<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
October 22, 1999
- --------------------------------------------------------------------------------
Date of report (Date of earliest event reported)
ACT Manufacturing, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Massachusetts 0-25560 04-2777507
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation or Organization) File Number) Identification No.)
2 Cabot Road
Hudson, Massachusetts 01749
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(978) 567-4000
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Exhibit Index Located on Page 4
<PAGE>
- 2 -
Item 5. Other Events.
This Current Report on Form 8-K of ACT Manufacturing, Inc. (the "Company")
is being filed to disclose the consolidated balance sheets of the Company as of
December 31, 1998 and 1997 and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998, 1997 and 1996.
These consolidated financial statements give retroactive effect to the merger of
the Company and CMC Industries, Inc. which has been accounted for as a pooling
of interests.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following financial statements and exhibits are filed as part of this
report, where indicated:
(a) Financial statements of the business acquired. None.
(b) Pro forma financial information. None.
(c) Exhibits.
--------
Exhibit No. Description
----------- -----------
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule for December 1996
27.2 Financial Data Schedule for December 1997
27.3 Financial Data Schedule for December 1998
99.1 The following audited financial statements of ACT
Manufacturing, Inc.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31,
1998 and 1997
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income
(Loss) for the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
99.2 The following audited financial statements of CMC
Industries, Inc. for the five-month period ended
December 31, 1999
Report of Independent Accountants
Consolidated Statement of Operations
Consolidated Statement of Changes in Stockholders'
Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
- 3 -
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 hereunto duly authorized.
ACT Manufacturing, Inc.
Date: October 22, 1999 By: /s/ Jeffrey B. Lavin
--------------------
Jeffrey B. Lavin
Vice President of Finance,
Chief Financial Officer, Treasurer
and Clerk
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule for December 1996
27.2 Financial Data Schedule for December 1997
27.3 Financial Data Schedule for December 1998
99.1 The following audited financial statements of ACT
Manufacturing, Inc.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998
and 1997
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income
(Loss) for the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
99.2 The following audited financial statements of CMC
Industries, Inc. for the five-month period ended
December 31, 1999
Report of Independent Accountants
Consolidated Statement of Operations
Consolidated Statement of Changes in Stockholders'
Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
ACT Manufacturing, Inc. and subsidiaries on Form S-3 filed on October 22, 1999
and Registration Statements No. 33-91964, No. 333-36751 and No. 333-84231 on
Form S-8 of our report dated October 15, 1999 appearing in this Current Report
on Form 8-K dated October 22, 1999.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
October 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,031
<SECURITIES> 0
<RECEIVABLES> 58,706
<ALLOWANCES> 751
<INVENTORY> 75,212
<CURRENT-ASSETS> 152,232
<PP&E> 25,184
<DEPRECIATION> 9,686
<TOTAL-ASSETS> 175,029
<CURRENT-LIABILITIES> 60,227
<BONDS> 35,960
0
0
<COMMON> 122
<OTHER-SE> 78,112
<TOTAL-LIABILITY-AND-EQUITY> 175,029
<SALES> 390,611
<TOTAL-REVENUES> 390,611
<CGS> 351,485
<TOTAL-COSTS> 370,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,936
<INCOME-PRETAX> 17,130
<INCOME-TAX> 6,868
<INCOME-CONTINUING> 10,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,262
<EPS-BASIC> .86
<EPS-DILUTED> .84
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,463
<SECURITIES> 0
<RECEIVABLES> 74,895
<ALLOWANCES> 2,105
<INVENTORY> 69,851
<CURRENT-ASSETS> 174,202
<PP&E> 32,176
<DEPRECIATION> 12,672
<TOTAL-ASSETS> 208,573
<CURRENT-LIABILITIES> 118,308
<BONDS> 5,269
0
0
<COMMON> 125
<OTHER-SE> 83,978
<TOTAL-LIABILITY-AND-EQUITY> 208,573
<SALES> 479,139
<TOTAL-REVENUES> 479,139
<CGS> 454,203
<TOTAL-COSTS> 478,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,056
<INCOME-PRETAX> (3,636)
<INCOME-TAX> (1,235)
<INCOME-CONTINUING> (2,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,401)
<EPS-BASIC> (.19)
<EPS-DILUTED> (.19)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,670
<SECURITIES> 0
<RECEIVABLES> 103,061
<ALLOWANCES> 1,233
<INVENTORY> 65,612
<CURRENT-ASSETS> 188,872
<PP&E> 48,494
<DEPRECIATION> 16,215
<TOTAL-ASSETS> 238,294
<CURRENT-LIABILITIES> 102,813
<BONDS> 42,848
0
0
<COMMON> 128
<OTHER-SE> 91,332
<TOTAL-LIABILITY-AND-EQUITY> 238,294
<SALES> 592,484
<TOTAL-REVENUES> 592,484
<CGS> 556,339
<TOTAL-COSTS> 583,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,625
<INCOME-PRETAX> 5,137
<INCOME-TAX> 2,044
<INCOME-CONTINUING> 3,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,093
<EPS-BASIC> .24
<EPS-DILUTED> .24
</TABLE>
<PAGE>
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
ACT Manufacturing, Inc.:
We have audited the consolidated balance sheets of ACT Manufacturing, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, comprehensive income (loss), stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of ACT Manufacturing,
Inc. and CMC Industries, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. We
did not audit the balance sheet of CMC Industries, Inc. as of July 31, 1998, or
the related statements of income, stockholders' equity, and cash flows of CMC
Industries, Inc. for each of the three years in the period ended July 31, 1998,
which statements reflect total assets of $93,405,000 as of July 31, 1998, and
total revenues of $301,955,000, $214,485,000 and $164,711,000 for the years
ended July 31, 1998, 1997 and 1996, respectively. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for CMC Industries, Inc. for 1998,
1997 and 1996, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ACT Manufacturing, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
October 15, 1999
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 10,670 $ 9,463
Accounts receivable trade (less allowance
for doubtful accounts of $1,233 in 1998
and $2,105 in 1997)...................... 101,828 74,895
Accounts and notes receivable from related
party.................................... 5,678 9,186
Inventory................................. 65,612 69,851
Prepaid expenses and other assets......... 4,204 2,390
Deferred tax asset........................ 880 --
Income taxes refundable................... -- 8,417
---------------- ----------------
Total current assets.................... 188,872 174,202
Property and equipment--net................. 32,279 19,504
Notes receivable related party.............. 1,400 --
Goodwill--net............................... 6,224 6,900
Investment in related party................. 5,884 5,884
Other assets--net........................... 3,635 2,083
---------------- ----------------
Total................................... $ 238,294 $ 208,573
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable bank......................... $ 18,111 $ 52,998
Current portion of long-term debt......... 1,300 1,300
Current portion of other long-term
liabilities.............................. 1,236 870
Accounts payable.......................... 71,956 54,493
Accrued compensation and related taxes.... 3,404 3,941
Income tax payable........................ 505 --
Deferred taxes............................ -- 164
Accrued expenses and other................ 6,301 4,542
---------------- ----------------
Total current liabilities............... 102,813 118,308
Long-term debt--Less current portion........ 41,756 3,558
Deferred taxes.............................. 1,173 893
Other long-term liabilities................. 1,092 1,711
Commitments and contingencies (Notes 12 and
15)........................................ -- --
Stockholders' equity:
Preferred stock--$.01 par value;
authorized, 5,000,000 shares; issued and
outstanding, none........................ -- --
Common stock--$.01 par value; authorized,
50,000,000 shares; issued and
outstanding, 12,835,908 shares in 1998
and 12,509,052 shares in 1997............ 128 125
Additional paid-in capital................ 74,960 70,515
Accumulated other comprehensive income
(loss)................................... (180) 4
Retained earnings......................... 16,552 13,459
---------------- ----------------
Total stockholders' equity.............. 91,460 84,103
---------------- ----------------
Total................................... $ 238,294 $ 208,573
================ ================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Net sales:
Unrelated parties......... $566,048 $447,827 $352,586
Related parties........... 26,436 31,312 38,025
-------- -------- --------
Total net sales......... 592,484 479,139 390,611
-------- -------- --------
Cost of goods sold:
Unrelated parties......... 532,018 425,396 316,502
Related parties........... 24,321 28,807 34,983
-------- -------- --------
Total cost of goods
sold................... 556,339 454,203 351,485
-------- -------- --------
Gross profit................ 36,145 24,936 39,126
Selling, general and
administrative expenses.... 27,383 24,516 18,268
Restructuring costs......... -- -- 792
-------- -------- --------
Operating income............ 8,762 420 20,066
Other income (expense):
Interest expense, net..... (3,718) (4,009) (3,068)
Other, net................ 93 (47) 132
-------- -------- --------
Total................... (3,625) (4,056) (2,936)
-------- -------- --------
Income (loss) before
provision for income
taxes...................... 5,137 (3,636) 17,130
Provision (benefit) for
income taxes............... 2,044 (1,235) 6,868
-------- -------- --------
Net income (loss)........... $ 3,093 $ (2,401) $ 10,262
======== ======== ========
Basic net income (loss) per
common share............... $ 0.24 $ (0.19) $ 0.86
======== ======== ========
Diluted net income (loss)
per common share........... $ 0.24 $ (0.19) $ 0.84
======== ======== ========
Weighted average shares
outstanding--basic......... 12,665 12,330 11,880
Weighted average shares
outstanding--diluted....... 12,976 12,330 12,237
</TABLE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
(in thousands)
<S> <C> <C> <C>
Net income (loss)..................................... $3,093 $(2,401) $10,262
Other comprehensive income (loss):
Foreign currency translation adjustment............. (184) 4 --
Minimum pension liability........................... -- 996 (63)
------ ------- -------
