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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 31, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____ to ___
Commission file number: 0-22974
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 [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $56,260,919 at October 9, 1997.
Shares of Common Stock, $.01 par value per shares outstanding at
September 30, 1997: 6,930,713
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 1997 Annual Meeting of
Shareholders: Part III
Portions of the 1997 Annual Report to Shareholders: Part II, Part IV (2)
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PART I
Item 1. Business
CMC, Industries, Inc. ("CMC" or the "Company") together with its
predecessor business, has been a leading manufacturer of telecommunications
systems and equipment for over 30 years. The Company was incorporated in 1990 to
acquire from Alcatel Network Systems, Inc. ("Alcatel"), certain businesses
operated from 1960 to 1987 by ITT and from 1987 to 1990 by Alcatel, n.v., a
joint venture between ITT and Compagnie Generale d'Electricite. In August 1993,
the Company transferred certain assets and related liabilities associated with
its telecommunications business to Cortelco Systems Holding Corp. ("Cortelco")
in exchange for 1,000,000 shares of Preferred Stock of Cortelco. These
transactions effectively transferred to Cortelco all of the Company's assets and
liabilities not related to its electronic manufacturing business. The Company
has provided independent electronic manufacturing services to a diverse base of
customers in both the telecommunications and computer electronics industries.
The Company manufactures a wide range of products for its customers
including sophisticated telecommunications equipment, personal computers,
computer peripherals and subassemblies and printed circuit board ("PCB")
assemblies. CMC provides a broad spectrum of manufacturing services primarily
based on the manufacture of PCB assemblies utilizing automated pin-through-hole
technology ("PTH"), surface mount technology ("SMT") and ball grid array ("BGA")
placement techniques. PTH technology involves the attachment of electronic
components to a PCB by inserting the leads of the components through holes in
the board and soldering the leads on the underside of the board. SMT and BGA
technologies involve the attachment of electronic components directly to the
surface of the board, and accordingly permits components to be mounted on each
side of the board. In addition, the Company provides full systems integration
assembly and test, materials procurement, distribution, product design and
engineering support services. The Company has manufacturing facilities in
Corinth, Mississippi and Santa Clara, California (Silicon Valley) and is in the
process of establishing a manufacturing facility in Hermosillo, Mexico. The
Company believes that these locations enable it to meet the cost and geographic
distribution requirements of its customers. The Company's major customers
include Cortelco, Micron Electronics ("Micron"), Global Village Communications
("Global Village") and RELTEC Corporation ("RELTEC").
Customers and Marketing
Telecommunications products have been manufactured at CMC's facility in
Corinth, Mississippi for over 30 years. From 1960 to 1987, the operations at
Corinth were owned and operated by ITT, which established a reputation for
quality manufacturing of telecommunications products and services to its
customers. The Company believes the telecommunications manufacturing expertise
that it has acquired over three decades is a competitive strength, allowing it
to meet customer requirements for strict quality control, prompt turnaround and
flexible response to design changes. Capitalizing on this expertise, the Company
has expanded into the manufacture of computer equipment and related peripherals
and data networking equipment. The Company is seeking to leverage its capacity
and manufacturing expertise by expanding sales to new customers with products
that are similar to its current customer base in the telecommunications, data
communications, computer-related products and value-added electronics
industries. In addition, the Company seeks to position its manufacturing
operations at strategic sites throughout the United States and worldwide.
Corinth, Mississippi is located in close proximity to major North American
freight hub locations, allowing for inexpensive ground transport and overnight
air delivery throughout the country. The Company's California facility is
located in Santa Clara, in the heart of Silicon Valley, the site of many of the
Company's current and potential customers. In October 1997, the Company
announced plans to build a manufacturing facility in Hermosillo, Mexico and to
open an international purchasing office in Taiwan. Hermosillo will offer an
attractive cost structure and solid logistics for current and prospective
customers and the location between two leading technical universities within the
city provides access to a pool of qualified engineers and technicians. The
purchasing office in Taiwan will provide localized procurement capabilities in
Asia, increasing access to lowest cost pricing and material availability.
CMC provides electronic manufacturing services to major
telecommunications OEMs as well as suppliers of computer monitors, computer
peripherals, data networking equipment and other electronic components. In turn,
CMC's customers sell these manufactured products to domestic and worldwide
markets. Products manufactured by the Company include telephones, ISDN
equipment, key and PBX/ACD systems, various data communications products and
telecommunications switching equipment and printed circuit board assemblies for
computer and communications equipment. Services provided
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include design for manufacturability and test, materials procurement,
prototyping, plastic injection molding, printed circuit board assembly, full
board-level test, system integration and configuration, full system test,
packaging, distribution and field return and repair support. Generally,
relationships between the Company and its customers for the manufacture of
product and related services are defined by a succession of purchase orders
placed by the customer and performed upon by CMC.
The Company offers electronic manufacturing services to its customers
on both a turnkey and consignment basis, with over 95% of the Company's net
sales derived from turnkey projects. In turnkey relationships, the Company both
procures components and other supplies and provides full manufacturing services.
In consignment relationships, the customer purchases and then provides
components and other supplies to the Company, and the Company charges for only
labor and overhead. The establishment of a turnkey relationship requires
significant investment of resources by both an OEM customer and a contract
manufacturer. An OEM customer must incur expense to qualify a contract
manufacturer by certifying the quality of the manufacturer's processes and
services and, in some cases, must also qualify a contract manufacturer's sources
of component supply. The OEM customer also works with a contract manufacturer to
refine product design and manufacturing processes in order to optimize
manufacturability. The Company believes that OEM customers seek to establish
relationships with turnkey manufacturing partners they perceive will be able to
meet their production requirements over a long period of time and for successive
product generations. The Company believes that these relationships, once
established, tend to be sustaining in nature due to the significant investment
of time and resources by both the Company and the OEM customer. Accordingly, the
Company believes that its emphasis on turnkey manufacturing results in greater
stability of its customer base. However, the Company's results of operations
have been in the past and may be in the future materially adversely affected in
the event customers for whom the Company manufactures products should cancel or
reschedule their existing and forecast orders. Such cancellations or
rescheduling could result in inefficient utilization of equipment and personnel
dedicated to the manufacture of the specific products. Moreover, because of such
stability, the Company may be unable to secure turnkey manufacturing projects
from new OEM customers working with competitors of the Company. The failure of
the Company to develop relationships with new OEM customers also may materially
and adversely affect the Company's results of operations.
CMC develops and maintains customer relationships through the efforts
of the Company's direct sales force and management, program managers, project
engineers and customer service personnel. Project engineers and customer service
personnel receive extensive training in the Company's manufacturing and service
capabilities in order to respond to the specific needs of customers. CMC's
project engineers work with the customers' engineers and technical personnel to
ensure a close working relationship and understanding of the specific needs of
each customer.
The Company's four largest customers in fiscal 1997 and their
respective percentages of CMC's net sales for 1997 and 1996, respectively, were
as follows: Micron, 21% and 0%; Cortelco, 15% and 23%; Global Village, 14% and
13% and RELTEC, 11% and 2%.
The Company derives revenues primarily from OEM arrangements which
prohibit the selling of the products manufactured to anyone other than the OEM
customer. As a result, the Company does not typically allow its customers to
return products, other than for repairs of defective materials. In such cases,
the Company charges the customer for the repair unless the defect resulted from
faulty manufacturing and occurred within an applicable warranty period.
This policy applies to both affiliated and non-affiliated customers.
It has been the Company's experience that orders for production of a
given product or product line typically decline over time as the customer's
product or product line matures. Generally, the Company has customers with
products at various stages in the product life cycles including development,
volume production and end-of-life production. In the event that the Company is
unable to compensate for any material reduction in sales of a given product over
time through production of replacement or new products for the customer or
through new business with alternative customers, the Company's revenues and
operating results could be materially adversely affected.
Manufacturing
Manufacturing Services
The Company's vertically-integrated turnkey manufacturing services
include component procurement and testing, PCB assembly using SMT, PTH and BGA
techniques, post-assembly PCB testing, in-circuit test development, full system
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integration and test, and product design and engineering support services. The
Company provides a complete, vertically-integrated manufacturing solution with
manufacturing capabilities as diverse as plastic injection molding, final unit
assembly and testing. The Company delivers finished products to the OEM or, if
requested, delivers products directly to the OEMs' customers.
