-----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, L3JYojK+2Cw9oyr4dxg8c7f9V94cli8wywvFUrCVH8tOsL74Ver6Vt+hRWFsz0Ep arfz5HWidU4EaeosKsziMg== 0000950144-97-011314.txt : 19971030 0000950144-97-011314.hdr.sgml : 19971030 ACCESSION NUMBER: 0000950144-97-011314 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971029 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-K SEC ACT: SEC FILE NUMBER: 000-22974 FILM NUMBER: 97702621 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-K 1 CMC INDUSTRIES, INC. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended July 31, 1997 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant: $56,260,919 at October 9, 1997. Shares of Common Stock, $.01 par value per shares outstanding at September 30, 1997: 6,930,713 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 1997 Annual Meeting of Shareholders: Part III Portions of the 1997 Annual Report to Shareholders: Part II, Part IV (2) 2 PART I Item 1. Business CMC, Industries, Inc. ("CMC" or the "Company") together with its predecessor business, has been a leading manufacturer of telecommunications systems and equipment for over 30 years. The Company was incorporated in 1990 to acquire from Alcatel Network Systems, Inc. ("Alcatel"), certain businesses operated from 1960 to 1987 by ITT and from 1987 to 1990 by Alcatel, n.v., a joint venture between ITT and Compagnie Generale d'Electricite. In August 1993, the Company transferred certain assets and related liabilities associated with its telecommunications business to Cortelco Systems Holding Corp. ("Cortelco") in exchange for 1,000,000 shares of Preferred Stock of Cortelco. These transactions effectively transferred to Cortelco all of the Company's assets and liabilities not related to its electronic manufacturing business. The Company has provided independent electronic manufacturing services to a diverse base of customers in both the telecommunications and computer electronics industries. The Company manufactures a wide range of products for its customers including sophisticated telecommunications equipment, personal computers, computer peripherals and subassemblies and printed circuit board ("PCB") assemblies. CMC provides a broad spectrum of manufacturing services primarily based on the manufacture of PCB assemblies utilizing automated pin-through-hole technology ("PTH"), surface mount technology ("SMT") and ball grid array ("BGA") placement techniques. PTH technology involves the attachment of electronic components to a PCB by inserting the leads of the components through holes in the board and soldering the leads on the underside of the board. SMT and BGA technologies involve the attachment of electronic components directly to the surface of the board, and accordingly permits components to be mounted on each side of the board. In addition, the Company provides full systems integration assembly and test, materials procurement, distribution, product design and engineering support services. The Company has manufacturing facilities in Corinth, Mississippi and Santa Clara, California (Silicon Valley) and is in the process of establishing a manufacturing facility in Hermosillo, Mexico. The Company believes that these locations enable it to meet the cost and geographic distribution requirements of its customers. The Company's major customers include Cortelco, Micron Electronics ("Micron"), Global Village Communications ("Global Village") and RELTEC Corporation ("RELTEC"). Customers and Marketing Telecommunications products have been manufactured at CMC's facility in Corinth, Mississippi for over 30 years. From 1960 to 1987, the operations at Corinth were owned and operated by ITT, which established a reputation for quality manufacturing of telecommunications products and services to its customers. The Company believes the telecommunications manufacturing expertise that it has acquired over three decades is a competitive strength, allowing it to meet customer requirements for strict quality control, prompt turnaround and flexible response to design changes. Capitalizing on this expertise, the Company has expanded into the manufacture of computer equipment and related peripherals and data networking equipment. The Company is seeking to leverage its capacity and manufacturing expertise by expanding sales to new customers with products that are similar to its current customer base in the telecommunications, data communications, computer-related products and value-added electronics industries. In addition, the Company seeks to position its manufacturing operations at strategic sites throughout the United States and worldwide. Corinth, Mississippi is located in close proximity to major North American freight hub locations, allowing for inexpensive ground transport and overnight air delivery throughout the country. The Company's California facility is located in Santa Clara, in the heart of Silicon Valley, the site of many of the Company's current and potential customers. In October 1997, the Company announced plans to build a manufacturing facility in Hermosillo, Mexico and to open an international purchasing office in Taiwan. Hermosillo will offer an attractive cost structure and solid logistics for current and prospective customers and the location between two leading technical universities within the city provides access to a pool of qualified engineers and technicians. The purchasing office in Taiwan will provide localized procurement capabilities in Asia, increasing access to lowest cost pricing and material availability. CMC provides electronic manufacturing services to major telecommunications OEMs as well as suppliers of computer monitors, computer peripherals, data networking equipment and other electronic components. In turn, CMC's customers sell these manufactured products to domestic and worldwide markets. Products manufactured by the Company include telephones, ISDN equipment, key and PBX/ACD systems, various data communications products and telecommunications switching equipment and printed circuit board assemblies for computer and communications equipment. Services provided 2 3 include design for manufacturability and test, materials procurement, prototyping, plastic injection molding, printed circuit board assembly, full board-level test, system integration and configuration, full system test, packaging, distribution and field return and repair support. Generally, relationships between the Company and its customers for the manufacture of product and related services are defined by a succession of purchase orders placed by the customer and performed upon by CMC. The Company offers electronic manufacturing services to its customers on both a turnkey and consignment basis, with over 95% of the Company's net sales derived from turnkey projects. In turnkey relationships, the Company both procures components and other supplies and provides full manufacturing services. In consignment relationships, the customer purchases and then provides components and other supplies to the Company, and the Company charges for only labor and overhead. The establishment of a turnkey relationship requires significant investment of resources by both an OEM customer and a contract manufacturer. An OEM customer must incur expense to qualify a contract manufacturer by certifying the quality of the manufacturer's processes and services and, in some cases, must also qualify a contract manufacturer's sources of component supply. The OEM customer also works with a contract manufacturer to refine product design and manufacturing processes in order to optimize manufacturability. The Company believes that OEM customers seek to establish relationships with turnkey manufacturing partners they perceive will be able to meet their production requirements over a long period of time and for successive product generations. The Company believes that these relationships, once established, tend to be sustaining in nature due to the significant investment of time and resources by both the Company and the OEM customer. Accordingly, the Company believes that its emphasis on turnkey manufacturing results in greater stability of its customer base. However, the Company's results of operations have been in the past and may be in the future materially adversely affected in the event customers for whom the Company manufactures products should cancel or reschedule their existing and forecast orders. Such cancellations or rescheduling could result in inefficient utilization of equipment and personnel dedicated to the manufacture of the specific products. Moreover, because of such stability, the Company may be unable to secure turnkey manufacturing projects from new OEM customers working with competitors of the Company. The failure of the Company to develop relationships with new OEM customers also may materially and adversely affect the Company's results of operations. CMC develops and maintains customer relationships through the efforts of the Company's direct sales force and management, program managers, project engineers and customer service personnel. Project engineers and customer service personnel receive extensive training in the Company's manufacturing and service capabilities in order to respond to the specific needs of customers. CMC's project engineers work with the customers' engineers and technical personnel to ensure a close working relationship and understanding of the specific needs of each customer. The Company's four largest customers in fiscal 1997 and their respective percentages of CMC's net sales for 1997 and 1996, respectively, were as follows: Micron, 21% and 0%; Cortelco, 15% and 23%; Global Village, 14% and 13% and RELTEC, 11% and 2%. The Company derives revenues primarily from OEM arrangements which prohibit the selling of the products manufactured to anyone other than the OEM customer. As a result, the Company does not typically allow its customers to return products, other than for repairs of defective materials. In such cases, the Company charges the customer for the repair unless the defect resulted from faulty manufacturing and occurred within an applicable warranty period. This policy applies to both affiliated and non-affiliated customers. It has been the Company's experience that orders for production of a given product or product line typically decline over time as the customer's product or product line matures. Generally, the Company has customers with products at various stages in the product life cycles including development, volume production and end-of-life production. In the event that the Company is unable to compensate for any material reduction in sales of a given product over time through production of replacement or new products for the customer or through new business with alternative customers, the Company's revenues and operating results could be materially adversely affected. Manufacturing Manufacturing Services The Company's vertically-integrated turnkey manufacturing services include component procurement and testing, PCB assembly using SMT, PTH and BGA techniques, post-assembly PCB testing, in-circuit test development, full system 3 4 integration and test, and product design and engineering support services. The Company provides a complete, vertically-integrated manufacturing solution with manufacturing capabilities as diverse as plastic injection molding, final unit assembly and testing. The Company delivers finished products to the OEM or, if requested, delivers products directly to the OEMs' customers. The Company offers comprehensive and advanced manufacturing solutions to its customers. The Company's broad range of manufacturing capabilities includes both automated PTH and more advanced SMT processes, including BGA assemblies. The Company offers vertical services such as component procurement, test, product design, and other engineering services. Accordingly, the Company's production processes can accommodate the manufacture of a broad range of communications and electronics components and products. While the Company continually seeks to improve the flexibility of its production systems, the commencement of production of new products typically involves startup costs, lower yields and other inefficiencies. Achievement of volume production for a new product typically requires a period as short as several days for products substantially similar to those previously manufactured by the Company, to as many as several months for completely new products. Since turnkey manufacturing may be a substitute for all or a portion of a customer's in-house manufacturing capability, continuous technical and administrative communication between the Company and