SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission file number 0-20686
UNIROYAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0341868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 N. Tamiami Trail, Suite 900
Sarasota, FL 34236
(Address of principal executive offices) (Zip Code)
(941) 361-2100
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X . No .
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practicable date.
Total number of shares of outstanding stock as of January 29, 1999
Common stock 12,080,740
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
December 27, September 27,
1998 1998
------------- -------------
Current assets:
Cash and cash equivalents $ 318 $ 5,585
Trade accounts receivable (less estimated reserve for
doubtful accounts of $268 and $246, respectively) 20,052 26,320
Inventories (Note 2) 38,377 38,139
Prepaid expenses and other current assets 5,174 5,837
Deferred income taxes 1,572 1,008
---------- ----------
Total current assets 65,493 76,889
Property, plant and equipment - net 69,506 65,551
Property, plant and equipment held for sale - net 5,923 5,924
Investment in preferred stock (Note 3) 11,571 -
Note receivable 5,000 5,000
Goodwill - net 8,869 8,951
Deferred income taxes 7,508 7,759
Other assets 16,083 16,277
---------- ----------
TOTAL ASSETS $ 189,953 $ 186,351
========== ==========
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 27, September 27,
1998 1998
------------- -------------
Current liabilities:
Current portion of long-term debt $ 9,506 $ 7,713
Trade accounts payable 13,325 15,302
Accrued expenses:
Compensation and benefits 8,978 9,743
Interest 1,447 149
Taxes, other than income 1,306 1,258
Accrued income taxes 629 921
Other 4,510 5,657
---------- ----------
Total current liabilities 39,701 40,743
Long-term debt 100,347 97,945
Other liabilities 15,045 15,061
---------- ----------
Total liabilities 155,093 153,749
---------- ----------
Commitments and contingencies (Note 7)
Minority interest (Note 5) 5,062 291
Stockholders' equity (Note 6):
Preferred stock:
Series C - 0 shares issued and outstanding; par value $0.01;
450 shares authorized - -
Common stock:
14,383,043 and 14,182,956 shares issued or to be issued,
respectively; par value $0.01; 35,000,000 shares authorized 144 142
Additional paid-in capital 55,383 54,613
Unrealized gain on securities available for sale - net 1,568 -
Deficit (11,613) (11,632)
---------- ----------
45,482 43,123
Less treasury stock at cost - 2,001,741 and 1,499,868 shares,
respectively (15,684) (10,812)
---------- ----------
Total stockholders' equity 29,798 32,311
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 189,953 $ 186,351
========== ==========
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
--------------------------------------------
December 27, December 28,
1998 1997
------------- -------------
Net sales $ 49,089 $ 51,182
Costs and expenses:
Costs of goods sold 37,791 36,901
Selling and administrative 6,921 7,014
Depreciation and other amortization 2,217 2,143
Amortization of reorganization value in excess of
amounts allocable to identifiable assets - 188
---------- ----------
Income before interest, income taxes and minority
interest 2,160 4,936
Interest expense - net (2,276) (2,545)
---------- ----------
(Loss) income before income taxes and minority
interest (116) 2,391
Income tax (expense) (Note 4) (94) (1,028)
---------- ----------
(Loss) income before minority interest (210) 1,363
Minority interest in losses of consolidated subsidiary 229 -
---------- ----------
Net income $ 19 $ 1,363
========== ==========
Net income per common share (Note 8) $ - $ 0.10
========== ==========
Net income per common share - assuming
dilution (Note 8) $ - $ 0.10
========== ==========
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
--------------------------------
December 27, December 28,
1998 1997
------------ ------------
Net income $ 19 $ 1,363
Unrealized gain on securities available for sale
(net of income taxes of $1,003) 1,568 -
---------- ----------
Comprehensive income (Note 9) $ 1,587 $ 1,363
========== ==========
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
-------------------------------------
December 27, December 28,
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income $ 19 $ 1,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,217 2,143
Deferred tax (benefit) provision (89) 1,054
Minority interest in losses of consolidated subsidiary (229) -
Amortization of reorganization value in excess of
amounts allocable to identifiable assets - 188
Amortization of Senior Secured Notes discount - 31
Amortization of refinancing and debt issuance costs 144 115
Other 31 69
Changes in assets and liabilities:
Decrease in trade accounts receivable 6,244 3,468
Increase in inventories (238) (2,891)
Increase in prepaid expenses and other assets (672) (2,024)
(Decrease) increase in trade accounts payable (1,977) 977
Decrease in accrued expenses (788) (3,392)
Decrease in other liabilities (16) (153)
---------- ----------
Net cash provided by operating activities 4,646 948
---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,008) (1,173)
Purchase of preferred stock (9,000) -
---------- ----------
Net cash used in investing activities (15,008) (1,173)
---------- ----------
FINANCING ACTIVITIES (Note 10):
Repayment of term loans (30) (189)
Proceeds from term loan 785 -
Increase in revolving loan balances 3,440 2,359
Investment by joint venture partner 5,000 -
Purchase of treasury stock (4,282) (2,187)
Stock options exercised 182 17
---------- ----------
Net cash provided by financing activities 5,095 -
---------- ----------
Net decrease in cash (5,267) (225)
Cash and cash equivalents at beginning of period 5,585 244
---------- ----------
Cash and cash equivalents at end of period $ 318 $ 19
========== ==========
See notes to condensed consolidated financial statements.
UNIROYAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended
December 27, 1998 and December 28, 1997
1. BASIS OF PRESENTATION
The interim Condensed Consolidated Financial Statements relate to
Uniroyal Technology Corporation and its wholly-owned subsidiaries
Uniroyal HPP Holdings, Inc., ULC Corp. and Uniroyal Optoelectronics,
Inc. (the "Company"). Uniroyal HPP Holdings, Inc. includes its
wholly-owned subsidiary, High Performance Plastics, Inc. ("HPPI") and
HPPI's wholly-owned subsidiary, ViPlex Corporation. Uniroyal
Optoelectronics, Inc. includes its majority-owned joint venture,
Uniroyal Optoelectronics, LLC. The interim Condensed Consolidated
Financial Statements of the Company are unaudited and should be read in
conjunction with the Company's audited financial statements and notes
thereto for the fiscal years ended September 27, 1998, September 28,
1997 and September 29, 1996. The Company's fiscal year ends on the
Sunday following the last Friday in September.
Certain reclassifications were made to the prior year financial
statements to conform to current period presentations. In the opinion
of the Company, all adjustments necessary for a fair presentation of
such interim Condensed Consolidated Financial Statements have been
included. Such adjustments consist only of normal recurring items.
Interim results are not necessarily indicative of results for a full
year. The interim Condensed Consolidated Financial Statements and notes
thereto are presented as permitted by the Securities and Exchange
Commission and do not contain certain information included in the
Company's annual Financial Statements and notes thereto.
2. INVENTORIES
December 27, September 27,
1998 1998
------------- -------------
Raw materials, work in process
and supplies $ 23,458 $ 22,844
Finished goods 14,919 15,295
------------ ------------
Total $ 38,377 $ 38,139
============ ============
3. INVESTMENT IN PREFERRED STOCK
On November 30, 1998, the Company purchased 642,857 shares of the
Series I Redeemable Convertible Preferred Stock ("Preferred Stock") of
Emcore Corporation ("Emcore") for approximately $9,000,000 ($14.00 per
share). The shares were offered pursuant to a private placement by
Emcore.
Dividends on the Preferred Stock are cumulative and will be payable, at
Emcore's option, in cash or additional shares of Preferred Stock on
March 31, June 30, September 30 and December 31, commencing December
31, 1998 at the annual rate of 2% per share of Preferred Stock on the
liquidation preference thereof (equivalent to $0.28 per annum per share
of Preferred Stock).
Shares of the Preferred Stock are convertible at any time, at the
option of the holders thereof, into shares of common stock of Emcore on
a one for one basis, subject to adjustment for certain events. On
December 24, 1998, the closing sales price of Emcore's common stock on
the Nasdaq National Market was $18.00.
The Preferred Stock is redeemable, in whole or in part, at the option
of Emcore at any time Emcore's common stock has traded at or above
$28.00 per share for 30 consecutive trading days, at a price of $14.00
per share plus accrued and unpaid dividends, if any, to the redemption
date. Emcore is required to provide no less than 30 days and no more
than 60 days notice of the redemption. The shares of Preferred Stock
are subject to mandatory redemption by Emcore on November 17, 2003.