Comprehensive income (loss)........................... $2,909 $(1,401) $10,199
====== ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
$.01
Par Accumulated
Value Additional Other Total
Common Paid-in Comprehensive Retained Stockholders'
Stock Capital Income (Loss) Earnings Equity
------ ---------- ------------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... $117 $59,244 $(933) $ 5,598 $64,026
Net income.............. -- -- -- 10,262 10,262
Minimum pension
liability.............. -- -- (63) -- (63)
Issuance of warrants.... -- 44 -- -- 44
Net proceeds from sale
of stock............... 4 3,198 -- -- 3,202
Income tax benefit from
employees'
exercise of stock
options................ -- 763 -- -- 763
---- ------- ----- ------- -------
Balance, December 31,
1996................... 121 63,249 (996) 15,860 78,234
Net loss................ -- -- -- (2,401) (2,401)
Minimum pension
liability.............. -- -- 996 -- 996
Exercise of warrants.... -- 1,267 -- -- 1,267
Net proceeds from sale
of stock............... 2 376 -- -- 378
Issuance of stock for
acquisition............ 2 5,248 -- -- 5,250
Cumulative foreign
currency translation
adjustments............ -- -- 4 -- 4
Income tax benefit from
employees'
exercise of stock
options................ -- 375 -- -- 375
---- ------- ----- ------- -------
Balance, December 31,
1997................... 125 70,515 4 13,459 84,103
Net income.............. -- -- -- 3,093 3,093
Net proceeds from sale
of stock............... 3 4,567 -- -- 4,570
Cumulative foreign
currency translation
adjustments............ -- -- (184) -- (184)
Cancellation of common
stock from
acquisition escrow..... -- (122) -- -- (122)
---- ------- ----- ------- -------
Balance, December 31,
1998................... $128 $74,960 $(180) $16,552 $91,460
==== ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 3,093 $ (2,401) $ 10,262
Adjustment to reconcile net income (loss) to
net cash provided by
(used for) operating activities:
Depreciation and amortization................ 4,884 3,587 2,864
Deferred income taxes........................ (764) 1,387 (1,700)
Provision for doubtful accounts.............. 1,945 1,805 20
Loss on disposal of fixed assets............. 132 -- 10
Increase (decrease) in cash from:
Accounts receivable--trade................. (26,771) (16,932) (22,823)
Inventory.................................. 4,239 7,684 (18,819)
Prepaid expenses and other assets.......... (2,632) (2,415) 1,124
Accounts payable........................... 17,463 10,743 7,912
Accrued compensation and related taxes..... (194) 130 693
Income tax refundable (payable)............ 8,922 (9,977) 2,049
Accrued expenses and other................. 1,372 980 1,554
-------- -------- --------
Net cash provided by (used for) operating
activities.............................. 11,689 (5,409) (16,854)
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment.......... (17,450) (4,820) (8,695)
(Increase) decrease in other noncurrent
assets........................................ (632) (153) 98
Proceeds from the sale of property and
equipment..................................... 111 -- 126
Acquisitions, net of cash acquired............. -- (2,388) --
-------- -------- --------
Net cash used for investing activities... (17,971) (7,361) (8,471)
-------- -------- --------
Cash flows from financing activities:
Borrowings under line-of-credit agreements,
net........................................... 4,612 15,712 22,977
Proceeds from long-term debt................... -- -- 1,596
Principal payments on long-term debt........... (1,300) (1,300) (1,347)
Repayments of other long-term liabilities...... (692) (2,337) (302)
Receipt of deferred revenue.................... 483 -- --
Net proceeds from sale of stock................ 4,570 2,085 3,246
-------- -------- --------
Net cash provided by financing
activities.............................. 7,673 14,160 26,170
-------- -------- --------
Effect of exchange rate changes on cash and
equivalents..................................... (184) 42 --
-------- -------- --------
Net increase in cash and cash equivalents........ 1,207 1,432 845
Cash and cash equivalents, beginning of year..... 9,463 8,031 7,186
-------- -------- --------
Cash and cash equivalents, end of year........... $ 10,670 $ 9,463 $ 8,031
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business--ACT Manufacturing, Inc. and Subsidiaries (the "Company"
or "ACT") provide value-added electronics manufacturing services for original
equipment manufacturers in the networking and telecommunications, computer,
industrial and medical equipment markets. The Company provides original
equipment manufacturers with complex printed circuit board assembly primarily
utilizing advanced surface mount technology, electro-mechanical subassembly,
total system assembly and integration, and mechanical and molded cable and
harness assembly.
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of ACT Manufacturing, Inc. and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. On July 29, 1999 the Company completed a
merger with CMC Industries, Inc. ("CMC") in which CMC became a wholly owned
subsidiary of ACT Manufacturing, Inc. The merger has been accounted for as a
pooling of interests, and accordingly, the Company's consolidated financial
statements for prior periods have been restated to include the operating
results, financial position and cash flows of CMC at the beginning of the
earliest period presented. In connection with the pooling, ACT issued 0.5 of a
share of ACT common stock for each outstanding share of CMC common stock. A
total of 3.9 million shares of ACT common stock were issued in connection with
the merger, and approximately 0.9 million shares of ACT common stock were
reserved for the conversion of CMC's outstanding stock options. Approximately
$5,601,000 in merger-related costs were charged to operations in the quarter
ended September 30, 1999.
ACT prepares its financial statements on the basis of a fiscal year ending
December 31, and CMC prepared its financial statements on the basis of a fiscal
year ending July 31. The consolidated statements of operations and cash flows
for the years ended December 31, 1998, 1997 and 1996 (herein referred to as
"Fiscal" 1998, 1997 and 1996) reflect the results of operations and cash flows
for ACT for the years then ended combined with CMC for the years ended July 31,
1998, 1997 and 1996, respectively. The consolidated balance sheets as of
December 31, 1998 and 1997 reflect the financial position of ACT as of those
dates combined with the financial position of CMC as of July 31, 1998 and 1997,
respectively. As a result of ACT and CMC having different fiscal years, CMC's
results of operations for the five-month period from August 1, 1998 through
December 31, 1998 are reported below. The financial statements have been
adjusted to reflect the conforming of CMC's accounting policy with that of
ACT's by expensing previously capitalized preoperating and start-up costs
associated with CMC's Mexican manufacturing facility. This adjustment also
gives effect to the tax deductibility of expenses.
As a result of ACT and CMC having different fiscal years, CMC's condensed
consolidated results of operations for the five-month period from August 1,
1998 through December 31, 1998 are reported separately, as follows:
<TABLE>
<S> <C>
Condensed Consolidated Statement of Operations Data (in
thousands):
Net sales.................................................... $122,423
Cost of sales................................................ 119,733
--------
Gross profit................................................. 2,690
Selling, general and administrative expenses................. 5,409
--------
Loss from operations......................................... (2,719)
Interest expense............................................. 691
--------
Loss before taxes............................................ (3,410)
Income tax benefit........................................... (1,279)
--------
Net loss..................................................... $ (2,131)
========
</TABLE>
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
This condensed consolidated statement of operations data of CMC for the period
August 1, 1998 through December 31, 1998 does not reflect any adjustment to
conform CMC's accounting policy with that of ACT's of expensing previously
capitalized preoperating and start-up costs associated with CMC's Mexican
manufacturing facility. The effect of such adjustment would be to reduce cost
of goods sold by $100,000 and reduce net loss by $60,000.
Translation of Foreign Currency--The Company translates financial statements
denominated in foreign currency by translating balance sheet accounts at the
end of period exchange rate and statement of operations accounts at the average
exchange rate for the period. Where the local currency is the functional
currency, translation gains and losses are recorded as a separate component of
stockholders' equity in accumulated other comprehensive income (loss) and
transaction gains and losses are reflected in other income (loss) in
determining net income. Where the U. S. dollar is the functional currency, all
foreign currency gains and losses are included in determining net income.
Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates. Estimates include such items
as reserves for accounts receivable and inventory, useful lives of other
assets, goodwill, property and equipment, and accrued liabilities. Actual
results could differ from those estimates.
Fair Value of Financial Instruments--Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain financial
instruments. The carrying amounts of cash, cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value
because of their short-term nature. The Company's bank debt, because it carries
a variable interest rate, is stated at its approximate fair market value.
Derivatives--The Company has entered into an interest rate swap that
qualifies as a matched swap that is linked by designation with a balance sheet
liability and has opposite interest rate characteristics of such balance sheet
item. Matched interest rate swaps qualify for settlement accounting. Under
settlement accounting, periodic net cash settlements under the swap agreement
are recognized in income on an accrual basis. These settlements are offset
against interest expense in the consolidated statements of operations.
Revenue Recognition--Revenue is recognized upon shipment of the product.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.
Inventory--Inventory is stated at the lower of cost or market. Cost has been
determined using the first-in, first-out ("FIFO") method for approximately 69%
and 67% of the inventories as of the end of Fiscal 1998 and 1997, respectively.
Cost has been determined using the last-in, first-out ("LIFO") method for
approximately 31% and 33% of the inventories as of the end of Fiscal 1998 and
1997, respectively.
