-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QNsBCmgOXU1s/0MhQi/CE15CgfIHupmFC0fo7a/jKu3pTObMSTUTcTQJWciC6qE6 aeDU6ftsHmLlQqO/H+WE4w== 0000950144-96-007457.txt : 19961101 0000950144-96-007457.hdr.sgml : 19961101 ACCESSION NUMBER: 0000950144-96-007457 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19961031 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMC INDUSTRIES INC CENTRAL INDEX KEY: 0000913270 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 621434910 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-22974 FILM NUMBER: 96651337 BUSINESS ADDRESS: STREET 1: 4950 PATRICK HENRY DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 601-287-3771 MAIL ADDRESS: STREET 1: 1801 FULTON DRIVE CITY: CORINTH STATE: MS ZIP: 38834 10-K405/A 1 CMC MISSISSIPPI 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A [x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee required] For the fiscal year ended July 31, 1996 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No fee required] For the transition period from ____ to ___ Commission file number: 0-22974 CMC INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 62-1434910 (State of incorporation) (IRS Employer Identification No.) 4950 PATRICK HENRY DRIVE, SANTA CLARA, CA 95054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 982-9999 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] [ ] X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ] State the aggregate market value of the voting stock held by non-affiliates of the registrant: $34,924,833 at October 8, 1996. Shares of Common Stock, $.01 par value per shares outstanding at September 30, 1996: 6,665,946 DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Portions of the Proxy Statement relating to the 1996 Annual Meeting of Shareholders: Part III Portions of the 1996 Annual Report to Shareholders: Part II 2 ITEM 3. LEGAL PROCEEDINGS. In December 1993, the Company retained the services of an industrial safety consultant to assist in quantifying the potential exposure to the Company in connection with clean-up and related costs of a former manufacturing site, commonly known as the ITT Telecommunications site in Milan, Tennessee and more particularly described as a 50.1 acre tract surveyed by Construction Layout Service of Milan, Tennessee. The consultant initially estimated that the cost to remove the contaminated soil and deliver it to an appropriate hazardous waste site would be approximately $200,000. Based upon this advice, the Company subsequently entered into a voluntary agreement to investigate the site with the Tennessee Department of Environment and Conservation. In addition, the Company agreed to reimburse a tenant of the site $115,000 for expenditures previously incurred to investigate environmental conditions at the site. The Company recorded a total provision of $320,000 based on these estimates. In fiscal 1995, an environmental expert concluded that the cost of a full study combined with short and long-term remediation of the site may cost between $3 and $4 million. During fiscal 1996 the State of Tennessee's Department of Environment and Conservation named certain potentially responsible parties ("PRPs") in relation to the former facilities. The Company was not named as a PRP. However, Alcatel, Inc., a PRP named by the State of Tennessee's Department of Environment and Conservation and a former owner of the Company, is seeking indemnification from the Company. To date, Alcatel has not filed any legal proceedings to enforce its indemnification claim. However, there can be no assurance that Alcatel will not initiate such proceedings or that any other third parties will not assert claims against the Company relating to remediation of the site. In the event any such proceedings are initiated or any such claim is made, the Company believes it has numerous defenses which it will vigorously assert. There can be no assurance that if any proceedings are initiated or any such claim is asserted, defense or resolution of such matter will not have a material adverse effect on the Company's financial position or results of operations. The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and will not disrupt the normal operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. 7 3 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (1) EXHIBITS
Exhibit Description Number ----------- 3.1* Restated Certificate of Incorporation. 3.2* Amended and Restated Bylaws. 4.1* Form of Common Stock Certificate. 4.2*** Securities Purchase Agreement, dated as of May 15, 1996, by and between the Company and each of the investors listed therein. 10.1* Agreement and Plan of Reorganization between CMC Industries, Inc. and International Telecommunication Asia PTE, Ltd. dated as of October 2, 1993. 10.2* Lease Agreement between The Board of Supervisors of Alcorn County, Mississippi and International Telephone and Telegraph Corp. dated August 1, 1961, as amended and supplemented and related documents. 10.3* Lease Agreement between Corinth Telecommunications Corp. (now known as CMC Manufacturing, Inc.) and Douglas Jumper and Truitt Stockton d/b/a Jumper-Stockton Warehouses for the Pinecrest Road warehouse dated October 20, 1992. 10.4* Lease Agreement between Corinth Telecommunications Corp. (now known as CMC Manufacturing, Inc.) and Douglas Jumper and Truitt Stockton d/b/a Jumper-Stockton Warehouses for the Sawyers Road warehouse dated October 20, 1992. 10.5* Lease Agreement between Lincoln N.C. Realty Fund, Incorporated and Topaz Industries, Inc. dated April 8, 1991. 10.6* Loan and Security Agreement dated August 23, 1993 between CMC Manufacturing, Inc. and Continental Bank, N.A. and related documents. 10.7* License Agreement between ITT Corporation and ITT Telecom Products Corporation (now known as CMC Manufacturing, Inc.) dated December 30, 1986. 10.8* Manufacturing Agreement between Cortelco International, Inc. and CMC Manufacturing, Inc. dated October 7, 1993. 10.9* Purchase Agreement between GTE Communication Systems Corporation and CMC Manufacturing, Inc. dated April 1, 1994. 10.10* Commercial Promissory Notes between Topaz Industries, Inc. and Bank of Communications dated January 2, 1992 and February 9, 1993. 10.11* Agreement between Cortelco International, Inc. and CMC Manufacturing, Inc. dated as of September 1, 1993. 10.12* Cortelco USA, Inc. (now known as CMC Manufacturing, Inc.) Profit Sharing Savings Plan and Trust for Salaried Employees. 10.13* Hourly Pension Plan for Employees of ITT Telecom Products Corporation (now known as CMC Manufacturing, Inc.) at Corinth. 10.14* CMC Industries, Inc. 1990 Equity Incentive Plan, as amended and restated. 10.15* Form of Indemnification Agreement between CMC Industries, Inc. and certain officers and directors. 10.16** Lease Agreement between Guzik Investments, L.P. and CMC Industries dated June 14, 1995. 13.1 1996 Annual Report to Shareholders. 21.1+ Subsidiaries of the Registrant. 23.1+ Consent of Independent Accountants. 27 Financial Data Schedule (for SEC use only)
4 + Filed Previously * Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 33-70126. ** Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended July 31, 1995. *** Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K filed the Securities and Exchange Commission on May 24, 1996. (2) FINANCIAL ON STATEMENTS AND SCHEDULES Consolidated Financial Statements of CMC Industries, Inc. and subsidiaries Consolidated Balance Sheets as of July 31, 1996 and 1995 Consolidated Statements of Income for the Years Ended July 31, 1996, 1995 and 1994 Consolidated Statements of Changes In Stockholders' Equity for the Years Ended July 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended July 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Report of Independent Accountants The Financial Statements are hereby incorporated by reference to pages 17 to 35 of the Company's 1996 Annual Report to Shareholders. Such Annual Report is filed as exhibit 13.1 hereto. All schedules specified by the Securities and Exchange Commission are inapplicable or omitted pursuant to Regulation S-X since the information is included in the Consolidated Financial Statements or related notes. (3) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission on May 24, 1996, reporting the consummation of a placement to private investors of an aggregate of 436,037 shares of the Company's Common Stock and Warrants to purchase an aggregate of 168,963 shares of the Company's Common Stock, which are exercisable at $7.50 per share. The purpose of the offering was principally to provide additional financial flexibility to take advantage of business opportunities as they arise. 5 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CMC INDUSTRIES, INC. /s/ Matthew G. Landa ------------------------------------ Date: October 28, 1996 Matthew G. Landa, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ David S. Lee Chairman of the Board October 28, 1996 - ---------------------------- David S. Lee /s/ Matthew G. Landa President, Chief Executive October 28, 1996 - ---------------------------- Officer and Director Matthew G. Landa /s/ Andrew J. Moley Executive Vice President, October 28, 1996 - ---------------------------- Chief Financial Officer and Andrew J. Moley Director /s/ Ira Coron Director October 28, 1996 - ---------------------------- Ira Coron /s/ Frederick W. Gibbs Director October 28, 1996 - ---------------------------- Frederick W. Gibbs /s/ Charles Holloway Director October 28, 1996 - ---------------------------- Charles Holloway
EX-13.1 2 1996 ANNUAL REPORT 1 EXHIBIT 13.1 1996 Annual Report to Shareholders. 2 CMC Industries, Inc. 1996 ANNUAL REPORT [LOGO] CMC 3 MISSION STATEMENT "To Attain the Highest Level of Technical Competence and Develop the Most Efficient Materials Logistics Processes in the Business in order to be the Most Flexible, Quickest Reacting Turn-key Provider of Electronics Manufacturing Services to the Communications and Electronics Industry." 4 Table of Contents - ------------------------------------------------------------------------------- Corporate Profile................................. 1 Letter To Shareholders............................ 2 Organizational Philosophy......................... 4 Financial Highlights.............................. 6 Management's Discussion And Analysis...................................... 9 Consolidated Financial Statements................. 17 Notes To Consolidated Financial Statements.............................. 21 Corporate Directory............................... 36
5 Corporate Profile CMC Industries, Inc. and Subsidiaries 1 [PICTURE] DURING THE COURSE OF THIS YEAR, CMC RELOCATED ITS CORPORATE HEADQUARTERS AND EXPANDED INTO A 75,000 SQUARE FOOT FULL TURNKEY ELECTRONICS MANUFACTURING FACILITY . THIS FACILITY IS DESIGNED SPECIFICALLY TO MEET THE NEEDS OF OUR SILICON VALLEY AND WEST COAST CUSTOMERS, WITH A FULL ARRAY OF SERVICES, FROM THE PRE-PROTOTYPE DESIGN STAGE TO COMPLETE SYSTEM INTEGRATION AND CONFIGURATION. [PICTURE] OUR FLAGSHIP FACILITY, IN CORINTH MS, WAS ESTABLISHED IN 1961. TODAY CMC OPERATES OUT OF A 350,000 SQUARE FOOT BUILDING INCORPORATING A FULL COMPLEMENT OF VALUE-ADDED SERVICE CAPABILITIES, INCLUDING FULL PLASTIC INJECTION MOLDING, A FIXTURE TOOLING SHOP, COMMUNICATIONS SCREEN ROOMS FOR RF (WIRELESS) TESTING AND THE LATEST IN AUTOMATED SURFACE MOUNT TECHNOLOGY AND BALL GRID ARRAY ASSEMBLY AND TEST EQUIPMENT. CMC now has over 425,000 square feet of manufacturing capacity, 1100 highly-skilled employees, worldwide procurement capabilities and expertise in the full range of value-added design, manufacturing, test, fulfillment and customer services. This combination of strengths allows CMC to truly be the "manufacturing division" of our global customers. 