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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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Form 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
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 No.)
1200 Ridgefield Blvd., Suite 200, Asheville, N.C. 28806
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (828) 670-5300
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. (X) Yes (_) No
All of the voting stock of the registrant is held by an affiliate of
the registrant.
On March 30, 2000, 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:
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Part of Form
10-K Into
which
Document Incorporated
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Registration Statement on Form S-4.................................Item 14
Report on Form 8-K.................................................Item 14
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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, general purpose relays, HVAC relays, solenoids,
radio frequency interference "RFI" filters, transformers, and definite
purpose contactors. Relays are switches used to control electric
current in a circuit; solenoids convert electric signals into
mechanical motion; RFI Filters are devices that control
electromagnetic energy; transformers are a safety electronic device
designed to "step-up or down" the incoming voltage supply; and
definite purpose contactors are a defined type of relay used to start
a compressor or motor in a user's end product. They are critical
components for a wide range of commercial, industrial and electronic
end products. The high performance group 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 specialized industrial group focuses
on general purpose relays, RFI filters, transformers and definite
purpose contactors used in a broad range of niche commercial end
products sold directly to leading Original Equipment Manufacturers
("OEMs") and through established distribution channels. The Company's
products are used in a large number of diverse end-use applications
including commercial/industrial equipment, commercial aircraft,
defense electronics, communications equipment, automatic test
equipment, heating, ventilation, air conditioning ("HVAC") industry,
and niche automotive applications.
CII was initially formed in 1980 by Ramzi Dabbagh, the Company's
Chairman 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
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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, invested approximately $21.7 million and
the retention of capital stock of Parent, which, for the purposes of
the Recapitalization was 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, all of which are wholly
owned by the Company: Kilovac, a California corporation; Corcom, an
Illinois corporation; Products Unlimited Corporation, an Iowa
corporation and Electro-Mech S. A., a Mexican corporation. The Company
also holds 40% of the shares of CII Guardian International Ltd., an
Indian corporation and 50% of the shares of Shanghai CII Electronics
Co., Ltd., a Chinese 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. Corcom has the following
subsidiaries, all of which are wholly owned by Corcom: Corcom S.A., a
Mexico corporation, Corcom West Indies Ltd. and Corcom International
Ltd., both Barbados corporations, Corcom GmbH, a German corporation
and Corcom Far East Ltd., a Hong Kong corporation. Products Unlimited
has the following subsidiaries, all of which are wholly owned by
Products Unlimited: Marc Industries, Inc., an Iowa corporation, SOL
Industries, Inc., an Iowa corporation, and GW Industries, Inc., an
Iowa corporation.
The Company was incorporated in North Carolina in 1980. The Company's
executive offices are located at 1200 Ridgefield Boulevard, Suite 200,
Asheville, North Carolina, 28806 and its telephone number is (828)
670-5300.
INDUSTRY SEGMENTS
The Company has five business units, which have separate management
teams and infrastructures that offer electronic products. These five
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, power relays and contactors, high voltage relays,
solenoids and electronic products. HPG accounted for 44% of 1999
consolidated net sales. SIG includes Corcom, Products Unlimited and
the Midtex brand. Products manufactured by SIG include RFI filters,
general purpose relays, transformers and contactors. SIG accounted for
56% of 1999 consolidated net sales.
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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, cancellation fees, other
income and expense, income taxes and extraordinary items.
PRODUCTS
Certain product lines sold by the Company (such as HVAC relays,
definite purpose contactors, RFI filters and transformers) were
acquired by the Company in connection with the Company's acquisition
of Corcom in June 1998 and of Products Unlimited in March of 1999.
RELAYS
A relay is an electrically operated switch, which controls electric
current or signal transmissions. Electromechanical relays 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 800 types of high
performance relays in its North Carolina, Ohio, and California
facilities. The Company, through a joint venture, also produces
certain high performance relays in India. 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, aerospace and defense
products. High performance relays accounted for approximately 42%,
74%, and 82% of the Company's net sales in 1999, 1998 and 1997,
respectively.
General purpose relays- The Company's general-purpose relays are
generally targeted towards niche applications with which the Company
has sole source relationships or limited competition. 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
Asia 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 5%, 12%
and 13% of the Company's net sales in 1999, 1998 and 1997
respectively.
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HVAC relays - The Company's HVAC relays are produced for application
in the HVAC market. These relays, used in control of heating or
cooling systems, are designed to meet environmental and functional
demands of domestic, commercial and industrial systems. This type of
relay is used in control of fan motors, pumps, gas valves and other
accessories associated with space heating/cooling or refrigeration.
Three basic relay types are built for domestic and export sales in
Iowa and Mexico. Approximately 80% of the HVAC relays produced by the
Company are sold to OEMs who use the products directly in new
production, or resell through manufacturer supported service
organizations. The remaining sales are to private repair or
replacement organizations. One of the three relay types has a unique
design and is applied to match air conditioning or refrigeration
motors, and assures dependable motor starts under all conditions.
Definite purpose contactors - Definite purpose contactors are a
specialized application of switching device positioned to serve a
niche in the HVAC market. The product is designed to provide a low
cost, reliable control with a definite life in service. The term
definite purpose describes the limited use of applications
differentiating this class of contactors from general purpose
contactors. General purpose contactors have replaceable parts, few
limitations for use, and selling prices five to six times the cost of
definite purpose contactors. The definite purpose contactors cover 25
to 120 amperes switching of 120 to 600 VAC in one, two, three and four
pole configurations. The definite purpose contactors are sold
domestically to OEM's and are exported for use in Europe and Asia. The
definite purpose contactor is intended to meet the rigorous
requirements of service in HVAC or refrigeration applications for a
typical twenty year service life. Definite purpose contractors are
manufactured at one of the Company's facilities in Illinois. Definite
purpose contactors accounted for approximately 13% of the Company's
net sales in 1999.
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 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.
FILTERS
RFI Filters - Radio frequency interference ("RFI") Filters are
electronic components used to protect electronic equipment from radio
frequency interference conducted through the alternating current
("AC") power cord. RFI Filters are also used to control the emission
of the RFI generated by electronic equipment so these emissions do not
interfere with other electronic devices. The Company also manufactures
a complete line of Signal Sentry(TM) products, which are filtered
modular RJ jacks designed to solve RFI problems on signal lines. The
Company maintains a catalog of standard commercial filters that
contains approximately 500 designs, offering a variety of sizes,
electrical configurations, current ratings and environmental
capabilities. These filters consist of electronic circuits utilizing
passive electrical components: inductance coils, capacitors and
resistors. These circuits are enclosed in a metal or plastic case
having terminals, lead wires or integral connectors, for attachment to
associated equipment. The Company also manufactures and sells RFI
filters for the military and facility markets. Both product lines are
manufactured at two of the Company's facilities in Mexico. Both
product lines are similar to commercial filters in their basic
function and design. However, military filters are subject to
extremely high performance requirements as described by military
specification. Facility filters are larger versions of the
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Company's line of commercial filters and are used to control RFI
conducted through the main power line feeding secure facilities. All
the Company's filters are designed and built to operate continuously
for at least five years when connected across a live AC power line.
The filters must perform without interruption because, in most cases,
they are energized even when the equipment in which they are installed
is switched off. RFI Filters accounted for approximately 23% and 14%
of the Company's net sales in 1999 and 1998, respectively.
TRANSFORMERS
Transformers - Transformers are electrical devices used extensively in
control and safety systems. Transformers are used in all modern
electronic devices and control systems to provide low voltage from a
higher voltage source. The transformer changes AC voltages either up
or down from the input voltage (primary) to the output voltage
(secondary) and may provide multiple voltage sources if so
constructed. The Company is the leading producer of transformers used
in the domestic HVAC market. All domestic thermostatic controls
require a transformer to be used to provide a safe 24 VAC control
voltage. The Company is a primary source for Class II (energy
limiting) transformers, supplying all domestic HVAC manufacturers.
Several lines of standard and numerous specialized transformers are
produced and shipped from three manufacturing locations in the United
States. Transformers accounted for approximately 11% of the Company's
net sales in 1999.
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 sales managers, 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 $1.2 and $1.0 million of the
Company's product development costs in 1999 and 1998, respectively.
The Company has developed several new high performance relays to be
used in the commercial airframe, high frequency communications, space
satellite, and automatic test equipment market place. These products
are being placed into production in 2000 and the Company expects to
begin selling certain of these products in 2000 and beyond. The
Company continues to develop lighter, smaller and higher performing
relays to serve new, existing and emerging markets. The Company
continues to develop these products for new end use applications.
The Company is also currently developing a new line of electrical
contactors for use in commercial and residential heating, ventilation,
and air conditioning equipment. These products are currently in the
prototype stage and the Company expects to begin manufacturing and
selling these products in 2001 and beyond.
The Company is currently developing several new power line
electromagnetic interference filters for use in telecom, industrial
and medical equipment as well as new filtered connectors to be used in
telecom and network equipment. Some of these products are proprietary
for certain of the Company's larger OEM customers and others will be
standard catalog products for sale to the industry as a whole. These
products are currently in the prototype stage and the Company expects
to begin manufacturing and selling these products in 2000 and beyond.
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PROPRIETARY RIGHTS
The Company currently holds 20 US patents and 20 foreign patents; 13
registered US trademarks and 34 foreign registered trademarks, and has
two US patent applications, nine foreign patent applications, one
international patent application and nine US trademark applications.
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 is not 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.
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 18% of
net sales during 1999 (comprised primarily of approximately 10.4% to
Europe, 3.5% to North America, and 2.5% to Asia). No single customer
accounted for 5% or more of the Company's total direct net sales for
1999 or 1998, respectively.
BACKLOG
The Company's backlog at December 31, 1999 was $60.7 million, with
$51.1 million shippable within 1 year. The Company's backlog at
December 31, 1998 was $58.4 million, with $49.8 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, ECE and Eaton in the high performance relay
market, Tyco Electronics in the general purpose relay market, Shaffner
A.G., and Delta in the RFI filter market, Siemens and Cutler-Hammer in
the definite purpose contactor market,
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Basler and Honeywell in the transformer market and General Electric
and Honeywell in the HVAC relay 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
may also 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 liability 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 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
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operating at 90% of its intended capacity 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, unless it provides a
substantially lower estimate. In that case, any substantial
differences are to be resolved through negotiation or expedited
arbitration. 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, to such an extent that it will have a materially adverse
affect on the Company's financial position or results of operations.
The Company has recorded a liability for the total remediation costs
of approximately $2.0 million, representing the discounted amount of
future remediation costs over the remaining period of remediation.
Applicable environmental laws provide for joint and several liability,
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 leased from a wholly-owned subsidiary of Figgie 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. 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
included an indemnity by the 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 had 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
"Escrowed Funds").
On or about January 5, 2000, the Company entered into an agreement
with the former owners of the Mansfield Property in which it purchased
the property and certain equipment and released the Escrowed Funds.
This agreement followed the decision by the former owner's registered
environmental consultant that no further environmental remediation was
needed at the property so long as the property was restricted to
industrial usage. The agreement reduces the indemnity cap to
$1,000,000 over nine years if the former owner does not seek and
obtain a covenant not to sue from the Ohio EPA relating to the site
and reduces the cap to zero over ten years if it obtains a covenant
not to sue relating to the site from the Ohio EPA. In either event,
the agreement leaves in place the Company's right to seek contribution
or indemnity under common law or statute from the former owners for
environmental problems and requires the
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former owners to complete some soil cleanup actions within six months
of closing. The transaction was closed on January 7, 2000. The Company
believes that remediation costs will not exceed the Indemnification
Cap. If such costs exceed the Cap and the Company is unable to obtain,
or is delayed in obtaining indemnification or contribution for any
reason, the Company could be materially and adversely affected. The
Company does not maintain environmental impairment liability
insurance. See Note 9 to Consolidated Financial Statements of
Communications Instruments, Inc. and subsidiaries.
EMPLOYEES
As of December 31, 1999, the Company had approximately 2,660
employees. Of these employees, approximately 620 are salaried
employees and approximately 2,040 are hourly workers. Of the
approximately 620 salaried employees, approximately 260 perform
manufacturing functions, over 50 are engineers engaged in research and
development activities, including the design and development of new
customer applications, 60 perform quality assurance tasks and
approximately 50 perform customer service. Approximately 150 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 2003.
