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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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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 NUMBER)
1396 CHARLOTTE HIGHWAY, FAIRVIEW, NC 28730
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (704) 628-1711
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
All of the voting stock of the registrant is held by an affiliate of the
registrant.
On April 21, 1998, the registrant had 1,000 shares of common stock
outstanding.
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference
into the part of the Form 10-K indicated:
<TABLE>
<CAPTION>
PART OF FORM
10-K INTO
WHICH
DOCUMENT INCORPORATED
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<S> <C>
Registration Statement on Form S-4........................... Item 14
Report on Form 8-K........................................... Item 14
</TABLE>
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Statements contained in this Form 10-K that are not historical facts are
forward looking statements that are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. Those statements involve
risks and uncertainties. The actual results of Communications Instruments,
Inc. and Subsidiaries (the "Company" or "CII") could differ significantly from
past results, and from those expressed or implied in forward looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed elsewhere in this Form 10-K.
PART I
ITEM 1--BUSINESS
General
CII is a designer, manufacturer, and marketer of a broad line of high
performance relays and solenoids. Relays, which are switches used to control
electric current in a circuit, and solenoids, which convert electric signals
into mechanical motion, are critical components for a wide range of
commercial, industrial and electronic products. The Company focuses on
producing highly engineered relays and solenoids for customized niche
applications that demand reliable performance, small size, lightweight, low
energy consumption, and durability. The Company's products are used in a large
number of diverse end-use applications including commercial aircraft, defense
electronics, telecommunications equipment, satellites, medical products, and
HVAC systems.
CII was initially formed in 1980 by Ramzi Dabbagh, the Company's Chairman,
President and Chief Executive Officer, and a group of private investors. The
Company made its initial acquisition of several relay and switch products from
the CP Clare division of General Instruments in 1980, and, since that initial
acquisition, Mr. Dabbagh and his management team have pursued a growth
strategy of acquiring manufacturers of relay products and related components,
often consolidating the acquired companies and/or their product lines into the
Company's manufacturing facilities and eliminating significant overhead. In
May 1993, the Company was acquired by the predecessor of CII Technologies,
Inc., a Delaware corporation and the holder of all of the outstanding capital
stock of the Company ("Parent") in a leveraged buyout transaction sponsored by
a group of investors and members of management.
In September 1997, the Company consummated an offering of $95,000,000
aggregate principal amount of 10% Senior Subordinated Notes (the "Notes"), due
2004, (the "Offering"). Concurrent with the Offering, (i) Code, Hennessy &
Simmons III, LP, certain members of management, and certain other investors
(collectively the "New Investors") acquired approximately 87% of the Parent,
and certain of Parent's existing stockholders (the "Existing Stockholders"),
including certain members of management, retained approximately 13% of
Parent's capital stock (collectively the "Recapitalization"); (ii) the Company
borrowed approximately $2.7 million pursuant to a new senior credit facility
providing for loans of up to $25.0 million (the "Senior Credit Facility");
(iii) the Company repaid approximately $29.3 million of outstanding
obligations under its prior senior credit facility (the "Old Credit Facility")
including a success fee of approximately $1.5 million in connection therewith
and certain other liabilities (the "Refinancing"); (iv) the Company purchased
for $4.5 million the remaining 20% of the outstanding capital stock of Kilovac
Corporation ("Kilovac") that the Company did not then own (the "Kilovac
Purchase"); and (v) the Company paid a dividend of approximately $59.4 million
to Parent, which was used to consummate the Recapitalization and repay certain
indebtedness of the Parent. Pursuant to the Recapitalization, the New
Investors, including Code, Hennessy & Simmons, and certain Existing
Stockholders, including members of senior management of the Company, invested
approximately $21.7 million and the retention of capital stock of Parent,
which, for the purposes of the Recapitalization, is valued at approximately
$3.3 million (collectively, the "Transactions").
On March 9, 1998, pursuant to a Registration Statement on Form S-4 under the
Securities Act of 1933, the Company completed an offer to exchange all of its
outstanding Notes for 10% Senior Subordinated Notes, due 2004, Series B.
The Company has the following subsidiaries, both of which are wholly owned
by the Company: Kilovac, a California corporation; and Electro-Mech S.A., a
Mexican corporation. The Company also holds 30% of the
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shares of CII Guardian International Ltd., an Indian corporation. Kilovac has
the following subsidiaries, both of which are wholly owned by Kilovac: Kilovac
International FSC Ltd., a Jamaican corporation; and Kilovac International, a
California corporation.
The Company was incorporated in North Carolina in 1980. The Company's
executive offices are located at 1396 Charlotte Highway, Fairview, North
Carolina, 28730 and its telephone number is (704) 628-1711.
Products/Relays
A relay is an electrically operated switch, which controls electric current
or signal transmissions. Electromechanical relays are a form of relay, which
utilize discrete switching elements which are opened or closed by
electromagnetic energy and thus control circuits with physical certainty.
These relays are designed to meet exacting circuit and ambient conditions and
can control numerous circuits simultaneously. Certain low wattage relays are
used to switch signals in test equipment, computers and telecommunications
systems. Higher power relays, which switch or control high voltage or high
currents, are used in the electrical distribution systems for aircraft, heart
defibrillators, electric vehicles and spacecraft power grids. Due to various
application requirements, relays come in thousands of shapes and sizes and
with differing levels of performance reliability. Because of the fundamental
switching functions performed by such products, they are critical components
in a wide range of commercial and industrial electrical and electronic
applications.
High performance relays--High performance relays are characterized by their
reliable performance and durability in adverse operating environments. High
performance relays provide customers with the advantages of smaller size,
lighter weight, longer life, lower energy consumption, and greater reliability
than general-purpose relays. Many of the Company's high performance relays are
hermetically sealed in metal or ceramic enclosures to protect the internal
operating mechanisms from harsh environments and to improve performance and
reliability. The Company manufactures more than 400 types of high performance
relays in its North Carolina, Ohio, Virginia and California facilities. High
performance relays generally command higher selling prices than general-
purpose relays. The Company's high performance relays are sold to
manufacturers of commercial aircraft, communication systems, medical
equipment, avionics systems, automatic test equipment, and aerospace and
defense products. High performance relays accounted for approximately 82%, 79%
and 69% of the Company's net sales in 1997, 1996 and 1995, respectively.
General purpose relays--The Company's general-purpose relays generally are
targeted towards niche applications with which the Company has sole source
relationships. The Company's general-purpose relays are used in commercial and
industrial applications where performance and reliability requirements are
somewhat less demanding than those for high performance relays. These relays
are generally manufactured for the Company in Mexico and in China where longer
production runs create operating efficiency with production lines that are
either semi-automated or utilize lower-cost assembly labor. The Company's
general purpose relay offering includes some of the more sophisticated product
types in the general-purpose category. Specific applications for the Company's
general-purpose relays include environmental management systems and
telecommunication switches. General-purpose relays accounted for approximately
13%, 15% and 25% of the Company's net sales in 1997, 1996 and 1995
respectively.
Electronic relays--Electronic relays feature very long service lives and
high reliability, but such products are not appropriate for applications
requiring complete electrical isolation. Switching speed of electronic relays
is normally much faster than that of electromechanical relays. The Company
significantly increased its electronic relay product line through the
acquisition of certain assets from Hi-G Company, Inc. in January 1995.
Electronic relays are sold to commercial, industrial, and defense equipment
manufacturers.
Solenoids--Solenoids are similar to relays in design, but rather than
control currents or transmissions, they are applied when a defined mechanical
motion is required in the user's equipment or system. Like relays, solenoids
can be made in many sizes and shapes to meet specific customer application
requirements. The Company supplies products to the high performance and the
general-purpose solenoid markets. High
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performance solenoids are custom designed and are used in the aerospace
industry, and in applications such as aerospace de-icing equipment, commercial
aircraft fuel shut-off valves, locking mechanisms for landing gear, and thrust
reversers for aircraft engines. General-purpose solenoid types are used in
vending machines, automation equipment, office equipment, and cameras.
Sales and Distribution
The Company sells its products worldwide through a network of independent
sales representatives and distributors in countries throughout North America,
Europe and Asia. This sales network is supported by the Company's internal
staff of direct product marketing managers, customer service associates,
application engineers and marketing communication specialists.
Product Development
The Company intends to develop new products with its customers to meet the
application requirements of its customers and to expand the Company's
technical capabilities. The Company has in the past formed strategic
partnerships with certain customers to develop new products, improve existing
products, and reduce total product costs. The Company's customers funded
approximately $1.0 million and $1.6 million of the Company's product
development expenses in 1997 and 1996, respectively.
The Company is developing several new types of high performance relays,
including a high voltage relay to be used in a new model of automatic heart
defibrillator, a high voltage relay for the rail transportation industry, a
new energy efficient, long-life environmentally sealed relay for applications
where energy consumption is critical, and a new relay designed to reduce
printed circuit board space. The Company is also developing a new line of
ultra-high reliability relays for aerospace and satellite equipment that are
continuously utilized in adverse conditions.
The Company is currently developing several new general-purpose relays to be
used in automotive, commercial, and industrial applications. These products
are currently in the prototype stage and the Company expects to begin
manufacturing and selling certain of these products in 1998. Additionally, the
Company is currently developing several new solenoid types for use in office
equipment, vending machines, security systems, home appliance, automotive,
commercial, and industrial applications. These products are currently in the
prototype stage and the Company expects to begin manufacturing and selling
certain of these products in 1998.
Proprietary Rights
The Company currently holds nine US patents, two registered US trademarks
and four foreign registered trademarks, and has three US patent applications,
one international patent application and four US trademark applications in
process. The Company intends to continue to seek patents on its products and
trademark applications, as appropriate. The Company does not believe that the
success of its business is materially dependent on the existence, validity or
duration of any patent or trademark.
The Company attempts to protect its trade secrets and other proprietary
rights through formal agreements with employees, customers, suppliers, and
consultants. Although the Company intends to protect its intellectual property
rights vigorously, there can be no assurance that these and other security
arrangements will be successful. The Company has from time to time received,
and may receive in the future, communications from third parties asserting
patents on certain of the Company's products and technologies. Although the
Company has not been a party to any material intellectual property litigation,
if a third party were to make a valid claim and the Company could not obtain a
license on commercially reasonable terms, the Company's operating results
could be materially and adversely affected. Litigation, which could result in
substantial cost to and diversions of resources of the Company, may be
necessary to enforce patents or other intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. The failure to obtain necessary licenses or the occurrence of
litigation relating to patent infringement or other intellectual property
matters could have a material adverse affect on the Company's business and
operating results.
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Customers
The Company has established a diversified base of customers representing a
wide range of industries and applications. Sales to customers outside of the
United States totaled approximately 17% of net sales during 1997 (comprised
primarily of approximately 8.5% to Europe, 3.2% to Asia, and 3.6% to North
America). No single customer accounted for 8% or more of the Company's total
net sales for 1997 or 1996.
Backlog
The Company's backlog of customer orders at December 31, 1997 was $61.7
million, with $42.9 million shippable within 1 year compared to a backlog at
December 31, 1996 of $52.3 million, with $36.8 million shippable within 1
year.
Competition
The Company competes primarily on the basis of quality, reliability, price,
services, and delivery. Its primary competitors are Teledyne Relays, Jennings,
Leach, and Eaton in the high performance relay market, the Electromechanical
Products division of Siemens in the general purpose relay market, and G. W.
Lisk in the solenoid market. Several of the Company's competitors have greater
financial, marketing, manufacturing, and distribution resources than the
Company and some have more automated manufacturing facilities. There can be no
assurance that the Company will be able to compete successfully in the future
against its competitors or that the Company will not experience increased
price competition, which could adversely affect the Company's results of
operations. The Company also faces competition for acquisition opportunities
from its competitors.
Environmental Matters
The Company is subject to various foreign, federal, state, and local
environmental laws and regulations. The Company believes its operations are in
material compliance with such laws and regulations. However, there can be no
assurance that violations will not occur or be identified, or that
environmental laws and regulations will not change in the future, in a manner
that could materially and adversely affect the Company.
Under certain circumstances, such environmental laws and regulations also
may impose joint and several liability for investigation and remediation of
contamination at locations owned or operated by an entity or its predecessors,
or at locations at which wastes or other contamination attributable to an
entity or its predecessors have come to be located. The Company can give no
assurance that such liability at facilities the Company currently owns or
operates, or at other locations, will not arise or be asserted against the
Company or entities for which it may be responsible. Such other locations
could include, for example, facilities formerly owned or operated by the
Company (or an entity or business that the Company has acquired), or locations
to which wastes generated by the Company (or an entity or business that the
Company has acquired) have been sent. Under certain circumstances such
liability at several locations (discussed below), or at locations yet to be
identified, could materially and adversely affect the Company.
The Company has been identified as a potentially responsible party ("PRP")
for investigation and cleanup costs at two sites under the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"). CERCLA provides for joint and several liabilities for
the costs of remediating a site, except under certain circumstances. However,
the Company believes it will be allocated responsibility for a relatively
small percentage of the cleanup costs at each of these sites, and in both
instances other PRP's will also be required to contribute to such costs.
Although the Company's total liability for cleanup costs at these sites cannot
be predicted with certainty, the Company does not currently believe that its
share of those costs will have a material adverse effect on the Company's
financial position or results of operations.
Soil and groundwater contamination has been identified at and about the
Company's Fairview, North Carolina facility resulting in that site's inclusion
in the North Carolina Department of Environmental, Health & Natural Resource's
Inactive Hazardous Waste Sites Priority List. The Company believes that the
Fairview contamination relates to the past activities of a prior owner of the
Fairview property (the "Prior Owner"). On
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May 11, 1995, the Company entered into a settlement agreement (the "Settlement
Agreement") with the Prior owner, pursuant to which the Prior Owner agreed to
provide certain funds for the investigation and remediation of the Fairview
contamination in exchange for a release of certain claims by the Company. In
accordance with the Settlement Agreement, the Prior Owner has placed $1.75
million in escrow to fund further investigation, the remediation of
contaminated soils and the installation and start-up of a groundwater
remediation system at the Fairview facility. The Company is responsible for
investigation, soil remediation and start-up costs in excess of the escrowed
amount, if any. The Settlement Agreement further provides that after the
groundwater remediation system has been operating for three years, the Company
will provide to the Prior Owner an estimate of the then present value of the
cost to continue operating and maintaining the system for an additional 27
years. After receiving the estimate, the Prior Owner is to deposit with the
escrow agent an additional sum equal to 90% of the estimate, up to a maximum
of $1.25 million. Although the Company believes that the Prior Owner has the
current ability to satisfy its obligations pursuant to the Settlement
Agreement, the Company does not believe that the total investigation and
remediation costs will exceed the amounts that the Prior Owner is required to
provide pursuant to the Settlement Agreement. The Company has recorded a
liability for the total remediation costs of approximately $2.4 million,
representing the discounted amount of future remediation costs over the 30-
year period of remediation. Applicable environmental laws provide for joint
and several liabilities, except under certain circumstances. Accordingly, the
Company, as the current owner of a contaminated property, could be held
responsible for the entire cost of investigating and remediating the site. If
the site remedial system fails to perform as anticipated, or if the funds to
be provided by the Prior Owner pursuant to the Settlement Agreement together
with the Company's reserve are insufficient to remediate the property, or if
the Prior Owner fails to make the scheduled future contribution to the
environmental escrow, the Company could be required to incur costs that could
materially and adversely affect the Company.
