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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                    FORM 10-Q

                                   (MARK ONE)


[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     FOR THE QUARTERLY PERIOD ENDED OCTOBERJANUARY 31, 19971998

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER: 0-22974

                              CMC INDUSTRIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE                                                   62-1434910
(STATE OR OTHER JURISDICTION OF                            (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION)                             IDENTIFICATION NO.)

4950 PATRICK HENRY DRIVE, SANTA CLARA, CA                  95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)

                         -------------------------------

                                 (408) 982-9999
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                         -------------------------------

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.

YES [X] NO [  ]

---         ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.

                 COMMON STOCK, $.01 PAR VALUE - 6,903,7967,450,407 SHARES
                       OUTSTANDING AS OF NOVEMBER 30, 1997FEBRUARY 28, 1998


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                                      INDEX

                         PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited):

                  Balance Sheets                                            3

                  Statements of Income                                      4

                  Statements of Cash Flows                                  5

                  Notes to Financial Statements                             6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                             7-11

                  PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                 12

Item 6.  Exhibits and Reports on Form 8-K                                  12



Signatures                                                                 13





                                       2
   Item 1.  Condensed Consolidated Financial Statements (Unaudited):

                Balance Sheets                                                 3

                Statements of Income                                           4

                Statements of Cash Flows                                       5

                Notes to Financial Statements                                  6



   Item 2.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                                7-12

   Item 3.  Quantitative and Qualitative Disclosure About Market Risks         12


                           PART II - OTHER INFORMATION


   Item 1.  Legal Proceedings                                                  13

   Item 2.  Changes in Securities and Use of Proceeds                          13

   Item 4.  Submission of Matters to a Vote of Security Holders                13-14

