Item 1. Business --------
(a) General Development of Business -------------------------------
Unless the context requires otherwise, as used herein, the term "Company" means CMI Corporation and its consolidated subsidiaries. Information regarding 1997 business developments is located in Item 1(c).
(b) Financial Information About Industry Segments ---------------------------------------------
The Company currently operates in one industry segment and information regarding this segment is located in Item 1(c). See consolidated financial statements for financial information (Item 8).
(c) Narrative Description of Business ---------------------------------
The Company was incorporated in Oklahoma in 1926. Since 1964, the Company has manufactured and marketed automated equipment for the road and heavy construction industry. The Company is an industry leader in the design and manufacture of automated equipment for the construction and maintenance of highways, city streets, airport runways, county roads, bridges, and parking lots. The Company's products include asphalt plants; asphalt pavement recycling systems; concrete pavers; machines for concrete placing and spreading, finishing, texturing, and curing; pavement profiling machines; pavement reclaimers; a complete line of automated fine grading, materials spreading and placing equipment; soil stabilizers; and a series of multiple use machines, that can be configured for either rear to side discharge, for placing base and/or paving materials. The Company also produces trailers, used by the construction and mining industries, industrial scales, bridge and canal paving equipment, and thermal systems for remediating contaminated soils. The Company has won market recognition by producing products emphasizing recycling and energy conservation.
During the fourth quarter of 1997, the Company expanded its product offerings by acquiring two manufacturers of concrete production plants and two product lines from a third manufacturer. The Company first acquired the Ross Company of Brownwood, Texas, a nearly 50 year old manufacturer of concrete central and ready mix plants. Ross has a strong reputation for innovative ready mix plants, both portable and stationery. The second concern acquired was the 75 year old C.S. Johnson Company of Champaign, Illinois. C.S. Johnson was the pioneer in the design and manufacture of large mass pour concrete central mix plants used on some of the world's largest construction projects. Notable past projects include the Hoover
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and Grand Coulie Dams. Johnson plants are currently providing the concrete for the world's largest construction project of modern times, the Three Gorges Dam in China. Finally, the Company acquired the TRASHMASTER Landfill compaction line and three hard materials grinding machines for the demolition and wood wastes industry from Rexworks, Inc. of Milwaukee, Wisconsin.
In late 1991, the President signed into law the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA-91) providing authorizations for total funding of more than $155 billion over a six-year period for highways, highway safety, and mass transportation programs. ISTEA-91, which expired September 30, 1997, had a positive impact on the Company, as well as the road and heavy construction industry as a whole. As in fiscal 1996, Federal Highway Trust Fund spending was set at just over $20 billion for fiscal 1997, continuing a pattern of funding in recent years, but below the amount authorized by Congress under ISTEA-91. After failing to re-authorize a new multi-year federal highway construction funding program during 1997, Congress passed an extension of the old program through April 30, 1998. In March 1998, the Senate passed the ISTEA II re-authorization providing $173 billion over six years for federal highway investment, a 43% increase over the previous six year authorization. The House bill, BESTEA, is expected to be passed by the April 30, 1998 deadline and it is expected to provide more funds for highways than the measure passed by the Senate.
The North American Free Trade Agreement (NAFTA) and General Agreement on Tariff and Trade (GATT) continue to have a positive impact on the heavy construction industry through increased export sales in North America and Europe.
Principal product information is as follows:
Hot Mix Asphalt Production Systems: -----------------------------------
The Company has continued to market and deliver its popular parallel flow hot mix asphalt production and recycling plants to customers. The Company has been providing the asphalt plant industry with this parallel flow technology since approximately 1978.
In 1993, the Company completed design work on a new counter-flow hot mix asphalt production plant. This new plant was introduced under the trade name "TRIPLE-DRUM." Production tests showed that the plant has superior heat transfer performance compared to other counter-flow plant designs, especially for recycle operations. The ease with which TRIPLE-DRUMs are passing tough exhaust emissions standards with high production rates, even under adverse production conditions, has been noticed by the industry and is resulting in stronger sales.
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The Company introduced a new line of batch type hot mix asphalt production plants during 1994, and introduced yet another series of metric sized batch plants for international markets during the first quarter of 1996.
The Company's parallel flow, TRIPLE-DRUM, and batch type hot mix asphalt production and recycling systems provide a wide range of technologies to serve the needs of the industry.
Concrete Paving Systems: ------------------------
The Company manufactures and markets worldwide a complete line of street and highway class concrete slipform paving and paving train support machines. The popularity of these machines relates directly to job site performance, which often has resulted in contractors earning performance bonuses for pavement smoothness as recorded by profileograph measuring. Some contractors have even recovered the original purchase cost of a machine from the bonuses of a single job.
The Company's highway class pavers incorporate machine improvements into the basic machine design, making features like computerized crowning and automatic placement of dowel bars less costly to add. During 1995, the Company introduced a new 3000 series of AUTO-GRADE slipform pavers which features a double telescoping mainframe to more easily accommodate changes in paving width. The series is available in two and four track models and is ideal for city streets, lane additions and ramp paving. The Company introduced a new line of curb and gutter pavers and smaller slipform pavers in 1996, which are being marketed under the trade name, METRO-PAV. Upgraded versions of its remaining AUTO-GRADE pavers were also introduced in 1996.
Pavement Profiling Equipment: -----------------------------
The Company introduced the industry's first dedicated pavement milling machine in 1976. Since that time, the Company's line of "ROTO-MILL" Pavement Profilers has set the standards for the fast developing pavement restoration and recycling market. The Company offers a wide range of models from small utility machines to the PR-1200, the world's largest pavement profiling machine. Current models include the PR-500C, PR-650, and PR-800-7, all half-lane width machines; the PR-1050, and PR-1200, full lane width machines; and two utility rubber tire models, the PRT-225 and PRT-525. During 1997, the Company introduced the PR-525, a track version of the highly mobile PRT-525.
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Reclaiming/Stabilizing Equipment: ---------------------------------
The Company's popular RS-500, a road reclamation and soil stabilization machine introduced in 1991, has had strong growth in sales over the past six years. Now marketed under the trade name, ROTO-MIXER, the productivity and versatility of these machines have created new work classifications and markets for recycling and pavements; and have dramatically increased the productivity of older methods. Current models include the RS-425, RS-500B and RS-650. During 1998, the Company plans to introduce the RS-450, a new higher production addition for governmental and smaller project markets.
Remediation Equipment: ----------------------
During 1994, the Company began marketing its newly designed Enviro-Tech Thermal Soil Remediation System. Soil remediation is a process whereby non-hazardous contaminates like oil, jet fuel, and other hydrocarbon-based pollutants are removed from the soil in a thermal process. Soil remediation systems use similar equipment and processes as the Company's asphalt production systems.
The Company has engineered and is marketing remediation systems with production ranges from 80 to 160 tons per hour. The Company's systems have been used at military and industrial sites, where they have set new production records which actually doubled the tons per hour produced on any previous jobs of similar nature.
Waste, Construction and Demolition Equipment: ---------------------------------------------
The product acquisitions from Rexworks gives CMI a solid market position in the waste, construction and demolition markets with three separate grinder designs; the Biogrind, Maxigrind and Megagrind. These models cover a broad range of grinding requirements from municipal greenwaste, land clearing, industrial waste and construction and demolition. Each model is designed for both wide application, and niche markets with its broad range. Customer loyalty to the models is excellent and many traditional CMI customers own these units; many more are prospects.
Weighing Equipment: -------------------
The Company manufactures and distributes a broad line of electronic scales for construction, transportation, material processing, mining, energy, agricultural, and industrial applications. These systems permit direct linkage to data processing equipment to speed material processing, record keeping, and billing. The Company also markets
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high technology automatic computer controls for continuous material blending, weighing, record keeping, inventory tracking, invoicing, and report writing. These control systems are primarily marketed with the Company's hot mix asphalt production plants and soil remediation systems.