The Company closed the Waynesboro, Virginia facility as negotiated and
accepted by the United Electrical, Radio and Machine Workers of
America, relocating products to the North Carolina facilities.
The Company believes that its relations with its employees are
satisfactory.
RECENT DEVELOPMENTS
As of the date of the filing of this report on Form 10K, there have
been no recent developments.
ITEM 2 - PROPERTIES
FACILITIES
The Company, headquartered in Asheville, 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:
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Location Square Leased/ Products Manufactured
Footage Owned
Fairview, North Carolina 70,000 Owned High performance relays and
solenoids
Sterling, Illinois 62,600 Owned Definite purpose contactors
Mansfield, Ohio 53,000 Owned High performance power relays
at 1/7/00
Juarez, Mexico 47,000 Owned RFI filters
Juarez, Mexico 45,000 Leased General purpose relays,
definite purpose contactors
Carpinteria, California 44,000 Leased High voltage and power
switching relays
Libertyville, Illinois 35,000 Leased RFI Filters
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Asheville, North Carolina 26,000 Owned High performance relays and
electronic relays
Guttenberg, Iowa 24,000 Owned Transformers
El Paso, Texas 19,000 Leased Distribution center
Prophetstown, Illinois 18,000 Owned Transformers
Sabula, Iowa 14,800 Owned HVAC relays
Juarez, Mexico 13,000 Leased Facility Filters
El Paso, Texas 8,000 Leased Distribution center
Martinsreid, Germany 7,000 Leased Sales and distribution center
</TABLE>
The Company's manufacturing and assembly facilities contain
approximately an aggregate of 486,000 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 California and its facility in Ohio,
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, its three facilities in
Mexico, and its facility in Illinois are all IS9001 certified and its
facility in California is IS9001 and QS9000 certified. The Company's
facilities in Fairview and Asheville, NC have ISO 9001 compliant
product lines and procedures. The facilities in California and Ohio
are ISO 14001 certified. The facility in California is also Mil-R-
83725, Mil-R-6106 and SAE ARD 50031 certified.
The leases for the Company's facility in Illinois expires in 2004, its
two leased facilities in Juarez, Mexico expire in 2001 and 2000,
respectively, its facility in Martinsreid, Germany expires in 2000,
one of the leased El Paso warehouses expires in 2002, the other leased
El Paso warehouse is on a month to month lease and its facility in
California expires in 2002.
10
<PAGE>
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 year ended December 31, 1995, (ii)
the year ended December 31, 1996 and (iii) data as of December 31,
1997, 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.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Fiscal Year Ended December 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $ 39,918 $ 66,336 $ 89,436 $ 120,030 $ 173,983
Cost of sales (1) ......................... 28,687 46,779 59,601 81,285 128,816
--------- --------- --------- --------- ---------
Gross margin ...................... 11,231 19,557 29,835 38,745 45,167
Selling expenses .......................... 3,229 4,903 6,077 8,635 12,083
General and administrative expenses (2) .. 3,326 5,464 7,432 8,935 11,593
Research and development expenses ......... 301 1,011 1,090 1,328 1,714
Amortization of goodwill and other
intangible assets ................... 251 543 648 1,769 4,537
Special compensation charge (3) ........... 1,300 - - - -
Environmental expense (4) ................. 951 - - - -
Special acquisition expenses (5) .......... 2,064 - 260 - -
--------- --------- --------- --------- ---------
(Loss) income from operations ... (191) 7,636 14,328 18,078 15,240
Interest expense and other financing ...... -
costs, (net) (6) ................... (2,309) (5,055) (6,573) (12,552) (17,887)
Cancellation fees (7) ..................... - - (800) - -
Other income (expense), net (8) .......... 2 201 (17) (171) (597)
--------- --------- --------- --------- ---------
(Loss) income before income taxes,
minority interest in subsidiary and
extraordinary items ................ (2,498) 2,782 6,938 5,355 (3,244)
(Benefit from) provision for income taxes . (812) 1,120 2,836 2,371 (419)
--------- --------- --------- --------- ---------
(Loss) income before minority interest in
subsidiary and extraordinary items ..... (1,686) 1,662 4,102 2,984 (2,825)
Income applicable to minority interest in
subsidiary ............................. (35) (33) (55) - -
--------- --------- --------- --------- ---------
(Loss) income before extraordinary items .. $ (1,721) $ 1,629 $ 4,047 $ 2,984 $ (2,825)
Extraordinary items (less applicable income
tax benefit: 1997- $266,1998 - $234 (9).. - (398) (351) -
--------- --------- --------- --------- ---------
Net (loss) income ................... $ (1,721) $ 1,629 $ 3,649 $ 2,633 $ (2,825)
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Gross Margin % ............................ 28.1% 29.5% 33.4% 32.3% 26.0%
Depreciation and amortization ............. $ 2,442 $ 3,551 $ 4,320 $ 6,928 $ 13,497
Capital Expenditures ...................... $ 1,139 $ 2,449 $ 2,146 $ 2,795 $ 4,430
Ratio of earrnings to fixed charges (10) .. NA 1.7x 2.1x 1.4x 0.8x
NET CASH PROVIDED BY (USED IN)
Operating Activities ................. $ 1,960 $ 8,498 $ 6,438 $ 9,232 $ 12,713
Financing Activities ................. 13,645 5,973 6,433 41,482 56,880
Investing Activities ................. (15,484) (14,548) (12,689) (50,543) (64,017)
OTHER NON-GAAP FINANCIAL DATA (11):
Adjusted EBITDA ........................... $ 6,618 $ 11,873 $ 19,128 $ 24,766 $ 28,172
Adjusted EBITDA Margin % .................. 16.6% 17.9% 21.4% 20.6% 16.2%
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 193 $ 116 $ 298 $ 469 $ 6,045
Working Capital ........................... 10,590 12,143 21,268 24,416 30,518
Property, plant and equipment, net ........ 13,225 15,796 16,824 22,841 40,747
Total assets .............................. 48,531 60,725 76,283 129,881 200,025
Total debt ................................ 23,452 30,622 101,622 138,681 190,669
Stockholder's equity (deficiency) ......... 10,293 11,750 (43,594) (35,855) (33,826)
</TABLE>
- ----------------------
(1) Reflects a one time expense in 1999 of $911,000 related to the announced
relocation of operations from the Company's Waynesboro, VA facility to its
facility in North Carolina.
(2) Reflects a non cash charge of $144,000 in 1999 for compensation for stock
options granted in 1999.
(3) 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.
(4) 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."
(5) Special acquisition expenses 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.
(6) 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.
(7) 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.
11
<PAGE>
(8) Reflects in 1999, a valuation reserve of $500,000 against a receivable from
Genicom in relation to a claim the Company filed against Genicom in
December 1999 based upon the purchase agreement which entitled the Company
to recover up to $500,000 for inventory unused or unsold during the two
years following the acquisition. In March 2000, Genicom filed a petition
for reorganization in Federal Bankruptcy Court.
(9) Extraordinary item in 1997 represents the write-off of the unamortized
portion of financing fees associated with the Old Credit Facility (as
defined), and in 1998 represents the write-off of the unamortized portion
of financing fees associated with the Old Senior Credit Facility (as
defined).
(10) 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 year ended December 31,
1995 by $2.5 million and by $3.2 million for the year ended December 31,
1999.
(11) Adjusted EBITDA represents income (loss) before interest expense (net),
income taxes, depreciation and amortization, gain or loss on disposal of
assets, extraordinary, unusual and nonrecurring items, the special
compensation charge, environmental expense and special acquisition charges
referred to in footnotes (3), (4) and (5) above, the provision for loss in
April, 1997 for receivables relating primarily to a single customer, the
non cash charges resulting from the Parent stock options granted in 1999,
the expense in 1999 for the valuation reserve of the receivable from
Genicom relating to the purchase agreement (see Note 8) 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"), the purchase of certain assets and certain liabilities
of Wilmar Electronics Inc. (the "Wilmar Acquisition"), the acquisition of
all the outstanding capital stock of Corcom, Inc. (the "Corcom Merger"),
the purchase of certain assets and certain liabilities of the Cornell
Dubilier's electronics relays division (the "CD Acquisition"), and the
purchase of all the outstanding equity securities of Products Unlimited
Corporation (the "Products Acquisition") pursuant to Accounting Principles
Board Opinion Nos. 16 and 17. 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. 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 EBITDA. 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 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.
OVERVIEW
On March 19, 1999, the Company purchased all of the outstanding equity
securities of Products Unlimited Corporation, an Iowa corporation
("Products"), a manufacturer and marketer of relays, transformers and
definite purpose contactors for the HVAC industry (the "Products
Acquisition"). Pursuant to the Stock Purchase Agreement, the Company
paid approximately $59.4 million For all the outstanding capital stock
of Products. Subsequently, the Company received a $764,000 working
capital purchase price adjustment. In
12
<PAGE>
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. For the year ended December 31,
1999, the Company accrued approximately $786,000 in accordance with
the terms of the agreement. For the year ending December 31, 2000, the
Company could be required to make an additional payment not to exceed
approximately $3.2 million. 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.
In July 1998, the Company purchased certain assets and assumed certain
liabilities of Cornell Dubilier's electronics relay division ("CD")
for $848,000 (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 $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 (the "Old Senior Credit Facility") and fund the
related merger costs. Corcom is an electromagnetic interference filter
manufacturer located in Libertyville, Illinois.
In May 1998, the Company purchased certain assets and assumed certain
liabilities of Wilmar Electronics Inc. ("Wilmar") for 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 ("Genicom") for approximately $4.7 million (the "GRD
Acquisition"). The Company financed the GRD Acquisition with funds
borrowed on its Old Senior Credit Facility. Under the terms of the
purchase agreement with Genicom, the Company was entitled to recover
up to $500,000 for inventory unsold or unused during the two years
following the acquisition. In December 1999, the Company submitted a
claim against Genicom for $500,000. In March 2000, Genicom filed a
petition for reorganization in Federal Bankruptcy Court. As a result,
the Company recorded a valuation reserve of $500,000 against this
receivable in 1999.
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 was
of the purchase price was paid by the Company through the issuance of
non-interest bearing note in the amount of $850,000 to the sellers,
which note was payable on October 31, 1999. The Company financed the
$1.3 million paid at closing with funds borrowed on its Old Senior
Credit Facility (as defined). In September 1999, the Company and the
sellers agreed to adjust the purchase price of ibex and reduce the
amount of the note payable by $400,000. The remaining
13
<PAGE>
balance of $450,000 was paid by the Company in September, 1999. The
reduction in purchase price resulted in a reduction of goodwill.
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
sales growth or operating results will continue in the future.
<TABLE>
<CAPTION>
Years Ended
December 31,
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of sales 66.6 67.7 74.0
------- -------- --------
Gross margin 33.4 32.3 26.0
Selling expenses 6.8 7.2 6.9
General and administrative expenses 8.3 7.4 6.7
Research and development expenses 1.2 1.1 1.0
Other expenses 1.1 1.5 2.6
------- -------- --------
Operating Income 16.0 15.1 8.8
</TABLE>
CONSOLIDATED
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
For purposes of comparing results of operations, the Company has
excluded the effects of certain acquisitions. For 1999 to 1998
comparisons, operations of Corcom for the second half of both 1999
and 1998 are considered below; however, operations for the first half
of both years is excluded as the Corcom Merger occurred on June 19,
1998.
Net sales of the Company for 1999 increased by $54.0 million, or
44.9% to $174.0 million from $120.0 million in 1998. Excluding Corcom
for the period from June 19, 1998 (date of acquisition) to June 30,
1998 and January 1, 1999 to June 30, 1999 and the effect of the
Products Acquisition, net sales of the Company for 1999 decreased
$12.9 million, or 10.8%, to $106.2 million from $119.1 million in
1998. This decrease is due primarily to (i) a softening in the
military/defense and recovering automatic test equipment markets,
(ii) lower net sales as a result of the relocation of operations due
to required requalifications in the customer base, (iii) a 1998 peak
in sales of a certain type of relay used in the communications
market, (iv) competitive price pressure partially offset by (v) a
slow recovery in some Asian markets, and (vi) stronger telecom market
sales in the filter business.