The Company offers comprehensive and advanced manufacturing solutions
to its customers. The Company's broad range of manufacturing capabilities
includes both automated PTH and more advanced SMT processes, including BGA
assemblies. The Company offers vertical services such as component procurement,
test, product design, and other engineering services. Accordingly, the Company's
production processes can accommodate the manufacture of a broad range of
communications and electronics components and products. While the Company
continually seeks to improve the flexibility of its production systems, the
commencement of production of new products typically involves startup costs,
lower yields and other inefficiencies. Achievement of volume production for a
new product typically requires a period as short as several days for products
substantially similar to those previously manufactured by the Company, to as
many as several months for completely new products.
Since turnkey manufacturing may be a substitute for all or a portion of
a customer's in-house manufacturing capability, continuous technical and
administrative communication between the Company and its customer is required.
CMC establishes a close relationship with each OEM customer in the early stages
of product development to assist the customer in the evaluation of board designs
and thereby improve manufacturability and testability. Building on this
knowledge, CMC's technical staff monitors manufacturing process yields and may
propose engineering changes for product improvement and cost reductions. Certain
of the products manufactured by CMC are in the early stages of their life cycles
and may therefore have ongoing design or engineering changes. The Company
believes a critical element of turnkey manufacturing services is the ability to
respond rapidly to engineering design changes. The Company believes that its
history in design and manufacturing, particularly in the telecommunications
industry, and its close working knowledge of its customers' products enables the
Company to meet its customers' needs effectively.
A key element in turnkey manufacturing services is the procurement of
materials, which consists of the planning, purchasing, expediting, warehousing
and financing of the components and other materials required to assemble a PCB
or system-level assembly. OEMs increasingly have required contract manufacturers
to purchase all or some components directly from component manufacturers or
distributors and to warehouse and finance the components and materials. The
Company orders materials and components based on purchase orders received and
accepted and seeks to minimize its inventory of materials or components that are
not identified for use in filling specific orders. Electronic components are
purchased directly by the Company and, in certain circumstances, the Company
bears the risk of component price fluctuations. The electronics industry has
been characterized by shortages from time to time of microprocessors and other
semiconductor components, which shortages have led to allocations by third-party
suppliers. These delays to date have not had a material adverse effect on the
Company's results of operations. If component shortages occur, the Company may
not be able to secure quantities required to fulfill orders, which could result
in delays in shipments, cancellation or delays in orders, or losses resulting
from price increases by suppliers of parts or components, all of which could
have a material adverse effect on the Company's results of operations.
CMC provides complete turnkey manufacturing solutions for its customers
from its vertically-integrated 350,000 square foot facility in Corinth,
Mississippi and its 75,000 square foot facility in Santa Clara, California. The
Company expects to commence operations from a new 55,000 square foot facility in
Hermosillo, Mexico in the third quarter of fiscal 1998. The Company plans to
provide full SMT assembly as well as complete system integration, test and
box-build capabilities at this location.
Manufacturing Processes
CMC manufactures for its customers a wide variety of complex and
technologically advanced products that require a coordinated manufacturing
process. The process requires the application of advanced manufacturing
technologies and computerized in-circuit, functional and system testing
techniques. Current processes at CMC include fine-pitch SMT, PTH, BGA and system
box-build assemblies. CMC seeks to add product lines that require advanced
technological processes, in order to further develop its manufacturing
expertise. Company employees regularly attend training seminars on the latest
developments in manufacturing technologies.
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In PTH production, components are attached by pins (also called
"leads") inserted through and soldered to plated holes in the PCB. In SMT
production, the leads on integrated circuits and other electronic components are
soldered to the surface of the PCB rather than inserted into holes. SMT can
accommodate a substantially higher number of leads in a given area than PTH,
thereby permitting the PCB to interconnect a greater density of integrated
circuits, which permits tighter component spacing and a reduction in the PCB
dimensions. Additionally, SMT allows components to be placed on both sides of
the PCB, thereby permitting even greater density. The substantially finer
lead-to-lead spacing or "pitch" in SMT requires a manufacturing process far more
exacting than the PTH interconnect products. Because of their high number of
leads, most very large scale integrated circuits are configured for SMT
production. SMT components are constantly changing, with BGA becoming the
package selection of many component manufacturers. The BGA assembly process uses
small balls of solder (instead of leads that could bend and break), located
directly underneath the part, to interconnect the component and circuit board.
X-ray equipment is instrumental in the development of BGA process parameters,
since the balls are located underneath the component and are not visible through
standard inspection techniques.
The Company utilizes a computerized material requirements planning
system to direct the flow of materials through the manufacturing cycle. Printed
circuit board assemblies with PTH components are assembled using automatic
insertion machines for all eligible components, including axial, dual inline
package, radial and square-wire pins, which for most products allows over 90% of
the total PTH components to be automatically inserted. Manually assembled
components are either purchased or prepared in-house to allow for "drop-in"
assembly on a moving assembly conveyor that feeds the PCB assemblies directly
into an automated soldering system that solders the pins to the PCB. For SMT
printed circuit assemblies, CMC has full capability to run either "top-side,"
"bottom-side" or "mixed-technology" PCB assemblies. Equipment capabilities
include screen-printing with vision and computer-controlled alignment;
high-speed, in-line epoxy dispensing; surface-mount component placement with
speeds up to 44,500 components per hour per machine; assembly of fine-pitch
components and computer-controlled infrared reflow soldering.
The Company subjects assembled and soldered boards to board-level
in-circuit and functional testing. As part of the final unit assembly process,
the Company also functionally tests all products to verify conformance to
customer specifications. If desired, product testing can include burn-in at
elevated temperatures utilizing the Company's in-house burn-in chambers. Printed
circuit boards utilized for telecommunication systems receive final system tests
to verify the functional integrity of each system.
Quality
The Company believes that the quality of its manufacturing and customer
services is critical to customer satisfaction and long-term success. CMC has
emphasized the pursuit of high quality for many years. From 1960 to 1987, CMC's
Corinth facility was part of ITT, which pioneered many quality improvement
processes. Many of CMC's manufacturing and customer support personnel were
trained in quality principles and practices as employees of ITT. CMC's quality
assurance engineers have for many years received training through in-house
programs and by attending seminars, including enrollment in The ITT Quality
College.
The Company has achieved ISO 9001 certification at its Mississippi
facility and ISO 9002 certification at its California facility. The Company
believes that the process of attaining ISO certification serves as an excellent
tool for quality improvement, enabling the Company to provide consistency and
excellence in its products and services. Also, since certain potential customers
prefer or require manufacturers to have achieved ISO certification, such
certification may offer certain competitive advantages. The Company believes
that compliance with ISO will allow it to expand its bid opportunities,
especially with customers who participate in world-wide markets.
In addition to ISO certification, CMC Mississippi has achieved
certification to British Approval Board for Telecommunications (BABT). Achieving
BABT certification broadens CMC's opportunities with telecommunication customers
by providing manufacturing solutions that meet the United Kingdom national
requirements or Common Technical Regulations under Directive 91/263/EEC.
Environmental Controls
The Company is subject to a variety of regulations concerning
environmental laws related to the use, storage, discharge and disposal of
hazardous chemicals utilized during the manufacturing process and constantly
monitors its operations to avoid violations. Although the Company believes that
its facilities are currently in compliance with
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applicable environmental laws, there can be no assurance that violations have
not occurred and will not occur. In the event of any violations of environmental
laws, the Company could be held liable for damages and for the costs of remedial
actions and could also be subject to revocation of its effluent discharge
permits. Any such revocation could require the Company to cease or limit
production at either or both of its facilities, thereby having a material
adverse impact on the Company's business and results of operations. To date,
environmental regulations have not restricted the Company's ability to operate
or expand its manufacturing operations or caused the Company to incur
significant expense. Environmental laws, however, could become more stringent
over time, imposing greater compliance costs and increasing risks and penalties
associated with a violation. See "Legal Proceedings."
Competition
The electronics manufacturing services industry is highly competitive.
Competitive manufacturing services are available from many independent sources
as well as in-house manufacturing operations of current and potential customers.
In addition, certain large electronics manufacturers are transforming existing
manufacturing facilities into contract manufacturing operations. The Company
also competes with foreign contract manufacturers which, due to lower cost of
labor, have become significant competitors with respect to high volume products
or those with a high labor content.
