Certain Factors That May Affect the Company's Business and Future Results
This annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results may differ
materially from the results projected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to, the
following:
We Have a History of Losses Although We Have Been Profitable Since Fiscal Year
1995
We were profitable in fiscal 1995, 1996, 1997 and 1998, after losing
approximately $21.4 million during fiscal years 1987 through 1994. A number of
factors caused our losses. Foremost was a decline in revenues due in part to
reduced government spending on defense-related products. In the past, these
products represented the majority of our business. We expect defense-related
products to represent a substantial portion of our business in the foreseeable
future. Therefore, future declines in government defense-related expenditures
may adversely affect our future profitability.
Past losses were also caused by declines in sales of our translucent ceramic
orthodontic bracket, from peak revenues of $6.2 million in 1988 to $.4 million
in 1994. Sales of this bracket declined in part because our exclusive bracket
distributor, Unitek Corporation, a subsidiary of Minnesota Mining & Mfg. Co.,
had accumulated excess inventory levels. Sales also declined because technical
problems caused some orthodontists to resist using earlier versions of the
bracket.
To maintain profitability and achieve revenue growth, we must, among other
things:
. develop the capacity to manufacture ceramic body armor in volume and to
address other opportunities for the use of our ceramics in armor
applications
. sell significant amounts of the newest version of our translucent
orthodontic bracket product, marketed by Unitek under the brand name
"Clarity";
. develop the capacity to successfully manufacture semiconductor equipment
components in volume and at acceptable profit margins; and
. continue to upgrade our technologies and commercialize products and
services incorporating such technologies.
If we do not successfully manage the factors that led to our losses, if we fail
to develop, manufacture and market profitable, high-quality ceramic products, or
if factors beyond our control reduce sales or profitability, we may not improve,
or even sustain, our current profitability.
13
We Must Successfully Develop and Market New Products; We have Limited
Volume Manufacturing Experience for Products Under Development
Our future prospects will depend to a large extent on the success of products
which currently provide little revenue or which remain under development. These
products include:
. semiconductor equipment components;
. lightweight ceramic armor vests for military personnel; and
. ceramic components for automobile and diesel engines.
We are developing ceramic automotive and diesel engine components based on our
belief that a significant market for these products will emerge. However,
predicting future demand for such components is fraught with uncertainties.
This is a new and evolving market and advanced technical ceramics are not
currently used in any significant automotive applications. It is possible that
such applications will never emerge.
Even if a market emerges, our efforts to produce ceramic components for
automobile and diesel engines remain in the experimental stage. To successfully
produce these components, we must significantly lower manufacturing costs and
develop high volume manufacturing capabilities while maintaining component
quality. If we meet our production goals, it typically takes several years to
introduce new materials and components into production automobiles. Thus,
demand for these products and our ability to service such demand are subject to
a high degree of uncertainty.
Nevertheless, we believe that such a market will emerge eventually and that we
will be well-positioned to capitalize on it. We have received a letter of
intent for the production of diesel engine components made from Ceradyne's
Ceralloy 147-lN sintered reaction bonded silicon nitride (SRBSN). We expect to
begin production late in the first quarter of 1999 and to ship approximately $1
million annually starting in the second quarter of 1999. Contingent upon our
1999 performance, including meeting certain customer quality and delivery
milestones, we anticipate significantly higher sales volumes in the year 2000
and beyond.
Failure to Manage Our Growth Could Adversely Affect Us
Our current introduction of new products is placing, and will continue to place,
a significant strain on our resources and personnel. To continue our growth, we
must introduce new products that apply our core advanced technical ceramic
technologies. Managing this transition to new products will strain our
operational, financial and managerial resources into the foreseeable future.
To effectively manage growth, particularly given the increasingly international
scope of our operations, we must:
. add manufacturing capacity and personnel;
. continue to implement and improve our operational, financial and
management information systems;
. develop the management skills of our managers and supervisors;
. add new management personnel and improve the expertise of existing
management personnel; and
. train, motivate and manage our employees.
14
Any failure to effectively manage growth could have material adverse effects on
our business, operating results and financial condition.
We Depend on Joel P. Moskowitz and Our Other Key Personnel
Our success largely depends on the continued service of our principal managers.
Many of these managers, and in particular Joel P. Moskowitz, who is Chairman,
Chief Executive Officer and President, and a principal stockholder of Ceradyne,
would be extremely difficult to replace. We also depend on other key personnel,
and our ability to attract, motivate and retain highly qualified personnel.
Competition for skilled employees is intense and there can be no assurance that
we will be able to recruit and retain such personnel. In addition, although Mr.
Moskowitz has an employment agreement with us that expires in July 1999, no
other employee has an agreement for a specified term of employment with
Ceradyne. If we are unable to retain our existing managers and employees or
hire and integrate new employees, it could have material adverse effects on our
business, operating results and financial condition.
The Advanced Technical Ceramics Markets Are Highly Competitive
The markets for applications of advanced technical ceramics are competitive. We
believe the principal competitive factors in these matters are:
. product performance;
. material specifications;
. application engineering capabilities
. customer support
. reputation; and
. price
At present, while we believe that we compete favorably with respect to these
factors, this may change. If we fail to address our competitive challenges,
there could be material adverse effects on our business, financial condition and
results of operations.
Our competitors include divisions of larger companies and manufacturers of non-
ceramic materials. Many of these competitors, both domestic and international,
have greater financial, marketing and technical resources than we do. Our
primary competitors include Kyocera Corporation's Industrial Ceramics Group,
Vesuvius, McDanel Refractories, Cercom, Coors Ceramics Company, Spectromat, and
others. No only do we compete with many large companies, but each of our
product lines competes with completely different companies.
We cannot guaranty that we will be able to compete successfully against our
current or future competitors or that competition will not have material adverse
effects on our business, operating results and financial condition
We Could Be Liable for Violations of Environmental Laws and Regulations
We are subject to a variety of environmental regulations relating to the use,
storage, discharge and disposal of hazardous materials used to manufacture our
products. Authorities could impose fines, suspend production, alter our
manufacturing processes, or stop our operations if we do not comply with these
regulations.
15
In the past, we produced certain products using beryllium oxide, which is highly
toxic in powder form. This powder, if inhaled, can cause chronic beryllium
disease in a small percentage of the population. In recent years, we have been
sued by former employees and a family member of a former employee alleging that
they had contracted chronic beryllium disease as a result of exposure to
beryllium oxide powders used in our products. We settled several of these
claims without incurring material liability, but several lawsuits are still
pending. We cannot guaranty that we will avoid future liability to persons who
allege that they contracted chronic beryllium disease as a result of exposure to
beryllium oxide utilized by Ceradyne.
While we believe we are in material compliance with all applicable environmental
statutes and regulations, any failure to comply with current or subsequently
enacted statutes and regulations could subject us to liabilities, fines or the
suspension of production. Furthermore, claims asserted against us related to
exposure to beryllium oxide powder may not be covered by insurance. Even if
covered, the amount of insurance may be inadequate to cover any adverse
judgment.
Fines and other punishments imposed in connection with environmental violations
and expenses related to remediation or compliance with environmental regulations
and future liability for incidences of chronic beryllium disease contracted by
employees could have material adverse effects on our business, operating results
and financial condition.
We were recently notified by the United States Environmental Protection Agency
that Ceradyne is a responsible party in the federal Superfund cleanup of the
Casmalia Disposal Site located in Santa Barbara County, California. The
notification states that Ceradyne, along with approximately 10,000 other
companies, has been designated as a de minimus waste generator due to the
relatively small quantity of the waste disposed at the Casmalia Disposal Site.
We properly disposed of this waste material in the 1970s and 1980s. However,
waste materials disposed at the Casmalia Disposal Site have leaked into the
water table. Under federal law, all parties who have disposed of waste
materials at the Casmalia Site must pay their proportional share of the cost of
the cleanup effort. In the fourth quarter of 1998, we recorded an expense in
the amount of $0.2 million as the estimated amount of our share of the cleanup
costs. We are currently investigating whether we are entitled to reimbursement
for this cost under our insurance policies.
We Depend Upon Sales to Agencies of the United States Government; We Face
the Risk That a Key Government Contract May be Terminated
We have a $17.0 million backlog of orders as of December 31, 1998. Of this
amount, approximately $8.5 million, or 50%, represents orders for defense
applications. These orders are closely tied to the level of U.S. defense
spending. Certain contracts for helicopter armor are directly or indirectly
with agencies of the United States government. Moreover, we anticipate that a
significant percentage of our revenues for the foreseeable future will derive
from direct or indirect sales to government agencies.
In recent years, the budgets of many government agencies have been reduced,
causing some of our customers and potential customers to re-evaluate their
needs. However, this trend was partially arrested in the first quarter of 1998.
A U.S. government agency selected Ceradyne to provide certain ceramic armor
products over a 5-year period. We received our first production order under
this program in October 1998 in the amount of $2.4 million. The government has
indicated that it may order as much as $100 million or more in products from us
over the 5-year life of this program, but there is no minimum amount that the
government is required to purchase and all orders are at the full discretion of
the government.
16
Under U.S. law, defense-related contracts may be canceled by the government for
convenience at any time and without cause. If that happens, we receive
reimbursement only for the expenses we actually incurred. Any such
cancellations could have material adverse effects on our business, operating
results and financial condition.
Sales of our Ceramic Orthodontic Brackets Depend on Our Exclusive Marketing
and Sales Relationship with Unitek
We developed our translucent ceramic orthodontic bracket pursuant to a joint
development agreement with Unitek. We sell this product only to Unitek pursuant
to an exclusive marketing agreement which expires in 2007. Consequently, our
sales of this product depend entirely on Unitek's marketing and sales efforts.
We also depend on customer and technical feedback from Unitek for the design of
improvements to the bracket. Some orthodontists were reluctant to use early
versions of this product. They preferred using traditional stainless steel
brackets and were wary of certain technical problems associated with earlier
versions of our ceramic bracket. These problems included:
. difficulty in removing, or debonding, the bracket from the tooth;
. breakage of brackets during the treatment process more often than
experience with stainless steel brackets; and
. slower movement of the metal arch wire through the ceramic brackets,
resulting in longer treatment times than with stainless steel brackets.
Designs introduced in October 1996 under the Unitek brand name "Clarity" are
intended to improve certain features of earlier versions of the bracket, but we
cannot guaranty that these new products will completely eliminate the
aforementioned problems or will receive wide market acceptance. Furthermore, we
cannot guaranty that Unitek will devote substantial marketing efforts to sales
of our orthodontic products, or that Unitek will not reassess its commitment to
our technologies or develop its own competitive technologies. If Unitek fails
to actively market our orthodontic brackets, or such brackets fail to achieve
market acceptance, there may be material adverse effects on our business,
operating results and financial condition.
We Depend on Our International Sales; We are Subject to Risks Associated
with Operating in International Markets
Shipments to customers outside of the United States accounted for approximately
20% of our sales in 1996, 20% in 1997, and 10% in 1998. We anticipate that
international shipments will account for a significant portion of our sales for
the foreseeable future. Therefore, the following risks associated with
international business activities could have material adverse effects on our
performance:
. burdens of comply with multiple and potentially conflicting foreign laws
and regulations, including export requirements, tariffs and other
barriers, health and safety requirements, and unexpected changes in any
of the foregoing.
. difficulty in obtaining export licenses from the U.S. government;
. differences in intellectual property protections;
. longer accounts receivable payment cycles;
17
. potentially adverse tax consequences due to overlapping or differing tax
structures;
. fluctuations in currency exchange rates; and
. risks associated with sales to foreign government agencies similar to
the risks associated with dealing with U.S. government agencies.