Gross profit of the Company for 1999 increased $6.4 million or 16.6%,
to $45.2 million from $38.7 million in 1998. Gross profit as a
percentage of net sales in 1999 decreased to 26.0% from 32.3% in
1998. Excluding Corcom for the period from June 19, 1998 (date of
acquisition) to June 30, 1998 and January 1, 1999 to June 30, 1999
and the effect of the Products Acquisition, gross profit of the
Company for 1999 decreased $5.5 million, or 14.3% to $32.9 million
from $38.4 million in 1998. Excluding Corcom for the period from June
19, 1998 (date of acquisition) to June 30, 1998 and January 1, 1999
to June 30, 1999 and the effect of the Products Acquisition, gross
profit as a percentage of net sales decreased to 31.0% from 32.3% in
1998. The decrease in gross margin as a percentage of net sales is
due primarily to (i) costs of approximately $911,000 incurred during
1999 for a portion of the costs of relocating the Waynesboro, VA
facility, (ii) the unfavorable effect of lower revenue from the
relocation of operations due to required
14
<PAGE>
requalifications in the customer base, (iii) lower volumes at lower
sales prices in an increasingly competitive market partially offset by
continued cost reductions.
Selling expenses for the Company for 1999 increased $3.5 million, or
39.9%, to $12.1 million from $8.6 million in 1998. Selling expenses as
a percentage of net sales decreased to 6.9% in 1999 from 7.2% in 1998.
Excluding Corcom for the period from June 19, 1998 (date of
acquisition) to June 30, 1998 and January 1, 1999 to June 30, 1999 and
the effect of the Products Acquisition, selling expenses for the
Company for 1999 decreased $67,000, or 0.8% to $8.5 million. Excluding
Corcom for the period from June 19, 1998 (date of acquisition) to June
30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the
Products Acquisition, selling expenses as a percentage of net sales
were 8.0% in 1999 compared to 7.2% 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 in addition to lower revenues.
General and administrative expenses for the Company for 1999 increased
$2.7 million, or 29.7%, to $11.6 million from $8.9 million in 1998.
General and administrative expenses as a percentage of net sales
decreased to 6.7% from 7.4% in 1998. Excluding Corcom for the period
from June 19, 1998 (date of acquisition) to June 30, 1998 and January
1, 1999 to June 30, 1999 and the effect of the Products Acquisition,
general and administrative expenses for the Company for 1999 decreased
$234,000, or 2.6%, to $8.6 million from $8.8 million in 1998.
Excluding Corcom for the period from June 19, 1998 (date of
acquisition) to June 30, 1998 and January 1, 1999 to June 30, 1999 and
the effect of the Products Acquisition, general and administrative
expenses as a percentage of net sales increased to 8.1% from 7.4% in
1998. The increase in general and administrative expenses as a
percentage of net sales is caused primarily by (i) a non cash charge
in 1999 of approximately $144,000 for stock compensation, and (ii) a
larger decline in revenues for the period relative to the decline
experienced in general and administrative expenses for the same
period.
Research and development expenses for the Company in 1999 increased
$386,000, or 29.1%, to $1.7 million from $1.3 million in 1998.
Excluding Corcom for the period from June 19, 1998 (date of
acquisition) to June 30, 1998 and January 1, 1999 to June 30, 1999 and
the effect of the Products Acquisition, research and development
expenses for the Company increased $36,000, or 2.7%, to $1.4 million
from $1.3 million in 1998.
Amortization of goodwill and other intangibles for the Company in 1999
increased $2.8 million, or 156.5%, to $4.5 million from $1.8 million
in 1998. This increase is due primarily to the effect of the Corcom
Merger and the Products Acquisition.
Interest expense and other financing costs of the Company for 1999
increased $5.3 million, or 42.5%, to $17.9 million from $12.6 million
in 1998. The increase was due primarily to increased debt level
associated with financing the Products Acquisition in March, 1999, the
Corcom Merger in June, 1998 and the CD Acquisition in July 1998.
Other expense for 1999 was $597,000 as compared to $171,000 for 1998.
The increase is due primarily to the write-off of a receivable from
Genicom. Under the terms of the purchase agreement with Genicom, the
Company was entitled to recover up to $500,000 for inventory unsold or
unused during the two years following the acquisition. In December
1999, the Company submitted a claim against Genicom for $500,000. In
March 2000, Genicom filed a petition for reorganization in Federal
Bankruptcy Court. As a result, the Company recorded a valuation
reserve of $500,000 against this receivable in 1999.
15
<PAGE>
Income tax benefit in 1999 was 12.9% of loss before income taxes as
compared to income tax expense of 44.3% of income before income taxes
in 1998. The decreased effective tax rate as a percentage of pre-tax
income (loss) is due primarily to the effect of goodwill amortization
not deductible for tax purposes from the Corcom Merger and the
Products Acquisition.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales of the Company for 1998 increased by $30.6 million, or
34.2%, to $120.0 million from $89.4 million in 1997. Excluding the
effect of the Corcom Merger, net sales of the Company for 1998
increased $13.5 million, or 15.1%, to $102.9 million from $89.4 in
1997. This increase is due primarily to the effect of fourth quarter
1997 and other fiscal 1998 acquisitions. There were no significant
changes in net sales of the base business.
Gross profit of the Company for 1998 increased $8.9 million, or 29.9%,
to $38.7 million from $29.8 million in 1997. Gross profit as a
percentage of net sales decreased to 32.3% from 33.4% in 1997.
Excluding the effect of the Corcom Merger, gross profit of the Company
for 1998 increased $3.8 million, or 12.6% to $33.6 million from $29.8
million in 1997. Excluding the Corcom Merger, gross profit as a
percentage of net sales decreased to 32.6% from 33.4% in 1997. The
decrease in gross margin as a percentage of net sales is due primarily
to lower gross profits as a percent of net sales for acquired
companies, the sale of acquired inventories that were written up to
fair market value and the cost to assimilate the GRD Acquisition, the
ibex Acquisition, the Wilmar Acquisition, and the CD Acquisition into
existing operations.
Selling expenses for the Company for 1998 increased $2.6 million, or
42.1%, to $8.6 million from $6.1 million in 1997. Selling expenses as
a percentage of net sales increased to 7.2% in 1998 from 6.8% in 1997.
Excluding the effect of the Corcom Merger, selling expenses for the
Company for 1998 increased $871,000, or 14.3%, to $6.9 million from
$6.1 million in 1997. Excluding the effect of the Corcom Merger,
selling expenses as a percentage of net sales were 6.8% in 1998 and
1997.
General and administrative expenses for the Company for 1998 increased
$1.5 million, or 20.2%, to $8.9 million from $7.4 million in 1997.
General and administrative expenses as a percentage of net sales
decreased to 7.4% from 8.3% in 1997. Excluding the effect of the
Corcom Merger, general and administrative expenses for the Company for
1998 decreased $29,000, or 0.4%. Excluding the effect of the Corcom
Merger, general and administrative expenses as a percentage of net
sales decreased to 7.2% from 8.3% in 1997. The decrease in general and
administrative expenses as a percentage of net sales is caused
primarily by a reduction in bad debt expense for 1998 when compared to
1997 and additional 1998 net sales without a corresponding increase in
fixed costs. The bad debt expense related primarily to the
collectibility of an account receivable from a single customer
relating to a dispute over product specification.
Research and development expenses for the Company in 1998 increased
$238,000, or 21.8%, to $1.3 million from $1.1 million in 1997.
Research and development expenses as a percentage of net sales
decreased to 1.1% from 1.2% in 1997. Excluding the effect of the
Corcom Merger, research and development expenses for the Company
increased $139,000, or 12.8%, to $1.2 million from $1.1 million in
1997. Excluding the effect of the Corcom Merger, research and
development expenses as a percentage of net sales were 1.2% in 1998
and 1997.
Amortization of goodwill and other intangibles for the Company in 1998
increased $1.1 million, or 173.0%, to $1.8 million from $648,000 in
1997. Excluding the effect of the Corcom Merger, amortization of
goodwill and other intangibles increased $114,000, or 17.6%, to
$762,000 from $648,000 in 1997. This increase is due primarily to the
amortization of goodwill due to the
16
<PAGE>
Kilovac purchase (third quarter 1997), the ibex Acquisition (fourth
quarter 1997), the Wilmar Acquisition (second quarter 1998) and the CD
Acquisition (third quarter 1998).
Interest expense and other financing costs of the Company for 1998
increased $6.0 million, or 91.0%, to $12.6 million from $6.6 million
in 1997. 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. The increase
was due primarily to the increased debt levels associated with the
issuance of the $95.0 million Notes and financing the Corcom Merger,
the ibex Acquisition, the GRD Acquisition, the Wilmar Acquisition and
the CD Acquisition partially offset by the pay down of the Old Credit
Facility on September 18, 1997.
Cancellation fees in 1997 reflect $800,000 of commitment fees and
other expenses incurred in connection with a credit facility to
provide financing in the event that the Offering was not consummated.
The extraordinary item in 1998 reflects the write-off of $585,000 of
unamortized deferred financing fees associated with the Old Senior
Credit Facility, net of tax of $234,000. The extraordinary item in
1997 reflects the write-off of $664,000 of unamortized deferred
financing fees associated with the Old Senior Credit Facility, net of
tax of $266,000.
SEGMENT DISCUSSION (SEE NOTE 14 TO THE CONSOLIDATED FINANCIAL
STATEMENTS)
High Performance Group
Year ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales of HPG decreased by $12.6 million, or 14.1%, to $76.5
million from $89.1 million in 1998. The decrease was due primarily to
(i) a softening in the military/defense and recovering automatic test
equipment markets, (ii) lower net sales as a result of the relocation
of operations due to required requalifications in the customer base,
and (iii) competitive price pressure partially offset by a slow
recovery in some Asian markets.
Operating income of HPG decreased by $7.3 million, or 41.8%, to $10.2
million from $17.5 million in 1998. Operating income of HPG as a
percentage of HPG net sales decreased to 13.4% from 19.7% in 1998.
This decrease in operating income as a percentage of net sales is due
primarily to (i) lower sales prices in an increasingly competitive
market, (ii) lower revenues, (iii) costs of approximately $911,000
incurred during 1999 of expenses in connection with the relocation of
the Waynesboro, VA facility and (iv) the unfavorable effect of lower
revenue from the relocation of operations due to required
requalifications in the customer base partially offset by (v) cost
reductions and (vi) removal of duplicate expenses at the Company's
Waynesboro, VA facility.
Year ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales of HPG increased by $11.6 million, or 15.0%, to $89.1
million from $77.5 million in 1997. The increase was due primarily to
the effect of the ibex Acquisition, the Genicom Acquisition and the
Wilmar Acquisition.
Operating income of HPG increased by $3.4 million, or 23.7%, to $17.5
million from $14.2 million in 1997. Operating income of HPG as a
percentage of HPG net sales increased to 19.7% from 18.3% in 1997.
This increase was caused primarily by a reduction in bad debt expenses
for 1998 when compared to 1997 and increased net sales with low
additional fixed costs partially offset by the cost of assimilating
acquisitions. The bad debt expense related primarily to the
17
<PAGE>
collectibility of an account receivable from a single customer
relating to a dispute over product specification.
Specialized Industrial Group
Year ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales of SIG increased by $66.8 million, or 213.0%, to $98.2
million from $31.4 million in 1998. Excluding Corcom from June 19,
1998 (date of acquisition) to June 30, 1998 and January 1, 1999 to
June 30, 1999 and the effect of the Products Acquisition, net sales of
SIG decreased by $10,000, or 0.0%, to $30.4 million.
Operating income of SIG increased by $4.6 million, or 138.0%, to $8.0
million from $3.4 million in 1998. Operating income of SIG as a
percentage of SIG net sales decreased to 8.1% from 10.7% in 1998.
Excluding Corcom from June 19, 1998 (date of acquisition) to June 30,
1998 and January 1, 1999 to June 30, 1999 and the effect of the
Products Acquisition, operating income of SIG increased by $352,000,
or 10.6%, to $3.7 million from $3.3 million in 1998. Excluding Corcom
from June 19, 1998 (date of acquisition) to June 30, 1998 and January
1, 1999 to June 30, 1999 and the effect of the Products Acquisition,
operating income as a percentage of net sales increased to 12.1% from
10.9% in 1998. This increase was due primarily to synergies attained
in the Corcom Merger.
