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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 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-9607
CENTRUM INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 34-1654011
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6135 Trust Drive, Suite 104A, Holland, Ohio 43528
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(Address of principal executive offices) (Zip code)
(419) 868-3441
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(Registrant's telephone number, including area code)
5580 Monroe Street. Suite 100, Sylvania, Ohio 43560
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(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 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 .
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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.
CLASS OUTSTANDING at December 31, 1996
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Common Stock - $.05 Par Value 8,298,215
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CENTRUM INDUSTRIES, INC.
INDEX
Page
COVER 1
INDEX 2
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets
as of December 31, 1996 and March 31,1996. 3
Condensed Consolidated Statements of
Income for the three and nine months ended
December 31, 1996 and 1995. 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
December 31, 1996 and 1995. 5
Notes to Condensed Consolidation
Financial Statements 6
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION 11
SIGNATURES 12
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PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRUM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
December 31, March 31,
1996 1996
Assets
Current Assets:
Cash and cash equivalents $ 1,635,587 $ 2,100,749
Accounts receivable, less allowances of $283,600
and $93,761, respectively 12,197,246 10,979,166
Inventories 11,645,130 9,395,244
Prepaid expense and other assets 1,143,850 720,006
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Total Current Assets 26,621,813 23,195,165
Property, plant and equipment, net 10,803,462 11,151,109
Other Assets 6,486,470 6,265,474
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Total Assets $ 43,911,745 $ 40,611,748
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Liabilities and Shareholders' Equity
Current Liabilities:
Bank line of credit $ 10,702,297 $ 7,886,486
Current portion of long-term debt 1,578,999 2,976,425
Accounts payable 7,900,629 9,611,745
Deferred income taxes 269,955 268,394
Accrued expense and other 3,012,865 3,476,627
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Total Current Liabilities 23,464,745 24,219,677
Long-term debt, less current portion 11,625,735 11,982,409
Other liabilities 675,746 826,670
Commitments and Contingent Liabilities (Note D)
Shareholders' Equity:
Common stock - $.05 par value, 15,000,000 authorized
8,298,215 and 6,170,860 issued and outstanding 414,911 308,543
Additional paid-in capital 7,895,766 5,322,267
Accumulated deficit (165,158) (2,047,818)
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Total Shareholders' Equity 8,145,519 3,582,992
Total Liabilities and Shareholders' Equity $ 43,911,745 $ 40,611,748
============= ==============
See notes to condensed consolidated financial statements.
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CENTRUM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three For the nine
months ended months ended
December 31 December 31 December 31 December 31
1996 1995 1996 1995
Sales $ 17,973,545 $ 6,398,426 $ 52,406,892 $ 16,930,644
Cost of sales 13,513,115 4,847,679 38,991,224 12,623,980
-------------- -------------- -------------- ------------
Gross profit 4,460,430 1,550,747 13,415,668 4,306,664
Depreciation 290,314 24,393 897,337 70,485
Selling, general and
administrative expenses 2,888,967 1,165,864 9,080,567 3,309,287
-------------- -------------- -------------- ------------
Operating income 1,281,149 360,490 3,437,764 926,892
-------------- -------------- -------------- ------------
Other income and (expenses)
Interest income 16,704 10,431 147,375 17,866
Interest expenses (740,500) (92,629) (2,009,600) (270,852)
Amortization (34,791) (37,292) (105,284) (112,833)
Miscellaneous 36,096 18,075 90,155 40,552
-------------- -------------- -------------- ------------
(722,491) (101,415) (1,877,354) (325,267)
Income before income taxes 558,658 259,075 1,560,410 601,625
Provision (benefit) for income taxes (452,478) 69,960 (322,250) 162,450
-------------- -------------- -------------- ------------
Net income $ 1,011,136 $ 189,115 $ 1,882,660 $ 439,175
=============== ============== ============== ============
Net income per common
and common equivalent share $ 0.12 $0.03 $0.24 $0.08
=============== ============== ============== ============
Weighted average number of
common and common equivalent
shares outstanding 8,482,626 5,688,117 7,801,458 5,689,525
=============== ============== ============== ============
See notes to condensed consolidated financial statements.
