<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee required]
For the fiscal year ended July 31, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For the transition period from ____ to ___
Commission file number: 0-22974
CMC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1434910
(State of incorporation) (IRS Employer Identification
No.)
4950 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 982-9999
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share
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.
[ ] [ ]
X
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $34,924,833 at October 8, 1996.
Shares of Common Stock, $.01 par value per shares outstanding at September 30,
1996: 6,665,946
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the Part of the Form 10-K into which
the document is incorporated:
Portions of the Proxy Statement relating to the 1996 Annual Meeting of
Shareholders: Part III
Portions of the 1996 Annual Report to Shareholders: Part II
<PAGE> 2
ITEM 3. LEGAL PROCEEDINGS.
In December 1993, the Company retained the services of an industrial
safety consultant to assist in quantifying the potential exposure to the
Company in connection with clean-up and related costs of a former manufacturing
site, commonly known as the ITT Telecommunications site in Milan, Tennessee and
more particularly described as a 50.1 acre tract surveyed by Construction
Layout Service of Milan, Tennessee. The consultant initially estimated that
the cost to remove the contaminated soil and deliver it to an appropriate
hazardous waste site would be approximately $200,000. Based upon this advice,
the Company subsequently entered into a voluntary agreement to investigate the
site with the Tennessee Department of Environment and Conservation. In
addition, the Company agreed to reimburse a tenant of the site $115,000 for
expenditures previously incurred to investigate environmental conditions at the
site. The Company recorded a total provision of $320,000 based on these
estimates. In fiscal 1995, an environmental expert concluded that the cost of
a full study combined with short and long-term remediation of the site may cost
between $3 and $4 million. During fiscal 1996 the State of Tennessee's
Department of Environment and Conservation named certain potentially
responsible parties ("PRPs") in relation to the former facilities. The Company
was not named as a PRP. However, Alcatel, Inc., a PRP named by the State of
Tennessee's Department of Environment and Conservation and a former owner of
the Company, is seeking indemnification from the Company. To date, Alcatel has
not filed any legal proceedings to enforce its indemnification claim. However,
there can be no assurance that Alcatel will not initiate such proceedings or
that any other third parties will not assert claims against the Company
relating to remediation of the site. In the event any such proceedings are
initiated or any such claim is made, the Company believes it has numerous
defenses which it will vigorously assert. There can be no assurance that if
any proceedings are initiated or any such claim is asserted, defense or
resolution of such matter will not have a material adverse effect on the
Company's financial position or results of operations.
The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect upon the results of operations or financial
condition of the Company and will not disrupt the normal operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
7
<PAGE> 3
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(1) EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
Number -----------
<S> <C>
3.1* Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Form of Common Stock Certificate.
4.2*** Securities Purchase Agreement, dated as of May 15, 1996, by and between the Company and each of the
investors listed therein.
10.1* Agreement and Plan of Reorganization between CMC Industries, Inc. and International Telecommunication
Asia PTE, Ltd. dated as of October 2, 1993.
10.2* Lease Agreement between The Board of Supervisors of Alcorn County, Mississippi and International
Telephone and Telegraph Corp. dated August 1, 1961, as amended and supplemented and related documents.
10.3* Lease Agreement between Corinth Telecommunications Corp. (now known as CMC Manufacturing, Inc.) and
Douglas Jumper and Truitt Stockton d/b/a Jumper-Stockton Warehouses for the Pinecrest Road warehouse
dated October 20, 1992.
10.4* Lease Agreement between Corinth Telecommunications Corp. (now known as CMC Manufacturing, Inc.) and
Douglas Jumper and Truitt Stockton d/b/a Jumper-Stockton Warehouses for the Sawyers Road warehouse
dated October 20, 1992.
10.5* Lease Agreement between Lincoln N.C. Realty Fund, Incorporated and Topaz Industries, Inc. dated April 8,
1991.
10.6* Loan and Security Agreement dated August 23, 1993 between CMC Manufacturing, Inc. and Continental
Bank, N.A. and related documents.
10.7* License Agreement between ITT Corporation and ITT Telecom Products Corporation (now known as CMC
Manufacturing, Inc.) dated December 30, 1986.
10.8* Manufacturing Agreement between Cortelco International, Inc. and CMC Manufacturing, Inc. dated October
7, 1993.
10.9* Purchase Agreement between GTE Communication Systems Corporation and CMC Manufacturing, Inc.
dated April 1, 1994.
10.10* Commercial Promissory Notes between Topaz Industries, Inc. and Bank of Communications dated January 2,
1992 and February 9, 1993.
10.11* Agreement between Cortelco International, Inc. and CMC Manufacturing, Inc. dated as of September 1,
1993.
10.12* Cortelco USA, Inc. (now known as CMC Manufacturing, Inc.) Profit Sharing Savings Plan and Trust for
Salaried Employees.
10.13* Hourly Pension Plan for Employees of ITT Telecom Products Corporation (now known as CMC
Manufacturing, Inc.) at Corinth.
10.14* CMC Industries, Inc. 1990 Equity Incentive Plan, as amended and restated.
10.15* Form of Indemnification Agreement between CMC Industries, Inc. and certain officers and directors.
10.16** Lease Agreement between Guzik Investments, L.P. and CMC Industries dated June 14, 1995.
13.1 1996 Annual Report to Shareholders.
21.1+ Subsidiaries of the Registrant.
23.1+ Consent of Independent Accountants.
27 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 4
+ Filed Previously
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 33-70126.
** Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended July 31, 1995.
*** Incorporated by reference to exhibits filed with the Registrant's Current
Report on Form 8-K filed the Securities and Exchange Commission on May 24,
1996.
(2) FINANCIAL ON STATEMENTS AND SCHEDULES
Consolidated Financial Statements of CMC Industries, Inc. and subsidiaries
Consolidated Balance Sheets as of July 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended July 31, 1996,
1995 and 1994
Consolidated Statements of Changes In Stockholders' Equity for the Years
Ended July 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended July 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
The Financial Statements are hereby incorporated by reference to pages 17
to 35 of the Company's 1996 Annual Report to Shareholders. Such Annual Report
is filed as exhibit 13.1 hereto.
All schedules specified by the Securities and Exchange Commission are
inapplicable or omitted pursuant to Regulation S-X since the information is
included in the Consolidated Financial Statements or related notes.
(3) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on May 24, 1996, reporting the consummation of a placement
to private investors of an aggregate of 436,037 shares of the Company's Common
Stock and Warrants to purchase an aggregate of 168,963 shares of the Company's
Common Stock, which are exercisable at $7.50 per share. The purpose of the
offering was principally to provide additional financial flexibility to take
advantage of business opportunities as they arise.
<PAGE> 5
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.
CMC INDUSTRIES, INC.
/s/ Matthew G. Landa
------------------------------------
Date: October 28, 1996 Matthew G. Landa, President,
Chief Executive Officer and Director
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David S. Lee Chairman of the Board October 28, 1996
- ----------------------------
David S. Lee
/s/ Matthew G. Landa President, Chief Executive October 28, 1996
- ---------------------------- Officer and Director
Matthew G. Landa
/s/ Andrew J. Moley Executive Vice President, October 28, 1996
- ---------------------------- Chief Financial Officer and
Andrew J. Moley Director
/s/ Ira Coron Director October 28, 1996
- ----------------------------
Ira Coron
/s/ Frederick W. Gibbs Director October 28, 1996
- ----------------------------
Frederick W. Gibbs
/s/ Charles Holloway Director October 28, 1996
- ----------------------------
Charles Holloway
</TABLE>
<PAGE> 1
EXHIBIT 13.1
1996 Annual Report to Shareholders.
<PAGE> 2
CMC Industries, Inc.
1996
ANNUAL
REPORT
[LOGO] CMC
<PAGE> 3
MISSION
STATEMENT
"To Attain the Highest Level
of Technical Competence
and Develop the Most Efficient
Materials Logistics Processes
in the Business in order to be
the Most Flexible, Quickest
Reacting Turn-key Provider
of Electronics Manufacturing
Services to the Communications
and Electronics Industry."
<PAGE> 4
Table of Contents
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Corporate Profile................................. 1
Letter To Shareholders............................ 2
Organizational Philosophy......................... 4
Financial Highlights.............................. 6
Management's Discussion
And Analysis...................................... 9
Consolidated Financial Statements................. 17
Notes To Consolidated
Financial Statements.............................. 21
Corporate Directory............................... 36
</TABLE>
<PAGE> 5
Corporate Profile
CMC Industries, Inc. and Subsidiaries 1
[PICTURE]
DURING THE COURSE OF THIS YEAR, CMC RELOCATED ITS CORPORATE HEADQUARTERS AND
EXPANDED INTO A 75,000 SQUARE FOOT FULL TURNKEY ELECTRONICS MANUFACTURING
FACILITY . THIS FACILITY IS DESIGNED SPECIFICALLY TO MEET THE NEEDS OF OUR
SILICON VALLEY AND WEST COAST CUSTOMERS, WITH A FULL ARRAY OF SERVICES, FROM THE
PRE-PROTOTYPE DESIGN STAGE TO COMPLETE SYSTEM INTEGRATION AND CONFIGURATION.
[PICTURE]
OUR FLAGSHIP FACILITY, IN CORINTH MS, WAS ESTABLISHED IN 1961. TODAY CMC
OPERATES OUT OF A 350,000 SQUARE FOOT BUILDING INCORPORATING A FULL COMPLEMENT
OF VALUE-ADDED SERVICE CAPABILITIES, INCLUDING FULL PLASTIC INJECTION MOLDING, A
FIXTURE TOOLING SHOP, COMMUNICATIONS SCREEN ROOMS FOR RF (WIRELESS) TESTING AND
THE LATEST IN AUTOMATED SURFACE MOUNT TECHNOLOGY AND BALL GRID ARRAY ASSEMBLY
AND TEST EQUIPMENT.
CMC now has over 425,000 square feet of manufacturing capacity, 1100
highly-skilled employees, worldwide procurement capabilities and expertise in
the full range of value-added design, manufacturing, test, fulfillment and
customer services. This combination of strengths allows CMC to truly be the
"manufacturing division" of our global customers.