In connection with the Company's purchase of certain assets and certain
liabilities of Hartman Electrical Manufacturing ("Hartman"), a division of
Figgie International, Inc. ("Figgie") (the "Hartman Acquisition"), the Company
entered into an agreement pursuant to which it leases from a wholly-owned
subsidiary of Figgie (the "Lessor") a manufacturing facility in Mansfield,
Ohio, (the "Mansfield Property") at which Hartman has conducted operations
(the "Lease"). The Mansfield Property may contain contamination at levels that
will require further investigation and may require soil and/or groundwater
remediation. As a lessee of the Mansfield Property, the Company may become
subject to liability for remediation of such contamination at and/or from such
property, which liability may be joint and several except under certain
circumstances. The Lease also includes an indemnity from Lessor to the
Company, guaranteed by Figgie, for certain environmental liabilities in
connection with the Mansfield Property, subject to a dollar limitation of
$12.0 million (the "Indemnification Cap"). In addition, in connection with the
Hartman Acquisition, Figgie has placed $515,000 in escrow for environmental
remediation costs at the Mansfield Property to be credited towards the
Indemnification Cap as provided in the Lease. The Company believes that, while
actual remediation costs may exceed the cash amount escrowed, such costs will
not exceed the Indemnification Cap. If costs exceed the escrow and the Company
is unable to obtain, or is delayed in obtaining, indemnification under the
Lease for any reason, the Company could be materially and adversely affected.
See "Note 10 to Financial Statements of Communications Instruments, Inc. and
Subsidiaries." The Company does not maintain environmental impairment
liability insurance.
Employees
As of December 31, 1997, the Company had approximately 1,190 employees. Of
these employees, approximately 300 are salaried employees and approximately
890 are hourly workers. Of the approximately 300 salaried employees,
approximately 80 perform manufacturing functions, over 50 are engineers
engaged in research and development activities, including the design and
development of new customer applications, approximately 30 perform quality
assurance tasks and approximately 20 perform customer service. Approximately
130 of the Company's employees in the Mansfield, Ohio facility are represented
by the International Union of Electronics, Electrical, Salaried, Machine and
Furniture Workers AFL, CIO and are covered by a collective bargaining
agreement, which is scheduled to expire in September 1999. Approximately 110
of the Company's employees in the Waynesboro, Virginia facility are
represented by the United Electrical,
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Radio, and Machine Workers of America, which is scheduled to expire in
December 2000. The Company believes that its relations with its employees are
satisfactory.
Recent Developments
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, Inc. is located in
Libertyville, Illinois and is an electromagnetic interference filter
manufacturer.
ITEM 2--PROPERTIES
Facilities
The Company, headquartered in Fairview, North Carolina, operates the
following manufacturing and distribution facilities. The Company believes that
such facilities are maintained in good condition and are adequate for its
present and intended needs:
<TABLE>
<CAPTION>
SQUARE OWNED/
LOCATION FOOTAGE LEASED PRODUCTS MANUFACTURED
-------- ------- ------ ---------------------------------------------
<S> <C> <C> <C>
Fairview,
North Carolina......... 70,000 Owned High performance relays and solenoids
Mansfield, Ohio......... 53,000 Leased High performance power relays
Juarez, Mexico.......... 45,000 Leased General purpose relays
Carpinteria, California. 44,000 Leased High voltage and power switching relays
Waynesboro, Virginia.... 40,000 Leased High performance relays
Asheville,
North Carolina......... 26,000 Owned High performance relays and electronic relays
Naples, Florida......... 10,000 Leased High performance power relays
El Paso, Texas.......... 6,000 Leased Distribution center
</TABLE>
The Company's manufacturing and assembly facilities contain approximately an
aggregate of 288,000 square feet of floor space. The Company currently has
available manufacturing space in certain of its facilities.
The Company believes this available manufacturing capacity will allow for
the integration of future product line acquisitions and/or the development of
new product lines. The Company's two facilities in North Carolina, its
facility in Ohio, and its facility in Virginia, each of which manufactures
products for the military, maintain Military Standard 790 and Military
Standard I 45208 certifications, respectively. The Company's facility in Ohio
is IS9001 certified and its facility in California is IS9001 and QS9000
certified.
The leases for the Company's facilities in Juarez, Mexico, Waynesboro,
Virginia, and Carpinteria, California expire in January 2001, April 1999 and
April 1999, respectively. The lease for the Company's Mansfield, Ohio facility
expires in 2001, subject to an option to purchase. The lease for the Company's
Naples, Florida facility expires in May, 1998, and the Company is currently
integrating all these operations into its Mansfield, Ohio facility.
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ITEM 3--LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. As of the date of this Form 10-K, the Company
is not a party to any lawsuit or proceeding which, individually or in the
aggregate, in the opinion of management, is reasonably likely to have a
material adverse effect on the financial condition of the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not Applicable
ITEM 6--SELECTED CONSOLIDATED FINANCIAL DATA
The following information is qualified in its entirety by the consolidated
financial statements of the Company. The following selected consolidated
financial data as of the dates and for the periods indicated were derived from
the audited consolidated financial statements of the Company contained
elsewhere in this Form 10-K, except data as of, and for, (i) the nine months
ended December 31, 1992, (ii) the period from January 1, 1993 to May 10, 1993,
(iii) the period from May 11, 1993 to December 31, 1993, (iv) the year ended
December 31, 1994, and (v) data as of December 31, 1995, which was derived
from audited consolidated financial statements of the Company (including its
predecessors) not included in this Form 10-K. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and the related notes
thereto, appearing elsewhere in this Form 10-K.
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SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------- ------------------------------------------------
NINE MONTHS JANUARY 1, MAY 11,
ENDED 1993 TO 1993 TO FISCAL YEAR ENDED DECEMBER 31,
DECEMBER 31, MAY 10, DECEMBER 31, -----------------------------------
1992 1993 1993 1994 1995 1996 1997
------------ ---------- ------------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $15,346 $ 8,378 $17,095 $31,523 $39,918 $66,336 $ 89,436
Cost of sales........... 10,270 6,684 14,448 24,330 28,687 46,779 59,601
------- ------- ------- ------- ------- ------- --------
Gross profit........... 5,076 1,694 2,647 7,193 11,231 19,557 29,835
Selling expenses........ 1,065 713 1,344 2,382 3,229 4,903 6,077
General and
administrative
expenses............... 842 586 1,150 2,248 3,326 5,464 7,432
Research and
development............ 44 21 41 103 301 1,011 1,090
Amortization of goodwill
and other intangible
assets................. 53 45 117 177 251 543 648
Special compensation
charge (1)............. -- -- -- -- 1,300 -- --
Environmental expense
(2).................... -- -- -- -- 951 -- --
Special acquisition
expenses (3)........... -- 153 266 -- 2,064 -- 260
------- ------- ------- ------- ------- ------- --------
Income (loss) from
operations............ 3,072 176 (271) 2,283 (191) 7,636 14,328
Interest expense and
other financing costs,
net (4)................ (93) (77) (728) (1,279) (2,309) (5,055) (6,573)
Cancellation fees (5)... -- -- -- -- -- -- (800)
Other income (expense),
net.................... 100 42 -- -- 2 201 (17)
------- ------- ------- ------- ------- ------- --------
Income (loss) before
income taxes,
minority interest in
subsidiary and
extraordinary item.... 3,079 141 (999) 1,004 (2,498) 2,782 6,938
Provision for (benefit
from) income taxes..... -- -- (357) 386 (812) 1,120 2,836
------- ------- ------- ------- ------- ------- --------
Income (loss) before
minority interest in
subsidiary and
extraordinary item..... 3,079 141 (642) 618 (1,686) 1,662 4,102
Income applicable to
minority interest in
subsidiary............. -- -- -- -- (35) (33) (55)
------- ------- ------- ------- ------- ------- --------
Income (loss) before
extraordinary item . 3,079 141 (642) 618 (1,721) 1,629 4,047
Extraordinary item (less
income tax benefit of
$266) (6) ............. -- -- -- -- -- -- 398
------- ------- ------- ------- ------- ------- --------
Net income (loss).... $ 3,079 $ 141 $ (642) $ 618 $(1,721) $ 1,629 $ 3,649
======= ======= ======= ======= ======= ======= ========
OTHER FINANCIAL DATA:
Gross Margin %.......... 33.1% 20.2% 15.5% 22.8% 28.1% 29.5% 33.4%
Depreciation and
amortization........... $ 425 $ 201 $ 1,309 $ 2,158 $ 2,442 $ 3,551 $ 4,320
Capital expenditures.... $ 353 $ 131 $ 323 $ 444 $ 1,139 $ 2,449 $ 2,146
Ratio of earnings to
fixed charges (7)...... 26.0x 2.5x NA 1.8x NA 1.7x 2.1x
NET CASH PROVIDED BY
(USED IN)
Operating Activities.... $ 3,187 $ 1,336 $ 1,332 $ 1,333 $ 1,960 $ 8,498 $ 6,438
Financing Activities.... (2,885) 1,611 380 256 13,645 5,973 6,433
Investing Activities.... (314) (2,876) (1,667) (1,544) (15,484) (14,548) (12,689)
OTHER NON-GAAP FINANCIAL
DATA (8):
Adjusted EBITDA......... $ 3,497 $ 530 $ 2,211 $ 4,351 $ 6,618 $11,873 $ 19,128
Adjusted EBITDA Margin
%...................... 22.8% 6.3% 12.9% 13.8% 16.6% 17.9% 21.4%
BALANCE SHEET DATA:
Cash.................... $ 10 $ 81 $ 27 $ 72 $ 193 $ 116 $ 298
Working capital......... 6,853 8,234 7,482 8,274 10,590 12,143 21,268
Property, plant and
equipment, net......... 1,929 2,358 12,554 11,735 13,225 15,796 16,824
Total assets............ 10,825 14,593 25,450 26,836 48,531 60,725 76,283
Total debt.............. 1,065 4,292 11,769 12,197 23,452 30,622 101,622
Stockholder's equity
(deficiency)........... 8,538 7,782 7,153 7,667 10,293 11,750 (43,594)
</TABLE>
- --------
(1) Reflects a special compensation charge of $1.3 million which represents
(i) the difference between the purchase price of common stock of Parent
issued to seven employees on December 1, 1995 and the estimated fair
market value of such shares (based upon the appraised value on December 1,
1995) and (ii) a related special cash bonus granted by the Company to the
same seven employees to pay taxes associated with such stock issuances.
8
<PAGE>
(2) Reflects a non-recurring charge of $951,000 which represents primarily the
costs incurred to date and the present value of the estimated future costs
payable by the Company over the next 30 years for groundwater remediation
at the Company's Fairview, North Carolina facility. See "Business--
Environmental Matters."
(3) Special acquisition expenses in 1993 consist primarily of costs related to
the relocation of a facility following the acquisition of Midtex Relays,
Inc. and costs associated with relocating certain operations acquired from
West Coast Electrical Manufacturing Co. and CP Clare Corporation. Such
expense in 1995 includes costs primarily related to (i) the relocation of
certain assets acquired from Hi-G Company, Inc. and from Deutsch Relays,
Inc. and (ii) the write-off of an agreement with a business development
consultant. Such expense in 1997 consists of one-time costs associated
with the integration of operations acquired from Genicom Corporation in
Waynesboro, Virginia ("Genicom") to the Company.
(4) Interest expense in 1996 includes a charge of $1.6 million related to
costs associated with the preparation of a withdrawn initial public
offering of Parent's capital stock. Interest expense in 1997 includes
additional success fee expense of $917,000 related to the payment of the
Old Credit Facility.
(5) Reflects commitment fees and other expenses of $800,000 incurred in
connection with a credit facility set up to provide financing in the event
the Offering was not consummated.
(6) Extraordinary item represents the write-off of the unamortized portion of
financing fees associated with the Old Credit Facility.
(7) For purposes of determining the ratio of fixed charges, earnings are
defined as earnings before income taxes and minority interest in
subsidiary plus fixed charges, and fixed charges consist of interest
expense, which includes amortization of deferred debt issuance costs and
deferred financing costs and the portion of rental expense on capital and
operating leases deemed representative of the interest factor. The
Company's earnings were insufficient to cover fixed charges for the period
from May 11, 1993 to December 31, 1993 and for the year ended December 31,
1995 by $1.7 million and $4.7 million, respectively.
(8) Adjusted EBITDA represents income (loss) before interest expense (net),
income taxes, depreciation and amortization, gain on disposal of assets,
extraordinary, unusual and nonrecurring items, the special compensation
charge, environmental expense and special acquisition charges referred to
in footnotes (1), (2) and (3) above, the provision for loss in April, 1997
for receivables relating primarily to a single customer and the non-cash
write-ups and non-cash charges resulting from the write-up of inventory
and fixed assets arising in connection with the acquisition of 80% of
Kilovac (the "Kilovac Acquisition"), the Hartman Acquisition, the Kilovac
Purchase, the purchase of 100% ownership in ibex Aerospace Inc. ("ibex")
of Naples, Florida (the "ibex Acquisition") and the purchase of certain
assets and certain liabilities of the Genicom Relays Division ("GRD") of
Genicom (the "GRD Acquisition") 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 in the same manner.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Some of the matters discussed below and elsewhere herein contain forward-
looking statements regarding the future performance of the Company and future
events. These matters involve risks and uncertainties that could cause actual
results to differ materially from the statements contained herein. The
following discussion and analysis of the results of operations, financial
condition and liquidity of the Company should be read in conjunction with the
consolidated financial statements and the related notes thereto included
elsewhere in this Form 10-K.
9
<PAGE>
Overview
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. The Company acquired the remaining 20%
interest in Kilovac and refinanced the secured bank debt and subordinated debt
of Parent, and Parent redeemed such preferred stock in conjunction with the
consummation of the Offering and the Transactions.
