1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBERJANUARY 31, 19981999
[ ] 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)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE - 7,593,556VALUE--7,681,798 SHARES
OUTSTANDING AS OF NOVEMBER 30, 1998FEBRUARY 28, 1999
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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 7-12
Item 3. Quantitative and Qualitative Disclosure About Market Risks 13
6 PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)Industries, Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
OCTOBERJanuary 31, 1999 July 31, 1998
JULY 31, 1998
UNAUDITEDUnaudited (*)
---------------- -------------
ASSETS--------------
CURRENT ASSETS
CASH AND CASH EQUIVALENTSCurrent assets
Cash and cash equivalents $ 4,7004,228 $ 5,281
ACCOUNTS AND NOTES RECEIVABLE, NET 32,925Accounts and notes receivable, net 35,310 31,282
ACCOUNTS AND NOTES RECEIVABLE FROM AFFILIATE 5,098Accounts and notes receivable from affiliate 5,709 5,678
INVENTORIES 28,348Inventories 26,789 20,275
OTHER CURRENT ASSETS 1,382Other current assets 1,084 2,000
--------- ---------
TOTAL CURRENT ASSETS 72,453------------ ------------
Total current assets 73,120 64,516
NOTES RECEIVABLE FROM AFFILIATE 1,250Notes receivable from affiliate 1,100 1,400
PLANT AND EQUIPMENT, NET 19,637Plant and equipment, net 19,713 18,790
INVESTMENT IN PREFERRED STOCK OF AFFILIATEInvestment in preferred stock of affiliate 5,884 5,884
OTHER ASSETS 4,062Other assets 4,059 4,015
--------- --------------------- ------------
$ 103,286103,876 $ 94,605
========= ===================== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
NOTES PAYABLE UNDER LINES OF CREDITCurrent liabilities
Notes payable under lines of credit $ 15,24517,232 $ 18,111
CURRENT PORTION OF LONG-TERM DEBT 2,174Current portion of long-term debt 1,752 2,146
ACCOUNTS PAYABLE 34,744Accounts payable 31,998 21,365
OTHER CURRENT LIABILITIES 6,753Other current liabilities 6,434 7,301
--------- ---------
TOTAL CURRENT LIABILITIES 58,916------------ ------------
Total current liabilities 57,416 48,923
LONG-TERM DEBT 2,713Long-term debt 4,758 2,268
OTHER LIABILITIESOther liabilities 1,364 1,469
--------- ---------
TOTAL LIABILITIES 62,993------------ ------------
Total liabilities 63,538 52,660
--------- ---------
STOCKHOLDERS' EQUITY
COMMON STOCKStockholders' equity
Common stock 77 76
ADDITIONAL PAID-IN CAPITAL 36,485Additional paid-in capital 36,486 36,157
RETAINED EARNINGS 4,172Retained earnings 4,216 6,153
TREASURY STOCKTreasury stock (441) (441)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 40,293------------ ------------
Total stockholders' equity 40,338 41,945
--------- --------------------- ------------
$ 103,286103,876 $ 94,605
========= ===================== ============
* CONDENSED FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.Condensed from audited consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)Industries, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
UNAUDITED
THREE MONTHS ENDED
OCTOBERThree Months Ended Six Months Ended
January 31, ----------------------------January 31,
----------------------- -------------------------
1999 1998 1997
--------1999 1998
------- ------ ------- -------
NET SALES
Net sales $ 73,73974,575 $ 90,626
COST OF SALES 73,124 85,068
-------- --------
GROSS PROFIT 615 5,558
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,370 3,099
-------- --------
OPERATING INCOME (LOSS) (2,755) 2,459
INTEREST EXPENSE, NET 415 395
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (3,170) 2,064
PROVISION (BENEFIT) FOR INCOME TAXES (1,189) 774
-------- --------
NET INCOME (LOSS)88,431 $ (1,981)148,314 $ 1,290
======== ========
NET INCOME (LOSS) PER COMMON SHARE
BASIC179,047
Cost of sales 71,009 82,926 144,133 167,984
--------- --------- --------- ---------
Gross profit 3,566 5,505 4,181 11,063
Selling, general and administrative expenses 3,077 3,182 6,447 6,281
--------- --------- --------- ---------
Operating income 489 2,323 (2,266) 4,782
Interest expense, net 419 357 834 752
--------- --------- --------- ---------
Income before income taxes 70 1,966 (3,100) 4,030
Provision for income taxes 26 737 (1,163) 1,511
--------- --------- --------- ---------
Net income $ 44 $ 1,229 $ (1,937) $ 2,519
========= ========= ========= =========
Net income per common share
Basic $ 0.01 $ 0.18 $ (0.26) $ 0.19
DILUTED0.36
Diluted $ (0.26)0.01 $ 0.18
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 7,567 6,920
DILUTED 7,567 7,3550.17 $ (0.25) $ 0.34
Weighted average shares outstanding
Basic 7,593 6,951 7,580 6,935
Diluted 7,718 7,405 7,643 7,380
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.See notes to unaudited condensed consolidated financial statements.