6 2 CMC Industries, Inc. and Subsidiaries TO OUR SHAREHOLDERS - ------------------------------------------------------------------------------- Fiscal 1996 was a year of transition for CMC Industries, Inc. After the disappointing performance of fiscal 1995, we entered 1996 with a mandate for change. During the year, we worked to focus our sales and marketing efforts on high growth business opportunities, improve our overhead structure to allow for profitable operations and strengthen our asset management to generate funds for growth. The results during the year have been encouraging. CMC achieved record sales for the Company of $164.7 million and, excluding a one-time pre-tax charge of $792,000 in the first quarter of the year, bottom-line earnings per share numbers improved substantially, from $.01 in 1995 to $.10 in 1996. These aggregate numbers highlight significant improvements in the performance of the Company and the increased prospects for future success at CMC. We believe that success in this industry is achieved by developing strong partnerships with, and providing a full suite of manufacturing services and materials management capabilities to, successful Original Equipment Manufacturers ("OEMs") in the most robust high-technology sectors. To this end, we focused our sales, marketing and operations efforts on areas of the Electronic Manufacturing Services ("EMS") marketplace, particularly communications and a few other select segments, which offer the greatest potential for growth. During the past year, we invested heavily in the latest generation Surface Mount Technology ("SMT") and Ball Grid Array ("BGA") equipment to service the needs of our OEM partners, and we upgraded our facilities, specifically in California, where we now operate out of a 75,000 sq. ft. facility located in the heart of the Silicon Valley. We have also upgraded our materials and purchasing functions with an eye to becoming the best materials logistics provider in the industry, and we have strengthened our management ranks with a core team of professionals with significant industry experience. Our newly-implemented management information systems give us the tools necessary to properly understand our business, and we strive to continuously improve our knowledge of and control over all facets of our operations. Finally, our Corporate Headquarters relocation to California and the Silicon Valley put us in close proximity to many of our key current and prospective customers. Thus far, the changes appear to be working as over 33% of our fourth quarter revenues came from customers new to CMC in 1996. This has allowed us to bring down the revenue concentration of our two largest accounts from a combined total of over 50% in the beginning of the year to just under 35% in the fourth quarter. This improved diversification and quality of our customer base, along with our improved earnings and asset management performance, are signs that the efforts we have made are beginning to bear fruit. Recently, we expanded our Board of Directors by welcoming Charles Holloway and Ira Coron to the Board. Professor Holloway is the holder of the Kleiner, Perkins, Caufield & Byers Professorship in Management at the Stanford University Graduate School of Business and is an expert in the fields of manufacturing and materials management. Mr. Coron is the Chief Executive Officer of California Amplifier, a leading manufacturer of wireless communications equipment. Their guidance and advice will be invaluable to us as we continue to improve our operations and broaden our customer base. In early August, we promoted Jack O'Rear to the position of Chief Operating Officer of CMC. Jack's leadership of the Mississippi operations has been a key factor in our improved performance, and we look forward to leveraging his expertise over the breadth of our operations. Sadly, we must also report the passing of Bill Fowble, a Director of the Company. We extend our condolences to his family and will miss him as a key member of the CMC team. In summary, 1996 was a year of continued improvement for CMC. We have in place today a talented group of employees and an operation poised to take advantage of the considerable opportunities available to us in our business sector. We appreciate our customers' faith in us, and we are grateful to you, our shareholders, for your support as we continue to make CMC a leader in the Electronics Manufacturing Services Industry. Sincerely, /s/ Matthew G. Landa - ----------------------------------- Matthew Landa President & Chief Executive Officer 7 Letter To Shareholders CMC Industries, Inc. and Subsidiaries 3 "We have in place today a talented group of employees and an operation poised to take advantage of the considerable opportunities available to us in our business sector." Matthew Landa President & Chief Executive Officer 8 4 CMC Industries, Inc. and Subsidiaries ORGANIZATIONAL PHILOSOPHY - ------------------------------------------------------------------------------- Quick response to our customers' needs, empowerment of our employees, the continual development of world-class processes to increase our flexibility and the development of competitive advantages for our customers are the four cornerstones of our organizational philosophy. RESPONSIVENESS TO CUSTOMERS At CMC, responding to customer needs is our primary objective. In today's increasingly competitive high-technology marketplace our customers' success is driven by their ability to be the best at managing products through increasingly shorter life cycles. We believe that those companies that can cost-efficiently launch and ramp new products the fastest, redesign existing products to meet evolving end-customer needs the quickest and bring product life cycles to conclusion the most effectively will stand head and shoulders above their competition. CMC has years of management experience dealing with these issues. Our workforce is highly trained and motivated and maintains the highest level of technical competence in leading edge communications-related manufacturing processes. EMPLOYEE EMPOWERMENT At CMC, we believe in empowering our employees with the tools needed to not only maintain the status quo but to continually improve each and every task they perform. In order for this system to be effective, our employees must be given the tools and the authority to effect real, positive change within the organization. When we refer to tools, we mean real-time access to the major drivers of performance for each program. Whether it be the internal cost to perform a purchasing transaction or the utilization of a particular piece of equipment, our employees need to know the status of these drivers at any given moment. This information allows all members of our team to constantly contribute toward making our business and our customer programs more efficient. It is through a complete understanding of our business at all levels in the organization that we drive our overriding philosophy of continual improvement. WORLD CLASS PROCESSES, FLEXIBILITY AND ADDED-VALUE It is our mission to create and continually improve the most efficient materials logistics processes, the best management information systems and the highest quality manufacturing processes. These distinctive competencies allow CMC to be the most flexible, quickest reacting and highest quality provider of electronics manufacturing services in the industry. A successful manufacturing partner is one that has flexibility built into its systems to react to unanticipated changes at multiple levels in the manufacturing value proposition. These changes come in many forms - such as changes in component availability, product design or external market conditions. The key is to effect change as quickly as possible while minimizing cost and maintaining the highest quality standards. At CMC, this is our focus. We add value to our customers by contributing our specialized knowledge of the full range of manufacturing services. By doing this, we allow our manufacturing partners to focus on those areas where they truly add the greatest value versus their competition. COMPETITIVE ADVANTAGE It is through continual change that CMC will strive to be the best electronic manufacturing services provider in the world. Our change is driven by our customers' needs, implemented by our empowered employees and enabled by our state-of-the-art business systems. The output of this process of change is the ongoing development and refinement of the most flexible and quickest reacting company in the EMS business, creating a truly competitive advantage for our manufacturing partners. 9 Organizational Philosophy CMC Industries, Inc. and Subsidiaries 5 Quick response to our customers' needs, empowerment of our employees, the continual development of world-class processes to increase our flexibility and the development of competitive advantages for our customers are the four cornerstones of our organizational philosophy. 10 6 CMC Industries, Inc. and Subsidiaries FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------- Over the course of fiscal 1996, CMC demonstrated consistent improvement in financial performance. Sales for the year were $164,700,000, a record for the Company and an increase of 14% over last year's $144,300,000. Within these numbers lies a significant trend. In 1995, 39% of revenues came from advanced manufacturing operations such as SMT, and the remaining 61% resulted primarily from hand assembly and auto insertion operations. In 1996, these numbers were reversed, with 61% of revenues being derived from SMT and BGA. In fact, SMT and BGA represented over 70% of fourth quarter revenues. This represents an annual growth rate of 81% for these operations and is a sign that today, CMC is truly aligned with the industry's demands. Gross margins improved from 5.3% in 1995 to 6.5% in 1996, and our gross margin in the fourth quarter was 8.2%, again indicating a strong positive trend. Operating income increased by $2,000,000 on a year over year basis, excluding the charge taken in the first quarter for a one time reduction in overhead staffing. Finally, net income more than doubled, and the trend was substantially positive as well, with the second, third and fourth quarters being profitable and the Company earning $.07 per share in the fourth quarter, up from losses of $.06 in the year ago period and $.11 in the first quarter of 1996. A key indicator for our management during the course of this transition has been employee productivity. Revenue per employee has risen from just over $23,000 in the fourth quarter of 1995 to $37,000 in the most recent quarter. This is largely attributable to the investment made in advanced automation equipment and the successful transition to the higher technology processes. We look to continue this trend into 1997. We generated in excess of $9,000,000 in operating cash flow over the course of the year after financing the growth of the business. Better inventory performance and a reduction in receivable days outstanding were the key areas of improvement. Bank borrowings were reduced by $4,000,000 and we purchased $5,000,000 of SMT & BGA equipment to further strengthen our manufacturing capabilities. In May, we raised $2,500,000 through an equity private placement adding to our overall capitalization and providing additional funds for growth. Overall, we significantly strengthened our financial position in 1996 by operating profitably, improving asset management, reducing debt and increasing our equity base. In summary, 1996 was a solid financial year for CMC, and we look to continue the positive trends through the upcoming year. Sincerely, /s/ Andrew Moley - ------------------------------------ Andrew Moley Executive Vice President & Chief Financial Officer 11 FINANCIAL HIGHLIGHTS CMC Industries, Inc. and Subsidiaries 7 ANNUAL NET SALES (in millions) [CHART] EARNINGS PER SHARE [CHART] Overall, we signigicantly strengthened our financial position in 1996 by operating profitably, improving asset management, reducing debt and increasing our equity base. Andrew Moley Executive President & Chief Financial Officer REVENUE PER EMPLOYEE (in thousands) [CHART] 12 8 CMC Industries, Inc. and Subsidiaries SELECTED CONSOLIDATED FINANCIAL DATA AND - ------------------------------------------------------------------------------- PRO FORMA FINANCIAL DATA The following table summarizes certain selected consolidated financial data and pro forma financial data, which should be read in conjunction with the Company's consolidated financial statements and related notes and with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The selected consolidated financial data as of July 31, 1996 and 1995, and for each of the years in the three-year period ended July 31, 1996, have been derived from, and are qualified by reference to, audited financial statements included elsewhere herein. The historical income statement data for periods through July 31, 1993 reflect the business of the Company until the August 1993 restructuring. The pro forma income statement data presents the pro forma operating results of the contract manufacturing services business.
