<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-22974
CMC INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1434910
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
4950 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
------------------------
(408) 982-9999
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE - 7,593,556 SHARES
OUTSTANDING AS OF NOVEMBER 30, 1998
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
Item 3. Quantitative and Qualitative Disclosure About Market Risks 13
6 PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
<PAGE> 3
CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, 1998 JULY 31, 1998
UNAUDITED (*)
---------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 4,700 $ 5,281
ACCOUNTS AND NOTES RECEIVABLE, NET 32,925 31,282
ACCOUNTS AND NOTES RECEIVABLE FROM AFFILIATE 5,098 5,678
INVENTORIES 28,348 20,275
OTHER CURRENT ASSETS 1,382 2,000
--------- ---------
TOTAL CURRENT ASSETS 72,453 64,516
NOTES RECEIVABLE FROM AFFILIATE 1,250 1,400
PLANT AND EQUIPMENT, NET 19,637 18,790
INVESTMENT IN PREFERRED STOCK OF AFFILIATE 5,884 5,884
OTHER ASSETS 4,062 4,015
--------- ---------
$ 103,286 $ 94,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
NOTES PAYABLE UNDER LINES OF CREDIT $ 15,245 $ 18,111
CURRENT PORTION OF LONG-TERM DEBT 2,174 2,146
ACCOUNTS PAYABLE 34,744 21,365
OTHER CURRENT LIABILITIES 6,753 7,301
--------- ---------
TOTAL CURRENT LIABILITIES 58,916 48,923
LONG-TERM DEBT 2,713 2,268
OTHER LIABILITIES 1,364 1,469
--------- ---------
TOTAL LIABILITIES 62,993 52,660
--------- ---------
STOCKHOLDERS' EQUITY
COMMON STOCK 77 76
ADDITIONAL PAID-IN CAPITAL 36,485 36,157
RETAINED EARNINGS 4,172 6,153
TREASURY STOCK (441) (441)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 40,293 41,945
--------- ---------
$ 103,286 $ 94,605
========= =========
</TABLE>
* CONDENSED FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
----------------------------
1998 1997
-------- -------
<S> <C> <C>
NET SALES $ 73,739 $ 90,626
COST OF SALES 73,124 85,068
-------- --------
GROSS PROFIT 615 5,558
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,370 3,099
-------- --------
OPERATING INCOME (LOSS) (2,755) 2,459
INTEREST EXPENSE, NET 415 395
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (3,170) 2,064
PROVISION (BENEFIT) FOR INCOME TAXES (1,189) 774
-------- --------
NET INCOME (LOSS) $ (1,981) $ 1,290
======== ========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ (0.26) $ 0.19
DILUTED $ (0.26) $ 0.18
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 7,567 6,920
DILUTED 7,567 7,355
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
---------------------------------
1998 1997
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME (LOSS) $ (1,981) $ 1,290
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING
activities:
DEPRECIATION AND AMORTIZATION 842 516
CHANGE IN ASSETS AND LIABILITIES:
RECEIVABLES (913) (16,646)
INVENTORIES (8,073) (1,154)
ACCOUNTS PAYABLE 13,379 11,827
OTHER ASSETS AND LIABILITIES (155) 1,394
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,099 (2,773)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (674) (602)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (674) (602)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
BORROWINGS UNDER LINES OF CREDIT, NET (2,866) 3,815
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (469) (426)
PROCEEDS FROM ISSUANCE OF STOCK 329 292
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,006) 3,681
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (581) 306
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,281 4,298
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,700 $ 4,604
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
CMC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary to present fairly the financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
NOTE 2 - INVENTORIES
The components of inventories were as follows (in thousands):
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
---------- --------
<S> <C> <C>
Raw materials and purchased components $ 26,932 $ 17,868
Work-in-process 321 1,637
Finished goods 1,095 770
-------- --------
$ 28,348 $ 20,275
======== ========
</TABLE>
NOTE 3 - NET INCOME PER SHARE
Earnings per share ("EPS") is calculated in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share," which requires the presentation of basic and diluted earnings per share.
