<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO
___________
COMMUNICATIONS INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-182-82-70
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Ridgefield Blvd, Suite 200, 28806
Asheville, NC (Zip Code)
(Address of principal executive offices)
(828) 670-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 913 $ 469
Accounts receivable (less allowance
for doubtful accounts: June 30, 1999 -
$462, 1998 - $479) 25,042 15,598
Inventories 27,479 26,656
Deferred income taxes 2,102 2,246
Other current assets 3,948 1,622
------------ ------------
Total current assets 59,484 46,591
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 42,433 22,841
------------ ------------
OTHER ASSETS:
Environmental assets 1,523 1,560
Goodwill (net of accumulated amortization:
June 30, 1999 - $2,809, 1998 - $1,872) 64,891 39,971
Intangible assets, net 32,590 18,705
Other noncurrent assets 355 213
------------ ------------
Total other assets 99,359 60,449
------------ ------------
TOTAL ASSETS $ 201,276 $ 129,881
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 11,284 $ 7,405
Accrued interest 2,806 2,799
Other accrued liabilities 10,082 6,792
Current portion of long-term debt 6,940 5,637
------------ ------------
Total current liabilities 31,112 22,633
LONG-TERM DEBT 185,298 133,044
ACCRUED ENVIRONMENTAL REMEDIATION COSTS 2,329 2,353
DEFERRED INCOME TAXES 14,301 7,041
OTHER NONCURRENT LIABILITIES 696 665
------------ ------------
Total liabilities 233,736 165,736
------------ ------------
CONTINGENCIES
STOCKHOLDER'S DEFICIENCY:
Common stock, $.01 par value, 1,000
shares authorized, issued and outstanding -- --
Additional paid in capital 22,317 17,317
Accumulated deficit (54,685) (53,194)
Accumulated other comprehensive
income (loss) (92) 22
------------ ------------
Total stockholder's deficiency (32,460) (35,855)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S
DEFICIENCY $ 201,276 $ 129,881
============ ============
</TABLE>
(1) Derived from December 31, 1998 audited consolidated financial statements
See notes to unaudited condensed consolidated financial statements
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three months ended Six Months Ended
---------------------- ---------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 49,277 $ 27,484 $ 83,129 $ 53,652
Cost of sales 37,546 18,209 61,873 36,217
-------- -------- -------- --------
Gross profit 11,731 9,275 21,256 17,435
Operating expenses:
Selling expenses 3,425 1,853 6,233 3,571
General and administrative expenses 2,974 1,936 5,611 3,791
Research and development expenses 475 362 859 599
Amortization of goodwill and other intangibles 1,237 238 1,992 419
-------- -------- -------- --------
Total operating expenses 8,111 4,389 14,695 8,380
-------- -------- -------- --------
Operating income 3,620 4,886 6,561 9,055
Interest expense, net (4,706) (2,827) (8,351) (5,456)
Other income (expense), net 9 2 (1) 3
-------- -------- -------- --------
Income (loss) before income taxes and extraordinary item (1,077) 2,061 (1,791) 3,602
Provision for (benefit from) income taxes (161) 832 (300) 1,457
-------- -------- -------- --------
Income (loss) before extraordinary item (916) 1,229 (1,491) 2,145
Extraordinary item--early extinguishment of debt
(less income tax benefits of $234) 0 351 0 351
-------- -------- -------- --------
Net income (loss) (916) 878 (1,491) 1,794
Other comprehensive income (loss):
Foreign currency translation adjustment (31) (2) (114) 1
-------- -------- -------- --------
Other comprehensive income (loss) (31) (2) (114) 1
-------- -------- -------- --------
Comprehensive income (loss) $ (947) $ 876 $ (1,605) $ 1,795
======== ======== ======== ========
</TABLE>
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in Thousands)
Six Months Ended
June 30,
---------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,491) $ 1,794
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,065 2,738
Deferred income taxes (551) (325)
Extraordinary loss -- 585
Other -- (6)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (623) (3,954)
Decrease (increase) in inventories 3,381 (745)
(Increase) decrease other current assets (301) 46
(Decrease) increase in accounts payable (1,991) 2,379
Increase in accrued liabilities 1,274 1,175
Increase in accrued interest 7 59
Changes in other assets and labilities (110) (6)
-------- --------
Net cash provided by operating activities 5,660 3,740
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash received (60,146) (46,827)
Purchases of property, plant and equipment (1,990) (1,240)
Investment in joint ventures (144) (95)
-------- --------
Net cash used in investing activities (62,280) (48,162)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 600 5,537
Borrowings under long-term debt agreements 55,000 35,100
Repayments under long-term debt agreement (2,000) --
Payment of loan financing fees (1,671) (754)
Payment of capital lease obligations (54) (38)
Advances from parent 263 105
Repayments of amounts owed to former
stockholders of subsidiary -- (113)
Additional paid-in capital (from parent) 5,000 5,000
Other (74) 38
-------- --------
Net cash provided by financing activities 57,064 44,875
NET INCREASE IN CASH AND CASH EQUIVALENTS 444 453
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 469 298
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 913 $ 751
======== ========
See notes to unaudited condensed consolidated financial statements
<PAGE>
Communications Instruments, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands except share amounts)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Communications Instruments, Inc. and its wholly owned subsidiaries
(the "Company"). The Company's subsidiaries, Kilovac Corporation ("Kilovac"),
Electro-Mech S.A. ("Electro-Mech"), Corcom, Inc. ("Corcom"), which became a
wholly owned subsidiary on June 19, 1998, Products Unlimited Corporation
("Products"), which became a wholly owned subsidiary on March 19,1999, operate
facilities in Carpenteria, California (Kilovac), Juarez, Mexico (Electro-Mech
and Corcom), Libertyville, Illinois (Corcom), Sterling and Prophetstown,
Illinois (Products), Sabula and Guttenburg, Iowa (Products) and Munich, Germany
(Corcom).
The interim financial data as of and for the quarters and the six months ended
June 30, 1999 and June 30, 1998 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, it does not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting only of
adjustments of a normal recurring nature) necessary for a fair presentation have
been included. The December 31, 1998 financial information was derived from
audited consolidated financial statements, but excludes certain disclosures
included in the Company's audited consolidated financial statements.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
year ended December 31, 1998 as well as the other information included in the
Company's annual report filed on Form 10-K. The results of operations and cash
flows for the interim periods presented are not necessarily indicative of the
results for the year ending December 31, 1999 or any other interim period.
2. Recapitalization, Acquisitions and Joint Venture
Recapitalization
On September 18, 1997, the Company entered into a series of recapitalization
transactions (collectively the "Transactions"). The Transactions are described
below.
Code, Hennessy & Simmons III, L.P., certain members of Company management and
certain other investors acquired approximately 87% of the capital stock of CII
Technologies, Inc., a Delaware Corporation (the "Parent"). Communications
Instruments, Inc. is a wholly owned subsidiary of the Parent. Certain of the
Parent's existing stockholders, including certain members of management,
retained approximately 13% of the Parent's capital stock (collectively, the
"Recapitalization").
Concurrently, the Company issued $95.0 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 a private placement offering permitted by Rule 144A of
the Securities Act of 1933, as amended (the
<PAGE>
"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.
Also, on September 18, 1997, the Company borrowed approximately $2.7 million
pursuant to a senior credit facility with a syndicate of financial institutions
providing for revolving loans of up to $25.0 million that was subsequently
retired in connection with the acquisition of Corcom on June 19, 1998 (the "Old
Senior Credit Facility"). The Company repaid approximately $29.3 million of
outstanding obligations under the then existing credit facility (the "Old Credit
Facility"), including a success fee of approximately $1.5 million in connection
therewith and certain other liabilities (the "Refinancing").
