SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
to
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required).
For the fiscal year ended December 31, 1993
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the transition period from __________ to __________.
Commission File Number 1-7960
TIE/communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-0872068
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8500 W. 110th Street, Overland Park, Kansas 66210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 344-0400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par American Stock Exchange, Inc.
value $.10 per share
___________________
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(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was $7,850,343 as of February 28, 1994. For purposes of the
foregoing statement only, directors and officers of the registrant and holders
of 5% or more of the registrant's common stock have been assumed to be
affiliates.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No ____
As of February 28, 1994, 3,981,338 shares of common stock of the registrant were
outstanding.
Documents incorporated by reference: Part III: registrant's proxy statement
prepared in connection with its 1994 annual meeting of stockholders.
Item 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
---------------------------------------- -----------------------------------------
Years Ended December 31, Six Months Six Months Years Ended December 31,
------------------------ Ended Ended ------------------------
1993 1992 Dec. 31, 1991 June 30, 1991 1990 1989
----------- ---------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenue $102,111 $101,154 $52,269 $ 51,541 $100,587 $107,153
Income (loss) from continuing operations 1,365 1,232 (183) (40,788) (11,353) (45,568)
Income (loss) from discontinued operations -- (13) 7 (4,534) 3,949 (24,257)
Extraordinary income -- -- -- 18,896 -- --
Preferred stock dividends and accretion -- -- -- -- (1,335) (5,192)
Net income (loss) applicable to common stock 1,365 1,219 (176) (26,426) (8,739) (75,017)
Earnings (loss) per common share:
Continuing operations $ 0.34 $ 0.31 $ (0.05) $ (40.45) $ (12.82) $ (51.33)
Discontinued operations -- -- 0.01 (4.50) 3.99 (24.53)
Extraordinary income -- -- -- 18.74 -- --
Cash dividends declared per common share -- -- -- -- -- --
At period end:
Total assets $ 62,994 $ 65,797 $76,531 $ 94,938 $132,398 $181,614
Working capital 5,653 12,503 11,209 10,587 10,495 30,682
Long-term debt -- 398 777 4,998 33,795 6,778
Cumulative Redeemable
Convertible Preferred Stock -- -- -- -- -- 42,897
Common stockholders' equity 22,922 21,618 20,781 21,096 31,792 41,234
</TABLE>
All references to per share amounts have been restated to reflect the 1 for 35
reverse stock split which was treated as being effective on June 30, 1991.
See Notes 1, 2, 10 and 11 to the Consolidated Financial Statements - Predecessor
Company and Note 10 to the Consolidated Financial Statements - Successor
Company for details regarding factors that materially affect the comparability
of the information reflected in the table above.
See Note 20 regarding restatement of 1993 amounts for correction of errors.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUCCESSOR COMPANY
The following discussion should be read in conjunction with the consolidated
financial statements for the Successor Company and notes thereto.
Results of Operations - 1993 Compared to 1992:
For the year ended December 31, 1993, the Company generated income from
continuing operations of $1.4 million or $0.34 per share as compared to income
from continuing operations of approximately $1.2 million or $0.31 per share for
the year 1992. The increase in net income from 1992 is due to the net effect of
a non-operating increase of $1.1 million in other income, net and a reduction in
operating income of $0.6 million, as discussed in more detail in the following
paragraphs. The operating results of the Company for 1993 were favorably
affected by the change in the amortization period for intangible assets that was
implemented on April 1, 1992.
Total net revenue for 1993 increased $1.0 million or .9% as compared to 1992.
An increase of $1.6 million occurred in new equipment sales with a decline of
$0.6 million in net revenue from services provided. Net revenue from new
equipment sales accounted for approximately 74.5% of the total revenue for 1993,
up slightly from approximately 73.7% for 1992. The remaining revenue was
generated by service transactions. The components of total net revenue are
expected to continue this relationship in future periods.
The gross margin percentage for 1993 was 50.3% as compared to 51.4% for 1992.
The decline in the gross margin percentage is due to the change in sales mix
with a slightly higher proportion of revenue being generated from new equipment
sales and sales of proprietary products, which carry a lower margin versus
service transactions. Lower margins on new equipment sales are acceptable as
these sales generate possible future service business. Additionally, the gross
margin on service revenue has declined from 68.6% in 1992 to 60.5% in 1993 due
to increased competition in the industry. The Company expects that these
factors will continue to affect the gross margin percentages in the future but
not cause significant future deterioration.
Another factor that may affect the Company's gross margin percentage in the more
distant future relates to the Company's agreement with NTK America. Under that
agreement, the Company is provided with the most favorable purchase prices on
NTK America products for the duration of the agreement. Once the agreement
expires (July 1996) or the Company is no longer purchasing the related product
lines (whichever occurs earlier), it is anticipated that the cost to the Company
to purchase these products will increase thereby lowering the gross margin. The
Company cannot estimate the impact of the foregoing on future gross margin at
this time.
Operating expenses for 1993 remained relatively consistent with 1992. Operating
expenses were favorably affected by a decline in amortization expense due to the
change in the amortization period of intangible assets which was implemented on
April 1, 1992. This change accounted for a reduction in operating expenses of
approximately $268 thousand for 1993 as compared to 1992. The Company is
continuing to monitor operating expense levels and will seek to continue to
control costs in future periods. It is not expected that operating expenses
will increase significantly in the future without a corresponding significant
increase in revenue.
15
Other income, net of $2.0 million for 1993 increased $1.1 million as compared to
1992. Other income, net is substantially comprised of royalty income of $1.5
million and $1.3 million for the years 1993 and 1992, respectively, primarily
from NTK America for its sale of equipment designed by the Company. The NTK
royalty agreement is in effect through July, 1996. Other income, net for 1993
also includes certain nonrecurring items including the gain on the disposal of
the Company's Connecticut headquarters facility of approximately $1.7 million
which occurred in the third quarter of 1993, extinguishing all long-term debt
except for statutory tax settlements. This gain was partially offset by the net
cost of the relocation of the headquarters to Kansas of approximately $1.3
million. Refer to Note 6 to the Successor Company to the Consolidated Financial
Statements for further details regarding these transactions. Additionally, the
Company recorded approximately $0.4 million of income in December 1993 related
to settlement of a property insurance claim and $0.2 million of expenses
associated with the attempted privatization of its Canadian subsidiary. All
other items included in other income, net increased $0.3 million in the
aggregate in 1993 as compared to 1992.
In 1993, TIE focused its efforts on maintaining its existing customer base and
implementation of training and marketing programs related to its new strategic
businesses. The purchase of certain assets of PacTel Meridian Systems (PTMS)
was consummated during the month of September and the California region fourth
quarter results were below expectations due to the logistics and non-recurring
expenses related to the transition of that base into the domestic direct sales
and service business. Earlier in the year the Company's Canadian subsidiary
struck an alliance with Alberta Government Telephone (AGT). The AGT alliance is
expected to have a positive impact on the results of TIE Canada.
In February, 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 109 - "Accounting for Income Taxes".
SFAS No. 109 requires a change from the deferred method of accounting for income
taxes to the asset and liability method of accounting for income taxes.
Effective January 1, 1993, the Company prospectively adopted SFAS No. 109.
Results of Operations - 1992 Compared to the Six Months Ended December 31, 1991:
Due to the Company's reorganization on July 1, 1991 (refer to "Reorganization of
the Company" under Item 1 and Note 2 to the Successor Company Consolidated
Financial Statements), the Successor Company operations cover both the year
ended December 31, 1992 and the six months ended December 31, 1991. The
comparative discussion to the prior year's results is presented for the last six
months of 1992 only as the Successor Company results of operations for the year
ended December 31, 1992 are not comparable to the results of operations of the
Predecessor Company.
16
Fiscal 1992 was a year of transition for the Company as the strategic direction
of the Company was expanded from a key system based business to a broader
platform of related products, services and software. The net income for the
year of $1.2 million or $0.31 per share is primarily the result of the Company's
cost reduction program coupled with the change in strategic direction.
For the six months ended December 31, 1992, the Company had net income of $1.5
million or $0.38 per share as compared to a loss of $176 thousand or $0.04 per
share for the comparable 1991 period. This improvement is primarily due to the
decline in operating expenses in 1992 which is the result of the Company's
efforts to reduce fixed and variable operating expenses. Additionally, the
operating results of the Company were favorably affected by the change in the
amortization period for intangible assets which increased the Company's net
income for the year ended December 31, 1992 by $723,000.
For the year ended December 31, 1992, net revenue from equipment sales accounted
for approximately 73.7% of total net revenue with the remaining 26.3% of net
revenue being derived from service transactions. Total net revenue for the
second half of 1992 declined slightly ($172 thousand) from the comparable 1991
period. Net revenue from equipment sales increased $952 thousand from the
second half of 1991 to the second half of 1992 while net revenue from service
transactions declined by $1.1 million for the comparable period.
The percentage of gross margin for the year ended December 31, 1992 was 51.4%.
The percentage of gross margin for the six months ended December 31, 1992 was
50.3% as compared to 52.7% for the same 1991 period. The decline in the gross
margin percentage is due to the shift in sales mix with a higher proportion of
revenue being generated from new equipment sales versus service transactions and
also due to a change in product mix sold. Additionally, the decline in the gross
margin percentage reflects the intense competition in the industry.
Operating expenses for the year ended December 31, 1992 totalled $51.1 million
or 50.5% of sales. Operating expenses for the six months ended December 31,
1992 and December 31, 1991 were $24.6 million and $28.5 million, respectively.
The significant decline of $3.9 million or 13.7% in operating expenses primarily
reflects the benefit of cost reduction programs implemented in the second
quarter of 1992 in order to reduce the break-even sales level of the Company.
To a lesser extent, the operating expenses were also favorably affected by a
decline in amortization expense due to the change in the amortization period of
intangible assets which was implemented in the second quarter of 1992.
Interest income and interest expense for the last six months of 1992 have not
varied significantly from the comparable 1991 period. Other income, net
includes royalty income of $1.3 million, $719 thousand and $514 thousand for the
year ended December 31, 1992 and the six months ended December 31, 1992 and
1991, respectively, from NTK America for its sale of equipment designed by the
Company. This royalty agreement is in effect through July 1996.