Basic EPS was computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted EPS was calculated by
dividing net income by the weighted average number of common shares outstanding
and dilutive common stock equivalent shares outstanding during the respective
periods. Common equivalent shares consist of stock options included in the
computation of EPS using the treasury stock method. A reconciliation of basic
earnings per share to diluted earnings per share for the past three fiscal years
is shown in the following table (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------------------------------------------
July 31, 1998 July 31,1997 July 31, 1996
------------------------------- ------------------------------ ----------------------------
Net Per Share Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Earnings available to
Common shareholders $2,531 7,205 $0.35 $1,606 6,757 $0.24 $105 6,235 $0.02
EFFECT OF DILUTIVE SECURITIES
Stock Options 348 410 214
----- ----- -----
DILUTED EPS
Earnings available to
Common shareholders ------ ----- ------ ----- ---- -----
Plus assumed conversions $2,531 7,553 $0.34 $1,606 7,167 $0.22 $105 6,449 $0.02
====== ===== ===== ====== ===== ===== ==== ===== =====
</TABLE>
6
<PAGE> 7
CMC INDUSTRIES, INC.
Item 2
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 telecommunications
business to Cortelco Systems Holding Corp. ("Cortelco"), a newly-formed company
owned by certain of the Company's existing stockholders, in exchange for
1,000,000 shares of Preferred Stock of Cortelco. These transactions effectively
transferred to Cortelco all of the Company's assets and liabilities not related
to its contract manufacturing business. This restructuring allowed CMC to focus
on contract manufacturing services while Cortelco pursued the development and
distribution of telephones and telecommunications products.
Set forth below are analyses of the Company's results of operations for
the three months ended October 31, 1998.
RESULTS OF OPERATIONS
Sales for the first quarter of fiscal year 1999 decreased by
approximately 19% to $73.7 million from $90.6 million for the corresponding
quarter of the prior year. Excluding sales to Micron Electronics, Inc.
("Micron"), with which business was discontinued at the end of the second
quarter of fiscal 1998, sales for the first three months of fiscal 1998 were
$52.5 million. For further information on the termination of the Micron
business, refer to the Company's Form 10Q for the quarterly period ended January
31, 1998.
Sales to customers other than Micron increased by $21.2 million (to
$73.7 million from $52.5 million) in the first three months of fiscal 1999 when
compared to the same period of the prior fiscal year. These increases were
accomplished with sales to new customers and increased sales to certain existing
customers. Sales to Diamond Multimedia Systems, Inc. ("Diamond") increased by
$24.9 million in the first quarter of fiscal 1999 when compared to the
corresponding quarter of the prior year due to both an increase in shipments and
the conversion of the business from consignment to turnkey. Although sales to
Diamond in the first quarter of fiscal 1999 were consistent with expectations,
the Company expects the level of business to decline in future quarters. Sales
also increased by $6.0 million in the first quarter of fiscal 1999 when compared
to the corresponding period of the prior fiscal year due to the initiation of
shipments under a full turnkey contract with Next Level Communications ("Next
Level"). The increases in sales to Diamond and Next Level were offset by a
decrease of $10.4 million in sales to Global Village Communications ("Global
Village"). Following Global Village's sale of its modem business to Boca
Research, Inc. ("Boca") in June 1998, manufacturing of products for Boca has
declined to minimal levels. This paragraph contains forward-looking statements
and readers are urged to consider the "Factors that May Affect the Company" in
this regard.
Gross profit for the first quarter of fiscal 1999 was $615,000 or 0.8%
of sales, as compared to $5.6 million or 6.1% of sales for the first quarter of
fiscal 1998. Gross profit as a percentage of sales decreased in the first
quarter of fiscal 1999 when compared to the corresponding period of the prior
fiscal year principally as a result of increases in manufacturing overhead costs
incurred in anticipation of higher sales volumes and costs associated with the
initiation of new manufacturing projects.
7
<PAGE> 8
Selling, general and administrative expenses were $3.4 million or 4.6%
of sales in the first quarter of fiscal 1999, as compared to $3.1 million or
3.4% of sales in the first quarter of fiscal 1998. The increase in such expenses
in the current quarter when compared to the corresponding quarter of the prior
fiscal year was primarily due to increases in marketing and information systems
costs incurred in an effort to increase revenues and improve profitability in
future periods.
Net interest expense for the first quarter of fiscal year 1999 was
$415,000, as compared to $395,000 in the first quarter of fiscal 1998. Interest
expense increased in the first quarter of fiscal 1999 when compared to the
corresponding quarter of the prior fiscal year primarily due to an increase in
average debt balances associated with the funding of the Company's expansion of
capacity in Mexico.
The Company's effective income tax rate was approximately 38%
throughout the first three months of both fiscal years 1999 and 1998. The
effective income tax rate approximates the blended state and federal statutory
rates in the United States and Mexico.
FACTORS THAT MAY AFFECT THE COMPANY
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E 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.