   Item 6.  Exhibits and Reports on Form 8-K                                   14


   Signatures                                                                  15
3 CMC INDUSTRIES, INC.Industries, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) UNAUDITED
OCTOBERJANUARY 31, 19971998 JULY 31, 1997 UNAUDITED (*) ---------------- ------------- ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS $ 4,6045,031 $ 4,298 ACCOUNTS RECEIVABLE, NET 49,77136,825 32,533 ACCOUNTS RECEIVABLE FROM AFFILIATE 8,5949,611 9,186 INVENTORIES 31,05422,269 29,900 OTHER CURRENT ASSETS 1,2554,743 1,196 --------- -------- TOTAL CURRENT ASSETS 95,27878,479 77,113 PLANT AND EQUIPMENT, NET 11,59711,575 11,498 INVESTMENT IN PREFERRED STOCK OF AFFILIATE 5,884 5,884 OTHER ASSETS 2,0174,083 2,048 --------- -------- $ 114,776100,021 $ 96,543 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES NOTES PAYABLE UNDER LINES OF CREDIT $ 16,60716,356 $ 12,792 CURRENT PORTION OF LONG-TERM DEBT 1,728 1,728 ACCOUNTS PAYABLE 47,76328,660 35,936 OTHER CURRENT LIABILITIES 7,4687,537 6,022 --------- -------- TOTAL CURRENT LIABILITIES 73,56654,281 56,478 LONG-TERM DEBT 3,964 4,3893,554 4,390 OTHER LIABILITIES 820 832808 831 --------- -------- TOTAL LIABILITIES 78,35058,643 61,699 STOCKHOLDERS' EQUITY COMMON STOCK 7075 69 ADDITIONAL PAID-IN CAPITAL 31,88535,603 31,594 RETAINED EARNINGS 4,9126,141 3,622 TREASURY STOCK (441) (441) --------- -------- TOTAL STOCKHOLDERS' EQUITY 36,42641,378 34,844 --------- -------- $ 114,776100,021 $ 96,543 ========= ========
* CONDENSED FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS. SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSTATEMENTS. 3 4 CMC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) UNAUDITED
THREE MONTHS ENDED OCTOBERSIX MONTHS ENDED JANUARY 31, ------------------------JANUARY 31, ------------------- -------------------- 1998 1997 19961998 1997 ------- ------- -------- ------- NET SALES $90,626 $41,941$88,431 $56,332 $179,047 $98,273 COST OF SALES 85,068 38,44182,926 52,396 167,984 90,837 ------- ------- -------- ------- GROSS PROFIT 5,558 3,5005,505 3,936 11,063 7,436 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,099 1,9953,182 2,200 6,281 4,195 ------- ------- -------- ------- OPERATING INCOME 2,459 1,5052,323 1,736 4,782 3,241 INTEREST EXPENSE, NET 395 319357 288 752 607 ------- ------- -------- ------- INCOME BEFORE INCOME TAXES 2,064 1,1861,966 1,448 4,030 2,634 PROVISION FOR INCOME TAXES 774 450737 548 1,511 998 ------- ------- -------- ------- NET INCOME $ 1,2901,229 $ 736900 $ 2,519 $ 1,636 ======= ======= ======== ======= NET INCOME PER COMMON SHARE BASIC $ 0.18 $ 0.11 ======= =======0.13 $ 0.36 $ 0.25 DILUTED $ 0.17 $ 0.13 $ 0.34 $ 0.23 WEIGHTED AVERAGE SHARES OUTSTANDING 7,355 6,996 ======= =======BASIC 6,951 6,669 6,935 6,667 DILUTED 7,405 7,188 7,380 7,092
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 CMC INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED
THREESIX MONTHS ENDED OCTOBERJANUARY 31, ---------------------------------------------------------- 1998 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 1,2902,519 $ 7361,636 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 516 4811,063 928 CHANGE IN ASSETS AND LIABILITIES: RECEIVABLES (16,646) (2,868)(4,717) (10,843) INVENTORIES (1,154) (4,758)7,631 (10,381) ACCOUNTS PAYABLE 11,827 10,559(7,276) 20,008 OTHER ASSETS AND LIABILITIES 1,394 (1,046) --------788 (836) ------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,773) 3,104 --------8 512 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: CAPITAL EXPENDITURES (602) (1,663) --------(1,114) (1,870) PAYMENTS FOR EQUIPMENT HELD FOR SALE AND LEASEBACK (3,015) -- DEPOSITS FOR FACILITY UNDER CONSTRUCTION IN MEXICO (1,500) -- OTHER (389) -- ------- -------- NET CASH USED IN INVESTING ACTIVITIES (602) (1,663) --------(6,018) (1,870) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: BORROWINGS UNDER LINES OF CREDIT, NET 3,815 (2,282)3,564 2,899 PRINCIPAL PAYMENTS ON LONG-TERM DEBT (426) (474)(836) (944) PROCEEDS FROM ISSUANCE OF STOCK 292 6 --------4,015 76 ------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,681 (2,750) --------6,743 2,031 ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 306 (1,309)733 673 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,298 2,977 --------------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,6045,031 $ 1,668 ========3,650 ======= ========
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 CMC INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position and results of operations and cash flows in conformity with generally accepted accounting principles. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1997. NetNOTE 2 - INVENTORIES The components of inventories were as follows (in thousands):
January 31, July 31, 1998 1997 ----------- --------- Raw materials and purchased components $19,399 $26,205 Work-in-process 2,357 2,874 Finished goods 513 821 ------- ------- $22,269 $29,900 ======= =======