its customer is required. CMC establishes a close relationship with each OEM customer in the early stages of product development to assist the customer in the evaluation of board designs and thereby improve manufacturability and testability. Building on this knowledge, CMC's technical staff monitors manufacturing process yields and may propose engineering changes for product improvement and cost reductions. Certain of the products manufactured by CMC are in the early stages of their life cycles and may therefore have ongoing design or engineering changes. The Company believes a critical element of turnkey manufacturing services is the ability to respond rapidly to engineering design changes. The Company believes that its history in design and manufacturing, particularly in the telecommunications industry, and its close working knowledge of its customers' products enables the Company to meet its customers' needs effectively. A key element in turnkey manufacturing services is the procurement of materials, which consists of the planning, purchasing, expediting, warehousing and financing of the components and other materials required to assemble a PCB or system-level assembly. OEMs increasingly have required contract manufacturers to purchase all or some components directly from component manufacturers or distributors and to warehouse and finance the components and materials. The Company orders materials and components based on purchase orders received and accepted and seeks to minimize its inventory of materials or components that are not identified for use in filling specific orders. Electronic components are purchased directly by the Company and, in certain circumstances, the Company bears the risk of component price fluctuations. The electronics industry has been characterized by shortages from time to time of microprocessors and other semiconductor components, which shortages have led to allocations by third-party suppliers. These delays to date have not had a material adverse effect on the Company's results of operations. If component shortages occur, the Company may not be able to secure quantities required to fulfill orders, which could result in delays in shipments, cancellation or delays in orders, or losses resulting from price increases by suppliers of parts or components, all of which could have a material adverse effect on the Company's results of operations. CMC provides complete turnkey manufacturing solutions for its customers from its vertically-integrated 350,000 square foot facility in Corinth, Mississippi and its 75,000 square foot facility in Santa Clara, California. The Company expects to commence operations from a new 55,000 square foot facility in Hermosillo, Mexico in the third quarter of fiscal 1998. The Company plans to provide full SMT assembly as well as complete system integration, test and box-build capabilities at this location. Manufacturing Processes CMC manufactures for its customers a wide variety of complex and technologically advanced products that require a coordinated manufacturing process. The process requires the application of advanced manufacturing technologies and computerized in-circuit, functional and system testing techniques. Current processes at CMC include fine-pitch SMT, PTH, BGA and system box-build assemblies. CMC seeks to add product lines that require advanced technological processes, in order to further develop its manufacturing expertise. Company employees regularly attend training seminars on the latest developments in manufacturing technologies. 4 5 In PTH production, components are attached by pins (also called "leads") inserted through and soldered to plated holes in the PCB. In SMT production, the leads on integrated circuits and other electronic components are soldered to the surface of the PCB rather than inserted into holes. SMT can accommodate a substantially higher number of leads in a given area than PTH, thereby permitting the PCB to interconnect a greater density of integrated circuits, which permits tighter component spacing and a reduction in the PCB dimensions. Additionally, SMT allows components to be placed on both sides of the PCB, thereby permitting even greater density. The substantially finer lead-to-lead spacing or "pitch" in SMT requires a manufacturing process far more exacting than the PTH interconnect products. Because of their high number of leads, most very large scale integrated circuits are configured for SMT production. SMT components are constantly changing, with BGA becoming the package selection of many component manufacturers. The BGA assembly process uses small balls of solder (instead of leads that could bend and break), located directly underneath the part, to interconnect the component and circuit board. X-ray equipment is instrumental in the development of BGA process parameters, since the balls are located underneath the component and are not visible through standard inspection techniques. The Company utilizes a computerized material requirements planning system to direct the flow of materials through the manufacturing cycle. Printed circuit board assemblies with PTH components are assembled using automatic insertion machines for all eligible components, including axial, dual inline package, radial and square-wire pins, which for most products allows over 90% of the total PTH components to be automatically inserted. Manually assembled components are either purchased or prepared in-house to allow for "drop-in" assembly on a moving assembly conveyor that feeds the PCB assemblies directly into an automated soldering system that solders the pins to the PCB. For SMT printed circuit assemblies, CMC has full capability to run either "top-side," "bottom-side" or "mixed-technology" PCB assemblies. Equipment capabilities include screen-printing with vision and computer-controlled alignment; high-speed, in-line epoxy dispensing; surface-mount component placement with speeds up to 44,500 components per hour per machine; assembly of fine-pitch components and computer-controlled infrared reflow soldering. The Company subjects assembled and soldered boards to board-level in-circuit and functional testing. As part of the final unit assembly process, the Company also functionally tests all products to verify conformance to customer specifications. If desired, product testing can include burn-in at elevated temperatures utilizing the Company's in-house burn-in chambers. Printed circuit boards utilized for telecommunication systems receive final system tests to verify the functional integrity of each system. Quality The Company believes that the quality of its manufacturing and customer services is critical to customer satisfaction and long-term success. CMC has emphasized the pursuit of high quality for many years. From 1960 to 1987, CMC's Corinth facility was part of ITT, which pioneered many quality improvement processes. Many of CMC's manufacturing and customer support personnel were trained in quality principles and practices as employees of ITT. CMC's quality assurance engineers have for many years received training through in-house programs and by attending seminars, including enrollment in The ITT Quality College. The Company has achieved ISO 9001 certification at its Mississippi facility and ISO 9002 certification at its California facility. The Company believes that the process of attaining ISO certification serves as an excellent tool for quality improvement, enabling the Company to provide consistency and excellence in its products and services. Also, since certain potential customers prefer or require manufacturers to have achieved ISO certification, such certification may offer certain competitive advantages. The Company believes that compliance with ISO will allow it to expand its bid opportunities, especially with customers who participate in world-wide markets. In addition to ISO certification, CMC Mississippi has achieved certification to British Approval Board for Telecommunications (BABT). Achieving BABT certification broadens CMC's opportunities with telecommunication customers by providing manufacturing solutions that meet the United Kingdom national requirements or Common Technical Regulations under Directive 91/263/EEC. Environmental Controls The Company is subject to a variety of regulations concerning environmental laws related to the use, storage, discharge and disposal of hazardous chemicals utilized during the manufacturing process and constantly monitors its operations to avoid violations. Although the Company believes that its facilities are currently in compliance with 5 6 applicable environmental laws, there can be no assurance that violations have not occurred and will not occur. In the event of any violations of environmental laws, the Company could be held liable for damages and for the costs of remedial actions and could also be subject to revocation of its effluent discharge permits. Any such revocation could require the Company to cease or limit production at either or both of its facilities, thereby having a material adverse impact on the Company's business and results of operations. To date, environmental regulations have not restricted the Company's ability to operate or expand its manufacturing operations or caused the Company to incur significant expense. Environmental laws, however, could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with a violation. See "Legal Proceedings." Competition The electronics manufacturing services industry is highly competitive. Competitive manufacturing services are available from many independent sources as well as in-house manufacturing operations of current and potential customers. In addition, certain large electronics manufacturers are transforming existing manufacturing facilities into contract manufacturing operations. The Company also competes with foreign contract manufacturers which, due to lower cost of labor, have become significant competitors with respect to high volume products or those with a high labor content. The Company believes that its primary competitors are Solectron Corporation, Avex, Inc., Flextronics International Ltd., Jabil Circuit, Inc., and SCI Systems, Inc. CMC believes that the primary competitive issues in the markets in which it focuses are quality of manufacturing processes, surface mount capacity and total production capacity, responsiveness to customer needs, price, quality, reliable delivery and financial resources. CMC believes that it competes favorably with respect to most of these factors. However, certain of the Company's competitors have greater SMT and total production capacity and greater financial resources than the Company. In addition, certain overseas competitors are able to offer low-cost production for certain types of products, particularly those which require a higher labor content. To remain competitive, the Company must continue to expand its advanced manufacturing technologies, provide superior quality and service, and be price competitive. In addition, the Company's planned manufacturing facility in Hermosillo, Mexico is an effort to expand manufacturing capacity while reducing costs. If the Company were to become unable to compete effectively in terms of quality, delivery, advanced manufacturing, service or price, the Company's business, financial condition and results of operations could be materially adversely affected. Backlog The Company's backlog was approximately $56.9 million at July 31, 1997 and $30.5 million at July 31, 1996. Backlog consists of purchase orders received by the Company primarily for shipment within 180 days. Cancellation and postponement of purchase orders occasionally occur, and the Company negotiates charges to such customers that vary depending on the timing and circumstances of the cancellation or postponement. Because of possible rescheduling and cancellation, backlog does not necessarily reflect future sales levels. Patents and Trademarks The Company owns four patents related to telephone equipment, but does not believe that patent or trademark protection is an important competitive factor in its market. Employees At July 31, 1997, the Company had 931 full time employees and 180 temporary employees. At such date, the Company had 871 hourly employees and 240 salaried employees, including 874 in manufacturing, 52 in manufacturing support, 99 in engineering and quality, 32 in sales and marketing, and 54 in general and administrative. None of the Company's employees are represented by a labor union, and the Company has never experienced a work stoppage or strike. The Company believes its relationships with its employees are good. Factors That May Affect The