<PAGE>
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 MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM __________ TO _________
COMMUNICATIONS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-182-82-70
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1396 Charlotte Highway, Fairview, NC 28730
(Address of principal executive offices) (Zip Code)
(704) 628-1711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
<PAGE>
PART I
ITEM 1: Financial Statements
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 187 $ 298
Accounts receivable (less allowance for doubtful accounts:
March 31, 1998 - $751, 1997 - $796) 15,306 11,602
Inventories 19,050 19,377
Deferred income taxes 2,137 2,130
Other current assets 1,278 1,334
-------- --------
Total current assets 37,958 34,741
------- --------
Property, plant and equipment, at cost 28,043 27,539
Less accumulated depreciation (11,691) (10,715)
-------- --------
Property, plant and equipment, net 16,352 16,824
-------- --------
Other assets:
Goodwill (net of accumulated amortization: March 31, 1998 - $1,012
1997 - $874) 15,872 16,010
Environmental receivable and restricted cash 1,625 1,605
Investment 191 108
Intangible and other assets 6,786 6,995
-------- --------
Total other assets 24,474 24,718
-------- --------
Total $ 78,784 $ 76,283
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Accounts payable $ 5,485 $ 4,753
Accrued interest 478 2,820
Other accrued liabilities 6,850 5,617
Current portion of long-term debt 47 56
Amounts payable to prior stockholders of subsidiary 114 227
-------- --------
Total current liabilities 12,974 13,473
Long term debt 103,771 101,566
Deferred income taxes 1,680 1,862
Amounts payable to prior stockholders of subsidiary 467 467
Other noncurrent liabilities 2,525 2,509
-------- --------
Total liabilities 121,417 119,877
-------- --------
Commitments and contingencies
Stockholder's deficiency
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid in capital 12,317 12,317
Accumulated deficit (54,911) (55,827)
Accumulated other comprehensive expense (39) (42)
Accounts receivable due from parent - (42)
-------- --------
Total stockholder's deficiency (42,633) (43,594)
-------- --------
Total $ 78,784 $ 78,283
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
------------------
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net sales $26,166 $22,427
Cost of sales 18,006 15,043
------- -------
Gross profit 8,160 7,384
------- -------
Operating expenses:
Selling expenses 1,718 1,498
General and administrative expenses 1,855 1,809
Research and development expenses 237 202
Amortization of goodwill and other intangibles 181 153
------- -------
Total operating expenses 3,991 3,662
------- -------
Operating income 4,l69 3,722
Interest expense, net (2,629) (944)
Other income, net 1 7
------- -------
Income before income taxes and minority
interest in subsidiary 1,541 2,785
Provision for income taxes 625 1,114
------- -------
Income after income taxes before minority
interest in subsidiary 916 1,671
Income applicable to minority interest in subsidiary - 29
------- -------
Net income 916 1,642
Other comprehensive income (expense):
Foreign currency translation adjustment 3 (1)
------- -------
Other comprehensive income (expense) 3 (1)
------- -------
Comprehensive income $ 919 $ 1,641
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC, AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 916 $ 1,642
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,329 1,038
Deferred income taxes (190) (68)
Minority interest - 29
Other - 16
Changes in operating assets and liabilities, net of
effects of acquisitions:
Increase in accounts receivable (3,704) (2,197)
Decrease in inventories 327 489
Decrease (increase) in other current assets 56 (334)
Increase (decrease) in accounts payable 732 (56)
Increase in accrued liabilities 1,177 775
Decrease in accrued interest (2,342) (4)
Changes in other assets and liabilities 3 79
------- -------
Net cash provided by (used in) operating activities (1,696) 1,409
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture (95) -
Purchases of property, plant and equipment (504) (444)
------- -------
Net cash used in investing activities (599) (444)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 2,200 -
Repayments under long-term debt agreement - (936)
Payment of capital lease obligations (22) -
Receipts from parent 98 31
Currency translation 3 (1)
Repayments of amounts owed to prior stockholders of subsidiary (113) -
Other 18 -
------- -------
Net cash provided by (used in) financing activities 2,184 (906)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (111) 59
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 298 116
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 187 $ 175
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
Communications Instruments, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands Except Share Amounts)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Communications Instruments, Inc. and its wholly owned subsidiaries
(the "Company"). The Company's subsidiaries, Kilovac Corporation ("Kilovac"),
which became a wholly owned subsidiary on September 18, 1997, and Electro-Mech
Corporation, operate facilities in Carpenteria, California and Juarez, Mexico,
respectively.