NOTE 3 - NET INCOME PER SHARE During the quarter, the Company adopted the Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share", which establishes new standards for reporting earnings per share ("EPS"). The EPS computations for the prior periods have been restated to conform with the provisions of SFAS No. 128. Basic EPS was computed by dividing net income perby the weighted average number of common and common equivalent share has been computed onshares outstanding during the basis ofperiod. Diluted EPS was calculated by dividing net income by the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the respective periods. Common equivalent shares consist of stock options included in the computation of net income per shareEPS using the treasury stock method. NOTE 2 - INVENTORIES The components of inventories were as follows (in thousands):
October 31, July 31, 1997 1997 ----------- ------- Raw materials and purchased components $27,632 $26,205 Work-in-process 2,379 2,874 Finished goods 1,043 821 ------- ------- $31,054 $29,900 ======= =======
6 7 CMC INDUSTRIES, INC. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL CMC Industries, Inc. ("CMC" or the "Company") was incorporated in 1990 to acquire certain businesses operated from the Company's Corinth, Mississippi manufacturing facility since 1960. In August 1993, the Company transferred certain assets and related liabilities associated with its telecommunications business to Cortelco Systems Holding Corp. ("Cortelco"), a newly-formed company owned by certain of the Company's existing stockholders, in exchange for 1,000,000 shares of Preferred Stock of Cortelco. These transactions effectively transferred to Cortelco all of the Company's assets and liabilities not related to its contract manufacturing business. This restructuring allowed CMC to focus on contract manufacturing services while Cortelco pursued the development and distribution of telephones and telecommunications products. Set forth below are analyses of the Company's results of operations for the three months and six months ended January 31, 1998. RESULTS OF OPERATIONS Net salesSales for the firstsecond quarter of fiscal year 1998 increased by approximately 116%57% to $90.6$88.4 million from $41.9$56.3 million for the corresponding quarter of the prior year. Sales tofor the first six months of fiscal 1998 were $179.0 million, an 82% increase over sales of $98.3 million for same period of the prior year. The Company's manufacturing relationship with Micron Electronics, Inc. a box build customer serving the computer market, accounted for $38.1 million, or 42% of("Micron"), the Company's revenueslargest customer in fiscal 1997 and in the first quartersix months of fiscal 1998. The1998, has been discontinued. Sales to Micron were $33.3 million and $71.4 million for the quarter and six months ended January 31, 1998, respectively, as compared to $16.7 million for each of the corresponding periods of the prior fiscal year (the Company initiated business with this customerMicron in the second quarter of fiscal 1997. Revenue growth was also1997). The loss of this business may have a material adverse effect on the Company's business and results of operations in future fiscal quarters. Although the Company will continue its effort to secure new customers and enhance existing customer relationships, there can be no assurances that the Company will be able to offset the adverse effects of the loss of this business. Sales to customers other than Micron were $55.1 million for the second quarter of fiscal 1998, up 39% from $39.6 million for the same quarter of the prior year, and $107.6 million for the first six months of fiscal 1998, up 32% from $81.6 million for the corresponding period of the prior fiscal year. These increases were accomplished with sales to new customers and increased sales to certain existing customers. During the quarter, the Company announced that it had initiated business in fiscal 1998 with two new customers, Williams Electronics (a subsidiary of WMS Industries, Inc.) and Premisys Communications, Inc. Additionally, the Company expects to initiate shipments in the fourth quarter of fiscal 1998 under a new turnkey contract with one of its current customers, Diamond Multimedia Systems, Inc. ("Diamond"). Currently the Company is selling to Diamond on a consignment basis only and expects to continue 7 8 this business until work begins under the new turnkey contract. This paragraph contains forward-looking statements, including, without limitation, the statements in the preceding sentences with respect to the turnkey contract with Diamond, and readers are urged to consider the "Factors that May Affect the Company" in this regard. Gross profit for the second quarter of fiscal 1998 was $5.5 million or 6.2% of sales, as compared to $3.9 million or 7.0% of sales for the second quarter of fiscal 1997. Gross profit for the first quartersix months of fiscal 1998 was $5.6$11.1 million or 6.1%6.2% of net sales, as compared to $3.5$7.4 million or 8.3% of net sales7.6% for the first quartersame period of the prior fiscal 1997. Gross marginyear. The decrease in gross profit as a percentage of sales decreasedfrom the corresponding period of the prior fiscal year principally resulted from a change in product mix, with the costs of materials as a percentage of total costs of goods sold increasing in the first quartercurrent fiscal year periods when compared to the corresponding periods of the prior fiscal 1998 fromyear. Since the comparable quartermarkup on the costs of fiscal 1997 principally due tomaterials is typically