<PAGE> 6
2 CMC Industries, Inc. and Subsidiaries
TO OUR SHAREHOLDERS
- -------------------------------------------------------------------------------
Fiscal 1996 was a year of transition for CMC Industries, Inc. After the
disappointing performance of fiscal 1995, we entered 1996 with a mandate for
change. During the year, we worked to focus our sales and marketing efforts on
high growth business opportunities, improve our overhead structure to allow for
profitable operations and strengthen our asset management to generate funds for
growth. The results during the year have been encouraging. CMC achieved record
sales for the Company of $164.7 million and, excluding a one-time pre-tax charge
of $792,000 in the first quarter of the year, bottom-line earnings per share
numbers improved substantially, from $.01 in 1995 to $.10 in 1996. These
aggregate numbers highlight significant improvements in the performance of the
Company and the increased prospects for future success at CMC.
We believe that success in this industry is achieved by developing strong
partnerships with, and providing a full suite of manufacturing services and
materials management capabilities to, successful Original Equipment
Manufacturers ("OEMs") in the most robust high-technology sectors. To this end,
we focused our sales, marketing and operations efforts on areas of the
Electronic Manufacturing Services ("EMS") marketplace, particularly
communications and a few other select segments, which offer the greatest
potential for growth. During the past year, we invested heavily in the latest
generation Surface Mount Technology ("SMT") and Ball Grid Array ("BGA")
equipment to service the needs of our OEM partners, and we upgraded our
facilities, specifically in California, where we now operate out of a 75,000 sq.
ft. facility located in the heart of the Silicon Valley.
We have also upgraded our materials and purchasing functions with an eye to
becoming the best materials logistics provider in the industry, and we have
strengthened our management ranks with a core team of professionals with
significant industry experience. Our newly-implemented management information
systems give us the tools necessary to properly understand our business, and we
strive to continuously improve our knowledge of and control over all facets of
our operations. Finally, our Corporate Headquarters relocation to California and
the Silicon Valley put us in close proximity to many of our key current and
prospective customers.
Thus far, the changes appear to be working as over 33% of our fourth quarter
revenues came from customers new to CMC in 1996. This has allowed us to bring
down the revenue concentration of our two largest accounts from a combined total
of over 50% in the beginning of the year to just under 35% in the fourth
quarter. This improved diversification and quality of our customer base, along
with our improved earnings and asset management performance, are signs that the
efforts we have made are beginning to bear fruit.
Recently, we expanded our Board of Directors by welcoming Charles Holloway and
Ira Coron to the Board. Professor Holloway is the holder of the Kleiner,
Perkins, Caufield & Byers Professorship in Management at the Stanford University
Graduate School of Business and is an expert in the fields of manufacturing and
materials management. Mr. Coron is the Chief Executive Officer of California
Amplifier, a leading manufacturer of wireless communications equipment. Their
guidance and advice will be invaluable to us as we continue to improve our
operations and broaden our customer base.
In early August, we promoted Jack O'Rear to the position of Chief Operating
Officer of CMC. Jack's leadership of the Mississippi operations has been a key
factor in our improved performance, and we look forward to leveraging his
expertise over the breadth of our operations. Sadly, we must also report the
passing of Bill Fowble, a Director of the Company. We extend our condolences to
his family and will miss him as a key member of the CMC team.
In summary, 1996 was a year of continued improvement for CMC. We have in place
today a talented group of employees and an operation poised to take advantage of
the considerable opportunities available to us in our business sector. We
appreciate our customers' faith in us, and we are grateful to you, our
shareholders, for your support as we continue to make CMC a leader in the
Electronics Manufacturing Services Industry.
Sincerely,
/s/ Matthew G. Landa
- -----------------------------------
Matthew Landa
President & Chief Executive Officer
<PAGE> 7
Letter To Shareholders
CMC Industries, Inc. and Subsidiaries 3
"We have in place today a
talented group of employees
and an operation poised
to take advantage of the
considerable opportunities
available to us in our
business sector."
Matthew Landa
President & Chief Executive Officer
<PAGE> 8
4 CMC Industries, Inc. and Subsidiaries
ORGANIZATIONAL PHILOSOPHY
- -------------------------------------------------------------------------------
Quick response to our customers' needs, empowerment of our employees, the
continual development of world-class processes to increase our flexibility and
the development of competitive advantages for our customers are the four
cornerstones of our organizational philosophy.
RESPONSIVENESS TO CUSTOMERS
At CMC, responding to customer needs is our primary objective. In today's
increasingly competitive high-technology marketplace our customers' success is
driven by their ability to be the best at managing products through
increasingly shorter life cycles.
We believe that those companies that can cost-efficiently launch and ramp new
products the fastest, redesign existing products to meet evolving end-customer
needs the quickest and bring product life cycles to conclusion the most
effectively will stand head and shoulders above their competition.
CMC has years of management experience dealing with these issues. Our
workforce is highly trained and motivated and maintains the highest level of
technical competence in leading edge communications-related manufacturing
processes.
EMPLOYEE EMPOWERMENT
At CMC, we believe in empowering our employees with the tools needed to not
only maintain the status quo but to continually improve each and every task
they perform. In order for this system to be effective, our employees must be
given the tools and the authority to effect real, positive change within the
organization.
When we refer to tools, we mean real-time access to the major drivers of
performance for each program. Whether it be the internal cost to perform a
purchasing transaction or the utilization of a particular piece of equipment,
our employees need to know the status of these drivers at any given moment. This
information allows all members of our team to constantly contribute toward
making our business and our customer programs more efficient. It is through a
complete understanding of our business at all levels in the organization that we
drive our overriding philosophy of continual improvement.
WORLD CLASS PROCESSES, FLEXIBILITY AND ADDED-VALUE
It is our mission to create and continually improve the most efficient
materials logistics processes, the best management information systems and the
highest quality manufacturing processes. These distinctive competencies allow
CMC to be the most flexible, quickest reacting and highest quality provider of
electronics manufacturing services in the industry.
A successful manufacturing partner is one that has flexibility built into its
systems to react to unanticipated changes at multiple levels in the
manufacturing value proposition. These changes come in many forms - such as
changes in component availability, product design or external market
conditions. The key is to effect change as quickly as possible while
minimizing cost and maintaining the highest quality standards. At CMC, this is
our focus.
We add value to our customers by contributing our specialized knowledge of the
full range of manufacturing services. By doing this, we allow our
manufacturing partners to focus on those areas where they truly add the
greatest value versus their competition.
COMPETITIVE ADVANTAGE
It is through continual change that CMC will strive to be the best electronic
manufacturing services provider in the world. Our change is driven by our
customers' needs, implemented by our empowered employees and enabled by our
state-of-the-art business systems. The output of this process of change is the
ongoing development and refinement of the most flexible and quickest reacting
company in the EMS business, creating a truly competitive advantage for our
manufacturing partners.
<PAGE> 9
Organizational Philosophy
CMC Industries, Inc. and Subsidiaries 5
Quick response to our customers' needs,
empowerment of our employees, the continual
development of world-class processes to
increase our flexibility and the development
of competitive advantages for our customers
are the four cornerstones of our
organizational philosophy.
<PAGE> 10
6 CMC Industries, Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Over the course of fiscal 1996, CMC demonstrated consistent improvement in
financial performance. Sales for the year were $164,700,000, a record for the
Company and an increase of 14% over last year's $144,300,000. Within these
numbers lies a significant trend. In 1995, 39% of revenues came from advanced
manufacturing operations such as SMT, and the remaining 61% resulted primarily
from hand assembly and auto insertion operations. In 1996, these numbers were
reversed, with 61% of revenues being derived from SMT and BGA. In fact, SMT and
BGA represented over 70% of fourth quarter revenues. This represents an annual
growth rate of 81% for these operations and is a sign that today, CMC is truly
aligned with the industry's demands.
Gross margins improved from 5.3% in 1995 to 6.5% in 1996, and our gross margin
in the fourth quarter was 8.2%, again indicating a strong positive trend.
Operating income increased by $2,000,000 on a year over year basis, excluding
the charge taken in the first quarter for a one time reduction in overhead
staffing. Finally, net income more than doubled, and the trend was
substantially positive as well, with the second, third and fourth quarters being
profitable and the Company earning $.07 per share in the fourth quarter, up from
losses of $.06 in the year ago period and $.11 in the first quarter of 1996.
A key indicator for our management during the course of this transition has been
employee productivity. Revenue per employee has risen from just over $23,000 in
the fourth quarter of 1995 to $37,000 in the most recent quarter. This is
largely attributable to the investment made in advanced automation equipment and
the successful transition to the higher technology processes. We look to
continue this trend into 1997.
We generated in excess of $9,000,000 in operating cash flow over the course of
the year after financing the growth of the business. Better inventory
performance and a reduction in receivable days outstanding were the key areas of
improvement. Bank borrowings were reduced by $4,000,000 and we purchased
$5,000,000 of SMT & BGA equipment to further strengthen our manufacturing
capabilities. In May, we raised $2,500,000 through an equity private placement
adding to our overall capitalization and providing additional funds for growth.
Overall, we significantly strengthened our financial position in 1996 by
operating profitably, improving asset management, reducing debt and increasing
our equity base.
In summary, 1996 was a solid financial year for CMC, and we look to continue
the positive trends through the upcoming year.
Sincerely,
/s/ Andrew Moley
- ------------------------------------
Andrew Moley
Executive Vice President & Chief Financial Officer
<PAGE> 11
FINANCIAL HIGHLIGHTS
CMC Industries, Inc. and Subsidiaries 7
ANNUAL NET SALES
(in millions)
[CHART]
EARNINGS PER SHARE
[CHART]
Overall, we signigicantly
strengthened our
financial position in 1996
by operating profitably,
improving asset
management, reducing
debt and increasing our
equity base.