Company The foregoing discussion of the Company's business, operations and competitive position contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E 6 7 of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this document. In addition to the other information contained and incorporated by reference in this document, the following factors should be considered carefully in evaluating the Company and its business. Potential Fluctuations in Operating Results. The Company's operating results are affected by a number of factors, including the timing and mix of manufacturing projects, capacity utilization, price competition, the degree of automation that can be used in the assembly process, the efficiencies that can be achieved by the Company in managing inventories and fixed assets, the timing of orders from customers, fluctuations in demand for customer products, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, increased costs and shortages of components or labor and economic conditions generally. All of these factors can cause substantial fluctuations in the Company's operating results. The Company's expenditures (including, but not limited to, equipment, inventory and labor) are based, in part, on its expectations as to future revenues and, to a large extent, are fixed in the short term. Accordingly, the Company has in the past and may in the future be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues, and any significant shortfall of demand in relation to the Company's expectations or any material delay or cancellation of customer orders could have an almost immediate material adverse effect on the Company's operating results. As a result, it is possible that in some future period, the Company's operating results could fail to meet the expectations of public market analysts or investors. In such events, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the trading price of Company's Common Stock could drop significantly. The Company's gross profit as a percentage of sales in future periods may be materially adversely affected by various factors associated with the Company's production of new product lines, acquisition of new manufacturing equipment and continued dependence on turnkey contracts (and the inventory risks inherent therein). Expansion of capacity will result in a higher fixed cost structure which will require increased revenue and/or significant improvements in operating efficiencies in order to maintain historical gross margins. Additionally, the commencement of production of new products typically involves significant startup costs, lower yields and other inefficiencies. New products do not generate gross margins as high as products which have been in volume production for several months. The Company also expects that competition may continue to intensify, which could also result in lower gross margins. 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, 1997, 1996 and 1995, the Company's four largest customers in such periods accounted for approximately 61%, 63%, and 69%, respectively, of consolidated net sales. Sales to Micron Electronics, Inc. accounted for approximately 21% of the Company's revenues for the fiscal year ended July 31, 1997. Any material delay, cancellation or reduction of orders from these or other customers could have a material adverse effect on the Company's results of operations. The percentage of the Company's sales to its major customers may fluctuate from period to period. Significant reductions in sales to any of these customers could have a material adverse effect on the Company's results of operations. In addition, customer contracts can be canceled and volume levels can be materially changed or delayed. The timely replacement of canceled, delayed or reduced contracts with new business cannot be assured. These risks are exacerbated because the Company's sales are to customers in segments of the electronics industry subject to rapid technological change and product obsolescence. The factors affecting these industries in general, or any of the Company's major customers in particular, could have a material adverse effect on the Company's results of operations. Competition. The electronics manufacturing services industry is comprised of a large number of companies, several of which have achieved substantial market share. The Company also faces competition from current and prospective customers, which evaluate the Company's capabilities against the merits of manufacturing products internally. The Company competes with different companies depending on the type of service or geographic area. Certain of the Company's competitors have broader geographic breadth. They also may have greater manufacturing, financial, research and development and marketing resources than the Company. The Company believes that the primary basis of competition in its targeted markets is manufacturing technology, quality, responsiveness, and the provision of value-added services and price. To be competitive, the Company must provide technologically advanced manufacturing services, high product quality levels, flexible delivery schedules and reliable delivery of finished products on a timely and price competitive basis. The Company currently may be at a competitive disadvantage as to price when compared to manufacturers with lower cost structures, particularly with respect to manufacturers with established facilities where labor costs are lower. 7 8 Shortages of Electronics Components. Most of the Company's net sales are derived from turnkey manufacturing services in which the Company procures components from third-party suppliers and bears the risk of component shortages. The electronics industry has been characterized by shortages from time to time in semiconductor and other components, which shortages have led to allocations by third-party suppliers. The Company's inability to procure desired supplies of certain components has in the past led, and may in the future lead, to some delays in shipments by the Company to its customers. These delays to date have not had a material adverse effect on the Company's results of operations. If these component shortages persist or intensify, however, the Company may not be able to secure quantities required to fulfill customer orders, which could result in delays in shipments, or cancellation or delays in customer orders, each of which could have a material adverse effect on the Company's results of operations. Management of Growth. There can be no assurance that the Company will successfully manage the integration of new business and the growth, if any, of the Company's operations. In addition, the Company may experience certain inefficiencies as it manages geographically dispersed operations. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its results of operations could be materially adversely affected. On occasion, customers may require rapid increases in production which can place an excessive burden on the Company's resources. There can be no assurance that the Company will be capable of meeting the demands placed upon the Company's resources by these or any other customers. Environmental Compliance. The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. In this regard, see "Legal Proceedings." Risk of Defects. The electronics products manufactured for customers by the Company are highly complex and may at times contain undetected design and/or manufacturing errors or failures. Such defects have been discovered in the past, and there can be no assurance that, despite the Company's quality control and quality assurance efforts, such defects will not occur in the future. If such defects occur in quantities or too frequently, the Company's business and operating results may be materially and adversely affected. Dependence on Key Personnel and Skilled Employees. The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain key personnel could have a material adverse effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and sales representatives and other skilled employees. Failure to do so could have a material adverse effect on the Company's operations. Possible Volatility of Market Price of Common Stock. The trading price of the Company's Common Stock is subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the electronics manufacturing services industry as well as the industries of the Company's customers, and other factors. In addition, the stock market is subject to price and volume fluctuations which affect the market price for many high technology companies in particular, and which may or may not be unrelated to operating performance. There can be no assurance as to the trading price of the Company's Common Stock at any time in the future. Item 2. Properties. The Company's principal facility is a 350,000 square foot manufacturing plant located on sixty-four acres in Corinth, Mississippi. The plant and land are leased at the rate of approximately seven thousand dollars annually, pursuant to a lease with the Industrial Development Board of Alcorn County, Mississippi, with options to renew the lease until 2060. The Company also leases a 75,000 square foot facility in Santa Clara, California, and 20,000 square feet of warehouse space in Corinth, Mississippi. The Company has announced plans to build a 55,000 square foot manufacturing facility in Hermosillo, Mexico and to open an international purchasing office in Taiwan in the 1998 fiscal year. Although there are currently no specific plans for further expansion, the Company continually evaluates customer needs and market opportunities to expand its facilities geographically. 8 9 Item 3. Legal Proceedings. The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and will not disrupt the normal operations of the Company. In December 1993, the Company retained the services of an industrial safety consultant to assist in quantifying the potential exposure to the Company in connection with clean-up and related costs of a former manufacturing site, commonly known as the ITT Telecommunications site in Milan, Tennessee and more particularly described as a 50.1 acre tract surveyed by Construction Layout Service of Milan, Tennessee. The consultant initially estimated that the cost to remove the contaminated soil and deliver it to an appropriate hazardous waste site would be approximately $200,000. Based upon this advice, the Company subsequently entered into a voluntary agreement to investigate the site with the Tennessee Department of Environment and Conservation. In addition, the Company agreed to reimburse a tenant of the site $115,000 for expenditures previously incurred to investigate environmental conditions at the site. The Company recorded a total provision of $320,000 based on these estimates. In fiscal 1995, an environmental expert concluded that the cost of a full study combined with short and long-term remediation of the site may cost between $3 and $4 million. During fiscal 1996, the State of Tennessee's Department of Environment and Conservation named certain potentially responsible parties ("PRPs") in relation to the former facility. The Company was not named as a PRP. However, Alcatel, Inc., a PRP named by the State of Tennessee's Department of Environment and Conservation and a former owner of the Company, is seeking indemnification from the Company. To date, Alcatel has not filed any legal proceedings to enforce its indemnification claim. However, there can be no assurance that Alcatel will not initiate such proceedings or that any other third parties will not assert claims against the Company relating to remediation of the site. In the event any such proceedings are initiated or any such claim is made, the Company believes it has numerous defenses which it will vigorously assert. There can be no assurance that if any proceedings are initiated or any such claim is asserted, defense or resolution of such matter will not have a material adverse effect on the Company's financial position or results of operations. Item 4. Submission of Matters to Vote of Security Holders None. 9 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. On December 9, 1993, the Securities and Exchange Commission declared effective the Company's Registration Statement with respect to an initial public offering of 1,750,000 shares of Common Stock. The Common Stock is listed on the Nasdaq National Market under the symbol "CMCI." The following table sets forth, for the periods indicated, the high and low sale prices for the Company's Common Stock as reported on the Nasdaq National Market. Such prices represent prices between dealers and do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.