Additionally, the Company paid a dividend of approximately $59.4 million to the
Parent, which was used by the Parent in conjunction with the proceeds of
issuances of the Parent's common stock (approximately $9.8 million), the
Parent's preferred stock (approximately $2.0 million) and junior subordinated
debt of the Parent (approximately $12.7 million) as follows: approximately $71.5
million was used to purchase shares of the Parent's capital stock from existing
shareholders; approximately $3.5 million was used to pay Recapitalization and
other financing expenses; and approximately $7.6 million was used to repay
certain indebtedness of the Parent.
Acquisitions
Acquisitions, unless otherwise noted below, are accounted for as purchases. The
purchase prices are allocated to the assets acquired and liabilities assumed
based on their fair values, and any excess cost is allocated to goodwill. The
fair value of significant property, plant and equipment and intangibles and
other assets acquired are determined generally by appraisals.
Products Unlimited
On March 19, 1999, the Company purchased all of the outstanding equity
securities of Products (the "Products Acquisition"), a manufacturer and marketer
of relays, transformers, and contractors for the HVAC industry. Pursuant to the
Stock Purchase Agreement, the Company paid approximately $59.4 million. In
addition, if Products achieves certain sales targets for the years ending
December 31, 1999 and December 31, 2000, the Company will make additional
payments to the former shareholders of Products not to exceed $4.0 million in
the aggregate. The payment of the purchase price and related fees was financed
by the issuance of $55.0 million of Tranche Term B loans, in accordance with an
amendment to the Senior Credit Facility (as defined), the contribution of $5.0
million in additional paid in capital by the Parent, and a draw on the revolving
loan portion of the Company's Senior Credit Facility (as defined). Products has
manufacturing facilities in Sterling and Prophetstown, Illinois and Sabula and
Guttenberg, Iowa and has approximately 1,000 employees.
The allocation of purchase price is subject to final determination based on
changes in certain estimates of asset valuations and determinations of
liabilities assumed that may occur within the first year of operations.
Management believes that there may be material changes to the allocation of the
purchase price to certain assets and liabilities.
<PAGE>
Cornell Dubilier
On July 24, 1998, the Company purchased certain assets and assumed certain
liabilities of the Cornell Dubilier electronics relay division ("CD") for $848
(the "CD Acquisition"). During 1998, CD was consolidated into the Company's
Midtex Division. The CD Acquisition was financed through a draw on the Company's
Senior Credit Facility.
Pro forma financial information is not presented relating to the CD Acquisition,
as this entity was not a significant subsidiary of the Company in 1998.
Corcom, Inc.
On June 19, 1998, the Company acquired all of the outstanding capital stock of
Corcom, an Illinois corporation pursuant to the merger of RF Acquisition Corp.,
a newly formed wholly owned subsidiary of the Company, with and into Corcom (the
"Corcom Merger"). The Company paid $13.00 per share to the shareholders of
Corcom in exchange for the shares received in the Corcom Merger (approximately
$51.1 million in the aggregate). The Company used a portion of the proceeds of
$48.1 million of borrowings under a $60.0 million credit facility entered into
with the Bank of America National Trust and Savings Association on June 19, 1998
(the "Senior Credit Facility"), additional paid-in capital of $5.0 million
contributed by the Parent, and $7.4 million in cash from Corcom to finance the
Merger, repay $7.4 million of debt and fund the related merger costs. Corcom is
an electromagnetic interference filter manufacturer located in Libertyville,
Illinois.
Wilmar Electronics Inc.
On May 6, 1998, the Company purchased certain assets and assumed certain
liabilities of Wilmar Electronics Inc. ("Wilmar") for approximately $2.1 million
(the "Wilmar Acquisition"). Wilmar was a producer of high performance protective
relays. Wilmar was consolidated into the Company's Kilovac subsidiary in June
1998. The Wilmar acquisition was financed with a draw on the Company's Old
Senior Credit Facility.
Pro forma financial information is not presented relating to the Wilmar
Acquisition as this entity was not a significant subsidiary of the Company in
1998.
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"). GRD, located
in Waynesboro, Virginia, is a manufacturer of high performance signal relays.
The GRD Acquisition was financed by a draw on the Company's Old Senior Credit
Facility.
The Company has announced the relocation of the manufacturing in its Waynesboro,
VA facility to its facilities in North Carolina. These plans were finalized in
late 1998. The relocation will be completed by the end of 1999. The estimated
costs of this facility relocation, including estimated costs of employee
separation and preparing the North Carolina facilities for the relocation, are
approximately $1.0 million. Management expects that a significant portion of
these costs will be expensed as incurred during 1999. Approximately $365 of
these costs were expensed in the six months ended June 30, 1999.
<PAGE>
ibex Aerospace Inc.
On October 31, 1997, the Company acquired certain assets and assumed certain
liabilities of ibex Aerospace Inc. ("ibex") for approximately $2.0 million (the
"ibex Acquisition"). Of the $2.0 million, 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. Ibex was a manufacturer and marketer
of high current electromechanical relays for critical applications in the
military and commercial aerospace markets. In 1998, ibex was consolidated into
the Company's Hartman Division. The transaction was financed through a draw on
the Company's Old Senior Credit Facility and the issuance of the note payable to
the sellers discounted to $697.
Pro forma financial information is not presented relating to the ibex
Acquisition as this entity was not a significant subsidiary of the Company in
1997.
Kilovac Corporation - 20% Purchase
On September 18, 1997, the Company purchased for approximately $4.5 million the
remaining 20% of the outstanding stock of Kilovac that the Company did not then
own (the "Kilovac Purchase"). The transaction was financed through proceeds from
the Recapitalization and the issuance of senior subordinated notes.
On October 11, 1995, the Company had purchased an 80% ownership interest in
Kilovac for an aggregate purchase price of approximately $15.681 million
including acquisition costs of approximately $1.3 million. Kilovac designs and
manufactures high voltage electromechanical relays. 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. An estimated $2.3 million ($468, net
of tax at June 30, 1999 and December 31, 1998) was initially payable to the
sellers upon the future realization of potential tax benefits associated with a
net operating loss carryforward.
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.
The following summarizes the purchase price allocations as the respective dates
of acquisitions:
<PAGE>
<TABLE>
<CAPTION>
Kilovac ibex GRD Wilmar Corcom CD Products
Purchase Acquisition Acquisition Acquisition Merger Acquisition Acquisition
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets $ 47 $ 1,041 $ 3,887 $ 381 $ 12,761 $ 505 $ 15,050
Property, plant and equipment 169 150 2,045 80 7,374 82 21,237
Intangibles and other assets 4,577 1,762 24 2,045 35,550 380 39,738
Liabilities assumed (293) (965) (1,273) (356) (10,635) (119) (15,901)
------ ------- ------- ------ -------- ----- --------
Purchase price, net of
acquired cash $4,500 $ 1,988 $ 4,683 $2,150 $ 45,050 $ 848 $ 60,124
====== ======= ======= ====== ======== ===== ========
</TABLE>
The following unaudited six months of 1998 pro forma financial information shows
the results of operations as though the Corcom Merger and the Products
Acquisition occurred as of January 1, 1998. The following unaudited six months
of 1999 pro forma financial information shows the results of operations as
though the Products Acquisition occurred as of January 1, 1999. These results
include, but are not limited to, the straight-line amortization of 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
transactions.
<TABLE>
<CAPTION>
Six Months ended
June 30,
-------------------
1999 1998
------- -------
<S> <C> <C>
Net sales $98,376 $99,681
Operating income 8,386 11,917
Income (loss) before extraordinary item (1,812) 942
Net income (loss) (1,812) 591
</TABLE>
The unaudited pro forma financial information presented above does not purport
to be indicative of either (i) the results of operations had the Products
Acquisition taken place on January 1, 1999 or had the Corcom Merger and the
Products Acquisition taken place on January 1, 1998 or (ii) future results of
operations of the combined businesses.