The Preferred Stock and the underlying common stock of Emcore have not
been registered under the Securities Act of 1933 and are subject to
certain restrictions on transfer. Emcore has agreed to use its best
efforts to file a registration statement covering the resale of the
shares of common stock issuable upon conversion of the Preferred Stock.
The Company believes that this registration will take place during the
current fiscal year.
The Company accounts for this investment in Preferred Stock in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Management has classified this investment as available for
sale and, in accordance with SFAS No. 115, carries the investment at
fair value with the unrealized gains and losses, net of income taxes,
reported as a separate component of Stockholders' Equity. The fair
value is determined by the most recently traded price of Emcore's
common stock at the balance sheet date.
4. INCOME TAXES
The provisions for income tax expense for the three months ended
December 27, 1998 and December 28, 1997 were calculated through the use
of the estimated annual income tax rates based on projected annualized
income.
5. MINORITY INTEREST
On November 30, 1998 Emcore made a capital contribution to Uniroyal
Optoelectronics, LLC of $5,000,000. The Company will fund its
equivalent capital contribution to the joint venture of approximately
$5,200,000 as cash is required by the joint venture.
6. STOCKHOLDERS' EQUITY
During the quarter ended December 27, 1998, the Company repurchased
444,790 shares of its common stock in the open market for approximately
$4,282,000.
During the quarter ended December 27, 1998 the Company received 57,083
shares of its common stock in lieu of cash for the exercise of stock
options from officers and employees of the Company. These shares were
valued at approximately $590,000 (which was calculated based upon the
closing market value of the stock on the day prior to the exercise
dates) and are included as treasury shares as of December 27, 1998.
7. COMMITMENTS AND CONTINGENCIES
Bankruptcy Proceedings
Notwithstanding the confirmation and effectiveness of the Plan of
Reorganization (the "Plan") of the Company's predecessors (the
"Predecessor Companies"), the United States Bankruptcy Court for the
Northern District of Indiana, South Bend Division (the "Bankruptcy
Court") continues to have jurisdiction to, among other things, resolve
disputed pre-petition claims and to resolve other matters that may
arise in connection with or relate to the Predecessor Companies' Plan.
The Company has resolved, through negotiation or through dismissal by
the Bankruptcy Court, approximately $38,000,000 in disputed claims.
Approximately 9,679,000 shares have been issued to the holders of
unsecured claims against the Predecessor Companies in settlement of the
allowed unsecured claims against the estates of the Predecessor
Companies and to the Company's ESOP. The remaining approximately
321,000 shares of the original 10,000,000 shares allocated for
disposition of the bankruptcy claims are being held pending resolution
of certain miscellaneous claims.
Litigation
The Company is engaged in litigation arising from the ordinary course
of business. Management believes the ultimate outcome of such
litigation will not have a material adverse effect upon the Company's
results of operations, cash flows or financial position.
Environmental Factors
The Company is subject to a wide range of federal, state and local laws
and regulations designed to protect the environment and worker health
and safety. The Company's management emphasizes compliance with these
laws and regulations. The Company has instituted programs to provide
guidance and training and to audit compliance with environmental laws
and regulations at Company owned or leased facilities. The Company's
policy is to accrue environmental and cleanup-related costs of a
non-capital nature when it is probable both that a liability has been
incurred and that the amount can be reasonably estimated.
Based on information available as of December 27, 1998, the Company
believes that the costs of known environmental matters either have been
adequately provided for or are unlikely to have a material adverse
effect on the Company's operations, cash flows or financial position.
8. INCOME PER COMMON SHARE
The reconciliation of the numerators and denominators of the basic and
diluted earnings per share computation for the three months ended
December 27, 1998 and December 28, 1997 is as follows:
Three Months Ended
December 27, 1998
-------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net Income $ 19
Basic EPS
---------
Income available to
common stockholders $ 19 12,508,998 $ -
=========
Effect of Dilutive Securities
-----------------------------
Stock options 953,151
Warrants 320,646
-----------
Diluted EPS
-----------
Income available to
common stockholders $ 19 13,782,795 $ -
========= =========== =========
Three Months Ended
December 28, 1997
--------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $1,363,000
Basic EPS
---------
Income available to
common stockholders $1,363,000 13,378,186 $ 0.10
========
Effect of Dilutive Securities
-----------------------------
Stock options 725,993
Warrants 119,860
----------
Diluted EPS
-----------
Income available to
common stockholders $1,363,000 14,224,039 $ 0.10
========== ========== ========
9. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
during the quarter ended December 27, 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income is defined as the change in quality of
a business during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 requires that the Company's
change in unrealized gains and losses on available for sale equity
securities be included in comprehensive income.
10. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
Payments for income taxes and interest expense were (in thousands):
Three Months Ended
-----------------------------------
December 27, December 28,
1998 1997
------------ ------------
Interest payments $ 859 $ 4,480
Income tax payments 479 81
ITEM 2. Management's Discussion and Analysis Of Financial Condition and
Results Of Operations
First Quarter Fiscal 1999 Compared with
the First Quarter Fiscal 1998
Net Sales. The Company's net sales decreased in the first quarter of Fiscal 1999
by approximately 4% to $49,089,000 from $51,182,000 in the first quarter of
Fiscal 1998. The decrease is primarily attributable to the Fiscal 1998 sale of
the automotive operations of the Coated Fabrics Segment and the gradual
phase-out of those operations. Excluding automotive sales from both periods,
sales increased 6% in the first quarter of Fiscal 1999 compared to the first
quarter of Fiscal 1998.
Net sales by the High Performance Plastics Segment increased approximately 6% in
the first quarter of Fiscal 1999 to $30,963,000 from $29,197,000 in the first
quarter of Fiscal 1998. The increase was primarily attributable to the
incremental sales resulting from the acquisition of ViPlex Corporation in the
third quarter of Fiscal 1998.
Net sales by the Coated Fabrics Segment decreased in the first quarter of Fiscal
1999 approximately 25% to $12,797,000 from $17,135,000 in the first quarter of
Fiscal 1998. The decrease was principally due to the sale in Fiscal 1998 of the
automotive operations of the Coated Fabrics Segment and the gradual phase-out of
the automotive operations. Automotive sales approximated $6,257,000 in the first
quarter of Fiscal 1999 compared to $10,796,000 in the first quarter of Fiscal
1998. Excluding the automotive sales from both periods, net sales by the Coated
Fabrics Segment increased approximately 3% as a result of increased selling
prices for Naugahyde vinyl coated fabrics.
Net sales by the Specialty Adhesives Segment increased in the first quarter of
Fiscal 1999 by approximately 10% to $5,329,000 from $4,850,000 in the first
quarter of Fiscal 1998. This increase is attributable to increased sales as a
result of a tolling agreement with a major adhesives company and increased sales
of Silaprene(R) due to increased unit volume and selling prices.
Income Before Interest, Income Taxes and Minority Interest. Income before
interest, income taxes and minority interest for the first quarter of Fiscal
1999 was $2,160,000, compared to $4,936,000 for the first quarter of Fiscal
1998. The decrease is attributable to a loss of revenues associated with the
gradual phase-out of the automotive operations of the Coated Fabrics Segment,
production inefficiencies from plant consolidations in the High Performance
Plastics Segment and start-up losses for the Optoelectronics Segment.
The High Performance Plastics Segment's income before interest, income taxes and
minority interest for the first quarter of Fiscal 1999 decreased to $2,735,000
from $3,762,000 in the first quarter of Fiscal 1998. The decrease is
attributable to a major plant consolidation at the Polycast cell cast acrylic
division as well as an unfavorable product line mix at the Royalite
thermoplastics division.
The Coated Fabrics Segment's income before interest, income taxes and minority
interest in the first quarter of Fiscal 1999 was $778,000 versus $2,076,000 in
the first quarter of Fiscal 1998. The decrease was primarily due to the
phase-out of the sales of the automotive business and certain incremental costs
related to the closure of the Port Clinton, Ohio facility used to produce
automotive products.
The Specialty Adhesives Segment had income before interest, income taxes and
minority interest in the first quarter of Fiscal 1999 of $177,000 compared to a
loss before interest, income taxes and minority interest of $169,000 in the
first quarter of Fiscal 1998. The increase is attributable to an increase in
sales of higher margin industrial products.
The Optoelectronics Segment incurred a loss before interest, income taxes and
minority interest of $593,000 in the first quarter of Fiscal 1999. The losses
related to start-up costs of the Segment. The Segment did not exist in the first
quarter of Fiscal 1998.
Approximately $937,000 of other expenses incurred in the first quarter of Fiscal
1999 compared to $545,000 in the first quarter of Fiscal 1998 were not allocated
to any segment of the Company's business.