High Low ---- --- Fiscal Year 1996: - ----------------- First quarter $ 4.75 $ 2.75 Second quarter 4.63 3.63 Third quarter 6.25 4.00 Fourth quarter 9.19 5.75 Fiscal Year 1997: - ----------------- First quarter 8.88 5.63 Second quarter 12.63 7.88 Third quarter 13.50 5.50 Fourth quarter 9.13 6.25
There were approximately 211 holders of record of the Common Stock as of September 30, 1997. The Company believes it had in excess of 1,000 beneficial shareholders as of September 30, 1997. The Company had 6,930,713 shares outstanding as of September 30, 1997. The Company has not paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. Item 6. Selected Financial Data. The Company's Selected Financial Data is hereby incorporated by reference to page 8 of its 1997 Annual Report to Shareholders. Excerpts of such Annual Report are filed as Exhibit 13.1 hereto. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The Company's Management's Discussion and Analysis of Financial Condition and Results of Operation is hereby incorporated by reference to pages 9 through 16 of its 1997 Annual Report to Shareholders. Excerpts of such Annual Report are filed as Exhibit 13.1 hereto. Item 8. Financial Statements and Supplementary Data. The information set forth in the Consolidated Financial Statements contained in excerpts of the 1997 Annual Report to Shareholders is incorporated herein by reference. An index to the Company's Consolidated Financial Statements is set forth at Part IV, Item 14(2) at page 13. The selected quarterly financial data set forth under the caption "Quarterly Results" at page 11 of excerpts of the 1997 Annual Report to Shareholders is incorporated herein by this reference. 10 11 Item 9. Changes in and Disagreements With Accountants on Accounting And Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. Information with respect to the directors and executive officers of the Company is incorporated by reference from the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders. Such Proxy Statement has been filed previously with the Securities and Exchange Commission. Item 11. Executive Compensation. Certain information relating to executive compensation included in the Proxy Statement relating to the 1997 Annual Meeting of Shareholders is incorporated herein by reference. Such Proxy Statement has been filed previously with the Securities and Exchange Commission. Item 12. Security Ownership of Certain Beneficial Owners and Management. Certain information relating to stock ownership included in the Proxy Statement relating to the 1997 Annual Meeting of Shareholders is incorporated herein by reference. Such Proxy Statement has been filed previously with the Securities and Exchange Commission. Item 13. Certain Relationships and Related Transactions. Certain information relating to transactions with management included in the Proxy Statement relating to the 1997 Annual Meeting of Shareholders is incorporated herein by reference. Such Proxy Statement has been filed previously with the Securities and Exchange Commission. 11 12 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* Loan and Security Agreement dated August 23, 1993 between CMC Manufacturing, Inc. and Continental Bank, N.A. and related documents. 10.6* License Agreement between ITT Corporation and ITT Telecom Products Corporation (now known as CMC Manufacturing, Inc.) dated December 30, 1986. 10.7* Agreement between Cortelco International, Inc. and CMC Manufacturing, Inc. dated as of September 1, 1993. 10.8* Cortelco USA, Inc. (now known as CMC Manufacturing, Inc.) Profit Sharing Savings Plan and Trust for Salaried Employees. 10.9* Hourly Pension Plan for Employees of ITT Telecom Products Corporation (now known as CMC Manufacturing, Inc.) at Corinth. 10.10**** CMC Industries, Inc. 1990 Equity Incentive Plan, amended and restated as of November 15, 1996. 10.11* Form of Indemnification Agreement between CMC Industries, Inc. and certain officers and directors. 10.12** Lease Agreement between Guzik Investments, L.P. and CMC Industries dated June 14, 1995. 10.13**** CMC Industries, Inc. 1996 Employee Stock Purchase Plan. 10.14 Executive Employment Agreement between CMC Industries, Inc. and Jack O'Rear dated August 1, 1997. 13.1 Excerpts from the 1997 Annual Report to Shareholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants. 27.1 Financial Data Schedule (For SEC electronic filing purposes only)
* 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. **** Incorporated by reference to exhibits filed with the Registrant's Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 22, 1996. 12 13 (2) Financial Statements and Schedules Consolidated Financial Statements of CMC Industries, Inc. and subsidiaries Consolidated Balance Sheets as of July 31, 1997 and 1996 Consolidated Statements of Income for the Years Ended July 31, 1997, 1996 and 1995 Consolidated Statements of Changes In Stockholders' Equity for the Years Ended July 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1996 and 1995 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 1997 Annual Report to Shareholders. Excerpts of such Annual Report are 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 No reports on Form 8-K were filed during the quarter ended July 31, 1997. 13 14 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, 1997 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, 1997 - ------------------------------ David S. Lee /s/ Matthew G. Landa President, Chief Executive October 28, 1997 - ------------------------------ Officer and Director Matthew G. Landa /s/ Andrew J. Moley Executive Vice President, October 28, 1997 - ------------------------------ Chief Financial Officer and Andrew J. Moley Director /s/ Ira Coron Director October 28, 1997 - ------------------------------ Ira Coron /s/ Frederick W. Gibbs Director October 28, 1997 - ------------------------------ Frederick W. Gibbs /s/ Charles Holloway Director October 28, 1997 - ------------------------------ Charles Holloway
14 EX-10.14 2 EXECUTIVE EMPLOYMENT AGREEMENT 1 Exhibit 10.14 CMC, Industries, Inc. Executive Employment Agreement This Agreement is effective as of August 1st, 1997 ("Effective Date") between CMC Industries, Inc. ("Company") and Jack O'Rear ("Executive"). RECITALS WHEREAS Executive has been continuously employed by Company since August, 1994; WHEREAS Company desires Executive to remain actively employed by the Company; and WHEREAS Executive desires to remain so employed under the terms and conditions set forth below; NOW, THEREFORE, the parties mutually agree as follows: AGREEMENT 1. Position and Duties. Executive shall be employed by Company as Company's Chief Operating Officer. Executive shall devote his full time and best efforts to this position. Executive shall report to the Chief Executive Officer of Company and shall comply with the policies of the Company. 2. Employment Period. (a) Basic Rule. This Agreement shall have a term of three (3) years (the "Employment Period"), beginning upon the Effective Date. The Company may terminate this Agreement prior to the end of the Employment Period pursuant to the terms of this Section 2. (b) Early Termination. Company may terminate Executive's employment prior to the end of the Employment Period by giving the Executive 30 days advance notice in writing. If Company terminates Executive's employment without Cause (defined below), Company shall pay Executive severance benefits as set forth in Section 6 hereof. (c) Termination for Cause. Company may terminate Executive's employment for Cause (defined below) by giving Executive thirty (30) day's advance notice in writing. No compensation or benefits will be paid or provided to the Executive under this Agreement on account of a termination for Cause. Executive's right under the benefit plans of the Company following a termination for Cause shall be determined under the provisions of those plans. "Cause" means (i) willful or habitual neglect of Executive's obligations under this Agreement, (ii) misuse of corporate funds, (iii) any other act of gross misconduct or (iv) commission of any crime which would constitute a felony under applicable law. (d) Executive's Commitment. Executive commits to the Company that he will remain as an employee of the Company for the full period of this Agreement. (e) Termination as a Result of Death or Disability. Executive's employment shall terminate in the event of his death. Company may terminate Executive's employment for Disability by giving Executive 30 day's advance notice in writing. No compensation or benefits will be paid or provided to Executive under this Agreement on account of termination as a result of death or Disability. Executive's rights under the benefit plans of Company upon such termination shall be determined under the provisions of those plans. For purposes of this Agreement, "Disability" means Executive has been unable to substantially perform his duties under this Agreement as a result of his incapacity due to physical or mental illness for at least 26 weeks. 2 3. Compensation. (a) Base Salary. Company will pay Executive an annual salary of $202,125, less applicable withholding, payable in accordance with Company's standard payroll policies. At least annually the Board will consider increases in the annual salary rate in light of Executive's individual performance, Company performance and other relevant factors determined by the Board. (b) Bonus. Executive shall be eligible to participate in the bonus plan of Company. Executive shall be entitled to bonuses thereunder, payable at such times as bonuses are paid to other Executives of Company. The amount of each bonus shall be based upon accomplishment of Company objectives specified by the Board of Directors of Company. 4. Employee Benefit Plans. During the Employment Period, Executive shall be entitled to participate in employee benefit plans or programs of Company to the extent that his position, tenure, salary, age, health and other qualifications make him eligible to participate, subject to the rules and regulations applicable thereto. 5. Stock Options. Any stock options held by Executive that were granted prior to the Effective Date shall remain in effect and shall be subject to the terms of the agreements under which they were granted. Executive shall be eligible to participate in the stock option plan of Company. Executive shall be entitled to option grants thereunder, granted at such times as grants are granted to other Executives of Company. Executive shall be eligible for an annual option grant of 15,000 stock options, subject to approval each year by the Board of Directors of Company. 6. Severance Payments. If Company terminates Executive's employment without Cause prior to the end of the Employment Period, Company shall pay Executive as severance payments a monthly amount equal to his then current month base salary (less applicable withholding) for the remainder of the Employment Period. The severance payments described in this Section 6 shall discharge all of the Company's obligations to the Executive. 7. Non-Solicitation of Employees. Executive covenants and agrees with Company that during the Employment Period and for two (2) years thereafter he will not solicit any of Company's then-current employees to terminate their employment with Company or to become employed by any firm, company or other business enterprise with which Executive may then be connected. However, if Company terminates Executive's employment without Cause, then this seventh clause of this agreement will be void. 8. General. (a) This Agreement shall be binding upon the legal representatives, distributees, successors and assigns of the parties hereto. (b) This Agreement and the exhibits hereto contain the entire agreement of the parties, and may not be changed orally, but only by a writing signed by the party against whom enforcement of such change is sought. (c) If any provision of this Agreement is held invalid, illegal or unenforceable, such provisions shall be deemed deleted and such deletion shall not affect the validity of other provisions of this Agreement. (d) This Agreement shall be governed by and construed according to the laws of the State of California. The federal and state courts of the state of California shall have exclusive jurisdiction to adjudicate any dispute rising out of this Agreement. EXECUTIVE CMC INDUSTRIES, INC. /s/ Jack O'Rear By: /s/ Matthew G. Landa - ------------------------ ---------------------------- Jack O'Rear Title: President and CEO EX-13.1 3 EXCERPTS FROM 1997 ANNUAL REPORT 1 Exhibit 13.1 Excerpts from the 1997 Annual Report to Shareholders. 2 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, 1997 and 1996, and for each of the years in the three-year period ended July 31, 1997, have been derived from, and are qualified by reference to, audited financial statements included elsewhere herein. The historical income statement data for the period ended July 31, 1993 reflects 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.