Joint Ventures
In January 1999, the Company formed a joint venture, Shanghai CII Electronics
Co. Ltd. with Shanghai CI Electric Appliance Co. Ltd (the "Chinese Joint
Venture"). Each party holds 50% of the shares of the new company. The new joint
venture is a manufacturer and marketer of relay components. The Company's
investment was approximately $144. The Chinese Joint Venture began production in
March 1999.
3. Inventories
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Components of inventory are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 7,884 $ 6,786
Work-in-process 8,367 9,093
Raw materials and supplies 18,355 17,401
Reserve for obsolescence (7,127) (6,624)
------- -------
Total $27,479 $26,656
======= =======
</TABLE>
4. Long -Term Debt
On June 19, 1998, the Company retired the Old Senior Credit Facility and
borrowed approximately $48.1 million pursuant to a senior credit facility with a
syndicate of financial institutions providing for revolving loans of up to $25.0
million and term loans of $35.0 million (the "Senior Credit Facility"). On March
19, 1999 the Company was issued a Tranche B Term Loan of $55.0 million as an
amendment to the Senior Credit Facility.
The Company's long-term debt at June 30, 1999 consists primarily of the $95.0
million Notes and revolving loans of $10.3 million and term loans of $86.0
million under the Senior Credit Facility. The Company and its wholly owned
subsidiaries, Kilovac and Kilovac International, Inc., have guaranteed the Notes
on a full, unconditional, and joint and several basis, which guarantees are
fully secured by the assets of such guarantors. Communications Instruments,
Inc., its wholly owned subsidiaries, including Kilovac, Kilovac International,
Inc. and Corcom, Inc., Products Unlimited Corporation, Marc Enterprises, Inc.,
SOL Industries, Inc., GW Industries, Inc. and the Parent 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, and commenced on March 15, 1998. The Notes will
mature on September 15, 2004, unless previously redeemed, and the Company will
not be required to make any mandatory redemption or sinking fund payment prior
to maturity except in connection with a change in ownership. The Notes may be
redeemed, in whole or in part, at any time on or after September 15, 2001 at the
option of the Company, at the redemption prices set forth in the Indenture,
plus, in each case, accrued and unpaid interest and premium, if any, to the date
of the redemption. In addition, at any time prior to September 15, 2000, the
Company may at its option, redeem up to 33.3% in aggregate principal amount of
the Notes at a redemption price of 110% of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption, with the net cash
proceeds of an Equity Offering (as defined in the Indenture), provided that not
less than $63.4 million aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption.
The Senior Credit Facility provides for a maximum credit facility of $115.0
million limited by outstanding indebtedness under the initial $90.0 million term
loan agreements (as amended) or availability on the borrowing base, as defined
in the loan agreement. All funds may be borrowed as either a base rate loan or
LIBOR loan. For base rate loans and LIBOR loans an applicable margin is added to
the base rate interest rate or the LIBOR interest rate based on a Consolidated
Senior Leverage Ratio Level (as defined in the Senior Credit Facility). The base
rate interest rate is the higher of a Reference Rate (as defined) or the federal
funds rate plus 1/2%. The "Reference Rate" means the rate of interest announced
by the lender as "Reference Rate." At June 30, 1999,
<PAGE>
LIBOR borrowing rates ranged from 7.6875% to 8.5625%. At June 30, 1999, the base
rate-borrowing rate was 9.25%. The weighted average borrowing rate, calculated
based on borrowings outstanding at June 30, 1999 under base rate and LIBOR loans
was 8.22%.
The Senior Credit Facility provides a line of credit of $25.0 million due on
June 19, 2003, a Tranche A term loan with a remaining balance of $31.0 million
due in full by June 19, 2003, and a Tranche B Term Loan of $55.0 million due in
full by March 15, 2004. The Tranche A term loan is payable as follows: $2.8
million remaining in 1999, $6.3 million in 2000, $7.8 million in 2001, $9.3
million in 2002, $5.0 million in 2003. The Tranche B term loan is payable as
follows: $275 remaining in 1999, $550 in 2000, $550 in 2001, $550 in 2002, $26.7
million in 2003 and $26.4 million in 2004.
The terms of the Senior Credit Facility and the Indenture place restrictions on
the Company including, but not limited to the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments (as defined), consummate certain asset sales, enter into
certain transactions with affiliates, merge or consolidate with any person or
sell, assign, transfer, lease, convey or otherwise dispose of the assets of the
Company and its subsidiaries. The Senior Credit Facility also contains financial
covenants including interest coverage ratios, leverage ratios, fixed charge
coverage ratios, limitations on capital expenditures and minimum levels of
earnings before interest, taxes, depreciation and amortization, as defined by
the Senior Credit Facility. As of June 30, 1999, the Company was in compliance
with all of the terms of the Indenture and the covenants of the Senior Credit
Facility.
Letters of credit outstanding under the Senior Credit Facility were $950 at June
30, 1999 and December 31, 1998.
The Senior Credit Facility requires the Company to pay commitment fees at an
annual rate of 0.5% on the undrawn amount of the Senior Credit Facility, subject
to adjustment based on the Consolidated Senior Leverage Ratio of the Company.
As of June 30, 1999, the Company had available unused borrowing capacity of
approximately $13.8 million under the Senior Credit Facility.
5. Contingencies
From time to time the Company is a party to certain lawsuits and administrative
proceedings that arise in the conduct of its business. While the outcome of the
lawsuits and proceedings cannot be predicted with certainty, management believes
that the lawsuits and proceedings, either singularly or in the aggregate, will
not have a material adverse effect on the financial condition, results of
operations or cash flows of the Company.
6. Segment Disclosure
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The
<PAGE>
adoption of SFAS No. 131 results in revised and additional disclosures but had
no effect on the financial position or results of operations of the Company. The
information for the six months ended June 30, 1998 has been restated from the
prior year's presentation in order to conform to the 1999 presentation.
The Company has six business units which have separate management teams and
infrastructures that offer electronic products. These business units have been
aggregated into two reportable segments that are managed separately because each
operating segment represents a strategic business platform that offers different
products and serves different markets.
The Company's two reportable operating segments are: (i) the High Performance
Group ("HPG") and (ii) the Specialized Industrial Group ("SIG"). HPG includes
the Communications Instruments Division, Kilovac and Hartman. Products
manufactured by HPG include high performance signal level relays and power
relays, high voltage and power switching relays, solenoids and other electronic
products. SIG includes Corcom, Midtex Division and Products. The SIG group
manufactures RFI filters, general purpose relays, contactors and transformers.
The accounting policies of the operating segments are the same as those of the
Company. Intersegment sales, which are eliminated in consolidation, are recorded
at standard cost.