The Company believes that its primary competitors are Solectron
Corporation, Avex, Inc., Flextronics International Ltd., Jabil Circuit, Inc.,
and SCI Systems, Inc. CMC believes that the primary competitive issues in the
markets in which it focuses are quality of manufacturing processes, surface
mount capacity and total production capacity, responsiveness to customer needs,
price, quality, reliable delivery and financial resources. CMC believes that it
competes favorably with respect to most of these factors. However, certain of
the Company's competitors have greater SMT and total production capacity and
greater financial resources than the Company. In addition, certain overseas
competitors are able to offer low-cost production for certain types of products,
particularly those which require a higher labor content. To remain competitive,
the Company must continue to expand its advanced manufacturing technologies,
provide superior quality and service, and be price competitive. In addition, the
Company's planned manufacturing facility in Hermosillo, Mexico is an effort to
expand manufacturing capacity while reducing costs. If the Company were to
become unable to compete effectively in terms of quality, delivery, advanced
manufacturing, service or price, the Company's business, financial condition and
results of operations could be materially adversely affected.
Backlog
The Company's backlog was approximately $56.9 million at July 31, 1997
and $30.5 million at July 31, 1996. Backlog consists of purchase orders received
by the Company primarily for shipment within 180 days. Cancellation and
postponement of purchase orders occasionally occur, and the Company negotiates
charges to such customers that vary depending on the timing and circumstances of
the cancellation or postponement. Because of possible rescheduling and
cancellation, backlog does not necessarily reflect future sales levels.
Patents and Trademarks
The Company owns four patents related to telephone equipment, but does
not believe that patent or trademark protection is an important competitive
factor in its market.
Employees
At July 31, 1997, the Company had 931 full time employees and 180
temporary employees. At such date, the Company had 871 hourly employees and 240
salaried employees, including 874 in manufacturing, 52 in manufacturing support,
99 in engineering and quality, 32 in sales and marketing, and 54 in general and
administrative. None of the Company's employees are represented by a labor
union, and the Company has never experienced a work stoppage or strike.
The Company believes its relationships with its employees are good.
Factors That May Affect The Company
The foregoing discussion of the Company's business, operations and
competitive position contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E
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of the Securities Exchange Act of 1934, as amended. 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.
Potential Fluctuations in Operating Results. The Company's operating
results are affected by a number of factors, including the timing and 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 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 has in the past and may in the
future 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 events, or in the event that
adverse conditions prevail or are perceived to prevail generally or with respect
to the Company's business, the trading price of 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). Expansion of capacity 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 startup 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, 1997, 1996 and 1995, the
Company's four largest customers in such periods accounted for approximately
61%, 63%, and 69%, respectively, of consolidated net sales. Sales to Micron
Electronics, Inc. accounted for approximately 21% of the Company's revenues for
the fiscal year ended July 31, 1997. Any material delay, cancellation or
reduction of orders from these or other customers could have a material 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 material adverse effect on the Company's results of
operations. In addition, customer contracts can be canceled and volume levels
can be materially changed or delayed. The timely replacement of canceled,
delayed or reduced contracts with new business cannot be assured. These risks
are exacerbated because the Company's sales are to customers in segments of the
electronics industry subject to rapid technological change and product
obsolescence. The factors affecting these industries in general, or any of the
Company's major customers in particular, could have a material 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, which 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, and 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 on a timely and price competitive basis. 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.
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Shortages 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. These delays to date have
not had a material adverse effect on the Company's results of operations. 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 and the growth, if any, of
the Company's operations. 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 results of operations could be materially
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 the 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 "Legal Proceedings."
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.
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 sales representatives and other 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 or may not 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.
Item 2. Properties.
The Company's principal facility is a 350,000 square foot manufacturing
plant located on sixty-four acres in Corinth, Mississippi. The plant and land
are leased at the rate of approximately seven thousand dollars annually,
pursuant to a lease with the Industrial Development Board of Alcorn County,
Mississippi, with options to renew the lease until 2060. The Company also leases
a 75,000 square foot facility in Santa Clara, California, and 20,000 square feet
of warehouse space in Corinth, Mississippi. The Company has announced plans to
build a 55,000 square foot manufacturing facility in Hermosillo, Mexico and to
open an international purchasing office in Taiwan in the 1998 fiscal year.
Although there are currently no specific plans for further expansion, the
Company continually evaluates customer needs and market opportunities to expand
its facilities geographically.
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Item 3. Legal Proceedings.
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.
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 facility. 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.
Item 4. Submission of Matters to Vote of Security Holders
None.
9
<PAGE> 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
On December 9, 1993, the Securities and Exchange Commission declared
effective the Company's Registration Statement with respect to an initial public
offering of 1,750,000 shares of Common Stock. The Common Stock is listed on the
Nasdaq National Market under the symbol "CMCI."
The following table sets forth, for the periods indicated, the high and
low sale prices for the Company's Common Stock as reported on the Nasdaq
National Market. Such prices represent prices between dealers and do not include
retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
Fiscal Year 1996:
- -----------------
<S> <C> <C>
First quarter $ 4.75 $ 2.75
Second quarter 4.63 3.63
Third quarter 6.25 4.00
Fourth quarter 9.19 5.75
Fiscal Year 1997:
- -----------------
First quarter 8.88 5.63
Second quarter 12.63 7.88
Third quarter 13.50 5.50
Fourth quarter 9.13 6.25
</TABLE>
There were approximately 211 holders of record of the Common Stock as
of September 30, 1997. The Company believes it had in excess of 1,000 beneficial
shareholders as of September 30, 1997. The Company had 6,930,713 shares
outstanding as of September 30, 1997.
The Company has not paid any cash dividends and does not anticipate
paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data.
The Company's Selected Financial Data is hereby incorporated by
reference to page 8 of its 1997 Annual Report to Shareholders. Excerpts of such
Annual Report are filed as Exhibit 13.1 hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The Company's Management's Discussion and Analysis of Financial
Condition and Results of Operation is hereby incorporated by reference to pages
9 through 16 of its 1997 Annual Report to Shareholders. Excerpts of such Annual
Report are filed as Exhibit 13.1 hereto.
Item 8. Financial Statements and Supplementary Data.
The information set forth in the Consolidated Financial Statements
contained in excerpts of the 1997 Annual Report to Shareholders is incorporated
herein by reference. An index to the Company's Consolidated Financial Statements
is set forth at Part IV, Item 14(2) at page 13.
The selected quarterly financial data set forth under the caption
"Quarterly Results" at page 11 of excerpts of the 1997 Annual Report to
Shareholders is incorporated herein by this reference.
10
<PAGE> 11
Item 9. Changes in and Disagreements With Accountants on Accounting And
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the directors and executive officers of the
Company is incorporated by reference from the Company's Proxy Statement relating
to the 1997 Annual Meeting of Shareholders. Such Proxy Statement has been filed
previously with the Securities and Exchange Commission.
Item 11. Executive Compensation.
Certain information relating to executive compensation included in the
Proxy Statement relating to the 1997 Annual Meeting of Shareholders is
incorporated herein by reference. Such Proxy Statement has been filed previously
with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Certain information relating to stock ownership included in the Proxy
Statement relating to the 1997 Annual Meeting of Shareholders is incorporated
herein by reference. Such Proxy Statement has been filed previously with the
Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions.
Certain information relating to transactions with management included
in the Proxy Statement relating to the 1997 Annual Meeting of Shareholders is
incorporated herein by reference. Such Proxy Statement has been filed previously
with the Securities and Exchange Commission.
11
<PAGE> 12
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* Loan and Security Agreement dated August 23, 1993 between CMC
Manufacturing, Inc. and Continental Bank, N.A. and related documents.
10.6* License Agreement between ITT Corporation and ITT Telecom Products
Corporation (now known as CMC Manufacturing, Inc.) dated
December 30, 1986.
10.7* Agreement between Cortelco International, Inc. and CMC Manufacturing,
Inc. dated as of September 1, 1993.
10.8* Cortelco USA, Inc. (now known as CMC Manufacturing, Inc.) Profit
Sharing Savings Plan and Trust for Salaried Employees.
10.9* Hourly Pension Plan for Employees of ITT Telecom Products Corporation
(now known as CMC Manufacturing, Inc.) at Corinth.
10.10**** CMC Industries, Inc. 1990 Equity Incentive Plan, amended and restated
as of November 15, 1996.
10.11* Form of Indemnification Agreement between CMC Industries, Inc. and
certain officers and directors.
10.12** Lease Agreement between Guzik Investments, L.P. and CMC Industries
dated June 14, 1995.
10.13**** CMC Industries, Inc. 1996 Employee Stock Purchase Plan.