Financial information related to foreign operations are translated into US
dollars based on exchange rates as given by a local bank. Assets and liabilities
are translated based on rates in effect on the balance sheet date. Income
statement amounts are translated using average exchange rates in effect during
the period. The resulting currency translation adjustments are accumulated and
reported as comprehensive income.
The interim financial data as of and for the quarters ended March 31, 1997 and
March 31, 1998 are unaudited and have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In
management's opinion, all adjustments (consisting only of adjustments of a
normal recurring nature) necessary for a fair presentation have been included.
The December 31, 1997 financial information was derived from audited
consolidated financial statements, but excludes certain disclosures included in
the Company's audit report.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
year December 31, 1997 as well as the other information included in the
Company's annual report filed on Form 10-K. The results of operations and cash
flows for the interim periods presented are not necessarily indicative of the
results for the year ending December 31, 1998 or any other interim period.
2. Transactions
Recapitalization
On September 18, 1997, the Company entered into a series of recapitalization
transactions, collectively the "Transactions". The Transactions are described
below.
Code, Hennessy & Simmons III, L.P., certain members of Company management and
certain other investors acquired approximately 87% of the capital stock of CII
Technologies, Inc., a Delaware Corporation (the "Parent"). Communications
Instruments, Inc. is a wholly owned subsidiary of the Parent. Certain of the
Parent's existing stockholders, including certain members of management,
retained approximately 13% of the Parent's capital stock (collectively, the
"Recapitalization").
<PAGE>
Concurrently, the Company issued $95 million of 10% Senior Subordinated Notes
due 2004 (the "Old Notes") pursuant to an Indenture, dated September 18, 1997,
by and among Communications Instruments, Inc., Kilovac, Kilovac International,
Inc. ("Kilovac International") and Norwest Bank Minnesota, National Association
(the "Indenture") through an offering permitted by Rule 144A of the Securities
Act of 1933, as amended. On January 30, 1998, the Company filed a registration
statement with the Securities and Exchange Commission for the registration of
its 10% Senior Subordinated Notes due 2004, Series "B" (the "Notes") to be
issued in exchange for the Old Notes (the "Exchange"). The registration
statement became effective on January 30, 1998 and the Exchange was completed on
March 9, 1998.
The Company borrowed approximately $2.7 million pursuant to a new senior credit
facility with a syndicate of financial institutions providing for revolving
loans of up to $25.0 million (the "Senior Credit Facility").
The Company repaid approximately $29.3 million of outstanding obligations under
the then existing credit facility, including a success fee of approximately $1.5
million in connection therewith and certain other liabilities.
The Company paid a dividend of approximately $59.4 million to the Parent, which
was used by the Parent in conjunction with the proceeds of issuances of the
Parent's common stock (approximately $9.8 million), the Parent's preferred stock
(approximately $2.0 million) and junior subordinated debt of the Parent
(approximately $12.7 million) as follows: approximately $71.5 million was used
to purchase shares of the Parent's capital stock from existing shareholders;
approximately $3.5 million was used to pay Recapitalization and other financing
expenses; and approximately $7.6 million was used to repay certain indebtedness
of the Parent.
