<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 APRIL 30, 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 - 7,462,316 SHARES
OUTSTANDING AS OF MAY 30, 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 7-11
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
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, 1998 JULY 31, 1997
UNAUDITED (*)
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 5,819 $ 4,298
ACCOUNTS RECEIVABLE, NET 39,506 32,533
ACCOUNTS RECEIVABLE FROM AFFILIATE 8,055 9,186
INVENTORIES 25,452 29,900
OTHER CURRENT ASSETS 2,548 1,196
--------- --------
TOTAL CURRENT ASSETS 81,380 77,113
PLANT AND EQUIPMENT, NET 11,935 11,498
INVESTMENT IN PREFERRED STOCK OF AFFILIATE 5,884 5,884
OTHER ASSETS 5,982 2,048
--------- --------
$ 105,181 $ 96,543
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
NOTES PAYABLE UNDER LINES OF CREDIT $ 17,070 $ 12,792
CURRENT PORTION OF LONG-TERM DEBT 1,728 1,728
ACCOUNTS PAYABLE 32,729 35,936
OTHER CURRENT LIABILITIES 7,430 6,022
--------- --------
TOTAL CURRENT LIABILITIES 58,957 56,478
LONG-TERM DEBT 3,122 4,390
OTHER LIABILITIES 797 831
--------- --------
TOTAL LIABILITIES 62,876 61,699
STOCKHOLDERS' EQUITY
COMMON STOCK 75 69
ADDITIONAL PAID-IN CAPITAL 35,950 31,594
RETAINED EARNINGS 6,721 3,622
TREASURY STOCK (441) (441)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 42,305 34,844
--------- --------
$ 105,181 $ 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 Nine Months Ended
April 30, April 30,
---------------------- ----------------------
1998 1997 1998 1997
------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $58,565 $54,369 $237,612 $152,642
Cost of sales 54,596 50,690 222,580 141,527
------- -------- -------- --------
Gross profit 3,969 3,679 15,032 11,115
Selling, general and administrative
expenses 2,731 2,410 9,012 6,605
-------- -------- -------- --------
Operating income 1,238 1,269 6,020 4,510
Interest expense, net 311 384 1,063 991
-------- -------- -------- --------
Income before income taxes 927 885 4,957 3,519
Provision for income taxes 347 335 1,858 1,333
-------- -------- -------- --------
Net income $ 580 $ 550 $ 3,099 $ 2,186
======== ======== ======== ========
Net income per common share
Basic $ 0.08 $ 0.08 $ 0.44 $ 0.33
Diluted $ 0.08 $ 0.08 $ 0.41 $ 0.31
Weighted average shares outstanding
Basic 7,440 6,803 7,104 6,712
Diluted 7,724 7,272 7,495 7,152
</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>
NINE MONTHS ENDED APRIL 30,
-------------------------------
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 3,099 $ 2,186
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,629 1,325
CHANGE IN ASSETS AND LIABILITIES:
RECEIVABLES (5,842) (14,179)
INVENTORIES 4,448 (5,190)
ACCOUNTS PAYABLE (3,207) 13,473
OTHER ASSETS AND LIABILITIES 842 863
------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 969 (1,522)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (2,027) (3,003)
PAYMENTS FOR EQUIPMENT HELD FOR SALE AND LEASEBACK (1,099) 0
DEPOSITS FOR FACILITY UNDER CONSTRUCTION IN MEXICO (2,135) 0
EXPENDITURES FOR START-UP OF MEXICO OPERATIONS (1,559) 0
------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,820) (3,003)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
BORROWINGS UNDER LINES OF CREDIT, NET 4,278 2,259
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (1,268) (1,385)
PROCEEDS FROM ISSUANCE OF STOCK 4,362 1,384
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,372 2,258
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,521 (2,267)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,298 2,977
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,819 $ 710
======= ========
</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>
April 30, July 31,
1998 1997
------- -------
<S> <C> <C>
Raw materials and purchased components $23,012 $26,205
Work-in-process 1,613 2,874
Finished goods 827 821
------- -------
$25,452 $29,900
======= =======
</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.
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. 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, 1997 July 31,1996 July 31, 1995
------------------------------ ---------------------------- ----------------------------
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 $1,606 6,757 $ 0.24 $105 6,235 $ 0.02 $ 40 6,087 $ 0.01
EFFECT OF DILUTIVE SECURITIES
Stock Options 410 214 166
----- ----- -----
DILUTED EPS
Earnings available to
Common shareholders
------ ------- ---- ------- ---- -------
Plus assumed conversions $1,606 7,167 $ 0.22 $105 6,449 $ 0.02 $ 40 6,253 $ 0.01
====== ===== ======= ==== ===== ======= ==== ===== =======
</TABLE>
6
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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 nine months ended April 30, 1998.