Year ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales of SIG increased by $19.2 million, or 157.1%, to $31.4
million from $12.2 million in 1997. Excluding the effect of the Corcom
Merger and the CD Acquisition, net sales of SIG increased by $1.2
million, or 10.1%, to $13.4 million from $12.2 million in 1997. This
increase is due primarily to growth in end use markets.
Operating income of SIG increased by $1.4 million, or 68.6%, to $3.4
million from $2.0 million in 1997. Operating income of SIG as a
percentage of SIG net sales decreased to 10.7% from 16.3% in 1997.
Excluding the effect of the Corcom Merger, operating income of SIG
increased by $547,000, or 27.4%, to $2.5 million from $2.0 million in
1997. Excluding the effect of the Corcom Merger operating income as a
percentage of net sales increased to 17.4% from 15.9% in 1997. This
increase was due primarily to improved productivity.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $12.7 million in 1999, $9.2
million in 1998 and $6.4 million in 1997. The increase in cash
provided by operations from 1998 to 1999 is primarily due to continued
reductions in inventories, partially offset by a reduction in accounts
payable. The increase in cash provided by operations from 1997 to 1998
is primarily due to (i) the one time payment in 1997 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) higher earnings adjusted for
depreciation and amortization, a decrease in accounts receivable and
other current assets, and an increase in accounts payable partially
offset by (iii) a decrease in accrued liabilities and an increase in
inventories.
The Company's accounts receivable increased from $15.6 million at year
end 1998 to $23.7 million at year end 1999. Of this increase, $8.6
million was attributable to the Products
18
<PAGE>
Acquisition. The Company's accounts receivable increased from $11.6
million at year end 1997 to $15.6 million at year end 1998. Of this
increase, $4.7 million was attributable to the Corcom Merger and the
Wilmar Acquisition. The days' sales outstanding for accounts
receivable was approximately 50 trade days, 48 trade days and 47 trade
days at December 31, 1997, 1998 and 1999, respectively. The continued
decreases in days' sales outstanding can be attributed to continued
increased collection efforts.
The Company's inventories increased from $26.7 million at year end
1998 to $27.5 million at year end 1999. Of this increase, $4.8 million
was attributable to the Products Acquisition, resulting in a net
decrease in inventories in the Company's other divisions of $4.0
million during 1999. This decrease in inventories in the Company's
other divisions is due to continuing inventory management. The
Company's inventories increased from $19.4 million at year end 1997 to
$26.7 million at 1998. Of this increase, $6.0 million was attributable
to the Corcom Merger, $505,000 was attributable to the CD Acquisition,
and $132,000 was attributable to the Wilmar Acquisition.
The Company has historically financed its operations and acquisitions
through a combination of internally generated funds and secured
borrowings. The Company financed the purchase of the remaining 20% of
Kilovac with proceeds from its offering of the 10% Senior Subordinated
Notes (the "Notes") in 1997. The Company financed the ibex Acquisition
with borrowings on its Old Senior Credit Facility (approximately $1.3
million) and the issuance of a non interest-bearing note in the amount
of $850,000. The Company financed the GRD Acquisition with borrowings
on its Old Senior Credit Facility of $4.7 million. The Company
financed the Wilmar Acquisition on its Old Senior Credit Facility
(approximately $2.1 million in borrowings). The Company financed the
Corcom Merger with its Senior Credit Facility (approximately $40.7
million in borrowings) and additional paid in capital of $5.0 million
contributed by the Parent. The Company financed the CD Acquisition
with borrowings under the Senior Credit Facility (approximately
$848,000 in borrowings). The Company financed the Products Acquisition
by the issuance of $55.0 million of Tranche Term B loans, in
accordance with an amendment to the Senior Credit Facility, 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.
Capital expenditures, excluding the effects of acquisitions were $4.4
million in 1999, $2.8 million in 1998, and $2.1 million in 1997. In
1999, capital expenditures included approximately $1.2 million for
increased capacity, approximately $1.4 million for productivity
improvements, approximately $660,000 for cost reductions,
approximately $797,000 for equipment replacement and rework and
approximately $292,000 for new product development. In 1998, capital
expenditures included approximately $182,000 for increased capacity,
approximately $1.5 million for increased efficiency, approximately
$712,000 for equipment replacement and rework and approximately
$437,000 for new product development. 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 new
product development. Acquisition spending totaled $59.4 million in
1999, $47.7 million in 1998 and $10.6 million in 1997.
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 Old
Senior Credit Facility, which enables the Company to borrow up to
$25.0 million, subject to certain borrowing conditions. The amount
available for borrowings under the Senior Credit Facility at December
31, 1999 was approximately $12.3 million. The Old Senior Credit
Facility (as amended by 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.
19
<PAGE>
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, 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 that inflation had any material effect on
the Company's business during 1997 and 1998. However, the Company does
believe that inflation began to have a negative impact on the
Company's business during 1999 due to a tighter U. S. labor market
which the Company believes has caused labor costs to increase at a
higher percentage level than in previous 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 business acquired and potential misrepresentations
from sellers), changes in business strategy or development plans,
dependence on independent sales representatives and distributors,
environmental regulations, availability of financing, competition,
reliance on key management personnel, ability to manage growth, loss
of customers and a variety of other factors.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields
containing a two-digit year is commonly referred to as the "Year 2000
Compliance" issue. After the year 2000 transition, such systems may
have been unable to accurately process certain data based information.
20
<PAGE>
The total cost to the Company of Year 2000 Compliance activities was
insignificant to the Company's financial position, results of
operations and cash flows.
The Company has not experienced significant Year 2000 Compliance
issues subsequent to 1999's fiscal year end and through the date of
this filing on Form 10K. Although the Company believes it has taken
the appropriate steps to address Year 2000 readiness, there is no
guarantee that the Company's efforts will prevent a material adverse
impact on the results of operations and financial condition.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, (as
amended by SFAS No. 137) effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The new standard establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities. It 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 at this time what impact, if any, that this
new accounting standard will have on its financial statements.
ITEM 7A - 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 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, Tranche A with a balance of $28.25
million at December 31, 1999, Tranche B with a balance of $54.725
million at December 31, 1999 and $12.6 million outstanding on the
Revolving Credit Facility which bears interest at variable rates.
Borrowings under the Senior Credit Facility bear interest based on the
Lenders' Reference Rate (as defined in the credit agreement) or
Eurodollar Rate plus an applicable margin. While changes in the
Reference Rate or the Eurodollar Rate could affect the cost of funds
borrowed in the near future, only $6.6 million of the Revolving Credit
Facility at December 31, 1999 was carried at a variable rate, with the
remainder of the Senior Credit Facility on short term fixed rates. The
Company, therefore, believes the effect, if any, of reasonable
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"). Interest on the Notes is payable
semi-annually in arrears on March 15 and September 15 of each year.
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
21
<PAGE>
date of redemption. In addition, at any time prior to September 15,
2000, the Company may, at its option, with the net cash proceeds of an
equity offering (as defined in the Indenture), 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, provided that not less than $63.4 million
aggregate principal amount of the Notes remains outstanding
immediately after the occurrence of such redemption.
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 its fixed rate long term bond debt. 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 or 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, 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
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 translation gains and losses,
which are reflected in other comprehensive income (loss), due to the
strengthening and weakening of the US dollar against the currencies of
the Company's foreign subsidiaries 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 translation
loss was $146,000 in 1999 compared to a gain of $64,000 in 1998 and a
loss of $4,000 in 1997.
The Company anticipates that it will continue to have exchange gains
or loss from foreign operations in the future.
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
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
22
<PAGE>
The executive officers and directors of the Company, and their ages
and position with the Company as of December 31, 1999 are set forth
below:
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AGE POSITION OR AFFILIATION
Ramzi A. Dabbagh 65 Chairman of the Board, Chief Executive Officer, and Director
Michael A. Steinback 45 President, Chief Operating Officer and Director
G. Daniel Taylor 63 Executive Vice President of Business Development and Director
Richard Heggelund 53 Chief Financial Officer
Michael J. Adams 43 Executive Vice President of Sales and Marketing
James R. Mikesell 57 Group Vice President HPG
Thomas J. Buns 50 Group Vice President SIG
Brian P. Simmons 39 Director
Andrew W. Code 41 Director
Steven R. Brown 30 Director
Jon S. Vesely 34 Director
Donald E. Dangott 67 Director
</TABLE>
The principal occupations as of December 31, 1999 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 and Chief Executive
Officer 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 President of the Company in 1998, 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.
Richard L. Heggelund became Chief Financial Officer of the Company in
1998. Prior to joining the Company, Mr. Heggelund was Vice President
of Finance for the Abex/NWL division of Parker Hannifin Corporation.
Prior to that he was Vice President and Chief Financial Officer of
Power Control Technologies Inc. From 1988 to 1995, Mr. Heggelund was
Vice President and Chief Financial Officer of Datron Inc., an
aerospace/defense manufacturer. Mr. Heggelund graduated from the
University of Wisconsin-Madison with a B.B.A. degree in Accounting.
Michael J. Adams joined the Company in 1998 as Vice President of Sales
and Marketing and was promoted to Executive Vice President of Sales
and Marketing in 1999, after six years with Square D Company, his last
position being Operations Manager of its Asheville, North Carolina
Facility.
23
<PAGE>
Mr. Adam's prior experience includes the establishment of the OEM
business with Square D and the Director of Marketing for Square D's
residential business.
James R. Mikesell was promoted to Group Vice President of HPG in 1999.
Mr. 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.
Thomas J. Buns was promoted to Group Vice President of SIG in 1999.
Mr. Buns joined the Company as Vice President and General Manager of
Corcom in 1998 upon the completion of the Corcom Merger. Mr. Buns
joined Corcom, Inc. in 1991 as Chief Financial Officer.
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 Managing Director 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 four 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, 1999.
24
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- LONG TERM
---------
COMPENSATION
------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION UNDERLYING COMPENSATION (1)
--------------------------- ------ ----- ------------ OPTIONS/SAR'S (#) ----------------
-----------------
<S> <C> <C> <C> <C> <C>
Ramzi A. Dabbagh $203,453 $85,039 $22,294 2,987 $14,142
Chairman, and Chief
Executive Officer
Michael A. Steinback $171,191 $76,510 $28,849 2,835 $ 1,617
President and Chief
Operating Officer
G. Daniel Taylor $122,330 $49,195 $12,329 1,613 $ 4,458
Executive Vice President of
Business Development
Richard Heggelund (2) $140,010 $31,490 $59,149 605 $ 2,131
Chief Financial Officer
Michael J. Adams $132,002 $42,940 $ 7,800 605 $ 706
Executive Vice President
of Sales and Marketing
</TABLE>
(1) These amounts represent insurance premiums paid by the Company with respect
to term life insurance.
(2) Mr. Heggelund's Other Annual Compensation includes relocation expenses.
<TABLE>
<CAPTION>
Individual Grants
- ----------------------------------------------------------------------- Potential realizable value at assumed
Annual rates of stock price appreciation
For option term
--------------------------------------------------
Number of Percent of total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise
Name Granted (#) fiscal year Price ($/Sh) Expiration Date 0% ($) 5% ($) 10% ($)
- ---- ----------- ----------- ----------- --------------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ramzi A. Dabbagh 2,987 17.3% $11.00 12/31/07 37,576 71,205 118,123
Michael A. Steinback 2,835 16.4% $11.00 12/31/07 35,664 67,582 112,112
G. Daniel Taylor 1,613 9.3% $11.00 12/31/07 20,292 38,451 63,787
Richard Heggelund 605 3.5% $11.00 12/31/07 7,611 14,422 23,925
Michael J. Adams 605 3.5% $11.00 12/31/07 7,611 14,422 23,925
</TABLE>
Executive co mpensation 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.
25
<PAGE>
EMPLOYMENT AGREEMENTS
The Company is party to an employment agreement with Mr. Steinback
which expires in April, 2000 and is subject to automatic renewal
unless either the Company or Mr. Steinback elects to terminate such
agreement. Mr. Steinback is entitled to receive an annual salary
(subject to annual review) of approximately $200,000, annual auto
allowances, and other standard employee benefits applicable to the
Company's other executive officers, and is entitled to participate in
the Company's executive bonus plan. Mr. Steinback is entitled to
receive full salary and benefits for a year if he is terminated at any
time during such year.