Acquisitions
On March 11, 1998, the Company, RF Acquisition Corp., a newly-formed wholly-
owned subsidiary of the Company ("RF Acquisition"), and Corcom, Inc. ("Corcom")
entered into an Agreement and Plan of Merger, pursuant to which RF Acquisition
will merge into Corcom and Corcom will become a wholly owned subsidiary of the
Company (the "Corcom Merger Agreement"). Pursuant to the Corcom Merger
Agreement, the Company has agreed to pay the shareholders of Corcom $13.00 per
share in cash (approximately $51.2 million in the aggregate) in exchange for the
shares of Corcom to be received in the merger. Bank of America National Trust
and Savings Association has committed to provide a credit facility to finance
the transaction. Corcom is located in Libertyville, Illinois and is an
electromagnetic interference filter manufacturer.
<PAGE>
Genicom Relays Division
On December 1, 1997, the Company acquired certain assets and assumed certain
liabilities of the Genicom Relays Division ("GRD") of Genicom Corporation
("Genicom") for approximately $4.7 million (the "GRD Acquisition"). The GRD
Acquisition was financed by a draw on the Company's Senior Credit Facility. The
transaction was accounted for as a purchase. The purchase price was allocated to
the assets of GRD based on their relative fair values, as follows:
<TABLE>
<S> <C>
Current assets $3,757
Property, plant and equipment 1,850
Intangible and other assets 24
Liabilities assumed (948)
------
Total purchase price $4,683
======
</TABLE>
The following unaudited pro forma financial information shows the results of
consolidated operations of the Company for the year ended December 31, 1997, as
though the GRD Acquisition occurred as of January 1, 1997. These results
include, but are not limited to, an increase in interest expense as a result of
the debt borrowed to finance the GRD Acquisition.
<TABLE>
<S> <C>
Net sales $103,780
Operating income 16,366
Income before extraordinary item 5,053
Net income 4,655
</TABLE>
The unaudited pro forma financial information presented above does not purport
to be indicative of either (i) the results of consolidated operations had the
GRD Acquisition taken place on January 1, 1997, or (ii) future results of
consolidated operations of the combined businesses.
ibex Aerospace Inc.
On October 31, 1997, the Company acquired certain assets and assumed certain
liabilities of ibex Aerospace Inc. (the "ibex Acquisition"). The purchase price
for the acquisition was approximately $2.0 million, of which approximately $1.3
million was paid at closing. The Company issued a noninterest bearing note
payable to the sellers in the amount of $850 (discounted to $697) for the
remainder of the purchase price. This note is payable on October 31, 1999. The
transaction was accounted for as a purchase. The purchase price was allocated to
the assets of ibex Aerospace Inc. based on their relative fair values, and
excess cost was allocated to goodwill.
<PAGE>
The following summarized the purchase price allocation as of the date of the
ibex Acquisition:
<TABLE>
<S> <C>
Current assets $1,041
Property, plant and equipment 150
Intangibles and other assets 1,762
Liabilities assumed (965)
------
Total purchase price $1,988
======
</TABLE>
The transaction was financed through a draw on the Company's Senior Credit
Facility and the issuance of the note payable to the sellers discounted to $697.
Pro forma financial information is not presented relating to the ibex
Acquisition as this entity was not a significant subsidiary of the Company in
1997.
Kilovac Corporation - 20% Purchase
On September 18, 1997, the Company purchased for approximately $4.5 million the
remaining 20% of the outstanding stock of Kilovac that the Company did not then
own (the "Kilovac Purchase"). The transaction was accounted for as a purchase.
To the extent of the remaining 20% change in ownership, the purchase price was
allocated to the assets of Kilovac based on their relative fair values. Excess
cost was allocated to goodwill.
The following summarizes the purchase price allocation as of the date of the
Kilovac Purchase:
<TABLE>
<S> <C>
Current assets $ 47
Property, plant and equipment 169
Intangibles and other assets 4,555
Liabilities assumed (271)
------
Total purchase price $4,500
======
</TABLE>
The transaction was financed through proceeds from the Recapitalization and the
issuance of the Notes.
Pro forma financial information is not presented relating to the purchase of the
remaining 20% ownership of Kilovac as Kilovac's accounts have been consolidated
into the Company's financial statements since October 1995.