10.14 Executive Employment Agreement between CMC Industries, Inc. and
Jack O'Rear dated August 1, 1997.
13.1 Excerpts from the 1997 Annual Report to Shareholders.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule (For SEC electronic filing purposes only)
</TABLE>
* 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.
**** Incorporated by reference to exhibits filed with the Registrant's Proxy
Statement on Schedule 14A filed with the Securities and Exchange Commission
on October 22, 1996.
12
<PAGE> 13
(2) Financial Statements and Schedules
Consolidated Financial Statements of CMC Industries, Inc. and subsidiaries
Consolidated Balance Sheets as of July 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended July 31,
1997, 1996 and 1995
Consolidated Statements of Changes In Stockholders' Equity for
the Years Ended July 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended July
31, 1997, 1996 and 1995
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 1997 Annual Report to Shareholders. Excerpts of such
Annual Report are 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
No reports on Form 8-K were filed during the quarter ended July 31, 1997.
13
<PAGE> 14
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, 1997 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, 1997
- ------------------------------
David S. Lee
/s/ Matthew G. Landa President, Chief Executive October 28, 1997
- ------------------------------ Officer and Director
Matthew G. Landa
/s/ Andrew J. Moley Executive Vice President, October 28, 1997
- ------------------------------ Chief Financial Officer and
Andrew J. Moley Director
/s/ Ira Coron Director October 28, 1997
- ------------------------------
Ira Coron
/s/ Frederick W. Gibbs Director October 28, 1997
- ------------------------------
Frederick W. Gibbs
/s/ Charles Holloway Director October 28, 1997
- ------------------------------
Charles Holloway
</TABLE>
14
<PAGE> 1
Exhibit 10.14
CMC, Industries, Inc.
Executive Employment Agreement
This Agreement is effective as of August 1st, 1997 ("Effective Date")
between CMC Industries, Inc. ("Company") and Jack O'Rear ("Executive").
RECITALS
WHEREAS Executive has been continuously employed by Company since
August, 1994;
WHEREAS Company desires Executive to remain actively employed by the
Company; and
WHEREAS Executive desires to remain so employed under the terms and
conditions set forth below;
NOW, THEREFORE, the parties mutually agree as follows:
AGREEMENT
1. Position and Duties. Executive shall be employed by Company as
Company's Chief Operating Officer. Executive shall devote his full time and best
efforts to this position. Executive shall report to the Chief Executive Officer
of Company and shall comply with the policies of the Company.
2. Employment Period.
(a) Basic Rule. This Agreement shall have a term of three (3)
years (the "Employment Period"), beginning upon the Effective Date. The Company
may terminate this Agreement prior to the end of the Employment Period pursuant
to the terms of this Section 2.
(b) Early Termination. Company may terminate Executive's
employment prior to the end of the Employment Period by giving the Executive 30
days advance notice in writing. If Company terminates Executive's employment
without Cause (defined below), Company shall pay Executive severance benefits as
set forth in Section 6 hereof.
(c) Termination for Cause. Company may terminate Executive's
employment for Cause (defined below) by giving Executive thirty (30) day's
advance notice in writing. No compensation or benefits will be paid or provided
to the Executive under this Agreement on account of a termination for Cause.
Executive's right under the benefit plans of the Company following a termination
for Cause shall be determined under the provisions of those plans. "Cause" means
(i) willful or habitual neglect of Executive's obligations under this Agreement,
(ii) misuse of corporate funds, (iii) any other act of gross misconduct or (iv)
commission of any crime which would constitute a felony under applicable law.
(d) Executive's Commitment. Executive commits to the Company
that he will remain as an employee of the Company for the full period of this
Agreement.
(e) Termination as a Result of Death or Disability.
Executive's employment shall terminate in the event of his death. Company may
terminate Executive's employment for Disability by giving Executive 30 day's
advance notice in writing. No compensation or benefits will be paid or provided
to Executive under this Agreement on account of termination as a result of death
or Disability. Executive's rights under the benefit plans of Company upon such
termination shall be determined under the provisions of those plans. For
purposes of this Agreement, "Disability" means Executive has been unable to
substantially perform his duties under this Agreement as a result of his
incapacity due to physical or mental illness for at least 26 weeks.
<PAGE> 2
3. Compensation.
(a) Base Salary. Company will pay Executive an annual salary
of $202,125, less applicable withholding, payable in accordance with Company's
standard payroll policies. At least annually the Board will consider increases
in the annual salary rate in light of Executive's individual performance,
Company performance and other relevant factors determined by the Board.
(b) Bonus. Executive shall be eligible to participate in the
bonus plan of Company. Executive shall be entitled to bonuses thereunder,
payable at such times as bonuses are paid to other Executives of Company. The
amount of each bonus shall be based upon accomplishment of Company objectives
specified by the Board of Directors of Company.
4. Employee Benefit Plans. During the Employment Period, Executive
shall be entitled to participate in employee benefit plans or programs of
Company to the extent that his position, tenure, salary, age, health and other
qualifications make him eligible to participate, subject to the rules and
regulations applicable thereto.
5. Stock Options. Any stock options held by Executive that were
granted prior to the Effective Date shall remain in effect and shall be subject
to the terms of the agreements under which they were granted. Executive shall be
eligible to participate in the stock option plan of Company. Executive shall be
entitled to option grants thereunder, granted at such times as grants are
granted to other Executives of Company. Executive shall be eligible for an
annual option grant of 15,000 stock options, subject to approval each year by
the Board of Directors of Company.
6. Severance Payments. If Company terminates Executive's
employment without Cause prior to the end of the Employment Period, Company
shall pay Executive as severance payments a monthly amount equal to his then
current month base salary (less applicable withholding) for the remainder of the
Employment Period. The severance payments described in this Section 6 shall
discharge all of the Company's obligations to the Executive.
7. Non-Solicitation of Employees. Executive covenants and agrees
with Company that during the Employment Period and for two (2) years thereafter
he will not solicit any of Company's then-current employees to terminate their
employment with Company or to become employed by any firm, company or other
business enterprise with which Executive may then be connected. However, if
Company terminates Executive's employment without Cause, then this seventh
clause of this agreement will be void.
8. General.
(a) This Agreement shall be binding upon the legal
representatives, distributees, successors and assigns of the parties hereto.
(b) This Agreement and the exhibits hereto contain the entire
agreement of the parties, and may not be changed orally, but only by a writing
signed by the party against whom enforcement of such change is sought.
(c) If any provision of this Agreement is held invalid,
illegal or unenforceable, such provisions shall be deemed deleted and such
deletion shall not affect the validity of other provisions of this Agreement.
(d) This Agreement shall be governed by and construed
according to the laws of the State of California. The federal and state courts
of the state of California shall have exclusive jurisdiction to adjudicate any
dispute rising out of this Agreement.
EXECUTIVE CMC INDUSTRIES, INC.
/s/ Jack O'Rear By: /s/ Matthew G. Landa
- ------------------------ ----------------------------
Jack O'Rear Title: President and CEO
<PAGE> 1
Exhibit 13.1
Excerpts from the 1997 Annual Report to Shareholders.
<PAGE> 2
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, 1997 and 1996, and for each of the years in the three-year period ended July
31, 1997, have been derived from, and are qualified by reference to, audited
financial statements included elsewhere herein. The historical income statement
data for the period ended July 31, 1993 reflects 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>
Years Ended July 31,
-----------------------------------------------------
(In thousands, except for share data) 1997 1996 1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
HISTORICAL INCOME STATEMENT DATA:
- ---------------------------------
Net sales ...................................... $214,485 $164,711 $144,303 $163,779 $150,638
Cost of sales .................................. 201,081 153,956 136,691 150,793 121,784
-------- -------- -------- -------- --------
Gross profit ................................... 13,404 10,755 7,612 12,986 28,854
Selling, general and administrative expenses ... 9,454 8,251 7,062 6,168 19,763
Restructuring charge ........................... -- 792 -- -- --
Research and development expenses .............. -- -- -- -- 6,304
-------- -------- -------- -------- --------
Operating income ............................... 3,950 1,712 550 6,818 2,787
Interest expense, net .......................... 1,350 1,512 1,561 1,386 2,899
Interest income from sales-type leases ......... -- -- -- -- 627
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. 2,600 200 (1,011) 5,432 515
Income tax provision (benefit) ................. 994 95 (1,051) 2,056 290
-------- -------- -------- -------- --------
Net income ..................................... $ 1,606 $ 105 $ 40 $ 3,376 $ 225
======== ======== ======== ======== ========
Net income per share(1) ........................ $ 0.22 $ 0.02 $ 0.01 $ 0.60 $ 0.05
======== ======== ======== ======== ========
Weighted average common shares and
equivalents(1) ................................. 7,167 6,449 6,253 5,664 4,515
PRO FORMA INCOME STATEMENT DATA:
- --------------------------------
Net sales ................................................................................... $111,590
Cost of sales ............................................................................... 99,941
--------
Gross profit ................................................................................ 11,649
Selling, general and administrative expenses ................................................ 4,812
--------
Operating income ............................................................................ 6,837
Interest expense, net ....................................................................... 980
--------
Income before income taxes .................................................................. 5,857
Provision for income taxes .................................................................. 2,107
--------
Net income .................................................................................. $ 3,750
========
Net income per share(1) ..................................................................... $ 0.83
========
HISTORICAL BALANCE SHEET DATA:
- ------------------------------
Working capital ................................ $ 20,635 $ 20,914 $ 21,739 $ 19,862 $ 5,626
Total assets ................................... 96,543 67,434 65,963 66,426 54,428
Long-term debt and capital lease obligations ... 4,390 6,261 6,341 5,545 5,096
</TABLE>
- ------------------------------
(1) Net income per share is calculated as described in Note 2 of Notes to
Consolidated Financial Statements. The Company has never paid or declared any
cash dividends.