STOCK OPTION PLAN
Parent has established a stock option plan (the "Plan") which provides
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. The
Company granted 2,658 shares under the Plan during 1998. All stock
options granted in 1998 were granted at an exercise price of $10.00
per share, which was the price of the Parent's stock at the time of
the Recapitalization. The Company granted 17,288 shares under the Plan
during 1999. All stock options granted in 1999 were granted at an
exercise price of $11.00 per share and the Company recorded a non-cash
compensation expense of approximately $144,000 in 1999 related to
these options.
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
BENEFICIAL
OWNED (1)
- ------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------ -------
<S> <C> <C>
Code, Hennessy & Simmons III, L.P.(2) ................. 805,432 71.8%
TCW/Crescent Mezzanine, L.L.C.(3) ..................... 96,133 8.6%
Ramzi A. Dabbagh(4) ................................... 54,695 4.9%
Michael A. Steinback(4) ............................... 35,706 3.2%
G. Daniel Taylor(4) ................................... 21,877 2.0%
Michael J. Adams(4) ................................... 2,000 0.2%
Richard L. Heggelund(4) ............................... 2,869 0.3%
Brian P. Simmons(5)(6) ................................ 805,432 71.8%
Andrew W. Code (5)(6) ................................. 805,432 71.8%
Jon S. Vesely(6) ...................................... - -
Steven R. Brown(6) .................................... - -
Donald E. Dangott ..................................... 5,975 0.5%
Directors and executive officers as a group (12 persons) 926,545 82.6%
</TABLE>
26
<PAGE>
(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 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., 1200
Ridgefield Blvd., Suite 200, Asheville, North Carolina 28806.
(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 paid $500,000 to CHS Management at the closing of the
Transactions as compensation for services rendered in connection with
the Transactions. The Company paid $300,000 to CHS at the time of the
Corcom Merger for services rendered in connection with the Merger. The
Company paid $580,000 to CHS at the time of the Products Acquisition
for services rendered in connection with the Acquisition. 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
27
<PAGE>
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
reimburses CHS Management for expenses incurred in connection with the
Transaction 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 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 and Taylor received
approximately $3.7 million, $1.3 million and $1.9 million,
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,
28
<PAGE>
Steinback and Taylor could receive from funds escrowed at the time of
the consummation of the Transactions approximately $126,000, $57,000
and $74,000, 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 STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
2. None
3. See "Index to Exhibits" on the following pages.
(b) No reports on Form 8K were filed during the fourth quarter of
1999.
29
<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 March 30, 2000.
COMMUNICATIONS INSTRUMENTS, INC.
BY: /S/
-------------------------------
Ramzi A. Dabbagh
Chairman of the Board and Chief
Executive Officer
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 March 30, 2000.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Chairman of the Board, Chief Executive Officer and
- ------------------------------------------- Director (Principal Executive Officer)
Ramzi A. Dabbagh
* Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer)
- -------------------------------------------
Richard L. Heggelund
President , Chief Operating Officer, and Director
*
- -------------------------------------------
Michael A. Steinback
* Executive Vice President and Business Development
- ------------------------------------------- Director
G. Daniel Taylor
* Director
- -------------------------------------------
Brian P. Simmons
* Director
- -------------------------------------------
Andrew W. Code
* Director
- -------------------------------------------
Steven R. Brown
* Director
- -------------------------------------------
Jon S. Vesely
* Director
- -------------------------------------------
Donald Dangott
</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
ATTORNEY-IN-FACT
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1997, 1998 and 1999
and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
Communications Instruments, Inc.:
We have audited the accompanying consolidated balance sheets of Communications
Instruments, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1999, and the related consolidated statements of operations and comprehensive
income, stockholder's deficiency, and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
March 30, 2000
-1-
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1998 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 469 $ 6,045
Accounts receivable (less allowance for doubtful accounts: 1998 - $479;
1999 - $621) 15,598 23,658
Inventories 26,656 27,498
Deferred income taxes 2,246 2,471
Cash restricted for environmental remediation - 233
Environmental settlement receivable - 1,250
Other current assets 1,622 2,232
--------- ---------
Total current assets 46,591 63,387
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, Net 22,841 40,747
--------- ---------
OTHER ASSETS:
Cash restricted for environmental remediation 340 -
Environmental settlement receivable 1,220 -
Goodwill (net of accumulated amortization: 1998 - $1,872, 1999 - $3,985) 39,971 64,892
Intangible assets, net 18,705 30,537
Other noncurrent assets 213 462
--------- ---------
Total other assets 60,449 95,891
--------- ---------
TOTAL ASSETS $ 129,881 $ 200,025
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 7,405 $ 13,141
Accrued interest 2,799 4,192
Other accrued liabilities 6,334 7,842
Current portion of long-term debt 5,637 7,694
--------- ---------
Total current liabilities 22,175 32,869
LONG-TERM DEBT 133,044 182,975
ACCRUED ENVIRONMENTAL REMEDIATION COSTS 2,353 1,953
DUE TO PARENT 458 1,866
DEFERRED INCOME TAXES 7,041 13,733
OTHER LIABILITIES 665 455
--------- ---------
Total liabilities 165,736 233,851
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIENCY:
Common stock - $.01 par value; 1,000 shares authorized, issued and outstanding - -
Additional paid-in capital 17,317 22,317
Accumulated deficit (53,194) (56,019)
Accumulated other comprehensive income (loss) 22 (124)
--------- ---------
Total stockholder's deficiency (35,855) (33,826)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY $ 129,881 $ 200,025
========= =========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1997 1998 1999
<S> <C> <C> <C>
NET SALES $ 89,436 $ 120,030 $ 173,983
COST OF SALES 59,601 81,285 128,816
--------- --------- ---------
GROSS MARGIN 29,835 38,745 45,167
--------- --------- ---------
OPERATING EXPENSES:
Selling expenses 6,077 8,635 12,083
General and administrative expenses 7,432 8,935 11,593
Research and development expenses 1,090 1,328 1,714
Amortization of goodwill and other intangible assets 648 1,769 4,537
Acquisition related expenses 260 - -
--------- --------- ---------
Total operating expenses 15,507 20,667 29,927
--------- --------- ---------
OPERATING INCOME 14,328 18,078 15,240
INTEREST EXPENSE (6,573) (12,552) (17,887)
OTHER EXPENSE, NET (17) (171) (597)
CANCELLATION FEES (800) - -
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST
AND EXTRAORDINARY ITEMS 6,938 5,355 (3,244)
INCOME TAX EXPENSE (BENEFIT) 2,836 2,371 (419)
--------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEMS 4,102 2,984 (2,825)
INCOME APPLICABLE TO MINORITY INTEREST IN SUBSIDIARY (55) - -
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS 4,047 2,984 (2,825)
EXTRAORDINARY ITEMS - LOSS ON EARLY EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX BENEFIT: 1997 - $266; 1998 - $234) (398) (351) -
--------- --------- ---------
NET INCOME (LOSS) 3,649 2,633 (2,825)
OTHER COMPREHENSIVE INCOME (LOSS) - Foreign currency
translation adjustment (4) 64 (146)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 3,645 $ 2,697 $ (2,971)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCOUNTS ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER
----------------- PAID-IN ACCUMULATED DUE FROM COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT PARENT INCOME (LOSS)
<S> <C> <C> <C> <C> <C> <C>
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)
Currency translation gain, net - - - - - 64
Contributions from Parent - - 5,000 - - -
Repayments by Parent, net - - - - 42 -
Net income - - - 2,633 - -
------ ----- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1998 1,000 - 17,317 (53,194) - 22
Currency translation loss, net - - - - - (146)
Contributions from Parent - - 5,000 - - -
Net loss - - - (2,825) - -
------ ----- -------- -------- -------- --------
BALANCES AT DECEMBER 31, 1999 1,000 $ - $ 22,317 $(56,019) $ - $ (124)
====== ===== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,649 $ 2,633 $ (2,825)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,320 6,928 13,497
Extraordinary loss 664 585 -
Deferred income taxes (401) (471) (850)
Minority interest 55 - -
(Gain) loss on disposal of assets (5) 54 24
Loss on Genicom receivable valuation - - 500
Other 11 (12) 34
Changes in operating assets and liabilities, net of effects of
acquisitions:
(Increase) decrease in accounts receivable (1,812) 667 568
Decrease (increase) in inventories 2,023 (614) 3,930
(Increase) decrease in other current assets (605) 434 (778)
(Decrease) increase in accounts payable (781) 1,129 (124)
Decrease in accrued liabilities (2,575) (1,852) (1,786)
(Decrease) increase in accrued interest 2,551 (21) 1,393
Changes in other assets and liabilities (656) (228) (870)
-------- -------- --------
Net cash provided by operating activities 6,438 9,232 12,713
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses and product lines, net of cash
acquired (10,561) (47,675) (59,443)
Investment in joint venture - (95) (144)
Proceeds from sale of assets 18 22 -
Purchases of property, plant and equipment (2,146) (2,795) (4,430)
-------- -------- --------
Net cash used in investing activities (12,689) (50,543) (64,017)
-------- -------- --------
</TABLE>
-5-
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bonds $ 95,000 $ - $ -
Net (repayments) borrowings under lines of credit (2,674) 3,900 2,900
Borrowings under long-term debt agreements - 35,100 55,000
Principal payments under long-term debt agreements (22,125) (2,000) (5,475)
Payments of capital leases (23) (88) (80)
Payment of loan fees (4,763) (843) (1,702)
Payments of amounts owed to former stockholders of subsidiary - (226) -
Additional paid-in capital (from Parent) - 5,000 5,000
Dividend to Parent (59,361) - -
Repayments from Parent 372 500 1,408
Other 7 139 (171)
-------- -------- --------
Net cash provided by financing activities 6,433 41,482 56,880
-------- -------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 182 171 5,576
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 116 298 469
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 298 $ 469 $ 6,045
======== ======== ========
</TABLE>
SEE NOTES 6 AND 8 FOR INTEREST AND TAXES PAID,
RESPECTIVELY
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES:
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 6).
During the year ended December 31, 1999, the noninterest bearing note
payable to the former owners of ibex Aerospace, Inc. was reduced
by $400 as a result of an amendment to the purchase agreement. This
amendment also resulted in a decrease of goodwill of $269.
See notes to consolidated financial statements.
-6-
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNLESS SPECIFIED, DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION, RECAPITALIZATION AND ACQUISITIONS
BUSINESS DESCRIPTION - Communications Instruments, Inc. and Subsidiaries
(the "Company") is engaged in the design, manufacture and distribution of
electromechanical, electronic and filter products, which include high
performance relays, general purpose relays, solenoids, EFI filters,
transformers and definite purpose contactors for the commercial/industrial
equipment, commercial airframe, defense/aerospace, communications,
heating, ventilation and air conditioning ("HVAC"), automotive and
automatic test equipment industries. Manufacturing and assembly operations
are performed primarily in North Carolina, California, Iowa, Ohio,
Illinois, Texas, Germany and Juarez, Mexico. The Company is a wholly owned
subsidiary of CII Technologies Inc. (the "Parent").
RECAPITALIZATION - On September 18, 1997, the Company entered into a
series of recapitalization transactions (collectively, the
"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 $95.0 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 "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 new senior credit facility with a syndicate of
financial institutions providing for revolving loans of up to $25.0
million (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").
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.
-7-
<PAGE>
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 relative 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.
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 Corporation
("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 $15.7 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 December 31, 1998 and 1999)
was initially payable to the sellers upon the future realization of
potential tax benefits associated with a net operating loss carryforward.
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 was 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 Hartman.
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.
In September 1999, the Company and the sellers agreed to adjust the
purchase price of ibex and reduce the amount of the note payable by $400.
The remaining balance of $450 was paid by the Company in September 1999.
The reduction in purchase price resulted in a reduction of goodwill.
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"). GRD, which was located in Waynesboro, Virginia, was a
manufacturer of high performance signal relays. The GRD Acquisition was
financed by a draw on the Company's Old Senior Credit Facility.