Years Ended July 31, ----------------------------------------------------- (In thousands, except for share data) 1997 1996 1995 1994 1993 ----------------------------------------------------- HISTORICAL INCOME STATEMENT DATA: - --------------------------------- Net sales ...................................... $214,485 $164,711 $144,303 $163,779 $150,638 Cost of sales .................................. 201,081 153,956 136,691 150,793 121,784 -------- -------- -------- -------- -------- Gross profit ................................... 13,404 10,755 7,612 12,986 28,854 Selling, general and administrative expenses ... 9,454 8,251 7,062 6,168 19,763 Restructuring charge ........................... -- 792 -- -- -- Research and development expenses .............. -- -- -- -- 6,304 -------- -------- -------- -------- -------- Operating income ............................... 3,950 1,712 550 6,818 2,787 Interest expense, net .......................... 1,350 1,512 1,561 1,386 2,899 Interest income from sales-type leases ......... -- -- -- -- 627 -------- -------- -------- -------- -------- Income (loss) before income taxes .............. 2,600 200 (1,011) 5,432 515 Income tax provision (benefit) ................. 994 95 (1,051) 2,056 290 -------- -------- -------- -------- -------- Net income ..................................... $ 1,606 $ 105 $ 40 $ 3,376 $ 225 ======== ======== ======== ======== ======== Net income per share(1) ........................ $ 0.22 $ 0.02 $ 0.01 $ 0.60 $ 0.05 ======== ======== ======== ======== ======== Weighted average common shares and equivalents(1) ................................. 7,167 6,449 6,253 5,664 4,515 PRO FORMA INCOME STATEMENT DATA: - -------------------------------- Net sales ................................................................................... $111,590 Cost of sales ............................................................................... 99,941 -------- Gross profit ................................................................................ 11,649 Selling, general and administrative expenses ................................................ 4,812 -------- Operating income ............................................................................ 6,837 Interest expense, net ....................................................................... 980 -------- Income before income taxes .................................................................. 5,857 Provision for income taxes .................................................................. 2,107 -------- Net income .................................................................................. $ 3,750 ======== Net income per share(1) ..................................................................... $ 0.83 ======== HISTORICAL BALANCE SHEET DATA: - ------------------------------ Working capital ................................ $ 20,635 $ 20,914 $ 21,739 $ 19,862 $ 5,626 Total assets ................................... 96,543 67,434 65,963 66,426 54,428 Long-term debt and capital lease obligations ... 4,390 6,261 6,341 5,545 5,096
- ------------------------------ (1) Net income per share is calculated as described in Note 2 of Notes to Consolidated Financial Statements. The Company has never paid or declared any cash dividends. 3 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 Systems Holding Corp. ("Cortelco"), an affiliate through common ownership, in exchange for 1,000,000 shares of redeemable preferred stock of Cortelco. This restructuring allowed CMC to focus on contract manufacturing services while Cortelco pursued the development and distribution of telephones and telecommunications products. The Company offers contract manufacturing services to its customers on both a turnkey and consignment basis, with over 95% of the Company's net sales in fiscal 1997 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, 1997, 1996 and 1995. Results of operations for the years ended July 31, 1997 and 1996 are discussed together in the section immediately below, followed by a discussion of results for the years ended July 31, 1996 and 1995. RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 1997 VERSUS 1996 Total net sales for fiscal 1997 were $214.5 million, up 30% from $164.7 million for fiscal 1996. Sales to a new box build customer serving the computer market accounted for $45.4 million, or 21% of the Company's revenues in fiscal 1997. The Company initiated business with this customer in the second quarter of fiscal 1997. Approximately $143.1 million, or 67% of the Company's sales in fiscal 1997 were to customers from the communications (telecommunications and data networking) industry as compared to $107.8 million, or 66%, in fiscal 1996. Revenue growth in the communications segment was accomplished in fiscal 1997 with sales to new customers and increased sales to certain existing customers. Gross profit for fiscal 1997 was $13.4 million or 6.2% of net sales, as compared to $10.8 million or 6.5% of net sales for fiscal 1996. The decrease in gross profit as a percentage of sales on a year-to-year basis was partially due to a pre-tax charge of $989,000 taken by the Company in the fourth quarter of fiscal 1997 to write off remaining inventory balances relating to certain customers. The Company's gross margins were also adversely impacted throughout the second half of fiscal 1997 by the decline of certain high margin consignment business and costs associated with the commencement of new turnkey business. 4 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 $9.5 million or 4.4% of net sales in fiscal 1997, as compared to $9.0 million (including $792,000 in non-recurring restructuring charges) or 5.5% of net sales for fiscal 1996. Although selling, general and administrative expenses decreased as a percentage of net sales, such expenses increased in absolute dollars in fiscal 1997 primarily due to additions to the Company's sales force, increases in expenses incurred to expand and upgrade information systems and an increase in selling expenses directly associated with the higher sales levels. Net interest expense for fiscal 1997 was $1.4 million as compared to $1.5 million for fiscal 1996. The decrease in fiscal 1997 compared to fiscal 1996 was primarily due to lower average debt balances. The Company's effective tax rate for fiscal 1997 was approximately 38.2% as compared to 47.5% for fiscal 1996. The fluctuation from year to year resulted from the relationship between the amortization of goodwill and pre-tax income. Goodwill amortization is treated as an expense for financial purposes but is not deductible for tax purposes. 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 industry as compared to $87.0 million, or 60%, in fiscal 1995. Revenue growth in the communications segment was realized as sales to new customers more than offset any decreases in sales in fiscal 1996 to existing customers. 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 costs resulting from a reduction in manufacturing overhead staffing. 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 selling, general and administrative 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, California. This move was made to give CMC an enhanced presence in 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, Mississippi operations. These reductions were necessary in light of the transition of the Company's business away from hand assembly and toward more advanced surface mount technology operations. 5 CMC Industries, Inc. and Subsidiaries 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 38.0% 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. QUARTERLY RESULTS The following table contains selected unaudited consolidated financial results for each of the four fiscal quarters for fiscal 1996 and 1997.
YEAR ENDED JULY 31, 1996 YEAR ENDED JULY 31, 1997 ------------------------------------------------- ------------------------------------------------ (In Thousands) QUARTER ENDED QUARTER ENDED ------------------------------------------------- ------------------------------------------------ OCTOBER 3 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 Net Sales $38,580 $41,810 $42,944 $41,377 $41,941 $56,332 $54,369 $61,843 Gross Profit 2,072 2,507 2,789 3,387 3,500 3,936 3,679 2,289 Selling, general and administrative expenses 2,861 2,005 1,899 2,278 1,995 2,200 2,410 2,849 Operating income (loss) (789) 502 890 1,109 1,505 1,736 1,269 (560) Interest expense, net 346 429 403 334 319 288 384 359 Net Income (loss) $ (715) $ 40 $ 300 $ 480 $ 736 $ 900 $ 550 $ (580) 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 5.4 6.0 6.5 8.2 8.3 7.0 6.8 3.7 Selling, general and administrative expenses 7.4 4.8 4.4 5.5 4.8 3.9 4.4 4.6 Operating income (loss) (2.0) 1.2 2.1 2.7 3.6 3.1 2.3 (0.9) Interest expense, net 0.9 1.0 0.9 0.8 0.8 0.5 0.7 0.6 Net income (loss) (1.9) 0.1 0.7 1.2 1.8 1.6 1.0 (0.9)
The Company's quarterly operating results have fluctuated 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, costs associated with the commencement of new turnkey or consignment manufacturing projects, increased costs and shortages of turnkey manufacturing components or qualified labor, and economic conditions generally 6 12 CMC Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) and within the telecommunications, data networking and computer industries. The Company's gross margin was adversely impacted in the fourth quarter of fiscal 1997 by a pre-tax charge of $989,000 taken by the Company to write off remaining inventory balances relating to certain customers. See "Results of Operations for the Year Ended July 31, 1997 versus 1996." The Company has experienced an increase in orders from a major customer related to the awarding of a government contract to such customer. Certain of these products are currently scheduled for delivery in the Company's first quarter of fiscal 1998. The Company may also experience an increase in sales during the first and second quarters of fiscal 1998 of certain other products for which demand would typically increase during the holiday buying season. There can be no assurance, however, that any such increase in sales will result, or that if it does result, it would not be offset by decreases in sales of other products. Nonetheless, the Company's business and results of operations may develop a seasonal trend with revenues and operating profit being the highest in the first two quarters of the fiscal year. 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 timing and mix of manufacturing projects, capacity utilization, price competition, the degree of automation that can be used in the assembly process, the efficiencies that can be achieved by the Company in managing inventories and fixed assets, the timing of orders from customers, fluctuations in demand for customer products, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, increased costs and shortages of components or labor and economic conditions generally. All of these factors can cause substantial fluctuations in the Company's operating results. The Company's expenditures (including, but not limited to, equipment, inventory and labor) are based, in part, on its expectations as to future revenues and, to a large extent, are fixed in the short term. Accordingly, the Company has in the past and may in the future be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues, and any significant shortfall of demand in relation to the Company's expectations or any material delay or cancellation of customer orders could have an almost immediate material adverse effect on the Company's operating results. As a result, it is possible that in some future period, the Company's operating results could fail to meet the expectations of public market analysts or investors. In such events, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the trading price of the Company's Common Stock could drop significantly. 7 CMC Industries, Inc. and Subsidiaries 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company's gross profit as a percentage of sales in future periods may be materially adversely affected by various factors associated with the Company's production of new product lines, acquisition of new manufacturing equipment and continued dependence on turnkey contracts (and the inventory risks inherent therein). Expansion of capacity will result in a higher fixed cost structure which will require increased revenue and/or significant improvements in operating efficiencies in order to maintain historical gross margins. Additionally, the commencement of production of new products typically involves significant startup costs, lower yields and other inefficiencies. New products do not generate gross margins as high as products which have been in volume production for several months. The Company also expects that competition may continue to intensify, which could also result in lower gross margins. 