lease obligation, less current portion 38 38
928 928
----------- ----------
44,811 43,923
----------- ----------
Shareholders' equity:
Preferred stock, 5,000 shares authorized,
none issued or outstanding -- --
Common stock, 30,000 shares authorized,
5,890,000 shares issued and outstanding 9,604 9,604
Additional paid-in capital 1,472 1,472
Retained earnings 12,133 12,241
----------- ----------
Total shareholders' equity 23,209 23,317
----------- ----------
Total liabilities and shareholders' equity $ 68,020 $ 67,240
=========== ===========
The accompanying notes are an integral part of this financial statement.
</TABLE>
3
<PAGE>
<TABLE>
SMC Corporation
Consolidated Statement of Income
(in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended
March 31, April 3,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Sales $ 47,805 $ 56,822
Cost of sales 41,799 50,613
----------- -----------
Gross profit 6,006 6,209
Selling, general and administrative expenses 4,251 4,936
Legal and settlement costs 347 870
----------- -----------
Income from operations 1,408 403
Interest expense 140 310
Other income, net (176) (86)
----------- -----------
Income before provision for taxes 1,444 179
Provision for income taxes 528 71
----------- -----------
Net income $ 916 $ 108
=========== ===========
Net income per share - basic $ .14 $ .02
=========== ===========
Net income per share - diluted $ .14 $ .02
=========== ===========
Weighted average number of shares - basic 6,440 5,890
=========== ===========
Weighted average number of shares - diluted 6,507 5,890
=========== ===========
The accompanying notes are an integral part of this financial statement.
</TABLE>
4
<PAGE>
<TABLE>
SMC Corporation
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
(in thousands)
- --------------------------------------------------------------------------------------------------------
<CAPTION>
Common Stock Additional
--------------------- paid-in Retained
Shares Amount capital earnings Total
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 6,343 $ 10,810 $ 1,488 $ 11,995 $ 24,293
Net income -- -- -- 409 409
Common stock issued upon exercise
of common stock options 252 1,954 -- -- 1,954
Stock repurchase (705) (3,160) (16) (271) (3,447)
-------- -------- ---------- -------- --------
Balance, December 31, 1998 5,890 9,604 1,472 12,133 23,209
-------- -------- ---------- -------- --------
Net income -- -- -- 108 108
-------- -------- ---------- -------- --------
Balance, April 3, 1999 5,890 $ 9,604 $ 1,472 $ 12,241 $ 23,317
======== ======== ========== ======== ========
The accompanying notes are an integral part of this financial statement.
</TABLE>
5
<PAGE>
<TABLE>
SMC Corporation
Consolidated Statement of Cash Flows
(in thousands)
- --------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended
March 31, April 3,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 916 $ 108
Adjustments to reconcile net income to net
provided by operating activities:
Depreciation and amortization 463 566
Changes in current assets and liabilities:
Accounts receivable 376 3,203
Inventories (3,264) (5,252)
Prepaid expenses and other (29) 291
Other assets 7 10
Accounts payable (438) (5,086)
Income taxes payable 77 --
Accrued liabilities and other obligations 1,525 1,046
---------- -----------
Net cash provided by (used in) operating activities (367) (5,114)
---------- -----------
Cash flows from investing activities:
Capital expenditures (326) (214)
Lease abatement -- 1,104
---------- -----------
Net cash provided by (used in) investing activities (326) 890
---------- -----------
Cash flows from financing activities:
Net repayments on notes payable (684) 3,377
Repayments of long-term debt (298) (220)
Principal payments on capital lease obligation (4) (5)
Proceeds from issuance of common stock 1,954 --
Repurchase of capital stock (300) --
---------- -----------
Net cash used in (provided by) financing activities 668 3,152
---------- -----------
Net decrease in cash and cash equivalents (25) (1,072)
Cash and cash equivalents, beginning of period 103 1,310
---------- -----------
Cash and cash equivalents, end of period $ 78 $ 238
========== ===========
The accompanying notes are an integral part of this financial statement.