Load King Division: -------------------
Load King, headquartered in Elk Point, South Dakota, manufactures a broad line of heavy duty trailers for equipment and material hauling. Bottom discharge material trailers and a family of redesigned rock hauler trailers have been added to the broad line of folding gooseneck and lightweight detachable gooseneck trailers engineered to meet individual state weight distribution requirements. Load King also responds to customer requirements for custom heavy haul trailers. During 1995, the Company began manufacturing its popular bottom dump trailers at its Oklahoma City manufacturing facility. The added production at the Oklahoma City manufacturing facility has reduced Load King's response time for filling dealer orders for these products and has permitted the Elk Point manufacturing facility to concentrate on the production of custom heavy hauling units.
Bid-Well Division: ------------------
Bid-Well, headquartered in Canton, South Dakota, is an industry leader in the development and manufacture of a wide variety of specialized lightweight grading and concrete paving and finishing machines for construction markets. This equipment includes bridge deck pavers and concrete overlay machines, building floor pavers and finishers, and specialized graders, pavers, and finishers for slope and canal paving.
Marketing and Distribution. The Company's construction equipment is sold - -------------------------- directly to end users and through independent dealers. The Company's scale and trailer products are sold through independent dealers. All products are sold in the United States and in foreign markets, except for weighing equipment and products manufactured by the Load King Division which are sold substantially in the United States.
Sources and Availability of Raw Materials. The principal component parts used - ----------------------------------------- in the Company's manufacturing of its pavement maintenance and construction equipment that are supplied by others include gas and diesel engines, hydraulic cylinders, tires, bearings, and raw steel. The Company has not experienced any delays in its component parts deliveries or
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received inferior component parts that have adversely affected its business. In addition, the Company purchases many of these components from a variety of outside suppliers and believes that alternate sources of supply exist for substantially all items.
Importance of Patents. The Company has obtained patent protection on certain - --------------------- components and features incorporated into its products, which expire on various dates. The Company's patents, together with licenses under patents owned by others, are considered by the Company to be adequate for the conduct of its business. The Company is of the opinion that the loss of any single patent or group of related patents would not materially affect the Company's business.
Seasonal Nature of the Business. The Company's business is seasonal in nature - ------------------------------- and precedes the months in which highway and road construction and restoration generally occur. A large portion of the Company's orders for its products are received in the months of November through July, with heavy shipments occurring in the months of March through August.
Practices Relating to Working Capital. The Company recognizes revenue when - ------------------------------------- sales transactions are completed, which is when products are shipped or title has transferred to the customer. Sales generally require a down payment or trade allowance and are due within normal trade terms. The Company also sells certain products under installment sales contracts. Inventories are carried in proportion to customer requirements and fluctuate in relation to the seasonal nature of the Company's business.
Dependence Upon a Single Customer or a Few Customers. The Company was not - ---------------------------------------------------- dependent on any single customer or group of customers during 1995 through 1997.
Competitive Conditions. The Company is one of the largest producers of pavement - ---------------------- maintenance and construction equipment in the United States. The Company has won substantial market recognition in the pavement maintenance and construction industry by producing products emphasizing recycling and energy conservation. Numerous companies produce equipment with similar features and the construction equipment market remains competitive. Competition is based primarily on price, product quality, financing, productivity, quality of construction, service, and availability of replacement parts.
Company-Sponsored Engineering and Product Development Activities. The Company - ---------------------------------------------------------------- invests significant resources in the development, enhancement, refinement, and production of new technologies for the road and heavy construction industry. The Company patents new technologies relating to
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significant changes and development of finished products. See discussion regarding current engineering and product development activities under principal product information and also see Management's Discussion and Analysis of Financial Conditions and Results of Operations (Item 7).
Environmental Laws and Regulations. The Company is subject to various - ---------------------------------- environmental laws and regulations, none of which have a current or expected future material financial impact on the Company.
Employees. The Company had approximately 1,590 employees as of December 31, - ---------- 1997.
(d) Financial Information About Foreign and Domestic Operations and Export ----------------------------------------------------------------------- Sales -----
The Company had export sales to unaffiliated customers through foreign dealers and representatives as follows (dollars in thousands):
See Consolidated Financial Statements (Item 8).
Item 2.
Item 2. Properties ----------
The Company has total plant, office, and warehouse areas of approximately 904,000 square feet, which are located in four states.
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The largest manufacturing plant, including the corporate headquarters, has approximately 600,000 square feet and is located in Oklahoma City, Oklahoma. Other principal manufacturing plants and offices owned by the Company, aggregating approximately 304,000 square feet, are located in South Dakota, Texas, and Iowa. The Company also leases approximately 95,000 square feet of manufacturing plants and offices located in Illinois. These facilities are adequate for the current and expected near future operations of the Company.
In addition, the Company owns 110 acres of land in Tennessee currently being held for sale.
Item 3.
Item 3. Legal Proceedings -----------------
As previously disclosed, on November 22, 1995, certain attorneys, previously engaged by the Company in connection with prior patent litigation, filed suit against the Company. The attorneys are seeking to recover approximately $1.4 million of legal fees and costs alleged to be owing by the Company, together with prejudgment and postjudgment interest and other costs.
There are numerous other claims and pending legal proceedings that generally involve product liability and employment issues. These cases are, in the opinion of management, ordinary routine matters incidental to the normal business conducted by the Company. In the opinion of the Company's management after consultation with outside legal counsel, the ultimate disposition of such proceedings, including the case above, will not have a materially adverse effect on the Company's consolidated financial position, liquidity or future results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------
Not applicable.
Executive Officers of the Registrant - ------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered item in Part I of this Form 10-K in lieu of being included in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 1998.
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The following is a list of names, listed alphabetically, and ages of all the executive officers of the registrant indicating all positions and offices with the registrant held by each such person and each such person's principal occupations or employment during the past five years.
(1) Mr. Basey has held manufacturing and general management positions with industrial companies for over 30 years; including the position of president and chief operating officer for one of AT&T's Business Units.
(2) Mr. Curtis has held marketing and general management positions with industrial companies for 30 years; including the positions of vice president, marketing and sales for Eagle Picher Construction Equipment Division; and president of Roadtec, a Division of Astec Industries.
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PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters ------------------------------------------------------------------------
Principal Market and Stock Prices: - ----------------------------------
The Company's Class A Common Stock is traded on the New York Stock Exchange. The closing market price for the Company's Class A Common Stock on March 23, 1998, was $4.81. The table below presents the high and low market prices for the Company's common shares for each three month period in 1997 and 1996. The following information was obtained from the monthly market statistics report prepared by the New York Stock Exchange.
Approximate Number of Shareholders: - -----------------------------------
The number of holders of record of the Company's common shares as of March 23, 1998, was 1,698.
Dividend Information: - ---------------------
The following table summarizes dividend payments authorized by the Company's Board of Directors:
Per Share Type Record Date Payment Date Amount ---- ---------- ------------ ---------
Common 11/15/96 12/03/96 $ .01 Common 02/18/97 03/03/97 .01 Common 05/16/97 06/12/97 .01 Common 08/15/97 09/02/97 .01 Common 11/21/97 12/01/97 .01 Common 03/12/98 03/18/98 .01
It is the Board of Director's present intention to continue paying regular quarterly cash dividends. Prior to the 1996 cash dividend, 1981 was the last year a cash dividend had been made on the Company's Class A Common Stock or Common Stock.
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See Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7) and Notes to Consolidated Financial Statements (Item 8).
Item 6.
Item 6. Selected Financial Data -----------------------
The following selected financial data should be read in conjunction with the consolidated financial statements of the Company, including notes and supplementary information appearing elsewhere herein.