<PAGE> 3
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 Systems Holding Corp. ("Cortelco"), an affiliate through common
ownership, in exchange for 1,000,000 shares of redeemable preferred stock of
Cortelco. This restructuring allowed CMC to focus on contract manufacturing
services while Cortelco pursued the development and distribution of telephones
and telecommunications products.
The Company offers contract manufacturing services to its customers on both a
turnkey and consignment basis, with over 95% of the Company's net sales in
fiscal 1997 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, 1997, 1996 and 1995. Results of operations for the
years ended July 31, 1997 and 1996 are discussed together in the section
immediately below, followed by a discussion of results for the years ended July
31, 1996 and 1995.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1997 VERSUS 1996
Total net sales for fiscal 1997 were $214.5 million, up 30% from $164.7 million
for fiscal 1996. Sales to a new box build customer serving the computer market
accounted for $45.4 million, or 21% of the Company's revenues in fiscal 1997.
The Company initiated business with this customer in the second quarter of
fiscal 1997. Approximately $143.1 million, or 67% of the Company's sales in
fiscal 1997 were to customers from the communications (telecommunications and
data networking) industry as compared to $107.8 million, or 66%, in fiscal 1996.
Revenue growth in the communications segment was accomplished in fiscal 1997
with sales to new customers and increased sales to certain existing customers.
Gross profit for fiscal 1997 was $13.4 million or 6.2% of net sales, as compared
to $10.8 million or 6.5% of net sales for fiscal 1996. The decrease in gross
profit as a percentage of sales on a year-to-year basis was partially due to a
pre-tax charge of $989,000 taken by the Company in the fourth quarter of fiscal
1997 to write off remaining inventory balances relating to certain customers.
The Company's gross margins were also adversely impacted throughout the second
half of fiscal 1997 by the decline of certain high margin consignment business
and costs associated with the commencement of new turnkey business.
<PAGE> 4
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 $9.5 million or 4.4% of net
sales in fiscal 1997, as compared to $9.0 million (including $792,000 in
non-recurring restructuring charges) or 5.5% of net sales for fiscal 1996.
Although selling, general and administrative expenses decreased as a percentage
of net sales, such expenses increased in absolute dollars in fiscal 1997
primarily due to additions to the Company's sales force, increases in expenses
incurred to expand and upgrade information systems and an increase in selling
expenses directly associated with the higher sales levels.
Net interest expense for fiscal 1997 was $1.4 million as compared to $1.5
million for fiscal 1996. The decrease in fiscal 1997 compared to fiscal 1996 was
primarily due to lower average debt balances.
The Company's effective tax rate for fiscal 1997 was approximately 38.2% as
compared to 47.5% for fiscal 1996. The fluctuation from year to year resulted
from the relationship between the amortization of goodwill and pre-tax income.
Goodwill amortization is treated as an expense for financial purposes but is not
deductible for tax purposes.
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 industry as compared to
$87.0 million, or 60%, in fiscal 1995. Revenue growth in the communications
segment was realized as sales to new customers more than offset any decreases in
sales in fiscal 1996 to existing customers. 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 costs resulting from a reduction in manufacturing overhead
staffing.
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 selling, general and administrative 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, California. This
move was made to give CMC an enhanced presence in 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, Mississippi operations. These reductions were
necessary in light of the transition of the Company's business away from hand
assembly and toward more advanced surface mount technology operations.
<PAGE> 5
CMC Industries, Inc. and Subsidiaries 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 38.0% 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.
QUARTERLY RESULTS
The following table contains selected unaudited consolidated financial results
for each of the four fiscal quarters for fiscal 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1996 YEAR ENDED JULY 31, 1997
------------------------------------------------- ------------------------------------------------
(In Thousands) QUARTER ENDED QUARTER ENDED
------------------------------------------------- ------------------------------------------------
OCTOBER 3 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 $38,580 $41,810 $42,944 $41,377 $41,941 $56,332 $54,369 $61,843
Gross Profit 2,072 2,507 2,789 3,387 3,500 3,936 3,679 2,289
Selling, general and
administrative expenses 2,861 2,005 1,899 2,278 1,995 2,200 2,410 2,849
Operating income (loss) (789) 502 890 1,109 1,505 1,736 1,269 (560)
Interest expense, net 346 429 403 334 319 288 384 359
Net Income (loss) $ (715) $ 40 $ 300 $ 480 $ 736 $ 900 $ 550 $ (580)
<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 5.4 6.0 6.5 8.2 8.3 7.0 6.8 3.7
Selling, general and
administrative expenses 7.4 4.8 4.4 5.5 4.8 3.9 4.4 4.6
Operating income (loss) (2.0) 1.2 2.1 2.7 3.6 3.1 2.3 (0.9)
Interest expense, net 0.9 1.0 0.9 0.8 0.8 0.5 0.7 0.6
Net income (loss) (1.9) 0.1 0.7 1.2 1.8 1.6 1.0 (0.9)
</TABLE>
The Company's quarterly operating results have fluctuated 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, costs associated with the commencement of new turnkey or
consignment manufacturing projects, increased costs and shortages of turnkey
manufacturing components or qualified labor, and economic conditions generally
<PAGE> 6
12 CMC Industries, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
and within the telecommunications, data networking and computer industries. The
Company's gross margin was adversely impacted in the fourth quarter of fiscal
1997 by a pre-tax charge of $989,000 taken by the Company to write off remaining
inventory balances relating to certain customers. See "Results of Operations for
the Year Ended July 31, 1997 versus 1996."
The Company has experienced an increase in orders from a major customer related
to the awarding of a government contract to such customer. Certain of these
products are currently scheduled for delivery in the Company's first quarter of
fiscal 1998. The Company may also experience an increase in sales during the
first and second quarters of fiscal 1998 of certain other products for which
demand would typically increase during the holiday buying season. There can be
no assurance, however, that any such increase in sales will result, or that if
it does result, it would not be offset by decreases in sales of other products.
Nonetheless, the Company's business and results of operations may develop a
seasonal trend with revenues and operating profit being the highest in the first
two quarters of the fiscal year.
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 timing and 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
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 has in the past and may in the future 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 events, or in the event that adverse conditions
prevail or are perceived to prevail generally or with respect to the Company's
business, the trading price of the Company's Common Stock could drop
significantly.
<PAGE> 7
CMC Industries, Inc. and Subsidiaries 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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). Expansion of capacity 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 startup 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, 1997, 1996 and 1995, the Company's
four largest customers in such periods accounted for approximately 61%, 63%, and
69%, respectively, of consolidated net sales. Sales to Micron Electronics, Inc.
accounted for approximately 21% of the Company's revenues for the fiscal year
ended July 31, 1997. Any material delay, cancellation or reduction of orders
from these or other customers could have a material 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 material adverse effect on the Company's results of operations. In
addition, customer contracts can be canceled and volume levels can be materially
changed or delayed. The timely replacement of canceled, delayed or reduced
contracts with new business cannot be assured. These risks are exacerbated
because the Company's sales are to customers in segments of the electronics
industry subject to rapid technological change and product obsolescence. The
factors affecting these industries in general, or any of the Company's major
customers in particular, could have a material 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, which 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, and 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
on a timely and price competitive basis. 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.