In evaluating financial performance, management focuses on operating income as a
segment's measure of profit or loss. Operating income is before interest
expense, interest income, other income and expense, income taxes and
extraordinary items. Financial information for the Company's operating segments
and a reconciliation of reportable segment net sales, operating income, and
assets to the Company's consolidated totals are as follows:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
High Performance Group $ 19,465 $ 23,096 $ 39,784 $45,845
Specialized Industrial Group 30,026 4,515 43,732 8,026
Intersegment elimination (1) (214) (127) (387) (219)
-------- -------- ------- -------
Consolidated net sales $ 49,277 $ 27,484 $83,129 $53,652
======== ======== ======= =======
Operating income:
High Performance Group $ 2,039 $ 4,735 $ 4,635 $ 8,917
Specialized Industrial Group 2,473 653 3,614 1,184
Corporate Allocations (2) (892) (502) (1,688) (1,046)
-------- -------- ------- -------
Consolidated operating income 3,620 4,886 6,561 9,055
-------- -------- ------- -------
Interest expense, net (4,706) (2,827) (8,351) (5,456)
Other income (expense), net 9 2 (1) 3
-------- -------- ------- -------
Consolidated income (loss) before income taxes $ (1,077) $ 2,061 $ (1,791) $ 3,602
======== ======== ======= =======
Depreciation and amortization expense:
High Performance Group $ 2,387 $ 2,233
Specialized Industrial Group 3,197 158
-------- -------
5,584 2,391
Amortization of debt issuance costs (3) 481 347
-------- -------
Consolidated depreciation and amortization expense $ 6,065 $ 2,738
======== =======
Purchases of property, plant and equipment:
High Performance Group $ 993 $ 1,076
Specialized Industrial Group 997 164
-------- -------
Consolidated capital expenditures $ 1,990 $ 1,240
======== =======
June 30, December 31,
1999 1998
---- ----
Assets:
High Performance Group $ 70,280 $ 69,351
Specialized Industrial Group 130,996 60,530
-------- --------
Consolidated assets $201,276 $129,881
======== ========
</TABLE>
(1) - represents net sales between HPG and SIG
(2) - represents the Corporate general and administrative expenses.
Management does not consider these costs in managing the operations of the
reportable segments
(3) - included on the consolidated statements of cash flows as depreciation and
amortization and included in the consolidated statement of operations as
interest expense.
Management does not consider these costs in managing the operations of the
reportable segments
7. New Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities, effective for all fiscal quarters
beginning after June 15, 1999 (the effective date has been extended to all
fiscal quarters beginning after June 15, 2000 by the issuance in June 1999 of
SFAS No. 137). The new standard establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It
<PAGE>
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company has not determined what impact, if any, that this new
accounting standard will have on its financial statements.
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
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 provides information which management believes is
relevant to an understanding of the operations and financial condition of the
Company. This discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in this
quarterly report as well as in the Registrant's Annual Report for the year ended
December 31, 1998 on Form 10-K.
Overview
In March 1999, the Company purchased all of the outstanding equity securities of
Products, a manufacturer and marketer of relays, transformers, and contactors
for the HVAC industry. Pursuant to the Stock Purchase Agreement, the Company
paid approximately $59.4 million. In addition, if Products achieves certain
sales targets for the years ending December 31, 1999 and December 31, 2000, the
Company will make additional payments to the former shareholders of Products not
to exceed $4.0 million in the aggregate. The payment of the purchase price and
related fees was financed by the issuance of $55.0 million of Tranche Term B
loans, in accordance with an amendment to the Senior Credit Facility (as
defined), the contribution of $5.0 million in additional paid in capital by the
Parent, and a draw on the revolving loan portion of the Company's Senior Credit
Facility (as defined). Products has manufacturing facilities in Sterling and
Prophetstown, Illinois and Sabula and Guttenberg, Iowa and has approximately
1,000 employees. The acquisition has been accounted for under the purchase
method of accounting.
In July 1998, the Company purchased certain assets and assumed certain
liabilities of Cornell Dubilier's electronics relay division ("CD") for $848
(the "CD Acquisition"). The CD Acquisition was financed with a draw on the
Company's Senior Credit Facility.
In June 1998, the Company acquired all of the outstanding capital stock of
Corcom, Inc., an Illinois corporation ("Corcom") pursuant to the merger of RF
Acquisition Corp., a newly formed wholly owned subsidiary of the Company, with
and into Corcom (the "Corcom Merger"). The Company paid $13.00 per share to the
shareholders of Corcom in exchange for the shares received in the Merger
(approximately $51.1 million in the aggregate). The Company used a portion of
the proceeds of $48.1 million of borrowings under a credit facility entered into
with the Bank of America National Trust and Savings Association on June 19, 1998
(the "Senior Credit Facility"), additional paid in capital of $5.0 million
contributed by the Parent, and $7.4 million in cash from Corcom to finance the
Merger, repay $7.4 million of debt (the "Old Senior Credit Facility") and fund
the related merger costs. Corcom is an electromagnetic interference filter
manufacturer located in Libertyville, Illinois.
<PAGE>
In May 1998, the Company purchased certain assets and assumed certain
liabilities of Wilmar Electronics Inc. ("Wilmar") for approximately $2.1 million
(the "Wilmar Acquisition"). Wilmar was consolidated into the Kilovac Subsidiary
in June 1998. The Wilmar Acquisition was financed with a draw on the Company's
Old Senior Credit Facility.
In December 1997, the Company purchased certain assets and assumed certain
liabilities of Genicom Relays Division ("GRD") of Genicom Corporation for $4.7
million (the "GRD Acquisition"). The Company financed the GRD Acquisition with
funds borrowed on the Old Senior Credit Facility.
In October 1997, the Company purchased 100% ownership in ibex Aerospace Inc.
("ibex") for $2.0 million, excluding expenses (the "ibex Acquisition"). ibex was
a wholly owned subsidiary of SOFIECE of Paris, France. The ibex operation was
consolidated into the Company's Hartman division in 1998. Of the $2.0 million
purchase price, approximately $1.3 million was paid at closing, and the
remainder of the purchase price was paid by the Company through the issuance of
a non-interest bearing note in the amount of $850 to the sellers, which note is
payable on October 31, 1999. The Company financed the $1.3 million paid at
closing with funds borrowed on the Old Senior Credit Facility.
Due to the Company's historical growth through acquisitions, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
Results of Operations
The following table sets forth information derived from the unaudited condensed
consolidated statements of operations expressed as a percentage of net sales for
the periods indicated. There can be no assurance that the trends in operating
results will continue in the future.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------------------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.4% 67.5% 76.2% 66.3%
Gross profit 25.6% 32.5% 23.8% 33.7%
Selling expenses 7.5% 6.7% 7.0% 6.7%
General and administrative expenses 6.7% 7.1% 6.0% 7.0%
Research and development expenses 1.0% 1.1% 1.0% 1.3%
Amortization of goodwill and other intangibles 2.4% 0.8% 2.5% 0.9%
Operating income 7.9% 16.9% 7.3% 17.8%
</TABLE>
Discussion of Consolidated Results of Operations
<PAGE>
Six Months Ended June 30, 1999 Compared to Six months Ended June 30, 1998
Net sales of the Company for the six months ended June 30, 1999, increased $29.5
million, or 54.9%, to $83.1 million from $53.7 million for the corresponding
period in 1998. Excluding the effect of the Corcom Merger and the Products
Acquisition, net sales of the Company for the six months ended June 30, 1999,
decreased $8.1 million, or 15.3%, to $44.6 million from $52.7 million for the
corresponding period in 1998. This decrease is due primarily to (i) a softening
in military/defense and the automatic test equipment markets, (ii) a 1998 peak
in a certain type of relay use in the communications market partially offset by
(iii) the effect of the Wilmar Acquisition and the CD Acquisition. Revenues were
unfavorably impacted by the relocation of operations due to the required
requalifications in the customer base.
Gross profit of the Company for the six months ended June 30, 1999, increased
$3.8 million, or 21.9%, to $21.3 million from $17.4 million for the
corresponding period in 1998. Gross profit margin decreased however, to 25.6%
from 32.5% for the same period in 1998. Excluding the effect of the Corcom
Merger and the Products Acquisition, gross profit of the Company for the six
months ended June 30, 1999, decreased $5.4 million, or 31.6%, to $11.7 million
from $17.1 million for the corresponding period in 1998. Excluding the effect of
the Corcom Merger and the Products Acquisition, gross profit margin decreased
however, to 26.3% from 32.5% for the corresponding period in 1998. The decrease
in gross margin as a percentage of net sales is due primarily to (i) lower gross
profits as a percentage of net sales for acquired companies, (ii) a charge of a
approximately $365,000 for a portion of the costs of relocating the Waynesboro,
VA facility, and (iii) lower volumes at lower sales prices in an increasingly
competitive market partially offset by continued cost reductions.