Year Ended July 31, -------------------------------------------------- 1996 1995 1994 1993 1992 (In thousands, except for share data) -------------------------------------------------- HISTORICAL INCOME STATEMENT DATA: Net sales.......................................... $164,711 $144,303 $163,779 $150,638 $140,823 Cost of sales...................................... 153,956 136,691 150,793 121,784 112,411 -------- -------- -------- -------- -------- Gross profit....................................... 10,755 7,612 12,986 28,854 28,412 Selling, general and administrative expenses....... 8,251 7,062 6,168 19,763 17,392 Restructuring charge............................... 792 -- -- -- -- Research and development expenses.................. -- -- -- 6,304 5,297 -------- -------- -------- -------- -------- Operating income................................... 1,712 550 6,818 2,787 5,723 Interest expense, net.............................. 1,512 1,561 1,386 2,899 2,388 Interest income from sales-type leases............. -- -- -- 627 845 -------- -------- -------- -------- -------- Income (loss) before income taxes.................. 200 (1,011 5,432 515 4,180 Income tax provision (benefit)..................... 95 (1,051 2,056 290 1,592 -------- -------- -------- -------- -------- Net income......................................... $ 105 $ 40 $ 3,376 $ 225 $ 2,588 ======== ======== ======== ======== ======== Net income per share (1)........................... $ 0.02 $ 0.01 $ 0.60 $ 0.05 $ 0.59 ======== ======== ======== ======== ======== Weighted average common shares and equivalents (1).................................... 6,449 6,253 5,664 4,515 4,390 PRO FORMA INCOME STATEMENT DATA: Net sales........................................................................... $111,590 $100,541 Cost of sales....................................................................... 99,941 90,622 -------- -------- Gross profit........................................................................ 11,649 9,919 Selling, general and administrative expenses........................................ 4,812 3,780 -------- -------- Operating income.................................................................... 6,837 6,139 Interest expense, net............................................................... 980 1,186 -------- -------- Income before income taxes.......................................................... 5,857 4,953 Provision for income taxes.......................................................... 2,107 1,857 -------- -------- Net income.......................................................................... $ 3,750 $ 3,096 ======== ======== Net income per share (1)............................................................ $ 0.83 $ 0.71 ======== ======== July 31, -------------------------------------------------- 1996 1995 1994 1993 1992 -------------------------------------------------- HISTORICAL BALANCE SHEET DATA: Working capital..................................... $20,914 $21,739 $19,862 $ 5,626 $11,483 Total assets........................................ 67,434 65,964 66,426 54,428 70,670 Long-term debt and capital lease obligations........ 6,261 6,341 5,545 5,096 10,311
- --------------------------- (1) Net income per share is calculated as described in Note 2 to the Consolidated Financial Statements. The Company has never paid or declared any cash dividends. 13 CMC Industries, Inc. and Subsidiaries 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS GENERAL CMC Industries, Inc. ("CMC" or the "Company") was incorporated in 1990 to acquire certain businesses operated from the Company's Corinth, Mississippi manufacturing facility since 1960. In August 1993, the Company transferred certain assets and related liabilities associated with its telephone business to Cortelco in exchange for 1,000,000 shares of non-voting Series A Preferred Stock of Cortelco, which effectively transferred to Cortelco all of the Company's assets and liabilities not related to its contract manufacturing business. This restructuring allowed CMC to focus on contract manufacturing services while Cortelco pursued the development and distribution of telephones and telecommunications products. See Note 1 to the Consolidated Financial Statements. The Company offers contract manufacturing services to its customers on both a turnkey and consignment basis, with over 90% of the Company's net sales derived from turnkey projects. On turnkey contracts, the Company both procures the components and other supplies and provides full manufacturing services. On consignment contracts, the customer provides the components and other supplies to the Company, and the Company charges for only labor and overhead; thus, sales volumes per assembly are generally lower and the gross margins are generally higher on consignment contracts since the Company does not procure materials for the assembly. Set forth below are analyses of the Company's results of operations for the fiscal years ended July 31, 1996, 1995 and 1994. Results of operations for the years ended July 31, 1996 and 1995 are discussed together in the section immediately below, followed by a discussion of results for the years ended July 31, 1995 and 1994. RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1996 VERSUS 1995 Total net sales for fiscal 1996 were $164.7 million, up 14% from $144.3 million for fiscal 1995. Approximately $107.8 million, or 66%, of the Company's sales in fiscal 1996 were to customers from the communications (telecom and data networking) industry as compared to $87.0 million, or 60%, in fiscal 1995. Revenue growth in the communications segment was realized as sales to customers new to the Company in fiscal 1996 more than offset a $7.6 million decrease in sales to Cortelco. Sales to computer customers were relatively flat from year to year as a $6.9 million decrease in sales to the Company's largest customer from this industry was substantially offset by sales to new customers. Gross profit for fiscal 1996 was $10.8 million or 6.5% of net sales, as compared to $7.6 million or 5.3% of net sales for fiscal 1995. The gross profit improvement on a year-to-year basis principally resulted from improved operating efficiencies related to higher sales volume, a stronger mix of higher margin new business and lower overhead costs resulting from a reduction in staffing. 14 10 CMC Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) Selling, general and administrative expenses were $9.0 million or 5.5% of net sales in fiscal 1996, as compared to $7.1 million or 4.9% of net sales for fiscal 1995. The higher expenses in fiscal 1996 were primarily due to additions to the Company's management team and sales force, increases in expenses incurred to improve program management and customer service in an effort to increase profitability in future periods, and $792,000 in non-recurring charges related to the restructuring of the Company's business. Of this amount, $241,000 related to the relocation of CMC's corporate offices and California operations to a new facility in Santa Clara, CA. This move gives CMC an enhanced presence in the Silicon Valley, the base of operations for many of the Company's current and prospective customers. The remaining amount represented one-time charges related to a reduction in overhead staffing at the Company's Corinth, MS operations. These reductions reflect the transition of the Company's business away from hand assembly work and towards more advanced surface mount technology operations. Net interest expense for fiscal 1996 was $1.5 million as compared to $1.6 million for fiscal 1995. The decrease in fiscal 1996 compared to fiscal 1995 was due to lower average debt balances. The Company's effective tax rate for fiscal 1996 was approximately 47.5%. The Company's effective tax rate was approximately 38% throughout fiscal 1995, with the exception of the recording of a non-recurring income tax benefit resulting from recognition of prior year research and development credits. The fluctuation from year to year also resulted from the amortization of goodwill, which was treated as an expense for financial purposes but was not deductible for tax purposes. RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1995 VERSUS 1994 Net sales for fiscal 1995 were $144.3 million, down 12% from $163.8 million for fiscal 1994. Sales of telecommunications products accounted for approximately 54% of sales in fiscal 1995 compared to 48% in fiscal 1994. The decline in sales in fiscal 1995, as compared to fiscal 1994, was largely attributable to a decrease in sales to the Company's largest customer in the computer electronics industry. Sales to this customer accounted for $35.3 million or approximately 24% of the Company's total revenues for fiscal 1995 as compared to sales of $59.9 million or approximately 37% of the Company's total revenues for fiscal 1994. Gross profit for fiscal 1995 was $7.6 million or 5.3% of net sales, as compared to $13.0 million or 7.9% of net sales for fiscal 1994. The decline in gross profit in fiscal 1995 was attributable in part to inefficient utilization of facilities, equipment and personnel resulting from a decline in orders from the Company's existing customer base. Margins were also adversely impacted by a shift in sales mix to lower margin products and a provision for inventory reserves for end-of-life products. 15 CMC Industries, Inc. and Subsidiaries 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) Selling, general and administrative expenses were $7.1 million or 4.9% of net sales in fiscal 1995, as compared to $6.2 million or 3.8% of net sales for fiscal 1994. The higher expenses in fiscal 1995 were primarily due to additions to the Company's management team and increases in expenses incurred to improve program management and customer service in an effort to increase sales and profitability in future periods. Net interest expense for fiscal 1995 was $1.6 million as compared to $1.4 million for the prior year. Most of the Company's debt bears interest at variable rates which were consistently higher during fiscal 1995 than in 1994. The Company's effective tax rate was approximately 38% throughout fiscal years 1995 and 1994, with the exception of the recording of a non-recurring income tax benefit of approximately $0.7 million in fiscal 1995. The benefit resulted from recognition of prior year research and development credits. The Company's operating results and cash flows were adversely impacted in fiscal 1995 and 1994 by declining sales to the Company's largest customer in the computer electronics industry, especially as it related to a major reschedule of production of a particular printed circuit board assembly. The Company began manufacture of this product in the first quarter of fiscal 1994. The following table shows the revenues derived from sales of this product for each quarter of fiscal 1994 and 1995. Quarter ended October 31, 1993 $ 4.8 million Quarter ended January 31, 1994 12.2 million Quarter ended April 30, 1994 6.3 million Quarter ended July 31, 1994 3.4 million Quarter ended October 31, 1994 3.3 million Quarter ended January 31, 1995 2.2 million Quarter ended April 30, 1995 0.9 million Quarter ended July 31, 1995 2.2 million The Company was advised by the customer in March 1994 that a production reschedule of this product was necessary due to the build-up of excess inventories in the customer's distribution channels and that the reschedule would be applied consistently to other suppliers of this product. The Company had anticipated that, due to operating efficiencies associated with high volumes of a single product, gross margins and cash flows from operations would increase due to the manufacture of this product; however, the drop in production due to the reschedule caused equipment and personnel to become underutilized. In fiscal 1995, the Company was unable to secure new business that adequately replaced the margin loss from the reschedule. The Company manufactures other products for this customer and continues to actively pursue additional business from the customer. 16 12 CMC Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) QUARTERLY RESULTS The following table contains selected unaudited consolidated financial results for each of the four fiscal quarters for fiscal 1995 and 1996.
