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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 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 - 7,450,407 SHARES
OUTSTANDING AS OF FEBRUARY 28, 1998
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <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 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of Security Holders 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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CMC Industries, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 1998 JULY 31, 1997
UNAUDITED (*)
---------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 5,031 $ 4,298
ACCOUNTS RECEIVABLE, NET 36,825 32,533
ACCOUNTS RECEIVABLE FROM AFFILIATE 9,611 9,186
INVENTORIES 22,269 29,900
OTHER CURRENT ASSETS 4,743 1,196
--------- --------
TOTAL CURRENT ASSETS 78,479 77,113
PLANT AND EQUIPMENT, NET 11,575 11,498
INVESTMENT IN PREFERRED STOCK OF AFFILIATE 5,884 5,884
OTHER ASSETS 4,083 2,048
--------- --------
$ 100,021 $ 96,543
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
NOTES PAYABLE UNDER LINES OF CREDIT $ 16,356 $ 12,792
CURRENT PORTION OF LONG-TERM DEBT 1,728 1,728
ACCOUNTS PAYABLE 28,660 35,936
OTHER CURRENT LIABILITIES 7,537 6,022
--------- --------
TOTAL CURRENT LIABILITIES 54,281 56,478
LONG-TERM DEBT 3,554 4,390
OTHER LIABILITIES 808 831
--------- --------
TOTAL LIABILITIES 58,643 61,699
STOCKHOLDERS' EQUITY
COMMON STOCK 75 69
ADDITIONAL PAID-IN CAPITAL 35,603 31,594
RETAINED EARNINGS 6,141 3,622
TREASURY STOCK (441) (441)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 41,378 34,844
--------- --------
$ 100,021 $ 96,543
========= ========
</TABLE>
* CONDENSED FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------- --------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
NET SALES $88,431 $56,332 $179,047 $98,273
COST OF SALES 82,926 52,396 167,984 90,837
------- ------- -------- -------
GROSS PROFIT 5,505 3,936 11,063 7,436
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,182 2,200 6,281 4,195
------- ------- -------- -------
OPERATING INCOME 2,323 1,736 4,782 3,241
INTEREST EXPENSE, NET 357 288 752 607
------- ------- -------- -------
INCOME BEFORE INCOME TAXES 1,966 1,448 4,030 2,634
PROVISION FOR INCOME TAXES 737 548 1,511 998
------- ------- -------- -------
NET INCOME $ 1,229 $ 900 $ 2,519 $ 1,636
======= ======= ======== =======
NET INCOME PER COMMON SHARE
BASIC $ 0.18 $ 0.13 $ 0.36 $ 0.25
DILUTED $ 0.17 $ 0.13 $ 0.34 $ 0.23
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 6,951 6,669 6,935 6,667
DILUTED 7,405 7,188 7,380 7,092
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 2,519 $ 1,636
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,063 928
CHANGE IN ASSETS AND LIABILITIES:
RECEIVABLES (4,717) (10,843)
INVENTORIES 7,631 (10,381)
ACCOUNTS PAYABLE (7,276) 20,008
OTHER ASSETS AND LIABILITIES 788 (836)
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8 512
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (1,114) (1,870)
PAYMENTS FOR EQUIPMENT HELD FOR SALE AND LEASEBACK (3,015) --
DEPOSITS FOR FACILITY UNDER CONSTRUCTION IN MEXICO (1,500) --
OTHER (389) --
------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,018) (1,870)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
BORROWINGS UNDER LINES OF CREDIT, NET 3,564 2,899
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (836) (944)
PROCEEDS FROM ISSUANCE OF STOCK 4,015 76
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,743 2,031
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 733 673
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,298 2,977
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,031 $ 3,650
======= ========
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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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, 1997.
NOTE 2 - INVENTORIES
The components of inventories were as follows (in thousands):
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
----------- ---------
<S> <C> <C>
Raw materials and purchased components $19,399 $26,205
Work-in-process 2,357 2,874
Finished goods 513 821
------- -------
$22,269 $29,900
======= =======
</TABLE>
NOTE 3 - NET INCOME PER SHARE
During the quarter, the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share", which establishes
new standards for reporting earnings per share ("EPS"). The EPS computations for
the prior periods have been restated to conform with the provisions of SFAS No.
128.
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.
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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 and six months ended January 31, 1998.
RESULTS OF OPERATIONS
Sales for the second quarter of fiscal year 1998 increased by
approximately 57% to $88.4 million from $56.3 million for the corresponding
quarter of the prior year. Sales for the first six months of fiscal 1998 were
$179.0 million, an 82% increase over sales of $98.3 million for same period of
the prior year.
The Company's manufacturing relationship with Micron Electronics, Inc.