<PAGE>
3. Inventories
Components of inventory are as follows :
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Finished goods $ 3,083 $ 2,882
Work-in-process 8,555 8,981
Raw materials 12,317 12,520
Reserve for obsolescence (4,905) (5,006)
------- -------
Total $19,050 $19,377
======= =======
</TABLE>
4. Comprehensive Income
<TABLE>
<CAPTION>
Foreign currency Accumulated other
Translation Comprehensive Expense
---------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance, January 1 $(42) $(38) $(42) $(38)
Current period income (expense) 3 (1) 3 (1)
---- ---- ---- ----
Ending balance, March 31 $(39) $(39) $(39) $(39)
==== ==== ==== ====
</TABLE>
5. Long Term Debt
The Company's long-term debt consists of the Notes and revolving loans of up to
$25.0 million under the Senior Credit Facility. The Company and its wholly owned
subsidiaries, Kilovac and Kilovac International, have guaranteed the Notes on a
full, unconditional, and joint and several basis, which guarantees are fully
secured by the assets of such guarantors. Communications Instruments, Inc., its
wholly owned subsidiaries, including Kilovac and Kilovac International, and the
Parent have guaranteed the Senior Credit Facility on a full, unconditional, and
joint and several basis.
Interest on the Notes is payable semi-annually in arrears on March 15 and
September 15 of each year, commencing on March 15, 1998. The Notes will mature
on September 15, 2004, unless previously redeemed, and the Company will not be
required to make any mandatory redemption or sinking fund payment prior to
maturity except in connection with a change in ownership. The Notes may be
redeemed, in whole or in part, at any time on or after September 15, 2001 at the
option of the Company, at the redemption prices set forth in the Indenture,
plus, in each case, accrued and unpaid interest and premium, if any, to the date
of the redemption. In addition, at any time prior to September 15, 2000, the
Company may at its option, redeem up to 33.3% in aggregate principal amount of
the Notes at a redemption price of 110% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption, with the net cash
proceeds of an Equity Offering (as defined in the Indenture), provided that not
less than $63.4 million aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption.
<PAGE>
The Senior Credit Facility is a line of credit which may be borrowed as either a
base rate loan or LIBOR loan. For base rate loans and LIBOR loans an applicable
margin is added to the base rate interest rate or the LIBOR interest rate based
on a Consolidated Leverage Ratio Level (as defined in the Senior Credit
Facility). The base rate interest rate is the higher of a Reference Rate (as
defined) or the federal funds rate plus 1/2%. The "Reference Rate" means the
rate of interest announced by the lender as "Reference Rate." At March 31, 1998,
LIBOR borrowing rates ranged from 7.88% to 8.0%. At March 31, 1998, the base
rate borrowing rate was 9.75%. The weighted average borrowing rate, calculated
based on borrowings outstanding at March 31, 1998 under base rate and LIBOR
loans, was 7.93%.
The terms of the Senior Credit Facility and the Indenture place restrictions on
the Company including, but not limited to the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments (as defined), consummate certain asset sales, enter into
certain transactions with affiliates, merge or consolidate with any person or
sell, assign, transfer, lease, convey or otherwise dispose of the assets of the
Company and its subsidiaries. The Senior Credit Facility also contains financial
covenants including interest coverage ratios, leverage ratios, and minimum
levels of earnings before interest, taxes, depreciation and amortization, as
defined by the Senior Credit Facility. As of March 31, 1998, the Company was in
compliance with all of the terms of the Indenture and the covenants of the
Senior Credit Facility.
Letters of credit outstanding under the Senior Credit Facility at March 31, 1998
and December 31, 1997 were $850, respectively.
The Senior Credit Facility requires the Company to pay commitment fees at an
annual rate of 0.5% on the undrawn amount of the Senior Credit Facility, subject
to adjustment based on the Consolidated Leverage Ratio of the Company.
As of March 31, 1998, the Company had available unused borrowing capacity of
$17.0 million under the Senior Credit Facility.