YEAR ENDED JULY 31, 1995 YEAR ENDED JULY 31, 1996 ---------------------------------------------- ------------------------------------------------- (In thousands) QUARTER ENDED QUARTER ENDED ---------------------------------------------- ------------------------------------------------- OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 Net sales $38,424 $38,764 $33,511 $33,604 $38,580 $41,810 $42,944 $41,377 Gross profit (loss) 3,415 3,169 (434) 1,462 2,072 2,507 2,789 3,387 Selling, general and administrative expenses 1,745 1,571 2,000 1,746 2,861 2,005 1,899 2,278 Operating income (loss) 1,670 1,598 (2,434) (284) (789) 502 890 1,109 Interest expense, net 382 387 453 339 346 429 403 334 Net income (loss) $ 798 $ 753 $(1,118) $ (393) $ (715) $ 40 $ 300 $ 480 As a Percentage of Sales ------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit (loss) 8.9 8.2 (1.3) 4.4 5.4 6.0 6.5 8.2 Selling, general and administrative expenses 4.5 4.1 6.0 5.2 7.4 4.8 4.4 5.5 Operating income (loss) 4.3 4.1 (7.3) (0.8) (2.0) 1.2 2.1 2.7 Interest expense, net 1.0 1.0 1.4 1.0 0.9 1.0 0.9 0.8 Net income (loss) 2.1 1.9 (3.3) (1.2) (1.9) 0.1 0.7 1.2
The Company's quarterly operating results fluctuate due to a number of factors, including the mix of manufacturing projects, capacity utilization, price competition, the timing of orders from major customers, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, increased costs and shortages of components or labor, and economic conditions generally. The Company normally reduces production in December of each year to allow for holidays and vacation, which can negatively impact results in the Company's second quarter due to inefficiencies and decreased overhead absorption. Net sales and gross margins were heavily influenced throughout fiscal 1995 by the reschedule of a printed circuit board assembly provided to one of the Company's largest customers for use in a personal computer monitor. See "Results of Operations for the Year Ended July 31, 1995 versus 1994." 17 CMC Industries, Inc. and Subsidiaries 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) FORWARD-LOOKING STATEMENTS This annual report contains certain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this document. In addition to the other information contained and incorporated by reference in this document, the following factors should be considered carefully in evaluating the Company and its business. FACTORS THAT MAY AFFECT THE COMPANY POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results are affected by a number of factors, including the mix of manufacturing projects, capacity utilization, price competition, the degree of automation that can be used in the assembly process, the efficiencies that can be achieved by the Company in managing inventories and fixed assets, the timing of orders from major customers, fluctuations in demand for customer products, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, increased costs and shortages of components or labor and economic conditions generally. All of these factors can cause substantial fluctuations in the Company's operating results. The Company's expenditures (including, but not limited to, equipment, inventory and labor) are based, in part, on its expectations as to future revenues and, to a large extent, are fixed in the short term. Accordingly, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues, and any significant shortfall of demand in relation to the Company's expectations or any material delay or cancellation of customer orders could have an almost immediate material adverse effect on the Company's operating results. As a result, it is possible that in some future period, the Company's operating results could fail to meet the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the price of the Company's Common Stock could drop significantly. The Company's gross profit as a percentage of sales in future periods may be materially adversely affected by various factors associated with the Company's production of new product lines, acquisition of new manufacturing equipment and continued dependence on turnkey contracts (and the inventory risks inherent therein). This expansion will result in a higher fixed cost structure which will require increased revenue and/or significant improvements in operating efficiencies in order to maintain historical gross margins. Additionally, the commencement of production of new products typically involves significant start-up costs, lower yields and other inefficiencies. New products do not generate gross margins as high as products which have been in volume production for several months. The Company also expects that competition may continue to intensify, which could also result in lower gross margins. CUSTOMER CONCENTRATION; DEPENDENCE ON INDUSTRY TRENDS. A small number of customers are currently responsible for a significant portion of the Company's net sales. In the fiscal years ended July 31, 1996, 1995 and 1994, the Company's four largest customers for such periods accounted for approximately 63%, 69% and 75%, respectively, of consolidated net sales. Any material delay, cancellation or reduction of orders from these or other customers could have a materially adverse effect on the Company's results of operations. The percentage of the Company's sales to its major customers may fluctuate from period to period. Significant reductions in sales to any of these customers could have a materially adverse effect on the Company's results of operations. In addition, customer contracts can be canceled, and volume levels can be changed or delayed. The timely replacement of canceled, delayed or reduced contracts with new 18 14 CMC Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) business cannot be assured. These risks are exacerbated because a majority of the Company's sales are to customers in the communications sector of the electronics industry, which is subject to rapid technological change and product obsolescence. The factors affecting this industry in general, or any of the Company's major customers in particular, could have a materially adverse effect on the Company's results of operations. COMPETITION. The electronics manufacturing services industry is comprised of a large number of companies, several of which have achieved substantial market share. The Company also faces competition from current and prospective customers who evaluate the Company's capabilities against the merits of manufacturing products internally. The Company competes with different companies depending on the type of service or geographic area. Certain of the Company's competitors have broader geographic breadth. They also may have greater manufacturing, financial, research and development, and marketing resources than the Company. The Company believes that the primary basis of competition in its targeted markets is manufacturing technology, quality, responsiveness, the provision of value-added services and price. To be competitive, the Company must provide technologically advanced manufacturing services, high product quality levels, flexible delivery schedules and reliable delivery of finished products. The Company currently may be at a competitive disadvantage as to price when compared to manufacturers with lower cost structures, particularly with respect to manufacturers with established facilities where labor costs are lower. SHORTAGE OF ELECTRONICS COMPONENTS. Most of the Company's net sales are derived from turnkey manufacturing services in which the Company procures components from third-party suppliers and bears the risk of component shortages. The electronics industry has been characterized by shortages from time to time in semiconductor and other components, which shortages have led to allocations by third-party suppliers. The Company's inability to procure desired supplies of certain components has in the past led, and may in the future, lead to some delays in shipments by the Company to its customers. If these component shortages persist or intensify, however, the Company may not be able to secure quantities required to fulfill customer orders, which could result in delays in shipments or cancellation or delays in customer orders, each of which could have a material adverse effect on the Company's results of operations. MANAGEMENT OF GROWTH. There can be no assurance that the Company will successfully manage the integration of new business. In addition, the Company may experience certain inefficiencies as it manages geographically dispersed operations. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its profitability could be adversely affected. On occasion, customers may require rapid increases in production which can place an excessive burden on the Company's resources. There can be no assurance that the Company will be capable of meeting the demands placed upon the Company's resources by these or any other customers. ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of environmental regulations relating to use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. In this regard, see Note 14 to the Consolidated Financial Statements. RISK OF DEFECTS. The electronics products manufactured for customers by the Company are highly complex and may at times contain undetected design and/or manufacturing errors or failures. Such defects have been discovered in the past, and there can be no assurance that, despite the Company's quality control and quality assurance efforts, such defects will not occur in the future. If such defects occur in quantities or too frequently, the Company's business and operating results may be materially and adversely affected. 19 CMC Industries, Inc. and Subsidiaries 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) DEPENDENCE ON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company's continued success depends, to a large extent, upon the efforts and abilities of key managerial and technical employees. The loss of services of certain key personnel could have a material adverse effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and skilled employees. Failure to do so could have a material adverse effect on the Company's operations. POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price of the Company's Common Stock is subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the electronics manufacturing services industry as well as the industries of the Company's customers and other factors. In addition, the stock market is subject to price and volume fluctuations which affect the market price for many high-technology companies in particular and which may be unrelated to operating performance. There can be no assurance as to the trading price of the Company's Common Stock at any time in the future. LIQUIDITY AND CAPITAL RESOURCES In recent years, the Company has primarily financed its operations through bank credit facilities, equipment leases and proceeds from issuances of capital stock. In January 1994, the Company completed its initial public offering, providing net proceeds of approximately $13.6 million. The proceeds from the offering were used primarily to repay long-term acquisition debt and bank loans made under the Company's revolving credit facility. The Company's bank credit facility is comprised of a $25.0 million revolving credit line, an $8.0 million term loan amortizing over five years beginning in February 1995 and a $3.8 million new equipment line. The loan agreement contains financial covenants related to the Company's net worth and debt service coverage and restricts capital expenditures. At September 30, 1996, total borrowings under this facility were $4.5 million under the revolving credit line and $5.9 million under the term loan. The Company's operations generated positive cash flow of $9.2 million in the year ended July 31, 1996. Cash was provided primarily by net income before depreciation and amortization of $1.9 million, a $4.8 million decrease in inventories, a $2.2 million increase in accounts payable and a $6.1 million reduction in receivables from affiliated companies. Cash was used to fund a $7.0 million increase in trade receivables from non-affiliated companies resulting primarily from higher sales levels. In May 1996, the Company raised approximately $2.5 million through a placement to private investors of an aggregate of 436,037 shares of the Company's Common Stock and Warrants to purchase an aggregate of 168,963 shares of the Company's Common Stock. The purpose of the private offering was principally to provide additional financial flexibility to take advantage of business opportunities as they arise. The proceeds were used initially to repay bank loans made under the Company's revolving credit line. The Company invested approximately $5.7 million in capital expenditures, primarily to acquire surface mount manufacturing equipment during fiscal 1996. The Company partially financed the acquisitions of the equipment with $1.6 million of long-term debt proceeds. 