During the third quarter of 1992, the Company completed the divestiture of its
distribution business (which it had begun in 1991) with the sale of the Canadian
subsidiary's key telephone system distribution business to NTK America. The
results of this transaction have been reported as discontinued operations for
all periods presented.
17
Inflation
Inflation has had a relatively minor impact on the Company as the rate of
inflation has declined in recent reporting periods. If operating expenses
increase, then the Company, to the extent permitted by competition, may attempt
to recover these increased costs by increasing sales prices to customers.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1993 totalled $8.1 million, a decrease
of $5.9 million from December 31, 1992. For the year ended December 31, 1993,
the Company used approximately $1.1 million of cash for operating activities,
which included restructuring, bankruptcy and other non- operating related
expenditures of approximately $1.9 million. During 1993 approximately $1.9
million was provided from cash received on notes receivable and the Company used
approximately $1.9 million for payment of the long-term tax liability, $869
thousand for net capital expenditures and $796 thousand to purchase a portion of
the minority interest in the Company's Canadian subsidiary. During 1993 the
Company paid $3.3 million to expand its service network by acquiring domestic
customer base using its available cash balances rather than borrowing funds
under its revolving line of credit. The acquisition of non-Northern Telecom
manufactured key/hybrid telephone equipment customer base from PacTel Meridian
Systems was the largest acquisition and is described in Note 9 to the Successor
Company Consolidated Financial Statements.
Upon confirmation of the Company's Plan of Reorganization (refer to Note 1 to
the Successor Company Consolidated Financial Statements), HCR Partners made
available to the Company a $10.0 million revolving line of credit through
December 31, 1993. No funds were borrowed under this line of credit.
Substantially all of the Company's assets are secured under this agreement and
the indebtedness under this line of credit has been guaranteed by the Company's
subsidiaries. The Company agreed that in connection with the liquidation of HCR
Partners, the revolving line of credit agreement could be assigned to and
assumed by Marmon Holdings, Inc. Effective December 31, 1993, the term of the
Credit Agreement was extended for an additional three year period ending
December 31, 1996 upon substantially the same terms and conditions, except that
the maximum credit available was reduced to $7,000,000. The Company will pay a
facilities fee of $75 thousand in connection with the extension. The Company
believes that the terms and conditions of the Credit Agreement as extended are
competitive with the terms and conditions available from third parties.
The Company believes sufficient cash resources exist to support its short-term
needs through currently available cash, cash expected to be generated from
future operations, or from the line of credit previously mentioned. The Company
can borrow against this line of credit if needed, assuming no breach of any of
the covenants (which include restrictions on asset purchases and require
specified levels of working capital and net worth to be maintained) and that the
aggregate principal amount outstanding at any time under the credit agreement
does not exceed the "Borrowing Base" (which is based on inventory and
receivables) set forth in the credit agreement. The Company was in compliance
with or had received a waiver of the covenants as of December 31, 1993 and
therefore was qualified to borrow the entire $7,000,000 available under the
line. Provided that the Company continues to maintain or improve its operating
results and continues to generate positive cash flow, it does not expect to draw
down this line to fund operations. Although the Company's operating results
have improved significantly since the reorganization, the industry in which the
Company is engaged is characterized by intense competition and this factor,
coupled with the effect of an uncertain economic recovery, makes the future
results of the Company extremely difficult to predict.
18
The Company does not anticipate a need for long-term financing at this time. If
the need for additional long-term financing should arise, management believes it
could be available if the Company continues a trend of profitability. The
Company is not certain of the cost, terms and conditions upon which such
financing would be available.
At December 31, 1993 the Company did not have any material commitments for
capital expenditures.
Recent Accounting Pronouncements
The Company does not provide post-retirement or post-employment benefits and,
therefore, there is no impact on the Company under SFAS 106, "Employers
Accounting for Post-Retirement Benefits Other Than Pensions" and SFAS 112
"Employers Accounting for Post-Employment Benefits".
PREDECESSOR COMPANY
The following discussion should be read in conjunction with the consolidated
financial statements for the Predecessor Company and notes thereto.
Significant Events
On June 19, 1991 the Company's Plan was confirmed by the Bankruptcy Court. In
accordance with the Plan, TIE issued 75% of its New Common Stock to HCR in
exchange for $31,594,000 principal amount of the Company's debt held by HCR.
Accrued interest owed to HCR of $3,124,000 and warrants to purchase 1,000,000
shares of the Old Common Stock held by HCR were extinguished. See
"Reorganization of the Company" under Item 1.
In accordance with Statement of Position 90-7 of the American Institute of
Certified Public Accountants, the Company has applied Fresh-Start Reporting to
its closing balance sheet at June 30, 1991. Upon emergence from Chapter 11
protection, Fresh-Start Reporting requires the Company to allocate its
reorganization value to the entity's assets. Liabilities are stated at their
present values and the prior accumulated deficit is eliminated when restating
the equity section of the balance sheet. Any remaining, unallocated
reorganization value was included on the balance sheet as an intangible asset.
The June 30, 1991 financial statements include the adjustments related to the
implementation of Fresh-Start Reporting. These adjustments resulted in a net,
one-time charge to income of $29,002,000.
On May 14, 1991, the Company entered into an agreement with NTK America to sell
specified inventory that it owned to NTK America at a price equal to the
Company's carrying value of such inventory. This transaction, which closed on
July 1, 1991, resulted in the sale of $9,020,000 in inventory to NTK America.
Additionally, the Company licensed, on a nonexclusive basis, all of its
telephone equipment technology to NTK America for a period of five years.
During that period, the Company will have an exclusive right to distribute
certain equipment manufactured by NTK America's parent, NTK, in Canada, and a
nonexclusive right to distribute certain other NTK products in the United States
and in Canada. If NTK America sells any of NTK's products in the United States
during the five year period, NTK America will pay the Company a royalty ranging
from 3% to 7.5% of the purchase price of all equipment designed by the Company,
depending on the distribution channel. In addition, the Company is provided
with the most favorable purchase prices for NTK America products during the
period of the agreement.
19
The Company commenced discontinuation of its distribution operations.
Accordingly, the operating results for this segment have been classified as
discontinued operations. In connection with the Company's decision to exit this
segment of the business, a provision of $3,100,000 was set up in the second
quarter of 1991 to reflect the writedown of assets related to this segment to
net realizable value and to provide for certain phaseout costs. During the
third quarter of 1992, the Company completed the divestiture of its distribution
business with the sale of the Canadian subsidiary's key system distribution
business to NTK America. The Company has also reported the results of this
transaction in discontinued operations.
Results of Operations
Net revenue from continuing operations for the six months ended June 30, 1991
increased 1.8% from the comparable six month 1990 period. Revenue from
equipment sales for this period dropped 6.6% from that period as a result of the
poor economic climate and somewhat negative customer reaction to the Company's
Chapter 11 filing. Service revenue for the six months ended June 30, 1991
increased 36.0% from the comparable 1990 six month period primarily due to the
CTG, Inc. acquisition by the Company's Canadian subsidiary and continued
expansion in the Company's domestic direct sales and service organization.
The percentage of gross margin to sales in the first six months of 1991 of 51.5%
was significantly above the margin of 45.1% for the first six months of 1990.
The increase in the gross margin percentages is largely due to a higher
proportion of revenue being generated by the Company's direct sales and service
organization which revenue carries a higher gross margin. Additionally the
Company's Canadian subsidiary experienced higher gross margin percentages in
1991 due to the expansion of its service and repair organizations.
Operating expenses for the six months ended June 30, 1991 increased by $201
thousand from the comparable 1990 period. The slight increase is due to
operating expenses associated with the expansion of the direct sales and service
organization.
During the second quarter of 1991, the Company established a $469,000,
restructuring reserve representing the estimated cost of upgrading the present
computer systems to accommodate the structure of the reorganized Company.
Interest income, interest expense and other income, net for the six months ended
June 30, 1991 approximated the prior year levels.
Various items related to the reorganization of the Company and the
implementation of Fresh-Start Reporting have been recorded. These represent
non-recurring adjustments recorded to properly reflect the total anticipated
costs attributable to the Chapter 11 filing as well as the final adjustments
required to restate the Company's balance sheet and implement Fresh-Start
Reporting.
Tax expense for the six months ended June 30, 1991 resulted from state and local
taxes and from taxes on the profitable operations of the Company's foreign
subsidiaries. Domestic tax benefits from losses reported for the six months
ended June 30, 1991 were not recognized due to the Company's inability to
carryback such losses.
20
As previously discussed, Discontinued Operations for the six months ended June
30, 1991 represents the operating results for the distribution operations as
well as the estimated loss on disposal. The Company commenced discontinuation
of these operations effective in the second quarter of 1991 and completed the
discontinuation in the third quarter of 1992.
In connection with the confirmation of the Plan, the Company recorded
extraordinary income of $18,896,000 from the reorganization transactions
involving HCR as more fully explained in Note 11 to the Predecessor Company
Consolidated Financial Statements.
Liquidity and Capital Resources
Cash and cash equivalents of $14.6 million at June 30, 1991 decreased $5.2
million from December 31, 1990. During the six months ended June 30, 1991, the
Company used approximately $3.0 million for operating activities, $919 thousand
for investment activities and $1.3 million for financing activities, including
$1.7 million for repayment of long-term and short-term debt and $681 thousand
for net capital expenditures.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
SUCCESSOR COMPANY
Page
Independent Auditors' Report 23
Financial Statements:
Consolidated Balance Sheets - December 31, 1993 and 1992 24 - 25
Consolidated Statements of Operations - Years Ended
December 31, 1993 and 1992 and Six Months Ended December 31, 1991 26
Consolidated Statements of Cash Flows - Years Ended
December 31, 1993 and 1992 and Six Months Ended December 31, 1991 27 - 28
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1993 and 1992 and Six Months Ended December 31, 1991 29
Notes to Consolidated Financial Statements 30 - 43
Financial Statement Schedules:
Schedule VIII: Valuation and qualifying accounts 44
Schedule X: Supplementary income statement information 45
All other schedules are either not required or the information is
provided in the footnotes to the financial statements.
PREDECESSOR COMPANY
Independent Auditors' Report 46
Financial Statements:
Consolidated Statement of Operations - Six Months Ended June 30, 1991 47 - 48
Consolidated Statement of Cash Flows - Six Months Ended June 30, 1991 49 - 50
Consolidated Statement of Stockholders' Equity - Six
Months Ended June 30, 1991 51
Notes to Consolidated Financial Statements 52 - 59
Financial Statement Schedules:
Schedule VIII: Valuation and qualifying accounts 60
Schedule IX: Short-term borrowings 61
Schedule X: Supplementary income statement information 62
All other schedules are either not required or the information is
provided in the footnotes to the financial statements.