We have traditionally invoiced all of our foreign sales in U.S. dollars.
Accordingly, we do not currently engage in foreign currency hedging transactions
that could protect against the risk of currency fluctuations. This approach
could pose risks. If the U.S. dollar were to become more expensive relative to
the currencies of our foreign customers, the price of our products in those
countries rises and our sales into those countries, or our profitability within
those countries, may fall.
Future international activity may require that we denominate foreign sales in
the local currencies of our customers. In that case, if the U.S. dollar were to
become more expensive relative to the currencies of our foreign customers, we
would receive fewer U.S. dollars for each unit of foreign currency that we
receive when our customers pay us. Therefore, a more expensive U.S. dollar would
cause us to incur losses upon the conversion of accounts receivable denominated
in foreign currencies. Such losses could harm our results of operations
We cannot export some of our products to certain foreign countries without an
export license obtained from the U.S. government. We have experienced difficulty
in obtaining licenses to export our products to certain countries. Similar
difficulties may arise again in the future. If any of the above risks emerge,
there may be material adverse effects on our business, operating results and
financial condition.
We May be Adversely Affected If We Are Unable to Adequately Safeguard Our
Intellectual Property or If We Infringe on Other's Intellectual Property
We rely on a combination of patents, trade secrets, trademarks, and other
intellectual property law, nondisclosure agreements and other protective
measures to preserve our proprietary rights to our products and production
processes. These measures afford only limited protection and may not preclude
competitors from developing products or processes similar or superior to ours.
Moreover, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as the laws of the United States.
Although we implement protective measures and intend to defend our proprietary
rights, there can be no assurance that these efforts will succeed. We may have
to litigate within the United States or abroad to enforce patents issued or
licensed to us, to protect trade secrets or know-how owned by us or to determine
the enforceability, scope and validity of our proprietary rights and the
proprietary rights of others. Enforcing or defending our proprietary rights
could be expensive and might not bring us timely and effective relief.
Furthermore, there can be no assurance that our products or processes are not in
violation of the patent rights of third parties, or that any of our patents will
not be challenged, invalidated or circumvented. Although there are no pending
or threatened intellectual property lawsuits against us, we may face litigation
or infringement claims in the future. Infringement claims could result in
substantial costs and diversion of our resources even if we ultimately prevail.
A third party claiming infringement may also obtain an injunction or other
equitable relief which could effectively block the distribution or sale of
allegedly infringing products. Although we may seek licenses from third parties
covering intellectual property that we are allegedly infringing, we cannot
guarantee that any such licenses could be obtained on acceptable terms, if at
all.
18
If we fail to adequately protect our intellectual property, or if we face claims
for infringement on the intellectual property of third parties, there may be
material adverse effects on our business, operating results, and financial
condition.
Item 2. Properties
The Company serves its markets from three manufacturing facilities across the
United States. The Company's Advanced Ceramic Operations, located in Costa
Mesa, California, primarily produces armor and orthodontic products, components
for semiconductor equipment, and houses the Company's SRBSN research and
development activities. The Company's cathode development and production are
handled through its Semicon Associates division located in Lexington, Kentucky.
Fused silica products, including missile radomes, are produced at the Company's
Thermo Materials division located in Scottdale, Georgia. These three facilities
comprise approximately 74,000, 35,000 and 85,000 square feet, respectively. The
Company's Costa Mesa and Scottdale facilities are held under long-term leases
which expire in October 2000 and December 2000, respectively. The Company owns
its Lexington, Kentucky facilities.
Ceradyne's manufacturing structure is summarized in the following table:
Item 3. Legal Proceedings
The Company is, from time to time, involved in various legal and other
proceedings that relate to the ordinary course of operating its business,
including, but not limited to, employment-related actions and workers'
compensation claims.
In October 1995 the Company was served with a complaint that was filed by four
persons and the spouses of those persons, who are/were employed by one of the
Company's customers. The complaint, filed in the United States District Court,
Eastern District of Tennessee, alleges that the employees contracted chronic
beryllium disease as a result of their exposure, during the course of their
employment with the Company's customer, to beryllium-containing products sold by
Ceradyne. The complaint seeks compensatory damages in the amount of $3.0
million for each of the four plaintiffs who were employed by the Company's
customer, compensatory damages of $1.0 million each for the two spouses, and
punitive damages in the amount of $5.0 million. Based upon information
currently available, the Company believes that the plaintiffs' claims are
without merit and that the resolution of this matter will not have a material
adverse effect on the financial condition or operations of
19
the Company. Defense of this case has been tendered to the Company's insurance
carriers, some of which are providing a defense subject to a reservation of
rights. There can be no assurance, however, that this claim or any of the claims
related to exposure to beryllium oxide will be covered by insurance, or that, if
covered, the amount of insurance will be sufficient to cover any potential
judgment.
In February 1997 the Company was served with a complaint that was filed by a
former employee of one of the Company's customers and his wife. The complaint,
filed in the United States District Court, Eastern District of Tennessee,
alleges that the husband contracted chronic beryllium disease as a result of his
exposure to beryllium-containing products sold by Ceradyne. The complaint seeks
compensatory damages in the amount of $5.0 million for the husband, $1.0 million
for the wife, and punitive damages in the amount of $10.0 million. The Company
believes that the plaintiffs' claims are without merit and that the resolution
of this matter will not have a material adverse effect on the financial
condition or operations of the Company. Defense of this case has been tendered
to the Company's insurance carriers, some of which are providing a defense
subject to a reservation of rights. There can be no assurances, however, that
this claim will be covered by insurance, or that, if covered, the amount of
insurance will be sufficient to cover any potential judgment.
In August 1997 the Company was served with a complaint filed by a former
employee of one of the Company's customers and his wife. The complaint, filed
in the United States District Court, Eastern District of Tennessee, alleges that
the husband contracted chronic beryllium disease as a result of his exposure to
beryllium-containing products sold by Ceradyne. The complaint seeks
compensatory damages in the amount of $5.0 million for the husband, $1.0 million
for the wife, and punitive damages in the amount of $10.0 million. The Company
believes that the plaintiffs' claims are without merit and that the resolution
of this matter will not have a material adverse effect on the financial
condition or operations of the Company. Defense of this case has been tendered
to the Company's insurance carriers, some of which are providing defense and
indemnification subject to a reservation of rights. There can be no assurances,
however, that this claim will be covered by insurance, or that, if covered, the
amount of insurance will be sufficient to cover any potential judgment.
In February 1999 the Company was served with a complaint filed by a former
employee of one of the Company's customers and his wife. The complaint, filed in
the United States District Court, Eastern District of Tennessee, alleges that
the husband contracted chronic beryllium disease as a result of his exposure to
beryllium-containing products sold by Ceradyne. The complaint seeks compensatory
damages in the amount of $5.0 million for the husband, $1.0 million for the
wife, and punitive damages in the amount of $10.0 million. The Company believes
that the plaintiffs' claims are without merit and that the resolution of this
matter will not have a material adverse effect on the financial condition or
operations of the Company. Defense of this case has been tendered to the
Company's insurance carriers. There can be no assurances, however, that this
claim will be covered by insurance, or that, if covered, the amount of insurance
will be sufficient to cover any potential judgment.
Item 4. Submission of matters to a vote of security holders
Not applicable
20
MANAGEMENT
Executive Officers of the Registrant.
The executive officers of the Company as of March l, 1999 are as follows:
Name Age Position
---------------------- --- --------
Joel P. Moskowitz..... 59 Chairman of the Board, President and Chief
Executive Officer
Earl E. Conabee....... 61 Vice President, and Director of Marketing at
Thermo Materials
Garry DeBoer......... 62 Vice President, and President of Semicon
Associates
Howard F. George...... 54 Vice President Finance, Chief Financial
Officer and Secretary
Donald A. Kenagy...... 57 Vice President, and President of Thermo
Materials
David P. Reed......... 44 Vice President, and General Manager of
Advanced Ceramic Operations
Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served
as President of the Company from 1974 until January 1987, and from September
1987 to the present. Mr. Moskowitz currently serves as Chairman of the Board,
President and Chief Executive Officer of the Company, which positions he has
held since 1983. Mr. Moskowitz currently serves on the Board of Trustees of
Alfred University. Mr. Moskowitz obtained a B.S. in Ceramic Engineering from
Alfred University in 1961 and an M.B.A. from the University of Southern
California in 1966.
Earl E. Conabee joined the Company in July 1985, and has served as Vice
President of the Company since June 1986. Mr. Conabee serves as Vice President
of Marketing for the Company's Thermo Materials division, where he is
responsible for the overall marketing and sales effort for fused silica
ceramics. Prior to joining the Company, Mr. Conabee served as General Manager
of Ceramatec, a manufacturer of technical ceramics, from 1983 to 1985, and as
Director of Refinery Operations for Englehard Minerals Corporation from 1973 to
1983. Mr. Conabee obtained a B.S. in Ceramic Engineering from Alfred University
in 1960.
Garry DeBoer joined the Company as President of its Semicon Associates
Division in September 1997. Mr. DeBoer attended Newark College of Engineering,
majoring in Metallurgy. He has spent most of his career in the field of
microwave electronics, used primarily in military defense systems and commercial
satellite communications. For the past twenty-five years prior to joining the
Company, Mr. DeBoer was employed by Varian Associates and Communications and
Power Industries in various Senior Technical and Management positions, and also
served as Manager of Commercial Products for CPI's Traveling Wave Tube Product
Division.
21
Howard F. George joined the Company in December 1995 and serves in the
positions of Vice President Finance, Chief Financial Officer, and Corporate
Secretary. Prior to joining Ceradyne, Mr. George was Chief Financial Officer of
Richmond Technology, Inc. and Chief Operating Officer of its subsidiary, Static
Control Services from 1992 to 1995. From 1990 to 1992, Mr. George was Vice
President of Finance for Sunset Richards, a subsidiary of Hanson, PLC. Mr.
George earned his B.A. degree in Business and Economics in 1970 at California
State University Long Beach, and an MBA from Pepperdine University, Malibu in
1980.
Donald A. Kenagy joined the Company in December 1986 when the Company
acquired Thermo Materials, and has served as Vice President of the Company since
July 1991. Mr. Kenagy is currently President of the Company's Thermo Materials
division, and as such is responsible for the operations, finances and marketing
of Thermo Materials. Mr. Kenagy joined Thermo Materials in 1972. Mr. Kenagy
received a B.S. in Ceramic Technology from Penn State in 1963, an M.S. in
Metallurgy from the Massachusetts Institute of Technology in 1965, and a Met.
Eng. degree from MIT in 1968.
David P. Reed joined the Company in November 1983, and has served as Vice
President since January 1988. Mr. Reed is responsible for the operations,
finances and marketing of the Company's Costa Mesa, California operations.
Prior to joining the Company, Mr. Reed served as Manager, Process Engineering
for the Industrial Ceramic Division of Norton Co. from 1980 to 1983. Mr. Reed
obtained a B.S. in Ceramic Engineering from Alfred University in 1976 and an
M.S. in Ceramic Engineering from the University of Illinois in 1978.
Officers serve at the discretion of the Board of Directors except for Mr.
Moskowitz, who serves pursuant to a five-year employment agreement which expires
in July 1999.
22
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol CRDN. The following table sets forth for the calendar quarters indicated
the high and low closing sale prices per share on the National Market as
reported by Nasdaq. As of January 2, 1999, the Company had approximately 529
record holders of its Common Stock.