6. Contingencies
From time to time the Company is a party to certain lawsuits and administrative
proceedings that arise in the conduct of its business. While the outcome of the
lawsuits and proceedings cannot be predicted with certainty, management believes
that the lawsuits and proceedings, either singularly or in the aggregate, will
not have a material adverse effect on the financial condition, or results of
operations or cash flows of the Company.
7. Subsequent Event
On May 7, 1998, the Company purchased certain assets and assumed certain
liabilities of Wilmar Electronics Inc. ("Wilmar") for $2.1 million (the "Wilmar
Acquisition"). The Wilmar operation will be consolidated into the Company's
Kilovac subsidiary in 1998.
<PAGE>
8. New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, effective for periods beginning after December 15, 1997.
The new standard requires disclosure about reportable operating segments for
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. Required disclosures will include, but are not limited
to, segment assets, certain revenue and expense items, and profit or loss.
<PAGE>
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
The following discussion and analysis provides information which management
believes is relevant to an understanding of the operations and financial
condition of the Company. This discussion and analysis should be read in
conjunction with the condensed consolidated financial statements and notes
thereto included in this quarterly report as well as in the Registrant's Annual
Report for the year ended December 31, 1997 on Form 10-K
Overview
In December 1997, the Company purchased certain assets and assumed certain
liabilities of Genicom Relays Division ("GRD") of Genicom Corporation for $4.7
million (the "GRD Acquisition"). The Company financed the GRD Acquisition with
funds borrowed on the Senior Credit Facility.
In October 1997, the Company purchased 100% ownership in ibex Aerospace Inc.
("ibex") for $2.0 million, excluding expenses (the "ibex Acquisition"). ibex was
a wholly owned subsidiary of SOFIECE of Paris, France. The ibex operation will
be consolidated into the Company's Hartman division in 1998. Of the $2.0 million
purchase price, approximately $1.3 million was paid at closing, and the
remainder of the purchase price was paid by the Company through the issuance of
a non-interest bearing note in the amount of $850,000 to the sellers, which note
is payable on October 31, 1999. The Company financed the $1.3 million paid at
closing with funds borrowed on the Senior Credit Facility.
In July 1996, the Company acquired certain assets and assumed certain
liabilities of Hartman Electrical Manufacturing ("Hartman"), a division of
Figgie International Inc. for $12.0 million, excluding acquisition costs (the
"Hartman Acquisition"). The Company financed the Hartman Acquisition with
secured bank debt, which was refinanced in conjunction with the consummation of
the Transactions.
In October 1995, the Company acquired an 80% interest in Kilovac for an
aggregate purchase price of $14.4 million, excluding acquisition costs, which
was financed with secured bank debt, subordinated debt of Parent and the
issuance by Parent of preferred stock. In September 1997 the Company acquired
the remaining 20% interest in Kilovac, refinanced such indebtedness and Parent
redeemed such preferred stock in conjunction with the Transactions.
<PAGE>
The Company has improved gross margins in recent years primarily due to
economies of scale at existing facilities as a result of the acquisition of
product lines which have been incorporated into the Company's existing
manufacturing facilities, internal growth, improved pricing, greater use of low
labor cost production facilities in Mexico and China, and improved production
efficiencies due to improved manufacturing processes at certain of the Company's
plants. Due to the Company's historical growth through acquisitions, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
RESULTS OF OPERATIONS
The following table sets forth information derived from the condensed
consolidated statements of operations expressed as a percentage of net sales for
the periods indicated. There can be no assurance that the trends in operating
results will continue in the future.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 68.8% 67.1%
Gross profit 31.2% 32.9%
Selling expenses 6.6% 6.7%
General and administrative expenses 7.1% 8.1%
Research and development expenses 0.9% 0.9%
Amortization of goodwill and other intangibles 0.7% 0.7%
Operating income 15.9% 16.6%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net sales of the Company for the quarter ended March 31, 1998 increased $3.7
million, or 16.7%, to $26.2 million from $22.4 million for the corresponding
period in 1997. This increase is due primarily to the effect of acquisitions and
growth in end use markets partially offset by the planned cessation of a product
line acquired with the Hartman Acquisition.