20 16 CMC Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- AND RESULTS OF OPERATIONS (Continued) The Company's needs for financing in the next twelve months include increases in working capital as required to support any sales growth and purchases of advanced manufacturing equipment. The Company expects to meet its short-term liquidity requirements generally through net cash provided by operations, vendor credit terms and short-term borrowings under its lines-of-credit. Beginning in fiscal 1996, the Company accelerated expenditures to increase surface mount technology capabilities, primarily through equipment acquisitions and leases. The Company expects to seek financing of $10 million or more for the acquisition or lease of manufacturing equipment during fiscal 1997; however, there can be no assurance that such financing will be available on terms acceptable to the Company, if at all. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS EFFECTIVE FOR FISCAL 1997 The Financial Accounting Standards Board (the "FASB") has issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective for fiscal years beginning after December 15, 1995 (fiscal 1997 for the Company). For long-lived assets and certain identifiable intangible assets, including related goodwill, to be held and used by an entity, the Statement requires a review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including an estimate of the future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss, based on comparison of carrying value to the fair value of the asset, must be recognized if the sum of the expected future cash flows is less than the carrying amount of the asset. For long-lived assets and certain identifiable intangible assets to be disposed of, the Statement requires financial statement reporting at the lower of carrying amount or fair value less cost to sell. The Company has reviewed its long-lived assets and their carrying amounts as of July 31, 1996 and does not expect application of this Statement in fiscal 1997 to significantly affect its results of operations or financial position. The FASB has also issued Statement of Financial Accounting Standards No. 123, Accounting For Stock-Based Compensation, effective for transactions entered into in fiscal years beginning after December 15, 1995 (fiscal 1997 for the Company). The Statement establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employee's stock, including, with respect to the Company, stock options and employee stock purchase plans. The Statement defines a fair value based method of accounting for employee stock options, under which compensation cost is measured at the date options are granted and recognized by charges to expense over the employees' service periods (usually the vesting period), and it encourages entities to adopt that method of accounting. It also allows entities to continue to measure compensation cost using the method prescribed under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, under which compensation expense is recognized for the excess, if any, of the market price of the stock at grant date over the amount the employee must pay to acquire the stock. The Company, under the provisions of APB No. 25, recognizes no compensation expense for employee stock options when options are granted to employees at a price equal to the market price of the Company's stock at the date of grant. The Company has reviewed the provisions of Statement No. 123 and elected to remain under the provisions of APB No. 25 with respect to its employee stock options that are granted at market price at the date of grant. This decision will result in recognition of no compensation expense for such stock options in future years. However, in accordance with the disclosure provisions of Statement No. 123, the Company, commencing in fiscal 1997, will disclose pro forma basis information to reflect its net income and earnings per share had compensation expense been recognized for these items. 21 CMC Industries, Inc. and Subsidiaries 17 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- (In thousands, except share data)
ASSETS JULY 31, JULY 31, 1996 1995 -------- -------- CURRENT ASSETS Cash and cash equivalents....................................... $ 2,977 $ 89 Trade accounts receivable, less allowance for doubtful accounts of $526 and $132...................................... 17,231 10,235 Accounts and notes receivable from affiliates................... 7,842 13,924 Inventories..................................................... 21,218 26,006 Income tax refundable........................................... -- 753 Other current assets............................................ 417 959 Deferred tax assets............................................. 48 -- ------- ------- Total current assets...................................... 49,733 51,966 Plant and equipment, net......................................... 10,863 7,042 Investment in preferred stock of affiliate....................... 5,884 5,884 Goodwill, net of accumulated amortization of $181 and $129................................................ 822 874 Other assets..................................................... 132 198 ------- ------- $67,434 $65,964 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable under lines of credit................................ $ 6,826 $10,303 Current portion of capital lease obligations....................... 404 260 Current portion of long-term debt.................................. 1,300 1,347 Trade accounts payable............................................. 15,537 13,291 Accrued compensation and related benefits.......................... 1,996 2,372 Accrued expenses and other current liabilities..................... 2,756 1,687 Deferred tax liabilities........................................... -- 967 ------- ------- Total current liabilities...................................... 28,819 30,227 Capital lease obligations........................................... 1,403 183 Long-term debt...................................................... 4,858 6,158 Other noncurrent liabilities........................................ 644 747 Deferred tax liabilities............................................ 608 311 ------- ------- Total liabilities.............................................. 36,332 37,626 ------- ------- Commitments and contingencies (Notes 6 and 13)...................... STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 5,000,000 shares.................. authorized; none outstanding -- -- Common stock, $.01 par value; 15,000,000 shares authorized; 6,662,779 and 6,097,902 shares issued and outstanding............. 67 61 Stock warrants outstanding (convertible into 65,473 shares of common stock).................................................. 44 -- Additional paid-in capital......................................... 29,971 27,299 Retained earnings.................................................. 2,016 1,911 Equity adjustment for minimum pension liability.................... (996) (933) ------- ------- Total stockholders' equity..................................... 31,102 28,338 ------- ------- $67,434 $65,964 ======= =======
The accompanying notes are an integral part of these financial statements. 22 18 CMC Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- (In thousands, except per share data)
YEAR ENDED JULY 31, --------------------------------------- 1996 1995 1994 ---------- ---------- ----------- Net sales Non-affiliates.................................. $126,686 $ 95,708 $110,112 Affiliates...................................... 38,025 48,595 53,667 -------- -------- -------- Total net sales.................................. 164,711 144,303 163,779 -------- -------- -------- Cost of sales Non-affiliates.................................. 118,973 90,659 101,405 Affiliates...................................... 34,983 46,032 49,388 -------- -------- -------- Total cost of sales.............................. 153,956 136,691 150,793 -------- -------- -------- Gross profit..................................... 10,755 7,612 12,986 Selling, general and administrative expenses..... 8,251 7,062 6,168 Restructuring charge............................. 792 -- -- -------- -------- -------- Operating income................................. 1,712 550 6,818 Interest expense................................. 1,512 1,561 1,386 -------- -------- -------- Income (loss) before income taxes................ 200 (1,011) 5,432 Income tax provision (benefit)................... 95 (1,051) 2,056 -------- -------- -------- Net income....................................... $ 105 $ 40 $ 3,376 ======== ======== ======== Net income per common and common equivalent share................................ $ 0.02 $ 0.01 $ 0.60 ======== ======== ======== Weighted average common and common equivalent shares............................... 6,449 6,253 5,664 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 23 CMC Industries, Inc. and Subsidiaries 19 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- (In thousands, except share data)
SHARES RETAINED ------------------- EARNINGS PREFERRED COMMON CAPITAL (DEFICIT) OTHER TOTAL --------- ------ ------- --------- ----- ----- Balance, July 31, 1993................. 50 4,302,485 $13,716 $(1,505) $ (986) $11,225 Net income............................. 3,376 3,376 Redemption of preferred shares......... (50) Issuance of shares..................... 1,732,000 13,606 13,606 Exercise of stock options.............. 59,100 20 20 Minimum pension liability.............. (244) (244) --------- --------- ------- ------- ------- ------- Balance, July 31, 1994................. -- 6,093,585 27,342 1,871 (1,230) 27,983 Net income............................. 40 40 Exercise of stock options.............. 40,417 18 18 Stock dividends waived................. (36,100) -- Minimum pension liability.............. 297 297 --------- --------- ------- ------- ------- ------- Balance, July 31, 1995................. -- 6,097,902 27,360 1,911 (933) 28,338 Net income............................. 105 105 Issuance of shares..................... 436,037 2,364 2,364 Issuance of warrants................... 44 44 Exercise of stock options.............. 128,840 314 314 Minimum pension liability.............. (63) (63) --------- --------- ------- ------- ------- ------- Balance, July 31, 1996................. -- 6,662,779 $30,082 $ 2,016 $ (996) $31,102 ========= ========= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. 24 20 CMC Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- (In thousands)