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CENTRUM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
For the nine For the nine
Months ended Months ended
December 31, December 31,
1996 1995
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Cash flows from operating activities:
Net income $ 1,882,660 $ 439,175
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,002,621 183,318
Deferred income taxes (533,645)
Changes in assets and liabilities that provide
(use) cash:
Accounts receivable (1,218,080) 376,446
Inventory (2,249,886) (288,259)
Prepaid expenses and other assets (214,919) (574,190)
Accounts payable (1,711,116) 213,915
Accrued expenses and other (614,685) 958,909
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Net cash provided by (used in) operating activities (3,657,050) 1,309,314
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Cash flows from investing activities:
Purchase of property and equipment (549,690) (65,445)
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Net cash used in investing activities (549,690) (65,445)
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Cash flows from financing activities:
Net proceeds (repayments) on short-term debt 2,815,811 (285,000)
Repayments of notes payable (1,754,100) (255,136)
Proceeds from the issuance of notes payable 550,000
Proceeds from the issuance of common stock 2,679,867 18,000
Repurchase of common stock (60,000)
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Net cash provided by (used in) financing activities 3,741,578 (32,136)
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Increase (decrease) in cash and cash equivalents (465,162) 1,211,733
Cash and cash equivalents at beginning of period 2,100,749 472,673
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Cash and cash equivalents at end of period $ 1,635,587 $ 1,684,406
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See notes to condensed consolidated financial statements.
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CENTRUM INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting principally of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of the results of operations for the three month and nine month
periods ended December 31, 1996 and 1995. Accounting policies followed by the
Company are described in Note 1 to the financial statements in its Annual
Report on Form 10-K for the year ended March 31, 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The condensed financial statements should be
read in conjunction with the financial statements, including notes thereto,
contained in the Company's Annual Report on Form 10-K for the year ended March
31, 1996.
The results of operations for the three months and nine months ended December
31, 1996, are not necessarily indicative of the results to be expected for the
full year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Certain amounts within the subsequent year financial statements have been
reclassified in order to be consistent with the current year presentation.
NOTE B: COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
Inventories consisted of the following at December 31, 1996 and March 31, 1996:
December 31, 1996 March 31, 1996
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Raw Materials $ 5,748,811 $ 4,756,954
Work in Progress 4,989,436 4,332,492
Finished Goods 906,883 305,798
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Total Inventories $ 11,645,130 $ 9,395,244
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Other assets consisted of the following at December 31, 1996 and March 31,
1996:
December 31, 1996 March 31, 1996
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Deferred Income Tax Benefits $ 2,601,599 $ 2,066,393
Goodwill, less accumulated amortization of
$509,778 and $404,494, respectively 2,334,332 2,439,616
Debt Issuance Costs 754,356 1,133,412
Other Assets 796,183 626,053
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Total Other Assets $ 6,486,470 $ 6,265,474
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NOTE C: INCOME TAXES
During the third quarter of the current fiscal year, management recorded a
provision for income tax expense of $195,530 which was offset by a $648,010
credit to deferred income tax expenses. The credit to deferred income tax
expense was to reduce the existing valuation allowance. The reduction of the
valuation allowance was based on new information evaluated during the third
quarter regarding the availability of certain federal net operating loss
carryforwards (NOLs) and the continued improvements in operating profits and
backlogs throughout the Company. These factors have reduced the level of
uncertainties with respect to a portion of these NOLs where management has now
concluded that they expect to realize these tax benefits. At December 31,
1996, a remaining valuation reserve of $1.45 million has been maintained due to
limitations on the usage of certain pre-acquistion NOLs and the continued
existence of uncertainties. The remaining valuation allowance could be
increased or reduced in the near term if estimates of future taxable income
during the carryforward period change substantially or if new information
regarding the uncertainties is received.
Income taxes payable as of December 31, 1996 and March 31, 1996 were $269,955
and $251,143, respectively.
NOTE D: COMMITMENTS AND CONTINGENT LIABILITIES
There has been no significant change from the prior year-end audited
statements.
NOTE E: INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The computation of income per common and common equivalent share is based on
the weighted average number of shares of common stock outstanding during the
respective periods. Common equivalent shares, including shares that would be
issued upon the exercise of outstanding warrants and options, have been
included in the calculations to the extent that they are dilutive in nature.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The changes in sales and operating income for the three and nine month periods
ended December 31, 1996 over the comparable period of a year ago were due
primarily to the inclusion of the metal forming subsidiary in the current
periods results. As discussed in the Form 10-K filed for the year ended March
31, 1996, the metal forming operations were acquired on March 8, 1996 and,
accordingly, the results of these operations were not included in the
comparable prior year periods. The metal forming operations have continued
their contribution to operating income during the current quarter. The metal
forming subsidiary has seen significant growth in sales and improvement in
operating income since its acquisition by
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Centrum and management believes that these trends will continue for the
remainder of the fiscal year.
Sales and operating income at the material handling subsidiary have decreased
compared to the corresponding prior year periods. Sales have decreased
primarily as a result of customer requested delivery reschedules into the next
fiscal year. A weaker margin product mix also impacted operating income.