</TABLE>
6
<PAGE>
SMC Corporation
Form 10-Q
For the First Quarter Ended April 3, 1999 (unaudited)
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1. Basis of Presentation of Interim Period Statements
The accompanying financial statements are unaudited and have been prepared
by SMC Corporation (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures typically included in 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 include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the results for the interim periods reported. The financial statements
should be read in conjunction with the audited financial statements and
notes thereto included in the 1998 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for an interim
period are not necessarily indicative of the results of operations for a
full year.
2. Inventories
Inventories by major classification are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, April 3,
1998 1999
----------- -----------
<S> <C> <C>
Raw materials $ 14,982 $ 14,717
Work-in-progress 8,527 10,579
Finished goods 3,206 6,671
---------- -----------
Total $ 26,715 $ 31,967
========== ===========
</TABLE>
3. Earnings Per Share
The Company adopted FASB Statement 128, "Earnings Per Share," in the fourth
quarter of 1997. FASB 128 requires dual presentation of basic and diluted
EPS. Previously, the Company had presented primary EPS. Diluted EPS is
calculated by dividing net income by the total of the weighted average
actual shares outstanding for each period plus the number of shares
calculated as having a dilutive impact, if any, related to the stock options
under the Company's Stock Incentive Plan, and the warrants issued in
conjunction with the Company's initial public offering. Previously reported
amounts for primary EPS are the same as the diluted EPS amounts now
reported. Basic EPS is computed by dividing the net income by the weighted
average actual shares outstanding for each period presented with no
consideration as to the dilutive impact of the Company's outstanding stock
options or warrants.
7
<PAGE>
4. Related Party Transactions
During the three month period ending April 3, 1999, the Company purchased
electronic parts for a total amount of $229,000 from a supplier company that
is owned by a principal related to an officer.
5. Comprehensive Income
In June 1997, Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards, No. 130, "Reporting
Comprehensive Income." The Company has adopted the standard as of January 1,
1998. Total comprehensive income for the three months ended April 3, 1999
and March 31, 1998 was net income of $108 thousand and $916 thousand,
respectively.
6. Segment Disclosure
The Company complies with segment reporting as set forth in the Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (SFAS No. 131) effective December 1998.
Under this statement, the Company employs the aggregation criteria of this
standard.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, selected
consolidated statement of income data, expressed as a percentage of sales, and
the percentage change in such data from the comparable prior period.
<TABLE>
<CAPTION>
Three months ended
March 31, April 3, Percentage change
1998 1999 in dollar amounts
--------- --------- -----------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 18.9%
Cost of sales 87.4 89.1 21.1
-------- --------
Gross profit 12.6 10.9 3.4
Selling, general and
administrative expenses 8.9 8.7 16.1
Litigation and
settlement costs .7 1.5 150.7
-------- --------
Income from operations 3.0 .7 (71.4)
Interest expense (.3) (.6) 121.4
Other income .4 .2 (51.1)
-------- --------
Pretax income 3.1 .3 (87.6)
Provision for income taxes 1.2 .1 (86.6)
-------- --------
Net income 1.9% .2% (88.2)
</TABLE>
Sales increased 18.9% to $56.8 million for the first quarter of 1999 from
$47.8 million for the comparable period in 1998. The increase was largely the
result of a 15.2% unit sales increase to 439 units, up from 381 in the prior
year. The unit increase is principally the result of stronger demand for the
Zanzibar and Continental models of the Safari division, as well as large
increases in sales of the Monterey, Contessa and Patriot models at the Beaver
division. The Harney division's new Renegade model also had a substantial
increase in demand over the same period one year ago.
Gross profit increased $203,000 (3.4%) in the first quarter of 1999
compared to 1998, and decreased as a percentage of sales from 12.6% to 10.9%.
The gross margin percentage declined due to a decrease in the sales mix of the
Beaver Marquis product, which was undergoing a scheduled model revision during
the first half of the quarter. The Marquis model change was completed on
schedule, and late first quarter Marquis sales increased at a pace comparable to
prior year levels.