In November 1995, the Company formed a joint venture, CII Guardian
International, Ltd., in India with Guardian Controls, Ltd., an Indian company
("Guardian Controls"), Kerala State Industrial Development Corporation
("KSIDC"), and certain other investors (the "Indian Joint Venture"). The
Company initially had a 28% interest in the Indian Joint Venture. As of
December 31, 1997, the Company has a 30% interest in the Indian Joint Venture,
Guardian Controls has a 30% interest in the Indian Joint Venture, KSIDC has a
15% interest, and the remaining 25% interest is held by certain financial
investors in India. The Indian Joint Venture started production in the fourth
quarter of 1996.
In July 1996, the Company acquired certain assets and assumed certain
liabilities of Hartman Electrical Manufacturing, a division of Figgie for
$12.0 million, excluding acquisition costs. The Company financed the Hartman
Acquisition with secured bank debt, which was refinanced in conjunction with
the consummation of the Offering and the Transactions.
In October 1997, the Company purchased 100% ownership in ibex for $2.0
million (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 its Senior Credit Facility.
In December 1997, the Company purchased certain assets and assumed certain
liabilities of the Genicom Relay Division ("GRD") from Genicom Corporation in
Waynesboro, Virginia ("Genicom") for $4.7 million. The Company financed the
GRD Acquisition with funds borrowed on its Senior Credit Facility.
The Company has improved gross margins in recent years primarily due to
increased production volumes at existing facilities as a result of the
acquisition of product lines which have been incorporated into the Company's
existing manufacturing facilities, economies of scale, 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 for the periods indicated information derived
from the consolidated statements of operations expressed as a percentage of
net sales. There can be no assurance that the trends in operating results will
continue in the future.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net Sales............................................ 100.0% 100.0% 100.0%
Cost of sales........................................ 71.9 70.5 66.6
----- ----- -----
Gross profit......................................... 28.1 29.5 33.4
Selling expenses..................................... 8.1 7.4 6.8
General and administrative expenses.................. 8.3 8.2 8.3
Research and development............................. 0.8 1.5 1.2
Other expenses....................................... 11.4 0.9 1.1
----- ----- -----
Operating income (loss).............................. (0.5) 11.5 16.0
</TABLE>
10
<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales of the Company for 1997 increased by $23.1 million, or 34.8%, to
$89.4 million from $66.3 million in 1996. The increase was due primarily to
(i) the full year effect of the Hartman Acquisition which represented $23.6
million in net sales in 1997, an increase of $13.4 million from $10.2 million
in net sales for the period from July 3, 1996 (the date following the date of
the Hartman Acquisition) to December 31, 1996, (ii) the ibex Acquisition which
represented $451,000 in net sales for the period from November 1, 1997 (the
date following the date of the ibex Acquisition) to December 31, 1997 and
(iii) the GRD Acquisition which represented $560,000 in net sales for the
period from December 2, 1997 (the date following the date of the GRD
Acquisition) to December 31, 1997. Excluding the effect of the Hartman
Acquisition, the ibex Acquisition, and the GRD Acquisition, net sales of the
Company for 1997 increased $8.7 million, or 15.4%, to $64.8 million from $56.2
million in 1996, primarily as a result of a $6.7 million increase in net sales
of high performance products and a $1.7 million increase in net sales of
general purpose relays. The Company attributes this increase in net sales to
growth in end use markets, market share gains, and introduction of new
products.
Gross profit of the Company for 1997 increased $10.3 million, or 52.6%, to
$29.8 million from $19.6 million in 1996. The Company's gross profit as a
percentage of net sales increased to 33.4% in 1997 from 29.5% in 1996. Such
increase was primarily due to the full year effect of the Hartman Acquisition.
Excluding the effect of the Hartman Acquisition, the ibex Acquisition, and the
GRD Acquisition, gross profit of the Company increased $4.5 million, or 25.4%,
to $22.3 million from $17.8 million in 1996. Excluding the Hartman
Acquisition, the ibex Acquisition and the GRD acquisition, the Company's gross
profit as a percentage of net sales increased to 34.5% in 1997 from 31.7% in
1996. The increase in gross profit as a percentage of net sales was primarily
due to improved yields, productivity and cost reductions.
Selling expenses for the Company in 1997 increased $1.2 million, or 23.9%,
to $6.1 million from $4.9 million in 1996. Such increase was due primarily to
the full year effect of the Hartman Acquisition. Selling expenses for the
Company as a percentage of net sales decreased to 6.8% in 1997 from 7.4% in
1996. Excluding the Hartman Acquisition, the ibex acquisition and the GRD
Acquisition, selling expenses for the Company increased $735,000, or 15.8%, to
$5.4 million in 1997 from $4.6 million in 1996. Such increase was primarily
due to additional commissions on higher sales volume , additional personnel
costs and increased advertising costs. Excluding the Hartman Acquisition, the
ibex Acquisition and the GRD Acquisition, selling expenses for the Company as
a percentage of net sales was 8.3% in 1997 and 1996.
General and administrative expenses for the Company in 1997 increased $2.0
million, or 36.0%, to $7.4 million from $5.5 million in 1996. Such increase
was due primarily to the full year effect of the Hartman Acquisition. General
and administrative expenses as a percentage of net sales increased to 8.3% in
1997 from 8.2% in 1996. Excluding the Hartman Acquisition, the ibex
Acquisition, and the GRD Acquisition, general and administrative expenses
increased $1.4 million, or 29.5%, to $6.2 million from $4.8 million in 1996.
Such increase was due primarily to additional personnel and compensation costs
and bad debt expense. The bad debt expense relates primarily to the
collectibility of accounts receivable from a single customer in relation to a
dispute over product specification. Excluding the Hartman Acquisition, the
ibex Acquisition, and the GRD Acquisition, general and administrative expenses
as a percentage of net sales increased to 9.5% in 1997 from 8.5% in 1996.
Research and development expenses for the Company in 1997 increased $79,000,
or 7.8%, to $1.1 million from $1.0 million in 1996. Research and development
expenses as a percentage of net sales decreased to 1.2% in 1997 from 1.5% in
1996. Excluding the effect of the Hartman Acquisition, the ibex Acquisition,
and the GRD Acquisition, research and development expenses for the Company
decreased $44,000, or (4.4%), to $967,000 from $1.0 million in 1996. Such
decrease was primarily due to the reallocation of engineering resources to
cost reduction projects in product manufacturing. Excluding the Hartman
Acquisition, the ibex Acquisition, and the GRD Acquisition, research and
development expenses as a percentage of net sales decreased to 1.5% in 1997
from 1.8% in 1996.
11
<PAGE>
Amortization of goodwill and other intangible assets of the Company in 1997
increased $105,000, or 19.3%, to $648,000 from $543,000 in 1996. Such increase
was due primarily to the full year effect of the Hartman Acquisition and
additional goodwill amortization associated with the Kilovac Purchase and the
ibex Acquisition.
Special acquisition expenses were $260,000 in 1997. The expenses related
primarily to one-time expenses associated with the transition of GRD from its
prior owner to the Company. There were no such expenses in 1996.
Interest expense and other financing costs, including cancellation fees, of
the Company for 1997 increased $2.3 million, or 45.9%, to $7.4 million from
$5.1 million in 1996. Interest expense in 1997 includes other financing costs
related to the Recapitalization of $917,000 for the success fee associated
with the repayment of the Old Credit Facility. 1996 interest expense includes
other financing costs of $1.6 million associated with a withdrawn initial
public offering of the Parent. Excluding the other financing costs in 1996 and
1997, interest expense increased by $2.2 million or 65.0%. Such increase was
due primarily to the additional interest expense on the 10% Senior
Subordinated Notes. Interest expense includes the accrual of the success fee,
amortization of loan origination fees, commitment fees related to the Senior
Credit Facility and other miscellaneous interest expenses including the
portion of rental expense on capitalized leases allocable to interest.
Cancellation fees reflect $800,000 of commitment fees and other expenses
incurred in connection with a credit facility to provide financing in event
the Offering was not consummated.
Other expense of the Company for 1997 was $17,000 as compared to $201,000 of
other income in 1996. The fluctuation resulted primarily from the recognition
of the gain on sale of certain high performance relay product line assets
during 1996.
Income tax expense was $2.8 million in 1997, compared to expense of $1.1
million in 1996. Income taxes as a percentage of income before taxes were
40.9% in 1997 and 40.3% in 1996. The increase in percentage is due primarily
to increased effective state tax rate.
The extraordinary item in 1997 reflects the write-off of unamortized
deferred financing costs associated with the Old Credit Facility, net of
income tax benefit of $266,000.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales of the Company for 1996 increased by $26.4 million, or 66.2%, to
$66.3 million from $39.9 million in 1995. The increase was primarily due to
(i) the full year effect of the Kilovac Acquisition which represented $14.9
million in net sales in 1996, an increase of $11.2 million from $3.7 million
in net sales for the period from October 12, 1995 (the date following the date
of the Kilovac Acquisition) to December 31, 1995 and (ii) the Hartman
Acquisition which represented $10.2 million in net sales for the period from
July 3, 1996 (the date following the date of the Hartman Acquisition) to
December 31, 1996. Excluding the Hartman Acquisition and the Kilovac
Acquisition, net sales of the Company for 1996 increased $5.0 million, or
13.9%, to $41.3 million from $36.2 million in 1995, primarily as a result of a
$3.4 million increase in net sales of high performance relays and a $894,000
increase in net sales of electronic products. The Company attributes this
increase to market share gain, improved market prices, growth in end use
markets, and new products.
Gross profit for the Company for 1996 increased $8.3 million, or 74.1%, to
$19.6 million from $11.2 million in 1995. The Company's gross profit as a
percentage of net sales increased to 29.5% in 1996 from 28.1% in 1995. Such
increase was due primarily to (i) the full year effect of the Kilovac
Acquisition and (ii) the Hartman Acquisition. Excluding the Hartman
Acquisition and the Kilovac Acquisition, the gross profit of the Company for
1996 increased $1.9 million, or 20.1%, to $11.3 million from $9.4 million in
1995. Excluding the Hartman Acquisition and the Kilovac Acquisition, the gross
profit as a percentage of net sales increased to 27.4% in 1996 from 26.0% in
1995. The increase in gross profit as a percentage of net sales were primarily
due to improved market prices, cost reductions, and the decrease in overhead
cost per unit produced, offset by additional inventory provisions of
approximately $400,000 due to a reassessment of slow moving inventory.
12
<PAGE>
Selling expenses for the Company in 1996 increased $1.7 million, or 51.8%,
to $4.9 million from $3.2 million in 1995. Such increase was due primarily to
(i) the full year effect of the Kilovac Acquisition and (ii) the Hartman
Acquisition. Selling expenses for the Company as a percentage of net sales
decreased to 7.4% in 1996 from 8.1% in 1995. Excluding the Hartman Acquisition
and the Kilovac Acquisition, selling expenses for the Company in 1996 remained
substantially unchanged. Excluding the Hartman Acquisition and the Kilovac
Acquisition, selling expenses as a percentage of net sales decreased to 6.7%
in 1996 from 7.6% in 1995. The decrease in selling expenses as a percentage of
net sales is attributable to the restructuring of commissions at one of the
Company's divisions and stable fixed costs.
General and administrative expenses for the Company in 1996 increased $2.1
million, or 64.3%, to $5.5 million from $3.3 million in 1995. Such increase
was primarily due to (i) the full year effect of the Kilovac Acquisition and
(ii) the Hartman Acquisition. General and administrative expenses for the
Company as a percentage of net sales decreased to 8.2% in 1996 from 8.3% in
1995. Excluding the Hartman Acquisition and the Kilovac Acquisition, general
and administrative expenses for the Company in 1996 increased $392,000, or
14.0%, to $3.2 million from $2.8 million in 1995. Such increase in general and
administrative expenses was primarily due to increased management compensation
and the reclassification of certain management personnel mainly from
manufacturing overhead due to a change in job functions. Excluding the Hartman
Acquisition and the Kilovac Acquisition, general and administrative expenses
for the Company as a percentage of net sales was 7.7% in 1995 and 1996.
Research and development expenses for the Company in 1996 increased
$710,000, or 235.9%, to $1.0 million from $301,000 in 1995. Such increase was
primarily due to the full year effect of the Kilovac Acquisition. Research and
development expenses for the Company as a percentage of net sales increased to
1.5% in 1996 from 0.8% in 1995. Excluding the Hartman Acquisition and the
Kilovac Acquisition, research and development expenses for the Company in 1996
increased $89,000, or 74.2%, to $209,000 from $120,000 in 1995. Such increase
was primarily due to the addition of engineering personnel. Excluding the
Hartman Acquisition and Kilovac Acquisition, research and development costs
for the Company as a percentage of net sales increased to 0.5% in 1996 from
0.3% in 1995.
Amortization of goodwill and other intangible assets of the Company in 1996
increased $292,000, or 116.3%, to $543,000 from $251,000 in 1995. Such
increase primarily reflects (i) the full year effect of the Kilovac
Acquisition and (ii) the Hartman Acquisition.
During 1995, the Company recorded a special compensation charge of $1.3
million, which represents (i) the difference between the purchase price of
common stock of the parent sold to seven employees on December 1, 1995 and the
estimated fair market value of such shares (based upon the appraised value at
December 1, 1995) and (ii) a related special cash bonus granted by the Company
to the same seven employees to pay taxes associated with such stock issuances.
No such costs were incurred in 1996.
During 1995, the Company recorded a non-recurring charge of $951,000, which
represents primarily the costs incurred to date and the present value of the
estimated future costs payable by the Company over the next 30 years for
groundwater remediation at the Fairview facility. During 1995 the Company
entered into a settlement with the prior owners of the Fairview facility which
determined the liability, as between the two parties, for current and future
expenses related to the remediation of the facility. See "Business--
Environmental Matters." No such costs were incurred in 1996.
Special acquisition expenses were $2.1 million in 1995. These expenses
related primarily to (i) the relocation of certain assets acquired from Hi-G
Company, Inc. and Deutsch Relays, Inc. to a new manufacturing facility in
Asheville, North Carolina and the commencement of production at such facility
and (ii) the write-off of a contract with a business development consultant.
No such costs were incurred in 1996.
Interest expense for the year ended December 31, 1996 increased $2.7
million, or 118.9%, to $5.1 million from $2.3 million for the year ended
December 31, 1995. This increase was caused by the expenses related to a
13
<PAGE>
withdrawn initial public offering ($1.6 million), the full year effect of the
additional borrowings for the Kilovac Acquisition and the additional
borrowings for the Hartman Acquisition. In the year ended December 31, 1996,
the average amount of Senior Debt was $27.1 million at an average interest
rate of 10.2%, compared to an average Senior Debt of $15.6 million at an
average rate of 10.7% for the year ended December 31, 1995. Interest expense
includes the accrual of the success fee, amortization of loan origination
fees, commitment fees related to the Senior Credit Facility and other
miscellaneous interest expenses including the portion of rental expense on
capitalized leases allocable to interest.