Property and Equipment--Purchased property and equipment is recorded at
cost. Capital lease property and equipment is recorded at the lesser of cost or
the present value of the minimum lease payments required. Depreciation and
amortization is provided using the straight-line method over the estimated
useful lives of the related assets (three to thirty years) and over the terms
of the related leases (five years).
Goodwill--Goodwill is being amortized on a straight-line basis over a period
of fifteen to twenty years.
Investment in Related Party--The carrying amount of the investment in
preferred stock of a related party is based upon the present value of expected
cash flows. See Note 11.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Assets--Other assets include cash surrender value of officer's life
insurance, prepaid pension expense and noncompete agreements. The noncompete
agreements are being amortized over three to ten years.
Warranty--The Company generally warrants that its hardware assemblies will
be free from defects in workmanship for 12 months and passes on to the customer
any warranties provided by component manufacturers and material suppliers to
the extent permitted. Warranty costs have not been material to date.
Income Taxes--The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." This Statement requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the Company's consolidated financial statements or
tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
existing assets and liabilities, using enacted tax rates in effect in the years
in which the differences are expected to reverse.
Stock Based Compensation--As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company accounts for stock option grants using
the intrinsic value method in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Net Income (Loss) Per Common Share--Basic net income per common share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net income
per common share reflects the potential dilution if common equivalent shares
outstanding (common stock options and warrants) were exercised or converted
into common stock unless the effects of such equivalent shares were
antidilutive.
A reconciliation of net income (loss) per common share and the weighted
average shares used in the earnings per share ("EPS") calculation for the
Fiscal years indicated is as follows (in thousands except per share amount):
<TABLE>
<CAPTION>
Net Income Per
(Loss) Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
1998
Basic.................................. $ 3,093 12,666 $ 0.24
=======
Effect of stock options................ 310 --
------ ------
Diluted................................ $ 3,093 12,976 $ 0.24
======= ====== ======
1997
Basic.................................. $(2,401) 12,330 $(0.19)
=======
Effect of stock options................ -- --
------ ------
Diluted................................ $(2,401) 12,330 $(0.19)
======= ====== ======
1996
Basic.................................. $10,262 11,880 $ 0.86
=======
Effect of stock options................ 357 (0.02)
------ ------
Diluted................................ $10,262 12,237 $ 0.84
======= ====== ======
</TABLE>
Options and warrants to purchase 757,296, 1,328,774 and 85,732 shares of
common stock were outstanding during Fiscal 1998, 1997 and 1996, respectively,
but were not included in the computation of diluted EPS because of either the
net loss in Fiscal 1997 or because the options' exercise prices were greater
than the average market prices of the common stock and, therefore, their effect
would be antidilutive.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Cash Flow Information--Selected cash payments and noncash
activities for the Fiscal years indicated were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Cash paid for interest........................... $ 3,887 $3,795 $3,143
Cash paid for (refunded from) income taxes....... (7,686) 7,729 6,201
Noncash investing and financing activities:
Assets acquired in exchange for common stock... -- 5,250 --
Reduction of goodwill upon cancellation of
common stock from acquisition escrow.......... 122 -- --
Receipt of stock as payment on account......... -- 441 --
</TABLE>
Impairment of long-lived assets--At each balance sheet date, the Company
assesses whether there has been an impairment in the value of long-lived assets
by determining whether projected undiscounted cash flows generated by the
applicable asset exceeds its net book value as of the assessment date. At the
end of Fiscal 1998 and 1997, subject to changes in circumstances, there were no
impairments of the Company's assets.
Comprehensive Income--The Company adopted SFAS No. 130, "Reporting
Comprehensive Income" in Fiscal 1998. SFAS No. 130 requires the reporting of
comprehensive income, which in the case of the Company, is the combination of
reported net income and the change in the cumulative translation adjustment,
which is a component of stockholders' equity.
Segments--In Fiscal 1998 the Company adopted provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
standard requires the reporting of certain information about operating segments
including the basis for the presentation and segment profit or loss. The
Company operates as a single segment within the electronics manufacturing
services industry. The disclosures relating to this segment are included in
Note 10.
Reclassifications--Certain reclassifications have been made to the 1997
consolidated financial statements to conform with 1998 presentation.
Recently Issued Financial Accounting Standard--In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," amended in June 1999 and
effective for fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the consolidated financial
statements of the Company. The Company will adopt this accounting standard on
January 1, 2001, as required.
2. Acquisitions
Effective June 9, 1997, the Company acquired substantially all of the assets
and liabilities of Electronics Systems International ("ESI") located in
Georgia. ESI is an electronics manufacturing services provider to customers
throughout the southeastern United States. Under the terms of the purchase
agreement, the Company acquired assets and liabilities of ESI in exchange for
190,546 shares of the Company's common stock plus acquisition costs. In 1998
the Company cancelled 4,446 shares previously issued and held in escrow. The
per share market value of the Company's common stock on the date of the
purchase was $27.50.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective June 10, 1997, the Company acquired substantially all of the
outstanding stock of Advanced Component Technologies Limited (formerly SignMax
Limited), a cable and harness manufacturing company based in Dublin, Ireland.
Under the terms of the purchase agreement, approximately 82% of the outstanding
common shares of Advanced Component Technologies Limited (formerly SignMax
Limited) were acquired for cash of $1,000,000 plus acquisition costs.
Effective June 27, 1997, the Company acquired all of the outstanding stock
of SignMax America, LLC, which owned the remaining 18% of Advanced Component
Technologies Limited (formerly SignMax Limited). Under the terms of the
purchase agreement, 100% of the outstanding common shares were acquired for
cash of $460,000 and the assumption of $575,000 in notes payable.
The ESI and SignMax transactions were accounted for as purchases in
accordance with APB Opinion No. 16, "Business Combinations" as follows (in
thousands):
<TABLE>
<S> <C>
Details of Acquisitions:
Cash paid, net of cash acquired.................................. $ 1,455
Acquisition expenses............................................. 939
-------
Total cash paid................................................ 2,394
Common stock issued.............................................. 5,250
-------
Total cash paid and common stock issued........................ 7,644
Liabilities assumed.............................................. 4,334
-------
Total purchase price of acquisitions........................... 11,978
Fair value of assets acquired.................................... 5,609
-------
Excess of purchase price over net assets....................... $ 6,369
=======
</TABLE>
The Company attributes the goodwill to the expected ability to expand sales
in these new geographic markets, utilizing the acquired existing business
infrastructure and geographic market presence as a basis for expansion.
Accumulated amortization on these acquisitions amounted to approximately
$640,000 and $239,000 at the end of Fiscal 1998 and Fiscal 1997, respectively.
The operating results of the acquired businesses from the dates of purchase are
included in the Company's Consolidated Statement of Operations for Fiscal 1997.
The Consolidated Statement of Operations for Fiscal 1998 includes a full year
of operations of the acquired businesses. Pro forma information has not been
provided, as the operations of the acquired businesses were not material to the
consolidated results of operations or financial position of the Company in
Fiscal 1997 and Fiscal 1996.
3. Inventory
Inventory consisted of the following at Fiscal year-end (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................. $50,354 $54,109
Work in process........................................... 12,511 14,244
Finished goods............................................ 2,747 1,498
------- -------
Total................................................. $65,612 $69,851
======= =======
</TABLE>
The carrying value of inventories approximates replacement cost.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consisted of the following at Fiscal year-end (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land.................................................. $ 798 $ --
Building.............................................. 4,622 --
Leasehold improvements................................ 7,618 3,353
Manufacturing equipment............................... 24,618 22,631
Office furniture and equipment........................ 7,856 4,932
Vehicles.............................................. 144 144
Construction-in-progress.............................. 2,838 1,116
-------- --------
Total property and equipment...................... 48,494 32,176
Less accumulated depreciation and amortization........ (16,215) (12,672)
-------- --------
Property and equipment--net....................... $ 32,279 $ 19,504
======== ========
</TABLE>
Included in property and equipment is a manufacturing facility and certain
equipment held under capital leases with a net carrying value of $1,615,950 and
$2,016,638 at the end of Fiscal 1998 and 1997, respectively.
The Company has capitalized interest in the amount of $171,000 at the end of
Fiscal 1998 related to the construction-in-progress.
5. Indebtedness
On July 29, 1999, the Company executed an Amended and Restated Credit
Agreement for a new $107.0 million Senior Secured Credit Facility ("Credit
Facility") with a group of banks ("Banks") led by The Chase Manhattan Bank as
agent ("Agent"), to replace the Company's existing credit facilities. This new
Credit Facility provides for a $7.0 million five-year Term Loan ("Term Loan")
and a $100.0 million five-year Line of Credit ("Revolving Credit Facility"),
both of which are secured by substantially all of the assets of the Company.
The Term Loan shall amortize at a rate of $1.0 million per year for the first
year and $1.5 million per year for years two through five. The Revolving Credit
Facility provides for borrowings up to an aggregate amount of $100.0 million,
limited to a certain percentage of qualified accounts receivable and qualified
inventory. Interest is payable monthly. For the Term Loan, the Company may
choose an interest rate of either (i) 2.5% above the prevailing London
Interbank Offering rate ("LIBOR"), or (ii) 0.5% above the prime rate as
announced by the Agent. For the Revolving Credit Facility, the Company may
choose an interest rate of either (i) 2.25% above the prevailing LIBOR rate, or
(ii) 0.25% above the prime rate. In addition to certain other prohibited
actions, the Credit Facility limits capital expenditures by the Company and
prohibits the payment of cash dividends on the Company's common stock. The
Credit Facility requires the Company to maintain certain minimum fixed charge
coverage ratios and maximum leverage ratios. Outstanding borrowings under the
Credit Facility are secured primarily by the Company's accounts receivable,
inventories, machinery and equipment.