Selling, general and administrative expenses increased 16.1% to $4.9
million for the first quarter of 1999 from $4.3 million in the comparable period
of 1998. This increase was due partly to an increase in selling expenses, which
were $460,000 (23.6%) higher compared to the same period in 1998. This sales
expense increase is a result of higher commission costs and promotion expenses
associated with higher sales volumes. Settlement and legal expenses increased
150.7% to $870,000 from $347,000 for the same
9
<PAGE>
period in the prior year. The company vigorously defended itself in several
lawsuits and thus incurred higher legal costs. While there can never be a
certainty of an outcome, the Company believes it will prevail in these cases. In
addition, the Company has recently undertaken considerable measures to
strengthen its executive, customer service, and warranty functions. Mathew
Perlot has now assumed the operational responsibilities of President in addition
to his duties of CEO and Chairman of the board of directors. The Company has
reorganized its customer service and warranty department to provide higher
levels of customer attention and satisfaction.
Given the factors affecting gross margin and selling, general and
administrative expenses, operating income decreased 71.4% to $403,000 for the
first quarter of 1999 from $1.4 million in the comparable period of 1998.
Interest expense increased 121.4% to $310,000 for the first quarter of 1999
from $140,000 in the comparable period of 1998. The increase was due primarily
to increased borrowings used to purchase a service center located in Tampa,
Florida and to build product for second quarter demand prior to the model
changeovers in June. Other income was $86,000 for the first quarter of 1999
compared to $176,000 for the first quarter of 1998.
The effective tax rate rose from 36.6% in the first quarter of 1998 to
40.0% in the first quarter of 1999 as the result of a one time energy credit
received in 1998. Net income after tax for the first quarter of 1999 was
$108,000, down from first quarter 1998 net income of $916,000.
The Company's revenues historically have been subject to some seasonal
fluctuation. Demand for high-line motor coaches tends to increase with the
beginning of the new model year, which occurs during the Company's third quarter
that ends September 30.
Liquidity and Capital Resources
During the first quarter of 1998, SMC generated a negative cash flow from
operations of $5.1 million while its working capital increased from $9.0 million
at December 31, 1998 to $10.2 million at April 3, 1998 (including cash and cash
equivalents of $238,000).
The Company anticipates that its aggregate capital expenditures for 1999
will be approximately $1.0 million. The Company plans to use cash generated from
operations and borrowings under its credit arrangements to fund these
expenditures.
The Company has an operating line of credit of $10 million, a real estate
line of credit of $8.3 million and a $4.0 million equipment financing line of
credit. As of April 3, 1999, $6.6 million was available on the operating line of
credit and $3.8 million was available on the real estate line of credit. Of the
amounts outstanding on these two lines of credit, $7.5 million is at the LIBOR
interest rate of 6.75% and $399,000 is at the prime
10
<PAGE>
rate of 7.75%. The entire $4.0 million equipment financing line of credit was
available at April 3, 1999. These amounts are secured by all assets not
specifically identified in other financing obligations. The terms of the
revolving credit and equipment financing agreements require compliance with
certain financial covenants and other covenants. The Company does not believe
any of these covenants will have a material impact on the Company's ability to
meet its cash obligations. The Company was in compliance with all covenants and
agreements at April 3, 1999.
Most dealer purchases of motor coaches from the Company are financed under
flooring financing arrangements between the dealer and a bank or finance
company. Under these flooring arrangements, the financing institution lends the
dealer all or substantially all of the wholesale purchase price of a motor coach
and retains a security interest in the coach purchased. These financing
arrangements provide that, for a period of time after a coach is financed
(generally 12 to 18 months), if the dealer defaults on its payment or other
obligations to the lender, the Company is obligated to repurchase the dealer's
inventory for the amount then due from the dealer plus, in certain
circumstances, costs incurred by the lender in connection with repossession of
the inventory. The repurchase price may be more than the resale value of the
coach. The Company's contingent liability under its repurchase obligations
varies from time to time. As of April 3, 1999, the Company estimates its total
contingent liability under repurchase obligations was approximately $128.7
million. To date, losses incurred by the Company pursuant to repurchase
obligations have not been material. The Company cannot predict with certainty
its future losses, if any, pursuant to repurchase obligations, and these amounts
may vary materially from the expenditures historically made by the Company.