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TIE/communications, Inc. (SUCCESSOR COMPANY)
We have audited the consolidated financial statements of TIE/communications,
Inc. and subsidiaries (Successor Company) ("the Company") as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules as listed in
the accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TIE/communications,
Inc. and subsidiaries (Successor Company) at December 31, 1993 and 1992, and the
results of their operations and their cash flows for the years ended December
31, 1993 and 1992 and the six month period ended December 31, 1991, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 11, the Company adopted the provisions of the Statement of
Financial Accounting Standards No. 109 - "Accounting for income taxes",
effective January 1, 1993.
As discussed in Note 20, the Company's 1993 financial statements have been
restated for the correction of errors.
November 14, 1994
Kansas City, Missouri
23
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
SUCCESSOR COMPANY
December 31,
-----------------------------
1993 (Note 20) 1992
-------------- -------------
Current assets:
Cash and cash equivalents $ 8,133,000 $14,052,000
Notes and accounts receivable, net
of allowance for doubtful accounts:
December 31, 1993-$1,529,000 12,520,000 10,614,000
December 31, 1992-$1,913,000
Inventories 14,223,000 12,443,000
Assets held for sale -- 2,699,000
Restricted cash equivalents 290,000 1,629,000
Current portion of long-term notes receivable 79,000 2,353,000
Current deferred tax assets, net 232,000 --
Prepaid expenses 1,059,000 926,000
Miscellaneous 2,345,000 1,061,000
---------- ----------
Total current assets 38,881,000 45,777,000
---------- ----------
Property, net 1,874,000 1,893,000
Intangible assets, net 19,655,000 16,597,000
Long-term deferred tax assets, net 1,954,000 --
Long-term notes receivable 473,000 1,132,000
Other assets 157,000 398,000
---------- ----------
Total assets $62,994,000 $65,797,000
========== ==========
See accompanying Notes to Consolidated Financial Statements.
24
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
SUCCESSOR COMPANY
December 31,
-----------------------------
1993 (Note 20) 1992
-------------- -------------
Current liabilities:
Notes payable and current
maturities of long term debt $ 1,424,000 $ 4,581,000
Accounts payable 8,596,000 6,913,000
Accrued expenses 9,871,000 9,676,000
Restructuring reserves 777,000 1,636,000
Deferred service revenue 10,207,000 8,099,000
Income taxes payable 2,353,000 2,369,000
---------- ----------
Total current liabilities 33,228,000 33,274,000
---------- ----------
Other non-current liabilities 739,000 1,801,000
Long-term debt -- 398,000
Long-term tax liability 4,370,000 6,229,000
Minority interest 1,735,000 2,477,000
---------- ----------
Total liabilities 40,072,000 44,179,000
Stockholders' equity:
Common Stock, par value $0.10 399,000 399,000
Authorized - 10,000,000 shares
Issued - 3,988,392 shares
Outstanding - 3,981,338 shares
Additional paid-in capital 19,217,000 19,217,000
Retained Earnings 2,408,000 1,043,000
Common Stock in treasury, at cost (60,000) (60,000)
---------- ----------
21,964,000 20,599,000
Cumulative currency translation adjustment 958,000 1,019,000
---------- ----------
Total stockholders' equity 22,922,000 21,618,000
---------- ----------
Total liabilities and stockholders' equity $62,994,000 $65,797,000
========== ==========
See accompanying Notes to Consolidated Financial Statements.
25
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR COMPANY
Years Ended December 31, Six Months
--------------------------- Ended
1993 (Note 20) 1992 December 31, 1991
-------------- ------------ -----------------
Net revenue:
Equipment sales $ 76,108,000 $ 74,540,000 $ 37,815,000
Services provided 26,003,000 26,614,000 14,454,000
----------- ----------- -----------
102,111,000 101,154,000 52,269,000
----------- ----------- -----------
Cost of sales:
Equipment sales 40,470,000 40,806,000 20,522,000
Services provided 10,264,000 8,370,000 4,197,000
----------- ----------- -----------
50,734,000 49,176,000 24,719,000
----------- ----------- -----------
Gross margin:
Equipment sales 35,638,000 33,734,000 17,293,000
Services provided 15,739,000 18,244,000 10,257,000
----------- ----------- -----------
51,377,000 51,978,000 27,550,000
Operating expenses 51,123,000 51,097,000 28,461,000
----------- ----------- -----------
Operating income (loss) from
consolidated operations 254,000 881,000 (911,000)
Interest income 860,000 1,032,000 691,000
Interest expense (538,000) (541,000) (249,000)
Other income, net 1,960,000 877,000 766,000
----------- ----------- -----------
Pretax income 2,536,000 2,249,000 297,000
Provision for income taxes 1,089,000 895,000 392,000
----------- ----------- -----------
1,447,000 1,354,000 (95,000)
Equity in loss of affiliate -- -- (60,000)
----------- ----------- -----------
Income (loss) before minority
interest 1,447,000 1,354,000 (155,000)
Minority interest 82,000 122,000 28,000
----------- ----------- -----------
Income (loss) from continuing
operations 1,365,000 1,232,000 (183,000)
Discontinued operations -
Estimated income (loss) on disposal -- (13,000) 7,000
----------- ----------- -----------
Net income (loss) $ 1,365,000 $ 1,219,000 $ (176,000)
=========== =========== ===========
Primary and fully diluted income
per share:
Continuing operations $ 0.34 $ 0.31 $ (0.05)
Discontinued operations -- -- 0.01
----------- ----------- -----------
$ 0.34 $ 0.31 $ (0.04)
=========== =========== ===========
Average shares outstanding 3,981,338 3,981,338 3,981,493
See accompanying Notes to Consolidated Financial Statements.
26
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR COMPANY
Years Ended December 31 Six Months
--------------------------- Ended
1993 (Note 20) 1992 December 31, 1991
-------------- ------------ -----------------
Cash flows from operating
activities:
Net income (loss) $1,365,000 $1,219,000 $ (176,000)
Adjustments to reconcile net
income to cash flows from
operating activities:
Depreciation and amortization 2,235,000 2,544,000 2,630,000
Deferred income and income taxes (52,000) (57,000) (28,000)
Equity in loss of affiliates, net -- -- (60,000)
Minority interest 82,000 122,000 28,000
Deferred income taxes 1,055,000 755,000 317,000
Gain on disposition of building (1,738,000) -- --
Relocation expense 1,300,000 -- --
Gain on sale of Canadian
distribution business -- (160,000) --
Changes in working capital,
net of acquisitions and
divestitures:
Accounts receivable (1,929,000) 2,296,000 3,487,000
Inventories (932,000) 3,350,000 (3,842,000)
Receivable from NTK America -- -- 8,526,000
Restricted cash equivalents 1,329,000 -- 265,000
Other receivables (801,000) 865,000 176,000
Miscellaneous current assets (392,000) 565,000 620,000
Accounts payable 1,731,000 2,329,000 (4,848,000)
Accrued expenses (952,000) (2,407,000) (2,421,000)
Restructuring reserves (1,904,000) (5,978,000) (2,847,000)
Deferred service revenue (1,500,000) (661,000) 80,000
Taxes payable (6,000) (89,000) 418,000
--------- --------- ---------
Cash flows from (used for)
operating activities (1,109,000) 4,693,000 2,325,000
Cash flows from investment
activities:
Capital expenditures, net of
disposals (869,000) (446,000) (934,000)
Cash received from notes
receivable 1,918,000 -- --
Increase (decrease) in investment
in and advances to affiliates -- (73,000) 201,000
Cash proceeds from sale of
investment in affiliate -- 202,000 --
Assets of businesses acquired (1) (3,258,000) (1,265,000) (989,000)
Purchase of minority interest
of subsidiary (796,000) (500,000) --
Proceeds from sale of Canadian
distribution business -- 762,000 --
Other -- (74,000) (320,000)
--------- --------- ---------
Cash flows used for
investment activities (3,005,000) (1,394,000) (2,042,000)
(Continued)
See accompanying Notes to Consolidated Financial Statements.
27
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
SUCCESSOR COMPANY
Years Ended December 31 Six Months
--------------------------- Ended
1993 (Note 20) 1992 December 31, 1991
-------------- ------------ -----------------
Cash flows from financing
activities:
Payment of long-term tax
liability $(1,859,000) $ (1,766,000) $ (540,000)
Long-term and short-term debt
repayments (455,000) (473,000) (304,000)
---------- ----------- ----------
Other 629,000 324,000 (199,000)
Cash flows used for
financing activities (1,685,000) (1,915,000) (1,043,000)
Impact of changes in foreign
currency translation (120,000) (227,000) (30,000)
---------- ----------- ----------
Increase (decrease) in cash
and cash equivalents (5,919,000) 1,157,000 (790,000)
Cash and cash equivalents at the
beginning of period 14,052,000 12,895,000 13,685,000
---------- ----------- ----------
Cash and cash equivalents at the
end of period $ 8,133,000 $ 14,052,000 $12,895,000
========== =========== ==========
- - - - ---------------------------------
Cash flow information:
Interest paid $ 513,000 $ 618,000 $ 443,000
========== =========== ==========
Income taxes paid (excluding
payment of long term tax
liability) $ 176,000 $ 269,000 $ 568,000
========== =========== ==========
(1) Acquisitions:
Inventory $(1,004,000) $ (416,000) $ (332,000)
Other current assets -- (22,000) --
Intangible assets (7,426,000) (947,000) (1,019,000)
Other assets (3,000) -- (92,000)
Accrued expenses 491,000 55,000 83,000
Deferred service revenue 3,684,000 65,000 371,000
Note payable 1,000,000 -- --
---------- ----------- ----------
$(3,258,000) $ (1,265,000) $( 989,000)
========== =========== ==========
(2) Non-cash activity:
Reduction of intangible
assets to establish
deferred tax asset $ 3,241,000 $ -- $ --
========== =========== ==========
Note received in exchange
for Canadian distribution
business $ -- $ 686,000 $ --
========== =========== ==========
See accompanying Notes to Consolidated Financial Statements.
