<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 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>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 751 $ 298
Accounts receivable (less allowance for doubtful accounts:
June 30, 1998 - $630, 1997 - $796) 20,219 11,602
Inventories 26,061 19,377
Deferred income taxes 2,984 2,130
Other current assets 2,009 1,334
----------- ------------
Total current assets 52,024 34,741
Property, plant and equipment, at cost 36,179 27,539
Less accumulated depreciation (12,687) (10,715)
----------- ------------
Property, plant and equipment, net 23,492 16,824
Other assets:
Goodwill (net of accumulated amortization: June 30, 1998 - $1,212
1997 - $874) 33,708 16,010
Environmental receivable and restricted cash 1,574 1,605
Investment in joint venture 190 108
Intangible and other assets 19,661 6,995
----------- ------------
Total other assets 55,133 24,718
----------- ------------
Total $ 130,649 $ 76,283
=========== ============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Accounts payable $ 8,653 $ 4,753
Accrued interest 2,879 2,820
Other accrued liabilities 8,553 5,617
Current portion of long-term debt 4,125 56
Amounts payable to prior stockholders of subsidiary 114 227
----------- ------------
Total current liabilities 24,324 13,473
Long term debt 138,203 101,566
Deferred income taxes 1,515 1,862
Amounts payable to prior stockholders of subsidiary 467 467
Other noncurrent liabilities 2,896 2,509
----------- ------------
Total liabilities 167,405 119,877
----------- ------------
Commitments and contingencies - -
Stockholder's deficiency
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid in capital 17,317 12,317
Accumulated deficit (54,032) (55,827)
Accumulated other comprehensive expense (41) (42)
Accounts receivable due from parent 0 (42)
----------- ------------
Total stockholder's deficiency (36,756) (43,594)
----------- ------------
Total $ 130,649 $ 76,283
=========== ============
</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 Six months ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $27,484 $23,652 $53,652 $46,079
Cost of sales 18,209 15,546 36,217 30,589
------- ------- ------- -------
Gross profit 9,275 8,106 17,435 15,490
Operating expenses:
Selling expenses 1,853 1,554 3,571 3,052
General and administrative expenses 1,936 2,286 3,791 4,095
Research and development expenses 362 296 599 498
Amortization of goodwill and other intangibles 238 158 419 311
------- ------- ------- -------
Total operating expenses 4,389 4,294 8,380 7,956
------- ------- ------- -------
Operating income 4,886 3,812 9,055 7,534
Interest expense, net (2,827) (882) (5,456) (1,826)
Other income, net 2 (6) 3 1
Cancellation fees - - - -
------- ------- ------- -------
Income before income taxes and minority
interest in subsidiary and extraordinary item 2,061 2,924 3,602 5,709
Provision for income taxes 832 1,161 1,457 2,275
------- ------- ------- -------
Income after income taxes before minority
interest in subsidiary and extraordinary item 1,229 1,763 2,145 3,434
Loss applicable to minority interest in subsidiary - (26) - (55)
------- ------- ------- -------
Income before extraordinary item 1,229 1,737 2,145 3,379
Extraordinary item - early extinguishment of debt
(less income tax benefits of $234) 351 - 351 -
------- ------- ------- -------
Net income 878 1,737 1,794 3,379
Other comprehensive income (expense):
Foreign currency translation adjustment (2) - 1 (1)
------- ------- ------- -------
Other comprehensive income (loss) - - - -
------- ------- ------- -------
Comprehensive income $ 876 $ 1,737 $ 1,795 $ 3,379
======= ======= ======= =======
</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>
Six months ended
June 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 1,794 3,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,738 2,062
Deferred income taxes (325) (360)
Write-off of old financing fees 585 -
Equity loss (gain) in CIIG investment (6) 33
Minority interest - 55
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in accounts receivable (3,954) (1,993)
(Increase) decrease in inventories (745) 1,351
(Increase) decrease in other current assets 46 (81)
Increase (decrease) in accounts payable 2,379 107
Increase (decrease) in accrued liabilities 1,175 (568)
Increase (decrease) in accrued interest 59 (23)
Changes in other assets and liabilities (6) 124
-------- --------
Net cash provided by operating activities 3,740 4,086
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture (95) -
Acquisition of business, net of cash received (46,827) -
Purchases of property, plant and equipment (1,240) (938)
-------- --------
Net cash used in investing activities (48,162) (938)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 47,937 417
Repayments under long-term debt agreement (7,400) (2,250)
Payment of loan financing fees (754) -
Proceeds from loan 100 -
Payment of capital lease obligations (38) -
Advances (to) from parent 105 (1,306)
Currency translation 1 (1)
Repayments of amounts owed to prior stockholders of
subsidiary (113) -
Additional paid in capital 5,000 -
Other 37 -
-------- --------
Net cash provided by (used in) financing activities 44,875 (3,140)
NET INCREASE IN CASH AND CASH EQUIVALENTS 453 8
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 298 116
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 751 $ 124
======== ========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
Communications Instruments, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, Electro-Mech
Corporation ("Electro-Mech"), and Corcom, Inc. ("Corcom"), which became a wholly
owned subsidiary on June 19, 1998, operate facilities in Carpenteria, California
(Kilovac), Juarez, Mexico (Electro-Mech and Corcom), Libertyville, IL (Corcom)
and Munich, Germany (Corcom).