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CMC INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)Industries, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
UNAUDITED
THREE MONTHS ENDED OCTOBERSix Months Ended January 31,
----------------------------------------------------------------
1999 1998
1997
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:---------
NET INCOME (LOSS)Cash flows from operating activities:
Net income (loss) $ (1,981)(1,937) $ 1,290
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING2,519
Adjustments to reconcile net income to
net cash provided by operating activities:
DEPRECIATION AND AMORTIZATION 842 516
CHANGE IN ASSETS AND LIABILITIES:
RECEIVABLES (913) (16,646)
INVENTORIES (8,073) (1,154)
ACCOUNTS PAYABLE 13,379 11,827
OTHER ASSETS AND LIABILITIES (155) 1,394Depreciation and amortization 1,721 1,063
Change in assets and liabilities:
Receivables (3,759) (4,717)
Inventories (6,514) 7,631
Accounts payable 10,633 (7,276)
Other assets and liabilities (246) 788
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,099 (2,773)Net cash provided by (used in) operating activities (102) 8
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (674) (602)Cash flows from investing activities:
Capital expenditures (1,556) (1,114)
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 (674) (602)Net cash used in investing activities (1,556) (6,018)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
BORROWINGS UNDER LINES OF CREDIT, NET (2,866) 3,815
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (469) (426)
PROCEEDS FROM ISSUANCE OF STOCK 329 292Cash flows from financing activities:
Borrowings under lines of credit, net (879) 3,564
Proceeds from long-term debt 2,092 --
Principal payments on long-term debt (938) (836)
Proceeds from issuance of stock 330 4,015
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,006) 3,681Net cash provided by financing activities 605 6,743
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (581) 306
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIODNet increase (decrease) in cash and cash equivalents (1,053) 733
Cash and cash equivalents at beginning of period 5,281 4,298
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIODCash and cash equivalents at end of period $ 4,7004,228 $ 4,6045,031
======== ========
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.See notes to unaudited condensed consolidated financial statements.
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CMC INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
reflect all normal recurring adjustments which are, in the opinion of
management, necessary to present fairly the financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1998.
NOTE 2 - INVENTORIES
The components of inventories were as follows (in thousands):
OctoberJanuary 31, July 31,
19981999 1998
---------- --------
Raw materials and purchased components $ 26,93225,710 $ 17,868
Work-in-process 32170 1,637
Finished goods 1,0951,009 770
-------- --------
$ 28,34826,789 $ 20,275
======== ========
NOTE 3 - NET INCOME PER SHARE
Earnings per share ("EPS") is calculated in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share," which requires the presentation of basic and diluted earnings per share.