FIVE-YEAR SELECTED FINANCIAL DATA - (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) Included in 1995 and 1994 net earnings are deferred tax benefits of approximately $8.8 million and $10 million, respectively, relating to previously unrecognized tax benefits related to Statement of Financial Accounting Standards No. 109.
(2) Total assets and long-term debt for 1997 reflects the impact of acquisitions of businesses (See Notes to Consolidated Financial Statements, Item 8).
The acquisitions did not have a material impact on net revenues, operating earnings or net earnings in 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations - -------------
Changes in Financial Condition, Liquidity, and Capital Resources - ----------------------------------------------------------------
During 1997, the Company's liquidity and capital resources remained strong. On October 1, 1997, the Company acquired all the outstanding stock of Brownwood Ross Company, a concrete plant manufacturing company, for $2.4
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million. On October 24, 1997, the Company acquired certain assets of CS Johnson Corporation, a concrete plant manufacturing company, for $.8 million. On December 17, 1997, the Company acquired certain assets related to the landfill and embankment compactor and material reduction grinder product lines from Rexworks, Inc. for $20.5 million. The acquisitions were funded with existing cash, 75,000 shares of Voting Class A Common Stock, and $15.0 million in debt. The Company will incur some costs in 1998 to relocate the landfill and embankment compactor and material reduction product lines of Rexworks, Inc. from Milwaukee to Oklahoma City; however, overall these acquisitions are expected to contribute to both revenue and earnings for the full year of 1998.
The $30 million 7.68%, unsecured senior notes issued in September 1996 mature from September 2000 to September 2006. The $25 million unsecured revolving line of credit obtained in September 1996 provides for interest at the LIBOR rate plus 1.25% to 2.0% or prime rate less 0.5% to 1.25%. The rate is determined based on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization and is adjusted every ninety days. The rate was 7.66% at December 31, 1997. The revolving line of credit was increased to $40 million effective December 31, 1997 and matures December 2000. As of December 31, 1997, the Company had utilized $15 million of the unsecured revolving line of credit. Other long-term debt has a maturity date of September 2010 and is expected to be paid when due. The debt-to-total-capital percentage was 41.2% at December 31, 1997 compared to 34.8% at December 31, 1996. The increase in debt- to-total-capital percentage is largely due to funding for acquisitions.
The Company maintains a fleet financing agreement with a third party lender related to the rental of finished products to customers. Generally, these financings range from three months to three years and are secured by the specific finished product. These financing arrangements provide the Company with additional short-term working capital and the ability to offer more attractive financing to its customers. The fleet financing agreement provides for interest at the prime rate. At December 31, 1997, the Company had no outstanding obligations under this agreement.
In January 1993, the Company entered into separate loan agreements with Recovery Equity Investors L.P., a shareholder, and Larry Hartzog, a shareholder and board member, to borrow $1.97 million at a fixed interest rate of 9%. In connection with the loan agreements, the lenders purchased stock purchase warrants from the Company entitling them to purchase up to 600,000 aggregate shares of the Company's Class A Common Stock at an exercise price of $3.75 per share. The lenders paid $50,000 for these stock purchase warrants. In July 1995, the $1.97 million was paid in accordance with the loan agreements. In January 1997, the lenders exercised the stock purchase warrants for 600,000 aggregate shares of the Company's Class A Common Stock at an exercise price of $3.75 per share. The additional $2.25 million in working capital was used for general corporate purposes.
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The Company's new financing and various other loan agreements and arrangements should provide the Company with sufficient working capital to finance its operations.
Other Changes in Financial Condition, Liquidity, and Capital Resources - ----------------------------------------------------------------------
Working capital increased to approximately $84.0 million at December 31, 1997 from $75.8 million at December 31, 1996. The increase in working capital is primarily the result of increased receivables of approximately $9.0 million and inventories of approximately $10.0 million offset by an increase in current liabilities of approximately $9.8 million. Included in working capital at December 31, 1997 was approximately $6.0 million of receivables purchased from Rexworks, approximately $8.6 million of inventories purchased from Rexworks and approximately $2.5 million of Rexworks' current liabilities assumed.
The increase in receivables is the result of increased fourth quarter sales and receivables purchased from Rexworks. The current ratio at December 31, 1997 was 4.42-to-1 compared to 6.10-to-1 at December 31, 1996.
Capital expenditures were $5.3 million in 1997, an increase of $1.9 million from the prior year. Capital expenditures are made to continue the improvement of the Company's manufacturing and product support efficiencies. Capital expenditures for 1998 are budgeted at $11.0 million. Capital expenditures will be funded with cash from operations and debt.
In connection with a 1985 acquisition, the Company issued 4,800 shares of 7% Series B Preferred Stock with a $4.8 million redemption value. The preferred stock accrued dividends at the rate of $70 per share per year. The cumulative dividends were payable each January and July and had to be fully paid or declared with funds set aside for payment before any dividend could be declared or paid on any other class of the Company's stock. The preferred stock carried a redemption price of $1,000 per share. During the period from 1988 to 1995, 1,350 shares of the preferred stock were redeemed and certain dividends were accrued and paid. During 1996, the Company paid approximately $4.8 million for the redemption of 3,450 shares of preferred stock plus accrued dividends. As of December 31, 1996, the Company had redeemed all outstanding preferred shares.
During 1997, the Company paid a quarterly cash dividend of one cent per share. During the first quarter of 1998, the Company's Board of Directors authorized payment of a quarterly cash dividend of one cent per share. It is the Board of Director's present intention to continue paying regular quarterly cash dividends.
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Accounting for Income Taxes - Income taxes are accounted for using the asset and - --------------------------- liability method under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized as income in the period that includes the enactment date.
The Company has a net deferred tax asset after consideration of the valuation allowance of approximately $12.2 million and $15.8 million at December 31, 1997 and 1996, respectively. The benefit of future tax deductions and credits not utilized by the Company in the past is reflected as an asset to the extent that the Company assesses that future operations will "more likely than not" be sufficient to realize such benefits. The Company has assessed its past earnings history and trends, sales backlog, budgeted sales, reversing taxable temporary differences and expiration dates of future tax deductions and credits. As a result, the Company has determined it is "more likely than not" that the $12.2 million of net deferred tax assets will be realized. The ultimate realization of future tax deductions and credits will require aggregate taxable income of approximately $32 million to $37 million in future years.
Results of Operations - ---------------------
1997 SALES AND EARNINGS. The Company's net revenues for the year ended December 31, 1997 rose to $154.0 million from $138.8 million for the year ended December 31, 1996. Net earnings for 1997 were $3.2 million versus $5.5 million in 1996, or 15 cents per share for 1997 versus 25 cents per share for 1996.
The Company's international sales decreased to $21.1 million in 1997 from $29.4 million in 1996 and $16.7 million in 1995, resulting in a decrease of approximately 28% from 1996 and an increase of approximately 26% over 1995. The Company's domestic sales were $132.9 million in 1997 and $109.4 million in 1996, an increase of approximately 21%. The increase in net revenues was primarily attributable to increased volume from the Company's core products. The acquisitions completed during the fourth quarter of 1997 did not significantly impact 1997 net revenues.
The decrease in international sales is primarily attributed to declines in Australia and North and Central America (other than the United States) offset by an increase in South America. The declines are primarily a result of unusually strong sales realized in 1996.
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The funding of the ISTEA-91 legislation and the commitment of the U.S. Congress and federal government to fund the improvement of the infrastructure has had a significant impact on the Company's industry the past several years. After failing to re-authorize a new multi-year federal highway construction funding program during 1997, Congress passed an extension of the old program through April 30, 1998. In March 1998, the Senate passed the ISTEA II re-authorization providing $173 billion over six years for federal highway investment, a 43% increase over the previous six year authorization. The House bill, BESTEA, is expected to be passed by the April 30, 1998 deadline and it is expected to provide more funds for highways than the measure passed by the Senate.