Financial information related to foreign operations are translated into US
dollars based on exchange rates as obtained from a local U.S. 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 six months ended June 30, 1998 and
June 30, 1997 and the quarters ended June 30, 1998 and June 30, 1997 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 audited
consolidated financial statements.
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 senior credit
facility with a syndicate of financial institutions providing for revolving
loans of up to $25.0 million that was subsequently retired in connection with
the acquisition of Corcom on June 19, 1998 (the "Old 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
Corcom, Inc.
On June 19, 1998, the Company acquired all of the outstanding capital stock of
Corcom, Inc., an Illinois corporation ("Corcom") pursuant to the merger of RF
Acquisition Corp., a newly formed wholly-owned subsidiary of the Company, with
and into Corcom (the "Merger"). The Company paid $13.00 per share to the
shareholders of Corcom in exchange for the shares received in the Merger
(approximately $51.1 million in the aggregate). The Company used a portion of
the proceeds of $48.1 million of borrowings under a $60.0 million credit
facility entered into with the Bank of America National Trust and Savings
Association on June 19, 1998, additional paid-in capital of $5.0 million
contributed by the Parent, and $7.4 million in cash from Corcom to finance the
Merger, repay $7.4 million of debt and fund the related merger costs. Corcom is
an electromagnetic interference filter manufacter located in Libertyville,
Illinois.
The Corcom Merger was accounted for as a purchase. The purchase price was
allocated to the assets of Corcom based on their relative fair values as
follows (In thousands):
<PAGE>
<TABLE>
<S> <C>
Current assets $12,173
Property, plant and equipment 7,320
Intangible and other assets 28,916
Liabilities assumed (3,359)
-------
Total purchase price $45,050
=======
</TABLE>
Such allocations of purchase price are subject to final determination based on
valuations and other studies that may be completed after the closing. Management
believes that there will be no material changes to the allocation of the
purchase price.
The following unaudited pro forma financial information shows the results of
consolidated operations of the Company for the six months ended June 30, 1998
and the year ended December 31, 1997 (including effects of Genicom Relays
Division ("GRD") for the year ended December 31, 1997), as though the Corcom
Merger occurred as of January 1, 1998 and January 1, 1997, respectively. These
results include, but are not limited to, an increase in interest expense as a
result of the debt borrowed to finance the Corcom Merger.
<TABLE>
<CAPTION>
Six Months Ended Twelve Months Ended
June 30, 1998 December 31, 1997
---------------- ---------------------
(In thousands)
<S> <C> <C>
Net sales $68,978 $140,568
Operating Income 9,371 19,490
Income before extraordinrary item 868 4,905
Pro forma net income 517 4,507
</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
Corcom Merger taken place on January 1, 1998 or January 1, 1997, respectively,
or (ii) future results of consolidated operations of the combined business.
Wilmar Electronics Inc.