<PAGE> 8
14 CMC Industries, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SHORTAGES 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. These delays to date have
not had a material adverse effect on the Company's results of operations. 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 and the growth, if any, of
the Company's operations. 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 results of operations could be materially
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 the 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 "Legal Proceedings."
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.
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 sales representatives and other skilled employees. Failure to do so
could have a material adverse effect on the Company's operations.
<PAGE> 9
CMC Industries, Inc. and Subsidiaries 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 or may not 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
The Company's bank credit facility is comprised of a revolving credit line of
$25.0 million, a $6.0 million term loan amortizing over fifty-six months
beginning in October, 1996 and a $3.8 million equipment line. The loan agreement
contains financial covenants related to the Company's net worth and debt service
coverage and restricts capital expenditures. At July 31, 1997, total borrowings
under this facility were $12.8 million under the revolving credit line and $4.9
million under the term loan.
The Company leases its primary manufacturing facilities and certain equipment
using both capital and operating lease arrangements. At July 31, 1997, future
minimum lease payments under the noncancelable portion of lease agreements were
$14.5 million, of which $5.0 million is scheduled for payment in fiscal 1998.
The Company's operations used cash of $2.0 million during the year ended July
31, 1997. Cash provided by net income before depreciation and amortization of
$3.4 million and a $20.4 million increase in accounts payable were more than
offset by a $17.1 million increase in trade receivables and an $8.7 million
increase in inventories. The Company believes that the increases in receivables,
inventories and payables were primarily due to, and commensurate with, the
increase in revenues experienced by the Company during this period.
During the year ended July 31, 1997, the Company used cash of $2.4 million for
capital expenditures, primarily to acquire manufacturing equipment, and $1.8
million to repay long-term debt. During the year, cash of $6.0 million was
provided by increased borrowings under the Company's revolving credit line.
During fiscal 1997, all outstanding warrants to purchase the Company's Common
Stock were exercised, resulting in capital provided to the Company of
approximately $1.3 million in exchange for 169,000 newly issued shares. Also
during the fiscal year, options to purchase 60,000 shares of the Company's
Common Stock were exercised, resulting in net proceeds to the Company of
approximately $300,000.
On March 31, 1997, the Company executed an agreement and subsequently acquired
42,500 shares of the Company's Common Stock in exchange for a $441,000
receivable due to the Company. The number of shares acquired was based on the
fair market value of the stock at the time of the transaction.
<PAGE> 10
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 may include
increases in working capital to support sales growth, if any, and expansion of
capacity (plant and equipment). The Company is currently negotiating the
purchase of a 4.4 acre tract of land in Hermosillo, Mexico and a 55,000 square
foot manufacturing plant under construction at this site. The Company estimates
that the total cost of the project will be approximately $3.0 million and plans
to finance this project using a combination of installment notes payable to the
building contractor and funds available under the Company's lines of credit. The
Company expects to meet its other short-term liquidity requirements generally
through net cash provided by operations, vendor credit terms, operating lease
arrangements and short-term borrowings under its lines-of-credit.
The Company from time to time evaluates possible business acquisitions, facility
additions and expansion of surface mount and BGA technology capabilities. The
Company may seek additional financing as needed to pursue growth opportunities,
including any expansion of capacity; however, there can be no assurance that
such financing will be available on terms acceptable to the Company, if at all.
<PAGE> 11
CMC Industries, Inc. and Subsidiaries 17
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JULY 31, July 31,
1997 1996
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ........................................... $ 4,298 $ 2,977
Trade accounts receivable, less allowance for
doubtful accounts of $75 and $526 ................................. 32,533 17,231
Accounts receivable from affiliate .................................. 9,186 7,842
Inventories ......................................................... 29,900 21,218
Other current assets ................................................ 1,196 417
Deferred tax assets ................................................. -- 48
-------- --------
Total current assets .................................. 77,113 49,733
Plant and equipment, net .................................................... 11,498 10,863
Investment in preferred stock of affiliate .................................. 5,884 5,884
Goodwill, net of accumulated amortization
of $233 and $181 ............................................................ 770 822
Other assets ................................................................ 1,278 132
-------- --------
Total assets .......................................... $ 96,543 $ 67,434
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable under lines of credit ................................. $ 12,792 $ 6,826
Current portion of capital lease obligations ........................ 428 404
Current portion of long-term debt ................................... 1,300 1,300
Trade accounts payable .............................................. 35,936 15,537
Accrued compensation and related benefits ........................... 2,284 1,996
Accrued expenses and other current liabilities ...................... 1,854 2,756
Deferred tax liabilities ............................................ 1,884 --
-------- --------
Total current liabilities ............................. 56,478 28,819
Capital lease obligations ................................................... 832 1,403
Long-term debt .............................................................. 3,558 4,858
Other noncurrent liabilities ................................................ 149 644
Deferred tax liabilities .................................................... 682 608
-------- --------
Total liabilities ..................................... 61,699 36,332
-------- --------
Commitments and contingencies (Notes 7 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;
6,892,211 and 6,662,779 shares issued and outstanding ............. 69 67
Stock warrants outstanding .......................................... -- 44
Additional paid-in capital .......................................... 31,594 29,971
Retained earnings ................................................... 3,622 2,016
Treasury stock (42,500 shares at cost) .............................. (441) --
Equity adjustment for minimum pension liability ..................... -- (996)
-------- --------
Total stockholders' equity ................................ 34,844 31,102
-------- --------
$ 96,543 $ 67,434
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 12
18 CMC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales
Non-affiliates ............................. $183,173 $126,686 $ 95,708
Affiliates ................................. 31,312 38,025 48,595
-------- -------- --------
Total net sales .................................. 214,485 164,711 144,303
-------- -------- --------
Cost of sales
Non-affiliates ............................. 172,274 118,973 90,659
Affiliates ................................. 28,807 34,983 46,032
-------- -------- --------
Total cost of sales .............................. 201,081 153,956 136,691
-------- -------- --------
Gross profit ..................................... 13,404 10,755 7,612
Selling, general and administrative expenses ..... 9,454 8,251 7,062
Restructuring charge ............................. -- 792 --
-------- -------- --------
Operating income ................................. 3,950 1,712 550
Interest expense ................................. 1,350 1,512 1,561
-------- -------- --------
Income (loss) before income taxes ................ 2,600 200 (1,011)
Income tax provision (benefit) ................... 994 95 (1,051)
-------- -------- --------
Net income ....................................... $ 1,606 $ 105 $ 40
======== ======== ========
Net income per common and common
equivalent share ............................... $ 0.22 $ 0.02 $ 0.01
======== ======== ========
Weighted average common and common
equivalent shares outstanding ................... 7,167 6,449 6,253
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 13
CMC Industries, Inc. and Subsidiaries 19
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON RETAINED TREASURY
SHARES CAPITAL EARNINGS STOCK OTHER TOTAL
--------- -------- ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
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
Net income .................... 1,606 1,606
Exercise of warrants .......... 168,963 1,267 1,267
Exercise of stock options ..... 60,469 314 314
Minimum pension liability ..... 996 996
Purchase of treasury stock .... (441) (441)
--------- -------- ------ ----- ------- -------
Balance, July 31, 1997 ........ 6,892,211 $ 31,663 $3,622 $(441) $ -- $34,844
========= ======== ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 14
20 CMC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 1,606 $ 105 $ 40
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes ........................... 1,409 (718) 759
Depreciation and amortization ................... 1,805 1,746 1,607
(Gain) loss on disposition of assets ............ -- 10 49
Changes in assets and liabilities:
Receivables ............................... (17,087) (914) (2,528)
Inventories ............................... (8,682) 4,788 3,143
Other assets .............................. (842) 1,379 (1,626)
Trade accounts payable .................... 20,399 2,246 (1,621)
Accrued expenses and other
current liabilities ..................... (614) 693 (919)
Other liabilities ......................... 15 (166) (611)
-------- ------- -------
Net cash provided by (used in) operating activities .... (1,991) 9,169 (1,707)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................. (2,388) (5,669) (1,465)
Proceeds from disposition of assets .................. -- 126 115
-------- ------- -------
Net cash used in investing activities .................. (2,388) (5,543) (1,350)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments)
under lines of credit ............................... 5,966 (3,477) 4,552
Proceeds from long-term debt ......................... -- 1,596 --
Principal payments on long-term debt ................. (1,300) (1,347) (1,232)
Principal payments on capital leases ................. (547) (232) (478)
Proceeds from exercise of stock options
and issuance of stock and warrants .................. 1,581 2,722 18
-------- ------- -------
Net cash provided by (used in) financing activities .... 5,700 (738) 2,860
-------- ------- -------
Net increase (decrease) in cash
and cash equivalents ................................. 1,321 2,888 (197)
Cash and cash equivalents
Beginning of year .................................... 2,977 89 286
-------- ------- -------
End of year .......................................... $ 4,298 $ 2,977 $ 89
======== ======= =======
SUPPLEMENTAL INFORMATION:
Income taxes paid (refunded) ......................... $ (206) $ 488 $ (123)
Interest paid ........................................ $ 1,360 $ 1,697 $ 1,582
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 15
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 telecommunications industries. Over 90% of the
Company's manufacturing contracts are for turnkey services and include
procurement of materials in addition to manufacturing.