The Company's gross margins were 25.2% down from 28.9% in the prior year. One reason for the decline is the Company's strategy to gain market share in the asphalt arena and the associated pricing pressures encountered. However, the primary cause for the decrease is the plant re-engineering program begun in 1997 with a long term goal of lowering costs of goods sold primarily by controlling labor costs while maximizing productivity and efficiency. In addition, in connection with the re-engineering efforts, the Company focused on improving the quality of its products and ensuring stringent quality standards were met prior to shipping equipment. These efforts required significant commitment of capital and man hours during the transition and resulted in increases in costs of sales during the first six months of 1997. The costs improved in the third and fourth quarters, but the impact on overall 1997 margins was negative.
Marketing and administrative expenses increased $2.4 million in 1997 due to increased sales efforts. As a percentage of net revenues, marketing and administrative expenses were approximately 16.5% in 1997 from approximately 16.6% in 1996.
Engineering and product development costs remained level as a percentage of net revenues at approximately 4%. The Company continues to be committed to setting standards of quality within the industry. During 1997, the Company introduced the PR-525, a track version of the highly mobile PRT-525 mill. During 1998, the Company will be introducing the RS-450, a new higher production road reclaimer and soil stabilization machine for governmental and smaller project markets. Additionally during 1998, the Company will be introducing a Medical Waste Grinder for the health care industry. These new products further emphasize the Company's commitment to product development and product enhancement.
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Interest expense decreased $27,000 from the prior year. The Company's average borrowings increased over 1996 largely due to the $30.0 million private placement completed in September 1996 and the $15.0 million funding from the Company's line-of-credit in December 1997. The increase in average borrowings in 1997 was partially offset by more favorable borrowing rates under the Company's new financing arrangements.
Income tax expense was $2.0 million in 1997 compared to $3.2 million in 1996. The Company's 1997 and 1996 earnings were fully taxed at a rate of approximately 36.5%. The exclusion of losses of the Company's foreign subsidiary in determining tax expense is the primary factor which increases the Company's financial tax rate.
The acquisitions completed during the fourth quarter of 1997 did not significantly contribute to 1997 net revenues and net earnings. During 1998, the Company anticipates an increase in net revenues of approximately $45 million from these acquisitions. Gross margins are comparable to the Company's existing core products. As a result of these acquisitions the Company anticipates an increase in marketing and administrative expenses of approximately $2.0 million, engineering and product development costs of approximately $1.0 million, and interest expenses of approximately $1.0 million. Overall these acquisitions are expected to be accretive to net earnings for the full year of 1998.
1996 SALES AND EARNINGS. The Company's net revenues for the year ended December 31, 1996 rose to $138.8 million from $130.6 million for the year ended December 31, 1995. Net earnings for 1996 were $5.5 million versus $17.5 million in 1995, or 25 cents per share for 1996 versus 82 cents per share for 1995. The Company's 1995 earnings per share of 82 cents included a tax benefit of 55 cents. The Company's earnings per share on a fully taxed basis would have been 25 cents per share in 1996 versus 27 cents a share in 1995.
The Company's international sales increased to $29.4 million in 1996 from $16.7 million in 1995 and $23.8 million in 1994, resulting in an increase of approximately 76% over 1995 and an increase of approximately 24% over 1994. During 1996, the North American Free Trade Agreement ("NAFTA") continued to favorably impact the Company's sales in international markets.
The Company's domestic sales were $109.4 million in 1996 from $113.9 million in 1995, a decrease of approximately 4%. Domestic sales in 1996 were negatively impacted by developments in Washington, D.C., notably the uncertainty about the government highway funding. This impact was felt during the first half of 1996 by the Company in the form of customers delaying or canceling purchases of equipment for the spring or summer construction seasons due to the uncertainty of business.
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Although the Company's 1996 domestic sales were impacted by the uncertainty surrounding the government highway funding, the development of the domestic highways and mass transportation system has had and will continue to have a positive impact on the Company. The continued funding of the ISTEA-91 legislation and the commitment of the U.S. Congress and federal government to fund the improvement of the infrastructure has had a significant impact on the Company's industry the past several years. The Company anticipates continued success as the government approved funding for ISTEA-91 legislation was set at approximately $20 billion for fiscal 1997.
The Company's gross margins were 28.9% down from 29.6% in the prior year. This reduction in margins is primarily the result of increased manufacturing costs as a percent of net revenues. This was primarily the result of the mix of products sold in 1996 as compared to 1995.
Marketing and administrative expenses increased in 1996 due to increased sales efforts. As a percentage of net revenues, marketing and administrative expenses increased to approximately 16.6% in 1996 from approximately 16.3% in 1995. This increase is largely due to the Company's participation in the 1996 CONEXPO trade show. The Company had the largest display at the 1996 show held in Las Vegas, Nevada, in March 1996. Excluding expenses related to CONEXPO, marketing and administrative expenses as a percentage of net revenues decreased to approximately 16.0% in 1996.
During 1996, the Company also continued taking steps to increase its market share in the international market place. This included an increased international sales force and a more aggressive advertising and marketing campaign to enlarge the Company's share of potential markets. Efforts by the Company proved to be effective with a 76% increase in international sales over the prior year. In addition, the Company continued to provide customer demonstrations for new and existing product, to participate in other industry trade shows, and to increase its domestic sales force.
Engineering and product development costs remained level as a percentage of net revenues at approximately 4%. The Company continues to be committed to setting standards of quality within the industry. During 1996, the Company hired a director of quality and a new director of engineering, reflecting the Company's commitment to product development and product enhancement through the addition and enhancement of key management positions. Also, the Company introduced several new products at the 1996 CONEXPO trade show. New products included a series of metric batch plants, upgraded versions of the AUTO-GRADE pavers, a new line of curb and gutter pavers and smaller slipform pavers, and a utility-sized rubber-tired pavement profiler machine. These new products further emphasize the Company's commitment to product development and product enhancement.
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Interest expense decreased $233,000 from the prior year as a result of more favorable borrowing rates under the Company's new financing arrangements.
Income tax expense was $3.2 million in 1996 compared to an $8.2 million net income tax benefit recognized in 1995. The Company's 1996 earnings were fully taxed, whereas 1995 earnings benefited from previously unrecognized tax benefits related to Statement 109.
Impact of Recently Issued Accounting Standards Not Yet Adopted - --------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of "comprehensive income" and its components in a set of financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company currently does not have any components of comprehensive income that are not included in net income. The Company will adopt SFAS No. 130 in 1998.
Also in June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued. SFAS No. 131 is effective for periods beginning after December 15, 1997. SFAS No. 131 requires that a public entity report financial and descriptive information about its reportable segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company will adopt SFAS No. 131 in 1998. However, such adoption is not expected to impact the Company's financial disclosures because the Company's current operations are limited to one reportable operating segment under SFAS No. 131's definitions.
Impact of Year 2000 Issue - -------------------------
An issue exists for all companies that rely on computers as the Year 2000 approaches. The "Year 2000" problem is the result of past practices in the computer industry of using two digits rather than four to identify the applicable year. This practice will result in incorrect results when computers perform arithmetic operations, comparisons or data field sorting involving years later than 1999. In connection with the plant re-engineering program the Company is currently implementing a new manufacturing and financial reporting system which is Year 2000 compliant.
CMI CORPORATION FORM 10-K December 31, 1997 ===============================================================================
The Company anticipates that it will be able to test its entire system using its internal programming staff and outside computer consultants and intends to make any necessary modifications to prevent disruption to its operations. Future costs in connection with any such modifications and completion of implementation are not expected to be material.