On May 6, 1998, the Company purchased certain assets and assumed certain
liabilities of Wilmar Electronics Inc. ("Wilmar") for $2.1 million (the "Wilmar
Acquisition"). The Wilmar Acquisition was consolidated into the Company's
Kilovac subsidiary in June 1998. The Wilmar Acquisition was financed with a draw
on the Company's Old Senior Credit Facility. The transaction was accounted for
as a purchase. The purchase price was allocated to the assets of Wilmar based on
their relative fair values, and excess cost was allocated to goodwill.
The following summarizes the purchase price allocation as of the date of the
Wilmar Acquisition (In thousands):
<PAGE>
<TABLE>
<S> <C>
Current assets $ 381
Property, plant and equipment 80
Intangibles and other assets 2,023
Liabilities assumed (356)
------
Total purchase price $2,128
======
</TABLE>
Pro forma financial information is not presented relating to the Wilmar
Acquisition as this entity is not a significant subsidiary of the Company.
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 Old 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
(In thousands):
<TABLE>
<S> <C>
Current assets $3,757
Property, plant and equipment 1,850
Intangibles 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>
<CAPTION>
(In thousands)
<S> <C>
Net sales $103,780
Operating income 16,366
Income before extraordinary item 5,053
Pro forma 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 $850,000
<PAGE>
(discounted to $697,000) 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.
The following summarized the purchase price allocation as of the date of the
ibex Acquisition (In thousands):
<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 Old Senior Credit
Facility and the issuance of the note payable to the sellers discounted to
$697,000.
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 (In thousands):
<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.
3. Inventories
Components of inventory are as follows (In thousands):
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Finished goods $ 6,220 $ 2,882
Work-in-process 9,988 8,981
Raw materials 16,335 12,520
Reserve for obsolescence (6,482) (5,006)
------- -------
Total $26,061 $19,377
======= =======
</TABLE>
4. Comprehensive Income (Expense) (In thousands):
<TABLE>
<CAPTION>
Accumulated
Foreign other
currency Comprehensive
Translation Expense
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance, January 1 $(42) $(38) $(42) $(38)
Period income (expense) 3 (1) 3 (1)
---- ---- --- ---
Ending balance, March 31 (39) (39) (39) (39)
Period income (expense) (2) - (2) -
---- ---- --- ---
Ending balance, June 30 $(41) $(39) $(41) $(39)
==== ==== ==== ====
</TABLE>
5. Long-Term Debt
On June 19, 1998, the Company retired the Old Senior Credit Facility and
borrowed approximately $48.1 million pursuant to a senior credit facility with a
syndicate of financial institutions providing for revolving loans of up to $25.0
million and term loans of $35.0 million (the "Senior Credit Facility").
The Company's long-term debt at June 30, 1998 consists primarily of the $95.0
million Notes and revolving loans of $11.3 million and term loans of $35.0
million under the Senior Credit Facility. The Company and its wholly owned
subsidiaries, Kilovac and Kilovac International, Inc., 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, Kilovac International,
Inc. and Corcom, Inc. 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
<PAGE>
aggregate principal amount of the Notes remains outstanding immediately after
the occurrence of such redemption.
The Senior Credit Facility provides for a maximum credit facility of $60.0
million limited by an outstanding indebtedness under the $35.0 million term loan
agreement or availability on the borrowing base, as defined in the loan
agreement. All funds 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 Senior
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 June 30, 1998, LIBOR borrowing rates
ranged from 8.125% to 8.25%. At June 30, 1998, the base rate borrowing rate was
10.00%. The weighted average borrowing rate, calculated based on borrowings
outstanding at June 30, 1998 under base rate and LIBOR loans was 8.23%.
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, fixed charge
coverage ratios and minimum levels of earnings before interest, taxes,
depreciation and amortization, as defined by the Senior Credit Facility. As of
June 30, 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 June 30, 1998
were $950,000 and at December 31, 1997 were $850,000.
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 Senior Leverage Ratio of the Company.
As of June 30, 1998, the Company had available unused borrowing capacity of
$13.7 million under the Senior Credit Facility.
On June 19, 1998, the Company extinguished all outstanding debt which was $5.8
million at December 31, 1997, under the Old Senior Credit Facility (see Note 2).