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 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 77% and
83% of inventories as of July 31, 1997 and 1996, respectively.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost less accumulated depreciation.
The Company provides for
<PAGE> 16
22 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
depreciation using the straight-line method for financial reporting purposes and
accelerated methods for income tax reporting purposes.
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 years ended July 31, 1997, 1996 and 1995, respectively
related to the purchase of a subsidiary in fiscal 1994.
At each balance sheet date, the Company assesses whether there has been
an impairment in the value of long-lived assets by determining whether projected
undiscounted cash flows generated by the applicable asset exceeds its net book
value as of the assessment date. At July 31, 1997, there were no impairments of
the Company's assets.
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 employees. The costs for such plans are
charged against earnings in the period incurred. The liability for health care
claims was $397,000 and $500,000 as of July 31, 1997 and 1996, respectively, and
the related expense incurred was $3,331,000, $3,078,000 and $3,102,000 for the
years ended July 31, 1997, 1996 and 1995, respectively. The Company does not
provide benefits under these plans to retired employees.
INCOME TAXES
The Company accounts for income taxes using 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, the Company 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> 17
CMC Industries, Inc. and Subsidiaries 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("SFAS No. 128"). SFAS No. 128 changes the computation, presentation and
disclosure requirements for earnings per share that are currently followed by
the Company. SFAS No. 128 is effective for years ending after December 15,1997
and early adoption is not permitted. If the provisions of SFAS No. 128 had been
adopted for the year ended July 31, 1997, the Company's proforma basic earnings
per share would have been $0.23, $0.02, and $0.01 for the years ended July 31,
1997, 1996 and 1995, respectively. Proforma diluted earnings per share would
have been $0.22, $0.02 and $0.01 for the years ended July 31, 1997, 1996 and
1995, respectively.
FINANCIAL INSTRUMENTS
Financial instruments are evaluated pursuant to SFAS No. 107, Disclosures about
Fair Value of Financial Instruments. 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 August 1993 (date of the restructure of the Company). 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 fair value of the Company's long-term debt is estimated based on the
current borrowing rates available to the Company for bank loans with similar
terms and average maturities. The carrying amounts approximate fair value
thereof because borrowings bear interest at a variable interest rate.
PRESENTATION
Certain fiscal 1996 and 1995 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):
<PAGE> 18
24 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
NET SALES RECEIVABLE AT
YEAR ENDED JULY 31, JULY 31,
----------------------------- ---------------
1997 1996 1995 1997 1996
----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Micron ......................... $45.4 $ -- $ -- $6.5 $ --
Cortelco ....................... 31.3 38.0 45.6 9.2 7.8
Global Village ................. 29.6 21.3 -- 8.2 .7
Reltec ......................... 24.2 3.7 -- 4.3 --
Harris ......................... 17.4 16.5 8.2 2.0 1.8
IBM ............................ 13.1 28.1 35.3 2.5 2.4
</TABLE>
The Company's credit risk principally relates to trade accounts
receivable and receivables from Cortelco, a related party. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral.
NOTE 5 -- INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Raw materials and purchased components ......... $26,205 $15,673
Work-in-process ................................ 2,874 5,174
Finished goods ................................. 821 371
------- -------
$29,900 $21,218
======= =======
</TABLE>
The carrying value of inventories at July 31, 1997 and 1996 approximated
replacement cost.
NOTE 6 -- PLANT AND EQUIPMENT
The components and useful lives of plant and equipment are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
July 31,
Useful life -----------------------
(years) 1997 1996
------- -------
<S> <C> <C> <C>
Machinery and equipment .......................... 3-10 $15,992 $14,760
Furniture and fixtures ........................... 5-15 1,465 714
Leasehold improvements ........................... 5 484 288
Computer equipment and software .................. 5 457 456
Construction in progress ......................... 56 239
------- -------
18,454 16,457
Less - Accumulated depreciation .................. (6,956) (5,594)
------- -------
$11,498 $10,863
======= =======
</TABLE>
<PAGE> 19
CMC Industries, Inc. and Subsidiaries 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation and amortization expense was $1,753,000, $1,694,000 and
$1,461,000 for fiscal 1997, 1996 and 1995, respectively. Plant and equipment
include assets under capital leases with a cost of $1,595,000 and $2,352,000 and
accumulated amortization of $400,000 and $1,018,000 as of July 31, 1997 and
1996, respectively.
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, 1997 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING CAPITAL
LEASES LEASES
------ ------
<S> <C> <C>
1998 ...................................... $ 4,527 $ 520
1999 ...................................... 4,026 809
2000 ...................................... 3,202 7
2001 ...................................... 1,197 7
2002 ...................................... 169 --
------- ------
Future minimum lease payments ........................ $13,121 1,343
=======
Less - Amount representing interest .................. (83)
Present value of future minimum lease payments ....... 1,260
Less - Current portion ............................... (428)
------
Long-term portion .................................... $ 832
======
</TABLE>
Rent expense relating to operating leases totaled approximately
$3,450,000, $1,555,000 and $988,600 for fiscal 1997, 1996 and 1995 respectively.
NOTE 8 -- BORROWINGS
On September 26, 1996, CMC Industries, Inc. 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 at CMC
Mississippi, Inc. and $7 million at 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). At July 31, 1997, the Company had $12.8 million
outstanding at a weighted average interest rate of 8.55%.
<PAGE> 20
26 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- 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). At July 31, 1997, the Company had
outstanding $4.9 million at an average interest rate of 8.43%.
- 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 options, 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 tangible net worth of $30.0 million as of October
31, 1996 and increasing to $31.5 million as of July 31, 1998, on a
consolidated basis;
- 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,
of at least 2 to 1 through September 1, 1998.
At July 31, 1996, the Company had $6.2 million outstanding under a 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, the Company had an
average interest rate of 8.49%. 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, the Company
had $6.8 million outstanding under the revolving loan facility at a weighted
average interest rate of 8.49%.
<PAGE> 21
CMC Industries, Inc. and Subsidiaries 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MATURITIES OF LONG-TERM DEBT
The aggregate annual maturities of long-term debt are as follows
(amounts in thousands):
<TABLE>
<S> <C>
1998 ............................... $1,300
1999 ............................... 1,300
2000 ............................... 1,300
2001 ............................... 958
</TABLE>
NOTE 9 -- CAPITAL STOCK
RECAPITALIZATION
On May 16, 1996, the Company issued 436,037 shares of common stock with
detachable warrants that entitled 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 issued were $2,464,000 and $44,000, respectively. Due to the
Company meeting specified levels of financial performance, the warrants were
called during the current year. Total proceeds from the exercise of the warrants
were $1.3 million.
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> 22
28 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At July 31, 1997, 325,086 shares had been exercised under the plan and
277,986 shares for which options were granted had terminated. Options
outstanding at July 31, 1997 expire in 1998 through 2007. During fiscal 1994,
certain shareholders waived their rights to receive 36,100 shares related to the
stock dividend.