Selling expenses for the Company for the six months ended June 30, 1999,
increased $2.7 million, or 74.5%, to $6.2 million from $3.6 million for the same
corresponding period in 1998. Selling expenses as a percentage of net sales
increased to 7.5% from 6.7% in the same period in 1998. Excluding the effect of
the Corcom Merger and the Products Acquisition, selling expenses for the Company
for the six months ended June 30, 1999, increased $242,000, or 7.0%, to $3.7
million from $3.5 million for the corresponding period in 1998. Excluding the
effect of the Corcom Merger and the Products Acquisition, selling expenses as a
percentage of net sales increased to 8.3% from 6.6% for the same period in 1998.
This increase in selling expenses as a percentage of net sales is due primarily
to the slightly higher costs associated with a newly organized Corporate Sales
and Marketing Department offset by lower revenues.
General and administrative expenses for the Company for the six months ended
June 30, 1999, increased $1.8 million, or 48.0%, to $5.6 million from $3.8
million in 1998. General and administrative expenses as a percentage of net
sales decreased to 6.7% from 7.1% for the corresponding period in 1998.
Excluding the effect of the Corcom Merger and the Products Acquisition, general
and administrative expenses for the Company for the six months ended June 30,
1999 decreased $412,000, or 10.9%, to $3.4 million from $3.8 million for the
corresponding period in 1998. Excluding the effect of the Corcom Merger and the
Products Acquisition, general and administrative expenses as a percentage of net
sales increased to 7.6% from 7.2% for the corresponding period in 1998. This
increase in general and administrative expenses as a percentage of net sales
primarily is attributed to slightly lower costs offset by a greater decrease
in revenues.
Research and development expenses for the Company for the six months ended June
30, 1999, increased $260,000, or 43.4%, to $859,000 from $599,000 for the
corresponding period in 1998. Excluding the effect of the Corcom Merger and the
Products Acquisition, research and
<PAGE>
development expenses for the six months ended June 30, 1999, increased $24,000,
or 4.1%, to $616,000 from $592,000 for the corresponding period in 1998.
Amortization of goodwill and other intangibles for the Company for the six
months ended June 30, 1999, increased $1.6 million, or 375.4%, to $2.0 million
from $419,000 for the corresponding period in 1998. Excluding the effect of the
Corcom Merger and the Products Acquisition, amortization of goodwill and other
intangibles for the Company for the six months ended June 30, 1999, increased
$30,000, or 8.1%, to $399,000 from $369,000 for the corresponding period in
1998. This increase is due primarily to the amortization of goodwill due to the
CD Acquisition (third quarter of 1998) and the Wilmar Acquisition (second
quarter of 1998).
Interest expense of the Company for the six months ended June 30, 1999,
increased $2.9 million, or 53.1%, to $8.4 million from $5.5 million for the
corresponding period in 1998. The increase was due primarily to the increased
debt levels associated with financing the Wilmar Acquisition, the Corcom
Merger, the Products Acquisition, and the CD Acquisition.
Income taxes of the Company for the six months ended June 30, 1999 were 14.9% of
loss before income taxes as compared to 40.4% for the corresponding period in
1998. The decreased effective tax rate is due primarily to the goodwill
amortization not deductible for tax purposes from the Corcom Merger and the
Products Acquisition.
Extraordinary item for the six months ended June 30, 1998 reflects the write-off
of $585,000 of unamortized deferred financing costs associated with the Old
Senior Credit Facility net of taxes of $234,000.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net sales of the Company for the quarter ended June 30, 1999, increased $21.8
million, or 79.3%, to $49.3 million from $27.5 million for the corresponding
period in 1998. Excluding the effect of the Corcom Merger and the Products
Acquisition, net sales of the Company for the quarter ended June 30, 1999,
decreased $4.8 million, or 17.9%, to $21.8 million from $26.5 million for the
corresponding period in 1998. This decrease is due primarily to (i) a softening
in military/defense and the automatic test equipment markets, (ii) a 1998 peak
in a certain type of relay use in the communications market partially offset by
(iii) the effect of the Wilmar Acquisition and the CD Acquisition. Revenues were
unfavorably impacted by the relocation of operations due to the required
requalifications in the customer base.
Gross profit of the Company for the quarter ended June 30, 1999, increased $2.5
million, or 26.5%, to $11.7 million from $9.3 million for the corresponding
period in 1998. Gross profit margin decreased however, to 23.8% from 33.7% for
the same period in 1998. Excluding the effect of the Corcom Merger and the
Products Acquisition, gross profit of the Company for the quarter ended June 30,
1999, decreased $3.5 million, or 39.5%, to $5.4 million from $9.0 million for
the corresponding period in 1998. Excluding the effect of the Corcom Merger and
the Products Acquisition, gross profit margin decreased however, to 24.9% from
33.8% for the corresponding period in 1998. The decrease in gross margin as a
percentage of net sales is due primarily to (i) lower gross profits as a
percentage of net sales for acquired companies, (ii) a charge of approximately
$115,000 for a portion of the costs of relocating the Waynesboro, VA facility,
and (iii) lower volumes at lower sales prices in an increasingly competitive
market partially offset by continued cost reductions.
Selling expenses for the Company for the quarter ended June 30, 1999, increased
$1.6 million, or 84.8%, to $3.4 million from $1.9 million for the same
corresponding period in 1998. Selling
<PAGE>
expenses as a percentage of net sales increased to 7.0% from 6.7% in the same
period in 1998. Excluding the effect of the Corcom Merger and the Products
Acquisition, selling expenses for the Company for the quarter ended June 30,
1999, increased $100,000, or 5.7%, to $1.9 million from $1.8 million for the
corresponding period in 1998. Excluding the effect of the Corcom Merger and the
Products Acquisition, selling expenses as a percentage of net sales increased to
8.5% from 6.6% for the same period in 1998. This increase in selling expenses as
a percentage of net sales is due primarily to the slightly higher costs
associated with a newly organized Corporate Sales and Marketing Department
offset by lower revenues.
General and administrative expenses for the Company for the quarter ended June
30, 1999, increased $1.0 million, or 53.6%, to $3.0 million from $1.9 million in
1998. General and administrative expenses as a percentage of net sales decreased
to 6.0% from 7.0% for the corresponding period in 1998. Excluding the effect of
the Corcom Merger and the Products Acquisition, general and administrative
expenses for the Company for the quarter ended decreased $152,000, or 8.3% to
$1.7 million from $1.8 million for the corresponding period in 1998. Excluding
the effect of the Corcom Merger and the Products Acquisition, general and
administrative expenses as a percentage of net sales increased to 8.1% from 6.9%
for the corresponding period in 1998. This increase in general and
administrative expenses as a percentage of net sales is primarily attributed to
slightly lower costs offset by a greater decrease in revenues.
Research and development expenses for the Company for the quarter ended June 30,
1999, increased $113,000, or 31.2%, to $475,000 from $362,000 for the
corresponding period in 1998. Excluding the effect of the Corcom Merger and the
Products Acquisition, research and development expenses for the quarter ended
June 30, 1999, decreased $41,000, or 11.5%, to $314,000 from $355,000 for the
corresponding period in 1998.