Other income of the Company increased to $201,000 in 1996 from $2,000 in
1995. The increase in other income resulted from recognition of 72% of the net
gain on the sale of certain high performance relay product line assets to the
Indian Joint Venture. Due to the Company's 28% ownership at that time of the
Indian Joint Venture, 28% of the net gain had been deferred.
Income taxes were an expense of $1.1 million in 1996, compared to a benefit
of $812,000 in the same period in 1995. Income taxes (benefit) as a percentage
of income (loss) before taxes were 40.3% in 1996 compared to 32.5% in 1995.
The increase in the effective tax rate is due to having profit before taxes as
opposed to a loss before taxes as in 1995.
Liquidity and Capital Resources
Cash provided by operating activities was $6.4 million in 1997, $8.5 million
in 1996 and $2.0 million in 1995.The decrease in cash provided by operations
from 1996 to 1997 is primarily due to (i) the one time payment of items
related to the Recapitalization including $1.5 million for the success fee and
$800,000 for commitment fees and other expenses incurred in connection with a
credit facility set up to provide financing in event the Offering was not
consummated, (ii) increases in accounts receivable due to higher revenues and
decreases in accounts payable offset by (iii) higher profitability and
decreases in inventory.The average days' sales outstanding for accounts
receivable was approximately 53 trade days at December 31, 1996 and 47 trade
days at December 31, 1997. The decrease in average days' sales outstanding can
be attributed to increased collection efforts. The increase in cash provided
by operating activities from 1995 to 1996 was mainly due to improved
collections of accounts receivable, reductions in inventory, increases in
accounts payable and improved operating results.
The Company's inventories increased from $17.1 million at year end 1996 to
$19.4 million at 1997. Of this increase, $3.8 million was attributable to the
GRD Acquisition and $456,000 was attributable to the ibex Acquisition. These
increases were offset by the sale of inventory associated with the planned
cessation of production of a product line acquired in the Hartman Acquisition
and improved inventory planning techniques. The Company's inventories
increased from $10.6 million at year end 1995 to $17.1 million at year-end
1996. Of this increase $7.1 million was attributable to the Hartman
Acquisition. This increase was also offset by a $300,000 reduction of
inventory associated with the sale of certain high performance relay product
line assets to the Indian Joint Venture and by improved inventory planning
techniques.
The Company's accounts payable decreased from $5.1 million at year-end 1996
to $4.8 million at year end 1997. The decrease is due primarily to lower
inventory purchases offset by $476,000 of accounts payable assumed in the ibex
Acquisition. The Company's accounts payable increased from $2.6 million at
year-end 1995 to $5.1 million at year end 1996. This increase was due
primarily to the Hartman Acquisition and also to increases in purchases to
support the Company's continued growth.
Cash used in investing activities was $12.7 million, $14.5 million and $15.5
million in 1997, 1996 and 1995, respectively. Cash provided by financing
activities was $6.4 million, $6.0 million and $13.6 million in 1997, 1996 and
1995, respectively.
The Company has historically financed its operations and acquisitions
through a combination of internally generated funds and secured borrowings.
The Company financed the Hartman Acquisition (approximately $13.0 million in
borrowings) with borrowings under the Old Credit Facility. The Company
financed the purchase of the remaining 20% of Kilovac with proceeds from its
bond offering. The Company financed the ibex Acquisition with borrowings on
its Senior Credit Facility (approximately $1.3 million) and the issuance of a
non interest-bearing note in the amount of $850,000 payable to the sellers on
October 31, 1999. The Company financed the GRD Acquisition with borrowings on
its Senior Credit Facility of $4.7 million.
14
<PAGE>
Capital expenditures, excluding the Hartman Acquisition, the Kilovac
Acquisition, the Kilovac Purchase, the ibex Acquisition and the GRD
Acquisition, were $2.1 million in 1997, $2.4 million in 1996 and $1.1 million
in 1995. In 1997, capital expenditures included approximately $609,000 for
increased capacity, approximately $891,000 for increased efficiency,
approximately $456,000 for equipment replacement and rework and approximately
$190,000 for equipment relating to new products. In 1996, capital expenditures
included approximately $1.5 million for increased capacity, approximately
$318,000 for increased efficiency and approximately $644,000 for equipment
replacement and rework. In 1995, capital expenditures included $414,000 for
improvements to the Asheville facility, $133,000 for the acquisition of
equipment for a high performance relay product line and $112,000 of capital
expenditures for Kilovac. Acquisition spending totaled $10.6 million in 1997,
$12.7 million in 1996 and $14.3 million in 1995.
On September 18, 1997, the Company applied the proceeds of the Notes,
together with borrowings under the Senior Credit Facility, to repay all
outstanding obligations under the Old Credit Facility and to pay a dividend to
the Parent. In connection with the Offering, the Company also paid to its
existing senior lenders under the Old Credit Facility a success fee in the
amount of approximately $1.5 million. In connection with the Offering, the
Company also entered into the Senior Credit Facility, which enables the
Company to borrow up to $25.0 million, subject to certain borrowing
conditions. The Senior Credit Facility is available for general corporate and
working capital purposes and to finance acquisitions and is secured by the
Company's assets.
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 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
be dependent 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.
Instruments governing the Company's indebtedness, including the Senior
Credit Facility and the Indenture dated as of September 18, 1997 by and among
the Company, Kilovac Corporation, Kilovac International, Inc. and Norwest Bank
Minnesota, National Association, contain financial and other covenants that
restrict, among other things, the Company's ability to incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of substantially all of the
assets of the Company.
Such limitations, together with the highly leveraged nature of the Company,
could limit corporate and operating activities, including the Company's
ability to respond to changing market conditions, to provide for unanticipated
capital investments or to take advantage of business opportunities.
Inflation
The Company does not believe inflation has had any material effect on the
Company's business over the past three years.
Impact of 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, and profit or loss.
15
<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
date-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 already 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 or
results of operations 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 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On April 24, 1998, the Registrant had a market capitalization of $2.5
billion or less and accordingly, such disclosures are not required in this
Annual Report on Form 10-K. Such disclosures will be included in filings that
include financial statements for fiscal years ended after June 15, 1998.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed as a separate
section of this report.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
16
<PAGE>
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The executive officers and directors of the Company, and their ages and
position with the Company as of December 31, 1997 are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION OR AFFILIATION
---- --- -----------------------
<C> <C> <S>
Ramzi A. Dabbagh 63 Chairman of the Board, Chief Executive Officer,
President and Director
Michael A. Steinback 43 Chief Operating Officer and Director
G. Daniel Taylor 61 Executive Vice President of Business Development
and Director
David Henning 50 Chief Financial Officer
Theodore H. Anderson 41 Vice President
Daniel R. McAllister 44 Vice President
Jim R. Mikesell 55 Vice President
Carl R. Freas 59 Vice President
Brian P. Simmons 37 Director
Andrew W. Code 39 Director
Steven R. Brown 28 Director
Jon S. Vesely 32 Director
Donald E. Dangott 65 Director
</TABLE>
The present principal occupations and recent employment history of each of
the executive officers and directors of the Company listed above are set forth
below:
Ramzi A. Dabbagh is the Chairman of the Board, Chief Executive Officer and
President of the Company. He served as President of Communications Instruments
from 1982 to 1995. Mr. Dabbagh served as President and Chairman of the
National Association of Relay Manufacturers ("NARM") from 1991 to 1993 and has
been a director of NARM since 1990.
Michael A. Steinback became Chief Operating Officer of CII and a director of
the Company in 1995. He served as the Vice President of Operations of CII from
1994 to 1995. From 1990 to 1993, Mr. Steinback was Vice President of Sales and
Marketing for CP Clare Corporation. Mr. Steinback has served on the Board of
Directors of NARM for two years.
G. Daniel Taylor has been the Executive Vice President of Business
Development of the Company since 1995 and a director of the Company since
1993. He served as a director of Kilovac from 1995 to 1997. He joined the
Company in 1981 as Vice President of Engineering and Marketing and became
Executive Vice President in 1984. He has served as the Company's
representative to NARM and has acted as an advisor to the National Aeronautics
and Space Administration (NASA) for relay applications and testing procedures
since 1967.
David Henning became Chief Financial Officer of the Company in 1994. He held
various positions at CP Clare Corporation from 1971 to 1994 including Chief
Financial Officer from 1992 to 1994.
17
<PAGE>
Theodore H. Anderson joined the Company in 1993 as Vice President and
General Manager of the Juarez, Mexico operations and was promoted to Vice
President and General Manager of North Carolina operations in January 1997.
Mr. Anderson was employed by CP Clare Corporation from 1990 to 1993 as Product
Marketing Manager, and was previously employed by Midtex Relays, Inc. as its
General Manager from 1986 to 1990 at which time he joined CP Clare
Corporation.
Daniel R. McAllister has served as the Vice President of the Company and
Vice President of Manufacturing and Engineering of Kilovac since the Kilovac
Acquisition in 1995 and had served as Vice President of Product Development of
Kilovac since 1990.
James R. Mikesell joined the Company as Vice President and General Manager
of Hartman in 1996 upon the completion of the Hartman Acquisition. Mr.
Mikesell joined Hartman Electrical Manufacturing in 1994, from IMO Industries,
where he had been the General Manager of their Controlex Division for the
previous five years.
Carl R. Freas has been Vice President and General Manager of the Juarez,
Mexico operations since December 1997 and previously served as director of
manufacturing since 1993. Mr. Freas was employed by Seimens Electromechanical
Division from 1984 to 1990 and held the position as Plant Manager, was self-
employed from 1990 to 1993 as a business consultant and small business owner,
at which time he joined the Company as Director of Manufacturing. He was
promoted to General Manager of the Company in January 1997 and then to Vice
President in December 1997.
Brian P. Simmons is a Principal of Code, Hennessy & Simmons, Inc. Since
founding Code, Hennessy & Simmons, Inc. in 1988, Mr. Simmons has been actively
involved in the investment origination and investment management activities of
such company. Prior to founding Code, Hennessy & Simmons, Inc., Mr. Simmons
was a Vice President with Citicorp's Leveraged Capital Group and before that
was employed by Mellon Bank.
Andrew W. Code is a Principal of Code, Hennessy & Simmons, Inc. Since
founding Code, Hennessy & Simmons, Inc. in 1988, Mr. Code has been actively
involved in the investment organization and investment management activities
of such company. Prior to founding Code, Hennessy & Simmons, Inc., Mr. Code
was a Vice President with Citicorp's Leveraged Capital Group and before that
was employed by American National Bank.
Steven R. Brown is a Vice President of Code, Hennessy & Simmons, Inc. Mr.
Brown was employed by Heller Financial from 1991 until 1994 at which time he
joined Code, Hennessy & Simmons, Inc. Mr. Brown held various positions within
Heller's commercial leveraged lending and real estate departments.
Jon S. Vesely is a Principal of Code, Hennessy & Simmons, Inc. Prior to
joining Code, Hennessy & Simmons, Inc. in 1991, Mr. Vesely was employed by
First Chicago Corporation in its leveraged leasing group.
Donald E. Dangott has served as a director of the Company from 1994 to
September 17, 1997, and from October 30, 1997 to present. He held various
positions at Eaton Corporation until 1993, including serving as the director
of Business Development Commercial and Military Controls Operations from 1990
to 1993, and he presently serves as a business development consultant. He is
the Executive Director and a member of the Board of Directors of the NARM.
ITEM 11--EXECUTIVE COMPENSATION
Executive Compensation
The following sets forth a summary of all compensation paid to the chief
executive officer and the three other executive officers of the Company (the
"Named Executive Officers") for services rendered in all capacities to the
Company for the year ended December 31, 1997.
18
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION (1)
--------------------------- -------- -------- ------------ ----------------
<S> <C> <C> <C> <C>
Ramzi A. Dabbagh.............. $190,275 $257,421 $24,973 $7,322
Chairman, President and Chief
Executive Officer
Michael A. Steinback.......... $152,813 $217,434 $10,598 $ 834
Chief Operating Officer
G. Daniel Taylor.............. $122,080 $184,663 $14,453 $4,458
Executive Vice President of
Business Development
David Henning................. $110,972 $172,761 $ 6,000 $1,639
Chief Financial Officer
</TABLE>
- --------
(1) These amounts represent insurance premiums paid by the Company with
respect to term life insurance.
Executive compensation is determined by the compensation committee of the
Company's Board of Directors (the "Compensation Committee"). The Compensation
Committee is composed of Brian P. Simmons and Steven R. Brown. None of the
Company's directors other than Donald E. Dangott receive compensation for
services as directors. Mr. Dangott receives compensation for his services as a
director in the amount of the greater of $1,000 per meeting or $1,000 per day
of service.
Employment Agreements
The Company is party to employment agreements with Messrs. Dabbagh and
Taylor which terminate in May, 1998 and provide for annual base salaries of
$193,767 and $124,323, respectively. In addition, the employment agreements
provide that both of these executive officers are entitled to participate in a
bonus pool based upon the performance of the Company as established by the
Board of Directors, and such other employee benefit plans and other benefits
and incentives as the Board of Directors of the Company shall determine from
time to time. Under the employment agreements, each of Messrs. Dabbagh and
Taylor agrees that during the period of such agreement and for one year
thereafter such executive officer will not (i) become employed by or in any
other way associated with a business similar to that of the Company, (ii)
solicit any business similar to that of the Company from any of its customers
or clients or (iii) encourage any employees of the Company which have been
employed by the Company for one year or less to enter into any employment
agreement or perform any services for any other organization or enter into any
other business. The agreements also provide that while employed by the
Company, neither of the executive officers may have a financial or other
interest in a supplier, customer, client or competitor of the Company
(provided that maintaining a financial interest equal to the lesser of
$100,000 in or 1% ownership of a public company is not precluded). The
employment agreements may be terminated immediately by the Company for cause
(as defined therein) or within three months after the death or disability of
the employee as determined in good faith by the Board of Directors of the
Company. The Company maintains key-man life insurance on Messrs. Dabbagh and
Taylor and has agreed to pay out of the proceeds of such policy three years'
salary to the estate of either officer in the event of the death of such
officer.