Forward Looking Statements - --------------------------
Statements of the Company or management's intentions, beliefs, anticipations, expectations and similar expressions concerning future events contained in this report constitute "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995. As with any future event, there can be no assurance that the events described in forward looking statements made in this report will occur or that the results of future events will not vary materially from those described in the forward looking statements made in this report. Important factors that could cause the Company's actual performance and operating results to differ materially from the forward looking statements include, but are not limited to, highway funding, adverse weather conditions, general economic conditions and political changes both domestically and overseas.
Clean Air Act - -------------
In 1990, the United States Congress passed certain amendments to the National Clean Air Act. As required by the National Clean Air Act, the implementation of the 1990 amendments may take up to seven years. The 1990 amendments have required certain products manufactured by the Company to be equipped with new pollution control devices. Additional products manufactured by the Company may require new pollution control devices. The Company believes that it will continue to be able to meet the implementation dates as required by the 1990 amendments.
Inflation - ---------
The Company did not experience any significant inflationary impact on its costs of materials.
CMI CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item 8.
Item 8. Financial Statements and Supplementary Data -------------------------------------------
PAGE
Independent Auditors' Report............................................ 23 - ----------------------------
Consolidated Financial Statements - ---------------------------------
Consolidated Statements of Earnings, Years ended December 31, 1997, 1996, and 1995........................ 24
Consolidated Balance Sheets, December 31, 1997 and 1996................ 25
Consolidated Statements of Changes in Common Stock and Other Capital, Years ended December 31, 1997, 1996, and 1995........................ 27
Consolidated Statements of Cash Flows, Years ended December 31, 1997, 1996, and 1995........................ 28
Notes to Consolidated Financial Statements, December 31, 1997, 1996, and 1995.................................... 29
Information required by schedules called for under Regulation S-X is either not applicable, not material, or is included in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT ----------------------------
The Board of Directors and Stockholders CMI Corporation:
We have audited the consolidated financial statements of CMI Corporation and subsidiaries (the Company) as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CMI Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Oklahoma City, Oklahoma February 23, 1998
CMI CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings
Years ended December 31, 1997, 1996, and 1995 (dollars in thousands, except per share data)
===============================================================================
See notes to consolidated financial statements.
CMI CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996 (dollars in thousands)
===============================================================================
See notes to consolidated financial statements.
CMI CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued
December 31, 1997 and 1996 (dollars in thousands)
===============================================================================
See notes to consolidated financial statements.
CMI CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Common Stock and Other Capital
Years ended December 31, 1997, 1996, and 1995 (dollars in thousands)
===============================================================================
See notes to condensed consolidated financial statements.
CMI CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995 (dollars in thousands)
===============================================================================
See notes to consolidated financial statements.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
===============================================================================
(1) Description of Business and Summary of Significant Accounting Policies ----------------------------------------------------------------------
Description of Business -----------------------
Since 1964, CMI Corporation and its subsidiaries (the Company) have manufactured and marketed automated equipment for the road and heavy construction industry. The Company's automated construction equipment has a wide variety of uses in the maintenance, construction, paving, and resurfacing of highways, city streets, parking lots, airport runways, tunnels, and bridges. The Company's raw materials are readily available, and the Company is not dependent on a single supplier or only a few suppliers.
Seasonal Nature of the Business -------------------------------
The Company's business is seasonal in nature and precedes the months in which highway and road construction and restoration generally occur. A large portion of the Company's orders for its products are received in the months of November through July, with heavy shipments occurring in the months of March through August.
Principles of Consolidation ---------------------------
The consolidated financial statements include the accounts of CMI Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents -------------------------
For purposes of the statement of cash flows, the Company considers unrestricted cash and cash equivalents with maturities of less than three months to be cash equivalents.
Business and Credit Concentrations ----------------------------------
The Company's customers are not concentrated in any specific geographic region, but are concentrated in the road and heavy construction business. No single customer accounted for a significant amount of the Company's sales, and there were no significant accounts receivable from a single customer. The Company reviews a customer's credit history before extending credit. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. To reduce credit risk, the Company generally requires a down payment on large equipment orders, and international sales are generally secured by letters of credit.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
===============================================================================
The Company had short-term notes receivable and sales-type lease payments due from customers included in accounts receivable of approximately $5,874,000 and $1,321,000 at December 31, 1997 and 1996, respectively.
Inventories -----------
Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out (FIFO) method. Costs included in inventories consist of materials, labor, and manufacturing overhead which are related to the purchase and production of inventories.
Property, Plant, and Equipment ------------------------------
Property, plant, and equipment, stated at cost or the present value of minimum lease payments for assets under capital leases, are depreciated over the estimated useful lives of the assets using the straight-line method. Estimated useful lives for buildings, machinery and equipment, and other property, plant, and equipment range from 3 to 33, 3 to 15, and 2 to 10 years, respectively. Significant improvements and betterments are capitalized if they extend the useful life of the asset. Routine repairs and maintenance are expensed when incurred.
The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Other Assets ------------
Other assets include loan acquisition costs and other intangible assets. Loan acquisition costs are being amortized on a straight-line basis over the life of the related loan agreement. Also included in other assets is the excess of acquisition costs over the fair value of net assets acquired (goodwill). Goodwill is being amortized on a straight-line basis over a fifteen year period.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
================================================================================
Intangible assets are evaluated periodically, and if conditions warrant, an impairment valuation allowance is provided. The Company assesses recoverability of its intangible assets under the provisions of SFAS No. 121.
Revenue Recognition -------------------
Revenue is recognized when sales transactions are completed, which is when products are shipped or title has transferred to the customer.
Income Taxes ------------
Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date.
Stock Option Plan -----------------
Prior to January 1, 1996, the Company accounted for its stock options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
===============================================================================
Earnings Per Common Share -------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 revised the previous calculation methods and presentations of earnings per share. The statement requires that all prior-period earnings per share data be restated. The Company adopted SFAS No. 128 in the fourth quarter of 1997 as required by the statement. The effect of adopting SFAS No. 128 was not material to the Company's prior period earnings per share data. The previously reported amounts for earnings per share were restated using basic earnings per share and diluted earnings per share.
Under the provisions of SFAS No. 128, basic earnings per share is computed by dividing net earnings (loss) applicable to common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if the Company's outstanding stock options were exercised (calculated using the treasury stock method).
The following table reconciles the net income applicable to common shares and weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the years 1997, 1996 and 1995 (in thousands, except per share data):
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
================================================================================
Use of Estimates ----------------
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 assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments -----------------------------------
The carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amounts of long-term receivables and long-term debt approximates fair value as the effective rates for these instruments are comparable to market rates at year-end.
(2) Acquisition of Businesses and Product Lines -------------------------------------------
On December 17, 1997, the Company acquired substantially all of the assets of Rexworks, Inc's TRASHMASTER Landfill compaction product line and three hard materials grinding machines for approximately $20.5 million which included assumption of certain liabilities related to the product lines. The purchase price was allocated to the assets acquired based on their estimated fair values, and approximately $16 million was allocated to receivables and inventory. The excess of the purchase price over the fair value of the net assets acquired (goodwill) was approximately $4.1 million and is being amortized on a straight-line basis over 15 years.
The financial statements reflect the preliminary allocation of the purchase price. The allocation has not been finalized due to certain pre- acquisition contingencies identified by the Company relating to impairment of assets and contingent liabilities. Accordingly, in 1998 goodwill associated with the acquisition may increase.
In October 1997, the Company acquired all of the outstanding stock of Brownwood Ross Company for $2.4 million in cash, and certain assets of CS Johnson Corporation for $425,000 in cash and 75,000 shares of the Company's common stock (valued at $375,000), and the assumption of approximately $321,000 in liabilities. The purchase price was allocated to the assets acquired based on their estimated fair values.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
================================================================================
The 1997 acquisitions described above were accounted for by the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of operations do not include any revenues or expenses related to these acquisitions prior to the respective closing dates. The cash portions of the acquisitions were financed through available cash and borrowings from the Company's line of credit. Following are the Company's unaudited pro forma results for 1997 and 1996 assuming the acquisitions occurred on January 1, 1996 (in thousands, except for per share data):
These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually resulted had the combinations been in effect on January 1, 1996, or of future results of operations.