YEAR ENDED JULY 31, --------------------------------- 1996 1995 1994 -------- -------- ------- Cash flows from operating activities: Net income......................................... $ 105 $ 40 $ 3,376 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes........................... (718) 759 150 Depreciation and amortization................... 1,746 1,607 1,308 Loss (gain) on disposition of assets........... 10 49 (16) Changes in assets and liabilities: Receivables................................. (914) (2,528) (6,998) Inventories................................. 4,788 3,143 (9,692) Other assets................................ 1,379 (1,626) 352 Trade accounts payable...................... 2,246 (1,621) (622) Accrued expenses and other current liabilities........................ 693 (919) (167) Other liabilities........................... (166) (611) 18 ------- ------- -------- Net cash provided by (used in) operating activities. 9,169 (1,707) (12,291) ------- ------- -------- Cash flows from investing activities: Capital expenditures............................... (5,669) (1,465) (4,644) Proceeds from disposition of assets................ 126 115 33 ------- ------- -------- Net cash used in investing activities............... (5,543) (1,350) (4,611) ------- ------- -------- Cash flows from financing activities: Net (repayments) borrowings under lines of credit.............................. (3,477) 4,552 6,869 Proceeds from long-term debt....................... 1,596 -- 2,000 Principal payments on long-term debt............... (1,347) (1,232) (4,989) Principal payments on capital leases............... (232) (478) (336) Note payable to affiliate.......................... -- -- (431) Proceeds from exercise of stock options and issuance of stock and warrants................. 2,722 18 13,626 ------- ------- -------- Net cash (used in) provided by financing activities. (738) 2,860 16,739 ------- ------- -------- Net increase (decrease) in cash and cash equivalents............................... 2,888 (197) (163) Cash and cash equivalents........................... Beginning of year.................................. 89 286 449 ------- ------- -------- End of year........................................ $ 2,977 $ 89 $ 286 ======= ======= ======== Supplemental information: Income taxes paid (refunded)....................... $ 488 $ (123) $ 1,394 Interest paid...................................... 1,697 1,582 1,416
The accompanying notes are an integral part of these financial statements. 25 CMC Industries, Inc. and Subsidiaries 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1 -- ORGANIZATION AND BASIS OF PRESENTATION DESCRIPTION OF BUSINESS CMC Industries, Inc. and its subsidiaries (the "Company") provide contract manufacturing services primarily to original equipment manufacturers ("OEMs") in the computer and communications industries. Over 90% of the Company's manufacturing contracts are for turnkey services and include procurement of materials in addition to manufacturing. RESTRUCTURING In August 1993, the Company completed a restructure in contemplation of an initial public offering of shares of the Company's common stock. The restructure was the result of a distribution plan adopted by the Board of Directors prior to July 31, 1993. In connection with this restructuring, the Company's name was changed from International Telecommunications Corporation to CMC Industries, Inc. The restructuring transactions were executed to transfer the telecommunications product development and distribution operations to a corporation affiliated with the Company by common ownership. The contract manufacturing services operations, including the manufacture of telecommunications products under contract with this affiliate and contract manufacturing services for other OEMs, were retained by the Company. Such services are carried out by the Company's wholly-owned subsidiaries CMC Mississippi, Inc. and CMC California, Inc. In connection with the restructuring, the Company transferred its telecommunications business assets, with a book value of approximately $49 million, and liabilities of approximately $37 million, to Cortelco Systems Holding Corp. ("Cortelco"), a newly-formed company owned by certain of the Company's existing stockholders, in exchange for 1,000,000 shares of redeemable preferred stock of Cortelco. The Cortelco preferred stock is nonvoting, has a liquidation preference of $12.50 per share and entitles the Company to dividends which were non-cumulative until August 1995 and thereafter cumulative at $.75 per share for each year in which Cortelco earns net income of $2 million or more. The Company may, subject to certain restrictions, require Cortelco to redeem the preferred stock, on a pro rata basis, over a five-year period beginning August 1998. The Company recorded the preferred stock at fair value, $5.9 million, based on the discounted cash flow of the redemption requirements. The excess cost basis of the net assets over the fair value of the preferred shares received was recorded as a distribution of capital to the Company's stockholders. The assets and liabilities transferred, the distribution of capital and the investment in preferred shares are considered noncash investing and financing activities and have been excluded from the statement of cash flows. 26 22 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- Note 2 -- SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingencies at the date of the financial statements and the related reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Investments with original maturities of three months or less are classified as cash equivalents. REVENUE RECOGNITION In addition to providing contract manufacturing services on a turnkey basis, the Company performs assembly services on a consignment basis where the customer typically procures the components used in the process. The Company recognizes revenue upon shipment for both turnkey and consignment contracts. INVENTORIES Inventories are stated at the lower of cost or market. Cost has been determined by the last-in, first-out ("LIFO") method for approximately 83% and 94% of inventories as of July 31, 1996 and 1995, respectively. PLANT AND EQUIPMENT Plant and equipment are stated at cost less accumulated depreciation. The Company provides for depreciation using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes. 27 CMC Industries, Inc. and Subsidiaries 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- GOODWILL The excess of purchase price over net tangible assets of businesses acquired is carried as goodwill. The Company amortizes such amounts on a straight-line basis over a twenty-year period. The Company recorded amortization expense of $52,000 for each of the years ended July 31, 1996, 1995 and 1994, related to the purchase of a subsidiary in fiscal 1993. DEFERRED LOAN COSTS Loan origination fees paid in connection with new borrowings are amortized using a method which approximates the effective rate method over the terms of the related borrowing. Amortization is included in interest expense. MEDICAL CARE AND DISABILITY BENEFIT PLANS The Company is self-insured with respect to certain medical care and disability benefit plans for 70% of its employees. The costs for such plans are charged against earnings in the period incurred. The liability for health care claims was $500,000 and $600,000 as of July 31, 1996 and 1995, respectively, and the related expense incurred was $3,078,000, $3,102,000 and $2,160,000 for the years ended July 31, 1996, 1995 and 1994, respectively. The Company does not provide benefits under these plans to retired employees. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards 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 the Company's financial statements or tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. NET INCOME PER SHARE Net income per common and common equivalent share has been computed on the basis of the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the related period. Common equivalent shares consist of stock options and warrants included in the computation of net income per share using the treasury stock method. 28 24 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- PRESENTATION Certain fiscal 1995 and 1994 balances have been reclassified to conform to the current year presentation. NOTE 3 -- RESTRUCTURING CHARGE In October 1995, the Company expensed $792,000 in non-recurring charges related to the restructuring of the Company's business. Of this amount, $241,000 related to the relocation of the Company's corporate offices and California operations to a new facility. The remaining amount represented one-time charges related to severance costs resulting from a reduction in overhead staffing at the Company's Mississippi operations. The Company reduced employment levels to reflect the transition of the Company's business away from hand assembly work towards more advanced surface mount technology operations. NOTE 4 -- MAJOR CUSTOMERS AND CREDIT RISK CONCENTRATIONS A substantial portion of the Company's sales are generated from contract manufacturing agreements with domestic OEM's and from sales to domestic distributors of telecommunication products. Sales and related accounts receivable attributable to customers representing 10% or more of total net sales are as follows (in millions):
NET SALES RECEIVABLE AT YEAR ENDED JULY 31, JULY 31, ------------------- ------------- 1996 1995 1994 1996 1995 ----- ----- ----- ---- ----- Cortelco...................... $38.0 $45.6 $42.7 $7.8 $10.2 IBM........................... 28.1 35.3 59.9 2.4 2.8 Global Village................ 21.3 - - .7 - Harris........................ 16.5 8.2 7.1 1.8 1.5
The Company's credit risk principally relates to trade accounts receivable and receivables from Cortelco arising from the transfer of assets described in Note 1. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. 29 CMC Industries, Inc. and Subsidiaries 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 5 -- INVENTORIES Inventories consist of the following (in thousands):
JULY 31, ------------------- 1996 1995 ------- ------- Raw materials and purchased components................... $15,673 $18,755 Work-in-process.......................................... 5,174 6,921 Finished goods........................................... 371 330 ------- ------- $21,218 $26,006 ======= =======
The carrying value of inventories at July 31, 1996 and 1995 approximated replacement cost. NOTE 6 -- PLANT AND EQUIPMENT The components and useful lives of plant and equipment are as follows (in thousands):
JULY 31, USEFUL ------------------- LIFE 1996 1995 (YEARS) ------- ------- Machinery and equipment.................................... 3-10 $14,760 $ 9,659 Furniture and fixtures..................................... 5-15 714 491 Leasehold improvements..................................... 5 288 107 Computer equipment and software............................ 5 456 456 Construction in progress................................... 239 312 ------- ------- 16,457 11,025 Less - Accumulated depreciation............................ 5,594 3,983 ------- ------- $10,863 $ 7,042 ======= =======
Depreciation and amortization expense was $1,694,000, $1,461,000 and $1,181,000 for fiscal 1996, 1995 and 1994, respectively. Plant and equipment include assets under capital leases with a cost of $2,352,000 and $945,000 and accumulated amortization of $1,018,000 and $638,000 as of July 31, 1996 and 1995, respectively. 30 26 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 7 -- BUILDINGS AND EQUIPMENT UNDER LEASE The Company leases its primary manufacturing facilities and certain equipment and computer software under capital leases. Certain office, warehouse, other manufacturing facilities and equipment are leased under operating leases. These lease agreements generally include renewal options at varying terms. Future minimum lease payments under the noncancelable portion of capital and operating leases at July 31, 1996 are as follows (in thousands):
OPERATING CAPITAL LEASES LEASES FISCAL YEAR ------ ------ 1997............................................. $1,647 $ 715 1998............................................. 1,723 520 1999............................................. 1,388 809 2000............................................. 1,149 7 2001............................................. 710 7 ------ ------ Future minimum lease payments.................... $6,617 2,058 ====== Less - Amount representing interest.............. 251 Present value of future minimum lease payments... 1,807 Less - Current portion........................... 404 ------ Long-term portion................................ $1,403 ======