-8-
<PAGE>
The Company finalized its plans to relocate the manufacturing in the
Waynesboro, VA facility to its facilities in North Carolina in 1998. The
costs of this facility relocation, including estimated costs of employee
separation and preparing the North Carolina facilities for the relocation,
totaled approximately $1.1 million, of which approximately $911 was
expensed in 1999 in cost of goods sold.
Under the terms of the purchase agreement with Genicom, the Company was
entitled to recover up to $500 for inventory unsold or unused during the
two years following the acquisition. In December 1999, the Company
submitted a claim against Genicom for the $500. In March 2000, Genicom
filed a petition for reorganization in Federal District Court. As a
result, the Company recorded a valuation reserve of $500 against this
receivable in 1999.
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.
Corcom, Inc.
On June 19, 1998, the Company acquired all of the outstanding capital
stock of Corcom, Inc., an Illinois corporation ("Corcom") pursuant to the
merger of RF Acquisition Corp., a newly formed wholly owned subsidiary of
the Company, with and into Corcom (the "Corcom Merger"). The Company paid
$13.00 per share to the shareholders of Corcom in exchange for the shares
received in the Merger (approximately $51.1 million in the aggregate). The
Company used a portion of the proceeds of $48.1 million of borrowings
under a $60.0 million credit facility entered into with 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.
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
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.
Products Unlimited
On March 19, 1999, the Company purchased all of the outstanding equity
securities of Products Unlimited Corporation, an Iowa corporation
("Products"), a manufacturer and marketer of relays, transformers and
definite purpose contactors for the HVAC industry (the "Products
Acquisition"). Pursuant to the Stock Purchase Agreement, the Company paid
approximately $59.4 million for the outstanding capital stock of
Products. 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. For the year ended December 31,
1999, the Company accrued
-9-
<PAGE>
approximately $786 in accordance with the terms of the agreement. For the
year ending December 31, 2000, the Company could be required to make an
additional payment not to exceed approximately $3.2 million. 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.
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 will be no material changes to the
allocation of the purchase price.
The following summarizes the purchase price allocations as of the
respective dates of acquisition:
<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 $ 12,904 $ 505 $ 14,320
Property, plant
and equipment 169 150 2,045 80 7,374 82 21,427
Intangibles and
other assets 4,577 1,493 24 2,023 35,777 380 40,692
Liabilities assumed (293) (965) (1,273) (356) (11,005) (119) (17,078)
-------- -------- -------- -------- -------- -------- --------
Purchase price,
net of acquired cash $ 4,500 $ 1,719 $ 4,683 $ 2,128 $ 45,050 $ 848 $ 59,361
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following unaudited 1997 pro forma financial information shows the
results of operations of the Company as though the Kilovac Purchase, the
Transactions, the GRD Acquisition and the Corcom Merger occurred as of
January 1, 1997. The following unaudited 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 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>
1997 1998 1999
<S> <C> <C> <C>
Net sales $140,568 $197,191 $189,230
Operating income 18,862 23,177 17,065
Income (loss) before extraordinary item 1,306 1,329 (2,450)
Net income (loss) 908 978 (2,450)
</TABLE>
The unaudited pro forma financial information presented above does not
purport to be indicative of either (i) the results of operations had the
Kilovac Purchase, the Transactions, the GRD Acquisition or the Corcom
Merger taken place on January 1, 1997, the results of operations had the
Corcom Merger or the Products Acquisition taken place on January 1, 1998,
the results of operations had the Products Acquisition taken place on
January 1, 1999 or (ii) future results of operations of the combined
businesses.
-10-
<PAGE>
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., Kilovac, Corcom and Products Unlimited.
All intercompany transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - All highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents.
INVESTMENTS - 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 40% 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 Indian 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, 1998 and 1999, was $171 and $116, respectively.
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 Company accounts for the Chinese Joint Venture using the
equity method. The Chinese Joint Venture is a manufacturer and marketer of
relay components. The Company's initial investment was approximately $144.
The Chinese Joint Venture began production in March 1999. The balance of
the investment in the Chinese Joint Venture at December 31, 1999 was $164.
REVENUE RECOGNITION - Except as stated below, sales and the related cost
of sales are recognized upon shipment of products sold, net of estimated
discounts and allowances.
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, if any, 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.
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 trade accounts receivable consist of the
following at December 31:
-11-
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Allowance, beginning of year $ 466 $ 796 $ 479
Provision for (recovery of) uncollectible accounts 428 (42) 97
Write-off of uncollectible accounts, net (98) (383) (13)
Effect of acquisitions and other - 108 58
----- ----- -----
Allowance, end of year $ 796 $ 479 $ 621
===== ===== =====
</TABLE>
The write-off of uncollectible accounts in 1998 relates primarily to one
customer receivable balance, which was provided for during 1997. The
Company settled the claim made by this customer during 1998.
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. Property, plant and equipment generally are depreciated using the
following lives: land improvements - 7 years, buildings - 20 years and
machinery and equipment - 3 to 8 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 due to the long life cycles of the
products.
INTANGIBLE ASSETS - Intangible assets are amortized on a straight-line
basis over the estimated lives of the related assets or, in the case of
the debt issuance costs, using a method which approximates the effective
interest method over the life of the related debt issue.
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. To analyze recoverability, the Company projects future
cash flows, undiscounted and before interest, over the remaining life of
such assets. If these projected cash flows are less than the carrying
amount, an impairment would be recognized, resulting in a write-down of
assets with a corresponding charge to earnings. The impairment loss is
measured based upon the difference between the carrying amount and the
fair value of the assets. No impairments were recorded in any of the years
in the period ended December 31, 1999.
INCOME TAXES - The Company accounts for income taxes using an asset and
liability approach as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes. The asset and
liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial reporting basis and tax basis of assets
and liabilities. 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.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
expense as incurred.
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. Significant estimates and assumptions made in the preparation
of these financial statements include the Company's allowance for
-12-
<PAGE>
doubtful accounts, reserves for distributor stock rotations, reserves for
obsolete and excess inventory, capitalized inventory variances, 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 values of the
Company's financial instruments, including primarily cash and cash
equivalents, accounts receivable and accounts payable, approximate their
carrying values at December 31, 1998 and 1999, due to their nature. The
fair value of the Company's Senior Credit Facility (as defined) is
estimated using the current rates that would be available for borrowing a
like amount from the bank and the fair value of the Notes (as defined) is
estimated based on quoted market prices. (See Note 6.)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) - Accumulated other
comprehensive income (loss) is comprised solely of foreign currency
translation adjustments. Financial information related to foreign
operations is translated into U.S. dollars based on exchange rates as
obtained from a local U.S. bank and The Wall Street Journal. Assets and
liabilities are translated based on rates in effect on the balance sheet
date. Income statement amounts are translated using average exchange rates
in effect during the period. The income tax effect of the foreign currency
translation adjustments was not material for any year during the three
year period ended December 31, 1999.
NEW ACCOUNTING STANDARD - The Financial Accounting Standards Board issued
SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities, effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The new standard establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. It 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 at
this time what impact, if any, that this new accounting standard will have
on its financial statements.
RECLASSIFICATIONS - Certain 1997 and 1998 amounts have been reclassified
to conform with the 1999 presentation.
-13-
<PAGE>
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Finished goods $ 6,786 $ 7,446
Work-in-process 9,093 8,715
Raw materials and supplies 17,401 18,168
Reserve for obsolescence (6,624) (6,831)
-------- --------
Total $ 26,656 $ 27,498
======== ========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Land and land improvements $ 1,450 $ 1,820
Buildings 3,290 5,978
Machinery and equipment 32,715 54,195
Construction in progress 489 1,693
-------- --------
37,944 63,686
Less accumulated depreciation (15,103) (22,939)
-------- --------
Total $ 22,841 $ 40,747
======== ========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
RANGE OF
1998 1999 ASSET LIVES
<S> <C> <C> <C>
Debt issuance costs $ 4,937 $ 6,664 5-7
Covenants not to compete 675 1,025 2-5
Patents and patent application 6,534 6,560 11-17
Trademarks 5,085 6,590 30
Acquired workforce 1,390 3,490 5-7
Acquired customer base 1,710 11,100 13-14
Acquired computer software 293 293 4
-------- --------
20,624 35,722
Less accumulated amortization (1,919) (5,185)
-------- --------
Total $ 18,705 $ 30,537
======== ========
</TABLE>
-14-
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Senior Credit Facility term loans payable to a bank due in quarterly
installments of $1,513 from March 31, 2000 through June 30, 2000, $1,887 from
September 30, 2000 through June 30, 2001, $2,262 from September 30, 2001 through
June 30, 2002, $2,638 from September 30, 2002 through March 31, 2003, $2,168 on
June 19, 2003 and $137 on June 30, 2003 and September 30, 2003, $26,263 on December
31, 2003, and $25,882 on March 15, 2004. An Excess Cash Payment (as defined) of
$850 due March 30, 2000. Interest is at base rate, or LIBOR rate, plus applicable margin $ 33,000 $ 82,975
Senior Credit Facility revolving loan payable to a bank due June 19, 2003. Interest
is at base rate, or LIBOR rate, plus applicable margin 9,700 12,600
10% Senior Subordinated Notes due 2004, Series "B" 95,000 95,000
Note payable to former owners of ibex Aerospace, Inc., non-interest bearing note
discounted using 10% interest rate, repaid September, 1999 782 -
Note payable to the City of Mansfield, 6% interest rate, due in four equal
annual installments of $25 to the final payment on May 22, 2002
100 75
Obligations under capital leases 99 19
--------- ---------
138,681 190,669
Less - current portion (5,637) (7,694)
--------- ---------
Total $ 133,044 $ 182,975
========= =========
</TABLE>
Debt maturities at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 7,694
2001 8,325
2002 9,825
2003 43,944
2004 120,881
--------
Total $190,669
========
</TABLE>
-15-
<PAGE>
The Company has a borrowing arrangement with a bank which provides for a
maximum credit facility of $115.0 million (including $3.0 million for
stand-by letters of credit), limited by outstanding indebtedness under the
initial $35.0 million term loan agreement ("Tranche A") and the $55.0
million term loan agreement ("Tranche B") or availability under the
borrowing base, as defined in the loan agreement (the "Senior Credit
Facility"). The amount available for borrowings under the Senior Credit
Facility at December 31, 1999 was approximately $12.3 million. 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 is the higher of a Reference Rate (as defined in the Senior Credit
Facility) or the federal funds rate plus 1/2%. At December 31, 1999, LIBOR
borrowing rates ranged from 8.0-9.5%. At December 31, 1999, the base-rate
borrowing rate was 9.75%. The weighted average borrowing rate on the
Senior Credit Facility, calculated based on borrowings outstanding at
December 31, 1999 under base rate and LIBOR loans, was 9.27%. The weighted
average borrowing rate on the Old Senior Credit Facility at December 31,
1998 was 7.74%. The estimated fair value of the Senior Credit Facility
approximated its carrying value at December 31, 1998 and December 31,
1999.
The Company and its wholly owned subsidiaries, Kilovac, Kilovac
International, Inc., Corcom, Inc., Products Unlimited Corporation, Marc
Industries, Inc., SOL Industries, Inc., and GW Industries, Inc. have
guaranteed the 10% Senior Subordinated Notes (the "Notes") and 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 10% Senior Subordinated Notes is payable semi-annually in
arrears on March 15 and September 15 of each year. 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, with
the net cash proceeds of an equity offering (as defined in the Indenture),
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, provided that not less than
$63.4 million aggregate principal amount of the Notes remains outstanding
immediately after the occurrence of such redemption. The estimated fair
value of the Notes at December 31, 1998 and 1999 was approximately $91.2
million and $76.0 million, respectively.
Letters of credit outstanding under credit facilities at December 31, 1998
and 1999 were $950 and $100, respectively.
The Senior Credit Facility requires the Company to pay commitment fees at
an annual rate of 0.5% on the undrawn amount of the Senior Credit
Facility, subject to adjustment based on the Consolidated Senior Leverage
Ratio of the Company.
On June 19, 1998, the Company extinguished all debt which was outstanding
at December 31, 1997, under the Old Senior Credit Facility. The
extraordinary loss recorded in the 1998 consolidated statement of
operations relates to the write-off of the unamortized portion of the debt
issuance costs related to the Old Senior Credit Facility. 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 former debt agreements.