Andrew Moley
Executive President
& Chief Financial Officer
REVENUE PER EMPLOYEE
(in thousands)
[CHART]
<PAGE> 12
8 CMC Industries, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA AND
- -------------------------------------------------------------------------------
PRO FORMA FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data and pro forma financial data, which should be read in conjunction with the
Company's consolidated financial statements and related notes and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein. The selected consolidated financial data
as of July 31, 1996 and 1995, and for each of the years in the three-year
period ended July 31, 1996, have been derived from, and are qualified by
reference to, audited financial statements included elsewhere herein. The
historical income statement data for periods through July 31, 1993 reflect the
business of the Company until the August 1993 restructuring. The pro forma
income statement data presents the pro forma operating results of the contract
manufacturing services business.
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------------------
1996 1995 1994 1993 1992
(In thousands, except for share data) --------------------------------------------------
HISTORICAL INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $164,711 $144,303 $163,779 $150,638 $140,823
Cost of sales...................................... 153,956 136,691 150,793 121,784 112,411
-------- -------- -------- -------- --------
Gross profit....................................... 10,755 7,612 12,986 28,854 28,412
Selling, general and administrative expenses....... 8,251 7,062 6,168 19,763 17,392
Restructuring charge............................... 792 -- -- -- --
Research and development expenses.................. -- -- -- 6,304 5,297
-------- -------- -------- -------- --------
Operating income................................... 1,712 550 6,818 2,787 5,723
Interest expense, net.............................. 1,512 1,561 1,386 2,899 2,388
Interest income from sales-type leases............. -- -- -- 627 845
-------- -------- -------- -------- --------
Income (loss) before income taxes.................. 200 (1,011 5,432 515 4,180
Income tax provision (benefit)..................... 95 (1,051 2,056 290 1,592
-------- -------- -------- -------- --------
Net income......................................... $ 105 $ 40 $ 3,376 $ 225 $ 2,588
======== ======== ======== ======== ========
Net income per share (1)........................... $ 0.02 $ 0.01 $ 0.60 $ 0.05 $ 0.59
======== ======== ======== ======== ========
Weighted average common shares and
equivalents (1).................................... 6,449 6,253 5,664 4,515 4,390
PRO FORMA INCOME STATEMENT DATA:
Net sales........................................................................... $111,590 $100,541
Cost of sales....................................................................... 99,941 90,622
-------- --------
Gross profit........................................................................ 11,649 9,919
Selling, general and administrative expenses........................................ 4,812 3,780
-------- --------
Operating income.................................................................... 6,837 6,139
Interest expense, net............................................................... 980 1,186
-------- --------
Income before income taxes.......................................................... 5,857 4,953
Provision for income taxes.......................................................... 2,107 1,857
-------- --------
Net income.......................................................................... $ 3,750 $ 3,096
======== ========
Net income per share (1)............................................................ $ 0.83 $ 0.71
======== ========
<CAPTION>
July 31,
--------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital..................................... $20,914 $21,739 $19,862 $ 5,626 $11,483
Total assets........................................ 67,434 65,964 66,426 54,428 70,670
Long-term debt and capital lease obligations........ 6,261 6,341 5,545 5,096 10,311
</TABLE>
- ---------------------------
(1) Net income per share is calculated as described in Note 2 to the
Consolidated Financial Statements. The Company has never paid or declared any
cash dividends.
<PAGE> 13
CMC Industries, Inc. and Subsidiaries 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
GENERAL
CMC Industries, Inc. ("CMC" or the "Company") was incorporated in 1990 to
acquire certain businesses operated from the Company's Corinth, Mississippi
manufacturing facility since 1960. In August 1993, the Company transferred
certain assets and related liabilities associated with its telephone business
to Cortelco in exchange for 1,000,000 shares of non-voting Series A Preferred
Stock of Cortelco, which effectively transferred to Cortelco all of the
Company's assets and liabilities not related to its contract manufacturing
business. This restructuring allowed CMC to focus on contract manufacturing
services while Cortelco pursued the development and distribution of telephones
and telecommunications products. See Note 1 to the Consolidated Financial
Statements.
The Company offers contract manufacturing services to its customers on
both a turnkey and consignment basis, with over 90% of the Company's net sales
derived from turnkey projects. On turnkey contracts, the Company both procures
the components and other supplies and provides full manufacturing services. On
consignment contracts, the customer provides the components and other supplies
to the Company, and the Company charges for only labor and overhead; thus,
sales volumes per assembly are generally lower and the gross margins are
generally higher on consignment contracts since the Company does not procure
materials for the assembly.
Set forth below are analyses of the Company's results of operations for
the fiscal years ended July 31, 1996, 1995 and 1994. Results of operations for
the years ended July 31, 1996 and 1995 are discussed together in the section
immediately below, followed by a discussion of results for the years ended July
31, 1995 and 1994.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1996 VERSUS 1995
Total net sales for fiscal 1996 were $164.7 million, up 14% from $144.3
million for fiscal 1995. Approximately $107.8 million, or 66%, of the
Company's sales in fiscal 1996 were to customers from the communications
(telecom and data networking) industry as compared to $87.0 million, or 60%, in
fiscal 1995. Revenue growth in the communications segment was realized as
sales to customers new to the Company in fiscal 1996 more than offset a $7.6
million decrease in sales to Cortelco. Sales to computer customers were
relatively flat from year to year as a $6.9 million decrease in sales to the
Company's largest customer from this industry was substantially offset by sales
to new customers.
Gross profit for fiscal 1996 was $10.8 million or 6.5% of net sales, as
compared to $7.6 million or 5.3% of net sales for fiscal 1995. The gross
profit improvement on a year-to-year basis principally resulted from improved
operating efficiencies related to higher sales volume, a stronger mix of higher
margin new business and lower overhead costs resulting from a reduction in
staffing.
<PAGE> 14
10 CMC Industries, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
Selling, general and administrative expenses were $9.0 million or 5.5% of
net sales in fiscal 1996, as compared to $7.1 million or 4.9% of net sales for
fiscal 1995. The higher expenses in fiscal 1996 were primarily due to
additions to the Company's management team and sales force, increases in
expenses incurred to improve program management and customer service in an
effort to increase profitability in future periods, and $792,000 in
non-recurring charges related to the restructuring of the Company's business.
Of this amount, $241,000 related to the relocation of CMC's corporate offices
and California operations to a new facility in Santa Clara, CA. This move gives
CMC an enhanced presence in the Silicon Valley, the base of operations for many
of the Company's current and prospective customers. The remaining amount
represented one-time charges related to a reduction in overhead staffing at the
Company's Corinth, MS operations. These reductions reflect the transition of
the Company's business away from hand assembly work and towards more advanced
surface mount technology operations.
Net interest expense for fiscal 1996 was $1.5 million as compared to $1.6
million for fiscal 1995. The decrease in fiscal 1996 compared to fiscal 1995
was due to lower average debt balances.
The Company's effective tax rate for fiscal 1996 was approximately 47.5%.
The Company's effective tax rate was approximately 38% throughout fiscal 1995,
with the exception of the recording of a non-recurring income tax benefit
resulting from recognition of prior year research and development credits. The
fluctuation from year to year also resulted from the amortization of goodwill,
which was treated as an expense for financial purposes but was not deductible
for tax purposes.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1995 VERSUS 1994
Net sales for fiscal 1995 were $144.3 million, down 12% from $163.8
million for fiscal 1994. Sales of telecommunications products accounted for
approximately 54% of sales in fiscal 1995 compared to 48% in fiscal 1994. The
decline in sales in fiscal 1995, as compared to fiscal 1994, was largely
attributable to a decrease in sales to the Company's largest customer in the
computer electronics industry. Sales to this customer accounted for $35.3
million or approximately 24% of the Company's total revenues for fiscal 1995 as
compared to sales of $59.9 million or approximately 37% of the Company's total
revenues for fiscal 1994.
Gross profit for fiscal 1995 was $7.6 million or 5.3% of net sales, as
compared to $13.0 million or 7.9% of net sales for fiscal 1994. The decline in
gross profit in fiscal 1995 was attributable in part to inefficient utilization
of facilities, equipment and personnel resulting from a decline in orders from
the Company's existing customer base. Margins were also adversely impacted by
a shift in sales mix to lower margin products and a provision for inventory
reserves for end-of-life products.
<PAGE> 15
CMC Industries, Inc. and Subsidiaries 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
Selling, general and administrative expenses were $7.1 million or 4.9% of
net sales in fiscal 1995, as compared to $6.2 million or 3.8% of net sales for
fiscal 1994. The higher expenses in fiscal 1995 were primarily due to
additions to the Company's management team and increases in expenses incurred
to improve program management and customer service in an effort to increase
sales and profitability in future periods.
Net interest expense for fiscal 1995 was $1.6 million as compared to $1.4
million for the prior year. Most of the Company's debt bears interest at
variable rates which were consistently higher during fiscal 1995 than in 1994.
The Company's effective tax rate was approximately 38% throughout fiscal
years 1995 and 1994, with the exception of the recording of a non-recurring
income tax benefit of approximately $0.7 million in fiscal 1995. The benefit
resulted from recognition of prior year research and development credits.
The Company's operating results and cash flows were adversely impacted in
fiscal 1995 and 1994 by declining sales to the Company's largest customer in
the computer electronics industry, especially as it related to a major
reschedule of production of a particular printed circuit board assembly. The
Company began manufacture of this product in the first quarter of fiscal 1994.
The following table shows the revenues derived from sales of this product for
each quarter of fiscal 1994 and 1995.
Quarter ended October 31, 1993 $ 4.8 million
Quarter ended January 31, 1994 12.2 million
Quarter ended April 30, 1994 6.3 million
Quarter ended July 31, 1994 3.4 million
Quarter ended October 31, 1994 3.3 million
Quarter ended January 31, 1995 2.2 million
Quarter ended April 30, 1995 0.9 million
Quarter ended July 31, 1995 2.2 million
The Company was advised by the customer in March 1994 that a production
reschedule of this product was necessary due to the build-up of excess
inventories in the customer's distribution channels and that the reschedule
would be applied consistently to other suppliers of this product. The Company
had anticipated that, due to operating efficiencies associated with high
volumes of a single product, gross margins and cash flows from operations would
increase due to the manufacture of this product; however, the drop in
production due to the reschedule caused equipment and personnel to become
underutilized. In fiscal 1995, the Company was unable to secure new business
that adequately replaced the margin loss from the reschedule. The Company
manufactures other products for this customer and continues to actively pursue
additional business from the customer.