less than the markup on the costs of conversion (including labor and overhead), gross profit as a higher percentage of lower margin box build business,sales usually declines as the declinematerials portion of certain high margin consignment business andtotal costs associated with the commencement of new turnkey business.increases. Selling, general and administrative expenses were $3.1$3.2 million or 3.4%3.6% of net sales in the firstsecond quarter of fiscal 1998, as compared to $2.0$2.2 million or 4.8%3.9% of net sales forin the firstsecond quarter of fiscal 1997. Selling, general and administrativeSuch expenses decreased as a percentagewere $6.3 million or 3.5% of net sales in the first quartersix months of fiscal 1998, fromas compared to $4.2 million or 4.3% of sales for the comparable quarter of fiscal 1997, partially as a resultcorresponding period of the significant increase in net sales for such periods. However, such expenses increasedprior year. The increases in absolute dollars in the first quarter of fiscal 1998 when compared tobetween the corresponding quarterperiods of the current and prior fiscal 1997years were primarily due to increases in salesmarketing, customer service and marketingmanagement expenses incurred in an effort to improve profitability in future periods and increases in expenses incurred to expand and upgrade the Company's management information system and an increase in selling expenses directlycommissions associated with the higher sales levels. Net interest expense for the second quarter and first quartersix months of fiscal year 1998 was $395,000$357,000 and $752,000, respectively, as compared to $319,000$288,000 and $607,000 for the corresponding period of the prior year. This increase resulted from a higher average debt outstanding in the first quarter of the fiscal 1998 when compared to the first quarterperiods of fiscal 1997. Interest expense was higher in the current fiscal year periods due to increased borrowings required to support the working capital growth associated with the higher sales levels. The Company's effective income tax rate was approximately 38% for boththroughout the first quartersix months of both fiscal year 1998 and 1997. The effective income tax rate approximates the first quarter of fiscal 1997. 7 8blended U.S. and state statutory rates. FACTORS THAT MAY AFFECT THE COMPANY This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this document. In addition to the other information contained and incorporated by reference in this document, the following factors should be considered carefully in evaluating the Company and its business. POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results are affected by a number of factors, including the timing and mix of manufacturing projects, capacity utilization, price competition, the degree of automation that can be used in the assembly process, the efficiencies that can be achieved by the Company in managing inventories and fixed assets, the timing of orders from customers, the rescheduling of existing and forecast orders for turnkey products, fluctuations in demand for customer products, the mix of products in various stages of their life cycles, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, increased costs and shortages of components or labor and economic conditions generally. All of these factors can cause substantial fluctuations in the Company's operating results. The Company's expenditures (including, but not limited to, equipment, inventory and labor) are based, in part, on its expectations as to future revenues and, to a large extent, are 8 9 fixed in the short term. Accordingly, the Company has in the past and may in the future be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenues, and any significant shortfall of demand in relation to the Company's expectations or any material delay or cancellation of customer orders could have an almost immediate material adverse effect on the Company's operating results. As a result, it is possible that in some future period, the Company's operating results could fail to meet the expectations of public market analysts or investors. In such events, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the trading price of Company's Common Stock could drop significantly. The Company's gross profit as a percentage of sales in future periods may be materially adversely affected by various factors associated with the Company's implementation of new product lines, acquisition of new manufacturing equipment and other capital expenditures and continued dependence on turnkey contracts (and the inventory risks inherent therein). Expansion of capacity will result in a higher fixed cost structure which will require increased revenue and/or significant improvements in operating efficiencies in order to maintain historical gross margins. Additionally, the commencement of production of new products typically involves significant startup costs, lower yields and other inefficiencies. New products do not generate gross margins as high as products which have been in volume production for several months. The Company also expects that competition may continue to intensify, which could also result in pricing pressure on the Company's value-added manufacturing services, and thus may lower the