28
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SUCCESSOR COMPANY
SIX MONTHS ENDED DECEMBER 31, 1991 AND
YEARS ENDED DECEMBER 31, 1992 AND 1993
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Treasury Stock Cumulative
---------------------- Paid-in (Deficit) ----------------- Translation Total
Shares Issued Amount Capital (Note 20) Shares Amount Adjustment (Note 20)
------------- ------ ---------- -------- ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1991 3,988,392 $399,000 $19,217,000 $ -- -- $ -- $1,480,000 $21,096,000
Purchase of Treasury Stock (7,054) (60,000) (60,000)
Cumulative Translation
Adjustment (79,000) (79,000)
Net loss for the six months
ended December 31, 1991 (176,000) (176,000)
--------- ------- ---------- -------- ------ ------- --------- ----------
Balance-December 31, 1991 3,988,392 399,000 19,217,000 (176,000) (7,054) (60,000) 1,401,000 20,781,000
Cumulative Translation
Adjustment (382,000) (382,000)
Net income for the year 1992 1,219,000 1,219,000
--------- ------- ---------- --------- ------ ------- --------- ----------
Balance-December 31, 1992 3,988,392 399,000 19,217,000 1,043,000 (7,054) (60,000) 1,019,000 21,618,000
Cumulative Translation
Adjustment (61,000) (61,000)
Net income for the year 1993 1,365,000 1,365,000
--------- ------- ---------- --------- ------ ------- --------- ----------
Balance - December 31, 1993 3,988,392 $399,000 $19,217,000 $2,408,000 (7,054) $(60,000) $ 958,000 $22,922,000
========= ======= ========== ========= ====== ======= ======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
TIE/communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
SUCCESSOR COMPANY
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: On June 19, 1991, the Company's First Amended Joint
Plan of Reorganization (the "Plan") was confirmed by the United States
Bankruptcy Court for the District of Delaware. The confirmed Plan provided
for the Company to issue Common Stock to HCR Partners in exchange for the
principal portion of its secured debt to HCR Partners ($31,594,000).
Accrued interest on HCR Partners secured debt ($3,124,000) and warrants to
purchase 1,000,000 shares of the Company's Common Stock held by HCR Partners
were extinguished. As a result of this transaction, HCR Partners became the
owner of 75% of the Common Stock of the Company. The effective date of the
Plan was July 2, 1991. However, for purposes of financial statement
reporting the Plan was treated as being effective on June 30, 1991.
Further, in accordance with the Statement of Position 90-7 of the American
Institute of Certified Public Accountants, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code", the Company was required to
account for the reorganization using Fresh-Start Reporting. Accordingly,
all financial information for any period prior to July 1, 1991 is referred
to as that of the "Predecessor Company". The accompanying financial
statements for the period(s) from July 1, 1991 forward are referred to as
those of the "Successor Company". Additionally, the Company's sale of
inventory in connection with its discontinued operations, which closed on
July 1, 1991, was also included in the Predecessor Company financial
statements so as to make the resulting Successor Company balance sheet more
clearly reflect the new entity.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority-owned domestic and foreign
subsidiaries. All intercompany accounts and transactions are eliminated.
Net Revenue: Revenue from equipment sales and service work to end users is
recognized at the time of its completion. Deferred service revenue is
recorded in equal increments over the term of the contract. Other equipment
sales are recognized when title passes to the customer.
Statements of Cash Flows: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market, using
the first-in, first-out method.
Property: Property, plant and equipment are stated at cost. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the assets. At the time fixed assets are sold or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts and the resulting gain or loss, if any, is included in the
determination of income. Maintenance and repair costs are expensed as
incurred.
30
Intangible assets: Intangible assets are being amortized on a straight-line
basis over periods ranging from 7 to 20 years.
Translation of foreign currencies: The financial statements of the
Company's foreign subsidiary are translated into U.S. dollars at current
exchange rates with any resulting adjustment being charged or credited to
stockholders' equity. Foreign currency transaction gains and losses, which
are not material, are reflected in income.
Research and development costs: New product development, product
improvement and research costs are expensed as incurred. Such costs
amounted to $881,000 and $917,000 for the years ended December 31, 1993 and
1992, respectively, and $241,000 for the six months ended December 31, 1991.
Earnings (loss) per common share: Earnings per common share are based on
the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. For the years ended December 31,
1993 and 1992 and six months ended December 31, 1991 the Company did not
have any common stock equivalents.
2. FRESH-START REPORTING
In accordance with SOP 90-7, since the Company's stockholders of existing
Common Stock prior to the confirmation of the Plan received less than 50% of
Common Stock after confirmation of the Plan, the Company accounted for the
reorganization using Fresh-Start Reporting. Accordingly, all assets and
liabilities were restated to reflect their reorganization value at June 30,
1991, which approximated fair value at that date of reorganization.
Based upon an independent analysis of the Company performed in conjunction
with the confirmation hearing on the Plan, a business value of $46,000,000
was established. The factors considered in determining the business value
included cash flow projections, historical and current operations, future
prospects and comparisons of the financial performance of the Company to
other comparable companies. Based on that analysis, management calculated
the portion of the reorganization value of the Company representing the
estimated value of the net assets of the Company immediately after the
reorganization at $21,096,000, after the adjustments to write down fixed
assets, receivables and inventory to the best estimate of their respective
fair market values at June 30, 1991 and to adjust liabilities to reflect
their present value. Intangible assets were written down to reflect the
reorganization value in excess of amounts allocable to identifiable assets.
3. CHANGE IN ACCOUNTING ESTIMATE
During the quarter ended June 30, 1992, the Company reevaluated the period
of amortization for intangible assets and concluded that the estimated
useful life of certain intangible assets should be extended from 10 years to
20 years. The conclusion was reached based upon extensive evaluation of
several factors including the future outlook of the Company and to make the
financial results of the Company more comparable to its main competitors.
The effect of this change in accounting estimate was to increase the
Company's net income for the year ended December 31, 1992 by $723,000 (or
$0.18 per share).
31
4. CASH AND CASH EQUIVALENTS
Cash equivalents consist of overnight investments, commercial paper and time
deposits which are carried at cost, which approximates market value. The
revolving cash account is an interest-bearing account held on deposit with
The Marmon Corporation (refer to Note 19 for further details). The
following is a schedule of cash and cash equivalents:
December 31,
-------------------------
1993 1992
---------- -----------
Cash $3,635,000 $ 2,063,000
Overnight investments 2,498,000 3,989,000
Revolving cash account 2,000,000 8,000,000
--------- ----------
$8,133,000 $14,052,000
========= ==========
Cash and cash equivalents do not include $290,000 and $1,629,000 of
restricted cash equivalents at December 31, 1993 and 1992, respectively
which are classified separately on the balance sheet. The amount at
December 31, 1993 represents collateral for a letter of credit supporting
the lease of corporate office facilities. Of the amount at December 31,
1992, approximately $1,250,000 is the collateral for letters of credit
supporting U.S. and Canadian bonding facilities. The remaining amount is a
compensating balance required to be maintained by the Company's Canadian
subsidiary.
5. INVENTORIES
December 31,
-------------------------
1993 1992
----------- -----------
Raw materials $ 193,000 $ 138,000
Work in process 890,000 543,000
Finished goods 13,140,000 11,762,000
---------- ----------
$14,223,000 $12,443,000
=========== ===========
6. RELOCATION OF CORPORATE HEADQUARTERS/GAIN FROM DISPOSITION
OF BUILDING
In August 1993, the Company completed the relocation of its corporate
headquarters from Seymour, Connecticut to Overland Park, Kansas. The
Company has moved out of the Seymour facility and has transferred the deed
on that building to its mortgage holder resulting in a gain of $1,738,000.
The costs associated with the relocation, principally transition and
relocation expenses, are estimated to aggregate approximately $1,300,000.
32
7. PROPERTY
The following is a schedule of property, plant and equipment (excluding
assets held for sale which are included in current assets in 1992):
December 31,
----------------------- Estimated
1993 1992 Life
---------- ---------- ---------
Land $ 10,000 $ 10,000 --
Buildings 224,000 224,000 30 years
Equipment and tooling 15,591,000 15,152,000 1-9 years
Leasehold improvements 668,000 676,000 Life of lease
Furniture and fixtures 3,692,000 3,910,000 3-10 years
---------- ----------
20,185,000 19,972,000
Less accumulated depreciation
and amortization 18,311,000 18,079,000
---------- ----------
$ 1,874,000 $ 1,893,000
========== ==========
8. INTANGIBLE ASSETS
Intangible assets includes the Reorganization Value In Excess Of Amounts
Allocable To Identifiable Assets which resulted from the application of
Fresh-Start Reporting. This intangible asset is being amortized on a
straight-line basis over a 20-year period (refer to Note 3). In connection
with the implementation of SFAS No. 109, intangible assets relating to the
reorganization have been reduced and will continue to be reduced as
Predecessor Company deferred tax assets are recognized.
Intangible assets also include the excess of consideration paid over the
fair value of net tangible assets of domestic businesses acquired since July
1, 1991, and of all businesses acquired by the Company's Canadian subsidiary
at the time of acquisition. These intangible assets are being amortized on
a straight-line basis over their estimated useful lives ranging from 7 to 20
years. The excess of consideration paid over fair value of net tangible
assets of businesses acquired in the years ended December 31, 1993 and 1992
totalled $7,426,000 and $947,000, respectively.
December 31,
--------------------------
1993 1992
----------- ----------
Reorganization Value In Excess Of Amounts
Allocated To Identifiable Assets $11,361,000 $14,403,000
Excess of consideration paid over
fair value of net assets acquired 12,742,000 5,469,000
Less accumulated amortization (4,448,000) (3,275,000)
---------- ----------
$19,655,000 $16,597,000
========== ==========
9. ACQUISITIONS
On September 17, 1993 the Company acquired substantially all of the
non-Northern Telecom manufactured key-hybrid telephone equipment customer
base of PacTel Meridian Systems ("PTMS"), a California general partnership
which the Company understands is 80% owned by Northern Telecom, Inc and 20%
owned by Pacific Bell. The acquisition, which was effected pursuant to an
Asset Purchase and Sale Agreement, included the acquisition and assignment
33
of contracts with customers and customer lists, together with inventory,
vehicles and other equipment of PTMS appropriate to service the customer
base. Certain liabilities of PTMS, directly related to the customer base,
were also assumed by the Company at closing. The liabilities consisted
primarily of prepaid service contracts and warranty reserves. The Company
and PTMS are not related and have no other material relationship.