Amortization of goodwill and other intangibles for the Company for the quarter
ended June 30, 1999, increased $999,000, or 419.7%, to $1.2 million from
$238,000 for the corresponding period in 1998. Excluding the effect of the
Corcom Merger and the Products Acquisition, amortization of goodwill and other
intangibles for the Company for the quarter ended June 30, 1999, increased
$8,000, or 4.3%, to $196,000 from $188,000 for the corresponding period in 1998.
This increase is due primarily to the amortization of goodwill due to the CD
Acquisition (third quarter of 1998).
Interest expense of the Company for the three months ended June 30, 1999,
increased $1.9 million, or 66.5%, to $4.7 million from $2.8 million for the
corresponding period in 1998. The increase was due primarily to the increased
debt levels associated with financing the Corcom Merger, the Products
Acquisition, and the CD Acquisition.
Income taxes of the Company for the three months ended June 30, 1999 were 16.8%
of loss before income taxes as compared to 40.5% for the corresponding period in
1998. The decreased effective tax rate is due primarily to the goodwill
amortization not deductible for tax purposes from the Corcom Merger and the
Products Acquisition.
Extraordinary item for the three months ended June 30, 1998 reflects the write-
off of $585,000 of unamortized deferred financing costs associated with the Old
Senior Credit Facility net of taxes of $234,000.
Segment Discussion
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
<PAGE>
High Performance Group
Net sales of HPG decreased by $6.1 million, or 13.2%, to $39.8 million from
$45.8 million for the corresponding period in 1998. This decrease is due
primarily to (i) a softening in military/defense and the automatic test
equipment markets and (ii) a recovering economic slow down in Asia partially
offset by (iii) the effect of the Wilmar Acquisition. Revenues were unfavorably
impacted by the relocation of operations due to the required requalifications in
the customer base.
Operating income of HPG decreased $4.3 million, or 48.0%, to $4.6 million from
$8.9 million for the same period in 1998. Operating income of HPG as a
percentage of net sales of HPG decreased to 11.9% from 19.5% for the same period
in 1998. The decrease in operating income as a percentage of net sales is due
primarily to lower sales prices in an increasingly competitive market, lower
revenues and approximately $365,000 of expenses in connection with the
relocation of the Waynesboro, VA facility.
Specialized Industrial Group
Net sales of SIG increased $35.7 million, or 444.8%, to $43.8 million from $8.0
million for the same period in 1998. Operating income of SIG increased $2.4
million, or 205.2%, to $3.6 million from $1.2 million for the same period in
1998. Operating income of SIG as a percentage of SIG net sales decreased to 8.3%
from 14.8% for the same period in 1998. As a result of the Corcom Merger and the
Products Acquisition, net sales and operating income increased $37.6 million and
$3.2 million, respectively. The remaining decrease in net sales and operating
income is $1.9 million and $792,000 respectively, and is due primarily to a 1998
peak in a certain type of relay used in the communications industry.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
High Performance Group
Net sales of HPG decreased by $3.6 million, or 15.7%, to $19.5 million from
$23.1 million for the corresponding period in 1998. This decrease is due
primarily to a softening in military/defense and the automatic test equipment
markets partially offset by the effect of the Wilmar Acquisition. Revenues were
unfavorably impacted by the relocation of operations due to the required
requalifications in the customer base.
Operating income of HPG decreased $2.7 million, or 56.9%, to $2.0 million from
$4.7 million for the same period in 1998. Operating income of HPG as a
percentage of net sales of HPG decreased to 10.5% from 20.5% for the same period
in 1998. The decrease in operating income as a percentage of net sales is due
primarily to lower sales prices in an increasingly competitive market, lower
revenues and approximately $65,000 of expenses in connection with the relocation
of the Waynesboro, VA facility.
Specialized Industrial Group
<PAGE>
Net sales of SIG increased $25.5 million, or 565.0%, to $30.0 million from $4.5
million for the same period in 1998. Operating income of SIG increased $1.8
million, or 278.7%, to $2.5 million from $653,000 for the same period in 1998.
Operating income of SIG as a percentage of SIG net sales decreased to 8.2% from
14.5% for the same period in 1998. As a result of the Corcom Merger and the
Products Acquisition, net sales and operating income increased $26.6 million and
$2.4 million, respectively. The remaining decrease in net sales and operating
income is $1.1 million and $530,000 respectively, and is due primarily to a 1998
peak in a certain type of relay used in the communications industry.
Liquidity and Capital Resources
Although there can be no assurances, the Company anticipates that its cash flow
generated from operations and borrowings under the Senior Credit Facility will
be sufficient to fund the Company's working capital needs, planned capital
expenditures, scheduled interest payments (including interest payments on the
Notes and amounts outstanding under the Senior Credit Facility) and its business
strategy for the next twelve months. However, the Company may require additional
funds if it enters into strategic alliances, acquires significant assets or
businesses or makes significant investments in furtherance of its growth
strategy. The ability of the Company to satisfy its capital requirements will
depend upon the future financial performance of the Company, which in turn will
be subject to general economic conditions and to financial, business, and other
factors, including factors beyond the Company's control. At June 30, 1999, the
Company had available unused borrowing capacity of approximately $13.8 million
under the Senior Credit Facility.
Cash Provided by Operating Activities
For the six months ended June 30, 1999, cash provided by operating activities
was $5.7 million, compared to $3.7 million for the same period in 1998. The
increase in cash provided by operations is due primarily to improved collections
of accounts receivable and a reduction in inventory partially offset by lower
net income and lower accounts payable levels.
The days' sales outstanding for accounts receivable was approximately 48.3 trade
days at December 31, 1998 and approximately 46.4 at June 30, 1999. The average
days' sales outstanding decreased due to better collections.
The Company's inventories increased from $26.7 million at December 31, 1998 to
$27.5 million at June 30, 1999. This increase is due to the Products Acquisition
($4.2 million) offset by improved inventory management. Inventory turns were 5.2
at June 30, 1999 and 2.9 at December 31, 1998.
The Company's accounts payable increased from $7.4 million at December 31, 1998
to $11.3 million at June 30, 1999. $5.9 million of this increase was due to the
Products Acquisition partially offset by lower accounts payable due to lower
inventory purchases.
<PAGE>
Cash Used in Investing Activities
Capital Expenditures were $2.0 million for the six months ended June 30, 1999
and $1.2 million for the corresponding period in 1998. Acquisition spending
totaled $60.1 million for the six months ended June 30, 1999 due to the Products
Acquisition and was $46.8 million for the six months ended June 30, 1998 due to
the Wilmar Acquisition and the Corcom Merger. Investment in joint ventures was
$144,000 for the six months ended June 30, 1999 and $95,000 for the
corresponding period in 1998.
Cash Provided By Financing Activities
Cash provided by financing activities for the three months ended June 30, 1999
was $57.0 million compared to $44.9 million for the same period in 1998. This
increase is due primarily to financing the Products Acquisition through
additional borrowings under the amended Senior Credit Facility as well as
additional paid-in capital from the Parent.
Adjusted EBITDA
Adjusted EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization, and before any gain (loss) on disposal of
assets, adjusted for extraordinary, unusual, and nonrecurring items, and
additional charges to cost of sales and general and administrative costs
resulting from the fair value adjustments to inventory and fixed assets pursuant
to Accounting Principles Board Opinion Nos. 16 and 17. Adjusted EBITDA is not
intended to represent cash flow from operations or net income as defined by
generally accepted accounting principles and should not be considered as a
measure of liquidity or an alternative to, or more meaningful than, operating
income or operating cash flow as an indication of the Company's operating
performance. Adjusted EBITDA is included herein because management believes that
certain investors find it a useful tool for measuring the Company's ability to
service its debt. There are no significant commitments for expenditures of funds
not contemplated by this measure of adjusted EBITDA. Adjusted EBITDA as
presented may not be comparable to other similarly titled measures presented by
other companies and could be misleading unless substantially all companies and
analysts calculate adjusted EBITDA the same.