<PAGE> 16
12 CMC Industries, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
QUARTERLY RESULTS
The following table contains selected unaudited consolidated financial
results for each of the four fiscal quarters for fiscal 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1995 YEAR ENDED JULY 31, 1996
---------------------------------------------- -------------------------------------------------
(In thousands) QUARTER ENDED QUARTER ENDED
---------------------------------------------- -------------------------------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 APRIL 30 JULY 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $38,424 $38,764 $33,511 $33,604 $38,580 $41,810 $42,944 $41,377
Gross profit (loss) 3,415 3,169 (434) 1,462 2,072 2,507 2,789 3,387
Selling, general and
administrative expenses 1,745 1,571 2,000 1,746 2,861 2,005 1,899 2,278
Operating income (loss) 1,670 1,598 (2,434) (284) (789) 502 890 1,109
Interest expense, net 382 387 453 339 346 429 403 334
Net income (loss) $ 798 $ 753 $(1,118) $ (393) $ (715) $ 40 $ 300 $ 480
<CAPTION>
As a Percentage of Sales
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit (loss) 8.9 8.2 (1.3) 4.4 5.4 6.0 6.5 8.2
Selling, general and
administrative expenses 4.5 4.1 6.0 5.2 7.4 4.8 4.4 5.5
Operating income (loss) 4.3 4.1 (7.3) (0.8) (2.0) 1.2 2.1 2.7
Interest expense, net 1.0 1.0 1.4 1.0 0.9 1.0 0.9 0.8
Net income (loss) 2.1 1.9 (3.3) (1.2) (1.9) 0.1 0.7 1.2
</TABLE>
The Company's quarterly operating results fluctuate due to a number of
factors, including the mix of manufacturing projects, capacity utilization,
price competition, the timing of orders from major customers, the timing of
expenditures in anticipation of increased sales, customer product delivery
requirements, increased costs and shortages of components or labor, and
economic conditions generally. The Company normally reduces production in
December of each year to allow for holidays and vacation, which can negatively
impact results in the Company's second quarter due to inefficiencies and
decreased overhead absorption.
Net sales and gross margins were heavily influenced throughout fiscal 1995
by the reschedule of a printed circuit board assembly provided to one of the
Company's largest customers for use in a personal computer monitor. See
"Results of Operations for the Year Ended July 31, 1995 versus 1994."
<PAGE> 17
CMC Industries, Inc. and Subsidiaries 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of certain of the risk factors set forth below and
elsewhere in this document. In addition to the other information contained and
incorporated by reference in this document, the following factors should be
considered carefully in evaluating the Company and its business.
FACTORS THAT MAY AFFECT THE COMPANY
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results are affected by a number of factors, including the mix of manufacturing
projects, capacity utilization, price competition, the degree of automation
that can be used in the assembly process, the efficiencies that can be achieved
by the Company in managing inventories and fixed assets, the timing of orders
from major customers, fluctuations in demand for customer products, the timing
of expenditures in anticipation of increased sales, customer product delivery
requirements, increased costs and shortages of components or labor and economic
conditions generally. All of these factors can cause substantial fluctuations
in the Company's operating results. The Company's expenditures (including, but
not limited to, equipment, inventory and labor) are based, in part, on its
expectations as to future revenues and, to a large extent, are fixed in the
short term. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues, and any
significant shortfall of demand in relation to the Company's expectations or
any material delay or cancellation of customer orders could have an almost
immediate material adverse effect on the Company's operating results. As a
result, it is possible that in some future period, the Company's operating
results could fail to meet the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail or
are perceived to prevail generally or with respect to the Company's business,
the price of the Company's Common Stock could drop significantly.
The Company's gross profit as a percentage of sales in future periods may
be materially adversely affected by various factors associated with the
Company's production of new product lines, acquisition of new manufacturing
equipment and continued dependence on turnkey contracts (and the inventory
risks inherent therein). This expansion will result in a higher fixed cost
structure which will require increased revenue and/or significant improvements
in operating efficiencies in order to maintain historical gross margins.
Additionally, the commencement of production of new products typically involves
significant start-up costs, lower yields and other inefficiencies. New
products do not generate gross margins as high as products which have been in
volume production for several months. The Company also expects that
competition may continue to intensify, which could also result in lower gross
margins.
CUSTOMER CONCENTRATION; DEPENDENCE ON INDUSTRY TRENDS. A small number of
customers are currently responsible for a significant portion of the Company's
net sales. In the fiscal years ended July 31, 1996, 1995 and 1994, the
Company's four largest customers for such periods accounted for approximately
63%, 69% and 75%, respectively, of consolidated net sales. Any material delay,
cancellation or reduction of orders from these or other customers could have a
materially adverse effect on the Company's results of operations.
The percentage of the Company's sales to its major customers may fluctuate
from period to period. Significant reductions in sales to any of these
customers could have a materially adverse effect on the Company's results of
operations. In addition, customer contracts can be canceled, and volume levels
can be changed or delayed. The timely replacement of canceled, delayed or
reduced contracts with new
<PAGE> 18
14 CMC Industries, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
business cannot be assured. These risks are exacerbated because a majority of
the Company's sales are to customers in the communications sector of the
electronics industry, which is subject to rapid technological change and
product obsolescence. The factors affecting this industry in general, or any
of the Company's major customers in particular, could have a materially adverse
effect on the Company's results of operations.
COMPETITION. The electronics manufacturing services industry is comprised
of a large number of companies, several of which have achieved substantial
market share. The Company also faces competition from current and prospective
customers who evaluate the Company's capabilities against the merits of
manufacturing products internally. The Company competes with different
companies depending on the type of service or geographic area. Certain of the
Company's competitors have broader geographic breadth. They also may have
greater manufacturing, financial, research and development, and marketing
resources than the Company. The Company believes that the primary basis of
competition in its targeted markets is manufacturing technology, quality,
responsiveness, the provision of value-added services and price. To be
competitive, the Company must provide technologically advanced manufacturing
services, high product quality levels, flexible delivery schedules and reliable
delivery of finished products. The Company currently may be at a competitive
disadvantage as to price when compared to manufacturers with lower cost
structures, particularly with respect to manufacturers with established
facilities where labor costs are lower.
SHORTAGE OF ELECTRONICS COMPONENTS. Most of the Company's net sales are
derived from turnkey manufacturing services in which the Company procures
components from third-party suppliers and bears the risk of component
shortages. The electronics industry has been characterized by shortages from
time to time in semiconductor and other components, which shortages have led to
allocations by third-party suppliers. The Company's inability to procure
desired supplies of certain components has in the past led, and may in the
future, lead to some delays in shipments by the Company to its customers. If
these component shortages persist or intensify, however, the Company may not be
able to secure quantities required to fulfill customer orders, which could
result in delays in shipments or cancellation or delays in customer orders,
each of which could have a material adverse effect on the Company's results of
operations.
MANAGEMENT OF GROWTH. There can be no assurance that the Company will
successfully manage the integration of new business. In addition, the Company
may experience certain inefficiencies as it manages geographically dispersed
operations. Should the Company increase its expenditures in anticipation of a
future level of sales which does not materialize, its profitability could be
adversely affected. On occasion, customers may require rapid increases in
production which can place an excessive burden on the Company's resources.
There can be no assurance that the Company will be capable of meeting the
demands placed upon the Company's resources by these or any other customers.
ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of
environmental regulations relating to use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing process. Any failure by the
Company to comply with present and future regulations could subject it to
future liabilities or the suspension of production. In addition, such
regulations could restrict the Company's ability to expand its facilities or
could require the Company to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations. In this regard,
see Note 14 to the Consolidated Financial Statements.
RISK OF DEFECTS. The electronics products manufactured for customers by
the Company are highly complex and may at times contain undetected design
and/or manufacturing errors or failures. Such defects have been discovered in
the past, and there can be no assurance that, despite the Company's quality
control and quality assurance efforts, such defects will not occur in the
future. If such defects occur in quantities or too frequently, the Company's
business and operating results may be materially and adversely affected.
<PAGE> 19
CMC Industries, Inc. and Subsidiaries 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
DEPENDENCE ON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company's
continued success depends, to a large extent, upon the efforts and abilities of
key managerial and technical employees. The loss of services of certain key
personnel could have a material adverse effect on the Company. The Company's
business also depends upon its ability to continue to attract and retain senior
managers and skilled employees. Failure to do so could have a material adverse
effect on the Company's operations.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price of
the Company's Common Stock is subject to significant fluctuations in response
to variations in quarterly operating results, general conditions in the
electronics manufacturing services industry as well as the industries of the
Company's customers and other factors. In addition, the stock market is
subject to price and volume fluctuations which affect the market price for many
high-technology companies in particular and which may be unrelated to operating
performance. There can be no assurance as to the trading price of the
Company's Common Stock at any time in the future.
LIQUIDITY AND CAPITAL RESOURCES
In recent years, the Company has primarily financed its operations through
bank credit facilities, equipment leases and proceeds from issuances of capital
stock. In January 1994, the Company completed its initial public offering,
providing net proceeds of approximately $13.6 million. The proceeds from the
offering were used primarily to repay long-term acquisition debt and bank loans
made under the Company's revolving credit facility.
The Company's bank credit facility is comprised of a $25.0 million
revolving credit line, an $8.0 million term loan amortizing over five years
beginning in February 1995 and a $3.8 million new equipment line. The loan
agreement contains financial covenants related to the Company's net worth and
debt service coverage and restricts capital expenditures. At September 30,
1996, total borrowings under this facility were $4.5 million under the
revolving credit line and $5.9 million under the term loan.
The Company's operations generated positive cash flow of $9.2 million in
the year ended July 31, 1996. Cash was provided primarily by net income before
depreciation and amortization of $1.9 million, a $4.8 million decrease in
inventories, a $2.2 million increase in accounts payable and a $6.1 million
reduction in receivables from affiliated companies. Cash was used to fund a
$7.0 million increase in trade receivables from non-affiliated companies
resulting primarily from higher sales levels.