Basic EPS was computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted EPS was calculated by
dividing net income by the weighted average number of common shares outstanding
and dilutive common stock equivalent shares outstanding during the respective
periods. Common equivalent shares consist of stock options included in the
computation of EPS using the treasury stock method. A reconciliation of basic
earnings per share to diluted earnings per share for the past three fiscal years
is shown in the following table (in thousands, except per share data):
Years Ended
---------------------------------------------------------------------------------------------
July 31, 1998 July 31,1997 July 31, 1996
------------------------------------------------------------ ------------------------------ ---------------------------------------------------------
Net Per Share Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------ -------- ------ ------
BASIC EPS
Earnings available to
Common shareholders $2,531 7,205 $0.35 $1,606 6,757 $0.24 $105 6,235 $0.02
EFFECT OF DILUTIVE SECURITIES
Stock Options 348 410 214
----- ----- ------------ -------- --------
DILUTED EPS
Earnings available to
Common shareholders -------- ------- ------- ------- ------ ----- ------ ----- ---- -----
Plus assumed conversions $2,531 7,553 $0.34 $1,606 7,167 $0.22 $105 6,449 $0.02
====== ===== ===== ====== ===== ===== ==== ===== ==================================================================================================
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CMC INDUSTRIES, INC.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
CMC Industries, Inc. ("CMC" or the "Company") was incorporated in 1990
to acquire certain businesses operated from the Company's Corinth, Mississippi
manufacturing facility since 1960. In August 1993, the Company transferred
certain assets and related liabilities associated with its telecommunications
business to Cortelco Systems Holding Corp. ("Cortelco"), a newly-formed company
owned by certain of the Company's existing stockholders, in exchange for
1,000,000 shares of Preferred Stock of Cortelco. These transactions effectively
transferred to Cortelco all of the Company's assets and liabilities not related
to its contract manufacturing business. This restructuring allowed CMC to focus
on contract manufacturing services while Cortelco pursued the development and
distribution of telephones and telecommunications products.
Set forth below are analyses of the Company's results of operations for
the three and six months ended OctoberJanuary 31, 1998.1999.
RESULTS OF OPERATIONS
Sales for the firstsecond quarter of fiscal year 1999 decreased by
approximately 19%16% to $73.7$74.6 million from $90.6$88.4 million for the corresponding
quarter of the prior year. Sales for the first six months of fiscal 1999 were
$148.3 million, a 17% decrease from sales of $179.1 million for the same period
of the prior year. Excluding sales to Micron Electronics, Inc. ("Micron"), with
which business was discontinued at the end of the second quarter of fiscal 1998,
sales for the second fiscal quarter and first threesix months of fiscal 1998 were
$52.5 million.$55.1 million and $107.6 million respectively. For further information on the
termination of the Micron business, refer to the Company's Form 10Q for the
quarterly period ended January 31, 1998.
Sales to customers other than Micron increased by $21.2 million (to
$73.7 million from $52.5 million) induring the second
quarter and first threesix months of fiscal 1999 by $19.5 million (to $74.6 million
from $55.1 million) and $40.7 million (to $148.3 million from $107.6 million),
respectively, when compared to the same periodcorresponding periods of the prior fiscal year.
These increases were accomplished with sales to new customers and increased
sales to certain existing customers. Sales to Next Level Communications ("Next
Level"), a customer new to the Company in fiscal 1999, were $8.5 million and
$14.5 million for the second quarter and first six months of fiscal 1999,
respectively. Sales to Diamond Multimedia Systems, Inc. ("Diamond") increased
by
$24.9 million induring the second quarter and first quartersix months of fiscal 1999 when compared to
the corresponding quartersame periods of the prior yearfiscal 1998 by $16.4 million and $41.4 million,
respectively, due to both an increase in shipments and the conversion of the
business from consignment to turnkey. Although sales to
Diamond in the first quarter of fiscal 1999 were consistent with expectations,
the Company expects the level of business to decline in future quarters. Sales
also increased by $6.0 million in the first quarter of fiscal 1999 when compared
to the corresponding period of the prior fiscal year due to the initiation of
shipments under a full turnkey contract with Next Level Communications ("Next
Level"). The increases in sales to Diamond and Next
Level were partially offset by a
decreasethe loss of $10.4 million in sales tobusiness with Global Village
Communications ("Global Village"). Following Global Village's following the sale of its modem business to
Boca Research, Inc. ("Boca") in June 1998. Sales to Global Village were $10.4
million and $20.8 million in the second quarter and first six months of fiscal
1998, manufacturingrespectively, but sales to Boca have been minimal in fiscal 1999.
Gross profit for the second quarter of productsfiscal 1999 was $3.6 million or
4.8% of sales, as compared to $5.5 million or 6.2% of sales for Boca has
declined to minimal levels. This paragraph contains forward-looking statements
and readers are urged to consider the "Factors that May Affect the Company" in
this regard.second
quarter of fiscal 1998. Gross profit for the first quartersix months of fiscal 1999 was
$615,000$4.2 million or 0.8%2.8% of net sales, as compared to $5.6$11.1 million or 6.1% of sales6.2% for the
first quartersame period of the prior fiscal 1998.year. Gross profit as a percentage of sales
decreased in the second quarter and first quartersix months of fiscal 1999 when
compared to the corresponding periodperiods of the prior fiscal year principally as a
result of increases in
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manufacturing overhead costs incurred in anticipation of higher sales volumes
and costs associated with the initiation of new manufacturing projects. 7
8There
can be no assurance that any anticipated increase in sales will occur or that
sales will not decrease in future periods. See "Factors that May Affect the
Company".