Adjusted EBITDA increased to $12.5 million for the six months ended June 30,
1999 from $11.5 million for the corresponding period in 1998. Adjusted EBITDA
increased to $7.4 million for the three months ended June 30, 1999 from $6.1
million for the corresponding period in 1998.
Inflation
The Company does not believe inflation has had any material effect on the
Company's business over the past three years.
Disclosure Regarding Forward-Looking Statements
Statements made by the Company which are not historical facts are forward
looking statements that involve risks and uncertainties. Actual results could
differ materially from those expressed or implied in forward looking statements.
All such forward looking statements are subject to the safe harbor created by
the Private Securities Litigation Reform Act of 1995. Important factors that
could cause future financial performance to differ materially from past results
and from those expressed or implied in this document, include, without
limitation, the risks of acquisition of businesses (including limited knowledge
of the businesses acquired and potential
<PAGE>
misrepresentations from sellers), changes in business strategy or development
plans, dependence on independent sales representatives and distributors,
environmental regulations, availability of financing, competition, reliance on
key management personnel, ability to manage growth, loss of customers and a
variety of other factors.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two-
digit year is commonly referred to as the "Year 2000 Compliance" issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
data based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Many of the Company's systems have
hardware and packaged software recently purchased from large vendors who have
represented that these systems are Year 2000 compliant. Internal and external
resources are being used to make the required modifications and are expected to
be completed and tested by September 1, 1999. The Company's major systems,
including its manufacturing, general ledger and payroll systems have been due
for upgrades in order to maintain vendor support. The Company, therefore, would
be devoting the efforts of its internal resources to some or all of these
projects through the normal course of business even if Year 2000 issues had not
existed.
The company relies upon third parties for its operations including, but not
limited to, suppliers of inventory, software, telephone service, electrical
power, water and financial services. The Company is in the process of
communicating with these third parties 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. Initial
communications with these third parties was completed by June 30, 1999.
However, there can be no guarantee that the systems of the other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. If
it has been determined that a vendor will not be Year 2000 compliant in a timely
manner, the Company will replace them with an alternative vendor. In most cases
there are more than one vendor for the Company's purchasing requirements. In the
case of no alternative suppliers, the Company will build inventory to maintain
production until the situation can be resolved. The Company is verifying that
its major customers are Year 2000 compliant. If it is determined that a customer
will not be compliant in a timely manner, the Company may request C.O.D. terms.
However, in most cases the Company believes that its records will be sufficient
to ensure collectability from its customers.
The total cost to the Company of these Year 2000 Compliance activities is
estimated to be less than $250,000, including any software upgrades, equipment
upgrades, incidentals and it is not anticipated to be material to its future
financial position, results of operations or cash flows in any given year. All
costs will be funded through its regular operating and financing activities.
These costs and the date which the Company plans to complete the Year 2000
modification and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
Item 3:
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from changes in interest rates and
foreign currency exchange rates which may adversely affect its results of
operations and financial condition. The Company seeks to minimize these risks
through its regular operating and financing activities.
The Company engages in neither speculative nor derivative financial or trading
activities
Interest Rate Risk
The Company has exposure to interest rate risk related to certain instruments
entered into for other than trading purposes. Specifically, the Company has in
place the Senior Credit Facility, which consists of two term loans ($86.0
million at June 30,1999) and the revolving credit facility ($10.3 million at
June 30, 1999), which bears interest at variable rates. (See Note 4 to the
unaudited condensed consolidated financial statements). Borrowings under the
Senior Credit Facility (both the term loans and revolving credit facility) bear
interest based on Lenders' Reference Rate (as defined in the Senior Credit
Facility) or LIBOR Rate plus an applicable margin. While changes in the
Reference Rate or the LIBOR Rate could affect the cost of funds borrowed in the
future, existing amounts outstanding at June 30, 1999 are primarily at fixed
rates. The Company, therefore, believes the effect, if any, of reasonably
possible near-term changes in interest rates on the Company's consolidated
financial position, results of operations and cash flows would not be material.
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"). The Company's Notes are at a fixed interest rate of 10%. As a
result, a change in the fixed rate interest market would change the estimated
fair market value of the Notes. The Company believes that a 10% change in the
long-term interest rate would not have a material effect on the Company's
financial condition, results of operations and cash flows.
While the Company historically has not used interest rate swaps, it may, in the
future, use interest rate swaps to assist in managing the Company's overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
Foreign Currency Exchange Risk
The Company has seven foreign subsidiaries or divisions, located in Mexico,
Germany, Jamaica, Barbados and Hong Kong as well as Joint Ventures in India and
China. The Company generates about 18% of its net sales from customers located
outside the United States. The Company's ability to sell its products in these
foreign markets may be affected by changes in economic, political or market
conditions in the foreign markets in which it does business.
The Company experiences foreign currency translations gains and losses, which
are reflected in the Company's consolidated statement of operations and
comprehensive income, due to the strengthening and weakening of the US dollar
against the currencies of the Company's foreign subsidiaries or divisions and
the resulting effect on the valuation of the intercompany accounts and certain
assets of the subsidiaries which are denominated in US dollars. The net loss
resulting from foreign currency translations was $114,000 in the first half of
1999 compared to a gain of $1,000 in the comparable period of 1998. The net loss
resulting from foreign currency translations was $31,000 in the second quarter
of 1999 compared to a loss of $2,000 in the comparable period of 1998.
<PAGE>
The Company anticipates that it will continue to have exchange gains or loss
from foreign operations in the future.
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
See Index of Exhibits. On April 5, 1999, the Company filed a Current Report
on Form 8-K to report its Acquisition of Products Unlimited.
On June 4, 1999, the Company filed an amendment to Current Report on Form 8-K to
report certain financial statements of Products Unlimited and certain pro forma
financial information of the Company pursuant to Items 7(a) and 7(b) of Form
8-K.
SIGNATURES
Communications Instruments, Inc.
August 13, 1999 /s/ Ramzi A. Dabbagh
- ------------------------- ---------------------------------------
Date Ramzi A. Dabbagh
Chairman of the Board
Chief Executive Officer
August 13, 1999 /s/ Richard L. Heggelund
- ------------------------- ---------------------------------------
Date Richard L. Heggelund
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------------------------------------------------------------------
2.1+ Agreement and Plan of Merger, dated as of March 10, 1998, by and among
the Company, RF Acquisition Corp. and Corcom, Inc. is incorporated
herein by reference to Report on Form 8-K
(File Number 333-38209).