In May 1996, the Company raised approximately $2.5 million through a
placement to private investors of an aggregate of 436,037 shares of the
Company's Common Stock and Warrants to purchase an aggregate of 168,963 shares
of the Company's Common Stock. The purpose of the private offering was
principally to provide additional financial flexibility to take advantage of
business opportunities as they arise. The proceeds were used initially to
repay bank loans made under the Company's revolving credit line.
The Company invested approximately $5.7 million in capital expenditures,
primarily to acquire surface mount manufacturing equipment during fiscal 1996.
The Company partially financed the acquisitions of the equipment with $1.6
million of long-term debt proceeds.
<PAGE> 20
16 CMC Industries, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
The Company's needs for financing in the next twelve months include
increases in working capital as required to support any sales growth and
purchases of advanced manufacturing equipment. The Company expects to meet its
short-term liquidity requirements generally through net cash provided by
operations, vendor credit terms and short-term borrowings under its
lines-of-credit. Beginning in fiscal 1996, the Company accelerated
expenditures to increase surface mount technology capabilities, primarily
through equipment acquisitions and leases. The Company expects to seek
financing of $10 million or more for the acquisition or lease of manufacturing
equipment during fiscal 1997; however, there can be no assurance that such
financing will be available on terms acceptable to the Company, if at all.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS EFFECTIVE FOR FISCAL 1997
The Financial Accounting Standards Board (the "FASB") has issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective for
fiscal years beginning after December 15, 1995 (fiscal 1997 for the Company).
For long-lived assets and certain identifiable intangible assets, including
related goodwill, to be held and used by an entity, the Statement requires a
review for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable, including an estimate of
the future cash flows expected to result from the use of the asset and its
eventual disposition. An impairment loss, based on comparison of carrying value
to the fair value of the asset, must be recognized if the sum of the expected
future cash flows is less than the carrying amount of the asset. For long-lived
assets and certain identifiable intangible assets to be disposed of, the
Statement requires financial statement reporting at the lower of carrying amount
or fair value less cost to sell. The Company has reviewed its long-lived assets
and their carrying amounts as of July 31, 1996 and does not expect application
of this Statement in fiscal 1997 to significantly affect its results of
operations or financial position.
The FASB has also issued Statement of Financial Accounting Standards No.
123, Accounting For Stock-Based Compensation, effective for transactions
entered into in fiscal years beginning after December 15, 1995 (fiscal 1997 for
the Company). The Statement establishes financial accounting and reporting
standards for stock-based employee compensation plans, including all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employee's stock, including, with respect to
the Company, stock options and employee stock purchase plans. The Statement
defines a fair value based method of accounting for employee stock options,
under which compensation cost is measured at the date options are granted and
recognized by charges to expense over the employees' service periods (usually
the vesting period), and it encourages entities to adopt that method of
accounting. It also allows entities to continue to measure compensation cost
using the method prescribed under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, under which compensation expense
is recognized for the excess, if any, of the market price of the stock at grant
date over the amount the employee must pay to acquire the stock. The Company,
under the provisions of APB No. 25, recognizes no compensation expense for
employee stock options when options are granted to employees at a price equal
to the market price of the Company's stock at the date of grant. The Company
has reviewed the provisions of Statement No. 123 and elected to remain under
the provisions of APB No. 25 with respect to its employee stock options that
are granted at market price at the date of grant. This decision will result in
recognition of no compensation expense for such stock options in future years.
However, in accordance with the disclosure provisions of Statement No. 123, the
Company, commencing in fiscal 1997, will disclose pro forma basis information
to reflect its net income and earnings per share had compensation expense been
recognized for these items.
<PAGE> 21
CMC Industries, Inc. and Subsidiaries 17
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS JULY 31, JULY 31,
1996 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents....................................... $ 2,977 $ 89
Trade accounts receivable, less allowance for doubtful
accounts of $526 and $132...................................... 17,231 10,235
Accounts and notes receivable from affiliates................... 7,842 13,924
Inventories..................................................... 21,218 26,006
Income tax refundable........................................... -- 753
Other current assets............................................ 417 959
Deferred tax assets............................................. 48 --
------- -------
Total current assets...................................... 49,733 51,966
Plant and equipment, net......................................... 10,863 7,042
Investment in preferred stock of affiliate....................... 5,884 5,884
Goodwill, net of accumulated amortization
of $181 and $129................................................ 822 874
Other assets..................................................... 132 198
------- -------
$67,434 $65,964
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Notes payable under lines of credit................................ $ 6,826 $10,303
Current portion of capital lease obligations....................... 404 260
Current portion of long-term debt.................................. 1,300 1,347
Trade accounts payable............................................. 15,537 13,291
Accrued compensation and related benefits.......................... 1,996 2,372
Accrued expenses and other current liabilities..................... 2,756 1,687
Deferred tax liabilities........................................... -- 967
------- -------
Total current liabilities...................................... 28,819 30,227
Capital lease obligations........................................... 1,403 183
Long-term debt...................................................... 4,858 6,158
Other noncurrent liabilities........................................ 644 747
Deferred tax liabilities............................................ 608 311
------- -------
Total liabilities.............................................. 36,332 37,626
------- -------
Commitments and contingencies (Notes 6 and 13)......................
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares..................
authorized; none outstanding -- --
Common stock, $.01 par value; 15,000,000 shares authorized;
6,662,779 and 6,097,902 shares issued and outstanding............. 67 61
Stock warrants outstanding (convertible into 65,473 shares
of common stock).................................................. 44 --
Additional paid-in capital......................................... 29,971 27,299
Retained earnings.................................................. 2,016 1,911
Equity adjustment for minimum pension liability.................... (996) (933)
------- -------
Total stockholders' equity..................................... 31,102 28,338
------- -------
$67,434 $65,964
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 22
18 CMC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Net sales
Non-affiliates.................................. $126,686 $ 95,708 $110,112
Affiliates...................................... 38,025 48,595 53,667
-------- -------- --------
Total net sales.................................. 164,711 144,303 163,779
-------- -------- --------
Cost of sales
Non-affiliates.................................. 118,973 90,659 101,405
Affiliates...................................... 34,983 46,032 49,388
-------- -------- --------
Total cost of sales.............................. 153,956 136,691 150,793
-------- -------- --------
Gross profit..................................... 10,755 7,612 12,986
Selling, general and administrative expenses..... 8,251 7,062 6,168
Restructuring charge............................. 792 -- --
-------- -------- --------
Operating income................................. 1,712 550 6,818
Interest expense................................. 1,512 1,561 1,386
-------- -------- --------
Income (loss) before income taxes................ 200 (1,011) 5,432
Income tax provision (benefit)................... 95 (1,051) 2,056
-------- -------- --------
Net income....................................... $ 105 $ 40 $ 3,376
======== ======== ========
Net income per common and common
equivalent share................................ $ 0.02 $ 0.01 $ 0.60
======== ======== ========
Weighted average common and common
equivalent shares............................... 6,449 6,253 5,664
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 23
CMC Industries, Inc. and Subsidiaries 19
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
SHARES RETAINED
------------------- EARNINGS
PREFERRED COMMON CAPITAL (DEFICIT) OTHER TOTAL
--------- ------ ------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1993................. 50 4,302,485 $13,716 $(1,505) $ (986) $11,225
Net income............................. 3,376 3,376
Redemption of preferred shares......... (50)
Issuance of shares..................... 1,732,000 13,606 13,606
Exercise of stock options.............. 59,100 20 20
Minimum pension liability.............. (244) (244)
--------- --------- ------- ------- ------- -------
Balance, July 31, 1994................. -- 6,093,585 27,342 1,871 (1,230) 27,983
Net income............................. 40 40
Exercise of stock options.............. 40,417 18 18
Stock dividends waived................. (36,100) --
Minimum pension liability.............. 297 297
--------- --------- ------- ------- ------- -------
Balance, July 31, 1995................. -- 6,097,902 27,360 1,911 (933) 28,338
Net income............................. 105 105
Issuance of shares..................... 436,037 2,364 2,364
Issuance of warrants................... 44 44
Exercise of stock options.............. 128,840 314 314
Minimum pension liability.............. (63) (63)
--------- --------- ------- ------- ------- -------
Balance, July 31, 1996................. -- 6,662,779 $30,082 $ 2,016 $ (996) $31,102
========= ========= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 24
20 CMC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 105 $ 40 $ 3,376
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes........................... (718) 759 150
Depreciation and amortization................... 1,746 1,607 1,308
Loss (gain) on disposition of assets........... 10 49 (16)
Changes in assets and liabilities:
Receivables................................. (914) (2,528) (6,998)
Inventories................................. 4,788 3,143 (9,692)
Other assets................................ 1,379 (1,626) 352
Trade accounts payable...................... 2,246 (1,621) (622)
Accrued expenses and other
current liabilities........................ 693 (919) (167)
Other liabilities........................... (166) (611) 18
------- ------- --------
Net cash provided by (used in) operating activities. 9,169 (1,707) (12,291)
------- ------- --------
Cash flows from investing activities:
Capital expenditures............................... (5,669) (1,465) (4,644)
Proceeds from disposition of assets................ 126 115 33
------- ------- --------
Net cash used in investing activities............... (5,543) (1,350) (4,611)
------- ------- --------
Cash flows from financing activities:
Net (repayments) borrowings
under lines of credit.............................. (3,477) 4,552 6,869
Proceeds from long-term debt....................... 1,596 -- 2,000
Principal payments on long-term debt............... (1,347) (1,232) (4,989)
Principal payments on capital leases............... (232) (478) (336)
Note payable to affiliate.......................... -- -- (431)
Proceeds from exercise of stock options
and issuance of stock and warrants................. 2,722 18 13,626
------- ------- --------
Net cash (used in) provided by financing activities. (738) 2,860 16,739
------- ------- --------
Net increase (decrease) in cash
and cash equivalents............................... 2,888 (197) (163)
Cash and cash equivalents...........................