Pursuant to the agreement, the Company purchased the customer base, together
with inventory and other equipment of PTMS for an aggregate purchase price
of $7,047,472. The liabilities assumed by the Company of $3,653,271
directly reduced the amount of consideration paid to PTMS for the acquired
assets. The net purchase price of $3,394,201, was effected by: (a) a cash
payment to PTMS of $2,428,843 at the closing; (b) issuance of a note payable
by the Company of $1,000,000 due to PTMS one year from closing with interest
at eight percent per annum; and (c) a subsequent payment of $34,642 by PTMS
to the Company to reflect final adjustments to the purchase price. Company
sales during 1993 relating to the PTMS acquisition totalled approximately
$2,800,000. The pro forma effects of the acquisition on the results of
operations, as though the acquisition had occurred on January 1, 1992, is
not determinable.
In the fourth quarter of 1990, the Company's Canadian subsidiary acquired
the business of CTG, Inc. a Toronto based telephone interconnect company
which operates in various locations throughout Canada. The Company's
Canadian subsidiary received cash of $3,361,000 in exchange for liabilities
assumed in connection with this acquisition. The consideration to be paid
for this acquisition is a royalty based on sales with a minimum
consideration of approximately $3,000,000. The minimum amount is to be paid
in equal quarterly installments over five years. The minimum royalty was
recorded as a liability. Future adjustments to the minimum royalty are
recorded as an adjustment to intangibles which amounted to approximately
$385,000 for the year ended December 31, 1993 (none in 1992 or 1991).
10. LONG TERM DEBT, NOTES PAYABLE AND AVAILABLE CREDIT FACILITIES
December 31,
-------------------------
1993 1992
---------- -----------
Variable rate term loans $ 424,000 $ 879,000
Mortgage loan -- 4,100,000
Notes payable 1,000,000 --
--------- ----------
Total debt 1,424,000 4,979,000
Less current maturities of long-term debt (1,424,000) (4,581,000)
--------- ----------
Total Long-Term Debt and Notes Payable $ -- $ 398,000
========= ==========
At December 31, 1993 and 1992, variable rate term loans primarily represent
secured debt of the Company's direct sales operations which was assumed at
acquisition or incurred to finance the acquisitions made prior to July 1,
1991. These loans bear interest at rates of 9% per annum at December 31,
1993 and rates ranging from 7.0% to 11% per annum at December 31, 1992. The
entire amount of variable rate term loans will mature in the year ending
December 31, 1994.
The mortgage loan was secured by land and building, with interest at 9.875%,
and was due in its entirety in September 1993. In August 1993, the Company
transferred the deed on the building to the mortgage holder without
recourse.
34
In connection with the acquisition of the customer base from PTMS, the
Company issued a note payable in the amount of $1,000,000 due on or before
September 17, 1994 at an interest rate of 8% per annum.
Upon confirmation of the Company's Plan of Reorganization, HCR Partners made
available a $10.0 million revolving line of credit. No funds have been
borrowed under this line of credit. Substantially all of the Company's
assets are mortgaged as security for borrowing under this agreement. The
Company agreed that in connection with the liquidation of HCR Partners, the
revolving line of credit agreement could be assigned to and assumed by
Marmon Holdings, Inc.
The Company is required to pay a commitment fee of 1/4% per annum on any
unused amounts available under this line of credit. The Company may draw
down on this line at any time assuming no breach of any of the covenants
(which include restrictions on asset purchases and require specified levels
of working capital and net worth to be maintained) and provided that the
aggregate principal amount outstanding at any time under this line does not
exceed the "Borrowing Base" (which is based on inventory and receivables).
The Company was in compliance with or had received a waiver of the covenants
as of December 31, 1993 and therefore was qualified to borrow the entire
$7,000,000 available under the line. The Company is also restricted from
declaring or paying dividends under the provisions of the Revolving Credit
Agreement without the written consent of the lender. Effective December 31,
1993, the term of the Credit Agreement was extended for an additional three
year period ending December 31, 1996 upon substantially the same terms and
conditions, except that the maximum credit available was reduced to
$7,000,000. The Company will pay a facilities fee of $75,000 in connection
with the extension. The Company believes that the terms and conditions of
the Credit Agreement as extended are competitive with the terms and
conditions available from third parties.
11. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 109 - "Accounting for Income
Taxes". SFAS 109 requires a change from the deferred method of accounting
for income taxes to the asset and liability method of accounting for income
taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax benefits or
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax benefits are recognized to the extent it is more likely
than not that such benefits will be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
In accordance with SOP 90-7, the reversal of temporary differences and
utilization of tax benefits attributed to the Predecessor Company will be
recognized as a deferred tax asset through the reduction of intangible
assets. Alternatively, temporary differences and tax benefits relating to
the Successor Company will be recognized through the Statement of Operations
as such items are expected to be recovered or settled.
Effective January 1, 1993, the Company prospectively adopted SFAS No. 109
recognizing a deferred tax asset of approximately $38,100,000 with a
corresponding valuation allowance of $35,400,000 million. The net amount of
$2,700,000 million was allocated as a reduction of goodwill, therefore,
there was no cumulative effect on income related to the change in accounting
for income taxes.
35
The components of pretax income (loss) of consolidated companies are as
follows:
Years Ended December 31,
------------------------ Six Months Ended
1993 1992 December 31, 1991
---------- ----------- -----------------
U.S. $1,747,000 $1,464,000 $(64,000)
Foreign 789,000 785,000 361,000
--------- --------- -------
Pretax income $2,536,000 $2,249,000 $297,000
========= ========= =======
The components of the income tax provision are as follows:
Years Ended December 31,
------------------------ Six Months Ended
1993 1992 December 31, 1991
---------- ----------- -----------------
Current:
State $ 34,000 $140,000 $ 75,000
Deferred:
Federal 586,000 625,000 --
State 42,000 285,000 --
Foreign 427,000 395,000 317,000
Tax settlements -- (550,000) --
--------- ------- -------
$1,089,000 $895,000 $392,000
========= ======= =======
The following table is a reconciliation of the provision for income taxes
reported in the Consolidated Statements of Operations to the provision as
calculated at the statutory U.S. Federal income tax rate:
Years Ended December 31,
------------------------ Six Months Ended
1993 1992 December 31, 1991
---------- ----------- -----------------
Tax computed on a consolidated
basis by applying the statutory
U.S. Federal income tax rate (34%) $ 862,000 $ 765,000 $101,000
Increase (decrease) resulting from:
Change in the valuation allowance
for deferred
tax assets allocated to income
tax expense (308,000) -- --
State and local income taxes,
net of federal income tax 50,000 280,000 75,000
Nondeductible goodwill
amortization 325,000 465,000 160,000
Tax settlements -- (550,000) --
Taxes on foreign income at
higher rates 104,000 86,000 56,000
Other items, net 56,000 (151,000) --
--------- -------- -------
$1,089,000 $ 895,000 $392,000
========= ======== =======
36
The significant components of deferred income tax expense for the year
ended December 31, 1993 are as follows:
Deferred income tax expense (exclusive of the
effects of other components listed below) $1,363,000
Net adjustment due to change in gross deferred tax asset 14,000
Decrease in valuation allowance for deferred tax assets (322,000)
---------
$1,055,000
=========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1993 are presented
below. The Company did not have any deferred tax liabilities at December
31, 1993.
Deferred tax assets:
Accounts receivable and notes receivable $ 1,522,000
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986 1,123,000
Plant and equipment, principally due to differences in
depreciation 567,000
Net operating loss carryforward 29,271,000
Warranty reserves 281,000
Other accrued expenses 567,000
Foreign investment tax credit carryforwards 1,209,000
Foreign research and development tax credit carryforwards 725,000
Deferred service revenue 773,000
Other temporary differences 1,285,000
----------
Total gross deferred tax assets 37,323,000
Less valuation allowance (35,137,000)
----------
Net deferred tax assets $ 2,186,000
===========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The Company, in determining the net
deferred tax asset to be recognized at January 1, 1993 and December 31,
1993, analyzed the past earnings history and the future projected pretax
book income and taxable income. In order to fully realize the deferred tax
asset reflected at December 31, 1993, the Company will need to generate
future taxable income of approximately $5,000,000. Management believes it
is more likely than not the Company will realize the benefits of deductible
differences and other tax attributes, net of existing valuation allowances
at December 31, 1993. The portion of the valuation allowance which would be
available to reduce goodwill for subsequently recognized tax benefits
amounted to approximately $11,361,000 at December 31, 1993.
At December 31, 1993, the Company has total net operating loss carryforwards
for federal income tax purposes of approximately $169,000,000; however, the
Company's ability to utilize the net operating losses has been materially
limited under Internal Revenue Code Section 382 and Section 383. Due to
these limitations, the amount of future taxable income which can be offset
by federal net operating losses incurred prior to July 1, 1991 is
37
approximately $2,700,000 annually ($41,800,000 in the aggregate). Federal
net operating losses incurred after June 30, 1991 approximate $23,000,000
and are available to offset future income without limitation. Federal and
state net operating loss carryforwards will expire between 1994 and 2007.
The Company will first utilize Predecessor Company NOL's to the extent
available and will thereafter utilize the Successor Company NOL's.
The Company also has foreign net operating loss carryforwards of
approximately $14,490,000 at December 31, 1993, which expire between 1996
and 1999. Additionally, there are foreign investment income tax credits of
approximately $1,209,000 which expire in 1998 through 2000 and foreign
research and development tax credits of approximately $725,000 which do not
expire.
For the year ended December 31, 1992 and the six months ended December 31,
1991, the deferred tax expense of $1,305,000 and $317,000, respectively,
represent taxes that would have been paid to the respective tax authorities
in the absence of operating loss carryforwards from prior periods. Since
these loss carryforwards are Predecessor Company losses, the Successor
Company is unable to realize the benefit for accounting purposes, and,
accordingly, intangible assets have been reduced by the amount of taxes not
paid.