Previously, the Company had a total credit facility at the end of Fiscal
1998 of $90.0 million including a $55.0 million Senior Secured Credit Facility
("Senior Credit Facility") with a financial institution and a $35.0 million
Loan and Security Agreement with another financial institution.
The Company executed the $55.0 million Senior Credit Facility in Fiscal 1998
to replace the $50.0 million loan and security agreement then outstanding. This
Senior Credit Facility provided for borrowings up to an aggregate amount of
$55.0 million, limited to a certain percentage of qualified accounts receivable
and inventory, of which $39,498,000 was utilized at the end of Fiscal 1998.
Interest was payable monthly and the
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Senior Credit Facility was due to mature in 2001. At the end of Fiscal 1998 the
interest rate on the Senior Credit Facility was 8.0%.
The Company entered into a $17.0 million interest rate swap agreement in
Fiscal 1998 simultaneous with the execution of the Senior Credit Facility. The
swap agreement provides for payments by the Company at a fixed rate of interest
of 6.76% and matures on October 19, 2001. The fair value of the interest rate
swap at end of Fiscal 1998 was approximately $(770,000) since the fixed rate of
interest of 6.76% was higher than the floating rate.
The $35.0 million Loan and Security Agreement included a revolving credit
facility totaling $25.0 million. The Company had $18,111,000 and $12,792,000
outstanding at weighted average interest rates of 8.0% and 8.6% at the end of
Fiscal 1998 and 1997, respectively. It also included a $6.0 million term loan
payable in 55 monthly installments of $108,333 and a final installment of
$91,667, commencing October 1, 1996. At the end of Fiscal 1998, the Company had
$3,558,000 outstanding at an average interest rate of 7.74%. At the end of
Fiscal 1997, the Company had $4,858,000 outstanding at an average interest rate
of 8.43%.
At the end of Fiscal 1998, the Company was not in compliance with the
capital expenditure covenant of its Senior Credit Facility. The Company
received a waiver from the bank relating to this covenant.
The Company was in default as of the end of Fiscal 1997 with certain
financial covenants under its former loan and security agreement. The Company's
banks waived compliance with such covenants as of the end of Fiscal 1997. Due
to the nature of the financial covenants, the Company reclassified all its
long-term bank debt under the former loan and security agreement of $40,206,000
to a current liability at the end of Fiscal 1997.
The aggregate annual maturities of long-term debt, under the previous
facilities, at the end of Fiscal 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 1,300
2000.............................................................. 1,300
2001.............................................................. 40,456
</TABLE>
6. Other Long-Term Liabilities
Other long-term liabilities consisted of the following at Fiscal year-end
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Noncompete covenant........................................ $ 303 $ 350
Deferred revenue........................................... 483 --
Capital leases............................................. 1,437 2,082
Other noncurrent liabilities............................... 105 149
------ ------
Total.................................................... 2,328 2,581
Less current portion....................................... 1,236 870
------ ------
Other long-term liabilities.............................. $1,092 $1,711
====== ======
</TABLE>
Noncompete Covenant--In 1993, the Company entered into an agreement with its
former sole stockholder, which provides for monthly payments over a ten-year
period, in return for a promise not to compete. The liability is recorded at
the present value of the required future payments at an interest rate of 8%.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Revenue--The Company received a $483,340 grant in Fiscal 1998 under
an agreement with the Ireland Industrial Development Agency. The $483,340
payment has been recorded as deferred revenue at the end of Fiscal 1998 since
the Company will be required to return the grant if certain conditions such as
employment levels are not met by December 31, 2002.
Facility and Equipment Leases--The Company leases a manufacturing facility
and certain equipment and computer software used in its manufacturing
operations under capital lease agreements that expire through 2003.
Other long-term liabilities at the end of Fiscal 1998 are due as follows (in
thousands):
<TABLE>
<CAPTION>
Noncompete Capital Deferred
Covenant Leases Revenue Other Total
---------- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
1999............................ $ 80 $1,215 $-- $-- $1,295
2000............................ 86 177 -- 105 368
2001............................ 92 90 -- -- 182
2002............................ 100 19 483 -- 602
2003............................ -- 12 -- -- 12
---- ------ ---- ---- ------
Total.......................... 358 1,513 483 105 2,459
Less amount representing
interest....................... 55 76 -- -- 131
---- ------ ---- ---- ------
Present value of minimum
payments....................... 303 1,437 483 105 2,328
Less current portion............ 57 1,179 -- -- 1,236
---- ------ ---- ---- ------
Other long-term liabilities.... $246 $ 258 $483 $105 $1,092
==== ====== ==== ==== ======
</TABLE>
The capital lease payments due in 1999 include balloon payments related to
two equipment leases. The Company has the option to renew the leases for an
additional year with payments totaling $43,000 per month. The Company intends
to exercise the renewal option.
7. Income Taxes
The provisions (benefits) for income taxes for the Fiscal years indicated
are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Current taxes:
Federal....................................... $2,221 $(2,619) $ 6,532
State......................................... 586 (3) 2,036
------ ------- -------
2,807 (2,622) 8,568
Deferred taxes.................................. (763) 1,387 (1,700)
------ ------- -------
Total....................................... $2,044 $(1,235) $ 6,868
====== ======= =======
</TABLE>
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income tax assets (liabilities) are attributable to the following
at the Fiscal year-end (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accounts receivable.................................... $ 460 $ 800
Inventory.............................................. (2,239) (2,404)
Depreciation........................................... (2,231) (1,866)
Accrued liabilities.................................... 1,568 1,039
State operating loss and credits....................... 367 387
Minimum tax credit..................................... 594 594
Other.................................................. 1,188 393
------- -------
Net deferred tax liability........................... $ (293) $(1,057)
======= =======
</TABLE>
The net deferred tax liability is classified as follows at the end of the
Fiscal years indicated (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current asset (liability).............................. $ 880 $ (164)
Noncurrent liability................................... (1,173) (893)
------- -------
Net deferred tax liability........................... $ (293) $(1,057)
======= =======
</TABLE>
No valuation allowance is required as the deferred tax assets are expected
to be fully realized.
A reconciliation of the expected tax rate at the U.S. statutory rate to the
effective tax rate for the Fiscal years indicated is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................................. 34% (34)% 34%
State income taxes, net of federal benefit.............. 6 (6) 7
Adjustments to prior year tax liability................. 1 -- --
Other................................................... (1) 6 (1)
--- --- ---
Effective rate........................................ 40% (34)% 40%
=== === ===
</TABLE>
For state income tax purposes, the Company has approximately $12,299,000
million of net operating loss carryforwards. The carryforwards expire between
2002 and 2012 and are subject to limitations on use based on tax jurisdictions
and changes in ownership. A deferred tax asset of $367,000 and $387,000 for
Fiscal 1998 and Fiscal 1997, respectively, has been recorded to reflect the
net future benefit of these net operating loss carryforwards. The 1997 tax
benefit was provided at 34% primarily due to the effects of nondeductible
expenses and the differences in pre-tax income earned in the various
jurisdictions in which we do business.
8. Capital Stock
Stock Option Plans
The Company has a 1995 Stock Plan, which provides for the grant of
incentive and nonqualified stock options to purchase up to an aggregate of
1,250,000 shares. The Company has a 1995 Non-Employee Director Stock Option
Plan that provides for the grant of options to purchase a maximum of 100,000
shares to nonemployee directors of the Company. The Company also has a 1993
Incentive Stock Option Plan under which options for up to 690,664 shares of
common stock may be granted at an exercise price not less than fair market
value at the date of grant.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CMC's 1990 Equity Incentive Plan provides for the granting of options to
purchase a maximum of 950,052 shares. Stock option activity for the Fiscal
years indicated was as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Fair
Options Price Value
--------- -------- -------
<S> <C> <C> <C>
Outstanding at Beginning of Fiscal 1996....... 718,415 $ 6.09
Granted..................................... 441,250 10.78 $5.74
Exercised................................... (168,420) 3.50
Forfeited................................... (181,237) 10.56
--------- ------
Outstanding at End of Fiscal 1996............. 810,008 8.18
Granted..................................... 772,750 22.97 13.42
Exercised................................... (85,435) 9.57
Forfeited................................... (168,551) 20.31
--------- ------
Outstanding at End of Fiscal 1997............. 1,328,772 15.06
Granted..................................... 1,246,750 12.92 6.95
Exercised................................... (42,290) 8.08
Forfeited................................... (571,578) 23.67
--------- ------
Outstanding at End of Fiscal 1998............. 1,961,654 $11.38
========= ======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------------
Weighted Weighted
Number Range of Average Average Number
of Exercise Remaining Life Exercise Currently
Options Price (In Years) Price Exercisable
------- ----------- -------------- -------- -----------
<S> <C> <C> <C> <C>
50,267 0.48-0.84 3 $ 0.60 50,267
67,932 3.70-5.00 4 3.90 56,749
602,945 5.45-8.00 7 7.34 272,550
367,693 8.75-12.25 7 11.33 115,984
857,452 13.64-20.38 8 15.04 155,549
15,365 21.00-27.13 9 23.40 3,064
</TABLE>
The options generally vest over three to five-year periods.