Amortization of reorganization value in excess of amounts allocable to
identifiable assets was $188,000 in the first quarter of Fiscal 1998.
Reorganization value in excess of amounts allocable to identifiable assets was
written off in Fiscal 1998; consequently, there was no amortization in the first
quarter of Fiscal 1999.
Interest Expense. Interest expense in the first quarter of Fiscal 1999 decreased
to $2,276,000 from $2,545,000 in the first quarter of Fiscal 1998. The increase
in debt during the first quarter of Fiscal 1999 versus the first quarter of
Fiscal 1998 was more than offset by a decrease in interest rates resulting from
a Fiscal 1998 debt refinancing.
Income Tax (Expense). Income tax (expense) in the first quarter of Fiscal 1999
was $94,000 compared to $1,028,000 in the first quarter of Fiscal 1998. The
provisions for income tax (expense) were calculated through the use of the
estimated income tax rates based on annualized income.
Liquidity and Capital Resources
For the first quarter of Fiscal 1999, operating activities provided $4,646,000
in cash as compared to $948,000 provided during the first quarter of Fiscal
1998. The increase in cash provided by operations for the first quarter of
Fiscal 1999 resulted primarily from a reduction in trade accounts receivable due
to the gradual phase-out of the Coated Fabrics Segment's automotive business.
Net cash used in investing activities for the first quarter of Fiscal 1999 was
$15,008,000 as compared to $1,173,000 used during the first quarter of Fiscal
1998. The increase in the purchases of property, plant and equipment related
primarily to capital expenditures for the new Optoelectronics production
facility in Tampa, Florida, capital expenditures for the modernization of the
Polycast division's production facility in Stamford, Connecticut and capital
expenditures for a capacity addition at Royalite's Warsaw, Indiana production
facility. Cash was also used in the first quarter of Fiscal 1999 to purchase
preferred stock in Emcore Corporation.
Net cash provided by financing activities during the first quarter of Fiscal
1999 was $5,095,000, as compared to no net cash provided or used during the
first quarter of Fiscal 1998. Borrowings under the Company's revolving line of
credit facilities provided the principal source of cash during the first quarter
of Fiscal 1999 and 1998. The borrowings in the first quarter of Fiscal 1999 and
Fiscal 1998 were primarily used to purchase Company stock in the open market.
Cash was also provided by a capital contribution to the Optoelectronics Segment
by the joint venture partner in the first quarter of Fiscal 1999.
The Company on December 27, 1998, had approximately $318,000 in cash and cash
equivalents as compared to approximately $5,585,000 at September 27, 1998.
Working capital at December 27, 1998 was $25,792,000 compared to $36,146,000 at
September 27, 1998. On December 27, 1998, the Company had outstanding borrowings
of $9,845,000 under its $20,000,000 revolving credit facility with Fleet
National Bank (subject to a borrowing base limitation of approximately
$20,000,000 at December 27, 1998) and $4,937,000 under its $10,000,000 revolving
credit facility with the CIT Group/Business Credit, Inc. (subject to a borrowing
base limitation of approximately $7,844,000 at December 27, 1998). The principal
uses of cash during the first quarter of Fiscal 1999 were to purchase preferred
stock of Emcore Corporation, repurchase of Company stock for treasury and to
fund capital expenditures for the new Optoelectronics facility in Tampa,
Florida. The Company believes that cash from its operations and its ability to
borrow under the revolving credit facilities mentioned above provide it
sufficient liquidity to finance its existing level of operations and meet its
debt service obligations. However, there can be no assurance that the Company's
operations together with amounts available under the revolving credit facilities
will continue to be sufficient to finance its existing level of operations and
meet its debt service obligations. The Company's ability to meet its debt
service and other obligations depends on its future performance, which in turn,
is subject to general economic conditions and to financial, business and other
factors, including factors beyond the Company's control. If the Company is
unable to generate sufficient cash flow from operations, it may be required to
refinance all or a portion of its existing debt or obtain additional financing.
There can be no assurance that the Company will be able to obtain such
refinancing or additional financing.
Effects of Inflation
The markets in which the Company sells products are competitive. In particular,
the Company has generally encountered effective resistance in connection with
its sales of acrylics to the aerospace industry. Thus, in an inflationary
environment the Company may not in all instances be able to pass through to
consumers general price increases; certain of the Company's operations may be
materially impacted if such conditions were to occur. The Company has not in the
past been adversely impacted by general price inflation.