Management believes that this trend in operating income will continue during
the fourth quarter based upon the composition of product mix in the existing
backlogs.
Sales at the motor production subsidiary have increased substantially over the
prior year period as a result of customer demand. Operating profits have
followed this trend benefiting from increased volume and a more profitable
product mix. These factors are expected to continue during the fourth
quarter.
Both consolidated revenues and operating margins benefited during the current
quarter from the trends discussed above. Sales increased by 6.6% over the
previous quarter of this year and operating margins exceeded 7% for the second
time this year. The Company's year-to-date operating margin has improved to
6.6% as compared to 5.5% for the comparable period in the prior year. In
addition, selling, general and administrative expenses for the year remain at
17% of sales, compared to 20% in the previous year. Depreciation expense
increased significantly due to acquisition of the metal forming operations and
the inclusion of their financial results in the current fiscal year.
Management believes that both the short-term and long-term fundamentals of each
of the Company's business units remain sound. Backlogs in each business
segment remain strong and the mix of products will continue to support
consolidated operating margins during the fourth quarter of fiscal 1997. For
these reasons, management believes that current trends in operating income can
be maintained during the remainder of this fiscal year.
The increase in interest expense for the period ended December 31, 1996 over
the comparable period of a year ago is primarily due to the issuance of debt at
the corporate office level and the metal forming subsidiary. The proceeds were
used primarily in connection with the acquisition of the metal forming
operations.
At March 31, 1996, a deferred tax asset valuation allowance of approximately
$2.3 million was recorded, primarily against NOLs for which ultimate
realization was deemed to be unlikely due to questions regarding the levels of
future profitability required to allow their use prior to expiration and other
uncertainties. During the third quarter of the current fiscal year, management
recorded a provision for income tax expense of $195,530 which was offset by a
$648,010 credit to deferred income tax expenses. The credit to deferred income
tax expense was to reduce the existing valuation allowance. The reduction of
the valuation allowance was based on new information evaluated during the third
quarter regarding the availability of certain NOLs and the continued
improvements in operating profits and backlogs throughout the Company. These
factors have reduced the level of uncertainties with respect to a portion of
these NOLs where management has now concluded that they expect to realize these
tax benefits. At December 31, 1996, a remaining valuation reserve of $1.45
million has been maintained due to limitations on the usage of certain
pre-acquistion NOLs and the continued existence of uncertainties. The
remaining valuation allowance could be increased or reduced
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in the near term if estimates of future taxable income during the carryforward
period change substantially or if new information regarding the uncertainties
is received.
Net income per common and common equivalent share has been diluted as a result
of the issuance of common shares pursuant to a Confidential Private Placement
Memorandum (Private Placement) initiated on November 15, 1995 and completed on
November 15, 1996. Please refer to the Form 10-K filed for the year ended
March 31, 1996 for more detailed discussion of these matters.
Summarized unaudited results of operations by business segment for the three
month and six month periods ended December 31, 1996 and 1995 are as follows:
Quarter ended Quarter ended
December 31, 1996 December 31, 1995
Dollars Percent Dollars Percent
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Sales
Metal forming $ 11,671,959 64.94% $ 0 0.00%
Material handling 3,888,480 21.63% 4,978,838 77.81%
Motor production 2,405,863 13.39% 1,419,588 22.19%
Corporate 7,243 0.00% 0 0.00%
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Total sales $ 17,973,545 100.00% $ 6,398,426 100.00%
============= ======== ============ ========
Operating income (loss)
Metal forming $ 1,077,637 84.11% $ 0 0.00%
Material handling 169,887 13.26% 345,595 95.87%
Motor production 270,988 21.15% 135,874 37.69%
Corporate (237,363) (18.53%) (120,979) (33.56%)
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Total operating
income $ 1,281,149 100.00% $ 360,490 100.00%
============= ======== ============ ========
Nine Months ended Nine Months ended
December 31, 1996 December 31, 1995
Dollars Percent Dollars Percent
------- ------- ------- -------
Sales
Metal forming $ 34,329,752 65.51% $ 0 0.00%
Material handling 11,789,685 22.50% 12,491,856 73.78%
Motor production 6,280,212 11.98% 4,438,788 26.22%
Corporate 7,243 0.01% 0 0.00%
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Total sales $ 52,406,892 100.00% $ 16,930,644 100.00%
============= ======== ============ ========
Operating income (loss)
Metal forming $ 3,247,573 94.47% $ 0 0.00%
Material handling 327,202 9.52% 870,866 93.96%
Motor production 504,353 14.67% 443,274 47.82%
Corporate (641,364) (18.65%) (387,248) (41.78%)
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Total operating
income $ 3,437,764 100.00% $ 926,892 100.00%
============= ======== ============ ========
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The Company's operations have been classified into four business segments:
metal forming operations, material handling systems, motor production systems,
and corporate office. The metal forming operations segment manufactures steel
forgings for the power generation, compressor and bearing markets along with
nonferrous casting for the glass container and pump and valve industries. The
material handling equipment segment involves the design, manufacture and
installation of material handling equipment for warehouse and distribution
applications. The motor production systems segment involves the manufacture of
armature winding machines and complete production systems for numerous complex
manufacturing processes.