Rent expense relating to operating leases totaled approximately $1,555,000, $988,600 and $598,000 for fiscal 1996, 1995 and 1994, respectively. NOTE 8 -- BORROWINGS SEPTEMBER 1996 REFINANCING Effective September 26, 1996, the Company entered into a Loan and Security Agreement with a financial institution which replaced a prior agreement with this lender. The Agreement provides the Company with a total credit facility of $35 million including the following: - Revolving credit facility totaling $25 Million ($18 Million available for CMC Mississippi, Inc. and $7 million available for CMC California, Inc.), including letters of credit, bearing interest, at the Company's option, at either the prime lending rate or an Adjusted Eurodollar Rate (as defined in the Credit Agreement). - Term loan to CMC Mississippi, Inc. totaling $6 million, payable in 55 monthly installments of $108,333 and a final installment of $91,667, commencing October 1, 1996 and bearing interest, at the Company's option, at either the prime lending rate or an Adjusted Eurodollar Rate (as defined in the Credit Agreement). 31 CMC Industries, Inc. and Subsidiaries 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- - Commitment to lend up to $3.8 million for machinery and equipment purchases in the form of installment loans, bearing interest, at the Company's option, at either the prime lending rate or an Adjusted Eurodollar Rate (as defined in the Credit Agreement). Outstanding borrowings under the new financing arrangement are secured primarily by the Company's accounts receivable, inventories, machinery and equipment. This financing arrangement expires in September 1998. The Loan and Security Agreement contains certain restrictive covenants which limit the activities of the Company with respect to, among other things, mergers and acquisitions, additional borrowings and leases, investments and the payment of dividends. The Loan and Security Agreement includes the following financial covenants with respect to CMC Industries, Inc.: - to maintain minimum consolidated tangible net worth of $30.0 million as of October 31, 1996 and increasing to $31.5 million as of July 31, 1998; - to not permit the ratio of total liabilities to stockholders' equity to exceed 2.0 to 1 as of July 31, 1997 and July 31, 1998; - to limit capital expenditures to $10 million during fiscal 1997 and $7 million during fiscal 1998; - to maintain debt service coverage ratio, as defined, of at least 1.15 to 1 through July 31, 1997 and 1.20 to 1 thereafter; and - to maintain interest coverage ratio for each individual subsidiary, as defined, of at least 2 to 1 through September 1, 1998. For fiscal years 1996 and 1995, the Company had outstanding $6.2 million and $7.5 million, respectively, under the term loan in effect at that time. The term loan bore interest, at the Company's option, at either the prime lending rate or an Adjusted Eurodollar Rate (as defined in the prior Credit Agreement). At july 31, 1996 and 1995, the Company utilized an average interest rate of 8.49% and 8.24%, respectively. The Company also maintained a revolving credit facility totaling $17 million, including letters of credit, bearing interest at the Company's option, at either the prime lending rate or an Adjusted Eurodollar Rate (as defined in the prior Credit Agreement). At July 31, 1996 and 1995, the Company had $6.8 million and $10.3 million, respectively, outstanding under the revolving facility at a weighted average interest rate of 8.49% and 8.24%, respectively. OTHER FINANCING During fiscal 1995 and 1994, CMC California, Inc. had several installment loans outstanding, secured by machinery and equipment and bearing interest at varying rates, with an aggregate principal balance of $154,000 as of July 31, 1994. All of the installment loans were repaid in fiscal 1995. 32 28 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- MATURITIES OF LONG-TERM DEBT The aggregate annual maturities of consolidated long-term debt outstanding at July 31, 1996 are as follows (in thousands): 1997. . . . . . . . . . . . . . . . . . . . . . $ 1,300 1998. . . . . . . . . . . . . . . . . . . . . . 1,300 1999. . . . . . . . . . . . . . . . . . . . . . 1,300 2000. . . . . . . . . . . . . . . . . . . . . . 1,300 2001. . . . . . . . . . . . . . . . . . . . . . 1,067
NOTE 9 -- CAPITAL STOCK RECAPITALIZATION On October 2, 1993, the Company's Board of Directors declared a stock dividend of 1,135,588 shares (189,265 after the reverse stock split discussed below) of the Company's common stock and approved a restatement of the Company's certificate of incorporation which resulted in the elimination of all former classes of common and preferred stock and the creation of one new class of common stock. The Board of Directors also authorized 5,000,000 shares of preferred stock. In connection with this recapitalization, a one-for-six reverse split of the Company's common stock was effected. The Company's Series A preferred stock was redeemed by the Company on October 2, 1993 for $50 and the shares were canceled. All common share data in the accompanying consolidated financial statements and notes give effect to the reverse stock split. The stock dividend, recapitalization and reverse stock split have been reflected in the accompanying financial statements retroactive to the beginning of the three-year period ended July 31, 1996. During fiscal 1995, certain shareholders waived their rights to receive 36,100 shares related to the stock dividend. On May 16, 1996, the Company issued 436,037 shares of common stock with detachable warrants that entitle the holders to purchase 168,963 shares of common stock at a price of $7.50 per share. The total proceeds for the shares and warrants were $2,464,000 and $44,000, respectively. The warrants are exercisable for three years from the date of issue and are callable by the Company if certain levels of financial performance are exceeded. STOCK OPTION PLAN The Company's Board of Directors has authorized 1,224,479 shares of the Company's common stock for issuance in connection with a stock option plan. The stock option plan provides for the granting of options to purchase shares of the Company's common stock at not less than 85% of fair market value on the date of grant. The plan is designed to allow for granting incentive stock options, nonstatutory stock options, stock bonuses and the issuance of restricted stock. 33 CMC Industries, Inc. and Subsidiaries 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- Stock option activity is summarized as follows:
YEAR ENDED JULY 31, ------------------------------------ 1996 1995 1994 -------- ------- ------- Outstanding options at beginning of year......... 467,502 389,816 540,500 Options granted $4.50/share.................................... 1,500 $4.87/share.................................... 4,000 $3.72/share.................................... 250,000 $3.25/share.................................... 50,000 $3.37/share.................................... 10,000 $4.75/share.................................... 4,000 $7.37/share.................................... 14,500 $4.63/share.................................... 8,000 $3.13/share.................................... 8,000 $4.00/share.................................... 12,500 49,666 $2.50/share.................................... 8,000 $9.00/share.................................... 2,500 $3.00/share.................................... 88,000 10,000 $6.00/share.................................... Options exercercised $0.42/share.................................... (126,500) (40,417) (59,100) $4.00/share.................................... (812) $6.00/share.................................... (1,528) Options forfeited................................ (42,473) (43,563) (80,309) Adjustment for stock dividend.................... -- -- (23,775) -------- ------- ------- Outstanding options at end of year............... 642,689 467,502 389,816 ======== ======= ======= Exercisable options at end of year............... 335,268 287,164 283,915 ======== ======= =======
NOTE 10 -- INCOME TAXES The provision (benefit) for income taxes comprised the following (in thousands):
YEAR ENDED JULY 31, -------------------------------- 1996 1995 1994 ----- -------- ------ Current: Federal............................. $ 610 $(1,810) $1,650 State............................... 203 -- 256 ----- ------- ------ 813 (1,810) 1,906 ----- ------- ------ Deferred: Federal............................. (622) 658 130 State............................... (96) 101 20 ----- ------- ------ (718) 759 150 ----- ------- ------ $ 95 $(1,051) $2,056 ===== ======= ======
34 30 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- Deferred tax liabilities (assets) comprised the following (in thousands):
JULY 31, -------------------- 1996 1995 ------- ------ Deferred tax liabilities: Inventories........................................... $ 2,014 $ 2552 Plant and equipment................................... 1,042 838 ------- ------- 3,056 3,390 ------- ------- Deferred tax assets: Investment in preferred stock of affiliate............ (2,360) (2,360) Accrued liabilities................................... (535) (546) Minimum pension liability............................. (597) (558) Net operating loss carryforwards...................... (172) (626) Minimum tax credit.................................... (721) (267) Other................................................. (471) (115) ------- ------- (4,856) (4,472) ------- ------- Valuation allowance.......................................... 2,360 2,360 ------- ------- Net deferred tax liability............................ $ 560 $ 1,278 ======= ======= The net deferred tax liability is classified as follows: Current (asset) liability........................... $ (48) $ 967 Noncurrent liability................................ 608 311 ------- ------- $ 560 $ 1,278 ======= =======
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
YEAR ENDED JULY 31, ----------------------------- 1996 1995 1994 ------ -------- ----- Statutory federal rate................................. 35.0% (35.0)% 35.0% State income tax, net of Federal benefit............... 54.0 6.6 3.4 Credits claimed for research and development........... -- (67.3) -- Other, net............................................. (41.5) (8.3) (.6) ----- ------ ---- Effective rate......................................... 47.5% (104.0)% 37.8% ===== ====== ====
35 CMC Industries, Inc. and Subsidiaries 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 11 -- RELATED PARTY TRANSACTIONS Following the August 1993 restructuring, the Company's largest customer has been Cortelco. Under a manufacturing services agreement, the Company provides manufacturing services to Cortelco on a turnkey basis with prices based on cost plus 8% for telephone products and cost plus 10% for telecommunications systems products. Included in net sales for fiscal 1996, 1995 and 1994 were sales to Cortelco totaling $38,025,000, $45,611,000 and $42,723,000, respectively. Total cost of sales for the periods relating to these sales to Cortelco were $35,542,000, $43,205,000 and $39,304,000, respectively. The Company has entered into an agreement with Cortelco to provide certain products and related support services to customers of Cortelco. The Company is required to pay a commission to Cortelco in the amount of 10% of sales of these products under this agreement. During fiscal 1996, 1995 and 1994, the Company incurred $341,000, $635,000 and $635,000, respectively, in commissions under this agreement. In addition to acting as primary supplier to Cortelco, the Company provided a $7,500,000 working capital loan to Cortelco which was repaid in fiscal 1994. The Company continues to provide credit only for manufacturing services sold to Cortelco in the form of trade receivables. During fiscal 1994, the Company began manufacturing for a new customer that is partially owned by Cortelco. The Company had no sales to this customer in fiscal 1996 and $3.0 million and $10.9 million in fiscal 1995 and 1994, respectively. At July 31, 1996, the Company had no accounts receivable from this customer and accounts receivable of $236,000 at July 31, 1995. Also, during 1995, the Company secured its past due balance from this customer by executing two notes receivable from the customer totaling $3.4 million. Both notes receivable were collected during fiscal 1996. A director of the Company has an ownership interest in a customer which purchased goods during fiscal 1996 totaling $1,731,000 at a cost of $1,697,000. As of July 31, 1996, the Company had accounts receivable of $491,000 from this customer which is considered past due by the Company. NOTE 12 -- EMPLOYEE BENEFITS RETIREMENT BENEFITS The Company maintains a defined benefit pension plan (the "Pension Plan") which covers substantially all hourly employees of CMC Mississippi, Inc. Retirement benefits under the Pension Plan are based on an employee's length of service and a benefit formula based on year of hire. The benefit formula does not include a provision for increases in future compensation levels. Contributions to the Pension Plan are primarily based on the projected unit actuarial cost method. The Pension Plan's assets consist principally of short-term U.S. government instruments and pooled fixed income, debt and equity investment funds with a financial institution. Effective June 1, 1994, the Company terminated the future service payments for employees. 36 32 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- The components of net periodic pension cost and related assumptions were as follows (in thousands):