The Internal Revenue Service ("IRS") completed its examination of the
Company's consolidated Federal income tax returns through the taxable year
ended December 31, 1986. As a result of such examination, the IRS proposed
certain adjustments that would increase the Company's tax liability and
consolidated taxable income for certain years. The Company negotiated a
settlement of these proposed adjustments which was approved by the Joint
Committee of Taxation on January 17, 1991. In addition to the Federal
income tax liability arising from the negotiated adjustments to the
Company's consolidated taxable income for those years, the adjustments
arising from the settlement will result in additional state income tax
liabilities. On April 26, 1991, the Company received a formal demand for
payment of the Federal income tax liability resulting from the settlement.
As a consequence of the Chapter 11 proceedings and applicable law, the
Company is entitled to defer payment of the Federal and state tax
liabilities over a period of six years, with payment thereof to be made
quarterly from October 1, 1991 for the Federal liability and annually for
the state liability from July 1, 1992. The outstanding balance accrues
interest at the six month U.S. Treasury Bill rate.
12. OTHER NON-CURRENT LIABILITIES
Included in other non-current liabilities are long-term obligations assumed
by the Company's Canadian subsidiary in connection with an acquisition made
in 1990 including a minimum royalty payable for that acquisition which
totalled $440,000 at December 31, 1993 and $1,009,000 at December 31, 1992
and a reserve for long-term restructuring costs of $441,000 at December 31,
1992 (refer to Note 12 to the Predecessor Company Consolidated Financial
Statements).
38
13. LEASE AND PURCHASE COMMITMENTS
The Company leases office and warehouse space under noncancellable operating
leases expiring at various dates through the year 1999, and leases certain
equipment under lease agreements expiring at various dates through 1997.
Minimum annual rentals on these lease commitments are as follows:
Minimum
Year Ended Annual
December 31, Rentals
------------ ----------
1994 $3,632,000
1995 2,573,000
1996 1,752,000
1997 875,000
1998 382,000
1999 15,000
---------
Total minimum annual rentals $9,229,000
=========
Rent expense charged to operations for the years ended December 31, 1993 and
1992 was $4,442,000 and $4,505,000, respectively, and for the six months
ended December 31, 1991, was $2,352,000. In the ordinary course of
business, leases expire and are replaced or renewed, therefore, the rent
expense in future periods is not expected to be less than the amount shown
for 1993.
In connection with the PTMS acquisition, the Company has committed to
purchase at least $7,500,000 of equipment (net of product discounts) from
Northern Telecom in 1994.
14. EMPLOYEE BENEFIT PLANS
The Company's Profit Sharing and Savings Plan was amended on January 1, 1985
to allow participating employees to authorize payroll deferrals of up to 10
percent of their total compensation and to contribute such amounts to the
plan. From June 1, 1992 to December 31, 1993, the Company matched a
participant's contribution by making contributions equal to 50% of that
portion of a participant's deferred compensation which did not exceed 6% of
the compensation payable to such participant. For the six months ended
December 31, 1991 and from January 1, 1992 until May 31, 1992, the Company
matched a participant's contribution by making contributions equal to 100%
of that portion of a participant's deferred compensation which did not
exceed 3% of the compensation payable to such participant. Employee and
Company contributions are considered tax deferred to the employee under
Section 401(k) of the Internal Revenue Code. During the years ended
December 31, 1993 and 1992 and the six months ended December 31, 1991, the
Company's contributions amounted to $307,000, $370,000 and $207,000,
respectively. At December 31, 1993, there were 529 participants in the
plan.
39
15. OTHER INCOME, NET
Years Ended December 31,
------------------------ Six Months Ended
1993 1992 December 31, 1991
---------- ---------- -----------------
Gain on disposition of building $1,738,000 $ -- $ --
Gain (loss) on sale of property (5,000) 6,000 46,000
Royalty income 1,495,000 1,317,000 558,000
Relocation expenses, net (1,300,000) -- --
Insurance settlement 350,000 -- --
Other (318,000) (446,000) 162,000
--------- --------- -------
Other income, net $1,960,000 $ 877,000 $766,000
========= ========= =======
Net royalty income is substantially comprised of royalty income from NTK
America for its sale of equipment designed by the Company in the amounts of
$1,378,000 and $1,298,000 for the years 1993 and 1992, respectively, and
$514,000 for the six months ended December 31, 1991. The NTK royalty
agreement is in effect through July 1996. In December 1993, the Company
recorded income of $350,000 related to settlement of a property insurance
claim for the loss of inventory.
16. DISCONTINUED OPERATIONS
On May 14, 1991, the Company entered into an agreement with Nitsuko America
Corporation ("NTK America") to sell specified inventory that it owns to NTK
America at a price equal to the Company's carrying value of such inventory.
This transaction, which closed on July 1, 1991, resulted in the sale of
$9,020,000 of inventory to NTK America. The Company received $500,000 of
this amount in June 1991. The remaining amount of $8,520,000 was recorded
as a current receivable and was paid to the Company in monthly installments
over the last six months of 1991.
Additionally, the Company will license on a nonexclusive basis all of its
telephone equipment technology to NTK America for a period of five years,
during which, the Company will have an exclusive right to distribute certain
equipment manufactured by NTK America's parent, Nitsuko Corporation ("NTK")
in Canada, and a nonexclusive right to distribute certain other NTK products
in the United States and in Canada. If NTK America sells any of NTK's
products in the United States, NTK America will pay the Company a royalty
ranging from 3% to 7.5% of the purchase price of all equipment designed by
the Company (depending on the distribution channel). In addition, the
Company will be provided with the most favorable purchase prices available
for NTK America's products during the period of the agreement.
As a result of the foregoing, the Company commenced discontinuation of its
distribution operations. Accordingly, the operating results for this
segment have been classified as discontinued operations for all the periods
presented in the consolidated financial statements.
During the third quarter of 1992, the Company's Canadian subsidiary sold its
key telephone system distribution business to Nitsuko America Corporation
("NTK America") for approximately $857,000. The Canadian subsidiary
received $762,000 of this amount in cash during 1992. The remaining amount
was paid in January 1993. This transaction completes the Company's
discontinuation (which was begun in 1991) of its distribution operations.
40
As part of the sales agreement with NTK America, the Canadian subsidiary
will be provided with the most favorable purchase prices available for NTK
America's products during the period of the agreement which is similar to
the U.S. agreement in place with NTK America.
17. BUSINESS SEGMENT AND GEOGRAPHIC AREAS
The Company operates primarily in the telecommunications equipment industry.
The Company primarily sells, installs and services its products through a
domestic and Canadian network of sales and service facilities primarily to
small to medium sized customers. An analysis of the Company's operations by
geographic location is as follows:
Year Ended United
December 31, 1993 States Canada Eliminations
- - - - ----------------- ----------- ----------- ------------
Consolidated
Sales to unaffiliated
companies $77,474,000 $24,734,000 $ (97,000) $102,111,000
========== ========== ========== ===========
Pretax income $ 1,747,000 $ 789,000 $ -- $ 2,536,000
========== ========== ========== ===========
Assets identifiable
to geographic areas $50,964,000 $14,274,000 $(2,244,000) $ 63,994,000
========== ========== ========== ===========
Year Ended United
December 31, 1992 States Canada Eliminations Consolidated
- - - - ----------------- ----------- ----------- ------------ ------------
Sales to unaffiliated
companies $75,152,000 $26,130,000 $ (128,000) $101,154,000
========== ========== ========== ===========
Pretax income $ 1,458,000 $ 785,000 $ 6,000 $ 2,249,000
========== ========== ========== ===========
Assets identifiable
to geographic areas $53,226,000 $14,786,000 $(2,215,000) $ 65,797,000
========== ========== ========== ===========
Six Months Ended United
December 31, 1991 States Canada Eliminations Consolidated
- - - - ----------------- ----------- ----------- ------------ ------------
Sales to unaffiliated
companies $37,354,000 $14,915,000 $ -- $52,269,000
========== ========== ========== ===========
Pretax income (loss) $ (64,000) $ 361,000 $ -- $ 297,000
========== ========== ========== ===========
Assets identifiable
to geographic areas $59,697,000 $18,521,000 $(1,687,000) $76,531,000
========== ========== ========== ===========
Identifiable assets for each geographic area are those assets associated
with the operations in each area. Eliminations include amounts for
internal sales between geographic areas, profit in inventory and
investments in foreign operations.
41
18. SELECTED QUARTERLY DATA (UNAUDITED)
Set forth below is selected quarterly information for the years ended
December 31, 1993 and 1992:
1993 Quarters
--------------------------------------------------
1st 2nd 3rd 4th (c)
----------- ----------- ----------- -----------
Net revenue $23,749,000 $24,011,000 $24,933,000 $29,418,000
Gross margin 12,323,000 12,386,000 12,409,000 14,259,000
Income from continuing
operations 239,000 259,000 235,000 632,000
Income from discontinued
operations -- -- -- --
Net income 239,000 259,000 235,000(a) 632,000(b)
Income per share:
Continuing operations $0.06 $0.07 $0.06 $0.16
Discontinued operations -- -- -- --
Total $0.06 $0.07 $0.06 $0.16
1992 Quarters
--------------------------------------------------
1st 2nd 3rd 4th
----------- ----------- ----------- -----------
Net revenue $24,286,000 $24,771,000 $26,673,000 $25,424,000
Gross margin 12,906,000 12,862,000 13,797,000 12,413,000
Income (loss) from
continuing operations (513,000) 288,000 1,037,000 420,000
Income (loss) from
discontinued operations (19,000) (39,000) 45,000 --
Net income (loss) (532,000) 249,000 1,082,000 420,000
Income (loss) per share:
Continuing operations $(0.13) $0.07 $0.26 $0.11
Discontinued operations -- (0.01) 0.01 --
Total $(0.13) $0.06 $0.27 $0.11
(a) Includes approximately $438,000 net gain from the disposition of the
building and associated relocation costs in the move of the corporate
headquarters to Overland Park, Kansas and approximately $442,000 of
unfavorable inventory adjustments and nonrecurring retroactive
adjustment made to correct the costing related to certain domestic
service contracts.
(b) Includes $350,000 gain on insurance settlement and $240,000 of expenses
associated with the attempted privatization of the Company's Canadian
subsidiary.
(c) Amounts have been restated for correction of errors. See Note 20.
42
19. RELATED PARTY TRANSACTIONS
The Company entered into an Administrative and Consulting Agreement dated as
of August 1, 1991 with The Marmon Group, Inc., ("Marmon"), an affiliate of
one of its principal stockholders, pursuant to which Marmon, will provide
certain centralized administrative and consulting services to the Company.