The extraordinary loss recorded in the three and six months ended June 30, 1998
relates to the write-off of the debt issuance costs related to the Old
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
<PAGE>
On July 27, 1998, the company purchased certain assets of Cornell Dubilier's
electronics relay division for approximately $890,000 subject to a purchase
price adjustment. The purchase was financed by a draw on the Senior Credit
Facility. The operations will be consolidated into the Company's Midtex Division
1998.
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 June 1998, the Company acquired all of the outstanding capital stock of
Corcom, Inc., an Illinois corporation ("Corcom") pursuant to the merger of RF
Acquisition Corp., a newly formed wholly-owned subsidiary of the Company, with
and into Corcom (the "Corcom Merger"). The Company paid $13.00 per share to the
shareholders of Corcom in exchange for the shares received in the Merger
(approximately $51.1 million in the aggregate). The Company used a portion of
the proceeds of $48.1 million of borrowings under a $60.0 million credit
facility entered into with the Bank of America National Trust and Savings
Association on June 19, 1998 (the "Senior Credit Facility"), additional paid in
capital of $5.0 million contributed by the Parent, and $7.4 million in cash from
Corcom to finance the acquisition and Merger, repay $7.4 million of debt and
fund the related merger costs. Corcom is an electromagnetic interference filter
manufacturer located in Libertyville, Illinois.
In May 1998, the Company purchased certain assets and assumed certain
liabilities of Wilmar Electronics Inc. ("Wilmar") for $2.1 million (the "Wilmar
Acquisition"). The Wilmar Acquisition was consolidated into the Kilovac
subsidiary in June 1998. The Company financed the Wilmar Acquisition with funds
borrowed on the Old Senior Credit Facility.
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 Old 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 was
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
<PAGE>
October 31, 1999. The Company financed the $1.3 million paid at closing with
funds borrowed on the Old Senior Credit Facility.
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 (the "Kilovac Purchase"), refinanced such
indebtedness and Parent redeemed such preferred stock in conjunction with the
Transactions.
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 Six Months Ended
June 30 June 30
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 66.3% 65.7% 67.5% 66.4%
Gross profit 33.7% 34.3% 32.5% 33.6%
Selling expenses 6.7% 6.6% 6.7% 6.6%
General and administrative expenses 7.0% 9.7% 7.1% 8.9%
Research and development expenses 1.3% 1.3% 1.1% 1.1%
Amortization of goodwill and other intangibles 0.9% 0.7% 0.8% 0.7%
Operating income 17.8% 16.1% 16.9% 16.4%
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net sales of the Company for the six months ended June 30, 1998, increased $7.6
million, or 16.4%, to $53.7 million from $46.1 million for the corresponding
period in 1997. This increase is due primarily to the effect of acquisitions
partially offset by the planned cessation of a product line acquired with the
Hartman Acquisition.
Gross profit of the Company for the six months ended June 30, 1998 increased
$1.9 million, or 12.6%, to $17.4 million from $15.5 million for the
corresponding period in 1997. Gross profit as a percentage of net sales
decreased to 32.5% from 33.6% for the same period in 1997. The
<PAGE>
decrease in gross profit as a percentage of net sales was due primarily to
assimilating the GRD Acquisition, the ibex Acquisition and the Wilmar
Acquisition into the existing operations.
Selling expenses for the Company for the six months ended June 30, 1998
increased $519,000, or 17.0% to $3.6 million from $3.1 million for the
corresponding period in 1997. Selling expenses as a percentage of net sales
increased to 6.7% from 6.6% in the same period in 1997.
General and administrative expenses of the Company for the six months ended June
30, 1998 decreased $304,000, or 7.4%, to $3.8 million from $4.1 million for the
corresponding period in 1997. General and administrative expenses as a
percentage of net sales decreased to 7.1% from 8.9% for the same period in 1997.
This decrease was caused by (i) additional revenue associated with acquisition
with low additional fixed costs, and (ii) a bad debt expense ($507,000) recorded
in 1997. The bad debt expense related primarily to the collectibility of
accounts receivable from a single customer in relation to a dispute over product
specification.