Company's gross margins. CUSTOMER CONCENTRATION; DEPENDENCE ON INDUSTRY TRENDS. A small number of customers are currently responsible for a significant portion of the Company's net sales. In the threesix months ended OctoberJanuary 31, 19971998 and the fiscal years ended July 31, 1997, 1996 and 1995, the Company's four largest customers in such periods accounted for approximately 69%68%, 61%, 63% and 69%, respectively, of consolidated net sales. Sales to Micron Electronics, Inc. accounted for approximately 42%40% of the Company's revenues for the threesix months ended OctoberJanuary 31, 19971998 and approximately 21% of the Company's revenues for the fiscal year ended July 31, 1997. As disclosed previously, the relationship with Micron has been discontinued and the Company's business and results of operations may be materially adversely affected by such loss in future quarters. Any other material delay, cancellation or reduction of orders from these or other customers, including, without limitation, orders from Diamond, could also have a material adverse effect on the Company's results of operations. 8 9 The percentage of the Company's sales to its major customers may fluctuate from period to period. Significant reductions in sales to any of these customers could have a material adverse effect on the Company's results of operations. In addition, customer contracts can be canceled and volume levels can be materially changed or delayed. The timely replacement of canceled, delayed or reduced contracts with new business cannot be assured. These risks are exacerbated because the Company's sales are to customers in segments of the electronics industry subject to rapid technological change and product obsolescence. The factors affecting these industries in general, or any of the Company's major customers in particular, could have a material adverse effect on the Company's results of operations. COMPETITION. The electronics manufacturing services industry is comprised of a large number of companies, several of which have achieved substantial market share. The Company also faces competition from current and prospective customers, which evaluate the Company's capabilities against the merits of manufacturing products internally. The Company competes with different companies depending on the type of service or geographic area. Certain of the Company's competitors have broader geographic breadth. They also may have greater manufacturing, financial, research and development and marketing resources than the Company. The Company believes that the primary basis of competition in its targeted markets is manufacturing technology, quality, responsiveness, and the provision of value-added services and price. To remain competitive, the Company must provide technologically advanced manufacturing services, high product quality levels, flexible delivery schedules and reliable delivery of finished products on a timely and 9 10 price competitive basis. The Company currently may be at a competitive disadvantage as to price when compared to manufacturers with lower cost structures, particularly with respect to manufacturers with established facilities where labor costs are lower. SHORTAGES OF ELECTRONICS COMPONENTS. Most of the Company's net sales are derived from turnkey manufacturing services in which the Company procures components from third-party suppliers and bears the risk of component shortages. The electronics industry has been characterized by shortages from time to time in semiconductor and other components, which shortages have led to allocations by third-party suppliers. The Company's inability to procure desired supplies of certain components has in the past led, and may in the future lead, to some delays in shipments by the Company to its customers. These delays to date have not had a material adverse effect on the Company's results of operations. If these component shortages persist or intensify, however, the Company may not be able to secure quantities required to fulfill customer orders, which could result in delays in shipments, or cancellation or delays in customer orders, each of which could have a material adverse effect on the Company's results of operations. MANAGEMENT OF GROWTH. There can be no assurance that the Company will successfully manage the integration of new business, if any, and the growth, if any, of the Company's operations. In addition, the Company may experience certain inefficiencies as it manages geographically dispersed operations, including but not limited to the Company's announced manufacturing facility in Hermosillo, Mexico (which is currently under development) and its international purchasing office in Taiwan. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its results of operations could be materially adversely affected. On occasion, customers may require rapid increases in production which can place an excessive burden on the Company's resources. There can be no assurance that the Company will be capable of meeting the demands placed upon the Company's resources by these or any other customers. ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. To date, environmental regulations have not restricted the Company's ability to operate or expand its manufacturing operations or caused the Company to incur significant expense. Environmental laws, however, could become more stringent over time, imposing greater compliance cost and increasing risks and penalties associated with a violation. Any failure by the Company to comply with present and future 9 10 regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. In this regard, see Part II. Item 1, "Legal Proceedings." RISK OF DEFECTS. The electronics products manufactured for customers by the Company are highly complex and may at times contain undetected design and/or manufacturing errors or failures. Such defects have been discovered in the past, and there can be no assurance that, despite the Company's quality control and quality assurance efforts, such defects will not occur in the future. If such defects occur in quantities or too frequently, the Company's business and operating results may be materially and adversely affected. DEPENDENCE ON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain key personnel could have a material adverse effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and sales representatives and other skilled employees for whom competition is intense. Failure to do so could have a material adverse effect on the Company's operations. 10 11 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 OctoberJanuary 31, 1997,1998, total borrowings under this facility were $16.6$16.4 million under the revolving credit line and $4.5$4.2 million under the term loan. The Company leases its primary manufacturing facilities and certain equipment using both capital and operating lease arrangements. At OctoberJanuary 31, 1997,1998, future minimum lease payments under the noncancelable portion of lease agreements were $13.0$11.4 million, of which $5.4$4.8 million is scheduled for payment in the next twelve months. In January 1998, the Company completed a private placement of an aggregate of 500,000 shares of its Common Stock, raising approximately $3.7 million. The purpose of the offering was principally to provide the Company additional financial flexibility to take advantage of business opportunities as they arise. The Company's cash and cash equivalents increased from $4.3 million to $4.6$5.0 million during the threesix months ended OctoberJanuary 31, 1997. The Company's1998. Cash from operations used cash of $2.8 million during these three months. Cash was provided by net incomeprofits before depreciation and amortization of $1.8$3.6 million, an $11.8a decrease in inventories of $7.6 million increase in accounts payable and changesa $788,000 change in other assets and liabilities of $1.4 million. Cash was used to fundsubstantially offset by a $16.6$4.7 million increase in trade receivablesaccounts receivable and an $1.2a $7.3 million increasedecrease in inventories.accounts payable. The Company believes that the increasesincrease in receivables, inventories and payables wereaccounts receivable was primarily due to, and commensurate with, the increase in revenues experienced by the Company during this period. Duringperiod; furthermore, the threeCompany believes that the decreases in inventories and accounts payable were primarily the result of improved inventory management and the termination of the Micron program. The Company used $6.0 million in investing activities during the six months ended OctoberJanuary 31, 1997,1998, including $1.9 million in deposits and other payments associated with the construction and start-up of the Company's new facility in Hermosillo, Mexico. The Company expended $3.0 million to acquire manufacturing equipment; although, the Company used cashcurrently contemplates that it will enter into a sale-leaseback transaction with respect to this manufacturing equipment, there can be no assurance that such transaction will be consummated. The Company also expended $1.1 million for other equipment and facility leasehold improvements. Cash flows from financing activities in the six months ended January 31, 1998 totaled $6.7 million, net of $602,000 for capital expenditures and $426,000$836,000 used to repay long-term debt. Duringdebt obligations. Cash provided included the quarter, cashproceeds from the private equity placement noted above, $292,000 from the issuance of $3.8 million was provided by increased borrowings under the Company's revolving credit line. Also during this same period, 10 11 approximately 54,000 shares of the Company's Common Stock were issued under the Company's stock option and employee stock purchase plans resulting in net proceeds toand $3.6 million from increased borrowings under the Company of approximately $292,000.Company's revolving credit line. The Company's needs for financing in the next twelve months may include increases in working capital to support sales growth, if any, and expansion of capacity (plant and equipment). The Company has 11 12 committed to purchase a 4.4 acre tract of land in Hermosillo, Mexico and a 55,000110,000 square foot manufacturing plant under construction at this site. The Company currently estimates that the cost of development of the project will be approximately $3$4.7 million (although there can be no assurance as to what the actual cost will in fact be) and plans to finance this project using a combination of installment notes payable to the building contractorcash on hand and funds available