Furthermore, even in circumstances where losses in connection with repurchase
obligations are not material, a repurchase obligation can represent a
significant cash requirement for the Company.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. To be in "Year 2000 compliance" a computer
program must be written using four digits to define years. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
The Company has completed its evaluation of both information technology
systems ("IT") and non-IT systems to determine Year 2000 compliance. Non-IT
systems typically include embedded technology such as microcontrollers.
For most of the Company's IT systems, Year 2000 compliance issues have been
identified and a remediation plan has been developed. Many of the Company's IT
systems have been made Year 2000-compliant or require insignificant costs to
become Year 2000 compliant. The Company estimates its costs for software and
hardware upgrades to its
11
<PAGE>
systems to total approximately $75,000. The Company spent approximately $40,000
for the year ending December 31, 1998 for system upgrades to make its primary IT
system Year-2000 compliant. During the three months ended April 3, 1999, the
Company spent or committed to spend an additional $20,000.
Additionally, the Company is evaluating the readiness of its significant
suppliers, financial institutions and customers to determine the extent to which
the Company is vulnerable to those parties failing to remediate their own Year
2000 issues. To date, the Company has not received notice of or become aware of
a material Year 2000 deficiency by a significant vendor, financial institution,
or customer.
At this time, the Company believes total costs incurred in responding to
other parties' Year 2000 computer system deficiencies, together with the cost of
any required modifications to the Company's internal systems, will not have a
material impact on the Company's results of operations or financial condition.
While the Company expects that the Year 2000 will not pose significant
operational problems, delays in the installation of the new systems or upgrades
to existing systems, or a failure of its vendors, customers or financial
institutions to become Year 2000 compliant could have a material adverse effect
on the Company's business, financial condition and results of operations. To
address this contingency, the Company is in the process of developing a risk
management plan which will be completed and tested during the third quarter of
1999.
12
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement of Calculation of Average Common Shares Outstanding
27 Financial Data Schedule
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Registrant during
the quarter ended April 3, 1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMC CORPORATION
Date: May 14, 1999 By: WILLIAM L. RICH
-------------------------------
William L. Rich
Chief Financial Officer
(Principal Financial Officer)
14
<PAGE>
Exhibit Index
Exhibit
No. Description
- ------- -----------
11 Statement of Calculation of Average
Common Shares Outstanding
27 Financial Data Schedule
<TABLE>
SMC CORPORATION EXHIBIT 11
STATEMENT OF CALCULATION OF AVERAGE
COMMON SHARES OUTSTANDING
<CAPTION>
Three Months
Ended
April 3, 1999
-------------
<S> <C>
Basic Earnings Per Share:
Weighted average number of shares 5,890,208
Diluted Earnings Per Share:
Weighted average number of shares 5,890,208
Stock option plan shares to be issued at prices
ranging from $6.00 to $9.00 per share 928,500
Warrant issues at a price of $9.30 per share 125,000
-------------
Less: Assumed purchase of shares by the Company
at the average market price during the period
using the proceeds received upon the assumed
exercise of the outstanding options and warrants (1,053,500)
-------------
Total Diluted Shares 5,890,208
=============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 238
<SECURITIES> 0
<RECEIVABLES> 9,653
<ALLOWANCES> 0
<INVENTORY> 31,967
<CURRENT-ASSETS> 46,138
<PP&E> 26,844
<DEPRECIATION> 7,703
<TOTAL-ASSETS> 67,239
<CURRENT-LIABILITIES> 35,921
<BONDS> 0
0
0
<COMMON> 9,604
<OTHER-SE> 13,712
<TOTAL-LIABILITY-AND-EQUITY> 67,239
<SALES> 56,822
<TOTAL-REVENUES> 56,822
<CGS> 50,613
<TOTAL-COSTS> 50,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310
<INCOME-PRETAX> 179
<INCOME-TAX> 71
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 0.018
<EPS-DILUTED> 0.018
</TABLE>