Research and development expenses of the Company for the six months ended June
30, 1998 increased $101,000, or 20.3%, to $599,000 from $498,000 for the
corresponding period in 1997. This increase is due primarily to costs incurred
in the implementation of new projects.
Amortization of goodwill and other intangibles for the six months ended June 30,
1998 increased $108,000, or 34.7%, to $419,000 from $311,000 for the
corresponding period in 1997. The increase is due primarily to (i) the
amortization of goodwill due to the Kilovac Purchase (third quarter 1997), the
ibex Acquisition (fourth quarter 1997), the Wilmar Acquisition (second quarter
1998) and the Corcom Merger (second quarter 1998), and (ii) additional
amortization of other intangible assets acquired in the Corcom Merger.
Interest expense for the six months ended June 30, 1998 increased $3.6 million,
or 198.8%, to $5.5 million from $1.8 million for the corresponding period in
1997. This increase was due primarily to the increased debt levels associated
with the issuance of $95.0 million of Notes in September 1997.
Extraordinary item for the six months ended June 30, 1998 reflects the write-off
of $585,000 of unamortized deferred financing costs associated with the Old
Senior Credit Facility net of taxes of $234,000.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Net sales of the Company for the quarter ended June 30, 1998 increased $3.8
million, or 16.2%, to $27.5 million from $23.7 million for the corresponding
period in 1997. This increase is due primarily to the effect of acquisitions
partially offset by the planned cessation of a product line acquired with the
Hartman Acquisition.
Gross profit of the Company for the quarter ended June 30, 1998 increased $1.2
million, or 14.4%, to $9.3 million from $8.1 million for the corresponding
period in 1997. Gross profit as a percentage of net sales decreased to 33.7%
from 34.3% for the same period in 1997. The decrease in gross profit as a
percentage of net sales is due primarily to assimilating the GRD Acquisition,
the ibex Acquisition and the Wilmar Acquisition into the existing operations of
the Company partially offset by increased productivity.
Selling expenses of the Company for the quarter ended June 30, 1998 increased
$299,000, or 19.2%, to $1.9 million from $1.6 million for the corresponding
period in 1997. Selling expenses as a percentage of net sales increased to 6.7%
from 6.6% in the same period in 1997.
<PAGE>
General and administrative expenses of the Company for the quarter ended June
30, 1998, decreased $350,000, or 15.3%, to $1.9 million from $2.3 million for
the corresponding period in 1997. General and administrative expenses as a
percentage of net sales decreased to 7.0% from 9.7% for the same period in 1997.
This decrease was caused by (i) additional revenue associated with acquisition
with low additional fixed costs, and (ii) a bad debt expense ($507,000) recorded
in 1997. The bad debt expense related primarily to the collectibility of
accounts receivable from a single customer in relation to a dispute over product
specification.
Research and development expenses of the Company for the quarter ended June 30,
1998 increased $66,000, or 22.3%, to $362,000 from $296,000 for the
corresponding period in 1997. The increase in costs is due primarily to new
projects.
Amortization of goodwill and other intangibles for the quarter ended June 30,
1998 increased $80,000, or 50.6%, to $238,000 from $158,000 for the
corresponding period in 1997. The increase is due primarily to (i) the
amortization of goodwill due to the Kilovac Purchase (third quarter 1997), the
ibex Acquisition (fourth quarter 1997), the Wilmar Acquisition (second quarter
1998) and the Corcom Merger (second quarter 1998), and (ii) additional
amortization of other intangible assets acquired in the Corcom Merger.
Interest expense for the Company for the quarter ended June 30, 1998 increased
$1.9 million, or 220.5%, to $2.8 million from $882,000 for the corresponding
period in 1997. This increase is due primarily to the increased debt levels
associated with the issuance of $95.0 million of Notes in September 1997.
Extraordinary item at June 30, 1998 reflects the write-off of $585,000 of
unamortized deferred financing costs associated with the Old Senior Credit
Facility net of taxes of $234,000.