This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are based on management's
current expectations and are subject to a number of factors and uncertainties,
as described in the Form 10-K filed for the year-ended March 31, 1996, which
could cause actual results to differ materially from those described in the
forward-looking statements. As a result, the Company's operating results may
fluctuate, especially when measured on a quarterly basis.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the nine month period ended December 31,
1996 totaled $3,657,050, as opposed to cash provided by operations of
$1,309,314 in the prior year period. Although net income, taxes and
depreciation and amortization during the period provided $2,351,636 versus
$622,493 in the prior year, the accumulation of additional inventories and
receivables along with the timing of certain payments resulted in the use of
additional capital resources during the first nine months of the year.
Inventories increased at the metal forming operations due to increased backlogs
and customer demand. Accounts receivable increased as a result of higher
shipping levels and the timing of customer payments. Accounts payable were
reduced at both the material handling and metal forming operations primarily as
a result of the timing of vendor payments. Reductions in the accrued expense
category occurred as a result of certain tax and benefit payments.
The cash absorbed in operating activities was financed primarily through the
$15,500,000 bank line of credit facility maintained by the metal forming
subsidiary and the sale of stock through the Private Placement. Management
believes that sufficient availability exists in the bank line of credit to
finance future operating activities at the metal forming subsidiary and
continued emphasis on inventory reductions will provide additional future
working capital.
Cash used in operating activities at the material handling subsidiary was
primarily financed through cash on-hand at the beginning of the period.
Management is currently negotiating a line of credit with a bank to finance
future working capital needs at this subsidiary. The motor production segment
has been successful in financing its growth utilizing cash on-hand and a bank
line of credit instituted this year. Management believes that the Company will
be successful in installing a bank line of credit at the material handling
subsidiary and that both of these segment operations will be able to finance
their growth internally.
The parent company has used cash on-hand and cash from the Private Placement to
finance its operations. In addition, a significant portion of cash raised by
the Private Placement memorandum was used to retire debt incurred during the
acquisition of the metal forming
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operations. The parent company has sufficient cash on-hand to finance the
operations at corporate office level.
The $15,500,000 line of credit agreement places certain restrictions on the
Company's ability to transfer cash between subsidiaries. Management does not
consider this restriction to be significant given the level of cash on hand at
the individual subsidiaries and the existing and planned credit facilities.
PART II - OTHER INFORMATION
During the third quarter, the motor production subsidiary entered into a joint
venture agreement with a European competitor, who offers a complementary
product line. As a result of this alliance, the joint venture company will be
able to offer a much broader array of motor production lines throughout the
North American market. Management believes that the motor production
subsidiary will benefit from this strategic marketing alliance.
The Private Placement closed on November 15, 1996. During the current fiscal
year 1,825,666 shares of common stock have sold for $2,464,650, which is net of
$273,849 in issuance costs and expenses.
On December 13, 1996, interest of $72,252 was paid by the issuance of 48,168
shares of common stock. The interest is attributable to term notes held by
certain of the Company's shareholders and directors. The principal and
interest on the notes has been paid in full. In addition, Board of Directors
fees of $48,000 were paid on December 13, 1996 by the issuance of 32,000
shares of common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRUM INDUSTRIES, INC.
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(Registrant)
Date February 10, 1997 By: /s/ Timothy M. Hunter
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Timothy M. Hunter
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Description
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EX 10.13 Amended and Restated Employment Agreement with
George H. Wells executed November 18, 1996.
EX 10.24 Model Board of Directors Stock Option Agreement.
EX 10.25 Model Employee Stock Option Agreement.
EX 10.26 Stock Option Agreement with George H. Wells dated
December 2, 1996.
EX 10.27 Stock Option Agreement with Timothy M. Hunter dated
December 2, 1996.
EX 10.28 Stock Option Agreement with Anthony A. Montani dated
December 2, 1996.
EX 27 Financial Data Schedule.