3.1 Articles of Incorporation of the Company is incorporated herein by
reference to Registration Statement on Form S-4
(File Number 333-38209)
3.2 By-laws of the Company is incorporated herein by reference to
Registration Statement on Form S-4
(File Number 333-38209)
3.3 Articles of Incorporation of Kilovac Corporation ("Kilovac") is
incorporated herein by reference to Registration Statement on Form S-4
(File Number 333-38209)
3.4 By-laws of Kilovac Corporation is incorporated herein by reference to
Registration Statement on Form S-4
(File Number 333-38209)
3.5 Articles of Incorporation of Kilovac International, Inc. ("Kilovac
International") is incorporated herein by reference to Registration
Statement on Form S-4
(File Number 333-38209)
3.6 By-laws of Kilovac International is incorporated herein by reference to
Registration Statement on Form S-4
(File Number 333-38209)
3.7 Amended and Restated Articles of Incorporation of Corcom, Inc. is
incorporated herein by reference to Report on Form 10-K
(File Number 333-38209)
3.8 By-laws of Corcom, Inc. is incorporated herein by reference to Report on
Form 10-K
(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 herein by reference 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 herein by reference to
Registration Statement on Form S-4
(File Number 333-38209)
<PAGE>
4.3 Registration Rights Agreement dated as of September 18, 1997 between the
Company, Kilovac and Kilovac International and BancAmerica Securities,
Inc. and Salomon Brothers, Inc., is incorporated herein by reference
to Registration Statement on Forms S-4
(File number 333-38209)
4.4 Supplemental Indenture, dated as of June 18, 1998 between Corcom, Inc.
and Norwest Bank Minnesota, National Association is incorporated
herein by reference to Report on Form 10-K
(File number 333-38209)
10.1 Employment Agreement dated as of May, 1993 between the Company and Ramzi
A. Dabbagh is incorporated herein 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.
Dan Taylor is incorporated herein by reference to Registration
Statement on Form S-2
(File number 333-38209)
10.3 Employment agreement dated as of May, 1993 between the Company and
Michael A. Steinback is incorporated herein by reference 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 herein 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, LP, is incorporated by reference to
Registration Statement on Form S-4
(File number 333-38209)
10.6 Tax Sharing Agreement dated as of September 18, 1997 between the
Company, Parent, Kilovac International and Kilovac International FSC
Ltd. is incorporated herein by reference 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 National Trust and Savings
Association and BancAmerica Securities, Inc., is incorporated herein
by reference to Registration Statement on Forms S-4
(File number 333-38209)
10.8 Pledge Agreements dated as of September 18, 1997 by parent, the Company,
Kilovac and Kilovac International in favor of Bank of America Trust
and Savings Association, is incorporated herein by reference to
Registration Statement on Form S-4
(File number 333-38209)
<PAGE>
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 incorporated herein 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 Association is incorporated herein by
reference to Registration Statement on Form S-4
(File Number 333-38209)
10.11 Stock Subscription and Purchase Agreement dated as of September 20,
1995, by and among the Company, Kilovac and the stockholders and
optionholders of Kilovac name therein, is incorporated herein by
reference to Registration Statement on Form S-4
(File Number 333-38209)
10.12+ Asset Purchase Agreement dated as of June 27, 1996 between the Company
and Figgie International Inc., is incorporated herein 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 herein by reference to Registration 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. d/b/a Hartman
Division of CII Technologies Inc. is incorporated herein by reference
to Registration Statement on Form S-4
(File Number 333-38209)
10.15 Second Amendment to Stock Subscription and Purchase Agreement dated as
of August 26, 1996 by and among the Company, Kilovac and certain
selling stockholders, is incorporated herein 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 stockholders, is incorporated
herein 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 herein by reference 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
<PAGE>
American National Bank and Trust Company of Chicago, is incorporated
herein by reference to Registration 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 incorporated herein 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 incorporated 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
herein 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 herein by reference to Registration
Statement on Form S-4
(File Number 333-38209)
10.23 Employment Agreement dated as of October 11, 1995 between Kilovac and
Pat McPherson is incorporated herein by reference to Registration
Statement on Form S-4
(File Number 333-38209)
10.24 Employment Agreement dated as of October 11, 1997 between Kilovac and
Rick Danchuk is incorporated herein 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 herein 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 incorporated by reference to
Report on Form 8-K
(File Number 333-38209)
10.27+ Stock Purchase Agreement dated as of October 31, 1997 by and between the
Company and Societe Financiere D'Investissements Dans L'Equipement et
la Construction Electrique, S.A., the sole stockholder of IBEX
Aerospace Technologies, Inc. is incorporated herein by reference to
Report on Form 10-K
(File Number 333-38209)
10.28+ Asset Purchase Agreement dated May 6, 1998, between Kilovac Corporation,
Zerubavel Heifetz, Cesar Marestaing and Wilmar Electronics, Inc. is
incorporated herein by reference to Report on Form 10-K
(File Number 333-38209)
<PAGE>
10.29+ Asset Purchase Agreement dated as of July 24, 1998, by and between the
Company and Cornell-Dubilier Electronics, Inc.
10.30 Voting Agreement dated as of March 10, 1998, by and among RF Acquisition
Corp., Werner E. Neuman and James A. Steinback is incorporated herein
by reference to Report on Form 10-K
(File Number 333-38209)
10.31+ Credit Agreement dated as of June 19, 1998, among the Company, Parent,
Bank of America National Trust and Savings Association and certain
other lending institutions from time to time a party thereto is
incorporated herein by reference to Report on Form 10-K
(File Number 333-38209)
10.32+ Pledge Agreement dated as of June 19, 1998, among Parent, the Company,
Kilovac and Kilovac International in favor of Bank of America National
Trust and Savings Association is incorporated herein by reference to
Report on Form 10-K
(File Number 333-38209)
10.33+ Subsidiary Guarantee dated as of June 19, 1998 by Kilovac, Kilovac
International and Corcom, Inc. in favor of Bank of America National
Trust and Savings Association is incorporated herein by reference to
Report on Form 10-K
(File Number 333-38209)
10.34+ Security Agreement dated as of June 19, 1998, among Parent, the
Company, Kilovac, Kilovac International and Corcom, Inc. in favor of
Bank of America National Trust and Savings Association is incorporated
herein by reference to Report on Form 10-K
(File Number 333-38209)
10.35+ Stock Purchase Agreement dated March 19, 1999, by and among Products
Unlimited Corporation, the Stockholders of Products Unlimited
Corporation and the Company is incorporated herein by reference to
Report on Form 8-K
(File Number 333-38209)
10.36+ Amended and restated Credit Agreement among Parent, the Company,
various lenders, NationsBank, N.A., as an Issuing Lender and Swingline
Lender, and NationsBank, N.A., as the Administrative Agent, is
incorporated herein by reference to Report on Form 8-K
(File Number 333-38209)
10.37+ Amended and restated Subsidiary Guaranty by certain subsidiaries of the
Company in favor of NationsBank, N.A. is incorporated herein by
reference to Report on Form 8-K
(File Number 333-38209)
10.38+ Amended and restated Security Agreement among Parent, the Company,
certain subsidiaries of the Company and Bank of America National Trust
and Savings Association, as collateral agent, is incorporated herein
by reference to report on Form 8-K
(File Number 333-38209)
<PAGE>
10.39+ Amended and restated Pledge Agreement by Parent, the Company and
certain subsidiaries of the Company in favor of Bank of America
National Trust and Savings Association, as collateral agent, is
incorporated herein by reference to Report on Form 8-K
(File Number 333-38209).
11.1 Statement re-Computation of Per Share Earnings. Not required because
the relevant computations can be clearly determined from the material
contained in the financial statements included herein.
27 Financial Data Schedule
99.1 Press release dated March 22, 1999, published by the registrant is
incorporated herein by reference to Report on Form 8-K
(File Number 333-38209).
+ 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 of Regulation S-K.
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 913
<SECURITIES> 0
<RECEIVABLES> 25,042
<ALLOWANCES> (462)
<INVENTORY> 27,479
<CURRENT-ASSETS> 59,484
<PP&E> 61,081
<DEPRECIATION> (18,648)
<TOTAL-ASSETS> 201,276
<CURRENT-LIABILITIES> 31,112
<BONDS> 192,238
0
0
<COMMON> 0
<OTHER-SE> (32,460)
<TOTAL-LIABILITY-AND-EQUITY> 201,276
<SALES> 49,277
<TOTAL-REVENUES> 49,277
<CGS> 37,546
<TOTAL-COSTS> 37,546
<OTHER-EXPENSES> 8,102
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<INTEREST-EXPENSE> 4,706
<INCOME-PRETAX> (1,077)
<INCOME-TAX> (161)
<INCOME-CONTINUING> (916)
<DISCONTINUED> 0
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<NET-INCOME> (916)
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