(3) Long-Term Debt and Notes Payable to Related Parties ---------------------------------------------------
Long-term debt and notes payable at December 31 are summarized as follows (dollars in thousands):
1997 1996 ---- ----
Series A Senior Notes, unsecured, with interest at 7.68%, due from September 2000 to September 2006 $30,000 30,000
Revolving line of credit, unsecured, with interest at 7.66% at December 31, 1997, due December 2000 15,000 -
4.4% to 8.25% (8.1% weighted average rate) fixed rate bonds, collateralized by a first security interest in certain real property, due September 2010 4,092 4,275
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
===============================================================================
Lease-purchase obligations and notes payable due through October 2008, with interest from 6.25% to 11.93%, collateralized by certain buildings and equipment 441 84 ------- ------ 49,533 34,359 Less current maturities of long-term debt 259 256 ------- ------ $49,274 34,103 ======= ======
In September 1996, the Company completed a $30 million private placement of unsecured series A senior notes and established a $25 million unsecured revolving line of credit with Bank of Oklahoma, N.A. of Oklahoma City. The $55 million in new financing replaced the existing $30 million credit agreement which had been in place since 1991. A portion of the proceeds from the $30 million unsecured series A senior notes were used to retire higher-interest debt and to redeem the Company's preferred stock. The $25 million unsecured revolving line of credit obtained in September 1996 provides for interest at the LIBOR rate plus 1.25% to 2.0% or prime rate less 0.5% to 1.25%. The rate is determined based on the ratio of funded debt to earnings before interest, taxes, depreciation and amortization and is adjusted every ninety days. Effective December 31, 1997 the unsecured revolving line of credit was increased to $40 million.
The Company's fleet financing agreement allows the Company to borrow 100 percent of the net sales price of specific equipment under lease contracts. The terms of the individual borrowings under the financing agreement are consistent with the lease contracts and generally range from three months to three years. Borrowings under the fleet financing agreement are secured by the specific equipment. As of December 31, 1997 and 1996, the Company had no borrowings outstanding under the fleet financing agreement.
Certain debt agreements contain restrictions on working capital, net worth (minimum of approximately $49.6 million at December 31, 1997), and other restrictive covenants. At December 31, 1997, the Company was in compliance with these covenants.
In January 1993, the Company entered into separate loan agreements with Recovery Equity Investors, L.P. (REI), a shareholder, and Mr. Larry Hartzog, a shareholder and member of the Company's board of directors, to borrow $1,970,000 at a fixed interest rate of 9 percent, due in July 1995. In July 1995, the $1,970,000 was paid in accordance with the loan agreements. The loan agreements also included the issuance of stock purchase warrants entitling REI and Mr. Hartzog to
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
===============================================================================
purchase up to 600,000 aggregate shares of the Company's Class A Common Stock at an exercise price of $3.75 per share. At the date of the loan agreement, the closing price of the Company's Class A Common Stock was $3.50. The lenders paid $50,000 for the stock purchase warrants. The Company allocated the total proceeds from the debt and the stock purchase warrants based on their book values which were determined to be their respective fair values. In January 1997, REI and Mr. Hartzog exercised the stock purchase warrants at an exercise price of $3.75 per share purchasing 600,000 shares of the Company's Class A Common Stock.
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1997, are as follows (dollars in thousands):
1998 $ 259 1999 254 2000 19,542 2001 4,564 2002 4,586 Thereafter 20,328 ------- $49,533 =======
(4) Redeemable Preferred Stock --------------------------
In connection with a 1985 acquisition, the Company issued 4,800 shares of 7% Series B Preferred Stock with a $4.8 million redemption value. The preferred stock accrued dividends at the rate of $70 per share per year. The cumulative dividends were payable each January and July and had to be fully paid or declared with funds set aside for payment before any dividend could be declared or paid on any other class of the Company's stock. The preferred stock carried a redemption price of $1,000 per share. During the period from 1988 to 1995, 1,350 shares of the preferred stock were redeemed and certain dividends were accrued and paid. During 1996, the Company paid approximately $4.8 million for the redemption of 3,450 shares of preferred stock plus accrued dividends. As of December 31, 1996 the Company had redeemed all outstanding preferred shares.
(5) Common Stock and Other Capital ------------------------------
In 1991, the Company entered into an Investment Agreement with REI pursuant to which, the Company sold REI 6,666,667 shares of Common Stock (subsequently Class A Common Stock) at $.75 per share. The Investment Agreement contains various covenants and restricts the Company from taking certain actions without the prior written consent of REI.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
===============================================================================
On February 14, 1992, the Company filed an amended and restated certificate of incorporation, which authorizes 20,000 shares of common stock and 45,000,000 shares of Class A Common Stock. Additionally, the Company effected a 1-for-2,000 reverse split of the common stock and declared a stock dividend of 1,999 shares of Class A Common Stock for each whole share of common stock outstanding following the reverse split. Owners of the remaining common stock could exchange each share of common stock for one share of Class A Common Stock. The exchange offer expired on April 30, 1992. At December 31, 1997 and 1996, 621 shares of common stock had not been exchanged. The Class A Common Stock has certain transfer restrictions in order to prevent a change in ownership, which could limit or eliminate the Company's income tax net operating loss carryforwards (see note 8).
On February 3, 1987, the Company authorized and declared a dividend of rights to purchase shares of common stock, subsequently Class A Common Stock, (the Rights) at the rate of one Right for each share of Class A Common Stock outstanding to shareholders of record as of February 4, 1987. The Rights Agreement was amended to exclude REI and the chairman of the board and chief executive officer from the definition of an acquiring person. The Rights are exercisable upon the occurrence of certain events. In the event the Company is acquired in a merger or other business combination transaction (including one in which the Company is a surviving corporation), excluding REI and the chairman of the board and chief executive officer, it is provided that each of the Rights will entitle its holder to purchase, at the then current exercise price of the Rights, that number of shares of Class A Common Stock of the surviving company, which at the time of such transaction would have a market value of two times the exercise price of the Rights. Therefore, each of the Rights entitled the holder, until February 4, 1997, to buy one share of Class A Common Stock at an exercise price of one-half of its market value at the time of exercise. The Rights were evidenced by the Class A Common Stock certificate and were not exercisable or transferable apart from the Class A Common Stock until fifteen days after a person, excluding REI and the chairman of the board and chief executive officer, acquires 20 percent or more, or makes a tender offer for 30 percent or more, of the Class A Common Stock. The exercise price and the number of shares of Class A Common Stock issuable upon the exercise of the Rights were subject to adjustment in certain cases to prevent dilution. The Rights did not have any voting rights and were redeemable, at the option of the Company, at a price of $.01 per Right until fifteen days subsequent to any person or entity acquiring beneficial ownership, excluding REI and the chairman of the board and chief executive officer, of at least 20 percent of the Class A Common Stock. Under terms of the Rights Agreement, the Rights expired on February 4, 1997.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
===============================================================================
(6) Stock Option Plans ------------------
The Company has established the 1992 Incentive Stock Option Plan (the Plan) for its employees, as approved by the shareholders. The Plan has two features: (1) stock options and (2) stock appreciation rights. The Plan is administered by the Compensation Committee of the Board of Directors. The granting of stock options and/or appreciation rights is at the sole discretion of the Compensation Committee. Board members are not allowed to participate in the Plan. A maximum of 1,000,000 stock options and/or appreciation rights may be granted under the Plan. The exercise price of the stock options is the market value of Class A Common Stock at the date of grant. Generally, the options vest and become exercisable ratably over a four-year period, commencing six months after the grant date. The Compensation Committee is entitled in its discretion to grant options with vesting periods which are different from the standard four year period. In a limited number of instances, the Compensation Committee has exercised its discretion and has granted options with both shorter and longer vesting periods than the standard four year period.