High Low
-------- ---------
Year ended December 31, 1998
First Quarter............................... 8 1/8 3 5/8
Second Quarter.............................. 7 1/2 4 1/2
Third Quarter............................... 5 9/16 3
Fourth Quarter.............................. 5 1/8 3 1/8
Year ended December 31, 1997
First Quarter............................... 9 1/8 5 7/8
Second Quarter ............................ 6 3/8 4 1/4
Third Quarter............................... 9 5/8 4 5/8
Fourth Quarter.............................. 6 31/64 3 3/4
The present policy of Ceradyne is to retain earnings for the operation and
expansion of its business. Ceradyne has never paid cash dividends, and
management does not anticipate that it will do so in the foreseeable future.
The Company did not sell any equity securities during the year ended December
31, 1998 that were not registered under the Securities Act of 1933.
23
Item 6. Selected Financial Data
Statements of Operations Data: (Amounts in thousands, except per share data)
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net Sales $26,279 $28,693 $28,212 $23,404 $17,996
Cost of product sales 21,292 23,274 21,065 16,948 15,867
------- ------- ------- ------- -------
Gross profit 4,987 5,419 7,147 6,456 2,099
------- ------- ------- ------- -------
Operating expenses:
Selling 1,494 1,515 1,571 1,492 1,502
General & administrative 3,239 3,660 3,137 2,748 2,535
Research and development 344 -- -- -- --
------- ------- ------- ------- -------
5,077 5,175 4,708 4,240 4,037
------- ------- ------- ------- -------
Income (loss) from operations (90) 244 2,439 2,216 (1,938)
Other income (expense):
Other income 382 265 1,890 265 366
Interest expense -- (134) (162) (342) (294)
------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes 292 375 4,167 2,139 (1,866)
Provision (benefit) for income taxes 10 (1,675) 127 50 ----
------- ------- ------- ------- -------
Net income (loss) $ 282 $ 2,050 $ 4,040 $ 2,089 (1,866)
======= ======= ======= ======= =======
Basic income (loss) per share $ .04 $ .26 $ .52 $ .32 $ (.30)
======= ======= ======= ======= =======
Diluted income (loss) per share $ .04 $ .26 $ .51 $ .32 $ (.30)
======= ======= ======= ======= =======
Weighted average shares outstanding 8,068 8,035 7,985 6,607 6,238
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's technology was developed primarily for defense and aerospace
applications, which have historically represented and continue to represent a
substantial portion of its business. Utilizing this historical base, the Company
has transitioned over several years to a more balanced product offering,
including industrial, consumer, microwave tube products, automotive,
semiconductor, and defense applications.
The Company's cost of product sales includes the cost of materials, direct labor
expenses and manufacturing overhead expenses. The Company's business requires
that it maintain a relatively high fixed manufacturing overhead. As a result,
the Company's gross profit, in absolute dollars and as a percentage of net
sales, is greatly impacted by the Company's sales volume and the corresponding
absorption of fixed manufacturing overhead expenses. Furthermore, due to the
customized nature of many of its products, the Company is frequently required to
devote resources to sustaining engineering expenses, which are also included in
cost of product sales and are generally expensed as incurred.
25
Results of Operations
The percentage relationships to net sales of certain income and expense items
for the three years ended December 31, 1998 are contained in the following
table.
Year Ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
Net Sales 100.00% 100.00% 100.00%
Cost of product sales 81.02 81.11 74.67
------ ------ ------
Gross Profit 18.98 18.89 25.33
------ ------ ------
Operating Expenses:
R&D 1.30 -- --
Selling 5.69 5.28 5.57
General & Administration 12.33 12.76 11.11
------ ------ ------
19.32 18.04 16.68
------ ------ ------
Income from operations (.34) .85 8.65
Other income (expenses):
Other income 1.45 .93 6.69
Interest expense -- (47) (.57)
------ ------ ------
1.45 .46 6.12
------ ------ ------
Income before provision (benefit) for income taxes 1.11 1.31 14.77
Provision (benefit) for income taxes .04 (5.83) .45
------ ------ ------
Net income 1.07% 7.14% 14.32%
====== ====== ======
26
Years Ended December 31, 1998 and 1997
Net Sales. Net sales for the year ended December 31, 1998 were $26.3 million, a
decrease of $2.4 million, or 8.4%, compared to the prior year. The decrease in
sales is primarily related to the Advanced Ceramics Operations in Costa Mesa,
California. Lightweight armor sales decreased due to delays in new Government
production releases. Wear resistant component sales decreased because of the
downturn in capital equipment shipments, and the low price of crude oil reduced
the demand for exploration components. Orthodontic bracket sales decreased
because the Company's customer increased its inventory levels in 1997 due to the
introduction of the new "Clarity" orthodontic bracket, and reduced the level of
inventory in 1998 because of "just in time" inventory practices. Structural
ceramics for semiconductor equipment decreased from the comparable prior year
net sales because of the world-wide downturn in the semiconductor industry.
The Company's Semicon Associates Division in Lexington, Kentucky posted a
decrease in net sales of approximately $.1 million from the prior comparable
period. This was mainly caused by reduced demand for the first three quarters
of 1998 (as compared to the same period in the comparable prior year), for
dispenser cathodes and samarium cobalt permanent magnets. However, for the 4th
Quarter 1998, demand for these products increased over the comparable prior
year's fourth quarter due to replacement parts procurement.
The Company's Thermo Materials Division in Scottdale, Georgia posted an increase
in net sales from the prior comparable period by approximately $.75 million.
The increase is due to missile radome shipments that are a result of the prior
year pilot production and an increase in fused silica ceramic components due to
an aggressive sales effort. Also, and to a lessor extent, net sales increased
due to the purchase of the Masrock and Fusil Foam assets and business from
Harbison Refractories Company. This was a small asset acquisition that the
Company completed in the 4th Quarter of 1998.
International sales have and continue to be an important part of the Company's
business, representing 16% of the Company's net sales for the period ended
December 31, 1998. This compares to 20% of net sales in the comparable prior
year period. The decrease was mainly attributable to the Asian downward
economic trend in the current year.
Gross Profit. The Company's gross profit was $5.0 million, or 19.0% of net
sales, for the year ended December 31, 1998, compared to $5.4 million, or 18.9%
of net sales, for the comparable prior year. The decrease in gross profit for
the year ended December 31, 1998 as compared to the prior year was $.4 million
or 8.0%.
All of the major product lines at the Company's Advanced Ceramics Operations in
Costa Mesa, California had decreases in gross profit as compared to the prior
year period due to lower volume and lower capacity utilization resulting in
unfavorable overhead absorption. This resulted in a gross profit decrease of
$2.3 million as compared to the prior year. Another key element that
contributed to the decrease was the charge of approximately $.3 million for
start-up costs associated with the semiconductor product line.
Gross profit for Semicon Associates in Lexington, Kentucky had an increase of
$1.8 million from the comparable prior year period. The reason for the increase
was that in the prior year an adjustment of approximately $1.7 million to write
off inventory and to reduce inventory carrying amounts to net realizable values
was recorded.
27
Gross profit for Thermal Materials in Scottdale, Georgia increased approximately
$.4 million from the comparable prior year period. The increase was the result
of increased volume, production yields, and greater capacity utilization.
Research and Development Expenses. Research and development expenses were
approximately $.35 million for the year ended December 31, 1998. The Company
established a new research and development department in 1998 to focus on new
materials technology. The expenses incurred related to salaries, travel,
outside services, materials and small tools.
In addition, the Company historically has and continues to engage in application
engineering and internally-funded research to improve and reduce the cost of
production and to develop new products. The costs associated with application
engineering and internally-funded research are generally expensed as incurred
and are included in cost of product sales.
Selling Expenses. Selling expenses were $1.5 million for the year ended
December 31, 1998 and 1997. Increases in direct salaries and travel expenses
were offset by a reduction in commission expense for the current year over the
prior comparable period.
General and Administrative Expenses. General and administrative expenses were
$3.2 million for the year ended December 31, 1998, a $.4 million decrease from
the prior year. The key elements for the decrease between the years was a non-
recurring charge in the prior year of $.2 million related to legal fees
associated with a legal settlement, coupled with a favorable settlement with a
customer in the current year resulting in net proceeds of $.4 million. The
above decreases in expenses from the prior year were offset by a non-recurring
charge of $.2 million in the current year's 4th quarter. This charge was the
result of written notification from the United States Environmental Protection
Agency that the Company was a responsible party in the Superfund cleanup of the
Casmalia Disposal Site in Santa Barbara County, CA. The notification states
that Ceradyne, along with approximately 10,000 other parties, has been
designated as "de minimus" waste generator due to the relatively small
quantities of its waste disposal. The Company properly disposed of this waste
material in the 1970's and 1980's, however the Casmalia Disposal Site leaked
into the water table. Thus the waste generators must pay their share of the
cost of the cleanup effort. The Company is investigating its insurance policies
for possible reimbursement of this charge.
Other Income and Expense. Other income was approximately $.4 million for the
year ended December 31, 1998 compared to $.3 million for the prior year. The
significant difference for the increase was the reduction of non-operational
miscellaneous expense that was incurred in the prior year.
Interest Expense. The Company had no interest expense for the year ended
December 31, 1998. The prior year had interest expense of $134,000. The reason
for the decrease is the payment of all debt outstanding in the prior year.
Income Taxes. The Company has recorded $10,000 provision for income tax for the
year ended December 31,1998. The Company in the prior year reversed a portion
of the previously established valuation allowance, primarily related to net
operating losses from prior years to offset tax provisions at statutory rates.
The Company has approximately $12.4 million remaining in net operating loss
carryforwards for Federal income tax purposes.
28
Net Income. Reflecting all of the matters discussed above, net income was
$282,000 (or $.04 per share basic and diluted) for the year ended December 31,
1998 compared to a net income of $2,050,000 (or $.26 per share basic and
diluted) for the prior year.
Years Ended December 31, 1997 and 1996.
Net Sales. Net sales for the year ending December 31, 1997 were $28.7 million,
a modest increase of $.5 million, or 1.7%, compared to the prior year. Key
elements of the 1997 product mix compared to 1996 reflects the following:
Structural ceramics for semiconductor equipment, a virtually new product line,
increased from $.l million in 1996 to $2.3 million in 1997. The introduction of
"Clarity" orthodontic ceramic brackets resulted in sales of $4.9 million in
1997, a 118% increase over 1996. This increase was due to increasing product
acceptance by orthodontists and the requirement by Ceradyne's customer, Unitek
(a Division of 3M), to meet its inventory levels. Armor sales decreased to $3.4
million in 1997 from $7.5 million in 1996 due to a decline in lightweight
ceramic armor vest shipments caused by the government's decision to not exercise
its option for $6.1 million, which lapsed in March 1997. Sales of the company's
cathodes for use in television and related uses fell to $.25 million from $1.1
million in 1996. Management believes that the potential for large scale
production of its cathodes for television and related applications may not
materialize in the near future, if at all.
International sales have and are expected to continue to be an important part of
the Company's business, representing 20% of the Company's net sales for the
period ending December 31, 1997, and is the same percentage as for the prior
year. The decrease in international shipments for cathodes for television from
the Semicon Associates Division has been offset by an increase of international
shipments for fused silica ceramics by the Thermo Materials Division.