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 Provided by Operating Activities
For the six months ended June 30, 1998, cash provided by operating activities
was $3.7 million, compared to $4.1 million for the same period in 1997. This
decrease was due primarily to increases in accounts receivable and inventory,
partially offset by improved operating income, an increase in accounts payable
and the timing of payments of income taxes. The average days' sales
<PAGE>
outstanding for accounts receivable was approximately 50 trade days at December
31, 1997 and approximately 52 at June 30, 1998. The average days' sales
outstanding increased due to higher percentage of sales in the last month of the
quarter and a slowdown in payment from some customers. The Company's inventories
increased from $19.4 million at December 31, 1997 to $26.1 million at June 30,
1998. $5.8 of this increase was due to the Corcom Merger and approximately
$132,000 was due to the Wilmar Acquisition. Inventory turns averaged 3.4 for the
quarter ended June 30, 1998 and for the year ended December 31, 1997. The
Company's accounts payable increased from $4.8 million at December 31, 1997 to
$8.7 million at June 30, 1998. Of this increase $1.5 million was due to the
Corcom Merger, and the remainder was due primarily to higher inventory purchases
and less spending at year end due to holidays and planned shutdown reducing year
end purchases.
Cash Used in Investing Activities
Capital expenditures were $1.2 million in the six months ended June 30, 1998 and
$938,000 for the corresponding period in 1997. Acquisition spending totaled
$46.8 million for the six months ended June 30, 1998.
Cash Provided By/Used in Financing Activities
Cash provided by financing activities for the six months ended June 30, 1998 was
$44.9 million compared to cash used by financing activities of $3.1 million 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
additional charge to cost of sales and general and administrative costs
resulting from the fair value adjustments to inventory and fixed assets 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 $11.5 million for the six months ended June 30,
1998 from $10.0 million for the corresponding period in 1997. Adjusted EBITDA
increased to $6.1 million for the three months ended June 30, 1998 from $5.3
million for the corresponding period in 1997.
Inflation
<PAGE>
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 potential 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.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
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. If it has been determined that a vendor will not be Year 2000 compliant
in a timely manner, the Company will replace them with an alternative vendor. In
most cases there are more than one vendor for the Company's purchasing
requirements. In the case of no alternative suppliers, the Company will build
inventory to maintain production until the situation can be resolved. The
Company is verifying that its major customers are Year 2000 compliant. If it is
determined that a customer will not be compliant in a timely manner, the Company
may request C.O.D. terms. However, in most cases the Company believes that its
records will be sufficient to ensure collectibility from their customers.
The total cost to the Company of these Year 2000 Compliance activities has been
insignificant and is not anticipated to be material to its future 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
<PAGE>
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.
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 July 6, 1998 reporting the merger of RF
Acquisition Corp., a wholly owned subidiary of the Company, with
and into Corcom, Inc. Required audited financial statements were
filed with this form and the unaudited proforma financial
statements for the year ended December 31, 1997 and six months
ended June 30, 1998 will be filed pursuant to a report on Form
8-KA.
SIGNATURES
Communications Instruments, Inc.
August 14, 1998 /s/ Ramzi A. Dabbagh
---------------------- -------------------------------
Date Ramzi A. Dabbagh
Chairman of the Board
August 14, 1998 /s/ David Henning
---------------------- -------------------------------
Date David Henning
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 751
<SECURITIES> 0
<RECEIVABLES> 20,219
<ALLOWANCES> 630
<INVENTORY> 26,061
<CURRENT-ASSETS> 52,024
<PP&E> 36,179
<DEPRECIATION> (12,687)
<TOTAL-ASSETS> 130,649
<CURRENT-LIABILITIES> 24,325
<BONDS> 138,203
0
0
<COMMON> 17,317
<OTHER-SE> (54,033)
<TOTAL-LIABILITY-AND-EQUITY> 130,649
<SALES> 27,484
<TOTAL-REVENUES> 27,484
<CGS> 18,209
<TOTAL-COSTS> 18,209
<OTHER-EXPENSES> 4,365
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 2,827
<INCOME-PRETAX> 2,061
<INCOME-TAX> 832
<INCOME-CONTINUING> 1,229
<DISCONTINUED> 0
<EXTRAORDINARY> 351
<CHANGES> 0
<NET-INCOME> 878
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