In consideration of such services, the Company has agreed to pay to Marmon a
monthly amount of $30,000 for the first six months until (January 31, 1992)
and $36,000 a month thereafter. Under the agreement, the Company has also
agreed to reimburse Marmon for all reasonable expenses it incurs in
connection with the provision of services to the Company. Reimbursements
are not considered material.
Additionally, in 1992 the Company began depositing its excess cash in a
revolving cash account with The Marmon Corporation (refer to Note 4). The
Company earns interest on the amounts deposited in this account at rates
that are at least comparable to third party rates available for equivalent
overnight investments.
20. EFFECT OF CORRECTIONS
The Company has amended its financial statements for 1993 to correct
recently discovered accounting errors. These errors principally relate to
incorrect service billings to California customers who previously had
purchased service contracts. The contracts were acquired as part of the
PTMS acquisition at the end of the third quarter of 1993. Additionally,
unrelated errors in the same period were discovered involving inventories
and accruals at the Company's Northwest operating unit. The effect of the
corrections is to reduce previously reported revenues for fiscal 1993 by
$420,000, reduce previously recorded pre-tax income by $466,000, and to
reduce previously reported net income by $317,000, as follows:
Year Ended December 31, 1993
As previously reported As restated
---------------------- -----------
Revenues $102,531,000 $102,111,000
============ ============
Pre-tax income $ 3,002,000 $ 2,536,000
============ ============
Net Income $ 1,682,000 $ 1,365,000
============ ============
Earnings/loss per share $ 0.42 $ 0.34
============ ============
TIE/communications, Inc. and Subsidiaries
SUCCESSOR COMPANY
SCHEDULE VIII: VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to
Beginning Cost and Balance at
Description of Period Expenses Deductions End of Period
----------- ---------- ---------- ---------- -------------
Year Ended
December 31, 1993
-----------------
Allowance for
doubtful accounts $1,913,000 $937,000 $(1,321,000)* $1,529,000
Year Ended
December 31, 1992
-----------------
Allowance for
doubtful accounts $2,090,000 $690,000 $ (867,000)* $1,913,000
Six Months Ended
December 31, 1991
-----------------
Allowance for
doubtful accounts $3,231,000 $802,000 $(1,943,000)* $2,090,000
----------------------
* Bad debts written off.
44
TIE/communications, Inc. and Subsidiaries
SUCCESSOR COMPANY
SCHEDULE X: SUPPLEMENTARY INCOME STATEMENT INFORMATION
Charged to Costs and Expenses
------------------------------------------
Years Ended December 31,
------------------------ Six Months Ended
1993 1992 December 31, 1991
---------- ---------- -----------------
Maintenance and repair $ 507,000 $ 503,000 $ 728,000
Depreciation and amortization 2,235,000 2,544,000 2,630,000
Taxes, other than payroll and
income tax * * *
Royalties * * *
Advertising costs * * *
- - - - -------------------
* Less than 1% of net sales.
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TIE/communications, Inc. (PREDECESSOR COMPANY)
We have audited the consolidated financial statements of TIE/communications,
Inc. and subsidiaries (Predecessor Company) ("the Company") as listed in the
accompanying index. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedules as listed in
the accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
TIE/communications, Inc. and subsidiaries (Predecessor Company) for the six
month period ending June 30, 1991, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 1, the Company's First Amended Joint Plan of Reorganization
(the "Plan") was confirmed by the United States Bankruptcy Court for the
District of Delaware on June 19, 1991, effective July 2, 1991 (June 30, 1991 for
accounting purposes). Further, in accordance with the Statement of Position
90-7 of the American Institute of Certified Public Accountants, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code", the Company
was required to account for the reorganization using Fresh-Start Reporting.
Accordingly, the accompanying financial statements are referred to as those of
the "Predecessor Company".
February 17, 1992,
(except for Note 10
which is as of February 15, 1993)
Stamford, Connecticut
46
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
PREDECESSOR COMPANY
Six Months
Ended
June 30, 1991
-------------
Net revenue:
Equipment sales $ 37,943,000
Services provided 13,598,000
-----------
51,541,000
-----------
Cost of sales:
Equipment sales 20,871,000
Services provided 4,117,000
-----------
24,988,000
-----------
Gross margin:
Equipment sales 17,072,000
Services provided 9,481,000
-----------
26,553,000
-----------
Operating expenses 27,815,000
Provision for restructuring of operations 469,000
-----------
Operating loss (1,731,000)
Interest income 492,000
Interest expense (1,214,000)
Other income, net 180,000
Reorganization items:
Professional fees 5,700,000
Provision for rejected executory contracts 892,000
Provision for settlement of disputed claims 750,000
Provision for settlement of lawsuits 1,500,000
Effect of Fresh-Start Reporting 29,002,000
-----------
Total reorganization items 37,844,000
-----------
Pretax loss (40,117,000)
Provision for income taxes - current 416,000
-----------
(40,533,000)
Equity in loss of affiliates (60,000)
-----------
Loss before minority interest (40,593,000)
Minority interest 195,000
-----------
(continued)
See accompanying Notes to Consolidated Financial Statements
47
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
(continued)
PREDECESSOR COMPANY
Six Months
Ended
June 30, 1991
-------------
Loss from continuing operations (40,788,000)
Discontinued operations:
Loss from operations (1,434,000)
Estimated loss on disposal (3,100,000)
-----------
Loss from discontinued operations (4,534,000)
-----------
Loss before extraordinary income (45,322,000)
Extraordinary item - gain on debt
extinguishment 18,896,000
-----------
Net loss $(26,426,000)
Income (loss) per common share:
Continuing operations:
Loss from continuing operations before
reorganization items $ (2.92)
Reorganization items (37.53)
-----------
Total from continuing operations (40.45)
Discontinued operations (4.50)
Extraordinary item 18.74
-----------
Total $ (26.21)
===========
Average shares outstanding 1,008,390
All references in the accompanying financial statements to the number of common
shares, per share amounts, and allocation between par value and paid-in capital
have been restated to reflect the 1 for 35 reverse stock split, the change in
par value and the adoption of Fresh-Start Reporting, which were treated as being
effective on June 30, 1991.
See accompanying Notes to Consolidated Financial Statements.
48
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
PREDECESSOR COMPANY
Six Months
Ended
June 30, 1991
-------------
Cash flows from operating activities:
Net loss $(26,426,000)
Adjustments to reconcile net income
to cash flows from operating activities:
Depreciation and amortization 3,048,000
Effect of Fresh-Start Reporting 29,002,000
Forgiveness of debt, net of stock issued (18,896,000)
Provision for reorganization costs 5,936,000
Estimated loss on disposal of discontinued operations 3,100,000
Provision for restructuring of operations 469,000
Deferred service revenue and income taxes (150,000)
Equity in unremitted losses of affiliates (60,000)
Minority interest in net income
of consolidated subsidiaries 157,000
Provision for Restricted Stock Plan 15,000
Changes in working capital, net of
acquisitions and divestitures:
Accounts receivable 1,732,000
Inventories 1,413,000
Miscellaneous current assets (574,000)
Accounts payable 3,205,000
Other current liabilities (3,961,000)
Taxes payable (978,000)
-----------
Cash flows used for operating activities (2,968,000)
-----------
Cash flows from investment activities:(1)
Capital expenditures, net of disposals (681,000)
Cash proceeds from sale of assets 500,000
Increase in investment in and advances to affiliates (20,000)
Other (718,000)
-----------
Cash flows used for investment activities (919,000)
-----------
(Continued)
See accompanying Notes to Consolidated Financial Statements.
49
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
PREDECESSOR COMPANY
Six Months
Ended
June 30, 1991
-------------
Cash flows from financing activities: (1)
Long-term and short-term repayments $(1,679,000)
Increase in long-term notes receivable (79,000)
Exercise of stock options 61,000
Other 348,000
----------
Cash flows used for financing activities (1,349,000)
----------
Impact of changes in foreign currency translation 44,000
----------
Decrease in cash and cash equivalents (5,192,000)
Cash and cash equivalents at beginning of period 19,842,000
----------
Cash and cash equivalents at end of period $14,650,000
==========
- - - - ----------------------------------
Cash flow information:
Interest paid $ 298,000
==========
Income taxes paid (excluding payment
of long-term tax liability) $ 955,000
==========
(1) Non-cash financing and investment
activities:
Issuance of Common Stock in exchange for debt $18,498,000
==========
Inventory sold in exchange for note receivable $ 8,520,000
==========
See accompanying Notes to Consolidated Financial Statements.
50
TIE/communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PREDECESSOR COMPANY
Six months ended June 30, 1991
<TABLE>
<CAPTION>
Additional Unearned Cumulative
Common Stock Portion of Treasury Stock
---------------------- Paid-in -------------- Restricted Translation
Shares Issued Amount Capital Deficit Shares Amount Stock Awards Adjustment Total
------------- ------ ------------ ------------- ------ ------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1991 992,363 $ 99,000 $173,585,000 $(143,188,000) (1,154) $(86,000) $(35,000) $1,417,000 $31,792,000
Shares of Common Stock
issued pursuant to
Restricted Stock Awards 1,885 -- 29,000 -- -- -- (29,000) -- --
Exercise of Common
Stock Options 6,942 1,000 61,000 -- -- -- 62,000
Shares of Common Stock
forfeited pursuant to
Restricted Stock Awards (1,771) -- (162,000) -- -- -- (72,000) -- (234,000)
Shares of Common Stock
cancelled pursuant to
Restricted Stock Awards (1,314) -- (120,000) -- -- -- 120,000 -- --
Shares of Common Stock
issued to purchase
minority interest of
subsidiary 147 -- -- -- -- -- -- -- --
Other items affecting
Common Stockholders'
Equity (1,154) -- (86,000) -- 1,154 86,000 16,000 63,000 79,000
Net loss for the six
months ended
June 30, 1991 -- -- -- (26,426,000) -- -- -- -- (26,426,000)
Issuance of Common Stock
to HCR Partners in
exchange for debt 2,991,294 299,000 15,524,000 -- -- -- -- -- 15,823,000
Effect of adoption of
Fresh-Start Reporting -- -- (169,614,000) 169,614,000 -- -- -- -- --
--------- ------- ----------- ----------- ----- ------- ------- --------- ----------
Balance June 30, 1991 3,988,392 $399,000 $ 19,217,000 $ -- -- $ -- $ -- $1,480,000 $21,096,000
========= ======= =========== =========== ===== ======= ======= ========= ==========
</TABLE>
All references in the accompanying financial statements to the number of common
shares, per share amounts, and allocation between par value and paid-in capital
have been restated to reflect the 1 for 35 reverse stock split, the change in
par value, and the adoption of Fresh-Start Reporting which were treated as
being effective on June 30, 1991.