RESULTS OF OPERATIONS
Sales for the third quarter of fiscal year 1998 increased by
approximately 8% to $58.6 million from $54.4 million for the corresponding
quarter of the prior year. Sales for the first nine months of fiscal 1998 were
$237.6 million, a 56% increase over sales of $152.6 million for the same period
of the prior year. As previously announced, the Company's manufacturing
relationship with Micron Electronics, Inc. ("Micron") was discontinued at the
end of the second quarter of fiscal 1998. Excluding sales to Micron, sales for
the first nine months of fiscal 1998 were $166.2 million.
When compared to the same periods of the prior fiscal year, sales to
customers other than Micron increased by 38% (to $58.6 million from $42.5
million) and 34% (to $166.2 million from $124.1 million) in the third quarter
and first nine months of fiscal 1998, respectively. These increases were
accomplished with sales to new customers and increased sales to certain existing
customers. The Company initiated business in fiscal 1998 with Midway Games, Inc.
(formerly known as Williams Electronics) and Premisys Communications, Inc. and
expects to begin shipments early in fiscal 1999 under a recently awarded full
turnkey contract with Next Level Communications. The Company began shipments
late in the third quarter of fiscal 1998 under a new turnkey contract with
Diamond Multimedia Systems, Inc., an existing customer previously served only on
a consignment basis. 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 third quarter of fiscal 1998 was $4.0 million or
6.8% of sales, as compared to $3.7 million or 6.8% of sales for the third
quarter of fiscal 1997. Gross profit for the first nine months of fiscal 1998
was $15.0 million or 6.3% of sales, as compared to $11.1 million or 7.3% for the
same period of the prior fiscal year. Gross profit as a percentage of sales
decreased in the first nine months of fiscal 1998 when compared to the
corresponding period of the prior fiscal year principally due to 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 period when compared to the
corresponding period of the prior fiscal year. Since the markup on the costs of
materials is typically less than the markup on the costs of conversion
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(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 $2.7 million or 4.7%
of sales in the third quarter of fiscal 1998, as compared to $2.4 million or
4.4% of sales in the third quarter of fiscal 1997. Such expenses were $9.0
million or 3.8% of sales in the first nine months of fiscal 1998, as compared to
$6.6 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 as well as increases in commissions associated
with higher sales levels.
Net interest expense for the third quarter and first nine months of
fiscal year 1998 was $311,000 and $1,063,000 respectively, as compared to
$384,000 and $991,000 for the corresponding periods of fiscal 1997. Interest
expense varied from period to period primarily due to changes in borrowings
needed to support working capital requirements.
The Company's effective income tax rate was approximately 38%
throughout the first nine 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 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
8
<PAGE> 9
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 nine months ended April 30, 1998 and the fiscal
years ended July 31, 1997, 1996 and 1995, the Company's four largest customers
in such periods accounted for approximately 61%, 61%, 63% and 69%, respectively,
of consolidated net sales. Sales to Micron accounted for approximately 30% of
the Company's revenues for the nine months ended April 30, 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 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 may 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.
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 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.
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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.
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 April 30, 1998, total borrowings
under this facility were $17.1 million under the revolving credit line and $3.9
million under the term loan.
The Company leases its primary manufacturing facilities and certain
equipment using both capital and operating lease arrangements. At April 30,
1998, future minimum lease payments under the noncancelable
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portion of lease agreements were $13.3 million, of which $5.2 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
$5.8 million during the nine months ended April 30, 1998. Cash from operations
provided by net profits before depreciation and amortization of $4.7 million, a
decrease in inventories of $4.4 million and a $842,000 change in other assets
and liabilities was partially offset by a $5.8 million increase in accounts
receivable and a $3.2 million decrease in accounts payable.
The Company used $6.8 million in investing activities during the nine
months ended April 30, 1998, including $3.7 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 $1.1 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 $2.0 million for other equipment acquisitions and
facility leasehold improvements.
Cash flows from financing activities in the nine months ended April 30,
1998 totaled $7.4 million, net of $1.3 used to repay long-term debt obligations.
Cash provided included the proceeds from the private equity placement noted
above, $743,000 from the issuance of approximately 105,000 shares of the
Company's Common Stock under the Company's stock option and employee stock
purchase plans and $4.3 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 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.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee has issued Statement of
Position ("SOP") 98-5, Reporting on the Costs of 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. The Company is currently reporting as an asset
start-up costs incurred to begin manufacturing operations in Hermosillo, Mexico
and expects that approximately $1.0 million of such costs will be incurred in
fiscal 1998. The Company plans to amortize 20%, or approximately $200,000, in
fiscal 1999 and expense the balance of approximately $800,000 in fiscal 2000
upon adoption of SOP 98-5.
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Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
None
12
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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 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 April 30, 1998.
13
<PAGE> 14
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: June 12, 1998 /s/ Matthew G. Landa
-----------------------------------
Matthew G. Landa
President and Chief Executive
Officer
Date: June 12, 1998 /s/ Andrew J. Moley
-----------------------------------
Andrew J. Moley
Executive Vice President and
Chief Financial Officer
14
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT APRIL 30, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
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