Gross Profit. The Company's gross profit was $5.4 million, or 18.9% of net
sales, for the year ended December 31, 1997, compared to $7.1 million, or 25.3%
of net sales, for the year ended December 31, 1996. The decrease in gross
profit for the year ended December 31, 1997 as compared to the prior year was
$1.7 million or 24.2%. The major reason for the decrease in gross profit was an
adjustment of approximately $1.7 million to write off inventory and establish
inventory reserves related to product lines at Semicon Associates Division in
Kentucky. Management has determined that obsolete inventory in the cathode
product line, and the CRT ceramic-impregnated dispenser cathode for television
applications, needs to be reserved in the amount of $.8 million. Of this
amount, $.5 million relates to inventory related to a contract with a Korean
manufacturer and was due to a contract dispute. Also, a write down of $.9
million resulting from net realizable value analyses was recorded in the cathode
product line. The Company has shifted production among different product lines
and now buys certain assemblies, which were previously manufactured in house,
from outside sources.
Except for the above adjustments, the gross profit change was slight between the
2 years. The orthodontic ceramic product line had increased gross profit because
of a sales volume increase of over 118%, and better process yields over the
prior year. The industrial product line also showed improvement in its process
yields over the prior year. The above increases were offset by decreases in
gross profit by the semiconductor product line which experienced initial start
up costs and low production yields. Also, the armor product line had a lower
profit margin in 1997 than in 1996 because of sales volume decreases which did
not absorb as much of the Company's fixed overhead as in the prior year.
29
Selling Expenses. Selling expenses were $1.5 million for the year ended
December 31, 1997, a decrease of $56,000 from the comparable period of the prior
year. This decrease was primarily due to reduced commission expense.
General and Administrative Expenses. General and Administrative Expenses were
$3.6 million for the year ended December 31, 1997, a $483,000 increase from the
comparable period of the prior year. The increases were primarily due to legal
fees associated with a litigation settlement, and to a write off of an account
receivable from a Far East customer.
Other Income and Expense. Other income was $265,000 for the year ended December
31, 1997 compared to $1,890,000 for the year ended December 31, 1996. The
decrease was mainly attributable to last year's reimbursement of $.2 million
from an insurance carrier for legal expenses, and a settlement with an insurance
carrier which netted approximately $1.3 million to the Company.
Interest Expense. For the year ended December 31, 1997 interest expense was
$134,000, a 17.3% decrease over the comparable period of the prior year,
primarily attributable to a decrease in debt.
Income Taxes. The Company, in conformance with its adopted Statement of
Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes", has
reversed a portion of the valuation allowance previously established applicable
to the net deferred tax asset. The income tax benefit resulting from the
reversal results from the Company's recent history of profitable operations.
The Company has available net operating loss carryforwards of approximately
$11.6 million as of December 31, 1997 for federal income tax purposes.
Net Income. Reflecting all of the matters discussed above, net income was
$2,050,000 (or $.26 per share) for the year ended December 31, 1997 compared to
a net income of $4,040,000 (or $.51 per share) for the prior year.
Year 2000 Disclosure. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. This inability to recognize or
properly treat the Year 2000 may cause the company's systems and applications to
process critical financial and operational information incorrectly. The Company
continues to assess the impact of the Year 2000 issue on its reporting systems
and operations.
The Company is currently in the process of investigating and determining whether
its internal accounting systems and other operational systems are Year 2000
compliant. A new software system which is Year 2000 compliant was installed at
the Corporate Headquarters and its Advanced Ceramic Operations located in Costa
Mesa, California in 1996. The Company expects to complete the conversion of
its internal accounting system at its Kentucky and Georgia divisions to such
upgraded software in 1999. The costs associated with these conversions are
approximately $150,000. As of February 10, 1999, the conversion plans were
underway at the Kentucky and Georgia locations. The estimated completion date
is set for May 1, 1999. The Company is taking steps to ensure that all of its
customers, suppliers, associates and affiliates will be in compliance with the
Year 2000 issue. This process includes a questionnaire confirming the status of
compliance with the Year 2000 criteria set forth by the Company. The criteria
that the Company will use to determine compliance with the Year 2000 is the
accurate processing of date/time information from, into, and between the
twentieth and twentieth-first centuries, and the years 1999 and 2000, including
leap year calculations that will affect the processing of information,
scheduling, manufacturing, and the quality of all products. Also, the Company
is in
30
the process of developing a contingency plan to minimize the risks associated
with non Year 2000 readiness. This plan is to be completed by 3rd Quarter 1999.
The Company is exposed to the following worst case Year 2000 scenario: That
several of the Company's customers and suppliers may experience Year 2000 non-
compliance issues that affect the Company. However, as the Company does have a
wide customer base, and no sole source suppliers, it believes the non-compliance
issue to be minimal. However, there can be no assurance that certain of the
Company's internal computer systems or networks or those of its key vendors and
customers will not be adversely affected by such Year 2000 issues, which could
have a material adverse effect on the Company's business, operating results or
financial condition.
Liquidity and Capital Resources
The Company generally meets its operating and capital requirements for cash flow
from operating activities and borrowings under its credit facility.
In November, 1997 the Company entered into a revolving credit agreement with
Comerica Bank. The new credit facility amount remains at $4,000,000 as of year
ended December 31, 1998 and no collateral is required of the Company. As of
December 31, 1998 there had been no borrowing under the credit facility.
Management believes that its current cash and cash equivalents on hand, as well
as cash generated from operations and the ability to borrow under the existing
credit facility, will be sufficient to finance anticipated capital and operating
requirements for at least the next 12 months.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
SEC Regulation S-K, Rule 3-05 requires expanded disclosure related to market
risk. The company as of year ended December 31, 1998 has no debt borrowing and
does not intend to borrow in the next twelve months. However, the Company does
have assets in cash and cash equivalents, and changes in interest rates would
affect earnings on these assets. As of December 31,1998, the Company had $2.9
million in a money market account based upon U.S. Treasury Bonds. The interest
on this cash has earned 5.40% APR for year ended December 31, 1998, and this
interest has been recorded in the Company's financial statements as part of
other income in the amount of $175,000. If the interest rate were to decrease
by 10% to 4.86% APR, the effect on other income and cash flow would result in
decreases of approximately $18,000.
Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements and Supplementary Data commence at page 46
of this report and an index thereto in included in Part IV, Item 14 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
31
PART III
Item 10. Directors and Executive Officers of Registrant
Information regarding executive officers of the Company is included in Part
I of this report.
The Directors of the Company are as follows:
Name Age Position
---------------------- --------- ------------------------------------
Joel P. Moskowitz..... 59 Chairman of the Board, President and
Chief Executive Officer
Leonard M. Allenstein. 60 Director
Richard A. Alliegro... 68 Director
Peter Beardmore....... 62 Director
Frank Edelstein....... 73 Director
Milton L. Lohr........ 73 Director
Melvin A. Shader...... 73 Director
Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served as
President of the Company from 1974 until January 1987, and from September 1987
to the present. Mr. Moskowitz currently serves as Chairman of the Board and
Chief Executive Officer of the Company, which positions he has held since 1983.
Mr. Moskowitz currently serves on the Board of Trustees of Alfred University.
Mr. Moskowitz obtained a B.S. in Ceramic Engineering from Alfred University in
1961 and an M.B.A. from the University of Southern California in 1966.
Leonard M. Allenstein has served on the Board of Directors of the Company
since 1983. Mr. Allenstein has been a private investor and businessman for more
than the past five years. Mr. Allenstein was a founder and general partner of
Bristol Restaurants, which owns and operates restaurants in the Southern
California area, from 1978 until December 1986.
Richard A. Alliegro has served on the Board of Directors of the Company since
1992. Mr. Alliegro retired from Norton Company in 1990 after 33 years, where
his last position was Vice President, Refractories and Wear, for Norton's
Advanced Ceramics operation. He served as President of Lanxide Manufacturing
Co., a subsidiary of Lanxide Corporation, from May 1990 to February 1993. Mr.
Alliegro currently is the owner of AllTec Consulting, Inc., a ceramic technology
consulting firm. Mr. Alliegro obtained B.S. and M.S. degrees in Ceramic
Engineering from Alfred University in 1951 and 1952, respectively, and serves as
a member of the Board of Trustees of that university.
Dr. Peter Beardmore is the director of the Chemical and Physical Sciences
Laboratory of Ford Motor Company. He has been associated with Ford since 1966.
Dr. Beardmore has a B. MET. in Metallurgy from the University of Sheffield, and
a Ph.D. in Metallurgy from the University of Liverpool. Dr. Beardmore was
elected to the Board of Directors of the Company in 1996.
32
Frank Edelstein has served on the Board of Directors of the Company since
1984. Mr. Edelstein has been a Vice President of Gordon + Morris Group (a
spinoff of Kelso & Company), an investment banking firm, since November 1986.
From 1979 to November 1986, he was Chairman of the Board of International
Central Bank & Trust Company, which was acquired by Continental Insurance Co. in
July 1983. Mr. Edelstein is currently a director of Arkansas Best Corp. and
IHOP Corp.
Milton L. Lohr served as a director of the Company from 1986 until October
1988, when he resigned to accept a position as Deputy Undersecretary of Defense
for Acquisitions. He held that position until May 1989 and was re-elected as a
director of the Company in July 1989. Mr. Lohr is currently the President of
Defense Development Corporation, a defense-related research and development
company. Mr. Lohr previously held the position of Senior Vice President of
Titan Systems, a defense-related research and development company, from 1986 to
1988, and was founder and President of Defense Research Corporation, a defense
consulting firm, from 1983 to 1986. Mr. Lohr served from 1969 to 1983 as
Executive Vice-President of Flight Systems, Inc., a firm engaged in aerospace
and electronic warfare systems. Mr. Lohr has over thirty-five years experience
in government positions and aerospace and defense management. He currently
serves as a panel member of the President's Science Advisory Committee, a member
of the Office of the Secretary of Defense, Army Science Board, as well as other
ad hoc government related assignments.
Melvin A. Shader has served on the Board of Directors of the Company since
1984. Dr. Shader retired in 1991 from TRW, Inc., where he was Vice President,
Business Development and Vice President, International at the Space and Defense
Sector of TRW, Inc. Dr. Shader had been with TRW, Inc. since 1970. From 1969
to 1970, Dr. Shader was Director of Planning in the Information Network Division
of Computer Sciences Corp. From 1954 to 1968, he was an executive with
International Business Machines Corp.
Directors are elected annually and hold office until the next annual meeting of
stockholders and until their successors have been elected and qualified. The
Company has agreed to nominate a representative of Ford for election as a
director pursuant to an agreement made in March 1986, pursuant to which
agreement Ford acquired a total of 1,207,299 shares of the Company's Common
Stock. Joel P. Moskowitz and members of his family have agreed to vote a
portion of their shares of the Company's Common Stock, if necessary, for the
election of Ford's nominee. Dr. Peter Beardmore is Ford's current
representative. Officers serve at the discretion of the Board of Directors
except for Mr. Moskowitz, who serves pursuant to a five-year employment
agreement which expires in July 1999.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1998, its
officers, directors and greater than ten percent beneficial owners complied with
all Section 16(a) filing requirements.
33
Item 11. Executive Compensation
Summary Compensation Table
The following table shows certain information concerning the
compensation of the Chief Executive Officer and five other most highly
compensated executive officers of the Company whose aggregate compensation for
services in all capacities rendered during the year ended December 31, 1998
exceeded $100,000 (collectively, the "Named Executive Officers"):
Long Term
Compensation
------------------------
Annual Compensation Securities
--------------------------------------- Underlying
Name & Options
Principal Position Year Salary Bonus (# of Shares)
---------------------- -------- ------------ ------------- ------------------------
Joel P. Moskowitz 1998 $228,191 $ 2,920 -
Chairman of the 1997 212,988 19,976 -
Board, Chief 1996 196,145 35,584 -
Executive Officer -
and President
David P. Reed 1998 $121,295 - 10,000
Vice President 1997 118,056 $24,594 13,500
1996 109,734 26,566 -
Howard F. George 1998 $101,062 - 5,000
Vice President 1997 94,300 $ 6,210 -
1996 90,000 6,984 25,000
Earl E. Conabee 1998 $101,220 - 4,000
Vice President 1997 96,731 - 2,000
1996 93,144 - -
Donald A. Kenagy 1998 $103,142 - 4,000
Vice President 1997 98,411 - 2,000
1996 94,384 - -
Gerhart D. DeBoer(1) 1998 $102,270 - 5,000
Vice President 1997 36,705 - 20,000
(1) Mr. DeBoer's employment with the Company commenced in September 1997.