-16-
<PAGE>
The terms of the Senior Credit Facility and the Indenture (see Note 1)
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, limitations
on capital expenditures and minimum levels of consolidated earnings before
interest, taxes, depreciation and amortization, as defined by the Senior
Credit Facility. The Senior Credit Facility has a mandatory prepayment
clause (the "Excess Cash Payment") which requires that excess cash flow
(as defined in the Senior Credit Facility) be used to prepay the Senior
Credit Facility within 90 days after the last day of the fiscal year end.
The excess cash flow for the year ended December 31, 1999 was $850.
As of December 31, 1999, the Company was not in compliance with certain of
the financial covenants of the Senior Credit Facility and the Indenture.
Such financial covenants were amended on March 3, 2000. The Company was in
compliance with the amended financial covenants as of December 31, 1999.
Commitment fees and other expenses incurred in connection with a credit
facility to provide financing in the event that the Offering was not
consummated (cancellation fees) 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 in the accompanying 1997 consolidated statement of operations.
Interest paid amounted to $4,129 (including success fee), $12,694 and
$16,599 for the years ended December 31, 1997, 1998 and 1999,
respectively.
7. LEASES
The Company leases certain office equipment under capital lease
arrangements. The leased assets have a net book value of $99 and $19 at
December 31, 1998 and 1999, respectively. The future minimum lease
obligation under capital leases as of December 31, 1998 and 1999, is
included in long-term debt (see Note 6).
The Company leases certain premises and equipment under non-cancelable
operating leases which have remaining terms from one to six years and
which provide for various renewal options. Total rent expense charged to
operations was approximately $1,053, $1,340 and $1,596 for the years ended
December 31, 1997, 1998 and 1999, respectively.
-17-
<PAGE>
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $1,216
2001 873
2002 588
2003 373
2004 214
Thereafter 23
------
Total $3,287
======
</TABLE>
8. INCOME TAXES
The significant components of income tax expense (benefit) are:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Current tax expense (benefit):
Federal $ 2,724 $ 2,370 $ (337)
State 453 368 145
Foreign 60 104 408
------- ------- -------
Total current tax expense 3,237 2,842 216
Deferred tax benefit (401) (471) (635)
------- ------- -------
Total tax expense (benefit) $ 2,836 $ 2,371 $ (419)
======= ======= =======
</TABLE>
In addition, the Company recorded an income tax benefit from an
extraordinary item totaling $266 and $234 during the years ended December
31, 1997 and 1998. Income tax payments amounted to approximately $2,251,
$1,574 and $665 for the years ended December 31, 1997, 1998 and 1999,
respectively.
The Company's effective tax rate differs from the statutory rate for the
following reasons:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------
1997 1998 1999
<S> <C> <C> <C>
Provision at statutory Federal tax rate 34.0% 34.0% (34.0)%
Effective state income tax rate 4.4 3.0 (3.0)
Nondeductible meals, entertainment and officers' life
insurance expenses 0.4 0.7 2.1
Mexican income taxes 0.9 1.9 (0.8)
Nondeductible goodwill 1.5 5.3 20.0
Other, net (0.3) (0.6) 2.8
------ ------ ------
Total 40.9% 44.3% (12.9)%
====== ====== ======
</TABLE>
-18-
<PAGE>
Deferred income taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Current deferred tax assets:
Sales and inventory reserves $ 1,410 $ 1,760
Accrued commissions 384 346
Bad debt reserves 128 264
Other 662 373
-------- --------
Total current deferred tax assets 2,584 2,743
Current deferred tax liabilities 338 272
-------- --------
Total current deferred tax assets, net $ 2,246 $ 2,471
======== ========
Long-term deferred tax assets:
Accrued expenses $ 440 $ 302
Federal net operating loss carryforward 1,470 744
State net operating loss carryforward 159 182
Federal tax credit carryforward 848 728
Other -- 77
-------- --------
2,917 2,033
Less - valuation allowance (75) (100)
-------- --------
Total long-term deferred tax assets 2,842 1,933
-------- --------
Long-term deferred tax liabilities:
Property and equipment 3,401 5,360
Intangibles 5,448 10,244
Other 1,034 62
-------- --------
Total long-term deferred tax liabilities 9,883 15,666
-------- --------
Total long-term deferred tax liabilities, net $ 7,041 $ 13,733
======== ========
Deferred tax assets (liabilities), net $ (4,795) $(11,262)
======== ========
</TABLE>
At December 31, 1999, the Company had a Federal net operating loss
carryforward of approximately $2.7 million 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 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 382 which expire beginning in 2016.
Realization of tax benefits is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards.
-19-
<PAGE>
9. 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 a prior
owner (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 areas of soil and groundwater contamination had been noted at the
Fairview facility, the most serious of which is TCE contamination in the
groundwater. Remedial investigations have been undertaken 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.
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 at 90% of its
intended capacity 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, unless it provides a substantially lower estimate. In that
case, any substantial differences are to be resolved through negotiation
or expedited arbitration. The Company has reflected the present value of
the receivable, discounted at 5% (approximately $1.22 million and $1.25
million at December 31, 1998 and 1999, respectively) and the escrowed cash
as restricted assets.
In October, 1995, the Company released the selling shareholders from their
indemnity obligation. 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.
-20-
<PAGE>
Total amounts estimated to be paid related to environmental liabilities
are approximately $3.6 million calculated as follows at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 130
2001 130
2002 130
2003 130
2004 130
Thereafter 2,990
------
3,640
Discount to present value -1,687
------
Liability at present value 1,953
======
</TABLE>
Assets recorded in relation to the above environmental liabilities are
approximately $1.56 million and $1.48 million at December 31, 1998 and
1999, respectively.
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 leased from a
wholly-owned subsidiary of Figgie 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. 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 included an indemnity by the 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 had placed $515 in escrow for environmental
remediation costs at the Mansfield Property to be credited towards the
Indemnification Cap as provided in the lease (the "Escrowed Funds").
During January 2000, the Company entered into an agreement with the former
owners of the Mansfield Property in which the Company purchased the
property and certain equipment and released $515 of funds contributed by
the former owners of Hartman and held in escrow from the date the Company
acquired Hartman. This agreement followed the decision by the former
owner's registered environmental consultant that no further environmental
remediation was needed at the property as long as the property was
restricted to industrial usage. The agreement reduces the indemnity cap to
$1.0 million over nine years if the former owner does not seek and obtain
a covenant not to sue from the Ohio EPA relating to the site and reduces
the cap to zero over ten years if the former owner obtains a covenant not
to sue relating to the site from the Ohio EPA. In either event, the
agreement leaves in place the Company's right to seek contribution or
indemnity under common law or statute from the former owners for
environmental issues and requires the former owners to complete some soil
cleanup actions within six months of closing. The transaction was closed
on January 7, 2000. The Company believes that remediation costs will not
exceed the Indemnification Cap. If such costs exceed the Cap and the
Company is unable to obtain, or is delayed in obtaining indemnification or
contribution for any reason, the Company could be materially and adversely
affected. The Company does not maintain environmental impairment liability
insurance.
10. 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
-21-
<PAGE>
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 $1,252, $2,437 and $3,196 for
the years ended December 31, 1997, 1998 and 1999, respectively.
Effective January 1, 1988, the 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 $412, $348 and $515 during
the years ended December 31, 1997, 1998 and 1999, respectively.
-22-
<PAGE>
11. 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 also 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 are reserved for issuance
under the 1997 Plan, subject to adjustment at the discretion of the
Compensation Committee or the Board of Directors. The Company accounts for
options granted under the 1997 Plan in accordance with the requirements of
Accounting Principles Board Opinion No. 25 and related interpretations.
The Company granted 2,658 shares under the 1997 Plan during 1998 (no
grants were issued in 1997). All such shares granted expire on December
31, 2007, subject to earlier expiration in certain circumstances. Shares
under option vest as follows: 33-1/3% of the options vested immediately,
33-1/3% vested on December 31, 1998, and the remaining 33-1/3% vested on
December 31, 1999. All stock options were granted at an exercise price of
$10.00 per share, which was the issuance price of the Parent's stock at
the time of the Recapitalization (see Note 1) and the estimated fair value
of the Parent's stock at the date of the grant. Accordingly, no
compensation cost for such grants has been reflected in the Company's 1998
consolidated statement of operations.
The Company granted 17,288 shares under the 1997 Plan during 1999. All
such grants expire on December 31, 2007, subject to earlier expiration in
certain circumstances. Shares under option vest as follows: 33 1/3% of the
options vested immediately, 33 1/3% vested on December 31, 1999, and the
remaining 33 1/3% vest on December 31, 2000. All stock options were
granted at an exercise price of $11.00 per share. Accordingly, a non-cash
compensation expense for such grants in the amount of approximately $144
has been reflected in the Company's 1999 consolidated statement of
operations.
A summary of stock option activity under the 1997 Plan is as follows:
<TABLE>
<CAPTION>
<S> <C>
Granted during 1998 2,658
Exercised during 1998 (417)
Forfeited during 1998 (76)
------
Outstanding at December 31, 1998 2,165
Granted during 1999 17,288
Exercised during 1999 (420)
Forfeited during 1999 (57)
------
Outstanding at December 31, 1999 18,976
======
Exercisable at December 31, 1998 1,302
Exercisable at December 31, 1999 13,213
</TABLE>
The exercise price of all options granted, exercised and forfeited during
1998, and of all of the options outstanding and exercisable at December
31, 1998, was $10.00 per share. The exercise price of all options granted
in 1999 was $11.00 per share. The exercise price of all options exercised
and forfeited in 1999 was $10.00 per share. The exercise price of the
options outstanding and exercisable at December 31, 1999 is as follows:
1,688 options outstanding and exercisable at $10.00 per share; 17,288
options outstanding and 11,525 options exercisable at $11.00 per share.
-23-
<PAGE>
The Parent's common stock is closely held by Code, Hennessy & Simmons III,
L.P., certain members of Company management and certain other investors.
Based on information available to the Company, including trading activity
in the Parent's common stock during 1999 and 1998, the Company has
determined that compensation cost, had it been determined based on the
fair value at the grant date for options under the 1997 Plan, would have
been immaterial. As such, management believes the pro forma effect on net
income for the years ended December 31, 1999 and 1998 is immaterial.
12. SIGNIFICANT CUSTOMERS
Approximately 20%, 20% and 9% of the Company's net sales in 1997, 1998 and
1999, respectively, were made, directly or indirectly, to the U.S.
Department of Defense.
-24-
<PAGE>
13. RELATED PARTY TRANSACTIONS
Non-employee shareholder groups (or their affiliates) of the Parent
provide management services to the Company. In connection with the
Recapitalization, the Company entered into an agreement with CHS
Management III, L.P. ("CHS Management"), an affiliate of Code, Hennessy &
Simmons, Inc., pursuant to which the Company will pay $500 plus expenses
per year to CHS Management for financial and management services provided
by CHS Management. The term of this agreement is five years, subject to
automatic renewal unless either CHS Management or the Company elects to
terminate (subject to earlier termination in certain circumstances). The
Company was charged $283, $529 and $521 for services provided by CHS
Management or other nonemployee shareholder groups of the Parent for the
years ended December 31, 1997, 1998 and 1999, respectively. Additionally,
such groups were paid $267 in 1997 for fees related to the
Recapitalization (See Note 1), $300 in 1998 for fees related to the Corcom
Merger (see Note 1), and $580 in 1999 for fees related to the Products
Acquisition (see Note 1).
Included in long-term liabilities at December 31, 1998 and 1999 were
payables owed to the Parent of approximately $458 and $1,866 respectively.
Such amounts are due to the Parent primarily as a result of a tax sharing
agreement between the Company and the Parent.
14. BUSINESS SEGMENTS
The Company has five business units which have separate management teams
and infrastructures that offer electronic products. These five 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. HPG accounted for 44% of 1999
consolidated net sales. SIG includes Corcom, Products Unlimited and the
Midtex Brand. Products manufactured by SIG include RFI filters, general
purpose relays, transformers and definite purpose contactors. SIG
accounted for 56% of 1999 consolidated net sales.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 2).
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.