Gross profit of the Company for the quarter ended March 31, 1998 increased
$776,000, or 10.5%, to $8.2 million from $7.4 million for the corresponding
period in 1997. Gross profit as a percentage of net sales decreased to 31.2%
from 32.9% for the same period in 1997. The decrease in gross profit as a
percentage of net sales was due primarily to (i) the cost of assimilating the
GRD Acquisition and the ibex Acquisition into the existing operations and (ii)
the reclassification of manufacturing related expenses from general and
administrative expenses into cost of sales partially offset by improved
productivity.
Selling expense of the Company for the quarter ended March 31, 1998 increased
$220,000, or 14.7%, to $1.7 million from $1.5 million for the corresponding
period in 1997. Selling expenses as a percentage of net sales decreased to 6.6%
from 6.7% in the same period in 1997.
<PAGE>
General and administrative expenses of the Company for the quarter ended March
31, 1998 increased $46,000, or 2.5% to $1.9 million from $1.8 million for the
corresponding period in 1997. General and administrative expenses as a
percentage of net sales decreased to 7.1% from 8.1% for the same period in 1997.
The decrease in general and administrative expenses as a percentage of net sales
was due primarily to (i) increased revenues with minimal increases in fixed
costs and (ii) the reclassification of manufacturing related expenses to cost of
sales.
Research and development expenses of the Company for the quarter ended
March 31, 1998 increased $35,000, or 17.3%, to $237,000 from $202,000 for the
corresponding period in 1997. The increase is primarily due to the
implementation of new projects.
Amortization of goodwill and other intangibles for the quarter ended March 31,
1998 increased $28,000, or 18.3%, to $181,000 from $153,000 for the
corresponding period in 1997. This increase is due primarily to the amortization
of goodwill due to the Kilovac Purchase and the ibex Acquisition in the third
and fourth quarters of 1997, respectively.
Interest expense for the Company for the quarter ended March 31, 1998 increased
$1.7 million, or 178.5%, to $2.6 million from $944,000 for the corresponding
period in 1997. This increase is due primarily to increased debt levels
associated with the issuance of $95.0 million of Notes.
LIQUIDITY AND CAPITAL RESOURCES
Although there can be no assurances, the Company anticipates that its cash flow
generated from operations and borrowings under the Senior Credit Facility will
be sufficient to fund the Company's working capital needs, planned capital
expenditures, scheduled interest payments (including interest payments on the
Notes and amounts outstanding under the Senior Credit Facility) and its business
strategy for the next twelve months. However, the Company may require additional
funds if it enters into strategic alliances, acquires significant assets or
businesses or makes significant investments in furtherance of its growth
strategy. The ability of the Company to satisfy its capital requirements will
depend upon the future financial performance of the Company, which in turn will
be subject to general economic conditions and to financial, business, and other
factors, including factors beyond the Company's control.
Cash Used in/Provided by Operating Activities
- ---------------------------------------------
For the three months ended March 31, 1998, cash used in operating activities was
$1.7 million, compared to cash provided of $1.4 million for the same period in
1997. This decrease was due primarily to (i) the semi-annual interest payment on
the Notes of $4.7 million and (ii) the increase in accounts receivable due to
higher revenue partially offset by increased accounts payable. The average days'
sales outstanding for accounts receivable was approximately 50 trade days at
December 31, 1997 and March 31, 1998. The Company's inventories decreased from
$19.4 million at December 31, 1997 to $19.1 million at March 31, 1998. This
decrease in inventory was caused by continued efforts to improve inventory
planning techniques and reduce cycle times. Inventory turns for the quarter
ended March 31, 1998 averaged 3.3 compared to a 3.4 average for the year ended
December 31, 1997. The Company's accounts payable increased from $4.8 million
at December 31, 1997 to $5.5 million at March 31, 1998. This increase was due
primarily to less spending at year end due to holidays and planned shutdown
reducing year end purchases.
<PAGE>
Cash Used in Investing Activities
- ---------------------------------
Capital expenditures were $504,000 in the three months ended March 31, 1998 and
$444,000 for the corresponding period in 1997. The Company also had a further
investment in the CII Guardian Joint Venture of $95,000 in the three months
ended March 31, 1998.