Beginning of year.................................. 89 286 449
------- ------- --------
End of year........................................ $ 2,977 $ 89 $ 286
======= ======= ========
Supplemental information:
Income taxes paid (refunded)....................... $ 488 $ (123) $ 1,394
Interest paid...................................... 1,697 1,582 1,416
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 25
CMC Industries, Inc. and Subsidiaries 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 -- ORGANIZATION AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
CMC Industries, Inc. and its subsidiaries (the "Company") provide contract
manufacturing services primarily to original equipment manufacturers ("OEMs")
in the computer and communications industries. Over 90% of the Company's
manufacturing contracts are for turnkey services and include procurement of
materials in addition to manufacturing.
RESTRUCTURING
In August 1993, the Company completed a restructure in contemplation of an
initial public offering of shares of the Company's common stock. The
restructure was the result of a distribution plan adopted by the Board of
Directors prior to July 31, 1993. In connection with this restructuring, the
Company's name was changed from International Telecommunications Corporation to
CMC Industries, Inc.
The restructuring transactions were executed to transfer the
telecommunications product development and distribution operations to a
corporation affiliated with the Company by common ownership. The contract
manufacturing services operations, including the manufacture of
telecommunications products under contract with this affiliate and contract
manufacturing services for other OEMs, were retained by the Company. Such
services are carried out by the Company's wholly-owned subsidiaries CMC
Mississippi, Inc. and CMC California, Inc. In connection with the
restructuring, the Company transferred its telecommunications business assets,
with a book value of approximately $49 million, and liabilities of
approximately $37 million, to Cortelco Systems Holding Corp. ("Cortelco"), a
newly-formed company owned by certain of the Company's existing stockholders,
in exchange for 1,000,000 shares of redeemable preferred stock of Cortelco.
The Cortelco preferred stock is nonvoting, has a liquidation preference of
$12.50 per share and entitles the Company to dividends which were
non-cumulative until August 1995 and thereafter cumulative at $.75 per share
for each year in which Cortelco earns net income of $2 million or more. The
Company may, subject to certain restrictions, require Cortelco to redeem the
preferred stock, on a pro rata basis, over a five-year period beginning August
1998. The Company recorded the preferred stock at fair value, $5.9 million,
based on the discounted cash flow of the redemption requirements. The excess
cost basis of the net assets over the fair value of the preferred shares
received was recorded as a distribution of capital to the Company's
stockholders.
The assets and liabilities transferred, the distribution of capital and
the investment in preferred shares are considered noncash investing and
financing activities and have been excluded from the statement of cash flows.
<PAGE> 26
22 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Note 2 -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities,
disclosure of contingencies at the date of the financial statements and the
related reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Investments with original maturities of three months or less are
classified as cash equivalents.
REVENUE RECOGNITION
In addition to providing contract manufacturing services on a turnkey
basis, the Company performs assembly services on a consignment basis where the
customer typically procures the components used in the process. The Company
recognizes revenue upon shipment for both turnkey and consignment contracts.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost has been
determined by the last-in, first-out ("LIFO") method for approximately 83% and
94% of inventories as of July 31, 1996 and 1995, respectively.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost less accumulated depreciation. The
Company provides for depreciation using the straight-line method for financial
reporting purposes and accelerated methods for income tax reporting purposes.
<PAGE> 27
CMC Industries, Inc. and Subsidiaries 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
GOODWILL
The excess of purchase price over net tangible assets of businesses
acquired is carried as goodwill. The Company amortizes such amounts on a
straight-line basis over a twenty-year period. The Company recorded
amortization expense of $52,000 for each of the years ended July 31, 1996, 1995
and 1994, related to the purchase of a subsidiary in fiscal 1993.
DEFERRED LOAN COSTS
Loan origination fees paid in connection with new borrowings are amortized
using a method which approximates the effective rate method over the terms of
the related borrowing. Amortization is included in interest expense.
MEDICAL CARE AND DISABILITY BENEFIT PLANS
The Company is self-insured with respect to certain medical care and
disability benefit plans for 70% of its employees. The costs for such plans are
charged against earnings in the period incurred. The liability for health care
claims was $500,000 and $600,000 as of July 31, 1996 and 1995, respectively,
and the related expense incurred was $3,078,000, $3,102,000 and $2,160,000 for
the years ended July 31, 1996, 1995 and 1994, respectively. The Company does
not provide benefits under these plans to retired employees.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("FAS 109"), Accounting for Income Taxes. FAS 109
is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, FAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
NET INCOME PER SHARE
Net income per common and common equivalent share has been computed on the
basis of the weighted average number of common shares outstanding and dilutive
common stock equivalent shares outstanding during the related period. Common
equivalent shares consist of stock options and warrants included in the
computation of net income per share using the treasury stock method.
<PAGE> 28
24 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
PRESENTATION
Certain fiscal 1995 and 1994 balances have been reclassified to conform to
the current year presentation.
NOTE 3 -- RESTRUCTURING CHARGE
In October 1995, the Company expensed $792,000 in non-recurring charges
related to the restructuring of the Company's business. Of this amount,
$241,000 related to the relocation of the Company's corporate offices and
California operations to a new facility. The remaining amount represented
one-time charges related to severance costs resulting from a reduction in
overhead staffing at the Company's Mississippi operations. The Company reduced
employment levels to reflect the transition of the Company's business away from
hand assembly work towards more advanced surface mount technology operations.
NOTE 4 -- MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS
A substantial portion of the Company's sales are generated from contract
manufacturing agreements with domestic OEM's and from sales to domestic
distributors of telecommunication products. Sales and related accounts
receivable attributable to customers representing 10% or more of total net
sales are as follows (in millions):
<TABLE>
<CAPTION>
NET SALES RECEIVABLE AT
YEAR ENDED JULY 31, JULY 31,
------------------- -------------
1996 1995 1994 1996 1995
----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Cortelco...................... $38.0 $45.6 $42.7 $7.8 $10.2
IBM........................... 28.1 35.3 59.9 2.4 2.8
Global Village................ 21.3 - - .7 -
Harris........................ 16.5 8.2 7.1 1.8 1.5
</TABLE>
The Company's credit risk principally relates to trade accounts receivable
and receivables from Cortelco arising from the transfer of assets described in
Note 1. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
<PAGE> 29
CMC Industries, Inc. and Subsidiaries 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 5 -- INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Raw materials and purchased components................... $15,673 $18,755
Work-in-process.......................................... 5,174 6,921
Finished goods........................................... 371 330
------- -------
$21,218 $26,006
======= =======
</TABLE>
The carrying value of inventories at July 31, 1996 and 1995 approximated
replacement cost.
NOTE 6 -- PLANT AND EQUIPMENT
The components and useful lives of plant and equipment are as follows
(in thousands):
<TABLE>
<CAPTION>
JULY 31,
USEFUL -------------------
LIFE 1996 1995
(YEARS) ------- -------
<S> <C> <C> <C>
Machinery and equipment.................................... 3-10 $14,760 $ 9,659
Furniture and fixtures..................................... 5-15 714 491
Leasehold improvements..................................... 5 288 107
Computer equipment and software............................ 5 456 456
Construction in progress................................... 239 312
------- -------
16,457 11,025
Less - Accumulated depreciation............................ 5,594 3,983
------- -------
$10,863 $ 7,042
======= =======
</TABLE>
Depreciation and amortization expense was $1,694,000, $1,461,000 and
$1,181,000 for fiscal 1996, 1995 and 1994, respectively. Plant and equipment
include assets under capital leases with a cost of $2,352,000 and $945,000 and
accumulated amortization of $1,018,000 and $638,000 as of July 31, 1996 and
1995, respectively.
<PAGE> 30
26 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 7 -- BUILDINGS AND EQUIPMENT UNDER LEASE
The Company leases its primary manufacturing facilities and certain
equipment and computer software under capital leases. Certain office,
warehouse, other manufacturing facilities and equipment are leased under
operating leases. These lease agreements generally include renewal options at
varying terms. Future minimum lease payments under the noncancelable portion of
capital and operating leases at July 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
FISCAL YEAR ------ ------
<S> <C> <C>
1997............................................. $1,647 $ 715
1998............................................. 1,723 520
1999............................................. 1,388 809
2000............................................. 1,149 7
2001............................................. 710 7
------ ------
Future minimum lease payments.................... $6,617 2,058
======
Less - Amount representing interest.............. 251
Present value of future minimum lease payments... 1,807
Less - Current portion........................... 404
------
Long-term portion................................ $1,403
======
</TABLE>
Rent expense relating to operating leases totaled approximately
$1,555,000, $988,600 and $598,000 for fiscal 1996, 1995 and 1994, respectively.
NOTE 8 -- BORROWINGS
SEPTEMBER 1996 REFINANCING
Effective September 26, 1996, the Company entered into a Loan and Security
Agreement with a financial institution which replaced a prior agreement with
this lender. The Agreement provides the Company with a total credit facility
of $35 million including the following:
- Revolving credit facility totaling $25 Million ($18 Million available
for CMC Mississippi, Inc. and $7 million available for CMC California,
Inc.), including letters of credit, bearing interest, at the Company's
option, at either the prime lending rate or an Adjusted Eurodollar Rate (as
defined in the Credit Agreement).
- Term loan to CMC Mississippi, Inc. totaling $6 million, payable in
55 monthly installments of $108,333 and a final installment of $91,667,
commencing October 1, 1996 and bearing interest, at the Company's option,
at either the prime lending rate or an Adjusted Eurodollar Rate (as defined
in the Credit Agreement).
<PAGE> 31
CMC Industries, Inc. and Subsidiaries 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
- Commitment to lend up to $3.8 million for machinery and equipment
purchases in the form of installment loans, bearing interest, at the
Company's option, at either the prime lending rate or an Adjusted
Eurodollar Rate (as defined in the Credit Agreement).
Outstanding borrowings under the new financing arrangement are secured
primarily by the Company's accounts receivable, inventories, machinery and
equipment. This financing arrangement expires in September 1998.