-25-
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net sales:
High Performance Group $ 77,483 $ 89,089 $ 76,518
Specialized Industrial Group 12,201 31,363 98,177
Intersegment elimination (1) (248) (422) (712)
--------- --------- ---------
Consolidated net sales $ 89,436 $ 120,030 $ 173,983
========= ========= =========
Operating income:
High Performance Group $ 14,157 $ 17,507 $ 10,189
Specialized Industrial Group 1,993 3,359 7,995
Corporate (1,822) (2,788) (2,944)
--------- --------- ---------
Consolidated operating income 14,328 18,078 15,240
Interest expense (6,573) (12,552) (17,887)
Other expense, net (17) (171) (597)
Cancellation fees (800) - -
--------- --------- ---------
Consolidated income (loss)before income taxes, minority
interest and extraordinary items $ 6,938 $ 5,355 $ (3,244)
========= ========= =========
Depreciation and amortization expense:
High Performance Group $ 3,819 $ 4,365 $ 4,826
Specialized Industrial Group 100 1,839 7,586
--------- --------- ---------
3,919 6,204 12,412
Amortization of debt issuance costs (2) 401 724 1,085
--------- --------- ---------
Consolidated depreciation and amortization expense $ 4,320 $ 6,928 $ 13,497
========= ========= =========
Purchases of property, plant and equipment:
High Performance Group $ 1,953 $ 2,034 $ 2,461
Specialized Industrial Group 193 761 1,912
Corporate - - 57
--------- --------- ---------
Consolidated capital expenditures $ 2,146 $ 2,795 $ 4,430
========= ========= =========
Assets:
High Performance Group $ 66,771 $ 65,078 $ 59,769
Specialized Industrial Group 4,838 60,530 128,787
Corporate 4,674 4,273 11,469
--------- --------- ---------
Consolidated assets $ 76,283 $ 129,881 $ 200,025
========= ========= =========
</TABLE>
(1) Represents net sales between HPG and SIG
(2) 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.
-26-
<PAGE>
Financial information for the Company's net sales by geographic area is as
follows:
<TABLE>
<CAPTION>
--------------------------------------
1997 1998 1999
<S> <C> <C> <C>
United States $ 74,703 $ 98,094 $142,544
North America (Non US) 3,226 4,853 6,075
United Kingdom 3,554 7,020 9,362
Germany 206 3,085 5,037
France 564 1,459 1,147
Japan 158 1,537 1,688
Other international 7,025 3,982 8,130
-------- -------- --------
Total $ 89,436 $120,030 $173,983
======== ======== ========
</TABLE>
Revenues are attributed to countries based on location of customer.
Direct and indirect net sales to the U.S. Department of Defense were
approximately 27% and 20% of HPG 1998 and 1999 net sales respectively, and
less than 1% of SIG 1998 and 1999 net sales.
* * * * * * * *
-27-
<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)
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)
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)
<PAGE>
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, L.P. 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)
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 333-3820)
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)
<PAGE>
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
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)
<PAGE>
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)
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
<PAGE>
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)
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)
10.40 First Amendment and Waiver to Credit Agreement, among Parent, the
Company, various lenders, Bank of America N. A., as Administrative
Agent.
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.
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Company, Kilovac, Corcom and Products Unlimited as
of December 31, 1999
24.1 Powers of Attorney
27 Financial Data Schedule for the fiscal year ended December 31, 1999
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).
<PAGE>
+ 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.
<PAGE>
EXHIBIT 10.40
FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT
FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT (this
"Amendment"), dated as of October 7, 1999, among CII TECHNOLOGIES, INC., a
Delaware corporation ("Holdings"), COMMUNICATIONS INSTRUMENTS, INC., a North
Carolina corporation (the "Borrower"), the lending institutions from time to
time party to the Credit Agreement referred to below (the "Lenders"), BANK OF
AMERICA, N.A. (as successor to NationsBank, N.A.), as an Issuing Lender and the
Swingline Lender and BANK OF AMERICA, N.A. (as successor to NationsBank, N.A.),
as Administrative Agent (the "Administrative Agent"). All capitalized terms used
herein and not otherwise defined shall have the respective meanings provided
such terms in the Credit Agreement referred to below.
W I T N E S S E T H :
WHEREAS, Holdings, the Borrower, the Lenders and the
Administrative Agent are parties to an Amended and Restated Credit Agreement,
dated as of June 19, 1998, and amended and restated as of March 19, 1999 (as
amended, modified or supplemented through, but not including, the date hereof,
the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend and waive certain
provisions of the Credit Agreement as herein provided, subject to and on the
terms and conditions set forth herein;
NOW, THEREFORE, it is agreed:
1. The Lenders hereby waive any Event of Default that has
arisen under the Credit Agreement solely as a result of the failure of Holdings
and the Borrower to comply with Section 8.05(v) of the Credit Agreement by up to
$50,000 at any time on or prior to the First Amendment Effective Date (as
hereinafter defined).
2. Section 8.05 of the Credit Agreement is hereby amended by
deleting the amount "$500,000" appearing in clause (v) thereof and by inserting
in lieu thereof the amount "$550,000".
3. In order to induce the Lenders to enter into this
Amendment, each of Holdings and the Borrower hereby represents and warrants that
(i) the representations and warranties contained in the Credit Agreement are
true and correct in all material respects on and as of the First Amendment
Effective Date (it being understood and agreed that any representation or
warranty which by its terms is made as of a specified date shall be required to
be true and correct in all material respects only as of such specified date) and
(ii) there exists no Default or Event of Default on the First Amendment
Effective Date, in each case after giving effect to this Amendment.
<PAGE>
4. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Loan Document.
5. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with Holdings, the Borrower and the
Administrative Agent at its notice office.
6. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
7. This Amendment shall become effective on the date (the
"First Amendment Effective Date") when Holdings, the Borrower and the Majority
Lenders (i) shall have signed a counterpart hereof (whether the same or
different counterparts) and (ii) shall have delivered (including by way of
facsimile transmission) the same to the Administrative Agent.
8. From and after the First Amendment Effective Date, all
references in the Credit Agreement and each of the Loan Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as amended
hereby.
* * *
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
CII TECHNOLOGIES, INC.
By
---------------------------------
Name:
Title:
COMMUNICATIONS INSTRUMENTS, INC.
By
---------------------------------
Name:
Title:
BANK OF AMERICA, N.A.,
as the Administrative Agent
By
---------------------------------
Name:
Title:
BANK OF AMERICA, N.A.,
as an Issuing Lender
By
---------------------------------
Name:
Title:
BANK OF AMERICA, N.A.,
as the Swingline Lender
By
---------------------------------
Name:
Title:
<PAGE>
BANK OF AMERICA, N.A., as a Lender
By
---------------------------------
Name:
Title:
ANTARES CAPITAL CORPORATION
By
---------------------------------
Name:
Title:
FIRST SOURCE FINANCIAL LLP
By: FIRST SOURCE FINANCIAL, INC.,
its Agent/Manager
By
---------------------------------
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By
---------------------------------
Name:
Title:
<PAGE>
BANK AUSTRIA CREDITANSTALT
CORPORATE FINANCE, INC.
By
---------------------------------
Name:
Title:
By
---------------------------------
Name:
Title:
MORGAN STANLEY DEAN WITTER PRIME
INCOME TRUST
By
---------------------------------
Name:
Title:
JACKSON NATIONAL LIFE INSURANCE
COMPANY
By: PPM America, Inc., as
attorney-in-fact, on behalf of
Jackson National Life Insurance
Company
By
---------------------------------
Name:
Title:
VAN KAMPEN PRIME RATE INCOME TRUST
By
---------------------------------
Name:
Title:
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By
---------------------------------
Name:
Title:
EATON VANCE SENIOR INCOME TRUST
By: Eaton Vance Management, as
Investment Advisor
By
---------------------------------
Name:
Title:
STATE STREET BANK AND TRUST
COMPANY, as Trustee for
General Motors Employees
Global Group Pension Trust
By
---------------------------------
Name:
Title:
<PAGE>
Exhibit 12.1
Communications Instruments, Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings (Loss) Before Taxes
and Minority Interest $ (2,498) $ 2,782 $ 6,938 $ 5,355 $ (3,244)
-------- -------- -------- -------- --------
Fixed Charges:
Interest Charges 2,172 3,139 5,243 11,835 16,863
Amortization of Financing
Costs 137 252 401 724 1,085
Environmental Interest -- 147 119 113 119
Estimated Interest Factor
of Rental Expense 40 272 351 532 532
-------- -------- -------- -------- --------
Total Fixed Charges 2,349 3,810 6,114 13,204 18,599
-------- -------- -------- -------- --------
Total Earnings Available for
Fixed Charges (149) 6,592 13,052 18,559 15,355
======== ======== ======== ======== ========
Ratio of Earnings to Fixed
Charges N/A 1.7x 2.1x 1.4x 0.8x
</TABLE>
Page 1
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
LIST OF SUBSIDIARIES OF COMMUNICATIONS INSTRUMENTS, INC. (AS OF 12/31/99)
<TABLE>
<S><C>
Name of Entity Name of Owner
-------------- -------------
Electro-Mech, S. A. de C. V., a corporation Communications Instruments, Inc., a
organized under the laws of Mexico North Carolina corporation
Kilovac Corporation, A California corporation Communications Instruments, Inc., a
North Carolina corporation
Corcom, Inc., an Illinois corporation Communications Instruments, Inc., a
North Carolina corporation
Products Unlimited Corporation, an Iowa Communications Instruments, Inc., a
corporation North Carolina corporation
Kilovac International, Inc., a California Kilovac Corporation, a California
corporation corporation
Kilovac International FSC, Ltd., a Kilovac Corporation, a California
corporation organized under the laws of corporation
Jamaica
Corcom, S. A. de C. V., a corporation Corcom, Inc., an Illinois corporation
organized under the laws of Mexico
Corcom West Indies Ltd., a corporation Corcom, Inc., an Illinois corporation
organized under the laws of Barbados
Corcom International Ltd., a corporation Corcom, Inc., an Illinois corporation
organized under the laws of Barbados
Corcom GmbH, a corporation organized Corcom, Inc., an Illinois corporation
under the laws of Germany
Corcom Far East Ltd., a corporation Corcom, Inc., an Illinois corporation
organized under the laws of Hong Kong
Marc Industries, Inc., an Iowa corporation Products Unlimited Corporation, an
Iowa corporation
SOL Industries, Inc., an Iowa corporation Products Unlimited Corporation, an
Iowa corporation
GW Industries, Inc., an Iowa corporation Products Unlimited Corporation, an
Iowa corporation
</TABLE>
<PAGE>
EXHIBIT 24.1
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears
below constitutes and appoints Ramzi A. Dabbagh and Richard Heggelund 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, 1999,
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 casue to
by virtue hereof.
This power of attorney has been signed as of the ____th day of March, 2000, by
the following persons.
/s/ Ramzi A. Dabbagh /s/ Richard Heggelund
- --------------------------------------- ------------------------------------
Ramzi A. Dabbagh, Richard Heggelund,
Chairman of the Board, Chief Executive Chief Financial Officer
Officer and Director
/s/ Michael A. Steinback /s/ G. Daniel Taylor
- --------------------------------------- ------------------------------------
Michael A. Steinback, G. Daniel Taylor,
Chief Operating Officer, President Executive Vice President of Business
and Director 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
/s/ Donald Dangott
- ---------------------------------------
Donald Dangott,
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,045
<SECURITIES> 0
<RECEIVABLES> 23,658
<ALLOWANCES> (621)
<INVENTORY> 27,498
<CURRENT-ASSETS> 63,387
<PP&E> 63,686
<DEPRECIATION> (22,939)
<TOTAL-ASSETS> 200,025
<CURRENT-LIABILITIES> 32,869
<BONDS> 182,975
0
0
<COMMON> 0
<OTHER-SE> (33,826)
<TOTAL-LIABILITY-AND-EQUITY> 200,025
<SALES> 173,983
<TOTAL-REVENUES> 173,983
<CGS> 128,816
<TOTAL-COSTS> 128,816
<OTHER-EXPENSES> 30,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,887
<INCOME-PRETAX> (3,244)
<INCOME-TAX> (419)
<INCOME-CONTINUING> (2,825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,825)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