("Micron"), the Company's largest customer in fiscal 1997 and in the first six
months of fiscal 1998, has been discontinued. Sales to Micron were $33.3 million
and $71.4 million for the quarter and six months ended January 31, 1998,
respectively, as compared to $16.7 million for each of the corresponding periods
of the prior fiscal year (the Company initiated business with Micron in the
second quarter of fiscal 1997). The loss of this business may have a material
adverse effect on the Company's business and results of operations in future
fiscal quarters. Although the Company will continue its effort to secure new
customers and enhance existing customer relationships, there can be no
assurances that the Company will be able to offset the adverse effects of the
loss of this business.
Sales to customers other than Micron were $55.1 million for the second
quarter of fiscal 1998, up 39% from $39.6 million for the same quarter of the
prior year, and $107.6 million for the first six months of fiscal 1998, up 32%
from $81.6 million for the corresponding period of the prior fiscal year. These
increases were accomplished with sales to new customers and increased sales to
certain existing customers. During the quarter, the Company announced that it
had initiated business in fiscal 1998 with two new customers, Williams
Electronics (a subsidiary of WMS Industries, Inc.) and Premisys Communications,
Inc. Additionally, the Company expects to initiate shipments in the fourth
quarter of fiscal 1998 under a new turnkey contract with one of its current
customers, Diamond Multimedia Systems, Inc. ("Diamond"). Currently the Company
is selling to Diamond on a consignment basis only and expects to continue
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this business until work begins under the new turnkey contract. This paragraph
contains forward-looking statements, including, without limitation, the
statements in the preceding sentences with respect to the turnkey contract with
Diamond, and readers are urged to consider the "Factors that May Affect the
Company" in this regard.
Gross profit for the second quarter of fiscal 1998 was $5.5 million or
6.2% of sales, as compared to $3.9 million or 7.0% of sales for the second
quarter of fiscal 1997. Gross profit for the first six months of fiscal 1998 was
$11.1 million or 6.2% of sales, as compared to $7.4 million or 7.6% for the same
period of the prior fiscal year. The decrease in gross profit as a percentage of
sales from the corresponding period of the prior fiscal year principally
resulted from a change in product mix, with the costs of materials as a
percentage of total costs of goods sold increasing in the current fiscal year
periods when compared to the corresponding periods of the prior fiscal year.
Since the markup on the costs of materials is typically less than the markup on
the costs of conversion (including labor and overhead), gross profit as a
percentage of sales usually declines as the materials portion of total costs
increases.
Selling, general and administrative expenses were $3.2 million or 3.6%
of sales in the second quarter of fiscal 1998, as compared to $2.2 million or
3.9% of sales in the second quarter of fiscal 1997. Such expenses were $6.3
million or 3.5% of sales in the first six months of fiscal 1998, as compared to
$4.2 million or 4.3% of sales for the corresponding period of the prior year.
The increases in absolute dollars between the corresponding periods of the
current and prior fiscal years were primarily due to increases in marketing,
customer service and management expenses incurred in an effort to improve
profitability in future periods and increases in commissions associated with
higher sales levels.
Net interest expense for the second quarter and first six months of
fiscal year 1998 was $357,000 and $752,000, respectively, as compared to
$288,000 and $607,000 for the corresponding periods of fiscal 1997. Interest
expense was higher in the current fiscal year periods due to increased
borrowings required to support the working capital growth associated with the
higher sales levels.
The Company's effective income tax rate was approximately 38%
throughout the first six months of both fiscal year 1998 and 1997. The effective
income tax rate approximates the blended U.S. and state statutory rates.
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, the rescheduling of existing and forecast orders for
turnkey products, fluctuations in demand for customer products, the mix of
products in various stages of their life cycles, 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
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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 implementation of new product lines, acquisition of new manufacturing
equipment and other capital expenditures 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
pricing pressure on the Company's value-added manufacturing services, and thus
may lower the Company's 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 six months ended January 31, 1998 and the fiscal
years ended July 31, 1997, 1996 and 1995, the Company's four largest customers
in such periods accounted for approximately 68%, 61%, 63% and 69%, respectively,
of consolidated net sales. Sales to Micron accounted for approximately 40% of
the Company's revenues for the six months ended January 31, 1998 and
approximately 21% of the Company's revenues for the fiscal year ended July 31,
1997. As disclosed previously, the relationship with Micron has been
discontinued and the Company's business and results of operations may be
materially adversely affected by such loss in future quarters. Any other
material delay, cancellation or reduction of orders from other customers,
including, without limitation, orders from Diamond, could also 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 remain
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
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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.
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, if any, and the growth, if
any, of the Company's operations. In addition, the Company may experience
certain inefficiencies as it manages geographically dispersed operations,
including but not limited to the Company's announced manufacturing facility in
Hermosillo, Mexico (which is currently under development) and its international
purchasing office in Taiwan. 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. 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 cost and increasing risks and penalties
associated with a violation. 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 Part II. Item 1, "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 for whom
competition is intense. Failure to do so could have a material adverse effect on
the Company's operations.