YEAR ENDED JULY 31, ----------------------------- 1996 1995 1994 ------- ------- ------- Service cost .......................... $ -- $ -- $ 240 Interest cost ......................... 579 557 521 Return on plan assets.................. (422) (441) (448) Net amortization and deferral ......... (65) 17 9 ----- ----- ----- Net periodic pension expense .......... $ 92 $ 133 $ 322 ===== ===== ===== Discount rate ......................... 8.0% 8.0% 7.5% Long-term rate of return .............. 8.0% 8.0% 8.0%
The following table sets forth the Pension Plan's status (in thousands):
JULY 31, -------------------- 1996 1995 ------- ------- Vested benefit obligation ........................ $ 7,312 $ 7,090 ======= ======= Accumulated benefit obligation ................... $ 7,655 $ 7,408 ======= ======= Projected benefit obligation...................... $ 7,655 $ 7,408 Fair value of plan assets......................... 7,145 6,729 ------- ------- Funded status .................................... (510) (679) Unrecognized net loss ............................ 1,592 1,491 Additional liability recorded..................... (1,592) (1,491) ------- ------- Accrued pension cost ............................. $ (510) $ (679) ======= =======
Statement of Financial Accounting Standards No. 87 ("FAS 87"), Employers' Accounting for Pensions, requires recognition in the balance sheet of a minimum pension liability for underfunded plans. The minimum liability that must be recognized is equal to the excess of the accumulated benefit obligation over plan assets. A corresponding amount is recognized either as an intangible asset, to the extent of unrecognized prior service costs, or a reduction of equity. Pursuant to FAS 87, the Company has recorded as of July 31, 1996 and 1995 an additional liability as shown above with a corresponding reduction, net of deferred tax benefits, in stockholders' equity. Recognition of the additional liability, net of deferred tax benefits, and changes in that amount from year to year are considered noncash financing activities and have been excluded from the statement of cash flows. 37 CMC Industries, Inc. and Subsidiaries 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- Under FAS 87, the portion of deferred gains and losses in excess of 10% of the projected benefit obligation is amortized as a component of net periodic pension cost. If amortization is required, the period used is the average remaining service period of active employees, which was approximately 14.5 years as of July 31, 1996. SAVINGS PLAN The Company maintains a profit-sharing savings plan (the "Savings Plan") for employees of CMC Industries, Inc. Under the terms of the Savings Plan, employees may contribute from 2% to 16% of compensation and an additional elective amount. The Company matched, until June 30,1994, 50% of an employee's contributions of up to 6% of the employee's compensation with a maximum match of $2,000 per year for any one employee. The Company may elect to make an additional discretionary profit-sharing contribution. Effective January 1, 1995, 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 1996 and 1995 and contributions of approximately $105,000 for fiscal 1994. NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS At July 31, 1996 and 1995, the Company did not have any outstanding financial derivative instruments. The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at July 31, 1996 and 1995, pursuant to Financial Accounting Standards Board Statement No. 107, Disclosures about Fair Value of Financial Instruments (in thousands).
JULY 31, 1996 JULY 31, 1995 --------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- -------- ---------- --------- Financial assets: Cash and cash equivalents .................. $ 2,977 $ 2,977 $ 89 $ 89 Receivables ................................ 25,073 25,073 24,159 24,159 Investments in preferred stock of affiliate .............................. 5,884 5,884 5,884 5,884 Financial liabilities: Payables ................................... 10,524 10,524 13,291 13,291 Long-term debt ............................. 11,484 11,484 17,808 17,808
38 34 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash, receivables and payables: The carrying amounts approximate fair value because of the short maturity of those instruments. Investment in preferred stock of affiliate: The carrying amount is based upon the present value of cash flows as of the date of the reorganization. Although the period has shortened, management does not believe that there has been an appreciable difference in the value of their security since the date received. Long-term debt: The balance of the Company's long-term debt approximates the fair value thereof because borrowings bear interest at a variable interest rate. NOTE 14 -- COMMITMENTS AND CONTINGENCIES In connection with the restructuring of the Company in August 1993, certain deferred income tax liabilities have been assumed by Cortelco. Although the LIFO method of inventory accounting is employed, a portion of this deferred income tax liability attributable to differing financial reporting and tax reporting bases of inventories may become payable in the foreseeable future based on certain rulings made in the U.S. federal tax courts. Although the Company has received indemnification from this affiliate with respect to such liability, the Company would be liable for this tax in the event Cortelco is unable to meet its obligation. The total amount of this deferred income tax liability assumed by Cortelco was approximately $2.2 million as of July 31, 1993. The Company is a defendant in several legal actions involving certain matters arising in the normal course of business. Management believes that the aggregate loss, if any, resulting from the final outcome of these proceedings will not be material to the financial position or results of operations of the Company. The Company has accrued $4,000 and $47,000, as of July 31, 1996 and 1995, respectively, for pending litigation and contingencies. In fiscal 1994, the Company incurred a non-recurring charge included in selling, general and administrative expenses of approximately $170,000 related to the costs of environmental clean-up at a former manufacturing site. The Company's original estimate of its cost of the clean-up was approximately $320,000 which was recorded prior to July 1994. In fiscal 1995, an environmental expert concluded that the cost of a full study combined with short and long-term remediation of the site may cost between $3 and $4 million. During fiscal 1996, the Company was excluded as a potentially responsible party ("PRP") by the State of Tennessee's Department of Environment and Conservation in relation to the former facility; however, Alcatel, Inc., a PRP named by the State of Tennessee's Department of Environment and Conservation and a former owner of the Company, is seeking indemnification from the Company. Management believes Alcatel's assertion to be without merit and has responded as such. As of July 31, 1996, no claims have been filed by Alcatel. 39 CMC Industries, Inc. and Subsidiaries 35 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of CMC Industries, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of CMC Industries, Inc. and it's subsidiaries at July 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP - ------------------------------------- PRICE WATERHOUSE LLP Memphis, Tennessee August 26, 1996, except as to Note 8, which is as of September 26, 1996 40 36 CMC Industries, Inc. and Subsidiaries CORPORATE DIRECTORY - -------------------------------------------------------------------------------- DIRECTORS David S. Lee Chairman of the Board Chairman, Cortelco Systems Holding Corp. Chairman, Data Technology Corp. Matthew G. Landa President and Chief Executive Officer Andrew J. Moley Executive Vice President and Chief Financial Officer Ira Coron Chairman and Chief Executive Officer, California Amplifier, Inc. Frederick Gibbs Consultant Mulberry Hill Enterprises Partner Gibbs and Gregory Attorney at Law Charles Holloway Professor, Stanford University Graduate School of Business EXECUTIVE OFFICERS Matthew G. Landa President and Chief Executive Officer Andrew J. Moley Executive Vice President and Chief Financial Officer Jack O'Rear Vice President and Chief Operating Officer President, Mississippi Operations Karl Chang Vice President President, California Operations Lanny N. Lambert Vice President and Secretary CORPORATE ADDRESS 4950 Patrick Henry Drive Santa Clara, CA 95054 (408) 982-9999 TRANSFER AGENT Union Planters National Bank 6200 Poplar Avenue Memphis, TN 38119 GENERAL COUNSEL Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 SPECIAL COUNSEL Baker, Donelson, Bearman & Caldwell 2000 First Tennessee Building 165 Madison Avenue Memphis, TN 38103 INDEPENDENT AUDITORS Price Waterhouse LLP One Commerce Square Memphis, TN 38103 FORM 10-K The Company's 1996 Annual Report or Form 10-K (without exhibits) as filed with the Securities and Exchange Commission is available without charge upon request to: Investor Relations, CMC Industries, Inc., 1801 Fulton Drive, Corinth, MS 38834 (601) 287-3771, ext. 170 PRICE RANGE OF COMMON STOCK The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "CMCI" since the Company's initial public offering of Common Stock in December 1993. The Company has paid no cash dividends on its Common Stock. The following table shows the high and low sales prices per share for the Common Stock as reported by Nasdaq for the periods indicated:
High Low Fiscal 1995 Q1 4 2 3/4 Q2 6 1/4 3 3/4 Q3 5 1/8 1 3/4 Q4 3 3/4 1 7/8 Fiscal 1996 Q1 4 3/4 2 3/4 Q2 4 5/8 3 5/8 Q3 6 1/4 4 Q4 9 3/16 5 3/4
ANNUAL MEETING The 1996 Annual Meeting of Shareholders will be held at CMC Industries, Inc., 1801 Fulton Drive, Corinth, MS, 38834 on Friday, November 15, 1996 at 10:00 a.m. local time. 41 - -------------------------------------------------------------------------------- CMC INDUSTRIES, INC. FACILITY LOCATIONS CMC CALIFORNIA 4950 PATRICK HENRY DRIVE SANTA CLARA, CA 95054 408.982.9999 FAX: 408.982.9922 Internet: cmc@cmcind.com CMC MISSISSIPPI 1801 FULTON DRIVE CORINTH, MS 38834 601.287.3771 FAX: 601.287.3469 Internet: invrel@cmcmfg.com (C) Copyright 1996, CMC Industries, Inc. J. DAVIDSON MERCURY PRINTING 42 CMC ------------------------ The Source For Solutions EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT JULY 31, 1996 AND 1995 (AUDITED) AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JULY 31, 1996, 1995 AND 1994 (AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR JUL-31-1996 AUG-01-1995 JUL-31-1996 2,977 0 25,073 0 21,218 49,733 10,863 0 67,434 28,819 0 0 0 67 31,035 67,434 67,434 164,711 153,956 153,956 9,043 0 1,512 200 95 105 0 0 0 105 .02 .02
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