The Loan and Security Agreement contains certain restrictive covenants
which limit the activities of the Company with respect to, among other things,
mergers and acquisitions, additional borrowings and leases, investments and the
payment of dividends. The Loan and Security Agreement includes the following
financial covenants with respect to CMC Industries, Inc.:
- to maintain minimum consolidated tangible net worth of $30.0 million
as of October 31, 1996 and increasing to $31.5 million as of July 31, 1998;
- to not permit the ratio of total liabilities to stockholders' equity
to exceed 2.0 to 1 as of July 31, 1997 and July 31, 1998;
- to limit capital expenditures to $10 million during fiscal 1997 and
$7 million during fiscal 1998;
- to maintain debt service coverage ratio, as defined, of at least
1.15 to 1 through July 31, 1997 and 1.20 to 1 thereafter; and
- to maintain interest coverage ratio for each individual subsidiary,
as defined, of at least 2 to 1 through September 1, 1998.
For fiscal years 1996 and 1995, the Company had outstanding $6.2 million
and $7.5 million, respectively, under the term loan in effect at that time.
The term loan bore interest, at the Company's option, at either the prime
lending rate or an Adjusted Eurodollar Rate (as defined in the prior Credit
Agreement). At july 31, 1996 and 1995, the Company utilized an average
interest rate of 8.49% and 8.24%, respectively. The Company also maintained a
revolving credit facility totaling $17 million, including letters of credit,
bearing interest at the Company's option, at either the prime lending rate or
an Adjusted Eurodollar Rate (as defined in the prior Credit Agreement). At
July 31, 1996 and 1995, the Company had $6.8 million and $10.3 million,
respectively, outstanding under the revolving facility at a weighted average
interest rate of 8.49% and 8.24%, respectively.
OTHER FINANCING
During fiscal 1995 and 1994, CMC California, Inc. had several installment
loans outstanding, secured by machinery and equipment and bearing interest at
varying rates, with an aggregate principal balance of $154,000 as of July 31,
1994. All of the installment loans were repaid in fiscal 1995.
<PAGE> 32
28 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
MATURITIES OF LONG-TERM DEBT
The aggregate annual maturities of consolidated long-term debt outstanding
at July 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997. . . . . . . . . . . . . . . . . . . . . . $ 1,300
1998. . . . . . . . . . . . . . . . . . . . . . 1,300
1999. . . . . . . . . . . . . . . . . . . . . . 1,300
2000. . . . . . . . . . . . . . . . . . . . . . 1,300
2001. . . . . . . . . . . . . . . . . . . . . . 1,067
</TABLE>
NOTE 9 -- CAPITAL STOCK
RECAPITALIZATION
On October 2, 1993, the Company's Board of Directors declared a stock
dividend of 1,135,588 shares (189,265 after the reverse stock split discussed
below) of the Company's common stock and approved a restatement of the
Company's certificate of incorporation which resulted in the elimination of all
former classes of common and preferred stock and the creation of one new class
of common stock. The Board of Directors also authorized 5,000,000 shares of
preferred stock. In connection with this recapitalization, a one-for-six
reverse split of the Company's common stock was effected. The Company's Series
A preferred stock was redeemed by the Company on October 2, 1993 for $50 and
the shares were canceled. All common share data in the accompanying
consolidated financial statements and notes give effect to the reverse stock
split.
The stock dividend, recapitalization and reverse stock split have been
reflected in the accompanying financial statements retroactive to the beginning
of the three-year period ended July 31, 1996. During fiscal 1995, certain
shareholders waived their rights to receive 36,100 shares related to the stock
dividend.
On May 16, 1996, the Company issued 436,037 shares of common stock with
detachable warrants that entitle the holders to purchase 168,963 shares of
common stock at a price of $7.50 per share. The total proceeds for the shares
and warrants were $2,464,000 and $44,000, respectively. The warrants are
exercisable for three years from the date of issue and are callable by the
Company if certain levels of financial performance are exceeded.
STOCK OPTION PLAN
The Company's Board of Directors has authorized 1,224,479 shares of the
Company's common stock for issuance in connection with a stock option plan. The
stock option plan provides for the granting of options to purchase shares of
the Company's common stock at not less than 85% of fair market value on the
date of grant. The plan is designed to allow for granting incentive stock
options, nonstatutory stock options, stock bonuses and the issuance of
restricted stock.
<PAGE> 33
CMC Industries, Inc. and Subsidiaries 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Outstanding options at beginning of year......... 467,502 389,816 540,500
Options granted
$4.50/share.................................... 1,500
$4.87/share.................................... 4,000
$3.72/share.................................... 250,000
$3.25/share.................................... 50,000
$3.37/share.................................... 10,000
$4.75/share.................................... 4,000
$7.37/share.................................... 14,500
$4.63/share.................................... 8,000
$3.13/share.................................... 8,000
$4.00/share.................................... 12,500 49,666
$2.50/share.................................... 8,000
$9.00/share.................................... 2,500
$3.00/share.................................... 88,000 10,000
$6.00/share....................................
Options exercercised
$0.42/share.................................... (126,500) (40,417) (59,100)
$4.00/share.................................... (812)
$6.00/share.................................... (1,528)
Options forfeited................................ (42,473) (43,563) (80,309)
Adjustment for stock dividend.................... -- -- (23,775)
-------- ------- -------
Outstanding options at end of year............... 642,689 467,502 389,816
======== ======= =======
Exercisable options at end of year............... 335,268 287,164 283,915
======== ======= =======
</TABLE>
NOTE 10 -- INCOME TAXES
The provision (benefit) for income taxes comprised the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------
1996 1995 1994
----- -------- ------
<S> <C> <C> <C>
Current:
Federal............................. $ 610 $(1,810) $1,650
State............................... 203 -- 256
----- ------- ------
813 (1,810) 1,906
----- ------- ------
Deferred:
Federal............................. (622) 658 130
State............................... (96) 101 20
----- ------- ------
(718) 759 150
----- ------- ------
$ 95 $(1,051) $2,056
===== ======= ======
</TABLE>
<PAGE> 34
30 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Deferred tax liabilities (assets) comprised the following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------------
1996 1995
------- ------
<S> <C> <C>
Deferred tax liabilities:
Inventories........................................... $ 2,014 $ 2552
Plant and equipment................................... 1,042 838
------- -------
3,056 3,390
------- -------
Deferred tax assets:
Investment in preferred stock of affiliate............ (2,360) (2,360)
Accrued liabilities................................... (535) (546)
Minimum pension liability............................. (597) (558)
Net operating loss carryforwards...................... (172) (626)
Minimum tax credit.................................... (721) (267)
Other................................................. (471) (115)
------- -------
(4,856) (4,472)
------- -------
Valuation allowance.......................................... 2,360 2,360
------- -------
Net deferred tax liability............................ $ 560 $ 1,278
======= =======
The net deferred tax liability is classified as follows:
Current (asset) liability........................... $ (48) $ 967
Noncurrent liability................................ 608 311
------- -------
$ 560 $ 1,278
======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------
1996 1995 1994
------ -------- -----
<S> <C> <C> <C>
Statutory federal rate................................. 35.0% (35.0)% 35.0%
State income tax, net of Federal benefit............... 54.0 6.6 3.4
Credits claimed for research and development........... -- (67.3) --
Other, net............................................. (41.5) (8.3) (.6)
----- ------ ----
Effective rate......................................... 47.5% (104.0)% 37.8%
===== ====== ====
</TABLE>
<PAGE> 35
CMC Industries, Inc. and Subsidiaries 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 11 -- RELATED PARTY TRANSACTIONS
Following the August 1993 restructuring, the Company's largest customer
has been Cortelco. Under a manufacturing services agreement, the Company
provides manufacturing services to Cortelco on a turnkey basis with prices
based on cost plus 8% for telephone products and cost plus 10% for
telecommunications systems products. Included in net sales for fiscal 1996,
1995 and 1994 were sales to Cortelco totaling $38,025,000, $45,611,000 and
$42,723,000, respectively. Total cost of sales for the periods relating to
these sales to Cortelco were $35,542,000, $43,205,000 and $39,304,000,
respectively.
The Company has entered into an agreement with Cortelco to provide certain
products and related support services to customers of Cortelco. The Company is
required to pay a commission to Cortelco in the amount of 10% of sales of these
products under this agreement. During fiscal 1996, 1995 and 1994, the Company
incurred $341,000, $635,000 and $635,000, respectively, in commissions under
this agreement.
In addition to acting as primary supplier to Cortelco, the Company
provided a $7,500,000 working capital loan to Cortelco which was repaid in
fiscal 1994. The Company continues to provide credit only for manufacturing
services sold to Cortelco in the form of trade receivables.
During fiscal 1994, the Company began manufacturing for a new customer
that is partially owned by Cortelco. The Company had no sales to this customer
in fiscal 1996 and $3.0 million and $10.9 million in fiscal 1995 and 1994,
respectively. At July 31, 1996, the Company had no accounts receivable from
this customer and accounts receivable of $236,000 at July 31, 1995. Also,
during 1995, the Company secured its past due balance from this customer by
executing two notes receivable from the customer totaling $3.4 million. Both
notes receivable were collected during fiscal 1996.
A director of the Company has an ownership interest in a customer which
purchased goods during fiscal 1996 totaling $1,731,000 at a cost of $1,697,000.
As of July 31, 1996, the Company had accounts receivable of $491,000 from this
customer which is considered past due by the Company.
NOTE 12 -- EMPLOYEE BENEFITS
RETIREMENT BENEFITS
The Company maintains a defined benefit pension plan (the "Pension Plan")
which covers substantially all hourly employees of CMC Mississippi, Inc.
Retirement benefits under the Pension Plan are based on an employee's length of
service and a benefit formula based on year of hire. The benefit formula does
not include a provision for increases in future compensation levels.
Contributions to the Pension Plan are primarily based on the projected unit
actuarial cost method. The Pension Plan's assets consist principally of
short-term U.S. government instruments and pooled fixed income, debt and equity
investment funds with a financial institution. Effective June 1, 1994, the
Company terminated the future service payments for employees.