The Company is party to employment agreements with Messrs. Steinback and
Henning which expire in April, 1998 and December, 1998, respectively, and are
subject to automatic renewal unless either the Company or such employee elects
to terminate such agreement. Messrs. Steinback and Henning are entitled to
receive annual salaries (subject to annual review) of $155,625 and $113,015,
respectively, annual auto allowances, and other standard employee benefits
applicable to the Company's other executive officers, and are entitled to
participate in the Company's executive bonus plan. Mr. Steinback and Mr.
Henning are entitled to receive full salary and benefits for a year if either
is terminated at any time during such year.
19
<PAGE>
Stock Option Plan
Parent has established a stock option plan (the "Plan") which will provide
for the granting of options and other stock-based awards to officers and
employees of Parent and the Company representing up to 5.4% of Parent's
outstanding capital stock on a fully-diluted basis. No options or other stock-
based awards had issued under the Plan at December 31, 1997.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Parent owns all of the Company's issued and outstanding capital stock. The
following table sets forth certain information regarding beneficial ownership
of the common stock of Parent after the consummation of the Recapitalization
by (i) each stockholder who the Company expects will own beneficially more
than 5% of the outstanding capital stock of Parent and (ii) each director,
each Named Executive Officer and all directors and executive officers of the
Company as a group. Except as set forth in the footnotes to the table, each
stockholder listed below has informed the Company that such stockholder has
sole voting and investment power with respect to the shares of common stock of
the Parent beneficially owned by such stockholder.
<TABLE>
<CAPTION>
SHARES OF PARENT
COMMON STOCK
BENEFICIALLY OWNED(1)
-----------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ----------- -----------
<S> <C> <C>
Code, Hennessy & Simmons III, L. P. (2)........... 736,180 72.6%
TCW/Crescent Mezzanine, L.L.C. (3)................ 90,101 8.8%
Ramzi A. Dabbagh (4).............................. 48,000 4.7%
Michael A. Steinback (4).......................... 30,480 3.0%
G. Daniel Taylor (4).............................. 20,000 2.0%
David Henning (4)................................. 10,940 1.1%
Brian P. Simmons (5) (6).......................... 736,180 72.6%
Andrew W. Code (5) (6)............................ 736,180 72.6%
Jon S. Vesely (6)................................. -- --
Steven R. Brown (6)............................... -- --
Donald E. Dangott................................. 5,600 *
Directors and executive officers as a group (14
persons)......................................... 873,200 86.1%
</TABLE>
- --------
*Amount represents less than 1.0% ownership
(1) Pursuant to rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person has beneficial ownership of any securities as to which
such person, directly or indirectly, through any contract, arrangement,
undertaking, relationship or otherwise has or shares voting power and/or
investment power and as to which such person has the right to acquire such
voting and/or investment power within 60 days. Percentage of beneficial
ownership as to any person as of a particular date is calculated by
dividing the number of shares beneficially owned by such person by the sum
of the number of shares outstanding as of such date and the number of
shares as to which such person has the right to acquire voting and/or
investment power within 60 days. The figures shown above do not take into
account any shares of common stock of Parent issuable upon exercise of
stock options to be granted at or subsequent to the date of the
Recapitalization.
(2) The address of Code, Hennessy & Simmons III, L. P. is 10 South Wacker
Drive, Suite 3175, Chicago, Illinois 60606.
(3) Includes shares of common stock held by certain affiliates of TCW/Crescent
Mezzanine, L.L.C. ("TCW/Crescent LLC") listed herein, and also includes
10,101 shares of common stock that TCW will have the right to acquire upon
exercise of certain warrants issued to TCW in connection with the
Recapitalization. TCW/Crescent LLC is the general partner of (i)
TCW/Crescent Mezzanine Partners, L. P. (the "L. P."), which holds 6.0% of
the Parent's outstanding common stock and (ii) TCW/Crescent Mezzanine
Investment Partners, L. P. (the "Investment L. P."). The managing owner of
TCW/Crescent
20
<PAGE>
Mezzanine Trust (the "Trust") is TCW/Crescent LLC. The general partner of
TCW Shared Opportunity Fund II, L. P. ("SHOP II") is TCW Investment
Management Corporation ("TIMCO"). The investment adviser of TCW Leveraged
Income Trust, L. P. ("LINC") is TIMCO. The investment adviser of
Crescent/Mach I Partners, L. P. ("MACH I") is TCW Asset Management Company
("TAMCO"). The entities referred to above are hereinafter collectively
referred to as "TCW". TCW holds 100% of the Parent's outstanding warrants
to purchase 10,101 shares of common stock; the L. P. holds 67.6% of the
warrants, and the Trust holds 20.6% of the warrants. Messrs. Mark
Attanasio, Robert Beyer, Jean-Marc Chapus and Mark Gold are portfolio
managers of one or more of the L. P. Investment L. P., Trust, SHOP II, MACH
I or LINC, and with respect to such entities, exercise voting and
dispositive powers on their behalf. The address of TCW is 11100 Santa
Monica Boulevard, Suite 200, Los Angeles, California 94111.
(4) The address of each such person is c/o CII Technologies Inc., 1396
Charlotte Highway, Fairview, North Carolina 28730.
(5) All of such shares are held of record by Code, Hennessy & Simmons III, L.
P. Messrs. Simmons and Code are officers, directors and stockholders of
Code, Hennessy & Simmons, Inc., the sole general partner of CHS Management
III, L. P., the sole general partner of Code, Hennessy & Simmons III, L.
P. Messrs. Simmons and Code disclaim beneficial ownership of such shares.
(6)The address of each such person is c/o Code, Hennessy & Simmons, Inc., 10
South Wacker Drive, Suite 3175, Chicago, IL 60606.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
In connection with the Recapitalization, the Company entered into a
Management Agreement with CHS Management III, L. P. ("CHS Management"), an
affiliate of Code, Hennessy & Simmons, Inc. pursuant to which CHS Management
will provide financial and management consulting services to the Company and
receive a monthly fee of $41,667. In addition, pursuant to the Management
Agreement, the Company and the Parent paid an aggregate of $500,000 to CHS
Management at the closing of the Transactions as compensation for services
rendered in connection with the Transactions. The Management Agreement also
provides that when and as the Company consummates the acquisition of other
businesses, the Company will pay to CHS Management a fee equal to one percent
of the acquisition price of each such business as compensation for services
rendered by CHS Management to the Company in connection with the consummation
of such acquisition. The term of the Management Agreement is five years,
subject to automatic renewal unless either CHS Management or the Company
elects to terminate; provided that the Management Agreement will terminate
automatically upon the occurrence of a change of control of the Company. The
Company believes that the fees to be paid to CHS Management for the
professional services to be rendered are at least as favorable to the Company
as those which could be negotiated with an unrelated third party. The Company
also reimbursed CHS Management for expenses incurred in connection with the
Transactions and with its services rendered to the Company and Parent.
Stockholders Agreement
In connection with the Recapitalization, Parent's stockholders entered into
a Stockholders Agreement. This agreement provides, among other things, for the
nomination of and voting for at least seven directors of Parent by Parent's
stockholders. The Stockholders Agreement also provides the number of directors
(subject to a minimum of seven) to be determined by Code, Hennessy & Simmons,
Inc. The following individuals were initially designated by Code, Hennessy &
Simmons, Inc. to serve as directors of Parent: Ramzi A. Dabbagh, Michael A.
Steinback, G. Daniel Taylor, Brian P. Simmons, Andrew W. Code, Jon S. Vesely,
and Steve R. Brown. See Item 10--"Directors and Executive Officers of the
Registrant."
Registration Agreement
In connection with the Recapitalization, Parent's stockholders entered into
a Registration Agreement. The Registration Agreement grants certain demand
registration rights to Code, Hennessy & Simmons. An unlimited
21
<PAGE>
number of such demand registrations may be requested by Code, Hennessy &
Simmons. In the event that Code, Hennessy & Simmons makes such a demand
registration request, all other stockholders of Parent will be entitled to
participate in such registration on a pro rata basis (based on shares held).
Code, Hennessy & Simmons may request, pursuant to its demand registration
rights, and each other stockholder may request, pursuant to his or its
participation rights, that up to all of such stockholder's shares of common
stock be registered by Parent. Parent is entitled to postpone such a demand
registration for up to 180 days under certain circumstances. In addition, the
parties to the Registration Agreement are granted certain rights to have
shares included in registrations initiated by Parent or its stockholders
("piggyback registration rights"). Expenses incurred in connection with the
exercise of such demand or piggyback registration rights shall, subject to
limited exceptions, be borne by Parent.
Tax Sharing Agreement
The operations of the Company are included in the Federal income tax returns
filed by Parent. Prior to the closing of the Initial Offering, Parent and the
Company entered into a Tax Sharing Agreement pursuant to which the Company
agreed to advance to Parent (i) so long as Parent files consolidated income
tax returns that include the Company, payments for the Company's share of
income taxes assuming the Company is a stand-alone entity, which in no event
may exceed the group's consolidated tax liabilities for such year, and (ii)
payments to or on behalf of Parent in respect of franchise or similar taxes
and governmental charges incurred by it relating to the business, operations
or finances of the Company.
Recapitalization
In connection with the Recapitalization, and subject to certain adjustments,
Messrs. Dabbagh, Steinback, Taylor, and Henning received approximately $3.47
million, $1.15 million, $1.74 million, and $414,000, respectively, in net cash
proceeds from their sale of shares of Parent and Parent's repayment of
indebtedness owing to them. Upon the satisfaction of certain conditions,
Messrs. Dabbagh, Steinback, Taylor and Henning could receive from funds
escrowed at the time of the consummation of the Transactions approximately
$377,000, $172,000, $222,000 and $62,000, respectively, in net cash proceeds.
Old Credit Facility
Bank of America National Trust and Savings Association ("Bank of America")
was a lender and agent under the Old Credit Facility. A portion of the net
proceeds of the Offering was used to satisfy the obligations outstanding under
the Old Credit Facility. As a result of such repayment, Bank of America, as
agent under the Old Credit Facility for the benefit of all the existing
lenders thereunder, received a success fee of $1.5 million. Bank of America is
a lender and the administrative agent in the Senior Credit Facility. Bank of
America is an affiliate of BancAmerica Securities, Inc., one of the Initial
Purchasers. In addition, an affiliate of Bank of America and BancAmerica
Securities, Inc. owns a limited partnership interest in CII Associates, L P.,
which in turn, held a portion of the capital stock and certain indebtedness of
Parent acquired and repaid in connection with the Recapitalization. Subject to
certain adjustments, the net proceeds from the Recapitalization allocable to
such affiliate based on such partnership interest equaled approximately $12.6
million.
PART IV
ITEM 14.--EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)The following documents are filed as a part of this report:
1. Financial Statements.
2. None.
22
<PAGE>
3. EXHIBITS.
<TABLE>
<CAPTION>
<C> <S> <C>
3.1 Articles of Incorporation of the Company is incorporated
by reference to Registration Statement on Form S-4 (File
number 333-38209).
<CAPTION>
<C> <S> <C>
3.2 By-laws of the Company is incorporated by reference to
Registration Statement on Form S-4 (File number 333-
38209).
3.3 Articles of Incorporation of Kilovac Corporation
("Kilovac") is incorporated by reference to Registration
Statement on Form S-4 (File number 333-38209).
3.4 By-laws of Kilovac Corporation is incorporated by refer-
ence to Registration Statement on Form S-4 (File number
333-38209).
3.5 Articles of Incorporation of Kilovac International, Inc.
("Kilovac International") is incorporated by reference to
Registration Statement on Form S-4 (File number 333-
38209).
3.6 By-laws of Kilovac International is incorporated by refer-
ence to Registration Statement on Form S-4 (File number
333-38209).
4.1 Indenture dated as of September 18, 1997 by and among the
Company, Kilovac, Kilovac International and Norwest Bank
Minnesota, National Association is incorporated by refer-
ence to Registration Statement on Form S-4 (File number
333-38209).
4.2 Purchase Agreement dated as of September 12, 1997 between
the Company, Kilovac and Kilovac International and
BancAmerica Securities, Inc. and Salomon Brothers, Inc is
incorporated by reference to Registration Statement on
Form S-4 (File number 333-38209).
4.3 Registration Rights agreement dated as of September 18,
1997 between the Company, Kilovac and Kilovac Interna-
tional and BancAmerica Securities, Inc. and Salomon Broth-
ers, Inc is incorporated by reference to Registration
Statement on Form S-4 (File number 333-38209).
10.1 Employment Agreement dated as of May, 1993 between the
Company and Ramzi A. Dabbagh is incorporated by reference
to Registration Statement on Form S-4 (File number 333-
38209).
10.2 Employment Agreement dated as of May, 1993 between the
Company and G. Daniel Taylor is incorporated by reference
to Registration Statement on Form S-4 (File number 333-
38209).
10.3 Employment Agreement dated as of May, 1993 between the
Company and Michael A. Steinbeck is incorporated by refer-
ence to Registration Statement on Form S-4 (File number
333-38209).
10.4 Employment Agreement dated as of January 7, 1994 between
the Company and David Henning is incorporated by reference
to Registration Statement on Form S-4 (File number 333-
38209).
10.5 Management Agreement, dated as of September 18, 1997 among
the Company, Parent and CHS Management III, L.P. is incor-
porated by reference to Registration Statement on Form S-4
(File number 333-38209).
10.6 Tax Sharing Agreement dated as of September 18, 1997 be-
tween the Company, Parent, Kilovac International and
Kilovac International FSC Ltd. is incorporated by refer-
ence to Registration Statement on Form S-4 (File number
333-38209).
+10.7 Credit Agreement dated as of September 18, 1997 between
the Company, Parent, various banks, Bank of America Na-
tional Trust and Savings Association and BancAmerica Secu-
rities, Inc. is incorporated by reference to Registration
Statement on Form S-4 (File number 333-38209).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.8 Pledge Agreements dated as of September 18, 1997 by Par-
ent, the Company, Kilovac and Kilovac International in fa-
vor of Bank of America Trust and Savings Association is
incorporated by reference to Registration Statement on
Form S-4 (File number 333-38209).
10.9 Subsidiary Guarantee dated as of September 18, 1997 by
Kilovac and Kilovac International in favor of Bank of
America National Trust and Savings Association is incorpo-
rated by reference to Registration Statement on Form S-4
(File number 333-38209).
10.10 Security Agreement dated as of September 18, 1997 among
Parent, the Company, Kilovac and Kilovac International in
favor of Bank of America National Trust and Savings Asso-
ciation is incorporated by reference to Registration
Statement on Form S-4 (File number 333-38209).
10.11 Stock Subscription and Purchase Agreement dated as of Sep-
tember 20, 1995, by and among the Company, Kilovac and the
stockholders and optionholders of Kilovac named therein is
incorporated by reference to Registration Statement on
Form S-4 (File number 333-38209).