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, 1997, 1996 and 1995, the Company's four largest customers in such periods accounted for approximately 61%, 63%, and 69%, respectively, of consolidated net sales. Sales to Micron Electronics, Inc. accounted for approximately 21% of the Company's revenues for the fiscal year ended July 31, 1997. Any material delay, cancellation or reduction of orders from these or other customers could have a material adverse effect on the Company's results of operations. The percentage of the Company's sales to its major customers may fluctuate from period to period. Significant reductions in sales to any of these customers could have a material adverse effect on the Company's results of operations. In addition, customer contracts can be canceled and volume levels can be materially changed or delayed. The timely replacement of canceled, delayed or reduced contracts with new business cannot be assured. These risks are exacerbated because the Company's sales are to customers in segments of the electronics industry subject to rapid technological change and product obsolescence. The factors affecting these industries in general, or any of the Company's major customers in particular, could have a material adverse effect on the Company's results of operations. COMPETITION. The electronics manufacturing services industry is comprised of a large number of companies, several of which have achieved substantial market share. The Company also faces competition from current and prospective customers, which evaluate the Company's capabilities against the merits of manufacturing products internally. The Company competes with different companies depending on the type of service or geographic area. Certain of the Company's competitors have broader geographic breadth. They also may have greater manufacturing, financial, research and development and marketing resources than the Company. The Company believes that the primary basis of competition in its targeted markets is manufacturing technology, quality, responsiveness, and the provision of value-added services and price. To be competitive, the Company must provide technologically advanced manufacturing services, high product quality levels, flexible delivery schedules and reliable delivery of finished products on a timely and price competitive basis. The Company currently may be at a competitive disadvantage as to price when compared to manufacturers with lower cost structures, particularly with respect to manufacturers with established facilities where labor costs are lower. 8 14 CMC Industries, Inc. and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SHORTAGES OF ELECTRONICS COMPONENTS. Most of the Company's net sales are derived from turnkey manufacturing services in which the Company procures components from third-party suppliers and bears the risk of component shortages. The electronics industry has been characterized by shortages from time to time in semiconductor and other components, which shortages have led to allocations by third-party suppliers. The Company's inability to procure desired supplies of certain components has in the past led, and may in the future lead, to some delays in shipments by the Company to its customers. These delays to date have not had a material adverse effect on the Company's results of operations. If these component shortages persist or intensify, however, the Company may not be able to secure quantities required to fulfill customer orders, which could result in delays in shipments, or cancellation or delays in customer orders, each of which could have a material adverse effect on the Company's results of operations. MANAGEMENT OF GROWTH. There can be no assurance that the Company will successfully manage the integration of new business and the growth, if any, of the Company's operations. In addition, the Company may experience certain inefficiencies as it manages geographically dispersed operations. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its results of operations could be materially adversely affected. On occasion, customers may require rapid increases in production which can place an excessive burden on the Company's resources. There can be no assurance that the Company will be capable of meeting the demands placed upon the Company's resources by these or any other customers. ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. In this regard, see "Legal Proceedings." RISK OF DEFECTS. The electronics products manufactured for customers by the Company are highly complex and may at times contain undetected design and/or manufacturing errors or failures. Such defects have been discovered in the past, and there can be no assurance that, despite the Company's quality control and quality assurance efforts, such defects will not occur in the future. If such defects occur in quantities or too frequently, the Company's business and operating results may be materially and adversely affected. DEPENDENCE ON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain key personnel could have a material adverse effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and sales representatives and other skilled employees. Failure to do so could have a material adverse effect on the Company's operations. 9 CMC Industries, Inc. and Subsidiaries 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price of the Company's Common Stock is subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the electronics manufacturing services industry as well as the industries of the Company's customers, and other factors. In addition, the stock market is subject to price and volume fluctuations which affect the market price for many high technology companies in particular, and which may or may not be unrelated to operating performance. There can be no assurance as to the trading price of the Company's Common Stock at any time in the future. LIQUIDITY AND CAPITAL RESOURCES The Company's bank credit facility is comprised of a revolving credit line of $25.0 million, a $6.0 million term loan amortizing over fifty-six months beginning in October, 1996 and a $3.8 million equipment line. The loan agreement contains financial covenants related to the Company's net worth and debt service coverage and restricts capital expenditures. At July 31, 1997, total borrowings under this facility were $12.8 million under the revolving credit line and $4.9 million under the term loan. The Company leases its primary manufacturing facilities and certain equipment using both capital and operating lease arrangements. At July 31, 1997, future minimum lease payments under the noncancelable portion of lease agreements were $14.5 million, of which $5.0 million is scheduled for payment in fiscal 1998. The Company's operations used cash of $2.0 million during the year ended July 31, 1997. Cash provided by net income before depreciation and amortization of $3.4 million and a $20.4 million increase in accounts payable were more than offset by a $17.1 million increase in trade receivables and an $8.7 million increase in inventories. The Company believes that the increases in receivables, inventories and payables were primarily due to, and commensurate with, the increase in revenues experienced by the Company during this period. During the year ended July 31, 1997, the Company used cash of $2.4 million for capital expenditures, primarily to acquire manufacturing equipment, and $1.8 million to repay long-term debt. During the year, cash of $6.0 million was provided by increased borrowings under the Company's revolving credit line. During fiscal 1997, all outstanding warrants to purchase the Company's Common Stock were exercised, resulting in capital provided to the Company of approximately $1.3 million in exchange for 169,000 newly issued shares. Also during the fiscal year, options to purchase 60,000 shares of the Company's Common Stock were exercised, resulting in net proceeds to the Company of approximately $300,000. On March 31, 1997, the Company executed an agreement and subsequently acquired 42,500 shares of the Company's Common Stock in exchange for a $441,000 receivable due to the Company. The number of shares acquired was based on the fair market value of the stock at the time of the transaction. 10 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 may include increases in working capital to support sales growth, if any, and expansion of capacity (plant and equipment). The Company is currently negotiating the purchase of a 4.4 acre tract of land in Hermosillo, Mexico and a 55,000 square foot manufacturing plant under construction at this site. The Company estimates that the total cost of the project will be approximately $3.0 million and plans to finance this project using a combination of installment notes payable to the building contractor and funds available under the Company's lines of credit. The Company expects to meet its other short-term liquidity requirements generally through net cash provided by operations, vendor credit terms, operating lease arrangements and short-term borrowings under its lines-of-credit. The Company from time to time evaluates possible business acquisitions, facility additions and expansion of surface mount and BGA technology capabilities. The Company may seek additional financing as needed to pursue growth opportunities, including any expansion of capacity; however, there can be no assurance that such financing will be available on terms acceptable to the Company, if at all. 11 CMC Industries, Inc. and Subsidiaries 17 CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
JULY 31, July 31, 1997 1996 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents ........................................... $ 4,298 $ 2,977 Trade accounts receivable, less allowance for doubtful accounts of $75 and $526 ................................. 32,533 17,231 Accounts receivable from affiliate .................................. 9,186 7,842 Inventories ......................................................... 29,900 21,218 Other current assets ................................................ 1,196 417 Deferred tax assets ................................................. -- 48 -------- -------- Total current assets .................................. 77,113 49,733 Plant and equipment, net .................................................... 11,498 10,863 Investment in preferred stock of affiliate .................................. 5,884 5,884 Goodwill, net of accumulated amortization of $233 and $181 ............................................................ 770 822 Other assets ................................................................ 1,278 132 -------- -------- Total assets .......................................... $ 96,543 $ 67,434 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable under lines of credit ................................. $ 12,792 $ 6,826 Current portion of capital lease obligations ........................ 428 404 Current portion of long-term debt ................................... 1,300 1,300 Trade accounts payable .............................................. 35,936 15,537 Accrued compensation and related benefits ........................... 2,284 1,996 Accrued expenses and other current liabilities ...................... 1,854 2,756 Deferred tax liabilities ............................................ 1,884 -- -------- -------- Total current liabilities ............................. 56,478 28,819 Capital lease obligations ................................................... 832 1,403 Long-term debt .............................................................. 3,558 4,858 Other noncurrent liabilities ................................................ 149 644 Deferred tax liabilities .................................................... 682 608 -------- -------- Total liabilities ..................................... 61,699 36,332 -------- -------- Commitments and contingencies (Notes 7 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; 6,892,211 and 6,662,779 shares issued and outstanding ............. 69 67 Stock warrants outstanding .......................................... -- 44 Additional paid-in capital .......................................... 31,594 29,971 Retained earnings ................................................... 3,622 2,016 Treasury stock (42,500 shares at cost) .............................. (441) -- Equity adjustment for minimum pension liability ..................... -- (996) -------- -------- Total stockholders' equity ................................ 34,844 31,102 -------- -------- $ 96,543 $ 67,434 ======== ========