The Company has reserved shares for future grants of common stock for
issuance pursuant to the 1993 Incentive Stock Option Plan, 1995 Non-Employee
Director Stock Option Plan, the 1995 Stock Plan and the 1990 Equity Incentive
Plan for 450,800, 62,000, 286,300 and 229,960 shares, respectively.
In January 1998 the Board of Directors approved a vote to reprice 516,500
employee stock options. The options were originally issued between March 1997
through October 1997 and had original grant prices ranging between $14.44 and
$39.25. The grant price for these options was lowered to $13.94, which reflects
the market value of the stock as of the reprice date. The repriced options
continue to vest according to the original grant date. No compensation expense
was required to be recorded in the consolidated statements of operations.
As described in Note 1, the Company uses the intrinsic value method to
measure compensation expense associated with grants of stock options to
employees. Had the Company used the fair value method to measure compensation
for grants made after Fiscal 1994, (including the repricing described above)
pro forma net income and net income per share for fiscal years indicated would
have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Net income (loss)................................ $ (966) $(5,432) $9,235
====== ======= ======
Diluted earnings (loss) per common share......... $(0.07) $ (0.43) $ 0.75
====== ======= ======
</TABLE>
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options on their grant date was measured using the
Black/Scholes option-pricing model. Key assumptions used to apply this pricing
model for the fiscal years indicated are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate................ 5.5% 6.0% 6.4%
Expected life of option grants......... 3-5 years 3-5 years 3-5 years
Expected volatility of underlying
stock................................. 102% 82% 63%
</TABLE>
It should be noted that the option-pricing model used was designed to value
readily tradable stock options with relatively short lives. The options granted
to employees are not tradable and have contractual lives of up to ten years.
However, management believes that the assumptions used to value the options and
the model applied yield a reasonable estimate of the fair value of the grants
made under the circumstances.
Private Placement
In 1998, CMC issued 250,000 shares of stock to two members of the board of
directors in a private placement. Proceeds from the issuance totaled
$3,620,000. The purchase price equaled the fair market value of the stock
issued.
Capitalization
On May 16, 1996, CMC issued 218,018 shares of common stock with detachable
warrants that entitle the holders to purchase 84,481 shares of common stock at
a price of $15.00 per share. The total proceeds for the shares and warrants
issued were $2,464,000 and $44,000, respectively. Due to the Company meeting
specified levels of financial performance, the warrants were called during
Fiscal 1997. Total proceeds from the exercise of the warrants were $1,267,000.
Stock Purchase Plan
On November 15, 1996, CMC's stockholders approved the Employee Stock
Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to
purchase common stock on a semi-annual basis at the lower of 85% of the market
price at the beginning or end of each offering period. As of the end of Fiscal
1998, there were 241,598 shares of common stock reserved for the ESPP. During
Fiscal 1998, employees purchased 39,012 shares under the ESPP. As of the end of
Fiscal 1998, a liability of $302,408 has been recorded for ESPP withholdings
not yet applied towards the purchase of common stock.
9. Employee Benefit Plans
Savings Plans
During Fiscal 1994, the Company adopted a savings plan for its employees
pursuant to Section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate, and the plan allows a deferral ranging
from a minimum 1% to the maximum percentage of compensation permitted by law.
Company contributions to the plan are at the discretion of the Board of
Directors. Contributions to the Plan were $0, $50,000 and $0, in Fiscal 1998,
1997 and 1996, respectively.
CMC had a profit-sharing savings plan (the "Savings Plan") for employees of
CMC. Under the terms of the Savings Plan, employees may contribute from 2% to
16% of compensation and an additional elective amount. Effective June 30, 1994,
the Company terminated matching employee contributions. The
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company may also elect to make an additional discretionary profit-sharing
contribution. Effective January 1, 1996, the Savings plan eligibility
requirements were amended to include all full-time employees with one hour of
service. The Company recorded no contributions for fiscal 1998, 1997 and 1996.
Medical Care and Disability Benefit Plans
The Company is self-insured with respect to certain medical care and
disability benefit plans for a percentage of its employees. The costs for such
plans are charged against earnings in the period incurred. The liability for
healthcare claims was $661,000 and $593,000 at the end of Fiscal 1998 and 1997,
respectively, and the related expense incurred was $4,265,000, $4,897,000 and
$3,878,000 for Fiscal 1998, 1997 and 1996, respectively. The Company does not
provide benefits under these plans to retired employees.
Retirement Benefits
CMC maintains a defined benefit pension plan (the "Pension Plan") which
covers certain hourly employees at one plant. Retirement benefits under the
Pension Plan are based on an employee's length of service and a benefit formula
based on year of hire. The benefit formula does not include a provision for
increases in further compensation levels. Contributions to the Pension Plan are
primarily based on the projected unit actuarial cost method. The Pension Plan's
assets consist principally of short-term U.S. government instruments and pooled
fixed income, debt and equity investment funds with a financial institution.
Effective June 1, 1994, the Company terminated the future service payments for
employees.
The following table sets forth changes in the projected benefit obligation
and changes in the fair value of Plan assets at Fiscal year-end (in thousands):
<TABLE>
<CAPTION>
July 31
--------------
1998 1997
------ ------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year......................... $7,238 $7,442
Service cost.................................................... -- --
Interest cost................................................... 612 582
Benefits paid................................................... (678) (555)
Loss due to census changes...................................... 540 --
Revaluation gain................................................ -- (231)
------ ------
Benefit obligation at end of year............................. $7,712 $7,238
====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.................. $7,375 $7,145
Actual return on plan assets.................................... 671 785
Employer contributions.......................................... 513 --
Benefits paid................................................... (678) (555)
------ ------
Fair value of plan assets at end of year...................... $7,881 $7,375
====== ======
Funded status................................................... $ 169 $ 137
Unrecognized loss............................................... 1,261 878
------ ------
Prepaid benefit cost.......................................... $1,430 $1,015
====== ======
</TABLE>
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net periodic pension cost and related assumptions for the
Fiscal years indicated were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Service cost......................................... $ -- $ -- $ --
Interest cost........................................ 612 582 579
Return on plan assets................................ (671) (785) (422)
Net amortization and deferral........................ 157 270 (65)
----- ----- -----
Net periodic pension expense......................... $ 98 $ 67 $ 92
===== ===== =====
Discount rate........................................ 8.25% 8.25% 8.00%
Long-term rate of return............................. 8.00% 8.25% 8.00%
</TABLE>
Under SFAS 87, the portion of deferred gains and losses in excess of 10% of
the projected benefit obligation is amortized as a component of net periodic
pension cost. If amortization is required, the period used is the average
remaining service period of active employees, which was approximately 13.67
years as of the end of Fiscal 1998.
10. Major Customers and Operating Data
Sales to Nortel Networks (formerly Bay Networks and Aptis Communication) and
Micron Electronics were each approximately 12% of the Company's net sales for
Fiscal 1998. In Fiscal 1997 Nortel Networks accounted for approximately 17% of
the Company's net sales and Lucent Technologies (including Ascend
Communications) accounted for approximately 12% of the Company's net sales for
Fiscal 1996. All such sales relate to the printed circuit board assembly
product line of the Company's business.
The Company operates as a single segment within the electronics
manufacturing services industry. A summary of the principal product line sales
for the years ended 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Printed Circuit Boards....................... $556,348 $450,467 $361,747
Cable and Harness............................ 36,136 28,672 28,864
-------- -------- --------
$592,484 $479,139 $390,611
======== ======== ========
</TABLE>
11. Transactions With Related Parties
The Company leases certain facilities and equipment from a realty trust
controlled by its principal stockholder under leases that expire in Fiscal
2003. These commitments are included in Note 12. The Company pays all operating
costs of the building. Total payments to the realty trust were approximately
$388,000 in Fiscal 1998 and $364,000 in Fiscal 1997 and 1996, respectively.
In Fiscal 1993, the Company entered into a ten-year agreement with one of
its directors for future consulting services. Payments under the agreement were
approximately $280,000 in Fiscal 1998, $259,000 in Fiscal 1997 and $240,000 in
Fiscal 1996. Future commitments under this agreement are approximately $302,000
in Fiscal 1999, $326,000 in Fiscal 2000, $352,000 in Fiscal 2001, $380,000 in
Fiscal 2002 and $233,000 in Fiscal 2003. The agreement expires in Fiscal 2003.
A noncompete agreement was also entered into with the same individual (see
Notes 1 and 6). Payments under this agreement were $73,000 in Fiscal 1998,
$68,000 in Fiscal 1997, and $63,000 in Fiscal 1996 with future payments
totaling $358,000.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1993, CMC transferred certain assets and related liabilities
associated with its telephone business to Cortelco Systems Holding Corporation
("Cortelco"), a related party in that one of the Company's directors has a
significant ownership interest in Cortelco. Under a manufacturing services
agreement which expired in Fiscal 1998, CMC provided manufacturing services to
Cortelco on a turnkey basis with prices based on cost plus 8% for telephone
products and cost plus 10% for telecommunications systems products. Included in
net sales for Fiscal 1998, 1997 and 1996 were sales to Cortelco totaling
$26,436,000, $31,312,000 and $38,025,000, respectively. Total cost of sales for
the periods relating to these sales to Cortelco were $24,321,000, $28,807,000
and $34,983,000, respectively. CMC continues to provide services to Cortelco
with prices negotiated on a per contract basis.