<CAPTION>
<C> <S> <C>
10.12+ Asset Purchase Agreement dated as of June 27, 1996 between
the Company and Figgie International Inc. is incorporated
by reference to Registration Statement on Form S-4 (File
number 333-38209).
10.13 Environmental Remediation and Escrow Agreement, dated as
of July 2, 1996 is incorporated by reference to Registra-
tion Statement on Form S-4 (File number 333-38209).
10.14 Lease Agreement dated as of July 2, 1996 by and between
Figgie Properties, Inc. and Communications Instruments,
Inc. dba Hartman Division of CII Technologies Inc. is in-
corporated by reference to Registration Statement on Form
S-4 (File number 333-38209).
10.15 Second Amendment to Stock Subscription and Purchase Agree-
ment dated as of August 26, 1996, by and among the Compa-
ny, Kilovac and certain selling stockholders is incorpo-
rated by reference to Registration Statement on Form S-4
(File number 333-38209).
10.16+ Recapitalization Agreement dated as of August 6, 1997 and
among Parent, certain investors and certain selling stock-
holders is incorporated by reference to Registration
Statement on Form S-4 (File number 333-38209).
10.17 Amendment to the Recapitalization Agreement dated as of
September 18, 1997 by and among Parent, certain investors
and certain selling stockholders is incorporated by refer-
ence to Registration Statement on Form S-4 (File number
333-38209).
10.18 Indemnification and Escrow Agreement dated as of September
18, 1997 by and among Parent, certain investors, certain
selling stockholders and American National Bank and Trust
Company of Chicago is incorporated by reference to Regis-
tration Statement on Form S-4 (File number 333-38209).
10.19 Stockholders Agreement dated September 18, 1997 by and
among Parent and certain of its stockholders is incorpo-
rated by reference to Registration Statement on Form S-4
(File number 333-38209).
10.20 Registration Agreement dated as of September 18, 1997 by
and among Parent and certain of its stockholders is incor-
porated by reference to Registration Statement on Form S-4
(File number 333-38209).
10.21 Form of Junior Subordinated Promissory Note of Parent is
incorporated by reference to Registration Statement on
Form S-4 (File number 333-38209).
10.22 Employment Agreement dated as of October 11, 1995 between
Kilovac and Dan McAllister is incorporated by reference to
Registration Statement on Form S-4 (File number 333-
38209).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.23 Employment Agreement dated as of October 11, 1995 between
Kilovac and Pat McPherson is incorporated by reference to
Registration Statement on Form S-4 (File number 333-
38209).
<CAPTION>
<C> <S> <C>
10.24 Employment Agreement dated as of October 11, 1997 between
Kilovac and Rick Danchuk is incorporated by reference to
Registration Statement on Form S-4 (File number 333-
38209).
10.25 Employment Agreement dated as of October 11, 1997 between
Kilovac and Robert A. Helman is incorporated by reference
to Registration Statement on Form S-4 (File number 333-
38209).
10.26 Asset Purchase Agreement dated as of November 30, 1997 by
and between the Company and Genicom Corporation is incor-
porated by reference to Report on Form 8-K (File Number
333-38209).
12.1 Statement of Computation of Ratios.
21.1 Subsidiaries of the Company, Kilovac and Kilovac Interna-
tional is incorporated by reference to Registration State-
ment on Form S-4 (File number 333-38209).
24.1 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
+ The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule to such agreement upon the request of the Commission in
accordance with Item 601(b)(2) of Regulation S-K.
(b) REPORTS ON FORM 8-K.
None
(c) EXHIBITS. The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) FINANCIAL STATEMENT SCHEDULES. None.
25
<PAGE>
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 ON APRIL 28, 1998.
Communications Instruments, Inc.
*
By:__________________________________
Ramzi A. Dabbagh
Chairman of the Board and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW, BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON APRIL 28, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
* Chairman of the Board, Chief Executive
___________________________________________ Officer, President and Director
Ramzi A. Dabbagh (Principal Executive Officer)
* Chief Financial Officer (Principal
___________________________________________ Financial Officer and Principal
David Henning Accounting Officer)
* Chief Operating Officer and Director
___________________________________________
Michael A. Steinbeck
* Executive Vice President and Business
___________________________________________ Development and Director
G. Daniel Taylor
* Director
___________________________________________
Brian P. Simmons
* Director
___________________________________________
Andrew W. Code
* Director
___________________________________________
Steven R. Brown
* Director
___________________________________________
Jon S. Vesely
</TABLE>
- --------
* The undersigned, by signing his name hereto, does sign and execute this
report pursuant to the Power of Attorney executed by the above named
officers and directors of the registrant and filed with the Securities and
Exchange Commission on behalf of such officers and directors.
/s/ Ramzi A. Dabbagh
_____________________________________
Ramzi A. Dabbagh
Attorney-in-Fact
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1997
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
Communications Instruments, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Communications Instruments, Inc. and Subsidiaries (the "Company"), as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholder's equity (deficiency), and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 the
Company at December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Greenville, South Carolina
March 19, 1998
F-1
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
ASSETS 1997
------ 1996 --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 116 $ 298
Accounts receivable (less allowance for doubtful accounts:
1996--$466;
1997--$796).............................................. 9,245 11,602
Inventories............................................... 17,141 19,377
Deferred income taxes..................................... 1,761 2,130
Other current assets...................................... 600 1,334
------- --------
Total current assets.................................... 28,863 34,741
------- --------
Property, plant and equipment, net.......................... 15,796 16,824
------- --------
Other assets:
Cash restricted for environmental remediation............. 685 445
Environmental settlement receivable....................... 1,104 1,160
Goodwill (net of accumulated amortization: 1996--$448;
1997--$874).............................................. 11,074 16,010
Intangible assets, net.................................... 2,972 6,969
Other noncurrent assets................................... 231 134
------- --------
Total other assets...................................... 16,066 24,718
------- --------
Total assets................................................ $60,725 $ 76,283
======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
-------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 5,059 $ 4,753
Accrued interest.......................................... 269 2,820
Other accrued liabilities................................. 6,869 5,617
Current portion of long-term debt......................... 4,523 56
Current payable due to minority stockholders of
subsidiary............................................... -- 227
------- --------
Total current liabilities............................... 16,720 13,473
Long-term debt.............................................. 26,099 101,566
Accrued environmental remediation costs..................... 2,511 2,364
Deferred income taxes and other liabilities................. 2,883 2,007
Other noncurrent liabilities................................ 762 467
------- --------
Total liabilities....................................... 48,975 119,877
------- --------
Commitments and contingencies
Stockholder's equity (deficiency):
Common stock--$.01 par value; 1,000 shares authorized,
issued and outstanding................................... -- --
Additional paid-in capital................................ 12,317 12,317
Accumulated deficit....................................... (115) (55,827)
Accounts receivable--due from Parent...................... (414) (42)
Currency translation loss, net............................ (38) (42)
------- --------
Total stockholder's equity (deficiency)................. 11,750 (43,594)
------- --------
Total liabilities and stockholder's equity (deficiency)..... $60,725 $ 76,283
======= ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... $39,918 $66,336 $89,436
Cost of sales....................................... 28,687 46,779 59,601
------- ------- -------
Gross margin........................................ 11,231 19,557 29,835
------- ------- -------
Operating expenses:
Selling expenses.................................. 3,229 4,903 6,077
General and administrative expenses............... 3,326 5,464 7,432
Research and development expenses................. 301 1,011 1,090
Amortization of goodwill and other intangible
assets........................................... 251 543 648
Special compensation charge....................... 1,300 -- --
Environmental costs............................... 951 -- --
Acquisition related expenses...................... 2,064 -- 260
------- ------- -------
Total operating expenses........................ 11,422 11,921 15,507
------- ------- -------
Operating income (loss)............................. (191) 7,636 14,328
Other income (expense), net......................... 2 201 (17)
Interest expense and other financing costs, net..... (2,309) (5,055) (6,573)
Cancellation fees................................... -- -- (800)
------- ------- -------
Income (loss) before income taxes, minority interest
and extraordinary item............................. (2,498) 2,782 6,938
Income tax expense (benefit)........................ (812) 1,120 2,836
------- ------- -------
Income (loss) before minority interest and
extraordinary item................................. (1,686) 1,662 4,102
Income applicable to minority interest in
subsidiary......................................... (35) (33) (55)
------- ------- -------
Income (loss) before extraordinary item............. (1,721) 1,629 4,047
Extraordinary item--loss on extinguishment of debt
(net of income tax benefit: $266).................. -- -- (398)
------- ------- -------
Net income (loss)................................... $(1,721) $ 1,629 $ 3,649
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCOUNTS CURRENCY
COMMON STOCK ADDITIONAL RECEIVABLE TRANSLATION
------------- PAID-IN ACCUMULATED DUE FROM ADJUSTMENT,
SHARES AMOUNT CAPITAL DEFICIT PARENT NET
------ ------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994................... 1,000 $-- $ 7,897 $ (23) $(196) $(11)
Currency translation
loss, net.............. -- -- -- -- -- (25)
Special compensation
charge................. -- -- 720 -- -- --
Contributions from
Parent................. -- -- 3,700 -- -- --
Advances to Parent, net. -- -- -- -- (48) --
Net loss................ -- -- -- (1,721) -- --
----- ---- ------- -------- ----- ----
Balances at December 31,
1995................... 1,000 -- 12,317 (1,744) (244) (36)
Currency translation
loss, net.............. -- -- -- -- -- (2)
Advances to Parent, net. -- -- -- -- (170) --
Net income.............. -- -- -- 1,629 -- --
----- ---- ------- -------- ----- ----
Balances at December 31,
1996................... 1,000 -- 12,317 (115) (414) (38)
Currency translation
loss, net.............. -- -- -- -- -- (4)
Repayments by Parent,
net.................... -- -- -- -- 372 --
Dividend to Parent...... -- -- -- (59,361) -- --
Net income.............. -- -- -- 3,649 -- --
----- ---- ------- -------- ----- ----
Balances at December 31,
1997................... 1,000 $-- $12,317 $(55,827) $ (42) $(42)
===== ==== ======= ======== ===== ====
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(1,721) $ 1,629 $ 3,649
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 2,442 3,551 4,320
Extraordinary loss.............................. -- -- 664
Deferred income taxes........................... (1,376) (500) (401)
Stock compensation charge....................... 720 -- --
Minority interest............................... 35 33 55
Gain on sale of assets.......................... -- (386) (5)
Other........................................... -- 1 11
Changes in operating assets and liabilities, net
of effects of acquisitions:
Decrease (increase) in accounts receivable.... (1,033) 1,175 (1,812)
Decrease in inventories....................... 748 607 2,023
Decrease (increase) in other current assets... (121) 432 (605)
Increase (decrease) in accounts payable....... (486) 1,462 (781)
Increase (decrease) in accrued liabilities.... 1,341 554 (24)
Changes in other assets and liabilities....... 1,411 (60) (656)
------- ------- -------
Net cash provided by operating activities.... 1,960 8,498 6,438
------- ------- -------
Cash flows from investing activities:
Acquisition of businesses and product lines, net
of cash acquired................................. (14,345) (12,678) (10,561)
Investment in joint venture....................... -- (167) --
Proceeds from sale of assets...................... -- 746 18
Purchases of property, plant and equipment........ (1,139) (2,449) (2,146)
------- ------- -------
Net cash used in investing activities........ (15,484) (14,548) (12,689)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of bonds................... -- -- 95,000
Net borrowings (repayments) under line of credit
arrangements..................................... 114 -- (2,674)
Borrowings under long-term debt agreements........ 15,245 11,266 --
Principal payments under long-term debt
agreements....................................... (4,789) (3,375) (22,125)
Payment of loan fees.............................. (577) (346) (4,763)
Dividend to Parent................................ -- -- (59,361)
Repayments from (advances to) Parent.............. (48) (104) 372
Payments of amounts owed to minority stockholders
of subsidiary.................................... -- (745) --
Contributions from Parent......................... 3,700 -- --
Payments of short-term debt....................... -- (81) --
Payments of capital leases........................ -- (640) (23)
Other............................................. -- (2) 7
------- ------- -------
Net cash provided by financing activities.... 13,645 5,973 6,433
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 121 (77) 182
Cash and cash equivalents, beginning of year....... 72 193 116
------- ------- -------
Cash and cash equivalents, end of year............. $ 193 $ 116 $ 298
======= ======= =======
See notes 7 and 9 for interest and taxes paid,
respectively
Supplemental schedule of noncash investing
activities:
During the year ended December 31, 1995, the
Company entered into a capital lease arrangement
for a building totaling $640.
See Note 1 for assets acquired and liabilities
assumed in acquisitions.
During the year ended December 31, 1997, the
Company entered into a noninterest bearing note
payable to the former owners of ibex Aerospace,
Inc. in the amount of $850 as a result of the
acquisition of this business (see Notes 1 and 7).
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. BUSINESS DESCRIPTION, ACQUISITIONS AND RECAPITALIZATION
Business Description--Communications Instruments, Inc. and Subsidiaries (the
"Company") is engaged in the design, manufacture and distribution of
electromechanical and electronic products, which include solid state relays
and solenoids for the commercial/industrial equipment, commercial airframe,
defense/aerospace, communications, automotive and medical industries.
Manufacturing is primarily performed in North Carolina, California, Virginia,
Ohio and Juarez, Mexico. The Company is a wholly owned subsidiary of
Communications Instruments Holdings, Inc., which changed its name on March 13,
1996 to CII Technologies Inc. (the "Parent").
Acquisitions
Hi-G Company, Inc.
On January 27, 1995, the Company acquired certain assets from Hi-G Company,
Inc. for $1,485 in cash. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired based on their fair values at the date of acquisition. As the
purchase price was equal to the fair value of the inventory at the date of
acquisition the entire purchase price was allocated to the inventory and no
value was assigned to the machinery and equipment acquired.
Kilovac Corporation-80% Purchase
On October 11, 1995, the Company purchased an 80% ownership interest in
Kilovac Corporation ("Kilovac") for an aggregate purchase price of $15,681
including acquisition costs of approximately $1,300. Kilovac designs and
manufactures high voltage electromechanical relays. The transaction was
accounted for as a purchase. To the extent of the 80% change in ownership, the
purchase price was allocated to the assets and liabilities of Kilovac based on
their fair values, with the remaining 20% minority interest valued at its
historical cost. Fair values were determined generally by appraisals with the
excess allocated to goodwill.