Year 2000
Many software applications and operational programs written in the past were not
designed to recognize calendar dates beginning in the Year 2000. The failure of
such applications or systems to properly recognize the dates beginning in the
Year 2000 could result in miscalculations or system failures which could result
in an adverse impact on the Company's operations.
The Company has instituted a Year 2000 task force that reports to the Audit
Committee of the Board of Directors. The Company has also initiated a
comprehensive project, overseen by the task force, to prepare its computer
systems, communication systems and manufacturing/testing equipment for the Year
2000. The project primarily includes three phases which are: 1) identification
and assessment of all software, hardware and equipment that could potentially be
affected by the Year 2000 issue, 2) remedial action necessary to bring such
systems into compliance and 3) further testing, if necessary. The Company has
generally completed the identification and assessment phase of its project and
is at various stages of remediation and testing the noted systems. The Company
plans to complete this project by July 31, 1999. The Company believes that the
majority of its major systems are currently Year 2000 compliant and costs to
transition the remaining systems to Year 2000 compliance are not anticipated to
exceed approximately $500,000. The Company has primarily used internal resources
in its Year 2000 project thus far and has incurred costs of less than $300,000.
The Company is also contacting critical suppliers of products and services and
customers to determine the extent to which the Company might be vulnerable to
such parties' failure to resolve their own Year 2000 issues. Where practicable,
the Company will access and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready. The Company does not have a
concentration of dependence on these parties. The effect, if any, on the
Company's results of operations from the failure of such parties to be Year 2000
ready is not reasonably estimable.
Currently the Company does not expect to experience significant disruptions of
its operations as a result of the change to the new millenium and therefore has
not formulated a contingency plan for such occurrence.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risks
The Company is exposed to various market risks, including changes in interest
rates. The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates on its floating rate long-term debt and revolving
credit advances. The Company's risk management policy includes the use of
derivative financial instruments (interest rate swaps) to manage its interest
rate exposure. The counter parties are major financial institutions. The Company
does not enter into derivatives or other financial instruments for trading or
speculative purposes.
The Company's interest rate swaps involve the exchange of fixed and variable
interest rate payments without exchanging the notional principal amount.
Payments or receipts on the agreements are recorded as adjustments to interest
expense. At December 27, 1998, the Company had outstanding swap agreements,
maturing at various dates through 2003, with an aggregate notional amount of
$80.0 million. Under these agreements the Company receives a floating rate based
on USD-LIBOR-BBA and pays a fixed weighted average interest rate of 5.80%. These
swaps effectively change the Company's payment of interest on $80.0 million of
its $104.8 million variable rate debt at December 27, 1998 to fixed rate debt.
The fair value of these interest rate swap agreements represents the estimated
receipts or payments that would be made to terminate the agreements. At December
27, 1998, the Company would have paid approximately $2.1 million to terminate
the agreements. A decrease of 100 basis points in the yield curve would increase
the amounts paid by approximately $2.5 million. The fair value is based on
dealer quotes, considering current interest rates.
At December 27, 1998, approximately $24.8 million of the Company's floating rate
long-term debt and revolving credit advances was not covered under an interest
swap agreement. For floating rate debt, interest changes generally do not affect
the fair market value but do impact future earnings and cash flows assuming
other factors are held constant. Based upon this balance, a change of one
percent in the interest rate would cause a change in interest expense of
approximately $248,000 on an annual basis
Forward Looking Information
The information provided herein may include forward-looking statements relating
to future events, such as the development of processes, the commencement of
production, or the future financial performance of the Company. Actual operating
results may differ from such projections and are subject to certain risks,
including, without limitation, risks arising from: increased competition, delays
in developing and commercializing new products and labor actions against the
Company's customers or vendors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(a) The Company knows of no pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of
their property is the subject other than routine litigation
incidental to the Company's business, an adverse outcome of which
would not be expected to have a material impact on the Company.
(b) No legal proceedings were terminated during the three months
ended December 27, 1998, other than routine litigation incidental
to the Company's business.
Item 2. Changes in Securities
None.
Item 3. Default upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: February 10, 1999 By: /s/ George J. Zulanas, Jr.
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George J. Zulanas, Jr.
Vice President, Chief Financial
Officer and Treasurer