under the Company's lines of credit. The Company expects to meet its other short-term liquidity requirements generally through net cash provided by operations, vendor credit terms, operating lease arrangements and short-term borrowings under its lines-of-credit.lines of credit. The Company from time to time evaluates possible business acquisitions, facility additions and expansion of capabilities. The Company may seek additional financing as needed to pursue growth opportunities, including any expansion of capacity; however, there can be no assurance that such financing will be available on terms acceptable to the Company, if at all. 11Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK None 12 1213 CMC INDUSTRIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and will not disrupt the normal operations of the Company. In December 1993, the Company retained the services of an industrial safety consultant to assist in quantifying the potential exposure to the Company in connection with clean-up and related costs of a former manufacturing site, commonly known as the ITT Telecommunications site in Milan, Tennessee and more particularly described as a 50.1 acre tract surveyed by Construction Layout Service of Milan, Tennessee. The consultant initially estimated that the cost to remove the contaminated soil and deliver it to an appropriate hazardous waste site would be approximately $200,000. Based upon this advice, the Company subsequently entered into a voluntary agreement to investigate the site with the Tennessee Department of Environment and Conservation. In addition, the Company agreed to reimburse a tenant of the site $115,000 for expenditures previously incurred to investigate environmental conditions at the site. The Company recorded a total provision of $320,000 based on these estimates. In fiscal 1995, an environmental expert concluded that the cost of a full study combined with short and long-term remediation of the site may cost between $3 and $4 million. During fiscal 1996, the State of Tennessee's Department of Environment and Conservation named certain potentially responsible parties ("PRPs") in relation to the former facility. The Company was not named as a PRP. However, Alcatel, Inc., a PRP named by the State of Tennessee's Department of Environment and Conservation and a former owner of the Company, is seeking indemnification from the Company. To date, Alcatel has not filed any legal proceedings to enforce its indemnification claim. However, there can be no assurance that Alcatel will not initiate such proceedings or that any other third parties will not assert claims against the Company relating to remediation of the site. In the event any such proceedings are initiated or any such claim is made, the Company believes it has numerous defenses which it will vigorously assert. There can be no assurance that if any proceedings are initiated or any such claim is asserted, defense or resolution of such matter will not have a material adverse effect on the Company's financial position or results of operations. ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS On January 23, 1998, the Company issued an aggregate of 500,000 shares of its Common Stock to M. Kenneth Oshman and Richard M. Moley for total cash consideration of approximately $3.7 million. The proceeds will provide additional flexibility to enable the Company to take advantage of business opportunities as they arise. This private placement of shares is exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The Company granted these investors certain registration rights that may not be exercised prior to January 23, 1999. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on November 13, 1997. Proxies for the meeting were solicited pursuant to Regulation 14A. At the meeting, management's nominees for directors were elected. A summary of the nominees and voting results are as follows: 13 14
NOMINEE SHARES ------------------ ------------------------------------------- ABSTENTIONS OR VOTING FOR BROKER NON-VOTES ------------ ---------------- Frederick W. Gibbs 5,737,173 4,720 Ira Coron 5,737,173 4,720
Additionally, the selection of Price Waterhouse LLP as independent public accountants for the year ending July 31, 1998 was ratified with 5,724,393 shares voting in favor, 13,100 shares voting against and 4,400 shares abstaining. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit 2727.1 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K. No reportsThe Company filed a Current Report on Form 8-K were filed bywith the Company duringSecurities and Exchange Commission on January 30, 1998, reporting the quarter ended October 31, 1997. 12consummation of a placement to private investors of an aggregate of 500,000 shares of the Company's Common Stock. The purpose of the offering was principally to provide additional financial flexibility to take advantage of business opportunities as they arise. 14 1315 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CMC INDUSTRIES, INC. Registrant Date: December 15, 1997March 10, 1998 /s/ Matthew G. Landa -------------------- Matthew G. Landa President and Chief Executive Officer Date: December 15, 1997March 10, 1998 /s/ Andrew J. Moley ------------------- Andrew J. Moley Executive Vice President and Chief Financial Officer 1315