At December 31, 1997, there were 270,208 additional options available for grant under the Plan. The per share weighted-average fair value of stock options granted during 1997, 1996, and 1995 was $2.27, $2.14, and $3.54 respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1997 - expected volatility 56%, expected dividend yield .9%; risk-free interest rate of 5.5%, and an expected life of 5 years. 1996 - expected volatility 58%, expected dividend yield 1%, risk-free interest rate of 5.5%, and an expected life of 5 years; 1995 - expected volatility 58%, expected dividend yield 0%, risk-free interest rate of 5.5%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its stock options and, accordingly, no compensation cost has been recognized for stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below:
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
===============================================================================
Pro forma net earnings reflects only options granted in 1997, 1996, and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of 5 years and compensation cost for options granted prior to January 1, 1995 is not considered.
Stock appreciation rights may be issued with stock options or separately, at the sole discretion of the Compensation Committee. Stock appreciation rights, if granted, would be payable in shares of Class A Common Stock over the same vesting period as the stock options. At December 31, 1997, no stock appreciation rights had been granted.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average Shares Exercise Price --------- ---------------- Balance at December 31, 1994 500,000 $3.54
Granted 100,000 6.44 Exercised 29,792 3.25 Forfeited 60,000 5.06 Expired 10,208 6.80 ------- Balance at December 31, 1995 500,000 $3.89 Granted 150,000 4.17 Exercised 1,000 3.25 ------- Balance at December 31, 1996 649,000 $3.95 Granted 85,000 4.50 Exercised 364,000 3.25 Expired 35,000 3.25 ------- Balance at December 31, 1997 335,000 $4.93 =======
At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $4.125 - $6.75 and 3.6 years, respectively.
At December 31, 1997, 1996, and 1995, the number of options exercisable was 94,175, 374,125, and 250,000, respectively, and the weighted-average exercise price of those options was $5.64, $3.46, and $3.25, respectively.
In February 1993, a member of the board of directors received options to purchase 10,000 shares of Class A Common Stock at the then current market price of $4.875 per share. The options were immediately exercisable. No options had been exercised at December 31, 1997.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
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In 1992, a consulting firm, of which a former board member is a director, received options for the purchase of up to 100,000 shares of Class A Common Stock for past services rendered. These options were immediately exercisable at an exercise price of $1.38 per share. The Company recorded approximately $125,000 in expense in 1992 for these options. These options were exercised in 1996.
(7) Leases ------
The Company leases equipment to customers under short-term and long-term contracts. Short-term contracts generally range from three to six months. Rental income from short-term leases was approximately $1,961,000, $2,935,000, and $2,096,000, for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company's long-term leases generally qualify as sales-type leases. The net investment in such leases is included in receivables. Future minimum lease payments to be received for long-term leases are as follows (dollars in thousands):
1998 $5,874 1999 1,127 2000 74 2001 305 2002 187 Thereafter 816 ------ $8,383 ======
(8) Income Taxes ------------
Income tax expense (benefit) consisted of the following (dollars in thousands):
1997 1996 1995
Current tax expense $ 173 165 616
Deferred tax expense (benefit) 1,857 3,000 (8,800) ------ ----- ------ $2,030 3,165 (8,184) ====== ===== ======
The deferred tax benefit in 1995 consisted of a reduction of the beginning- of-the-year valuation allowance of $12,479,000, offset by a deferred tax expense of $3,679,000.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
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Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 35% to earnings before income taxes in 1997, 1996, and 1995, as a result of the following (dollars in thousands):
1997 1996 1995 ------ ------- -------
Computed expected tax expense $1,818 3,019 3,261 State income taxes 185 336 380 Reduction of valuation allowance (357) (37) (12,479) Other, net 384 (153) 654 ------ ------- ------- $2,030 3,165 (8,184) ====== ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1997 and 1996, are as follows (dollars in thousands):
1997 1996 ---- ---- Net operating loss and other carryforwards $11,359 14,139 Other, net 3,364 3,559 ------- ------ Deferred tax assets 14,723 17,698 Deferred tax liability (plant and equipment temporary differences) (2,249) (1,267) ------- ------ 12,474 16,431 Less valuation allowance 274 631 ------- ------ Net deferred tax asset $12,200 15,800 ======= ======
During 1995, the Company reduced the valuation allowance to recognize a deferred tax asset of $18.8 million at December 31, 1995. The deferred tax asset at December 31, 1997 and 1996 was $12.2 million and $15.8 million, respectively. The recognized deferred tax asset is based upon expected utilization of net operating loss and other carryforwards and reversal of certain temporary differences. The ultimate realization of the deferred tax asset will require aggregate taxable income of approximately $32 million to $37 million in future years.
The estimated taxable income for 1997 before utilization of income tax net operating loss carryforwards was approximately $5.8 million. The estimated taxable income for 1996 before utilization of income tax net operating loss carryforwards was approximately $7.6 million. The taxable loss for 1995 was approximately $10 million. This differs from earnings before income taxes for 1995 as a result of realizing a loss on the sale of the assets of CMI Energy Conversion Systems, Inc. (CMI Energy) for tax purposes. The loss was recognized for financial reporting purposes in prior years when the assets of CMI Energy were reduced to estimated realizable value.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
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The Company has assessed its past earnings history and trends, sales backlog, budgeted sales (including sales of acquired businesses in 1997, see note 2), reversing taxable temporary differences and expiration dates of carryforwards and has determined that it is more likely than not that the $12,200,000 of net deferred tax assets will be realized. The remaining valuation allowance of approximately $274,000 is maintained against deferred tax assets which the Company has determined to not be realizable.
At December 31, 1997, the Company has tax net operating loss carry forwards of approximately $20,827,000 for federal income tax purposes. Such carryforwards, which may provide future tax benefits, expire as follows: $5,707,000 in 2005, $4,810,000 in 2006, and $10,310,000 in 2010. Future changes in ownership, as defined by section 382 of the Internal Revenue Code, could limit the amount of net operating loss carryforwards used in any one year (see note 5).
(9) Export Sales ------------
The Company had export sales of approximately $21.1 million, $29.4 million, and $16.7 million in 1997, 1996, and 1995, respectively. These sales were made through foreign dealers and representatives. A significant portion of these sales were made in Asia, Australia, South America, and North and Central America, excluding the United States.
(10) Employee Benefit Plan ---------------------
The Company has a defined contribution plan whereby eligible employees may contribute pretax wages in accordance with the provisions of the plan. At the discretion of the Board of Directors, the Company matches certain contributions made by eligible employees. Discretionary matching contributions of approximately $269,000, $155,000, and $128,000 were made in 1997, 1996, and 1995, respectively.
(11) Supplemental Quarterly Financial Information (unaudited) --------------------------------------------------------
Following is a summary of the unaudited interim results of operations for the years ended December 31 (in thousands, except per share data):
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
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----------------------------------------- First Second Third Fourth Full Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- Net revenues $36,493 38,758 36,636 26,901 138,788 Net earnings(loss) $ 2,095 1,784 2,333 (751) 5,461 Net earnings(loss) per common share: Basic $ .10 .09 .11 (.04) .25 Diluted $ .10 .09 .11 (.04) .25
In the fourth quarter of 1997, the Company recognized adjustments to reduce the carrying value of inventory and accounts receivable by $1.1 million and $400,000, respectively, and to increase the reserves for warranty and legal contingencies by $550,000 and $400,000, respectively. The net effect of the fourth quarter adjustments increased the net loss by approximately $1.6 million.