CMC had an agreement in Fiscal 1996 with Cortelco to provide certain
products and related support services to customers of Cortelco. CMC was
required to pay a commission to Cortelco in the amount of 10% of sales of these
products under this agreement. During Fiscal 1996, CMC incurred $341,000 in
commissions under this agreement.
In July of 1998, CMC converted certain accounts receivable from Cortelco
totaling $2,000,000 into a note receivable. Under the terms of the note,
Cortelco agrees to pay the balance over a three-year term with monthly payments
of $50,000 plus interest. Interest accrues on the note at a rate of 9.0% per
annum. CMC continues to provide credit for manufacturing services sold to
Cortelco in the form of trade receivables.
The Cortelco preferred stock is nonvoting, has a liquidation preference of
$12.50 per share and entitles the Company to dividends which are non-cumulative
until August 1995 and thereafter cumulative at $0.75 per share for each year in
which Cortelco earns net income of $2.0 million or more. The Company may,
subject to certain restrictions, require Cortelco to redeem the preferred
stock, on a pro rata basis, over a five-year period beginning August 1999. The
Company recorded the preferred stock at fair value, $5,884,000 million, based
on the discounted cash flow of the redemption requirements. The excess cost
basis of the net assets over the fair value of the preferred shares received
was recorded as a distribution of capital to the Company's stockholders.
A director of the Company has an ownership interest in a customer which
purchased goods during Fiscal 1996 totaling $1,731,000 at a cost of $1,697,000.
As of the end of Fiscal 1996, the Company had an accounts receivable balance of
$491,000 from this customer. During Fiscal 1997, the Company settled the then
outstanding balance of $441,000 with this customer through receipt of Company
common stock with a fair value of the same amount.
12. Operating Lease Commitments
The Company leases various plant and office equipment under noncancelable
operating leases expiring through 2007. Rent expense in Fiscal 1998, 1997 and
1996 was approximately $14,276,000, $9,361,000, and $4,255,000, respectively.
The future minimum rental payments under these leases over the next five years
are approximately as follows (in thousands):
<TABLE>
<CAPTION>
Related-
party Other
Commitments Commitments Total
----------- ----------- -------
<S> <C> <C> <C>
1999...................................... $ 364 $15,174 $15,538
2000...................................... 364 13,033 13,397
2001...................................... 364 9,445 9,809
2002...................................... 364 6,546 6,910
2003...................................... 196 4,085 4,281
------ ------- -------
Total................................... $1,652 $48,283 $49,935
====== ======= =======
</TABLE>
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has equipment lease lines of approximately $11.3 million
available for purchases of manufacturing equipment, computer hardware and
software and furniture. In May 1998, the Company entered into a $5.0 million
operating lease line agreement for the purchase of certain equipment in the
Dublin, Ireland facility. At the end of Fiscal 1998 substantially all of the
available operating lease line had been utilized for outstanding commitments.
13. Restructuring Charge
During Fiscal 1996, the Company expensed $792,000 in non-recurring charges
related to the restructuring of a subsidiary. Of this amount, $241,000 related
to the relocation of the subsidiary's corporate offices and California
operations to a new facility. The remaining amount represented one-time charges
related to severance costs resulting from a reduction in the subsidiary's
staffing. The subsidiary reduced employment levels to reflect the transition of
its business away from hand assembly work towards more advanced surface mount
technology operations. All such amounts were paid in either Fiscal 1996 or
1997.
14. Contingencies
On June 15, 1999, we received written notice from legal counsel for the
Lemelson Medical, Education & Research Foundation, Limited Partnership alleging
that we are infringing certain patents held by the Lemelson Foundation
Partnership and offering to license such patents to us. Based on our
understanding of the terms that the Lemelson Foundation Partnership has made
available to current licensees, we believe that obtaining a license from them
under the same or similar terms would not have a significant negative effect on
our financial condition. Our results of operations in a particular quarter may
be negatively affected, however. Moreover, a license may not be available on
terms satisfactory to us. Litigation with respect to patents and other
intellectual property matters can result in substantial costs and damages,
require the cessation of the use of infringing products and processes, and
force the infringing party to obtain a license to the relevant intellectual
property.
On February 27, 1998, the Company and several of the Company's officers and
directors were named as defendants in a purported securities class action
lawsuit filed in the United States District Court for the District of
Massachusetts. The plaintiffs amended the complaint on October 16, 1998. The
plaintiffs purport to represent a class of all persons who purchased or
otherwise acquired the Company's Common Stock in the period from April 17, 1997
through March 31, 1998. The amended complaint alleges, among other things, that
the defendants knowingly made misstatements to the investing public about the
value of the Company's inventory and the nature of its accounting practices. On
December 15, 1998, the Company filed a motion to dismiss the case in its
entirety based on the pleadings. The Company's motion to dismiss the purported
securities class action lawsuit was granted without prejudice on May 27, 1999,
and the case was closed by the Court on June 1, 1999. On June 28, 1999 the
plaintiffs filed a new motion with the Court seeking permission to file a
second amended complaint. The Company opposed that motion. On July 13, 1999 the
court denied the plaintiffs' motion to amend, noting "final judgment having
entered in this case." On July 26, 1999 the plaintiffs filed a motion with the
Court asking the Court to extend the 30-day period for filing an appeal of its
ruling dismissing the case. The Company opposed that motion as well, and the
Court denied the motion on August 10, 1999. On August 12, 1999, the plaintiffs
filed a notice indicating their intent to appeal the Court's orders of July 26,
1999 and August 10, 1999. The Company believes the claims asserted in this
action and the appeals noticed by the plaintiffs are without merit and intends
to continue to defend itself vigorously in this action. The Company further
believes that this litigation will not have a material adverse effect on the
Company's business and results of operations, although there can be no
assurance as to the outcome of these matters. No provision for any liability
that may result from this litigation has been made in the accompanying
consolidated financial statements.
In connection with the transfer of certain assets and liabilities associated
with its telephone business to Cortelco in August 1993, certain deferred income
tax liabilities have been assumed by Cortelco. Although the
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LIFO method of inventory accounting is employed, a portion of this deferred
income tax liability attributable to differing financial reporting and tax
reporting bases of inventories may become payable in the foreseeable future
based on certain rulings made in the U.S. federal tax courts. Although the
Company has received indemnification from this affiliate with respect to such
liability, the Company would be liable for this tax in the event Cortelco is
unable to meet its obligation. The total amount of this deferred income tax
liability assumed by Cortelco was approximately $2.2 million as of Fiscal 1993.
In Fiscal 1994, the Company incurred a non-recurring charge included in
selling, general and administrative expenses of approximately $170,000 related
to the costs of environmental clean-up at a former manufacturing site. The
Company's original estimate of its cost of the clean-up was approximately
$320,000 which was recorded prior to July 1994. In 1995, an environmental
consultant estimated that the cost of a full study combined with short- and
long-term remediation of the site may cost between $3.0 and $4.0 million.
Subsequent environmental studies done in 1999 have estimated such costs as
between $750,000 and $3.5 million. During Fiscal 1996, the Company was excluded
as a potentially responsible party ("PRP") by the State of Tennessee's
Department of Environment and Conservation in relation to the former facility;
however, Alcatel, Inc., a PRP named by the State of Tennessee's Department of
Environment and Conservation and a former owner of the Company, is seeking
indemnification from the Company under the purchase agreement by which CMC
acquired the stock of one of the operators of the facility. To date, Alcatel
has not filed any legal proceedings to enforce its indemnification claim.
However, Alcatel could initiate such proceedings and other third parties could
assert claims against the Company relating to remediation of the site. We have
entered into an agreement with Alcatel pursuant to which the statute of
limitations on their indemnification claim is tolled for a period of time. In
the event any proceedings are initiated or any claims made, the Company would
defend itself vigorously. Defense or resolution of this matter could negatively
impact the Company's financial position and results of operations.
In connection with the Fiscal 1996 staff reduction discussed in Note 14,
certain of the 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 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 subsequently settled for
$112,000. A second plaintiff's claim for $53,000 was subsequently settled for
$48,500. The Equal Employment Opportunity Commission ("EEOC") has negotiated
with the Company to reach a monetary settlement for other potential claimants.
The Company 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. The Company reserved $975,000 to resolve all such claims
which represented its best estimate of funds to ultimately be paid to such
claimants. This charge was recorded in Fiscal 1998.
In addition to the above, the Company is a defendant in several legal
actions involving certain matters arising in the normal course of business.
Management believes that the aggregate loss, if any, resulting from the final
outcome of these proceedings will not be material to the financial position or
results of operations of the Company. No additional accrual has been recorded
for these pending matters.