34
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning grants of
options to each of the Named Executive Officers during the year ended December
31, 1998. In addition, in accordance with the rules and regulations of the
Securities and Exchange Commission, the following table sets forth the
hypothetical gains or "option spreads" that would exist for the options. Such
gains are based on assumed rates of annual compound stock appreciation of 5% and
10% from the date on which the options were granted over the full term of the
options. The rates do not represent the Company's estimate or projection of
future Common Stock prices, and no assurance can be given that any appreciation
will occur or that the rates of annual compound stock appreciation assumed for
the purposes of the following table will be achieved.
Potential Realizable
Value at Assumed Annual
Percent of Rates of Stock Price
Total Options Appreciation for
Granted to Exercise Option Term(2)
Options Granted Employees in Price Expiration -----------------------
Name (# of Shares)(1) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ---------------- ------------- --------- ---------- --------- ---------
Joel P. Moskowitz - - - - - -
David P. Reed 5,000 3.9% 3.781 1/27/08 1,895 30,145
5,000 3.9% 3.500 9/04/08 1,000 27,900
Howard F. George 5,000 3.9% 3.500 9/04/08 1,000 27,900
Earl E. Conabee 2,000 1.6% 5.813 3/10/08 7,314 18,534
2,000 1.6% 3.500 9/04/08 4,400 11,160
Donald A. Kenagy 2,000 1.6% 5.813 3/10/08 7,314 18,534
2,000 1.6% 3.500 9/04/08 4,400 11,160
Gerhart D. DeBoer 5,000 3.9% 3.781 1/27/05 7,695 17,945
(1) The per share exercise price of all options granted is the fair market
value of the Company's Common Stock on the date of grant. Options have a
term of 10 years and become exercisable in five equal installments, each of
which vests at the end of each year after the grant date, except for Mr.
DeBoer, whose options have a term of seven years and become exercisable in
two equal installments, each of which vests at the end of each year after
the grant date.
(2) The potential realizable value is calculated from the exercise price per
share, assuming the market price of the Company's Common Stock appreciates
in value at the stated percentage rate from the date of grant to the
expiration date. Actual gains, if any, are dependent on the future market
price of the Common Stock.
35
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information regarding option
exercises during the year ended December 31, 1998 by the Named Executive
Officers, the number of shares covered by both exercisable and unexercisable
options as of December 31, 1998 and the value of unexercised in-the-money
options held by the Named Executive Officers as of December 31, 1998:
Value of Unexercised
Number of Securities Underlying In-the-Money Options at
Unexercised Options at Fiscal Year-End Fiscal Year-End(1)
-------------------------------------- -----------------------
No. of Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----- ------------- -------- ----------- ------------- ----------- -------------
Joel P. Moskowitz - - - - - -
David P. Reed 7,000 $19,250 33,200 24,800 $38,125 $3,375
Howard F. George - - 15,000 15,000 - -
Earl E. Conabee 5,000 13,750 3,400 5,600 2,625 -
Donald A. Kenagy 10,000 27,500 4,400 6,600 6,500 1,875
Gerhart D. DeBoer - - 10,000 15,000 - -
(1) Based upon the closing price of the Common Stock on December 31, 1998, as
reported by the Nasdaq National Market ($3.625 per share).
36
Employment Agreement
In July 1994, the Company entered into a five-year employment agreement with
Mr. Moskowitz, pursuant to which he will serve as Chairman of the Board of
Directors, Chief Executive Officer and President of the Company. The agreement
provides for a base salary at the rate of $175,000 per year; however, Mr.
Moskowitz voluntarily agreed to accept a reduced salary at the rate of $150,000
per year through March 31, 1995 to aid the Company in its cost-cutting efforts.
His annual base salary was reinstated to $175,000 as of April 1, 1995, and was
increased to $200,000 effective February 12, 1996. Effective February 10, 1997,
Mr. Moskowitz' base annual salary was increased to $215,000, and was further
increased to $230,000 effective February, 1998. Effective February 9, 1999, the
annual base salary was further increased to $242,000. Under the agreement, if
Mr. Moskowitz' employment is terminated by the Company (other than as a result
of death, incapacity or for "good cause" as defined in the agreement) or if Mr.
Moskowitz elects to resign for "good reason" (as defined in the agreement), Mr.
Moskowitz will be entitled to receive severance pay in an amount equal to his
annual base salary, at the rate in effect on the date of termination, payable on
normal pay dates for the remainder of the term of the agreement. "Good reason"
includes a "change in control" of the Company, a removal of Mr. Moskowitz from
any of his current positions with the Company without his consent, or a material
change in Mr. Moskowitz' duties, responsibilities or status without his consent.
A "change in control" of the Company shall be deemed to occur if (1) there is a
consolidation or merger of the Company where the Company is not the surviving
corporation and the shareholders prior to such transaction do not continue to
own at least 80% of the common stock of the surviving corporation, (2) there is
a sale of all, or substantially all, of the assets of the Company, (3) the
stockholders approve a plan for the liquidation or dissolution of the Company,
(4) any person becomes the beneficial owner, directly or indirectly, of 30% or
more of the Company's outstanding Common Stock or (5) if specified changes in
the composition of the Company's Board of Directors occur.
Compensation of Directors
Directors are paid fees for their services on the Board of Directors in such
amounts as are determined from time to time by the Board. During 1998, a fee of
$500 per month plus $1000 for each Board meeting attended was paid to each non-
employee director other than the Ford representative, Dr. Beardmore, who did not
receive a fee.
Compensation Committee Interlocks and Insider Participation
The Board of Directors has established Audit, Compensation and Stock Option
Committees. The Compensation Committee's function is to review and make
recommendations to the Board regarding executive officers' compensation. This
committee is composed of Messrs. Beardmore, Edelstein, Alliegro, Shader and
Lohr. The Audit Committee meets with the Company's independent public
accountants to review the Company's financial condition and internal accounting
controls. This committee is composed of Messrs. Edelstein, Beardmore, Shader
and Lohr. The Stock Option Committee is composed of Mr. Moskowitz and Dr.
Beardmore. This committee administers the Company's 1994 Stock Incentive Plan
and the 1995 Employee Stock Purchase Plan. Dr. Beardmore is serving as Ford's
representative on the Board of Directors.
37
Item 12. Security Ownership of Certain Beneficial Owners
and Management
The following table sets forth information as of March 3, 1999, regarding the
beneficial ownership of the common stock of the Company by (i) each person or
group known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each of the directors of the Company,
(iii) each of the executive officers named in the Summary Compensation Table,
and (iv) all current executive officers and directors of the Company as a group.
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership(1) of Class
------------------------------- ----------------------- --------
Joel P. Moskowitz 1,163,110 14.4%
3169 Redhill Avenue
Costa Mesa, CA 92626
Ford Motor Company 1,207,299 15.0%
The American Road
Dearborn, MI 48121
Dimensional Fund Advisors, Inc. 466,000 (2) 5.8%
1299 Ocean Ave., 11th Floor
Santa Monica, CA 90401
Leonard M. Allenstein 110,000 (3) 1.4%
Richard A. Alliegro 19,500 (4) *
Earl E. Conabee 24,834 (5) *
Dr. Peter Beardmore - -
Garhart D. DeBoer 10,000 (6) *
Frank Edelstein 40,400 (7) *
Donald A. Kenagy 15,595 (8) *
Melvin A. Shader 23,000 (9) *
Milton L. Lohr 20,000 (10) *
David P. Reed 53,667 (11) *
Howard F. George 15,557 (12) *
38
All current executive 1,495,663 18.6%
officers and directors as a
group (12 persons above)
* Less than 1%
(1) Except as otherwise noted, the beneficial owners have sole voting and
investment powers with respect to the shares indicated, subject to
community property laws where applicable.
(2) Based on information contained in a statement on Schedule 13G dated
February 11, 1999, as filed with the Securities and Exchange Commission. As
stated in such Schedule 13G, all shares are held on behalf of advisory
clients of Dimensional Fund Advisors, Inc., which disclaims beneficial
ownership of such shares.
(3) Includes 20,000 shares subject to options held by Mr. Allenstein which are
currently exercisable or will become exercisable within 60 days of March 3,
1999.
(4) Includes 15,000 shares subject to options held by Mr. Alliegro which are
currently exercisable or will become exercisable within 60 days of March 3,
1999.
(5) Includes 3,400 shares subject to options held by Mr. Conabee which are
currently exercisable or will become exercisable within 60 days of March 3,
1999.
(6) Includes 10,000 shares subject to options held by Mr. DeBoer which are
currently exercisable or will become exercisable within 60 days of March 3,
1999.
(7) Includes 22,500 shares subject to options held by Mr. Edelstein which are
currently exercisable or will become exercisable within 60 days of March 3,
1999.
(8) Includes 14,800 shares subject to options held by Mr. Kenagy which are
currently exercisable or will become exercisable within 60 days of March 3,
1999.
(9) Includes 10,000 shares subject to options held or will become exercisable
within 60 days of by Dr. Shader which are currently exercisable March 3,
1999.
(10) Includes 20,000 shares subject to options held by Mr. Lohr which are
currently exercisable or will become exercisable within 60 days of March 3,
1999.
(11) Includes 34,200 shares subject to options held will become exercisable
within 60 days of March by Mr. Reed which are currently exercisable or 3,
1999.
(12) Includes 15,000 shares subject to options held or will become exercisable
within 60 days of by Mr. George which are currently exercisable March 3,
1999.
39
Item 13. Certain Relationships and Related Transactions
On March 11, 1986, the Company sold 526,316 shares of its Common Stock to
Ford Motor Company ("Ford") at a price of $19.00 per share, for a total purchase
price of $10,000,000. At the same time, the Company and Ford created a new
corporation, Ceradyne Advanced Products, Inc. ("CAPI"), and entered into
agreements involving a broad-based technology transfer, licensing and joint
development program. Under the agreements, Ford contributed technology and a
portfolio of United States and foreign patents relating to technical ceramics to
CAPI in exchange for 80% of CAPI's capital stock, and Ceradyne acquired the
remaining 20% of CAPI in exchange for $200,000. The technology and patents
contributed by Ford were developed in the Ford Research Laboratories over a 15-
year period. Under the March 11, 1986 agreements, the Company was granted an
option to acquire Ford's 80% interest in CAPI in exchange for an additional
680,983 shares of Ceradyne Common Stock, which the Company exercised effective
February 12, 1988. As a result, Ceradyne now owns 100% of CAPI and Ford owns a
total of 1,207,299 shares of the Company's Common Stock. The Company and Ford
also entered into a joint development agreement which includes a commitment by
Ford to contribute up to $5,000,000, on a matching value basis with Ceradyne,
for the development by Ceradyne of technical ceramic products oriented towards
the automotive market. Through December 31, 1998, Ford has contributed to the
Company, on a cost sharing basis, a total of $4.5 million in cash and equipment
under this joint development program.