8
<PAGE> 9
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 quarter ended October 31, 1998 and fiscal years
ended July 31, 1998, 1997 and 1996, the Company's four largest customers in such
periods accounted for approximately 70%, 56%, 61%, and 63%, respectively, of
consolidated net sales. Sales to Micron Electronics, Inc., with which business
was discontinued in the second quarter of fiscal 1998, accounted for
approximately 24% and 21% of the Company's revenues for the fiscal years ended
July 31, 1998 and July 31, 1997, respectively. 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, or failure to pay in full by any customer of amounts owed to the
Company, could have a material adverse effect on the Company's results of
operations. In addition, customer contracts can be canceled and volume levels
may 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.
RELATIONSHIP WITH CORTELCO. The Company has had numerous transactions
with its former affiliate and customer, Cortelco Systems Holding Corp.
("Cortelco"). Mr. Lee, a director of the Company, is also a director of
Cortelco, and is the largest stockholder of each of the Company and Cortelco.
Transactions between the Company and Cortelco include the transfer of certain
assets and related liabilities associated with the telephone business to
Cortelco in exchange for 1,000,000 shares of Preferred Stock of Cortelco in
August 1993 and the execution of an agreement to provide certain products and
related support services to customers of Cortelco. The Company has the right to
require that the Preferred Stock be redeemed by Cortelco beginning on August 1,
1999 in five annual installments of $2.5 million each. There can be no
assurances that such payments will be made by Cortelco on a timely basis, if at
all.
Historically, Cortelco has not been as current as other customers in
making payments on its trade accounts with the Company. In July 1998, the
Company converted certain older accounts receivable from Cortelco totaling $2.0
million into a note receivable. Under the terms of the note, Cortelco has agreed
to pay the balance over a three-year term with monthly payments of $50,000, plus
interest and a final installment of $200,000 due at the end of the three-year
period. Interest accrues on the note at a rate of 9.0% per annum. The Company
continues to provide credit for manufacturing services sold to Cortelco in the
form of trade receivables, and as of October 31, 1998, had approximately
$4,498,000 in trade receivables from Cortelco. Cortelco's payments on its trade
accounts with the Company have in the past been late, and there can be no
assurances that such payments or payments on the note will in the future be made
on a timely basis, if at all.
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
9
<PAGE> 10
structures, particularly with respect to manufacturers with established
facilities in regions where labor costs are lower.
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.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company's bank credit facility is comprised of a revolving credit
line of $25.0 million and a $6.0 million term loan amortizing over fifty-six
months beginning in October 1996. The loan agreement contains financial
covenants related to the Company's net worth and debt service coverage and
restricts capital expenditures. At October 31, 1998, total borrowings under this
facility were $15.2 million under the revolving credit line and $3.2 million
under the term loan.
The Company leases its U.S manufacturing facilities and certain
equipment using both capital and operating lease arrangements. At October 31,
1998, future minimum lease payments under the noncancelable portion of lease
agreements were $18.8 million, of which $6.6 million is scheduled for payment in
the next twelve months.
The Company's cash and cash equivalents decreased from $5.3 million to
$4.7 million during the three months ended October 31, 1998. During this period,
the Company's operations provided cash of $3.1 million because a $13.4 million
increase in accounts payable more than offset the net loss before depreciation
and amortization of $1.1 million, an $8.1 million increase in inventories, a
$913,000 increase in accounts receivable and a $155,000 change in other assets
and liabilities.
The Company used $674,000 in investing activities during the three
months ended October 31, 1998. Cash expended in investing activities was
principally to improve leaseholds and to acquire manufacturing equipment.
Cash used in financing activities in the three months ended October 31,
1998 totaled $3.0 million, including $469,000 used to repay long-term debt
obligations and $2.9 million used to reduce borrowings under the Company's
revolving credit line. Cash provided included $329,000 from the issuance of
approximately 81,240 shares of the Company's Common Stock under the Company's
stock option and employee stock purchase plans.
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). During fiscal 1998, the Company purchased a
4.4-acre tract of land in Hermosillo, Mexico and an 110,000 square foot
manufacturing plant located at this site. The final payment of approximately
$635,000 for this facility is expected be made in the second quarter of fiscal
1999 using cash on hand 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 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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's manufacturing equipment, computer programs or computer hardware that
have date-sensitive software or embedded chips may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to operate equipment, process transactions,
send invoices, or engage in similar normal business activities.
11
<PAGE> 12
Based on recent assessments, the Company determined that it will be
required to modify or replace only insignificant portions of hardware and
software so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with minor modifications of existing
hardware and software, the Year 2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves four phases;
assessment, remediation, testing and implementation. To date the Company
believes that it has completed its assessment of all material systems that could
be affected by the Year 2000 Issue. The completed assessment indicated that most
of the Company's significant information technology systems and software and
hardware used in manufacturing equipment (hereafter also referred to as
operating equipment) would not be materially affected. Further, the Company does
not conduct a significant portion of its vendor purchase transactions through
systems that interface directly with suppliers.