The following summarizes the purchase price allocation as of the acquisition
date:
<TABLE>
<S> <C>
Current assets................................................... $ 5,563
Property, plant and equipment.................................... 1,802
Intangibles and other assets..................................... 10,165
Liabilities assumed.............................................. (1,849)
-------
Total purchase price......................................... $15,681
=======
</TABLE>
The transaction was financed through additional borrowings of approximately
$9,700 on the term and revolver loans and a contribution by the Parent of
$3,700. Additionally, an estimated $2,300 ($694, net of tax at December 31,
1997 and 1996) was initially payable to the sellers upon the future
realization of potential tax benefits associated with a net operating loss
carryforward.
The following unaudited pro forma financial information shows the results of
consolidated operations of the Company as though the acquisition of the 80%
ownership interest in Kilovac occurred as of January 1, 1995. These results
include, but are not limited to, the straight-line amortization of the excess
purchase price over the net assets acquired over a thirty year period and an
increase to interest expense as a result of the debt borrowed to finance the
acquisition.
<TABLE>
<S> <C>
Net sales......................................................... $50,947
Operating income.................................................. 1,215
Net loss.......................................................... (1,545)
</TABLE>
F-6
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma financial information presented above does not
purport to be indicative of either (i) the results of consolidated operations
had the acquisition of the 80% ownership interest in Kilovac taken place on
January 1, 1995, or (ii) future results of consolidated operations of the
combined businesses.
The Company was obligated to purchase the remaining 20% interest in Kilovac
at the option of the selling shareholders on either December 31, 2000 or
December 31, 2005, or upon the occurrence of certain events, if earlier, at an
amount determined in accordance with the terms of the purchase agreement. The
remaining 20% interest in Kilovac was purchased by the Company on September
18, 1997.
Hartman Electrical Division
On July 2, 1996, the Company purchased certain assets and assumed certain
liabilities of the Hartman Electrical Division ("Hartman") of Figgie
International, Inc. for an aggregate purchase price of $13,024 including
acquisition costs of approximately $1,000. Hartman is a manufacturer and
marketer of high current electromechanical relays for critical applications in
the military and commercial aerospace markets. The transaction was accounted
for as a purchase. The purchase price was allocated to the assets and
liabilities of Hartman based on their fair values. Fair values were determined
generally by appraisals with the excess cost allocated to goodwill.
The following summarizes the purchase price allocation as of the acquisition
date:
<TABLE>
<S> <C>
Current assets................................................. $10,229
Property, plant and equipment.................................. 3,172
Intangibles and other assets................................... 3,799
Liabilities assumed............................................ (4,176)
--------
Total purchase price....................................... $13,024
========
</TABLE>
The transaction was financed through additional borrowings of approximately
$13,000 on the term and revolver loans.
The following unaudited pro forma financial information shows the results of
consolidated operations of the Company as though the Hartman acquisition
occurred as of January 1, 1995 and 1996, respectively. These results include,
but are not limited to, the straight-line amortization of the excess purchase
price over the net assets acquired over a thirty year period and an increase
in interest expense as a result of the debt borrowed to finance the
acquisition.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net sales............................................... $57,379 $77,161
Operating income........................................ 3,299 9,593
Net income (loss)....................................... (513) 2,380
</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 Hartman acquisition taken place on January 1, 1995 and 1996,
respectively, or (ii) future results of consolidated operations of the
combined businesses.
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.
F-7
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 a recapitalization and
the issuance of senior subordinated 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.
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.
The following summarizes 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 (as defined) 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.
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 (as
defined). 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
Intangibles and other assets...................................... 24
Liabilities assumed............................................... (948)
------
Total purchase price.......................................... $4,683
======
</TABLE>
F-8
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following unaudited pro forma financial information shows the results of
consolidated operations of the Company as though the GRD Acquisition occurred
as of January 1, 1996 and 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 GRD Acquisition.
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Net sales............................................... $79,987 $103,780
Operating income........................................ 7,219 16,366
Income before extraordinary item........................ 1,142 5,053
Net income.............................................. 1,142 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, 1996 and 1997, respectively,
or (ii) future results of consolidated operations of the combined businesses.
Recapitalization
On September 18, 1997, the Company entered into a series of recapitalization
transactions. These transactions are described below.
Code, Hennessy & Simmons III, L.P., certain members of Company management
and certain other investors (collectively, the "New Investors") acquired
approximately 87% of the capital stock 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").
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 (the "Offering"). 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 (the "Old Credit Facility"), including
a success fee of approximately $1.5 million in connection therewith and
certain other liabilities (the "Refinancing").
The Company paid a dividend of approximately $59.4 million to the Parent
(the "Dividend"), 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The accompanying consolidated financial
statements include Communications Instruments, Inc. and its wholly owned
subsidiaries, Electro-Mech S.A. and Kilovac. All intercompany transactions
have been eliminated in consolidation.
F-9
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents--All highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents.
Investment--In November 1995, the Company formed a joint venture in India
with Guardian Controls Ltd., an Indian Company, a bank and certain financial
investors. The Company has a 30% interest in the joint venture which was
formed for the purpose of manufacturing relays, relay components, and sub-
assemblies in India for the domestic Indian market and global markets. The
Company accounts for the joint venture using the equity method. The joint
venture started production during the fourth quarter of 1996. The balance of
the investment in the joint venture at December 31, 1997 and 1996, was $108
and $166, respectively.
Revenue Recognition--Except as stated below, sales and the related cost of
sales are recognized upon shipment of products sold.
Certain sales of Kilovac, which constitute an immaterial component of total
consolidated sales, represent revenues received under long-term fixed price
development contracts. Revenues under these contracts are recognized based on
the percentage of completion method, measured by the percentage of costs
incurred to date to estimated total costs for each contract. Costs in excess
of contract revenues on cost sharing development contracts are expensed in the
period incurred as costs of sales. Provision for estimated losses on fixed
price contracts is made in the period such losses are determined by
management.
Certain sales of Hartman represent revenues received under long-term
commercial and governmental contracts. Provision for estimated losses, if any,
on long-term contracts is made in the period such losses are determined by
management.
Warranty Costs--Estimated warranty costs are provided based on known claims
and historical claims experience.
Acquisition Related Expenses--In conjunction with the acquisition of certain
product lines and businesses, the Company has incurred direct costs of
integration of the acquisitions into its existing businesses, such as moving,
training and product qualification costs. Such costs are expensed in the
period incurred.
Allowance for Doubtful Accounts--Allowance for doubtful accounts is provided
based on management's assessment of collectibility of the Company's accounts
receivable and historical experience. The changes in the allowance for
doubtful accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Allowance, beginning of year............................ $301 $420 $466
Provision for uncollectible accounts.................... 127 93 428
Write-off of uncollectible accounts, net................ (48) (147) (98)
Effect of acquisitions and other........................ 40 100 0
---- ---- ----
Allowance, end of year.................................. $420 $466 $796
==== ==== ====
</TABLE>
Inventories--Inventories are stated at the lower of cost (first-in, first-
out method) or market.
Property, Plant and Equipment--Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to twenty years.
Goodwill--Goodwill represents the excess of cost over net assets acquired
and is being amortized by the straight-line method over the estimated period
benefited of thirty years.
F-10
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets--Intangible assets, primarily patents, covenants not to
compete and debt issuance costs, are amortized on a straight-line basis over
the patent life, term of the related noncompete agreement, or on the effective
interest method over the life of the related debt issue.
Income Taxes--The Company files a consolidated Federal income tax return
with the Parent. Current and deferred tax expenses are allocated to the
Company from the Parent as if the Company filed a separate tax return.
Long-lived Assets--The Company analyzes the carrying value of intangible
assets and other long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
Income Taxes--The Company accounts for income taxes using an asset and
liability approach as prescribed by SFAS No. 109, Accounting for Income Taxes.
The asset and liability approach requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the financial reporting basis and tax basis of assets and
liabilities.
Research and Development--Research and development costs are charged to
expense as incurred.
Reclassifications--Certain 1995 and 1996 amounts have been reclassified to
conform with the 1997 presentation.
Use of Estimates in the Preparation of Financial Statements--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. Examples of significant estimates
and assumptions made in the preparation of these financial statements include
the Company's allowance for doubtful accounts, reserves for inventory
obsolescence, fair values of assets acquired and liabilities assumed in
connection with purchase business combinations, accrual for environmental
remediation costs, and provision for losses, if any, to be incurred on fixed
price sales contracts.
Fair Value of Financial Instruments--The estimated fair value of the
Company's financial instruments, including primarily cash and cash
equivalents, accounts receivable, accounts payable and long-term debt,
approximate their carrying values at December 31, 1997 and 1996, respectively.
New Accounting Standards--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.
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Finished goods.......................................... $ 2,266 $ 2,882
Work-in-process......................................... 8,357 8,981
Raw materials........................................... 11,388 12,520
Reserve for obsolescence................................ (4,870) (5,006)
------- -------
Total............................................... $17,141 $19,377
======= =======
</TABLE>
F-11
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Land and land improvements.............................. $ 616 $ 655
Buildings............................................... 2,756 2,645
Machinery and equipment................................. 19,298 23,577
Construction in progress................................ 714 662
------- -------
23,384 27,539
Less accumulated depreciation........................... (7,588) (10,715)
------- -------
Total............................................... $15,796 $16,824
======= =======
</TABLE>
Property, plant and equipment are depreciated using the following lives:
land improvements--7 years, buildings--20 years and machinery and equipment--3
to 10 years.
5. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Debt issuance costs...................................... $ 1,426 $4,763
Covenants not to compete................................. 580 380
Patents.................................................. 1,675 2,069
Trademarks............................................... 360 450
Other.................................................... 3 3
------- ------
4,044 7,665
Less accumulated amortization............................ (1,072) (696)
------- ------
Total................................................ $ 2,972 $6,969
======= ======
</TABLE>
6. OTHER ACCRUED LIABILITIES
Significant items comprising this account balance at December 31, 1997 and
1996, respectively, were accrued loss contingencies related to long-term sales
contracts of $573 and $1,905, accrued warranty liabilities of $736 and $471,
and accrued vacation liabilities of $1,011 and $505, respectively.
F-12
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Senior Credit Facility revolving loans payable to a
bank, interest at base rate or LIBOR rate plus
applicable margin, due September 18, 2003............ $ -- $ 5,800
10% Senior Subordinated Notes due 2004, Series "B".... -- 95,000
Note payable to former owners of ibex Aerospace Inc.,
non-interest bearing note discounted using 10%
interest rate, due October 31, 1999.................. -- 708
Term loan payable to a bank, repaid in 1997. Interest
at prime plus 2% (10.25% at December 31, 1996)....... 22,125 --
Revolving loan payable to a bank, repaid in 1997.
Interest at prime plus 1.5% (9.75% at December 31,
1996)................................................ 8,474 --
Obligations under capital leases...................... 23 114
------- --------
30,622 101,622
Less--current portion................................. (4,523) (56)
------- --------
Total............................................. $26,099 $101,566
======= ========
</TABLE>
Debt maturities at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................ $ 56
1999............................ 747
2000............................ 19
2001............................ --
2002............................ --
Thereafter...................... 100,800
--------
Total....................... $101,622
========
</TABLE>
The Company and its wholly owned subsidiaries, Kilovac and Kilovac
International, have guaranteed the 10% senior subordinated notes on a full,
unconditional, and joint and several basis, which guarantees are fully secured
by the assets of such guarantors. Communications Instruments, Inc. and its
wholly-owned subsidiaries, including Kilovac and Kilovac International, have
guaranteed the Senior Credit Facility on a full, unconditional, and joint and
several basis, which guarantees are fully secured by the assets of such
guarantors.
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 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.
F-13
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Senior Credit Facility is a line of credit that may be borrowed as
either a base rate or LIBOR loan, up to $25.0 million. For base rate loans and
LIBOR loans, an applicable margin is added to the base interest rate or the
LIBOR interest rate based on a Consolidated Leverage Ratio Level (as defined
in the Senior Credit Facility). The base 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 December 31, 1997, LIBOR borrowing rates ranged from
8.1875% to 8.25%. At December 31, 1997, the base rate borrowing rate was
9.75%. The weighted average borrowing rate, calculated based on borrowings
outstanding at December 31, 1997 under base rate and LIBOR loans, was 8.68%.
Letters of credit outstanding under the Senior Credit Facility at December
31, 1997 were $850. There were no letters of credit outstanding at December
31, 1996.
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.
On September 18, 1997, the Company extinguished all debt which was
outstanding at December 31, 1996, under former debt agreements (see Note 1).
The extraordinary loss recorded in the 1997 consolidated statement of
operations relates to the write-off of the unamortized portion of the debt
issuance costs related to such agreements.
The terms of the Senior Credit Facility and the Indenture place certain
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 other 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
December 31, 1997, the Company was in compliance with all the terms of the
Indenture. As of December 31, 1997, the Company was not in compliance with
certain of its covenants under the Senior Credit Facility, for which it
received a waiver of noncompliance from the bank on March 19, 1998. The
estimated fair value of the Company's long-term debt approximates its carrying
value at December 31, 1997 and 1996.
Interest Expense and Other Financing Costs--Interest expense and other
financing costs include interest expense and costs associated with an initial
public offering withdrawn by the Company during 1996, and costs associated
with the Recapitalization in 1997. Interest expense and other financing costs
for the years ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Interest expense..................................... $2,309 $3,427 $6,573
Other financing costs................................ -- 1,628 --
------ ------ ------
Total............................................ $2,309 $5,055 $6,573
====== ====== ======
</TABLE>
In addition, cancellation fees incurred were $800 in the year ended December
31, 1997.
On September 18, 1997, the Company paid a success fee to the lender of the
Old Credit Facility, which was based upon the market value or appraised value
of the Company on the valuation date, as required by a change in control per
the terms of the agreement. The amount of the success fee paid was $1,466. At
December 31, 1996, $567 was accrued related to this fee, based on management's
estimate of the value of the Company. The remainder of the fee was charged to
1997 operations and is included in interest expense and other financing costs
in the accompanying 1997 consolidated statement of operations.
F-14
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest paid amounted to $1,657, $2,826, and $4,129 (including success fee
payment) for the years ended December 31, 1995, 1996 and 1997, respectively.
8. LEASES
The Company leases certain office equipment under capital lease
arrangements. The leased assets have a net book value of $23 and $114 at
December 31, 1996 and 1997, respectively. The future minimum lease obligation
under capital leases as of December 31, 1996 and 1997, is included in long-
term debt (see Note 7). On February 7, 1996, the Company purchased a building
which was leased at December 31, 1995 in accordance with the capital lease
arrangement. The $625 purchase price was financed through additional
borrowings under the revolving loan agreement.
The Company leases certain premises and equipment under noncancelable
operating leases which have remaining terms from one to four years and which
provide for various renewal options. Total rent expense charged to operations
was approximately $120, $815 and $1,053 for the years ended December 31, 1995,
1996 and 1997, respectively.