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Selected Quarterly Financial Data (unaudited):
Summarized quarterly financial data are as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1998 Quarters
-----------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................. $151,569 $162,604 $137,452 $140,859
Gross profit.......................... 7,530 9,182 9,529 9,904
Net income............................ 164 1,130 1,219 580
Earnings per share:
Basic............................... 0.01 0.09 0.10 0.05
Diluted............................. 0.01 0.09 0.09 0.04
</TABLE>
<TABLE>
<CAPTION>
1997 Quarters
------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.......................... $112,191 $128,696 $116,675 $121,577
Gross profit....................... 12,542 13,432 7,069 (8,107)
Net income (loss).................. 4,097 4,531 (70) (10,959)
Earnings (loss) per share:
Basic............................ 0.34 0.37 (0.01) (0.88)
Diluted.......................... 0.32 0.35 (0.01) (0.88)
</TABLE>
The Company's Fiscal 1997 loss (before taxes) includes certain significant
adjustments and non-recurring charges recorded during the fourth quarter (in
thousands):
<TABLE>
<S> <C>
Physical inventory adjustments................................... $13,113
Allowance for doubtful accounts.................................. 1,740
Non-recurring professional fees.................................. 600
-------
$15,453
=======
</TABLE>
16. Subsequent Event
On October 12, 1999, the Company acquired certain inventory and fixed assets
of GSS/Array Technology, Inc. located in San Jose, California, a subsidiary of
GSS/Array Technology Public Company, Ltd., a Thailand company for approximately
$12,763,000 million in cash. We have assumed on-going relationships with select
GSS/Array domestic customers.
* * * * *
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CMC Industries, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows of CMC Industries, Inc. and
its subsidiaries present fairly, in all material respects, their operations and
their cash flows for the five months in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
As discussed in Note 13, CMC Industries, Inc. merged with ACT Manufacturing,
Inc. on July 29, 1999. The merger was accounted for as a pooling of interests.
/s/ PricewaterhouseCoopers LLP
_______________________________
PricewaterhouseCoopers LLP
Memphis, Tennessee
June 21, 1999, except as to
Note 13, which is as of
July 29, 1999
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
For the five-month period ended December 31, 1998
<TABLE>
<S> <C>
Net sales:
Non-affiliates..................................................... $112,773
Affiliates......................................................... 9,650
--------
Total net sales.................................................. 122,423
--------
Cost of sales:
Non-affiliates..................................................... 110,855
Affiliates......................................................... 8,878
--------
Total cost of sales.............................................. 119,733
--------
Gross profit......................................................... 2,690
Selling, general and administrative expenses......................... 5,409
--------
Loss from operations............................................. (2,719)
Interest expense..................................................... 691
--------
Loss before taxes................................................ (3,410)
Income tax benefit................................................... (1,279)
--------
Net loss......................................................... $ (2,131)
========
Net loss per share:
Basic.............................................................. $ (.28)
========
Diluted............................................................ $ (.28)
========
Weighted average shares outstanding:
Basic.............................................................. 7,620
Diluted............................................................ 7,620
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
For the five-month period ended December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
--------- ------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance July 31, 1998... 7,554,816 $36,233 $ 6,153 $ (441) $ -- $41,945
Comprehensive loss:
Net loss.............. (2,131) (2,131)
Minimum pension
liability............ (1,511) (1,511)
-------
Total comprehensive
loss............... (3,642)
Exercise of options..... 937 4 4
Employee stock purchase
plan................... 80,303 326 326
--------- ------- ------- ------ ------- -------
Balance December 31,
1998................... 7,636,056 $36,563 $ 4,022 $(441) $(1,511) $38,633
========= ======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
For the five-month period ended December 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net Loss........................................................... $ (2,131)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Deferred income taxes............................................ 190
Depreciation and amortization.................................... 1,427
Bad debt expense................................................. 283
Changes in assets and liabilities:
Receivables.................................................... (13,335)
Inventories.................................................... (11,180)
Other assets................................................... 476
Trade accounts payable......................................... 25,964
Accrued expenses and other current liabilities................. (1,152)
Other liabilities.............................................. (105)
--------
Net cash provided by operating activities.................... 437
--------
Cash flows from investing activities:
Capital expenditures............................................... (1,319)
--------
Net cash used in investing activities........................ (1,319)
--------
Cash flows from financing activities:
Net borrowings under lines of credit............................... (2,938)
Principal payments on long-term debt............................... (541)
Principal payments on capital leases............................... (233)
Proceeds from employee stock purchase plan and exercise of stock
options........................................................... 330
--------
Net cash used in financing activities........................ (3,382)
--------
Net decrease in cash and cash equivalents............................ (4,264)
Cash and cash equivalents:
Beginning of period................................................ 5,281
--------
End of period...................................................... $ 1,017
========
Supplemental information:
Income taxes paid.................................................. $ 306
Interest paid...................................................... $ 730
Non-cash supplemental disclosure:
Purchase of equipment with capital lease........................... $ 942
Minimum pension liability.......................................... $ 1,511
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Organization and Basis of Presentation
Description of Business
CMC Industries, Inc. and its subsidiaries ("CMC") provide contract
manufacturing services primarily to original equipment manufacturers ("OEMs")
in the computer and telecommunications industries. Over 90% of CMC's
manufacturing contracts are for turnkey services and include procurement of
materials in addition to manufacturing. CMC's fiscal year end is July 31.
Note 2--Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of CMC
Industries, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities,
disclosure of contingencies at the date of the financial statements and the
related reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
Cash on hand and in banks, together with other highly liquid investments
with original maturities of three months or less, are classified as cash
equivalents.
Revenue recognition
In addition to providing contract manufacturing services on a turnkey basis,
CMC performs assembly services on a consignment basis where the customer
typically procures the components used in the process. CMC recognizes revenue
upon shipment for both turnkey and consignment contracts.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by the last-in, first-out ("LIFO") method.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. CMC provides for depreciation using the straight-line method for
financial reporting purposes and accelerated methods for income tax reporting
purposes.
Goodwill
The excess of purchase price over net tangible assets of businesses acquired
is carried as goodwill. CMC amortizes such amounts on a straight-line basis
over a twenty-year period. CMC recorded amortization expense of $21,000 for the
five months ended December 31, 1998, related to the purchase of a subsidiary in
fiscal 1994.
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
At each balance sheet date, CMC assesses whether there has been an
impairment in the value of long-lived assets by determining whether projected
undiscounted cash flows generated by the applicable asset exceed its net book
value as of the assessment date. At December 31, 1998, there were no
impairments of CMC's assets.
Deferred loan costs
Loan origination fees paid in connection with new borrowings are amortized
using a method which approximates the effective rate method over the terms of
the related borrowing. Amortization is included in interest expense.
Preoperating costs
Preoperating and start-up costs incurred in connection with the construction
and preparation of CMC's new Mexico manufacturing facility have been
capitalized and are being amortized over a five-year period. Capitalized
preoperating and start-up costs total $1.1 million as of December 31, 1998.
During the five-month period ended December 31, 1998, CMC has recorded
amortization expense in the amount of $100,000 in relation to these costs.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-up
Activities. This SOP is effective for CMC in fiscal 2000 and requires companies
to expense such costs as incurred. Pursuant to this SOP, CMC will be required
to expense the remaining unamortized balance of the aforementioned cost in the
first fiscal quarter of fiscal 2000.
Medical care and disability benefit plans
CMC is self-insured with respect to certain medical care and disability
benefit plans for 70% of employees. The costs for such plans are charged
against earnings in the period incurred and were $1,059,000 for the five months
ended December 31, 1998. CMC does not provide benefits under these plans to
retired employees.
Translation of foreign currencies
The functional currency of the Mexico operation is the U.S. dollar. Foreign
currency gains and losses associated with Mexico operations are included in
determining net income. For the five months ended December 31, 1998,
transaction gains or losses were insignificant.
Income taxes
CMC accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109 ("FAS 109"), Accounting for Income Taxes. FAS 109 is
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in CMC's financial statements or tax returns. In
estimating future tax consequences, CMC generally considers all expected future
events other than enactments of changes in the tax law or rates.
Net income per share
Net income per share is calculated in accordance with SFAS No. 128, Earnings
per Share, which requires the presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution and is
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
computed by dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity (see Note 11).
Note 3--Major Customers and Credit Risk Concentrations
A substantial portion of CMC's sales are generated from contract
manufacturing agreements with domestic OEMs and from sales to domestic
distributors of telecommunication products. Sales attributable to customers
representing 10% or more of total net sales are as follows (in thousands):
<TABLE>
<CAPTION>
Sales for the
Five Months Ended
December 31, 1998
-----------------
<S> <C>
Next Level.............................................. $13,288
Reltec/Marconi.......................................... 20,299
Diamond Multimedia...................................... 39,004
CMC's credit risk principally relates to trade accounts receivable and
receivables from Cortelco, a related party. CMC performs ongoing credit
evaluations of its customers and generally does not require collateral.
Note 4--Property, Plant and Equipment
The useful lives of property, plant and equipment are as follows:
<CAPTION>
Useful life years
-----------------
<S> <C>
Machinery and equipment................................. 3-10
Building................................................ 30
Furniture and fixtures.................................. 5-15
Leasehold improvements.................................. 5
</TABLE>
Depreciation expense was $1,310,000 for the five months ended December 31,
1998.
Note 5--Buildings and Equipment Under Lease
CMC leases its primary manufacturing facility and certain equipment and
computer software under capital leases. Certain office, warehouse, other
manufacturing facilities and equipment are leased under operating leases. These
lease agreements generally include renewal options at varying terms. Future
minimum lease payments under the noncancelable portion of capital and operating
leases at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Year Ended December 31, Leases Leases
----------------------- --------- -------
<S> <C> <C>
1999.................................................... $ 6,990 $ 598
2000.................................................... 4,712 294
2001.................................................... 2,859 268
2002.................................................... 2,348 239
2003.................................................... 1,207 199
------- ------
Future minimum lease payments........................... $18,116 $1,598
======= ======
</TABLE>
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense relating to operating leases totaled approximately $2,896,000
for the five months ended December 31, 1998. The capital lease payments due in
1999 include balloon payments related to two equipment leases. CMC has the
option to renew the leases for an additional year with payments totaling
$43,000 per month. CMC intends to exercise the renewal option.