A summary of activity in the plan follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- --------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ....... 642,689 4.06 467,502 3.24 389,816 3.08
Granted ................................ 348,500 7.13 346,500 3.83 161,666 3.41
Exercised .............................. (60,469) 5.18 (128,840) 0.51 (40,417) 0.50
Canceled ............................... (57,901) 7.40 (42,473) 3.96 (43,563) 4.90
------- -------- -------
Outstanding at end of year ............. 872,819 4.99 642,689 4.06 467,502 3.24
======= ======== =======
Exercisable at end of year ............. 461,567 4.30 322,500 4.19 283,126 2.67
======= ======== =======
</TABLE>
The options outstanding at July 31, 1997 are exercisable at prices
ranging from $0.42 to $13.00 per share. The weighted average remaining
contractual life of all outstanding options was 7.5 years at July 31, 1997.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretation in
accounting for its plan. Accordingly, no compensation expense has been
recognized for its stock-based compensation plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in fiscal 1997 and 1996 consistent with the method prescribed by
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
earnings for fiscal 1997 and 1996 would have been reduced by approximately
$364,000 and $175,000, respectively. Earnings per share would have been reduced
by $0.05 and $0.03 for fiscal 1997 and 1996, respectively. These pro forma
results will not be representative of the impact on future years because only
grants made in fiscal 1997 and 1996 were considered. The weighted average
grant-date fair value of options granted during fiscal 1997 and 1996 was $4.68
and $2.66, respectively. The fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for fiscal 1997 and 1996, respectively:
dividend yields of 0% each year; average expected volatility of 55% and 56%;
risk-free interest rates of 6.75% and 6.50%; and an average expected life of 4.5
years.
<PAGE> 23
CMC Industries, Inc. and Subsidiaries 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10 -- INCOME TAXES
The provision (benefit) for income taxes comprised the following
(amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1997 1996 1995
------ ----- -------
<S> <C> <C> <C>
Current:
Federal ................... $ (330) $ 610 $(1,810)
State ..................... (85) 203 --
------ ----- -------
(415) 813 (1,810)
------ ----- -------
Deferred:
Federal ................... 1,329 (622) 658
State ..................... 80 (96) 101
------ ----- -------
1,409 (718) 759
------ ----- -------
$ 994 $ 95 $(1,051)
====== ===== =======
</TABLE>
Deferred tax liabilities (assets) comprised the following (amounts in
thousands):
<TABLE>
<CAPTION>
JULY 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Inventories ....................................................... $ 2,674 $ 2,014
Plant and equipment ............................................... 1,655 1,042
Other ............................................................. 267 --
------- -------
4,596 3,056
------- -------
Deferred tax assets:
Accrued liabilities ............................................... (776) (535)
Minimum pension liability ......................................... -- (597)
Net operating loss carryforwards .................................. -- (172)
Minimum tax credit ................................................ (594) (721)
Other ............................................................. (660) (471)
------- -------
(2,030) (2,496)
------- -------
Net deferred tax liability ............................................. $ 2,566 $ 560
======= =======
The net deferred tax liability is classified as follows:
Current liability (asset) ......................................... $ 1,884 $ (48)
Noncurrent liability .............................................. 682 608
------- -------
$ 2,566 $ 560
======= =======
</TABLE>
<PAGE> 24
30 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the statutory federal income tax rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate ................................ 35.0% 35.0% (35.0)%
State income tax, net of Federal benefit .............. (0.1) 54.0 6.6
Credits claimed for research and development .......... -- -- (67.3)
Other, net ............................................ 3.3 (41.5) (8.3)
---- ----- ------
Effective rate ........................................ 38.2% 47.5% (104.0)%
==== ===== ======
</TABLE>
NOTE 11 -- RELATED PARTY TRANSACTIONS
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 1997, 1996 and 1995 were sales to
Cortelco totaling $31,312,000, $38,025,000 and $45,611,000, respectively. Total
cost of sales for the periods relating to these sales to Cortelco were
$28,807,000, $34,983,000 and $43,205,000, respectively.
The Company had an agreement in 1996 and 1995 with Cortelco to provide
certain products and related support services to customers of Cortelco. The
Company was required to pay a commission to Cortelco in the amount of 10% of
sales of these products under this agreement. During fiscal 1996 and 1995, the
Company incurred $341,000 and $635,000, respectively, in commissions under this
agreement.
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 customer that
is partially owned by Cortelco. The Company had no sales to this customer in
fiscal 1997 and 1996 and approximately $3.0 million in fiscal 1995. At July 31,
1997 and 1996, the Company had no accounts receivable from this customer. 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.
<PAGE> 25
CMC Industries, Inc. and Subsidiaries 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Cortelco preferred stock is nonvoting, has a liquidation preference
of $12.50 per share and entitles the Company to dividends which are
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.
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 an accounts receivable balance of $491,000
from this customer. During 1997, the Company settled the then outstanding
balance of $441,000 with this customer through receipt of Company common stock
with a fair value of the same amount.
NOTE 12 -- EMPLOYEE BENEFITS
RETIREMENT BENEFITS
The Company maintains a defined benefit pension plan (the "Pension
Plan") which covers certain 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> 26
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 (amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost ............................ $ -- $ -- $ --
Interest cost ........................... 582 579 557
Return on plan assets ................... (785) (422) (441)
Net amortization and deferral ........... 270 (65) 17
----- ----- -----
Net periodic pension expense ............ $ 67 $ 92 $ 133
===== ===== =====
Discount rate ........................... 8.25% 8.00% 8.00%
Long-term rate of return ................ 8.25% 8.00% 8.00%
</TABLE>
The following table sets forth the Pension Plan's status (amounts in thousands):
<TABLE>
<CAPTION>
JULY 31,
----------------------
1997 1996
------ -------
<S> <C> <C>
Vested benefit obligation ...................... $6,960 $ 7,312
====== =======
Accumulated benefit obligation ................. $7,238 $ 7,655
====== =======
Projected benefit obligation ................... $7,238 $ 7,655
Fair value of plan assets ...................... 7,375 7,145
------ -------
Funded status .................................. 137 (510)
Unrecognized net loss .......................... 878 1,592
Additional liability recorded .................. -- (1,592)
------ -------
Prepaid (accrued) pension cost ................. $1,015 $ (510)
====== =======
</TABLE>
<PAGE> 27
CMC Industries, Inc. and Subsidiaries 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 recorded as of July 31, 1996 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.
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 13.5 years
as of July 31, 1997.
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. Effective June 30, 1994, the Company terminated matching
employee contributions. The Company may also elect to make an additional
discretionary profit-sharing contribution. Effective January 1, 1996, the
Savings Plan eligibility requirements were amended to include all full-time
employees. The Company recorded no contributions for fiscal 1997, 1996 and 1995.
On November 15, 1996, the Stockholders approved the Employee Stock
Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to purchase
common stock on a quarterly basis at the lower of 85% of the market price at the
beginning or end of each three-month offering period. As of July 31, 1997, there
were 250,000 shares of common stock reserved for the ESPP, and there have been
no issuances to date. The ESPP operates on a calendar basis with witholdings
beginning March 1, 1997. As of July 31, 1997, a liability of $268,000 has been
recorded for ESPP withholdings not yet applied towards the purchase of common
stock.
<PAGE> 28
34 CMC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 -- 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 $0 and $4,000, as of July 31, 1997 and 1996,
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, 1997, no
claims have been filed by Alcatel.
<PAGE> 29
CMC Industries, Inc. and Subsidiaries 35
REPORT OF INDEPENDENT ACCOUNTANTS
[PRICE WATERHOUSE LOGO]
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 its subsidiaries at July 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended July 31, 1997, 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
Memphis, Tennessee
August 25, 1997
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant.
CMC Mississippi, Inc. (fka CMC Manufacturing, Inc.), a Delaware corporation
CMC California, Inc. (fka Topaz Industries, Inc.), a Delaware corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No, 33-80234 and 333-19705) of CMC Industries, Inc. of
our report dated August 25, 1997 appearing on page 35 of the Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K
PRICE WATERHOUSE LLP
Memphis, Tennessee
October 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT JULY 31, 1997 AND 1996 (AUDITED) AND THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JULY 31, 1997, 1996 AND
1995 (AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 4,298
<SECURITIES> 0
<RECEIVABLES> 41,719
<ALLOWANCES> 0
<INVENTORY> 29,900
<CURRENT-ASSETS> 71,113
<PP&E> 11,498
<DEPRECIATION> 0
<TOTAL-ASSETS> 96,543
<CURRENT-LIABILITIES> 56,478
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 34,775
<TOTAL-LIABILITY-AND-EQUITY> 96,543
<SALES> 214,485
<TOTAL-REVENUES> 214,485
<CGS> 201,081
<TOTAL-COSTS> 201,081
<OTHER-EXPENSES> 9,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,350
<INCOME-PRETAX> 2,600
<INCOME-TAX> 994
<INCOME-CONTINUING> 1,606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,606
<EPS-PRIMARY> .22
<EPS-DILUTED> 0
</TABLE>