So long as Ford continues to own 5%, or more, of the Company's outstanding
common stock, Ceradyne has agreed to use its best efforts to cause one person
designated by Ford to be elected a member of the Ceradyne Board of Directors
and, under certain circumstances in the event the Company issues additional
shares of its Common Stock in a public or private transaction, to permit Ford to
purchase, at the same price and terms upon which sold by the Company in such
transaction, additional shares of Ceradyne Common Stock to enable Ford to
maintain its percentage ownership of the Company.
In connection with the sale of stock to Ford, Joel P. Moskowitz, Chairman
of the Board, Chief Executive Officer and President of the Company, and members
of his immediate family agreed to vote shares of the Company's Common Stock
owned by them in favor of the election of Ford's nominee to the Board of
Directors. However, they may first vote that number of shares that is necessary
to assure the election of Joel P. Moskowitz as a director of the Company, and
any shares that are not necessary to assure the election of Mr. Moskowitz and a
Ford nominee to the Board of Directors may be voted by them without restriction.
40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements: Page
--------------------- ----
Report of Independent Public Accountants 45
Consolidated Balance Sheets at December 31, 1998 and 1997 46-47
Consolidated Statements of Operations for 48
the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders Equity for 49
the Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the Years ended 50-51
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 52-64
(2) Financial Statement Schedules:
Schedule VIII -- Valuation and Qualifying Accounts 65
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Consolidated Financial Statements and Notes thereto.
(b) The following reports on Form 8-K were filed during the last quarter of the
fiscal year ended December 31, 1998:
None
(c) List of Exhibits
3.1 Certificate of Incorporation of the Registrant. Incorporated herein by
reference to Exhibit 3.1 to the Registrant's Registrant Statement on
Form 8-B.
3.2 Bylaws of Registrant. Incorporated herein by reference to Exhibit 3.2
to the Registrant's Form 10-Q Report for the period ended June 30,
1996.
3.3 Amendment to Bylaws of Registrant, adopted April 29, 1996. Incorporated
herein by reference to Exhibit 3.3 to the Registrant's Form 10-Q Report
for the period ended June 30, 1996.
4.1 Form of Representatives' Common Stock Purchase Warrant. Incorporated
herein by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (File No. 33-62345).
41
10.1* Ceradyne, Inc. 1983 Stock Option Plan as amended and restated.
(Incorporated by reference from Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (File No. 2-99930) filed on
September 25, 1985 (the "1985 S-1").
10.2 Lease between Trico Rents and the Registrant dated March 23, 1984,
covering premises located at 235 Paularino Avenue, Costa Mesa,
California. Incorporated herein by reference to Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (File No. 2-90821).
10.3 Lease covering premises located at 3169-A Red Hill Avenue, Costa
Mesa, California dated October 28, 1985. Incorporated herein by
reference to Exhibit 10.30 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1985.
10.4 Stock Sale Agreement between the Registrant and Ford Motor Company
dated March 11, 1986. Incorporated herein by reference to Exhibit
10.31 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985.
10.5 Agreement between certain shareholders of the Registrant and Ford
Motor Company dated March 11, 1986. Incorporated herein by reference
to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1985.
10.6 Stock Purchase Agreement between Ceradyne Advanced Products, Inc.,
the Registrant and Ford Motor Company dated March 11, 1986.
Incorporated herein by reference to Exhibit 10.33 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1985.
10.7 Patent and Technology Transfer Agreement between Ford Motor Company
and Ceradyne Advanced Products, Inc. dated March 11, 1986.
Incorporated herein by reference to Exhibit 10.34 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1985.
10.8 License Agreement between the Registrant and Ceradyne Advanced
Products, Inc. dated March 11, 1986. Incorporated herein by reference
to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985.
10.9 License Agreement between Ford Motor Company and the Registrant dated
March 11, 1986. Incorporated herein by reference to Exhibit 10.36 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985.
10.10 Joint Development Agreement between the Registrant and Ford Motor
Company dated March 11, 1986. Incorporated herein by reference to
Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
10.11 Lease dated March 31, 1986 covering premises located at 3163 Red Hill
Avenue, Costa Mesa, California. Incorporated herein by reference to
Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.
42
10.12 Lease dated August 5, 1986 covering premises located at 225 Paularino
Avenue, Costa Mesa, California. Incorporated herein by reference to
Exhibit 10.46 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986.
10.13 Short-form Memorandum of Lease Assignment dated December 15, 1986,
and Lease dated June 23, 1980, covering premises located at 3449
Church Street, Scottdale, Georgia. Incorporated herein by reference
to Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986.
10.14* Amendment dated June 3, 1986 to the Ceradyne, Inc. 1983 Stock Option
Plan. Incorporated herein by reference to Exhibit 10.50 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
10.15* Amendment dated March 16, 1987 to the Ceradyne, Inc. 1983 Stock
Option Plan. Incorporated herein by reference to Exhibit 10.51 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
10.16 Joint Development Agreement dated March 28, 1986 between Unitek
Corporation and the Registrant, and First and Second Amendments
thereto. Incorporated herein by reference to Exhibit 10.52 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
10.17* Amendment dated April 30, 1987 to the Ceradyne, Inc. 1983 Stock
Option Plan. Incorporated herein by reference to Exhibit 10.56 to the
Registrant's Registration Statement on Form 8-B.
10.18* Employment Agreement entered into as of July 5, 1994 by and between
Joel P. Moskowitz and the Registrant. Incorporated herein by
reference to Exhibit 10.30 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
10.19* Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by
reference to Exhibit 10.31 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
10.20* Amendment No. 1 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 4.2 to Registrant's
Registration Statement on Form S-8 (File No. 33-61675).
10.21* Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein
by reference to Exhibit 4.1 to Registrant's Registration Statement on
Form S-8 (File No. 33-61677).
10.22 Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and
the Registrant covering premises located at 235 Paularino Avenue,
Costa Mesa, California. Incorporated herein by reference to Exhibit
10.32 to the Registrant's Registration Statement on Form S-1 (File
No. 33-62345).
43
10.23 Amendment No. 2, dated June 5, 1995, to Lease covering premises
located at 3169-A Red Hill Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.33 to the Registrant's
Registration Statement on Form S-1 (File No. 33-62345).
10.24 Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986
covering premises located at 3163 Red Hill Avenue, Costa Mesa,
California. Incorporated herein by reference to Exhibit 10.34 to the
Registrant's Registration Statement on Form S-1 (File No. 33-62345).
10.25 Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986
covering premises located at 225 Paularino Avenue, Costa Mesa,
California. Incorporated herein by reference to Exhibit 10.35 to the
Registrant's Registration Statement on Form S-1 (File No. 33-62345).
10.26* Amendment No. 2 to the Ceradyne, Inc. 1994 Stock Incentive Plan
incorporated herein by reference to Exhibit 10.36 to the Registrant's
Annual report on Form 10-K for the fiscal year ended December 31,
1996.
10.27* Amendment No. 3 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 4.4 to Registrant's
Registration Statement on Form S-8 (File No. 333-31679).
10.28* Amendment No. 4 to the Ceradyne, Inc. 1994 Stock Incentive Plan.
21.1 Subsidiaries of the Registrant. Incorporated herein by reference to
Exhibit 23.2 to the Registrant's Statement on Form S-1 (File No. 33-
62345).
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
* Each of these exhibits constitutes a management contract,
compensatory plan, or arrangement required to be filed as an exhibit
to this Report pursuant to Item 14(c) of this Report.
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Directors of
Ceradyne, Inc.:
We have audited the accompanying consolidated balance sheets of Ceradyne, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ceradyne, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Orange County, California
March 5, 1999
45
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
(Amounts in thousands)
1998 1997
------- -------
CURRENT ASSETS:
Cash and cash equivalents $ 2,870 $ 3,569
Accounts receivable, net of allowances of
approximately $92 and $179 for doubtful
accounts in 1998 and 1997, respectively 4,381 4,685
Other receivables 167 96
Inventories 7,520 7,366
Production tooling 1,104 882
Prepaid expenses and other 880 716
------- -------
Total current assets 16,922 17,314
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land 422 422
Buildings and improvements 1,825 1,825
Machinery and equipment 20,664 18,456
Leasehold improvements 1,723 1,629
Office equipment 2,210 2,001
Construction in progress 103 401
------- -------
26,947 24,734
Less--Accumulated depreciation and amortization 18,090 16,768
------- -------
8,857 7,966
------- -------
COSTS IN EXCESS OF NET ASSETS ACQUIRED,
net of accumulated amortization of $1,908 and $1,751 in
1998 and 1997, respectively 2,009 1,923
------- -------
OTHER ASSETS, net of accumulated amortization of
$618 and $592 in 1998 and 1997, respectively 1,705 1,814
------- -------
Total assets $29,493 $29,017
======= =======
The accompanying notes are an integral part
of these consolidated balance sheets.
46
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
1998 1997
-------- --------
CURRENT LIABILITIES:
Accounts payable $ 1,084 $ 1,197
Accrued expenses:
Payroll and payroll related 553 622
Other 234 168
-------- --------
Total current liabilities 1,871 1,987
-------- --------
DEFERRED REVENUE 270 270
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value:
Authorized--12,000,000 shares
Outstanding--8,054,838 and 7,963,459 shares
in 1998 and 1997, respectively 37,718 37,408
Accumulated deficit (10,366) (10,648)
-------- --------
Total stockholders' equity 27,352 26,760
-------- --------
Total liabilities and stockholders' equity $ 29,493 $ 29,017
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
47
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Amounts in thousands, except per share data)
1998 1997 1996
------- ------- -------
NET SALES $26,279 $28,693 $28,212
COST OF PRODUCT SALES 21,292 23,274 21,065
------- ------- -------
Gross profit 4,987 5,419 7,147
------- ------- -------
OPERATING EXPENSES:
Selling 1,494 1,515 1,571
General and administrative 3,239 3,660 3,137
Research and development 344 --- ---
------- ------- -------
5,077 5,175 4,708
------- ------- -------
Income from operations (90) 244 2,439
------- ------- -------
OTHER INCOME (EXPENSE):
Other income 382 265 1,890
Interest expense --- (134) (162)
------- ------- -------
382 131 1,728
------- ------- -------
Income before provision (benefit)
for income taxes 292 375 4,167
PROVISION (BENEFIT) FOR INCOME
TAXES 10 (1,675) 127
------- ------- -------
Net income $ 282 $ 2,050 $ 4,040
======= ======= =======
BASIC INCOME PER SHARE $.04 $.26 $ .52
======= ======= =======
DILUTED INCOME PER SHARE $.04 $.26 $ .51
======= ======= =======
The accompanying notes are an integral part
of these consolidated statements.
48
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
(Amounts in thousands, except share data)
Common Stock
-------------------
Number Accumulated
of Shares Amount Deficit
--------- ------- -------------
BALANCE, December 31, 1995 7,715,624 $36,590 $(16,738)
Issuance of common stock 25,521 147 ---
Exercise of stock options 160,645 401 ---
Net Income --- --- 4,040
--------- ------- --------
BALANCE, December 31, 1996 7,901,790 $37,138 $(12,698)
Issuance of common stock 37,469 202 ---
Exercise of stock options 24,200 68 ---
Net Income --- --- 2,050
--------- ------- --------
BALANCE, December 31, 1997 7,963,459 37,408 (10,648)
Issuance of common stock 50,179 197 ---
Exercise of stock options 41,200 113 ---
Net Income --- --- 282
--------- ------- --------
BALANCE, December 31, 1998 8,054,838 $37,718 $(10,366)
========= ======= =========
The accompanying notes are an integral part
of these consolidated statements.