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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 January 31, 1998, total
borrowings under this facility were $16.4 million under the revolving credit
line and $4.2 million under the term loan.
The Company leases its primary manufacturing facilities and certain
equipment using both capital and operating lease arrangements. At January 31,
1998, future minimum lease payments under the noncancelable portion of lease
agreements were $11.4 million, of which $4.8 million is scheduled for payment in
the next twelve months.
In January 1998, the Company completed a private placement of an
aggregate of 500,000 shares of its Common Stock, raising approximately $3.7
million. The purpose of the offering was principally to provide the Company
additional financial flexibility to take advantage of business opportunities as
they arise.
The Company's cash and cash equivalents increased from $4.3 million to
$5.0 million during the six months ended January 31, 1998. Cash from operations
provided by net profits before depreciation and amortization of $3.6 million, a
decrease in inventories of $7.6 million and a $788,000 change in other assets
and liabilities was substantially offset by a $4.7 million increase in accounts
receivable and a $7.3 million decrease in accounts payable. The Company believes
that the increase in accounts receivable was primarily due to, and commensurate
with, the increase in revenues experienced by the Company during this period;
furthermore, the Company believes that the decreases in inventories and accounts
payable were primarily the result of improved inventory management and the
termination of the Micron program.
The Company used $6.0 million in investing activities during the six
months ended January 31, 1998, including $1.9 million in deposits and other
payments associated with the construction and start-up of the Company's new
facility in Hermosillo, Mexico. The Company expended $3.0 million to acquire
manufacturing equipment; although, the Company currently contemplates that it
will enter into a sale-leaseback transaction with respect to this manufacturing
equipment, there can be no assurance that such transaction will be consummated.
The Company also expended $1.1 million for other equipment and facility
leasehold improvements.
Cash flows from financing activities in the six months ended January
31, 1998 totaled $6.7 million, net of $836,000 used to repay long-term debt
obligations. Cash provided included the proceeds from the private equity
placement noted above, $292,000 from the issuance of approximately 54,000 shares
of the Company's Common Stock under the Company's stock option and employee
stock purchase plans and $3.6 million from increased borrowings under the
Company's revolving credit line.
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 has
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committed to purchase a 4.4 acre tract of land in Hermosillo, Mexico and a
110,000 square foot manufacturing plant under construction at this site. The
Company currently estimates that the cost of development of the project will be
approximately $4.7 million (although there can be no assurance as to what the
actual cost will in fact be) and plans to finance this project 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.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
None
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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.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 23, 1998, the Company issued an aggregate of 500,000 shares
of its Common Stock to M. Kenneth Oshman and Richard M. Moley for total cash
consideration of approximately $3.7 million. The proceeds will provide
additional flexibility to enable the Company to take advantage of business
opportunities as they arise. This private placement of shares is exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof. The Company granted these investors certain registration rights
that may not be exercised prior to January 23, 1999.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on November 13,
1997. Proxies for the meeting were solicited pursuant to Regulation 14A. At the
meeting, management's nominees for directors were elected. A summary of the
nominees and voting results are as follows:
13
<PAGE> 14
<TABLE>
<CAPTION>
NOMINEE SHARES
------------------ -------------------------------------------
ABSTENTIONS OR
VOTING FOR BROKER NON-VOTES
------------ ----------------
<S> <C> <C>
Frederick W. Gibbs 5,737,173 4,720
Ira Coron 5,737,173 4,720
</TABLE>
Additionally, the selection of Price Waterhouse LLP as independent
public accountants for the year ending July 31, 1998 was ratified with 5,724,393
shares voting in favor, 13,100 shares voting against and 4,400 shares
abstaining.
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.
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on January 30, 1998,
reporting the consummation of a placement to private investors
of an aggregate of 500,000 shares of the Company's Common
Stock. The purpose of the offering was principally to provide
additional financial flexibility to take advantage of business
opportunities as they arise.
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: March 10, 1998 /s/ Matthew G. Landa
--------------------
Matthew G. Landa
President and Chief Executive
Officer
Date: March 10, 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 JANUARY 31, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JANUARY 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 5,031
<SECURITIES> 0
<RECEIVABLES> 46,436
<ALLOWANCES> 0
<INVENTORY> 22,269
<CURRENT-ASSETS> 78,479
<PP&E> 11,575
<DEPRECIATION> 0
<TOTAL-ASSETS> 100,021
<CURRENT-LIABILITIES> 54,281
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 41,303
<TOTAL-LIABILITY-AND-EQUITY> 100,021
<SALES> 179,047
<TOTAL-REVENUES> 179,047
<CGS> 167,984
<TOTAL-COSTS> 167,984
<OTHER-EXPENSES> 6,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 752
<INCOME-PRETAX> 4,030
<INCOME-TAX> 1,511
<INCOME-CONTINUING> 2,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,519
<EPS-PRIMARY> .36
<EPS-DILUTED> .34
<FN>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