(12) Supplemental Cash Flow Information ----------------------------------
Cash paid for interest amounted to approximately $2,804,000, $2,346,000, and $3,166,000 in 1997, 1996, and 1995, respectively.
Cash paid for income taxes amounted to approximately $249,000, $315,000 and $277,000 in 1997, 1996, and 1995, respectively.
A 1997 acquisition (see note 2) included consideration in the form of the Company's Voting Class A Common Stock. The fair value of stock issued was approximately $375,000.
(13) Commitments and Contingencies -----------------------------
The Company and its subsidiaries are parties to various leases relating to plants, warehouses, office facilities, transportation vehicles, and certain other equipment. Real estate taxes, insurance, and maintenance expenses are normally obligations of the Company. It is expected that in the normal course of business, the majority of the leases will be renewed or replaced by other leases. Leases do not restrict dividends, debt, or future leasing arrangements. All leasing arrangements contain normal leasing terms without unusual purchase options or escalation clauses. Rent expense was $715,000 in 1997, $419,000 in 1996, and $460,000 in 1995.
Minimum rental commitments under all non-cancelable leases for five years subsequent to December 31, 1997, are approximately as follows: $1,061,000 in 1998, $709,000 in 1999, $281,000 in 2000, $265,000 in 2001, and $265,000 in 2002.
CMI CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
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At December 31, 1997, the Company was contingently liable as guarantor for certain accounts receivable sold with recourse of approximately $3,982,000 through December 2002.
(14) Litigation ----------
As previously disclosed, on November 22, 1995, certain attorneys, previously engaged by the Company in connection with prior patent litigation, filed suit against the Company in the Circuit Court of Cook County, Illinois. On December 20, 1995 the case was removed to the United States District Court for the Northern District of Illinois, Eastern Division. The attorneys are seeking to recover approximately $1.4 million of legal fees and costs alleged to be owing by the Company, together with prejudgment and postjudgment interest and other costs.
There are numerous other claims and pending legal proceedings that generally involve product liability and employment issues. These cases are, in the opinion of management, ordinary routine matters incidental to the normal business conducted by the Company. In the opinion of the Company's management after consultation with outside legal counsel, the ultimate disposition of such proceedings, including the case above, will not have a materially adverse effect on the Company's consolidated financial position, liquidity or future results of operations.
(15) CMI Energy Conversion Systems, Inc. -----------------------------------
In 1983, a subsidiary of the Company, CMI Energy, indefinitely suspended construction of a solid waste disposal facility (the Project). In connection with the Project, the Company contracted with the City of Oklahoma City (the City) to receive municipal solid waste.
In 1995, the Company sold the assets of CMI Energy for cash and a five year note bearing interest at eight percent. As a result of the sale, a letter of credit in the amount of $675,000 held by the City, securing the Company's performance under the solid waste delivery contract, was released. CMI Energy did not materially affect the Company's results of operations in 1995.
(16) Related Party Transactions --------------------------
During 1997, the Company leased certain manufacturing plants and offices located in Champaign, Illinois, from the now active President of CMI Johnson-Ross. The current lease is for twenty-four months at a rate of $15,000 per month. Aggregate lease payments for the period ended December 31, 1997 were $33,500.
CMI CORPORATION FORM 10-K December 31, 1997
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Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure --------------------
None.
PART III
In accordance with the provisions of General Instruction G(3), Items 10, 11, 12, and 13 are incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 1998.
PART IV
Item 14.
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports ------------------------------------------------------------------ on Form 8-K -----------
(a) Consolidated Financial Statements and Consolidated Financial Statement ----------------------------------------------------------------------- Schedule --------
1. Consolidated Financial Statements: ----------------------------------
See Index to Consolidated Financial Statements at Item 8 on Page 22 of this Form 10-K.
2. Consolidated Financial Statement Schedules: -------------------------------------------
Information required by schedules called for under regulation S-X is either not applicable, not material, or is included in the consolidated financial statements or notes thereto.
3. Exhibits --------
(Numbered in accordance with Regulation S-K Item 601)
CMI CORPORATION FORM 10-K December 31, 1997
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Page Number or Exhibit Incorporation by Number Description Reference to - ------- ----------- ----------------
(3i) Amended and Restated Certificate Exhibit 2 on Form 8-K, of Incorporation dated February 18, 1992; and Exhibit (3i) on Form 10-Q dated August 14, 1995
(3ii) Amended and Restated By-Laws Exhibit 6 on Form 8-K, dated August 26, 1991
(4) The registrant, by signing this report, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument which defines the right of holders of long-term debt of the registrant and all of its subsidiaries for which consolidated or unconsolidated its subsidiaries on a consolidated basis.
(10) Separate loan and warrant agreements with Exhibit 1 of the 1992 REI and Larry Hartzog. Form 10-K dated March 8,
(10) Stock Purchase Agreement Exhibit 10 of Form 10-Q dated May 2, 1995
CMI CORPORATION FORM 10-K December 31, 1997
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(21) Subsidiaries of the Registrant:
Place of Incorporation Name or Organization ---- ---------------
CMI Limited Partnership Oklahoma CMI Sales Co. Oklahoma Product Support, Inc. Oklahoma Machinery Investment Corporation Oklahoma CMI International (U.K.), Ltd. England CMI Energy Conversion Systems, Inc. Oklahoma CMI OIL Corporation Oklahoma CMI Dakota Co. South Dakota CMI Metro-Pav, Inc. Iowa Transport Trailer Manufacturing Company Oklahoma Brownwood Ross Company Texas CMI Johnson Corporation Illinois
(23) Consent of Independent Auditors Exhibit 23 of this Form 10-K
(27) Financial Data Schedule Exhibit 27 on this Form 10-K
(b) Reports on Form 8-K -------------------
Form 8-K disclosing the acquisitions of the landfill and embankment compactor and material reduction grinder divisions owned by Rexworks, Inc., a Delaware Corporation, was filed December 24, 1997.
CMI CORPORATION FORM 10-K December 31, 1997
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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:
(Registrant) CMI CORPORATION
By: /s/ Bill Swisher Dated: March 23, 1998 ----------------------------------- Bill Swisher Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Kenneth J. Barker Dated: March 23, 1998 ------------------------------------ Kenneth J. Barker Director
By: /s/ Albert L. Basey Dated: March 23, 1998 ------------------------------------ Albert L. Basey President and Chief Operating Officer
By: /s/ Robert L. Curtis Dated: March 23, 1998 ------------------------------------ Robert L. Curtis Vice President, Sales and Marketing
By: /s/ Joseph J. Finn-Egan Dated: March 23, 1998 ------------------------------------ Joseph J. Finn-Egan Director
By: /s/ Ronald A. Kahn Dated: March 23, 1998 ------------------------------------ Ronald A. Kahn Director
CMI CORPORATION FORM 10-K December 31, 1997
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SIGNATURES
By: /s/ Larry D. Hartzog Dated: March 23, 1998 ------------------------------------ Larry D. Hartzog Director
By: /s/ Jim D. Holland Dated: March 23, 1998 ------------------------------------ Jim D. Holland Senior Vice President, Treasurer and Chief Financial Officer
By: /s/ Jeffrey A. Lipkin Dated: March 23, 1998 ------------------------------------ Jeffrey A. Lipkin Director
By: /s/ J. Larry Nichols Dated: March 23, 1998 ------------------------------------ J. Larry Nichols Director
By: /s/ Matthew J. Rohwer Dated: March 23, 1998 ------------------------------------ Matthew J. Rohwer Controller
By: /s/ Thomas P. Stafford Dated: March 23, 1998 ------------------------------------ Thomas P. Stafford Director
By: /s/ Bill Swisher Dated: March 23, 1998 ------------------------------------ Bill Swisher Chairman of the Board and Chief Executive Officer