Note 6--Borrowings
On September 26, 1996, CMC entered into a Loan and Security Agreement with a
financial institution which provides CMC with a total credit facility of $35
million including the following:
. Revolving credit facility totaling $25 million including letters of
credit, bearing interest, at CMC's option, at either the prime lending
rate or an Adjusted Eurodollar Rate (as defined in the Credit
Agreement). CMC had $15.2 million outstanding at a weighted average
interest rate of 8.2% at December 31, 1998.
. Term loan totaling $6 million, commencing October 1, 1996, payable in 55
monthly installments of $108,333 and a final installment of $91,667,
bearing interest, at CMC's option, at either the prime lending rate or
an Adjusted Eurodollar Rate (as defined in the Credit Agreement). At
December 31, 1998, CMC had outstanding $3.0 million at an average
interest rate of 8.2%.
. Commitment to lend up to $3.8 million for machinery and equipment
purchases in the form of installment loans, bearing interest, at CMC's
option, at either the prime lending rate or an Adjusted Eurodollar Rate
(as defined in the Credit Agreement).
Outstanding borrowings under this financing arrangement are secured
primarily by CMC's accounts receivable, inventories, machinery and equipment.
The Loan and Security Agreement contains certain restrictive covenants which
limit the activities of CMC with respect to, among other things, mergers and
acquisitions, additional borrowings and leases, investments and the payment of
dividends. The Loan and Security Agreement includes the following financial
covenants:
. to maintain minimum tangible net worth of an agreed upon amount on a
consolidated basis;
. to not permit the ratio of total liabilities to stockholders' equity to
exceed an agreed upon amount;
. to limit capital expenditures to agreed upon levels;
. to maintain debt service coverage ratio, as defined, of an agreed upon
level.
Effective January 31, 1999, CMC entered into a new bank loan agreement
comprising of a revolving credit line of $30 million and a $5 million term
loan. The loan agreement contains financial covenants related to CMC's net
worth and debt service coverage and restricts capital expenditures. Subsequent
to December 31, 1998, CMC was in default under the net worth and debt service
covenants. CMC did not obtain a waiver or request amendment to its agreement as
a result of the merger discussed in Note 13.
Maturities of long-term debt
The aggregate annual maturities of long-term debt, notwithstanding the
default discussed above, are as follows (amounts in thousands):
<TABLE>
<S> <C>
1999............................................................... $1,300
2000............................................................... 1,300
2001............................................................... 417
</TABLE>
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Capital Stock
Stock purchase plan
On November 15, 1996, the Stockholders' approved the Employee Stock Purchase
Plan ("ESPP"). The ESPP allows eligible employees the right to purchase common
stock on a semi-annual basis at the lower of 85% of the market price at the
beginning or end of each offering period. As of December 31, 1998, there were
559,066 shares of common stock reserved for the ESPP. During the five months
ended December 31, 1998, employees purchased 80,303 shares under the ESPP.
Stock option plan
CMC's board of directors has authorized 2,275,720 shares of CMC's common
stock for issuance in connection with a stock option plan. The stock option
plan provides for the granting of options to purchase shares of CMC's common
stock at not less than 85% of fair market value on the date of grant. The plan
is designed to allow for granting incentive stock options, nonstatutory stock
options, stock bonuses and the issuance of restricted stock.
As of December 31, 1998, 410,603 shares had been exercised under the plan
and 416,344 shares for which options were granted had terminated. Options
outstanding at December 31, 1998 expire in 1999 through 2007.
A summary of activity in the plan follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at beginning of period.............. 1,440,184 $6.78
Granted......................................... 170,000 4.27
Exercised....................................... (937) 4.50
Canceled........................................ (73,803) 8.90
---------
Outstanding at December 31, 1998................ 1,535,444 $6.40
========= =====
Exercisable at December 31, 1998................ 752,895 $5.34
========= =====
</TABLE>
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- --------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices At 12/31/98 Life (in Years) Price at 12/31/98 Price
---------------- ----------- --------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.42 to $ 3.63 217,333 7.40 $ 2.93 94,333 $ 2.05
3.72 3.72 250,000 6.79 3.72 250,000 3.72
4.00 5.87 190,225 7.56 5.53 112,208 5.46
5.88 7.50 270,501 7.09 6.68 104,167 6.00
7.87 8.00 204,510 8.30 7.95 101,349 7.92
8.25 8.37 19,375 8.33 8.36 8,144 8.35
9.00 9.00 235,500 9.38 9.00 40,738 9.00
9.56 9.56 10,000 9.13 9.56 2,083 9.56
10.13 10.13 120,000 8.79 10.13 35,000 10.13
10.50 10.50 18,000 8.87 10.50 4,873 10.50
--------- -------
1,535,444 752,895
========= =======
</TABLE>
CMC applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations in accounting for its
plan. Accordingly, no compensation expense has been recognized for its stock-
based compensation plan. Had compensation cost for CMC's stock option plan
been determined based on the fair value at the grant date for awards during
the five months ended December 31, 1998 consistent with the method prescribed
by SFAS No. 123, Accounting for Stock-Based Compensation, CMC's net loss for
the period would have been increased by approximately $464,000. Basic and
diluted loss per share would have been increased by $.06. The weighted average
grant-date fair value of options granted during the period was $2.47. The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for the period: dividend yields of 0% each year; average expected
volatility of 72%; risk-free interest rate of 5.51%, and an average expected
life of 4.69 years.
Note 8--Income Taxes
The benefit for income taxes comprised the following (amounts in
thousands):
<TABLE>
<CAPTION>
Five Months Ended
December 31, 1998
------------------
<S> <C>
Current:
Federal.............................................. $(1,320)
State................................................ (149)
-------
(1,469)
-------
Deferred:
Federal.............................................. 404
Foreign.............................................. (384)
State................................................ 170
-------
190
-------
$(1,279)
=======
</TABLE>
<PAGE>
CMC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, CMC has certain net operating loss carryforwards which
are available to reduce income taxes. These carryforwards total approximately
$6 million for state income tax purposes, and expire during the period 2010
through 2012. If certain substantial changes in CMC's ownership should occur,
there would be an annual limitation on the amount of carryforwards which can be
utilized.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Five Months Ended
December 31, 1998
-----------------
<S> <C>
Statutory federal rate.................................. (35.0)%
State income tax, net of federal benefits............... (4.2)
Surtax exemption........................................ 1.0
Other, net.............................................. 0.7
-----
Effective rate.......................................... (37.5)%
=====
</TABLE>
Note 9--Related Party transactions
In August 1993, CMC transferred certain assets and related liabilities
associated with its telephone business to Contelco Systems Holding Corporation
("Cortelco"), a related party. Under a manufacturing services agreement which
expired in 1998, CMC provided manufacturing services to Cortelco on a turnkey
basis with prices based on cost plus 8% for telephone products and cost plus
10% for telecommunications systems products. Included in net sales the five
months ended December 31, 1998 were sales to Cortelco totaling $9,650,000.
Total cost of sales for the period relating to these sales to Cortelco was
$8,878,000. CMC continues to provide services to Cortelco with prices
negotiated on a per contract basis.
In July of 1998, CMC converted certain accounts receivable from Cortelco
totaling $2,000,000 into a note receivable. Under the terms of the note,
Cortelco agrees to pay the balance over a three-year term with monthly payments
of $50,000 plus interest. Interest accrues on the note at a rate of 9.0% per
annum. CMC continues to provide credit for manufacturing services sold to
Cortelco in the form of trade receivables. The outstanding balance of this note
was $1,750,000 at December 31, 1998.
In connection with the August 1993 transfer of assets and related
liabilities to Cortelco, CMC received preferred stock in Cortelco. The Cortelco
preferred stock is nonvoting, has a liquidation preference of $12.50 per share
and entitles CMC to dividends which are non-cumulative until August 1995 and
thereafter cumulative at $.75 per share for each year in which Cortelco earns
net income of $2 million or more. CMC recorded the preferred stock at fair
value, $5.9 million, based on the discounted cash flow of the redemption
requirements. The excess cost basis of the net assets over the fair value of
the preferred shares received was recorded as a distribution of capital to
CMC's stockholders.
In March 1999, CMC consented to a restructuring of certain assets of
Cortelco. In connection with this restructuring, Cortelco distributed common
stock of Cortelco Systems, Inc. to its stockholders on a pro rata basis.
Pursuant to this distribution, CMC and Cortelco entered into a Stock
Distribution Agreement and CMC received its pro rata share which was equal to
6,125,302 shares of common stock of Cortelco Systems, Inc. CMC also entered
into a Stock Purchase Agreement with Mr. David Lee, a director of CMC and the
largest stockholder of CMC and Cortelco, under which, through a series of "put"
and "call" rights, Mr. Lee effectively guarantees CMC the right to receive not
less than approximately $5.9 million in respect of the common stock of Cortelco
Systems, Inc. and the preferred stock of Cortelco by May 2002. In consideration
for the receipt of Mr. Lee's guarantee, CMC consented to an amendment to
Cortelco's certificate of incorporation, which among other things, delays the
dates on which the preferred stock may be tendered for redemption by CMC.