<PAGE> 36
32 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
The components of net periodic pension cost and related assumptions were
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost .......................... $ -- $ -- $ 240
Interest cost ......................... 579 557 521
Return on plan assets.................. (422) (441) (448)
Net amortization and deferral ......... (65) 17 9
----- ----- -----
Net periodic pension expense .......... $ 92 $ 133 $ 322
===== ===== =====
Discount rate ......................... 8.0% 8.0% 7.5%
Long-term rate of return .............. 8.0% 8.0% 8.0%
</TABLE>
The following table sets forth the Pension Plan's status (in thousands):
<TABLE>
<CAPTION>
JULY 31,
--------------------
1996 1995
------- -------
<S> <C> <C>
Vested benefit obligation ........................ $ 7,312 $ 7,090
======= =======
Accumulated benefit obligation ................... $ 7,655 $ 7,408
======= =======
Projected benefit obligation...................... $ 7,655 $ 7,408
Fair value of plan assets......................... 7,145 6,729
------- -------
Funded status .................................... (510) (679)
Unrecognized net loss ............................ 1,592 1,491
Additional liability recorded..................... (1,592) (1,491)
------- -------
Accrued pension cost ............................. $ (510) $ (679)
======= =======
</TABLE>
Statement of Financial Accounting Standards No. 87 ("FAS 87"), Employers'
Accounting for Pensions, requires recognition in the balance sheet of a minimum
pension liability for underfunded plans. The minimum liability that must be
recognized is equal to the excess of the accumulated benefit obligation over
plan assets. A corresponding amount is recognized either as an intangible
asset, to the extent of unrecognized prior service costs, or a reduction of
equity. Pursuant to FAS 87, the Company has recorded as of July 31, 1996 and
1995 an additional liability as shown above with a corresponding reduction, net
of deferred tax benefits, in stockholders' equity. Recognition of the
additional liability, net of deferred tax benefits, and changes in that amount
from year to year are considered noncash financing activities and have been
excluded from the statement of cash flows.
<PAGE> 37
CMC Industries, Inc. and Subsidiaries 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Under FAS 87, the portion of deferred gains and losses in excess of 10% of
the projected benefit obligation is amortized as a component of net periodic
pension cost. If amortization is required, the period used is the average
remaining service period of active employees, which was approximately 14.5
years as of July 31, 1996.
SAVINGS PLAN
The Company maintains a profit-sharing savings plan (the "Savings Plan")
for employees of CMC Industries, Inc. Under the terms of the Savings Plan,
employees may contribute from 2% to 16% of compensation and an additional
elective amount. The Company matched, until June 30,1994, 50% of an employee's
contributions of up to 6% of the employee's compensation with a maximum match
of $2,000 per year for any one employee. The Company may elect to make an
additional discretionary profit-sharing contribution. Effective January 1,
1995, the Savings Plan eligibility requirements were amended to include all
full-time employees with one hour of service. The Company recorded no
contributions for fiscal 1996 and 1995 and contributions of approximately
$105,000 for fiscal 1994.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
At July 31, 1996 and 1995, the Company did not have any outstanding
financial derivative instruments. The following table presents the carrying
amounts and estimated fair values of the Company's financial instruments at
July 31, 1996 and 1995, pursuant to Financial Accounting Standards Board
Statement No. 107, Disclosures about Fair Value of Financial Instruments (in
thousands).
<TABLE>
<CAPTION>
JULY 31, 1996 JULY 31, 1995
--------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents .................. $ 2,977 $ 2,977 $ 89 $ 89
Receivables ................................ 25,073 25,073 24,159 24,159
Investments in preferred stock
of affiliate .............................. 5,884 5,884 5,884 5,884
Financial liabilities:
Payables ................................... 10,524 10,524 13,291 13,291
Long-term debt ............................. 11,484 11,484 17,808 17,808
</TABLE>
<PAGE> 38
34 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash, receivables and payables: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Investment in preferred stock of affiliate: The carrying amount is based
upon the present value of cash flows as of the date of the reorganization.
Although the period has shortened, management does not believe that there
has been an appreciable difference in the value of their security since the
date received.
Long-term debt: The balance of the Company's long-term debt approximates
the fair value thereof because borrowings bear interest at a variable
interest rate.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
In connection with the restructuring of the Company in August 1993,
certain deferred income tax liabilities have been assumed by Cortelco. Although
the LIFO method of inventory accounting is employed, a portion of this deferred
income tax liability attributable to differing financial reporting and tax
reporting bases of inventories may become payable in the foreseeable future
based on certain rulings made in the U.S. federal tax courts. Although the
Company has received indemnification from this affiliate with respect to such
liability, the Company would be liable for this tax in the event Cortelco is
unable to meet its obligation. The total amount of this deferred income tax
liability assumed by Cortelco was approximately $2.2 million as of July 31,
1993.
The Company is a defendant in several legal actions involving certain
matters arising in the normal course of business. Management believes that the
aggregate loss, if any, resulting from the final outcome of these proceedings
will not be material to the financial position or results of operations of the
Company. The Company has accrued $4,000 and $47,000, as of July 31, 1996 and
1995, respectively, for pending litigation and contingencies.
In fiscal 1994, the Company incurred a non-recurring charge included in
selling, general and administrative expenses of approximately $170,000 related
to the costs of environmental clean-up at a former manufacturing site. The
Company's original estimate of its cost of the clean-up was approximately
$320,000 which was recorded prior to July 1994. In fiscal 1995, an
environmental expert concluded that the cost of a full study combined with
short and long-term remediation of the site may cost between $3 and $4 million.
During fiscal 1996, the Company was excluded as a potentially responsible
party ("PRP") by the State of Tennessee's Department of Environment and
Conservation in relation to the former facility; however, Alcatel, Inc., a PRP
named by the State of Tennessee's Department of Environment and Conservation
and a former owner of the Company, is seeking indemnification from the Company.
Management believes Alcatel's assertion to be without merit and has responded
as such. As of July 31, 1996, no claims have been filed by Alcatel.
<PAGE> 39
CMC Industries, Inc. and Subsidiaries 35
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of CMC Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of CMC Industries, Inc. and it's subsidiaries at July 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 1996, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------------------
PRICE WATERHOUSE LLP
Memphis, Tennessee
August 26, 1996, except as to Note 8,
which is as of September 26, 1996
<PAGE> 40
36 CMC Industries, Inc. and Subsidiaries
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
DIRECTORS
David S. Lee
Chairman of the Board
Chairman, Cortelco Systems
Holding Corp.
Chairman, Data Technology Corp.
Matthew G. Landa
President and Chief Executive
Officer
Andrew J. Moley
Executive Vice President and
Chief Financial Officer
Ira Coron
Chairman and Chief Executive
Officer, California Amplifier, Inc.
Frederick Gibbs
Consultant Mulberry Hill
Enterprises
Partner Gibbs and Gregory
Attorney at Law
Charles Holloway
Professor, Stanford University
Graduate School of Business
EXECUTIVE OFFICERS
Matthew G. Landa
President and Chief Executive
Officer
Andrew J. Moley
Executive Vice President and
Chief Financial Officer
Jack O'Rear
Vice President and Chief
Operating Officer
President, Mississippi Operations
Karl Chang
Vice President
President, California Operations
Lanny N. Lambert
Vice President and Secretary
CORPORATE ADDRESS
4950 Patrick Henry Drive
Santa Clara, CA 95054
(408) 982-9999
TRANSFER AGENT
Union Planters National Bank
6200 Poplar Avenue
Memphis, TN 38119
GENERAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
SPECIAL COUNSEL
Baker, Donelson, Bearman & Caldwell
2000 First Tennessee Building
165 Madison Avenue
Memphis, TN 38103
INDEPENDENT AUDITORS
Price Waterhouse LLP
One Commerce Square
Memphis, TN 38103
FORM 10-K
The Company's 1996 Annual Report
or Form 10-K (without exhibits) as
filed with the Securities and Exchange
Commission is available without charge
upon request to: Investor Relations,
CMC Industries, Inc., 1801 Fulton
Drive, Corinth, MS 38834
(601) 287-3771, ext. 170
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been
traded on the Nasdaq National Market
under the symbol "CMCI" since the
Company's initial public offering of
Common Stock in December 1993.
The Company has paid no cash
dividends on its Common Stock.
The following table shows the
high and low sales prices per
share for the Common Stock as
reported by Nasdaq for the
periods indicated:
<TABLE>
<CAPTION>
High Low
Fiscal 1995
<S> <C> <C>
Q1 4 2 3/4
Q2 6 1/4 3 3/4
Q3 5 1/8 1 3/4
Q4 3 3/4 1 7/8
<CAPTION>
Fiscal 1996
<S> <C> <C>
Q1 4 3/4 2 3/4
Q2 4 5/8 3 5/8
Q3 6 1/4 4
Q4 9 3/16 5 3/4
</TABLE>
ANNUAL MEETING
The 1996 Annual Meeting of
Shareholders will be held at
CMC Industries, Inc., 1801
Fulton Drive, Corinth, MS,
38834 on Friday, November 15,
1996 at 10:00 a.m. local time.
<PAGE> 41
- --------------------------------------------------------------------------------
CMC INDUSTRIES, INC.
FACILITY LOCATIONS
CMC CALIFORNIA
4950 PATRICK HENRY DRIVE
SANTA CLARA, CA 95054
408.982.9999
FAX: 408.982.9922
Internet: [email protected]
CMC MISSISSIPPI
1801 FULTON DRIVE
CORINTH, MS 38834
601.287.3771
FAX: 601.287.3469
Internet: [email protected]
(C) Copyright 1996, CMC Industries, Inc.
J. DAVIDSON
MERCURY PRINTING
<PAGE> 42
CMC
------------------------
The Source For Solutions
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT JULY 31, 1996 AND 1995 (AUDITED) AND THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JULY 31, 1996, 1995 AND
1994 (AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 2,977
<SECURITIES> 0
<RECEIVABLES> 25,073
<ALLOWANCES> 0
<INVENTORY> 21,218
<CURRENT-ASSETS> 49,733
<PP&E> 10,863
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,434
<CURRENT-LIABILITIES> 28,819
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 31,035
<TOTAL-LIABILITY-AND-EQUITY> 67,434
<SALES> 67,434
<TOTAL-REVENUES> 164,711
<CGS> 153,956
<TOTAL-COSTS> 153,956
<OTHER-EXPENSES> 9,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,512
<INCOME-PRETAX> 200
<INCOME-TAX> 95
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