The accompanying notes are an integral part of these financial statements. 12 18 CMC Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
YEAR ENDED JULY 31, ------------------------------ 1997 1996 1995 -------- -------- -------- Net sales Non-affiliates ............................. $183,173 $126,686 $ 95,708 Affiliates ................................. 31,312 38,025 48,595 -------- -------- -------- Total net sales .................................. 214,485 164,711 144,303 -------- -------- -------- Cost of sales Non-affiliates ............................. 172,274 118,973 90,659 Affiliates ................................. 28,807 34,983 46,032 -------- -------- -------- Total cost of sales .............................. 201,081 153,956 136,691 -------- -------- -------- Gross profit ..................................... 13,404 10,755 7,612 Selling, general and administrative expenses ..... 9,454 8,251 7,062 Restructuring charge ............................. -- 792 -- -------- -------- -------- Operating income ................................. 3,950 1,712 550 Interest expense ................................. 1,350 1,512 1,561 -------- -------- -------- Income (loss) before income taxes ................ 2,600 200 (1,011) Income tax provision (benefit) ................... 994 95 (1,051) -------- -------- -------- Net income ....................................... $ 1,606 $ 105 $ 40 ======== ======== ======== Net income per common and common equivalent share ............................... $ 0.22 $ 0.02 $ 0.01 ======== ======== ======== Weighted average common and common equivalent shares outstanding ................... 7,167 6,449 6,253 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 13 CMC Industries, Inc. and Subsidiaries 19 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except share data)
COMMON RETAINED TREASURY SHARES CAPITAL EARNINGS STOCK OTHER TOTAL --------- -------- ------ ----- ------- ------- 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 Net income .................... 1,606 1,606 Exercise of warrants .......... 168,963 1,267 1,267 Exercise of stock options ..... 60,469 314 314 Minimum pension liability ..... 996 996 Purchase of treasury stock .... (441) (441) --------- -------- ------ ----- ------- ------- Balance, July 31, 1997 ........ 6,892,211 $ 31,663 $3,622 $(441) $ -- $34,844 ========= ======== ====== ===== ======= =======
The accompanying notes are an integral part of these financial statements. 14 20 CMC Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED JULY 31, ------------------------------ 1997 1996 1995 -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................... $ 1,606 $ 105 $ 40 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes ........................... 1,409 (718) 759 Depreciation and amortization ................... 1,805 1,746 1,607 (Gain) loss on disposition of assets ............ -- 10 49 Changes in assets and liabilities: Receivables ............................... (17,087) (914) (2,528) Inventories ............................... (8,682) 4,788 3,143 Other assets .............................. (842) 1,379 (1,626) Trade accounts payable .................... 20,399 2,246 (1,621) Accrued expenses and other current liabilities ..................... (614) 693 (919) Other liabilities ......................... 15 (166) (611) -------- ------- ------- Net cash provided by (used in) operating activities .... (1,991) 9,169 (1,707) -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................. (2,388) (5,669) (1,465) Proceeds from disposition of assets .................. -- 126 115 -------- ------- ------- Net cash used in investing activities .................. (2,388) (5,543) (1,350) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under lines of credit ............................... 5,966 (3,477) 4,552 Proceeds from long-term debt ......................... -- 1,596 -- Principal payments on long-term debt ................. (1,300) (1,347) (1,232) Principal payments on capital leases ................. (547) (232) (478) Proceeds from exercise of stock options and issuance of stock and warrants .................. 1,581 2,722 18 -------- ------- ------- Net cash provided by (used in) financing activities .... 5,700 (738) 2,860 -------- ------- ------- Net increase (decrease) in cash and cash equivalents ................................. 1,321 2,888 (197) Cash and cash equivalents Beginning of year .................................... 2,977 89 286 -------- ------- ------- End of year .......................................... $ 4,298 $ 2,977 $ 89 ======== ======= ======= SUPPLEMENTAL INFORMATION: Income taxes paid (refunded) ......................... $ (206) $ 488 $ (123) Interest paid ........................................ $ 1,360 $ 1,697 $ 1,582
The accompanying notes are an integral part of these financial statements. 15 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 telecommunications industries. Over 90% of the Company's manufacturing contracts are for turnkey services and include procurement of materials in addition to manufacturing. 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 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 77% and 83% of inventories as of July 31, 1997 and 1996, respectively. PLANT AND EQUIPMENT Plant and equipment are stated at cost less accumulated depreciation. The Company provides for 16 22 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) depreciation using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes. GOODWILL The excess of purchase price over net tangible assets of businesses acquired is carried as goodwill. The Company amortizes such amounts on a straight-line basis over a twenty-year period. The Company recorded amortization expense of $52,000 for years ended July 31, 1997, 1996 and 1995, respectively related to the purchase of a subsidiary in fiscal 1994. At each balance sheet date, the Company assesses whether there has been an impairment in the value of long-lived assets by determining whether projected undiscounted cash flows generated by the applicable asset exceeds its net book value as of the assessment date. At July 31, 1997, there were no impairments of the Company's assets. DEFERRED LOAN COSTS Loan origination fees paid in connection with new borrowings are amortized using a method which approximates the effective rate method over the terms of the related borrowing. Amortization is included in interest expense. MEDICAL CARE AND DISABILITY BENEFIT PLANS The Company is self-insured with respect to certain medical care and disability benefit plans for 70% of employees. The costs for such plans are charged against earnings in the period incurred. The liability for health care claims was $397,000 and $500,000 as of July 31, 1997 and 1996, respectively, and the related expense incurred was $3,331,000, $3,078,000 and $3,102,000 for the years ended July 31, 1997, 1996 and 1995, respectively. The Company does not provide benefits under these plans to retired employees. INCOME TAXES The Company accounts for income taxes using 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, the Company 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. 17 CMC Industries, Inc. and Subsidiaries 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 changes the computation, presentation and disclosure requirements for earnings per share that are currently followed by the Company. SFAS No. 128 is effective for years ending after December 15,1997 and early adoption is not permitted. If the provisions of SFAS No. 128 had been adopted for the year ended July 31, 1997, the Company's proforma basic earnings per share would have been $0.23, $0.02, and $0.01 for the years ended July 31, 1997, 1996 and 1995, respectively. Proforma diluted earnings per share would have been $0.22, $0.02 and $0.01 for the years ended July 31, 1997, 1996 and 1995, respectively. FINANCIAL INSTRUMENTS Financial instruments are evaluated pursuant to SFAS No. 107, Disclosures about Fair Value of Financial Instruments. 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 August 1993 (date of the restructure of the Company). 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 fair value of the Company's long-term debt is estimated based on the current borrowing rates available to the Company for bank loans with similar terms and average maturities. The carrying amounts approximate fair value thereof because borrowings bear interest at a variable interest rate. PRESENTATION Certain fiscal 1996 and 1995 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): 18 24 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NET SALES RECEIVABLE AT YEAR ENDED JULY 31, JULY 31, ----------------------------- --------------- 1997 1996 1995 1997 1996 ----- ----- ----- ---- ---- Micron ......................... $45.4 $ -- $ -- $6.5 $ -- Cortelco ....................... 31.3 38.0 45.6 9.2 7.8 Global Village ................. 29.6 21.3 -- 8.2 .7 Reltec ......................... 24.2 3.7 -- 4.3 -- Harris ......................... 17.4 16.5 8.2 2.0 1.8 IBM ............................ 13.1 28.1 35.3 2.5 2.4
The Company's credit risk principally relates to trade accounts receivable and receivables from Cortelco, a related party. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. NOTE 5 -- INVENTORIES Inventories consist of the following (amounts in thousands):
JULY 31, ------------------- 1997 1996 ------- ------- Raw materials and purchased components ......... $26,205 $15,673 Work-in-process ................................ 2,874 5,174 Finished goods ................................. 821 371 ------- ------- $29,900 $21,218 ======= =======
The carrying value of inventories at July 31, 1997 and 1996 approximated replacement cost. NOTE 6 -- PLANT AND EQUIPMENT The components and useful lives of plant and equipment are as follows (amounts in thousands):
July 31, Useful life ----------------------- (years) 1997 1996 ------- ------- Machinery and equipment .......................... 3-10 $15,992 $14,760 Furniture and fixtures ........................... 5-15 1,465 714 Leasehold improvements ........................... 5 484 288 Computer equipment and software .................. 5 457 456 Construction in progress ......................... 56 239 ------- ------- 18,454 16,457 Less - Accumulated depreciation .................. (6,956) (5,594) ------- ------- $11,498 $10,863 ======= =======
19 CMC Industries, Inc. and Subsidiaries 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Depreciation and amortization expense was $1,753,000, $1,694,000 and $1,461,000 for fiscal 1997, 1996 and 1995, respectively. Plant and equipment include assets under capital leases with a cost of $1,595,000 and $2,352,000 and accumulated amortization of $400,000 and $1,018,000 as of July 31, 1997 and 1996, respectively. 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, 1997 are as follows (amounts in thousands):
FISCAL YEAR OPERATING CAPITAL LEASES LEASES ------ ------ 1998 ...................................... $ 4,527 $ 520 1999 ...................................... 4,026 809 2000 ...................................... 3,202 7 2001 ...................................... 1,197 7 2002 ...................................... 169 -- ------- ------ Future minimum lease payments ........................ $13,121 1,343 ======= Less - Amount representing interest .................. (83) Present value of future minimum lease payments ....... 1,260 Less - Current portion ............................... (428) ------ Long-term portion .................................... $ 832 ======