49
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Amounts in thousands)
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 282 $ 2,050 $ 4,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,505 1,361 1,284
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net 304 169 (1,095)
(Increase) decrease in other receivables (71) 1,301 (1,385)
(Increase) decrease in inventories (154) 390 (1,007)
Increase in production tooling (222) (344) (172)
Increase in prepaid expenses and other assets (324) (1,683) (78)
Increase (decrease) in accounts payable (113) (465) 20
Increase (decrease) in accrued expenses (3) (245) 66
Increase in deferred revenue --- 9 ---
------- ------- -------
Net cash provided by operating activities 1,204 2,543 1,673
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,213) (2,887) (2,641)
------- ------- -------
Net cash used in investing activities (2,213) (2,887) (2,641)
------- ------- -------
The accompanying notes are an integral part
of these consolidated statements.
50
CERADYNE, INC.
- 2 -
1998 1997 1996
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net $ 310 $ 270 $ 548
Net payments on long-term debt --- (1,000) (1,156)
------- ------- -------
Net cash provided by (used in) financing activities 310 (730) (608)
------- ------- -------
Decrease in cash and cash equivalents (699) (1,074) (1,576)
Cash and cash equivalents, beginning of period 3,569 4,643 6,219
------- ------- -------
Cash and cash equivalents, end of period $ 2,870 $ 3,569 $ 4,643
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ --- $ 134 $ 150
======= ======= =======
Income taxes paid $ 10 $ 33 $ 177
======= ======= =======
The accompanying notes are an integral part
of these consolidated statements.
51
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Summary of Significant Accounting Policies
a. Principles of Consolidation and Nature of Operations
The consolidated financial statements include the financial statements of
Ceradyne, Inc. (a Delaware Corporation), and its subsidiaries. Ceradyne,
Inc. and its subsidiaries are collectively referred to herein as the
Company. All significant intercompany accounts and transactions have been
eliminated.
The Company develops, manufactures and markets advanced technical ceramic
products and components for industrial, defense, consumer and microwave
applications. The products are sold primarily to industrial, consumer, and
defense concerns globally.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial maturity
of three months or less when purchased to be cash equivalents.
c. Accounts Receivable
The allowance for doubtful accounts includes management's estimate of the
amount expected to be uncollectable on specific accounts and unidentified
accounts included in accounts receivable. In estimating the potential losses
on specific accounts, management relies on in-house prepared analysis and
review of other available information. The amounts the Company will
ultimately realize could differ from the amounts assumed in arriving at the
allowance for doubtful accounts in the accompanying financial statements.
d. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
The write down of inventory for obsolete items is based on management's
estimate of the amount considered obsolete based on specific reviews of
inventory items. In estimating the allowance, management relies on its
knowledge of the industry as well as its current inventory levels. The
amounts the Company will ultimately realize could differ from amounts
estimated by management. Inventory costs include the cost of material, labor
and manufacturing overhead. The following is a summary of inventories by
component:
Depreciation and amortization of property, plant and equipment are provided
using the straight-line method over the following estimated useful lives:
Buildings and improvements 20 years
Machinery and equipment 3 to 12 years
Leasehold improvements Term of lease
Office equipment 5 years
Maintenance, repairs and minor renewals are charged to expense as incurred.
Repairs and maintenance expense approximated $729,000, $708,000, and
$598,000 in 1998, 1997 and 1996, respectively. Additions and improvements
are capitalized. When assets are disposed of, the applicable costs and
accumulated depreciation and amortization are removed from the accounts and
any resulting gain or loss is included in the results of operations.
f. Sales Recognition
Sales are recorded as of the date shipments are made, or goods are accepted
by customers for production contracts.
g. Deferred Revenue
In September 1994, the Company finalized an agreement to manufacture and
supply a specific cathode to a third party at reduced prices. In
consideration for entering into this contract, the Company received a cash
fee of $261,000. The fee was deferred in the financial statements and was
recognized over the life of the agreement once shipments commence. At
December 31, 1997, all of the fee has been recognized.
In November 1997, Ford Motor Company contributed $270,000 for the year 1998
to the Joint Product Development Program (see Note 10). The Company fully
amortized this amount to revenue during 1998.
In October 1998, Ford Motor Company contributed an additional $270,000 for
the year 1999 to the Joint Product Development Program. The Company will
fully amortize this amount to revenue during 1999.
h. Net Income Per Share
The Company accounts for net income per share in accordance with SFAS No.
128 "Earnings Per Share". Basic net income per share is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding. Diluted net income per share is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding plus the effect of any dilutive stock
options and common stock warrants using the Treasury stock method.
53
The following is a summary of the number of shares entering into the
computation of net income per common and common equivalent share:
December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Weighted average number of
shares outstanding 8,005,000 7,931,000 7,807,000
Dilutive stock options and
common stock warrants 63,000 104,000 178,000
--------- --------- ---------
Number of shares used in
diluted computation 8,068,000 8,035,000 7,985,000
========= ========= =========
i. Accounting for Long-Lived Assets
As prescribed by Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of," the Company assesses the recoverability of its long-lived
assets (including goodwill) by determining whether the asset balance can be
recovered over the remaining depreciation or amortization period through
projected undiscounted future cash flows. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
There were no impairment charges in any of the three years in the period ended
December 31, 1998.
j. Deferred Start-up and Preproduction Costs
Start-up costs incurred to establish the technological feasibility of a new
product to be sold or otherwise marketed are charged to expense in the period
incurred. Costs incurred subsequent to establishing technological feasibility
but prior to commercial sales to customers are capitalized and amortized over
one year from the startup completion date. During the year ended December
31, 1998, $252,000 of deferred startup costs from the semiconductor product
line were expensed. In 1998 the Company incurred $188,000 in deferred costs
capitalized for the armor vest product line under a new government contract.
In September 1998, the Company received a commitment for the initial minimum
quantity to be purchased.
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" is
effective for the Company's fiscal year beginning January 1, 1999. The effect
of adoption will be immaterial to the Company's financial position and results
of operations.
k. Use of Estimates
The preparation of financial statements in accordance 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 financial statements.
Actual results could differ from those estimates.
54
l. Engineering and Research
The costs associated with application engineering and internally-funded
research are expensed as incurred and are included in cost of product sales or
other operating expenses. The Company established a new research and
development department in 1998 to focus on new materials technology. Costs
associated with the department approximated $344,000. In addition, the
Company has historically and continues to engage in application engineering
and internally funded research to improve and reduce the cost of products and
to develop new products. Costs associated with Company-funded research were
approximately $384,000, $380,000 and $400,000 in 1998, 1997 and 1996,
respectively.
m. Stock Based Compensation Plans
Effective January 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". At a minimum, SFAS
No. 123 requires the Company to disclose pro forma net income and earnings
per share as if the fair value based accounting method of SFAS No. 123 had
been used to account for stock-based compensation. These disclosures are
included in Note 7.
n. Fair Value of Financial Instruments
The carrying value of accounts receivable and trade payables approximates the
fair value due to their short-term maturities. The carrying value of the
Company's line of credit is considered to approximate fair market value as the
interest rates of these instruments are based predominately on variable
reference rates.
o. Environmental Liabilities and Expenditures
Accruals for environmental matters are recorded in operating expenses when it
is probable that a liability has been incurred and the amount of the liability
can be reasonably estimated. In the 4th quarter of 1998, the Company recorded
approximately $.2 million as an accrual for the written notification from the
United States Environmental Protection Agency that the Company was a
responsible party in the Superfund cleanup of the Casmalia Disposal Site in
Santa Barbara County, CA. The notification states that Ceradyne, along with
approximately 10,000 other parties, have been designated as "de minimus" waste
generators due to the relatively small quantities of their waste disposal.
The Company properly disposed of this waste material in the 1970's and 1980's,
however the Casmalia Disposal Site leaked into the water table. Thus the
waste generators must pay their share of the cost of the cleanup effort. The
company is investigating its insurance policies for possible reimbursement of
this charge.
2. Debt and Bank Borrowing Arrangements
In November, 1997 the Company terminated its revolving credit agreement with an
asset based lender, and entered into a revolving credit agreement with Comerica
Bank. The new credit facility amount remains at $4,000,000 and no collateral
will be required of the Company. The Company paid off its short-term minimum
borrowing requirement debt of $1,000,000 in fiscal year 1997. As of December
31, 1998 there had been no borrowing under the credit facility.
55
3. Income Taxes
The provision (benefit) for income taxes is comprised of the following:
The Company's deferred tax asset at December 31, 1998 relates primarily to its
tax net operating loss carryforwards, which total approximately $12.4 million
and expire as follows:
The components of the Company's deferred tax asset as of December 31, 1998 and
1997 are as follows:
December 31,
--------------------------
1998 1997
----------- -----------
Inventory adjustments $ 246,000 $ 583,000
Contingency reserves 71,000 ---
Deferred revenue --- 108,000
Vacation accrual 91,000 112,000
Bad debt allowance 36,000 72,000
Net operating loss and tax credit
carryforwards 4,961,000 4,630,000
Other (81,000) (83,000)
----------- -----------
5,324,000 5,422,000
Valuation allowance (3,699,000) (3,714,000)
----------- -----------
Net deferred tax asset $ 1,625,000 $ 1,708,000
=========== ===========
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred tax
asset as reduced by the valuation allowance.
56
The effective income tax rate for the years ended December 31, 1998, 1997 and
1996 differs from the Federal statutory income tax rate due to the following
items:
December 31
-----------------------------------------
1998 1997 1996
-------- ----------- -----------
Income before taxes $292,000 $ 375,000 $ 4,167,000
-------- ----------- -----------
Provision for income taxes at federal
statutory rate 113,000 128,000 1,417,000
Increases (decreases) in tax resulting from:
Utilization of net operating loss carryforwards (57,000) (95,000) (1,389,000)
Reduction of valuation allowance --- (1,846,000) ---
Other, including state taxes (46,000) 138,000 99,000
-------- ----------- -----------
Provision (benefit) for income taxes 10,000 (1,675,000) 127,000
-------- ----------- -----------
Effective tax rate 3.47% (446.67)% 3.05%
======== =========== ===========
4. Commitments and Contingencies
a. Operating Lease Obligations
The Company leases certain of its manufacturing facilities under
noncancelable operating leases expiring at various dates through March 2001.
One of the facility leases is subject to a 4 percent annual escalation
clause. The Company incurred rental expense under these leases of $667,000,
$620,000 and $596,000 in 1998, 1997 and 1996, respectively. The approximate
minimum rental commitments required under existing noncancelable leases as of
December 31, 1998 are as follows:
The Company has an employment agreement with the Chief Executive Officer
which expires on July 5, 1999. In addition to a base salary, the agreement
provides for a bonus to be determined by the Compensation Committee of the
Board of Directors. No maximum compensation limit exists. Compensation
expense pursuant to this agreement in 1998, 1997 and 1996 was $231,111,
$232,964 and $231,729, respectively.
c. Legal Proceedings
The Company is, from time to time, involved in various legal and other
proceedings that relate to the ordinary course of operating its business,
including, but not limited to, employment-related actions and workers'
compensation claims.
In October 1995 the Company was served with a complaint that was filed by
four persons and the spouses of those persons, who are/were employed by one
of the Company's customers. The
57
complaint, filed in the United States District Court, Eastern District of
Tennessee, alleges that the employees contracted chronic beryllium disease as
a result of their exposure, during the course of their employment with the
Company's customer, to beryllium-containing products sold by Ceradyne. The
complaint seeks compensatory damages in the amount of $3.0 million for each
of the four plaintiffs who were employed by the Company's customer,
compensatory damages of $1.0 million each for the two spouses, and punitive
damages in the amount of $5.0 million. Based upon information currently
available, the Company believes that the plaintiffs' claims are without merit
and that the resolution of this matter will not have a material adverse
effect on the financial condition or operations of the Company. Defense of
this case has been tendered to the Company's insurance carriers, some of
which are providing a defense subject to a reservation of rights. There can
be no assurance, however, that this claim or any of the claims related to
exposure to beryllium oxide will be covered by insurance, or that, if
covered, the amount of insurance will be sufficient to cover any potential
judgment.