Selling, general and administrative expenses were $3.4$3.1 million or 4.6%4.1%
of sales in the firstsecond quarter of fiscal 1999, as compared to $3.1$3.2 million or
3.4%3.6% of sales in the second quarter of fiscal 1998. Such expenses were $6.4
million or 4.3% of sales in the first quartersix months of fiscal 1998. The increase in such expenses
in the current quarter when1999, as compared to
$6.3 million or 3.5% of sales for the corresponding quarterperiod of the prior year.
Although selling, general and administrative expenses were comparable on an
absolute basis in the corresponding periods of fiscal year was primarily1999 and fiscal 1998, such
expenses as a percentage of sales increased in the fiscal 1999 periods due to
increases in marketing and information systems
costs incurred in an effort to increase revenues and improve profitability in
future periods.the lower sales levels.
Net interest expense for the second quarter and first quartersix months of
fiscal year 1999 was $415,000,$419,000 and $834,000, respectively, as compared to
$395,000 in$357,000 and $752,000 for the first quartercorresponding periods of fiscal 1998. Interest
expense increased in the second quarter and first quartersix months of fiscal 1999 when
compared to the corresponding quarterperiods of the prior fiscal year primarily due to
an increase in average debt balances associated with the funding of the
Company's expansion of capacity in Mexico.
The Company's effective income tax rate was approximately 38%
throughout the first threesix months of both fiscal years 1999 and 1998. The
effective income tax rate approximates the blended state and federal statutory
rates in the United States and Mexico.
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, 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 of these
and other factors, 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
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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.
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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 quartersix months ended OctoberJanuary 31, 19981999 and fiscal years
ended July 31, 1998, 1997 and 1996, the Company's four largest customers in such
periods accounted for approximately 70%68%, 56%, 61%, and 63%, respectively, of
consolidated net sales. Sales to Micron Electronics, Inc., with whichwhom business
was discontinued in the second quarter of fiscal 1998, accounted for
approximately 24% and 21% of the Company's revenues for the fiscal years ended
July 31, 1998 and July 31, 1997, respectively. 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, or failure to pay in full by any customer of amounts owed to the
Company, could have a material adverse effect on the Company's results of
operations. In addition, customer contracts can be canceled and volume levels
may be materially changed or delayed. The timely replacement of canceled,
delayed or reduced contracts with new business cannot be assured. These risks
are exacerbated because the Company's sales are to customers in segments of the
electronics industry subject to rapid technological change and product
obsolescence. The factors affecting these industries in general, or any of the
Company's major customers in particular, could have a material adverse effect on
the Company's results of operations.
RELATIONSHIP WITH CORTELCO. The Company has had numerous transactions
with its former affiliate and customer, Cortelco Systems Holding Corp.
("Cortelco"). Mr. Lee,David S.Lee, a director of the Company, is also a director of
Cortelco, and is the largest stockholder of each of the Company and Cortelco.
Transactions between the Company and Cortelco include the transfer of certain
assets and related liabilities associated with the telephone business to
Cortelco in exchange for 1,000,000 shares of Preferred Stock of Cortelco in
August 1993 and the execution of an agreement to provide certain products and
related support services to customers of Cortelco. The Company has the right to
require that the Preferred Stock be redeemed by Cortelco beginning on August 1,
1999 in five annual installments of $2.5 million each. There can be no
assurances that such payments will be made by Cortelco on a timely basis, if at
all.
Historically, Cortelco has not been as current as other customers in
making payments on its trade accounts with the Company. In July 1998, the
Company converted certain older accounts receivable from Cortelco totaling $2.0
million into a note receivable. Under the terms of the note, Cortelco has agreed
to pay the balance over a three-year term with monthly payments of $50,000, plus
interest and a final installment of $200,000 due at the end of the three-year
period. Interest accrues on the note at a rate of 9.0% per annum. As of January
31, 1999, Cortelco had made all payments required at that date under the terms
of the note. The Company continues to provide credit for manufacturing services
sold to Cortelco in the form of trade receivables, and as of OctoberJanuary 31, 1998,1999,
had approximately $4,498,000$5,109,000 in trade receivables from Cortelco. Cortelco's
payments on its trade accounts with the Company have in the past been late, and
there can be no assurances that such payments or payments on the note will in
the future be made on a timely basis, if at all.