Future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................. $907
1999.............................. 584
2000.............................. 389
2001.............................. 95
------
Total......................... $1,975
======
</TABLE>
9. INCOME TAXES
The significant components of income tax expense (benefit) are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Current tax expense:
Federal........................................ $ 435 $1,404 $2,724
State.......................................... 83 175 453
Foreign........................................ 46 41 60
------- ------ ------
Total current tax expense.................... 564 1,620 3,237
Deferred tax expense (benefit)................... (1,376) (500) (401)
------- ------ ------
Total tax expense (benefit).................. $ (812) $1,120 $2,836
======= ====== ======
</TABLE>
In addition, the Company recorded an income tax benefit from an
extraordinary item totaling $266 during the year ended December 31, 1997.
Income tax payments amounted to approximately $859, $1,142 and $2,251 for the
years ended December 31, 1995, 1996 and 1997, respectively.
F-15
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's effective tax rate differs from the statutory rate for the
following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Provision (benefit) at statutory Federal tax rate.... (34.0)% 34.0% 34.0%
Effective state income tax rate...................... (3.6) 3.5 4.4
Nondeductible meals, entertainment and officers' life
insurance expenses.................................. 1.2 0.9 0.4
Mexican income taxes................................. 1.7 1.5 0.9
Nondeductible goodwill............................... -- -- 1.5
Other, net........................................... 2.2 0.9 (0.3)
----- ---- ----
(32.5)% 40.8% 40.9%
===== ==== ====
</TABLE>
Deferred income taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Current deferred tax assets:
Federal net operating loss carryforward................. $ 192 $ 222
State net operating loss carryforward................... 53 57
Other................................................... 1,516 2,287
------ ------
Total current deferred tax assets..................... 1,761 2,566
Current deferred tax liabilities.......................... -- 436
------ ------
Total current deferred tax assets, net................ $1,761 $2,130
====== ======
Long-term deferred tax assets:
Accrued expenses........................................ $ 612 $ 428
Federal net operating loss carryforward................. 787 886
State net operating loss carryforward................... 203 106
Federal tax credit carryforward......................... 278 317
------ ------
1,880 1,737
Less--Valuation allowance............................... (114) (110)
------ ------
Total long-term deferred tax assets................... 1,766 1,627
------ ------
Long-term deferred tax liabilities:.
Property and equipment.................................. 2,691 2,437
Intangibles............................................. 788 862
Other................................................... 287 190
------ ------
Total long-term deferred tax liabilities.............. 3,766 3,489
------ ------
Total long-term deferred tax liabilities, net......... $2,000 $1,862
====== ======
Deferred tax assets (liabilities), net.................... $ (239) $ 268
====== ======
</TABLE>
At December 31, 1997, the Company had a Federal net operating loss
carryforward of $2,558 which expires beginning in 2010. Internal Revenue Code
Section 382 imposes certain limitations on the ability of a taxpayer to
utilize its Federal net operating losses in any one year if there is a change
in ownership of more than 50% of the Company. Management has considered the
Section 382 limitation and believes that it is more likely than not that the
entire Federal net operating loss carryforward will be utilized. For state tax
purposes, California tax law limits
F-16
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
loss carryforwards to a five-year period. A valuation allowance has been
recorded relating to Kilovac for the portion of the California net operating
loss carryforward which may not be realized due to the previously mentioned
limitation. In addition, Kilovac has Federal general business and alternative
minimum tax credit carryforwards subject to Internal Revenue Code Section 383
which expire beginning in 2016. Realization of tax benefits is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. The amount of the deferred tax asset considered realizable
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
10. CONTINGENCIES
Litigation
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 these lawsuits and proceedings cannot be predicted with
certainty, management believes that the lawsuits and proceedings, either
singularly or in the aggregate, would not have a material adverse effect on
the financial condition or results of operations of the Company.
Environmental Remediation
The Company has been notified by the State of North Carolina Department of
Environment, Health & Natural Resources ("NCDHNR") that its manufacturing
facility in Fairview, North Carolina has sites containing hazardous wastes
resulting from activities by the owners prior to the Predecessor Company (the
"Prior Owner"). Additionally, the Company has been identified as a potentially
responsible party for remediation at two superfund sites which formerly were
used by hazardous waste disposal companies employed by the Company.
Several soil and groundwater contaminations have been noted at the Fairview
facility, the most serious of which is TCE contamination in the groundwater.
Remedial investigations have been on-going at the facility and the NCDHNR has
placed the facility on the Inactive Hazardous Sites Inventory. Soil
remediation was completed in January 1996 and the groundwater remediation
system was formally set in operation on April 1, 1997.
In the acquisition agreement of the Predecessor Company, the Company
obtained indemnity from the selling shareholders for any environmental clean
up costs as a result of existing conditions which would not be paid by the
Prior Owner. The indemnity was limited to the extent of amounts owed to the
selling shareholders through the subordinated note.
On May 11, 1995, the Company reached a settlement with the Prior Owner which
resulted in a cash deposit of $1,750 to an escrow account and an obligation
for the Prior Owner to pay to the escrow account after the groundwater
remediation system has been operating at least at 90% capacity for three
years, an amount equal to the lesser of 90% of the present value of the long
term operating and maintenance costs of the groundwater remediation system or
$1,250. The Company has reflected the present value of the receivable,
discounted at 5%, ($1,104 and $1,160 at December 31, 1996 and 1997,
respectively) and the cash as restricted assets as the funds are held in
escrow to be used specifically for the Fairview facility environmental
remediation and monitoring and will become unrestricted only when the NCDHNR
determines that no further action is required.
In October, 1995, the Company released the selling shareholders from their
indemnity obligation. This action resulted in the recording of a separate
environmental remediation liability and the recognition in 1995 operations of
an expense of $951 of environmental related costs which are not covered under
the settlement with the Prior Owner. The environmental remediation liability
is recorded at the present value, discounted at 5%, of the best estimate of
the cash flows to remediate and monitor the remediation over the estimated
thirty year remediation period, which was developed by a third party
environmental consultant based on experience with similar remediation projects
and methods and taking inflation into consideration.
F-17
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total amounts estimated to be paid related to environmental liabilities are
$3,949 calculated as follows at December 31, 1997:
<TABLE>
<S> <C>
1998............................ $ 135
1999............................ 135
2000............................ 135
2001............................ 135
2002............................ 135
Thereafter...................... 3,274
-------
3,949
Discount to present value....... (1,585)
-------
Liability at present value...... $ 2,364
=======
</TABLE>
Assets recorded in relation to the above environmental liabilities are
$1,605 and $1,789 at December 31, 1997 and 1996, respectively.
In connection with the Hartman Acquisition, the Company entered into an
agreement (the "Lease") pursuant to which it leases from the former owner of
Hartman a manufacturing facility in Mansfield, Ohio (the "Mansfield
Property"), at which Hartman has conducted operations. The Mansfield Property
may contain contamination at levels that will require further investigation
and may require soil and/or groundwater remediation. As a lessee of the
Mansfield Property, the Company may become subject to liability for
remediation of such contamination at and/or from such property, which
liability may be joint and several except under certain circumstances. The
Lease of the Mansfield Property includes an indemnity from the former owner of
Hartman to the Company for certain environmental liabilities in connection
with the Mansfield Property, subject to a dollar limitation of $12.0 million
(the "Indemnification Cap"). In addition, the former owner has placed $515 in
escrow for potential environmental remediation costs at the Mansfield Property
to be credited towards the Indemnification Cap as provided in the Lease. The
Company believes that, while actual remediation costs may exceed the cash
amount escrowed, such costs will not exceed the Indemnification Cap.
Accordingly, no liability has been recorded in the accompanying consolidated
financial statements for the potential environmental remediation.
11. EMPLOYEE BENEFITS
The Company has a self-funded welfare benefit plan (the "Plan") for its
employees. The Plan was formed in 1981 to provide hospitalization and medical
benefits for substantially all full-time employees of the Company and their
dependents. The Plan is funded principally by employer contributions in
amounts equal to the benefits provided. Employee contributions vary depending
upon the amount of coverage elected by the employee. Employer contributions
amounted to $307, $792, and $1,252 for the years ended December 31, 1995, 1996
and 1997, respectively.
Effective January 1, 1988, the Predecessor Company implemented an investment
retirement plan (the "Retirement Plan") pursuant to Section 401(k) of the
Internal Revenue Code for all employees who qualify based on tenure with the
Company. The Retirement Plan provides for employee and Company contributions
subject to certain limitations. The cost of the Retirement Plan charged to
operations was approximately $110, $297, and $412 during the years ended
December 31, 1995, 1996 and 1997, respectively.
During 1995, the Parent sold 5,000 shares of common stock with an estimated
fair market value of $776 for $56 to certain employees of the Company. The
Company recorded compensation expense of $720 in 1995 representing the
difference between the issuance price and the fair market value of the stock
as determined by an independent appraiser. Additionally, in 1995, the Company
paid bonuses of $580 to the employees for reimbursement of the tax impact to
the employees of these transactions.
F-18
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK PLAN
On September 18, 1997, the Parent adopted the 1997 Management Stock Plan
(the "1997 Plan"). The 1997 Plan is administered by the Compensation Committee
of the Board of Directors. All employees of the Company who are selected by
the Compensation Committee are eligible to participate in the 1997 Plan. The
1997 Plan provides for the granting of non-qualified incentive stock options.
The shares of common stock issuable under the 1997 Plan are common shares of
the Parent and may be either authorized unissued shares, or treasury shares,
or any combination thereof. A total of 53,163 shares of the Parent's common
stock is subject to options under the 1997 Plan, subject to adjustment at the
discretion of the Compensation Committee or the Board of Directors. No stock
options were issued under the 1997 Plan through December 31, 1997.
13. SIGNIFICANT CUSTOMERS
Sales to foreign customers accounted for 15%, 19%, and 17% of net sales for
the years ended December 31, 1995, 1996 and 1997, respectively.
Approximately 20% of the Company's sales are made, directly or indirectly,
to the U.S. Department of Defense.
14. RELATED PARTY TRANSACTIONS
Nonemployee shareholder groups provide management services to the Company.
The Company was charged $156, $150 and $283 for such services for the years
ended December 31, 1995, 1996 and 1997, respectively. Additionally, such
groups were paid $150 in 1995 for fees related to the Kilovac acquisition,
$130 in 1996 for fees related to the Hartman acquisition and $267 in 1997 for
fees related to the Recapitalization (see Notes 1 and 5).
15. SUBSEQUENT EVENT
On March 11, 1998, the Company entered into an Agreement and Plan of Merger
with Corcom, Inc. ("Corcom"), whereby Corcom will become a wholly-owned
subsidiary of the Company. In connection with the Agreement and Plan of
Merger, the Company has agreed to pay the shareholders of Corcom $13 per share
or an aggregate $51.2 million in cash in exchange for the shares of Corcom to
be received in the merger. Corcom is located in Libertyville, IL, and is an
electromagnetic interference filter manufacturer.
F-19
<PAGE>
EXHIBIT 12.1
COMMUNICATIONS INSTRUMENTS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------------
NINE 4.5 7.5
MONTHS MONTHS MONTHS YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/92 5/10/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
-------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (Loss) Before
Taxes and Minority
Interest............... $3,079 $141 $(999) $1,004 $(2,498) $2,782 $ 6,938
------ ---- ----- ------ ------- ------ -------
Fixed Charges:
Interest Charges...... 93 77 639 1,189 2,172 3,139 5,243
Amortization of
Financing Costs...... -- -- 79 90 137 252 401
Environmental
Interest............. -- -- -- -- -- 147 119
Estimated Interest
Factor of Rental
Expense.............. 30 17 8 21 40 272 351
------ ---- ----- ------ ------- ------ -------
Total Fixed Charges. 123 94 726 1,300 2,349 3,810 6,114
------ ---- ----- ------ ------- ------ -------
Total Earnings
Available for Fixed
Charges............ $3,202 $235 $(273) $2,304 $ (149) $6,592 $13,052
====== ==== ===== ====== ======= ====== =======
Ratio of Earnings to
Fixed Charges.......... 26.0x 2.5x N/A 1.8x N/A 1.7x 2.1x
</TABLE>
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
COMMUNICATIONS INSTRUMENTS, INC.
KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears
below constitutes and appoints Ramzi A. Dabbagh and David Henning and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for and in his name, place and stead, in any
and all capacities which such person serves or may serve with respect to
Communications Instruments, Inc., to sign the Annual Report on Form 10-K of
Communications Instruments, Inc. for the fiscal year ended December 31, 1997,
and any or all amendments to such Annual Report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or heir or his substitutes, may lawfully do or cause to
by virtue hereof.
This power of attorney has been signed as of the 22nd day of April, 1997, by the
following persons.
/s/ Ramzi A. Dabbagh /s/ David Henning
- -------------------------------------- -------------------------------------
Ramzi A. Dabbath, David Henning,
Chairman of the Board, Chief Executive Chief Financial Officer
Officer, President and Director
/s/ Michael A. Steinbeck /s/ G. Daniel Taylor
- -------------------------------------- -------------------------------------
Michael A. Steinbeck, G. Daniel Taylor,
Chief Operating Officer and Director Executive Vice President of Business
Development and Director
/s/ Brian P. Simmons /s/ Andrew W. Code
- -------------------------------------- -------------------------------------
Brian P. Simmons, Andrew W. Code,
Director Director
/s/ Steven R. Brown /s/ Jon S. Vesely
- -------------------------------------- -------------------------------------
Steven R. Brown, Jon S. Vesely,
Director Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 298
<SECURITIES> 0
<RECEIVABLES> 11,602
<ALLOWANCES> 796
<INVENTORY> 19,377
<CURRENT-ASSETS> 34,741
<PP&E> 16,824
<DEPRECIATION> 10,715
<TOTAL-ASSETS> 76,283
<CURRENT-LIABILITIES> 13,473
<BONDS> 101,566
0
0
<COMMON> 0
<OTHER-SE> (43,594)
<TOTAL-LIABILITY-AND-EQUITY> 76,283
<SALES> 89,436
<TOTAL-REVENUES> 89,436
<CGS> 59,601
<TOTAL-COSTS> 59,601
<OTHER-EXPENSES> 15,096
<LOSS-PROVISION> 428
<INTEREST-EXPENSE> 7,373
<INCOME-PRETAX> 6,938
<INCOME-TAX> 2,836
<INCOME-CONTINUING> 4,047
<DISCONTINUED> 0
<EXTRAORDINARY> 398
<CHANGES> 0
<NET-INCOME> 3,649
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