For its information technology exposures, the Company believes that it
has completed the remediation phase for all material systems and that it has
completed all software reprogramming and replacement as of December 15, 1998. To
date, the Company has completed approximately one-half of its testing and has
implemented approximately one-half of its remediated systems. The Company has
currently scheduled the testing phase to be complete by January 1, 1999, with
all remediated systems fully implemented by January 31, 1999; however, there can
be no assurance that such schedules will be met.
For its operating equipment exposures, the Company believes that it has
completed the remediation phase of the resolution process as of December 15,
1998. Testing of this equipment is more difficult than its information
technology systems and the Company is in the early stages of this task. The
Company is scheduled to complete its testing and implementation of affected
equipment by March 31, 1999; however, there can be no assurance that such
schedules will be met.
With respect to third parties, the Company currently has no material
systems that interface directly with significant vendors. The Company plans to
query its important suppliers regarding Year 2000 readiness but to date is not
aware of any problems that would materially impact results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that these third parties will be Year 2000 ready and any inability of those
parties to complete their Year 2000 resolution process could materially impact
the Company.
The Company will primarily utilize internal resources to reprogram, to
replace, test and implement, as needed, the software and operating equipment for
Year 2000 modifications. The total cost of the Year 2000 project is not expected
to materially affect the Company's business or results of operations. However,
there can be no guarantee that unexpected events will not occur and actual
results could be materially adversely affected. Specific factors that might
cause such material adverse effects include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee has issued Statement of
Position ("SOP") 98-5, Reporting on the Costs and Start-up Activities, effective
for fiscal years beginning after December 15, 1998 (fiscal 2000 for the
Company). SOP 98-5 requires the costs of start-up activities and organization
costs to be expensed as incurred. In fiscal 1998, the Company capitalized $1.2
million of start-up costs incurred to begin manufacturing operations in
Hermosillo, Mexico. The Company plans to amortize 20%, or $240,000, in fiscal
1999 and expense the balance of $960,000 in fiscal 2000 upon adoption of SOP
98-5.
12
<PAGE> 13
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
None
CMC INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - 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.
In connection with a fiscal 1996 staff reduction, certain terminated
employees subsequently claimed that the Company had engaged in age
discrimination in their dismissal and sought damages of varying amounts. The
Company defended the actual and threatened claims vigorously during fiscal 1998
incurring approximately $275,000 in legal costs over the course of the year. On
August 6, 1998, a judgment was rendered in the favor of one plaintiff in the
amount of $127,000, which the Company has appealed. A second plaintiff's claim
for $53,000 was filed and subsequently settled for $48,500. The EEOC has
negotiated with the Company to reach a monetary settlement for other potential
claimants. Without admitting any liability, the Company has entered into a
Conciliation Agreement with the EEOC and agreed to pay approximately $500,000 to
settle all such claims and limit future litigation costs. As a result of these
events and the significant ongoing costs to defend these claims, in
13
<PAGE> 14
October 1998, the Company concluded that its interest would be best served to
settle all such matters. The Company has reserved $975,000 to resolve all such
claims, which represents its best estimate of funds to ultimately be paid to
such claimants. This charge was recorded in the fiscal year ended July 31, 1998.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibit 27.1 Financial Data Schedule (for SEC use
only)
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended October 31, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMC INDUSTRIES, INC.
--------------------
Registrant
Date: December 15, 1998 /s/ Matthew G. Landa
-----------------------------
Matthew G. Landa
President and Chief Executive
Officer
Date: December 15, 1998 /s/ Andrew J. Moley
----------------------------
Andrew J. Moley
Executive Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 4,700
<SECURITIES> 0
<RECEIVABLES> 38,023
<ALLOWANCES> 0
<INVENTORY> 28,348
<CURRENT-ASSETS> 72,453
<PP&E> 19,637
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,286
<CURRENT-LIABILITIES> 58,916
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 40,216
<TOTAL-LIABILITY-AND-EQUITY> 103,286
<SALES> 73,739
<TOTAL-REVENUES> 73,739
<CGS> 73,124
<TOTAL-COSTS> 73,124
<OTHER-EXPENSES> 3,370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 415
<INCOME-PRETAX> (3,170)
<INCOME-TAX> (1,189)
<INCOME-CONTINUING> (1,981)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,981)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
<FN>
See notes to unaudited condensed consolidated financial statements.
</FN>
</TABLE>