CAsh Provided By/Used in Financing Activities
- ---------------------------------------------
Cash provided by financing activities was $2.2 million for the three months
ended March 31, 1998 compared to cash used in financing activities of $906,000
for the same period in 1997.
Adjusted EBITDA
- ---------------
Adjusted EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization, and before any gain (loss) on disposal of
assets, adjusted for extraordinary, unusual and nonrecurring items, and the
non-cash write-ups and non-cash charges resulting from the write-up of inventory
and fixed assets arising from acquisitions accounted for pursuant to Accounting
Principles Board Opinion Nos. 16 and 17. Adjusted EBITDA is not intended to
represent cash flow from operations or net income as defined by generally
accepted accounting principles and should not be considered as a measure of
liquidity or an alternative to, or more meaningful than, operating income or
operating cash flow as an indication of the Company's operating performance.
Adjusted EBITDA is included herein because management believes that certain
investors find it a useful tool for measuring the Company's ability to service
its debt. There are no significant commitments for expenditures of funds not
contemplated by this measure of adjusted EBITDA. Adjusted EBITDA as presented
may not be comparable to other similarly titled measures presented by other
companies and could be misleading unless substantially all companies and
analysts calculate adjusted EBITDA the same.
Adjusted EBITDA increased to $5.4 million for the quarter ended March 31, 1998
from $4.7 million for the corresponding period in 1997.
Inflation
- ---------
The Company does not believe inflation has had any material effect on the
Company's business over the past three years.
Disclosure Regarding Forward-looking Statements
- -----------------------------------------------
Statements made by the Company which are not historical facts are forward
looking statements that involve risks and uncertainties. Actual results could
differ materially from those expressed or implied in forward looking statements.
All such forward looking statements are subject to the safe harbor created by
the Private Securities Litigation Reform Act of 1995. Important factors that
could cause future financial performance to differ materially from past results
and from those expressed or implied in this document, include, without
limitation, the risks of acquisition of businesses (including limited knowledge
of the businesses acquired and misrepresentations from sellers), changes in
business strategy or development plans, dependence on independent sales
representatives and distributors, environmental regulations, availability of
financing, competition, reliance on key management personnel, ability to manage
growth, loss of customers and a variety of other factors.
<PAGE>
Year 2000 Compliance
- --------------------
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the "Year 2000 Compliance" issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
data-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Many of the Company's systems
include new hardware and packaged software recently purchased from large vendors
who have represented that these systems are Year 2000 compliant. Internal and
external resources are being used to make the required modifications to the
remaining hardware and software. These modifications are expected to be
completed and tested by December 31, 1998.
In addition, the Company is in the process of communicating with others with
whom it does significant business to determine their Year 2000 Compliance
readiness and the extent to which the Company is vulnerable to any third party
Year 2000 issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The total cost to the Company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position, results of
operations or cash flows in any given year. These costs and the date on which
the Company plans to complete the Year 2000 modification and testing processes
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
ITEM 3:
Quantitative and Qualitative Disclosures about Market Risk
On May 15, 1998, the Registrant had a market capitalization of $2.5 billion or
less and accordingly, such disclosures are not required in this Form 10-Q. Such
disclosures will be included in filings that include financial statements for
fiscal years ended after June 15, 1998.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a. Form 8-K filed on February 18, 1998 reporting the acquisition of
the Genicom Relays Division of Genicom Corporation. No financial
statements were filed with this form.
b. Form 8-KA filed on March 17, 1998 reporting the Pro Forma
statements of the Genicom Relays Division of Genicom Corporation
and the audited financial statements of the Genicom Relays
Division for the year ended December 29, 1996.
SIGNATURES
Communications Instruments, Inc.
--------------------------------
---------------------- --------------------------------
Date Ramzi A. Dabbagh
Chairman of the Board
---------------------- --------------------------------
Date David Henning
Chief Financial Officer
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