In February 1997 the Company was served with a complaint that was filed by a
former employee of one of the Company's customers and his wife. The
complaint, filed in the United States District Court, Eastern District of
Tennessee, alleges that the husband contracted chronic beryllium disease as a
result of his exposure to beryllium-containing products sold by Ceradyne.
The complaint seeks compensatory damages in the amount of $5.0 million for
the husband, $1.0 million for the wife, and punitive damages in the amount of
$10.0 million. The Company believes that the plaintiffs' claims are without
merit and that the resolution of this matter will not have a material adverse
effect on the financial condition or operations of the Company. Defense of
this case has been tendered to the Company's insurance carriers, some of
which are providing a defense subject to a reservation of rights. There can
be no assurances, however, that this claim will be covered by insurance, or
that, if covered, the amount of insurance will be sufficient to cover any
potential judgment.
In August 1997 the Company was served with a complaint filed by a former
employee of one of the Company's customers and his wife. The complaint, filed
in the United States District Court, Eastern District of Tennessee, alleges
that the husband contracted chronic berylliium disease as a result of his
exposure to beryllium-containing products sold by Ceradyne. The complaint
seeks compensatory damages in the amount of $5.0 million for the husband,
$1.0 million for the wife, and punitive damages in the amount of $10.0
million. The Company believes that the plaintiffs' claims are without merit
and that the resolution of this matter will not have a material adverse
effect on the financial condition or operations of the Company. Defense of
this case has been tendered to the Company's insurance carriers, some of
which are providing defense and indemnification subject to a reservation of
rights. There can be no assurances, however, that this claim will be covered
by insurance, or that, if covered, the amount of insurance will be sufficient
to cover any potential judgment.
In February 1999 the Company was served with a complaint filed by a former
employee of one of the Company's customers and his wife. The complaint, filed
in the United States District Court, Eastern District of Tennessee, alleges
that the husband contracted chronic beryllium disease as a result of his
exposure to beryllium-containing products sold by Ceradyne. The complaint
seeks compensatory damages in the amount of $5.0 million for the husband,
$1.0 million for the wife, and punitive damages in the amount of $10.0
million. The Company believes that the plaintiffs' claims are without merit
and that the resolution of this matter will not have a material adverse
58
effect on the financial condition or operations of the Company. Defense of
this case has been tendered to the Company's insurance carriers. There can be
no assurances, however, that this claim will be covered by insurance, or
that, if covered, the amount of insurance will be sufficient to cover any
potential judgment.
5. Disclosure About Segments of Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. The company has adopted No. 131 in fiscal 1998, as required.
The Company serves its markets and manages its business through three divisions,
each of which has its own manufacturing facilities and administrative and
selling functions. The Company's Advanced Ceramic Operations, located in Costa
Mesa, California, primarily produces armor and orthodontic products, components
for semiconductor equipment, and houses the Company's SRBSN research and
development activities. The Company's cathode development and production are
handled through its Semicon Associates division located in Lexington, Kentucky.
Fused silica products, including missile radomes, are produced at the Company's
Thermo Materials division located in Scottdale, Georgia. Ceradyne's
manufacturing structure is summarized in the following table:
For fiscal year 1998, two customers accounted for approximately 16% and 11% of
net consolidated sales. For fiscal year 1997, one customer accounted for
approximately 17% of net consolidated sales. For fiscal year 1996, one customer
accounted for approximately 17% of net consolidated sales.
6. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established standards for the reporting and display
of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in stockholder's equity
except those resulting from investments by and distributions to owners.
Currently, no difference exists between the Company's net income and its
comprehensive net income.
7. Stock Options
The Company has a stock option plan, the 1994 Stock Incentive Plan and an
employee stock purchase plan, the 1995 Employee Stock Purchase Plan. The
Company had a 1985 Employee Stock Purchase Plan which expired on July 31, 1995.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
1998 1997 1996
-------- ---------- ----------
Net Income: As Reported $282,000 $2,050,000 $4,040,000
Pro Forma 97,371 1,888,000 3,794,000
Basic income per share As Reported $ .04 $ .26 $ .52
Pro Forma .01 .24 .49
Diluted income per share As Reported $ .04 $ .26 $ .51
Pro Forma .01 .23 .48
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the 1998, 1997 and 1996 pro forma net income include immaterial
amounts related to the purchase discount offered under the 1995 Employee Stock
Purchase Plan.
The Company may sell up to 100,000 shares of stock to its full-time employees
under the 1995 Employee Stock Purchase Plan. The Company has sold 24,162,
22,004 and 13,694 shares in 1998, 1997 and 1996, respectively, under the 1995
Employee Stock Purchase Plan. Employees may purchase shares at the lower of 85
percent of the quoted market value of the shares as determined on the first or
last day of the plan year. The weighted average fair value of shares sold in
1998, 1997 and 1996 was $3.93, $4.63 and $4.75, respectively.
The Company may grant options for up to 650,000 shares under the 1994 Stock
Incentive Plan. The Company has granted options for 606,700 shares through
December 31, 1998. Options are granted at or above the fair market value at the
date of grant and generally become exerciseable over a five-year
61
period.
A summary of the status of the Company's stock option plan at December 31, 1996,
1997 and 1998 and changes during the years then ended is presented in the table
and narrative below:
Of the 498,150 options outstanding at December 31, 1998, 265,550 have exercise
prices between $2.00 and $4.375, with a weighted average exercise price of
$2.93, and a weighted average remaining contractual life of seven years. The
remaining 232,600 options have exercise prices between $4.75 and $7.375, with a
weighted average exercise price of $5.76, and a weighted average remaining
contractual life of nine years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996, respectively: risk free
interest rates of 5.4, 6.38 and 6.29 percent; expected lifes for 1998, 1997 and
1996 of 7 years; expected volatility of 94.87, 57.43 and 57.20 percent. The
assumed dividend yield in 1998, 1997 and 1996 is zero percent.
8. Supplemental Retirement Plan
In December 1988 the Board of Directors of the Company approved the adoption of
a supplemental retirement plan (Ceradyne SMART 401(K) Plan) in which
substantially all employees are eligible to participate after completing 90 days
of employment. Participation in the Plan is voluntary. An employee may elect
to contribute up to seven percent (7%) of the employee's pretax compensation as
a basic contribution. The Company may contribute any amount which the Board of
Directors annually determines appropriate. Company contributions fully vest and
are nonforfeitable after the participant has completed five years of service.
During the years ended December 31, 1998, 1997, and 1996, the related company
contribution was approximately $42,000, $116,000, and $117,000, respectively.
62
The Company's contribution is in the form of shares of its common stock. The
number of shares to be contributed will be determined by dividing the total
Company match for the Plan year by the higher of the market value per share of
common stock as of the end of that Plan year (December 31), or the audited book
value per share of common stock as of the end of that Plan year. The
participants' cash contributions may be invested, at their discretion, in one or
all of the following: (1) Fixed Income Fund, (2) Bond and Mortgage Fund, (3)
International Stock Fund, or (4) Equity Fund. The member can elect to allocate
the accumulated and future contributions to their accounts among these funds in
increments of 10 percent.
The Company has reserved 250,000 shares of its common stock for possible
issuance under the Plan. At December 31, 1998, 125,897 shares were available
for issuance under the Plan.
9. Interim Financial Information (unaudited)
The results by quarter for 1998 and 1997 are as follows:
Quarter Ending
--------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------------- ------------- ------------- -------------
Net sales $7,341,000 $6,342,000 $6,290,000 $6,305,000
Net income 483,000 326,000 44,000 (571,000)
Diluted income per
share- $ .06 $ .04 $ .01 $ (.07)
========== ========== ========== ==========
Quarter Ending
--------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
---------- ---------- ----------- ----------
Net sales $6,621,000 $7,280,000 $7,100,000 $7,692,000
Net income 284,000 759,000 508,000 499,000
Diluted income per
share- $ .04 $ .10 $ .06 $ .06
========== ========== ========== ==========
10. Joint Venture and Joint Development Agreement
On March 11, 1986, the Company sold 526,316 shares of its common stock to Ford
Motor Company (Ford) for a gross sales price of $10,000,000. In addition, Ford
and the Company formed a joint venture, Ceradyne Advanced Products, Inc. (CAPI),
in which the Company acquired a 20 percent interest for $200,000. Ford
contributed certain technology in exchange for its 80 percent interest in the
joint venture. The Company granted Ford an option to put Ford's 80 percent
interest in the joint venture to the Company in exchange for 608,020 shares of
the Company's common stock. Ford granted the Company an option to call Ford's
80 percent interest in the joint venture in exchange for 680,983 shares of the
Company's common stock.
63
On February 13, 1988, the Company exercised its call option and issued 680,983
shares of its common stock to Ford. The value of the shares issued ($2,043,000)
was allocated to the technology acquired and is being amortized over a 20 year
period utilizing the purchase method of accounting (see Note 1).
Ford and the Company have also entered into a joint development program to
develop a prototype production facility to produce ceramics with automotive
applications. Under the terms of the joint development agreement, Ford and the
Company share equally in the cost of this project. For the years ending
December 31, 1998, 1997 and 1996, Ford agreed to contribute $270,000, $270,000
and $275,000, respectively, which have been reflected as revenue in the
accompanying consolidated financial statements.
64
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Balance Charged Balance
at to Costs at
Beginning and End of
Description of Period Expenses Deductions Period
---------------------- --------- -------- ---------- -------
For the Year Ending
December 31, 1998:
----------------------
Allowance for
doubtful
accounts receivable $179 $ 55 $142 $ 92
==== ==== ==== ====
For the Year Ending
December 31, 1997:
----------------------
Allowance for
doubtful
accounts receivable $125 $134 $ 80 $179
==== ==== ==== ====
For the Year Ending
December 31, 1996:
------------------
Allowance for
doubtful
accounts receivable $150 $ 0 $ 25 $125
==== ==== ==== ====
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 31, 1999 CERADYNE, INC.
By /s/ JOEL P. MOSKOWITZ
--------------------------------------------
Joel P. Moskowitz
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ JOEL P. MOSKOWITZ Chairman of the Board, March 31, 1999
------------------------- Chief Executive Officer,
Joel P. Moskowitz President and Director
(Principle executive
officer)
/s/ HOWARD F. GEORGE Chief Financial Officer March 31, 1999
------------------------- (Principle financial
Howard F. George and accounting officer)
/s/ LEONARD M. ALLENSTEIN Director March 31, 1999
-------------------------
Leonard M. Allenstein
/s/ RICHARD A. ALLIEGRO Director March 31, 1999
-------------------------
Richard A. Alliegro
/s/ FRANK EDELSTEIN Director March 31, 1999
-------------------------
Frank Edelstein
/s/ PETER BEARDMORE Director March 31, 1999
-------------------------
Peter Beardmore
/s/ MELVIN A. SHADER Director March 31, 1999
-------------------------
Melvin A. Shader
/s/ MILTON L. LOHR Director March 31, 1999
-------------------------
Milton L. Lohr
66
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated March 5, 1999 included in the
previously filed Registration Statement File No. 333-31679 and Registration
Statement File No. 33-61677.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Orange County, California
March 5, 1999
ARTICLE 5
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K - YEAR
ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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