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
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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
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10 structures, particularly with respect to manufacturers with established
facilities in regions 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 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
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performance. There can be no assurance as to the trading price of the Company's
Common Stock at any time in the future.
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LIQUIDITY AND CAPITAL RESOURCES
The Company'sEffective January 31, 1999, the Company entered into a new bank credit facility isloan
agreement comprised of a revolving credit line of $25.0$30 million and a $6.0$5 million
term loan amortizing over fifty-six
months beginning in October 1996.loan. The loan agreement contains financial covenants related to the
Company's net worth and debt service coverage and restricts capital
expenditures. At OctoberJanuary 31, 1998,1999, total borrowings under this facility were
$15.2$17.2 million under the revolving credit line and $3.2$5.0 million under the term
loan.
The Company leases its U.S manufacturing facilities and certain
equipment using both capital and operating lease arrangements. At OctoberJanuary 31,
1998,1999, future minimum lease payments under the noncancelablenon-cancelable portion of lease
agreements were $18.8$18.4 million, of which $6.6$6.9 million is scheduled for payment in
the next twelve months.
The Company's cash and cash equivalents decreased from $5.3 million to
$4.7$4.2 million during the threesix months ended OctoberJanuary 31, 1998.1999. During this period,
the Company's operations providedused cash of $3.1 million because$102,000 and the Company experienced a
$13.4$10.6 million increase in accounts payable, more than offset thea net loss before depreciation and
amortization of $1.1 million, an $8.1$216,000, a $6.5 million increase in inventories, a $913,000$3.8 million
increase in accounts receivable and a $155,000$246,000 change in other assets and
liabilities.
The Company used $674,000cash of $1.6 million in investing activities during
the threesix months ended OctoberJanuary 31, 1998.1999, including $435,000 for payments on the
Hermosillo, Mexico facilities. Cash expended in other investing activities was
principally to improve leaseholds and to acquire manufacturing equipment.
Cash used inprovided by financing activities in the threesix months ended OctoberJanuary
31, 19981999 totaled $3.0 million, including $469,000 used to repay long-term debt
obligations and $2.9 million used to reduce borrowings under the Company's
revolving credit line.$605,000 on a net basis. Cash provided included $329,000$2.1 million
from the restructure of long-term debt and $330,000 from the issuance of
approximately 81,240 shares of the Company's Common Stock under the Company's
stock option and employee stock purchase plans. Cash used included $879,000 to
reduce outstanding borrowings under the Company's revolving credit line and
$938,000 to repay long-term debt and capital lease obligations.
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). During fiscal 1998, the Company purchased a
4.4-acre tract of land in Hermosillo, Mexico and ana 110,000 square foot
manufacturing plant located at this site. The final payment of approximately
$635,000$200,000 for this facility is expected to be made in the secondthird quarter of fiscal
1999 using cash on hand and funds available under the Company's lines of credit.credit,
although there can be no assurance of this. The Company expects to meet its
other short-term liquidity requirements generally through net cash provided by
operations, vendor credit terms, operating lease arrangements and short-term
borrowings under its lines of credit.
The Company from time to time evaluates possible business acquisitions,
facility additions and expansion of capabilities. The Company may seek
additional financing as needed to pursue growth opportunities, including any
expansion of capacity; however, there can be no assurance that such financing
will be available on terms acceptable to the Company, if at all.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
of the
Company's manufacturing equipment, computer programs or computer hardware used by the
Company that have date-sensitive software or embedded chips may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
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operations, including, among other things, a temporary inability to operate
equipment, process transactions, send invoices, or engage in similar normal
business activities.
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Based on recent assessments, theThe Company determined in its initial assessment that it will be
required to modify or replace only
insignificant portions of hardware and software required modification or
replacement so that those systems willwould properly utilize dates beyond December
31, 1999. The Company presently believes that withdue to completion of minor
modifications ofto existing hardware and software, the Year 2000 Issue has been
substantially mitigated, although there can be mitigated.no assurance of this.