Rent expense relating to operating leases totaled approximately $3,450,000, $1,555,000 and $988,600 for fiscal 1997, 1996 and 1995 respectively. NOTE 8 -- BORROWINGS On September 26, 1996, CMC Industries, Inc. 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 at CMC Mississippi, Inc. and $7 million at 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). At July 31, 1997, the Company had $12.8 million outstanding at a weighted average interest rate of 8.55%. 20 26 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - 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). At July 31, 1997, the Company had outstanding $4.9 million at an average interest rate of 8.43%. - 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 options, 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 tangible net worth of $30.0 million as of October 31, 1996 and increasing to $31.5 million as of July 31, 1998, on a consolidated basis; - 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, of at least 2 to 1 through September 1, 1998. At July 31, 1996, the Company had $6.2 million outstanding under a 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, the Company had an average interest rate of 8.49%. 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, the Company had $6.8 million outstanding under the revolving loan facility at a weighted average interest rate of 8.49%. 21 CMC Industries, Inc. and Subsidiaries 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MATURITIES OF LONG-TERM DEBT The aggregate annual maturities of long-term debt are as follows (amounts in thousands): 1998 ............................... $1,300 1999 ............................... 1,300 2000 ............................... 1,300 2001 ............................... 958
NOTE 9 -- CAPITAL STOCK RECAPITALIZATION On May 16, 1996, the Company issued 436,037 shares of common stock with detachable warrants that entitled 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 issued were $2,464,000 and $44,000, respectively. Due to the Company meeting specified levels of financial performance, the warrants were called during the current year. Total proceeds from the exercise of the warrants were $1.3 million. 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. 22 28 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At July 31, 1997, 325,086 shares had been exercised under the plan and 277,986 shares for which options were granted had terminated. Options outstanding at July 31, 1997 expire in 1998 through 2007. During fiscal 1994, certain shareholders waived their rights to receive 36,100 shares related to the stock dividend. A summary of activity in the plan follows:
1997 1996 1995 ------------------- --------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- -------- -------- ------- -------- Outstanding at beginning of year ....... 642,689 4.06 467,502 3.24 389,816 3.08 Granted ................................ 348,500 7.13 346,500 3.83 161,666 3.41 Exercised .............................. (60,469) 5.18 (128,840) 0.51 (40,417) 0.50 Canceled ............................... (57,901) 7.40 (42,473) 3.96 (43,563) 4.90 ------- -------- ------- Outstanding at end of year ............. 872,819 4.99 642,689 4.06 467,502 3.24 ======= ======== ======= Exercisable at end of year ............. 461,567 4.30 322,500 4.19 283,126 2.67 ======= ======== =======
The options outstanding at July 31, 1997 are exercisable at prices ranging from $0.42 to $13.00 per share. The weighted average remaining contractual life of all outstanding options was 7.5 years at July 31, 1997. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretation in accounting for its plan. Accordingly, no compensation expense has been recognized for its stock-based compensation plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards in fiscal 1997 and 1996 consistent with the method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net earnings for fiscal 1997 and 1996 would have been reduced by approximately $364,000 and $175,000, respectively. Earnings per share would have been reduced by $0.05 and $0.03 for fiscal 1997 and 1996, respectively. These pro forma results will not be representative of the impact on future years because only grants made in fiscal 1997 and 1996 were considered. The weighted average grant-date fair value of options granted during fiscal 1997 and 1996 was $4.68 and $2.66, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions for fiscal 1997 and 1996, respectively: dividend yields of 0% each year; average expected volatility of 55% and 56%; risk-free interest rates of 6.75% and 6.50%; and an average expected life of 4.5 years. 23 CMC Industries, Inc. and Subsidiaries 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10 -- INCOME TAXES The provision (benefit) for income taxes comprised the following (amounts in thousands):
YEAR ENDED JULY 31, --------------------------------------- 1997 1996 1995 ------ ----- ------- Current: Federal ................... $ (330) $ 610 $(1,810) State ..................... (85) 203 -- ------ ----- ------- (415) 813 (1,810) ------ ----- ------- Deferred: Federal ................... 1,329 (622) 658 State ..................... 80 (96) 101 ------ ----- ------- 1,409 (718) 759 ------ ----- ------- $ 994 $ 95 $(1,051) ====== ===== =======
Deferred tax liabilities (assets) comprised the following (amounts in thousands):
JULY 31, ---------------------- 1997 1996 ------- ------- Deferred tax liabilities: Inventories ....................................................... $ 2,674 $ 2,014 Plant and equipment ............................................... 1,655 1,042 Other ............................................................. 267 -- ------- ------- 4,596 3,056 ------- ------- Deferred tax assets: Accrued liabilities ............................................... (776) (535) Minimum pension liability ......................................... -- (597) Net operating loss carryforwards .................................. -- (172) Minimum tax credit ................................................ (594) (721) Other ............................................................. (660) (471) ------- ------- (2,030) (2,496) ------- ------- Net deferred tax liability ............................................. $ 2,566 $ 560 ======= ======= The net deferred tax liability is classified as follows: Current liability (asset) ......................................... $ 1,884 $ (48) Noncurrent liability .............................................. 682 608 ------- ------- $ 2,566 $ 560 ======= =======
24 30 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
YEAR ENDED JULY 31, --------------------------- 1997 1996 1995 ---- ---- ---- Statutory federal rate ................................ 35.0% 35.0% (35.0)% State income tax, net of Federal benefit .............. (0.1) 54.0 6.6 Credits claimed for research and development .......... -- -- (67.3) Other, net ............................................ 3.3 (41.5) (8.3) ---- ----- ------ Effective rate ........................................ 38.2% 47.5% (104.0)% ==== ===== ======
NOTE 11 -- RELATED PARTY TRANSACTIONS 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 1997, 1996 and 1995 were sales to Cortelco totaling $31,312,000, $38,025,000 and $45,611,000, respectively. Total cost of sales for the periods relating to these sales to Cortelco were $28,807,000, $34,983,000 and $43,205,000, respectively. The Company had an agreement in 1996 and 1995 with Cortelco to provide certain products and related support services to customers of Cortelco. The Company was required to pay a commission to Cortelco in the amount of 10% of sales of these products under this agreement. During fiscal 1996 and 1995, the Company incurred $341,000 and $635,000, respectively, in commissions under this agreement. 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 customer that is partially owned by Cortelco. The Company had no sales to this customer in fiscal 1997 and 1996 and approximately $3.0 million in fiscal 1995. At July 31, 1997 and 1996, the Company had no accounts receivable from this customer. 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. 25 CMC Industries, Inc. and Subsidiaries 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Cortelco preferred stock is nonvoting, has a liquidation preference of $12.50 per share and entitles the Company to dividends which are non-cumulative until August 1995 and thereafter cumulative at $.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. 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 an accounts receivable balance of $491,000 from this customer. During 1997, the Company settled the then outstanding balance of $441,000 with this customer through receipt of Company common stock with a fair value of the same amount. NOTE 12 -- EMPLOYEE BENEFITS RETIREMENT BENEFITS The Company maintains a defined benefit pension plan (the "Pension Plan") which covers certain 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. 26 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 (amounts in thousands):
YEAR ENDED JULY 31, ------------------------------- 1997 1996 1995 ----- ----- ----- Service cost ............................ $ -- $ -- $ -- Interest cost ........................... 582 579 557 Return on plan assets ................... (785) (422) (441) Net amortization and deferral ........... 270 (65) 17 ----- ----- ----- Net periodic pension expense ............ $ 67 $ 92 $ 133 ===== ===== ===== Discount rate ........................... 8.25% 8.00% 8.00% Long-term rate of return ................ 8.25% 8.00% 8.00%
The following table sets forth the Pension Plan's status (amounts in thousands):
JULY 31, ---------------------- 1997 1996 ------ ------- Vested benefit obligation ...................... $6,960 $ 7,312 ====== ======= Accumulated benefit obligation ................. $7,238 $ 7,655 ====== ======= Projected benefit obligation ................... $7,238 $ 7,655 Fair value of plan assets ...................... 7,375 7,145 ------ ------- Funded status .................................. 137 (510) Unrecognized net loss .......................... 878 1,592 Additional liability recorded .................. -- (1,592) ------ ------- Prepaid (accrued) pension cost ................. $1,015 $ (510) ====== =======
27 CMC Industries, Inc. and Subsidiaries 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 recorded as of July 31, 1996 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. 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 13.5 years as of July 31, 1997. 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. Effective June 30, 1994, the Company terminated matching employee contributions. The Company may also elect to make an additional discretionary profit-sharing contribution. Effective January 1, 1996, the Savings Plan eligibility requirements were amended to include all full-time employees. The Company recorded no contributions for fiscal 1997, 1996 and 1995. On November 15, 1996, the Stockholders approved the Employee Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. As of July 31, 1997, there were 250,000 shares of common stock reserved for the ESPP, and there have been no issuances to date. The ESPP operates on a calendar basis with witholdings beginning March 1, 1997. As of July 31, 1997, a liability of $268,000 has been recorded for ESPP withholdings not yet applied towards the purchase of common stock. 28 34 CMC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 13 -- 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 $0 and $4,000, as of July 31, 1997 and 1996, 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, 1997, no claims have been filed by Alcatel. 29 CMC Industries, Inc. and Subsidiaries 35 REPORT OF INDEPENDENT ACCOUNTANTS [PRICE WATERHOUSE LOGO] 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 its subsidiaries at July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1997, 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 Memphis, Tennessee August 25, 1997 EX-21.1 4 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21.1 Subsidiaries of the Registrant. CMC Mississippi, Inc. (fka CMC Manufacturing, Inc.), a Delaware corporation CMC California, Inc. (fka Topaz Industries, Inc.), a Delaware corporation EX-23.1 5 CONSENT OF INDEPENDANT ACCOUNTANTS 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No, 33-80234 and 333-19705) of CMC Industries, Inc. of our report dated August 25, 1997 appearing on page 35 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K PRICE WATERHOUSE LLP Memphis, Tennessee October 28, 1997 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT JULY 31, 1997 AND 1996 (AUDITED) AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995 (AUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUL-31-1997 AUG-01-1996 JUL-31-1997 4,298 0 41,719 0 29,900 71,113 11,498 0 96,543 56,478 0 0 0 69 34,775 96,543 214,485 214,485 201,081 201,081 9,454 0 1,350 2,600 994 1,606 0 0 0 1,606 .22 0
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