The Company's plan to resolve the Year 2000 Issue involvesinvolved four phases;
assessment, remediation, testing and implementation. To date theThe Company believes that
it has completed its assessment of all material systems that could be affected
by the Year 2000 Issue. The completed assessment indicated that most of the
Company's significant information technology systems and software and hardware
used in manufacturing equipment (hereafter also referred to as operating
equipment) would not be materially affected.affected, although there can be no assurance
of this. Further, the Company does not conduct a significant portion of its
vendor purchase transactions through systems that interface directly with
suppliers.
For its information technology exposures, the Company believes that it
has completed the remediation phase for all material systems and that it has
completed all software reprogramming and
replacement as of December 15, 1998.for all material systems. To date, the Company believes that it has
completed approximately one-half of its testing and has implemented approximately one-halfall of its remediated systems.
The Company has
currently scheduled the testing phase to be complete by January 1, 1999, with
all remediated systems fully implemented by January 31, 1999; however,However, there can be no assurance that such schedules will be met.implementation has resolved all
related Year 2000 issues.
For its operating equipment exposures, the Company believes that it has
completed the remediation phase of the resolution process, asalthough there can be
no assurance of December 15,
1998.this. Testing of this equipment is more difficult than its
information technology systems and the Company is now in the earlylate stages of this
task. The Company is scheduled to complete its testing and implementation of
affected equipment by March 31, 1999; however, there can be no assurance that
such schedules will be met.
With respect to third parties, the Company currently has no material
systems that interface directly with significant vendors. The Company plans to
queryhas
queried its important suppliers regarding Year 2000 readiness but to date is not
aware of any problems that would materially impact results of operations,
liquidity or capital resources. However, the Company has no means of ensuring
that these third parties will be Year 2000 ready and any inability of those
parties to complete their Year 2000 resolution process could materially impact
the Company.
The Company willhas primarily utilizeutilized internal resources to reprogram, to
replace, test and implement, as needed, the software and operating equipment for
Year 2000 modifications. The total cost of the Year 2000 project is not expected
to materially affect the Company's business or results of operations. However,
there can be no guarantee that unexpected events will not occur and actual
results could be materially adversely affected. Specific factors that might
cause such material adverse effects include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee has issued Statement of
Position ("SOP") 98-5, Reporting on the Costs and Start-up Activities, effective
for fiscal years beginning after December 15, 1998 (fiscal 2000 for the
Company). SOP 98-5 requires the costs of start-up activities and organization
costs to be expensed as incurred. In fiscal 1998, the Company capitalized $1.2
million of start-up costs incurred to begin manufacturing operations in
Hermosillo, Mexico. The Company plans to amortize 20%, or $240,000, in fiscal
1999 and expense the balance of $960,000 in fiscal 2000 upon adoption of SOP
98-5.
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Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
None
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.
In connection with a fiscal 1996 staff reduction, certain terminated
employees subsequently claimed that the Company had engaged in age
discrimination in their dismissal and sought damages of varying amounts. The
Company defended the actual and threatened claims vigorously during fiscal 1998
incurring approximately $275,000 in legal costs over the course of the year. On
August 6, 1998, a judgment was rendered in the favor of one plaintiff in the
amount of $127,000, which the Company has appealed.subsequently settled for $112,000. A
second plaintiff's claim for $53,000 was filed and subsequently settled for
$48,500. The EEOC has negotiated with the Company to reach a monetary settlement
for other potential claimants. Without admitting any liability, the Company has
entered into a Conciliation Agreement with the EEOC and agreed to pay
approximately $500,000 to settle all such claims and limit future litigation
costs. As a result of these events and the significant ongoing costs to defend
these claims, in 13
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October 1998, the Company concluded that its interest would be
best served to settle all
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such matters. The Company has reserved $975,000 to resolve all such claims,
which represents its best estimate of funds to ultimately be paid to such
claimants. This charge was recorded in the fiscal year ended July 31, 1998.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibit 27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended OctoberJanuary 31, 1998.
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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, 1998March 12, 1999 /s/ Matthew G. Landa
--------------------------------------------------
Matthew G. Landa
President and Chief Executive
Officer
Date: December 15, 1998March 12, 1999 /s/ Andrew J. Moley
------------------------------------------------
Andrew J. Moley
Executive Vice President and
Chief Financial Officer
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