See accompanying Notes to Consolidated Financial Statements.
51
TIE/communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
PREDECESSOR COMPANY
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
On June 19, 1991, the Company's First Amended Joint Plan of Reorganization
(the "Plan") was confirmed by the United States Bankruptcy Court for the
District of Delaware. The confirmed Plan provided for the Company to issue
Common Stock to HCR Partners in exchange for the principal portion of its
secured debt to HCR Partners ($31,594,000). Accrued interest on HCR
Partners secured debt ($3,124,000) and warrants to purchase 1,000,000 shares
of the Company's Common Stock held by HCR Partners were extinguished. As a
result of this transaction, HCR Partners became the owner of 75% of the
Common Stock of the Company (refer to Note 2 for further details). The
effective date of the Plan was July 2, 1991. However, for purposes of
financial statement reporting, the Plan was treated as being effective on
June 30, 1991. Further, in accordance with the Statement of Position 90-7
of the American Institute of Certified Public Accountants, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code", the
Company was required to account for the reorganization using Fresh-Start
Reporting (refer to Note 3 for further details). Accordingly, the
accompanying financial statements are referred to as those of the
"Predecessor Company".
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority-owned domestic and foreign
subsidiaries. All intercompany accounts and transactions with consolidated
subsidiaries are eliminated. Investments in affiliated companies that are
20% to 50% owned are accounted for under the equity method.
Net Revenue: Revenue from equipment sales and service work to end users is
recognized at the time of its completion. Deferred service revenue is
recorded in equal increments over the term of the contract. Other equipment
sales are recognized when title passes to the customer.
Statement of Cash Flows: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market, using
the first-in, first-out method.
Property: Property, plant and equipment are stated at cost. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the assets. At the time fixed assets are sold or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts and the resulting gain or loss, if any, is included in the
determination of income. Maintenance and repair costs are expensed as
incurred.
Intangible assets: Consideration paid in excess of the fair value of net
assets acquired is being amortized on a straight-line basis over periods
ranging from 7 to 40 years.
Research and development costs: New product development, product
improvement and research costs are expensed as incurred. Such costs
amounted to $1,146,000 for the six months ended June 30, 1991.
52
Income taxes: Deferred income taxes are provided for timing differences in
the recognition of certain revenues and expenses for financial statement and
tax reporting purposes. Timing differences principally relate to
depreciation, warranty costs, and restructuring provisions.
Translation of foreign currencies: Balance sheets and income statements of
all foreign subsidiaries are translated into U.S. dollars at current
exchange rates on a monthly basis with any resulting adjustment being
charged or credited to the stockholders' equity section of the balance
sheet. Foreign currency transaction gains and losses are reflected in
income as incurred.
Loss per common share: Loss per common share is based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. For the period presented, the Company's common
stock equivalents were antidilutive and, therefore, were not included in the
computation of loss per share.
All references in the accompanying financial statements to the number of
common shares, per share amounts, and allocation between par value and
paid-in-capital have been restated to reflect the 1 for 35 reverse stock
split and the change in the par value and the effect of Fresh-Start
Reporting (refer to Notes 2 and 3) which were treated as being effective on
June 30, 1991.
2. PLAN OF REORGANIZATION
On June 19, 1991, the Company and 25 of its domestic subsidiaries emerged
from Chapter 11 protection of the United States Bankruptcy Code ("Chapter
11") as the United States Bankruptcy Court for the District of Delaware
confirmed the Plan. The confirmed Plan provided for the following:
The principal amount of the Company's secured debt due HCR Partners,
$31,594,000, was exchanged for 75% of the Company's Common Stock. Accrued
interest on HCR Partners debt, $3,124,000, and warrants to purchase
1,000,000 shares of the Company's Common Stock held by HCR Partners were
extinguished. The Company recorded a gain on this transaction as more fully
explained in Note 11. All bona fide prepetition liabilities, other than to
HCR Partners, were paid in full.
The Company's obligation at June 30, 1991 to certain taxing authorities has
been deferred for payment over a period not to exceed six years.
Pursuant to a reverse stock split effected in connection with the Plan, the
stockholders of the Company received one share of Common Stock (the "New
Common Stock") in exchange for every 35 shares of Common Stock (the "Old
Common Stock") they owned prior to confirmation of the Plan. The New Common
Stock has a par value of $.10 per share as compared to $.05 per share for
the Old Common Stock. As a consequence of the foregoing, the holders of Old
Common Stock hold in total approximately 25% of the outstanding shares of
New Common Stock. All unexercised options to purchase Old Common Stock and
Restricted Stock Awards for Old Common Stock were cancelled.
The estimated reorganization related costs total $8,842,000 and were
provided for in the second quarter of 1991. This amount includes
professional fees related to the bankruptcy and provisions for amounts
expected to be paid to settle various reorganization related claims.
53
3. FRESH-START REPORTING
In accordance with Statement of Position 90-7 of the American Institute of
Certified Public Accountants, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", since the Company's stockholders
of existing Common Stock prior to the confirmation of the Plan received less
than 50% of Common Stock after confirmation of the Plan, the Company
accounted for the reorganization using Fresh-Start Reporting. Accordingly,
all assets and liabilities were restated to reflect their reorganization
value which approximated fair value at the date of reorganization.
Based upon an independent analysis of the Company performed in conjunction
with the confirmation hearing on the Plan, a business value of $46,000,000
was established. The factors considered in determining the business value
included cash flow projections, historical and current operations, future
prospects and comparisons of the financial performance of the Company to
other comparable companies. Based on that analysis, management calculated
the portion of the reorganization value of the Company representing the
estimated value of the net assets of the Company immediately after the
reorganization at $21,096,000, after the adjustments to write down fixed
assets, receivables and inventory to the best estimate of their respective
fair market values at June 30, 1991 and to adjust liabilities to reflect
their present value. Intangible assets were written down to reflect the
reorganization value in excess of amounts allocable to identifiable assets.
The total effect on the Statement of Operations from applying Fresh-Start
Reporting was $29,002,000.
The following summarizes the effect of Fresh-Start Reporting on the June 30,
1991 balance sheet of Predecessor Company:
June 30, 1991
-----------------------------------------
Effects of
Predecessor Fresh-Start Successor
Company Reporting Company
------------ ------------- -----------
Current assets $ 58,942,000 $ (418,000) $58,524,000
Property, net 7,570,000 (1,750,000) 5,820,000
Investments in affiliates 1,404,000 (300,000) 1,104,000
Intangible assets, net 47,936,000 (25,379,000) 22,557,000
Long-term notes 3,364,000 -- 3,364,000
----------- ----------- ----------
Total assets $119,216,000 $(27,847,000) $91,369,000
=========== =========== ==========
54
June 30, 1991
------------------------------------------
Effects of
Predecessor Fresh-Start Successor
Company Reporting Company
------------ ------------- ------------
Current liabilities $ 46,782,000 $ 1,155,000 $47,937,000
Deferred income 412,000 -- 412,000
Deferred income tax 24,000 -- 24,000
Long-term debt 4,998,000 -- 4,998,000
Long-term tax liability 10,321,000 -- 10,321,000
Minority interest 2,488,000 -- 2,488,000
Other non-current liabilities 4,093,000 -- 4,093,000
----------- ----------- ----------
Total liabilities 69,118,000 1,155,000 70,273,000
Stockholders' equity 50,098,000 (29,002,000) 21,096,000
----------- ----------- ----------
Total liabilities and
Stockholders' equity $119,216,000 $(27,847,000) $91,369,000
=========== =========== ==========
4. INCOME TAXES
The components of pretax loss of consolidated companies are as follows:
Six Months Ended
June 30, 1991
-----------------
U.S. $(40,733,000)
Foreign 616,000
------------
$(40,117,000)
The components of the income tax provision are as follows:
Six Months Ended
June 30, 1991
---------------
Current:
Federal $ 273,000
State 143,000
------------
416,000
Deferred Federal --
------------
Total taxes on income $ 416,000
============
55
The following table is a reconciliation of the provision for income taxes
reported in the Consolidated Statement of Operations to the provision as
calculated at the statutory U.S. Federal income tax rate:
Six Months Ended
June 30, 1991
----------------
Tax benefit computed on a consolidated
basis by applying the statutory U.S.
Federal income tax rate (34%) $(13,675,000)
Increase resulting from:
State and local taxes 143,000
Non-deductible items: 10,939,000
Net operating losses for which
no carryback benefit can be
recognized 3,009,000
------------
$ 416,000
===========
5. RENTS
The Company leases office, manufacturing and warehouse space under
noncancellable operating leases. Rent expense charged to operations for the
six months ended June 30, 1991 was $2,663,000.
6. STOCK OPTIONS AND STOCK PURCHASE PLANS
The Company had several incentive stock plans for key employees which
provided that options may be granted at amounts not less than the fair
market value at the date of grant. The stock option plans, which were
approved by the stockholders, included the 1981, 1982, 1983 and 1986 plans
which provided in the aggregate for the issuance of a maximum of 112,142
shares. The provisions of all of the plans were essentially the same, with
the exception that the 1986 plan provided for the grant of stock
appreciation rights with the grant of options, the grant of restricted stock
awards and the grant of options to eligible non-management directors. These
plans were cancelled in connection with the Plan of Reorganization.
Set forth below is a summary of information concerning options under the
Company's plans prior to cancellation:
Number of
Shares Exercise Price Per Share
--------- ------------------------
Options outstanding at January 1, 1991 60,523 $8.75 - $1,448.30
Options exercised (6,942) $8.75
Options granted -- --
Options cancelled (53,581) $8.75 - $1,448.30
-------
Options outstanding at June 30, 1991 --
=======
Refer to Note 7 for grants of restricted stock awards.
56
7. INCENTIVE COMPENSATION PROGRAM
Under the 1986 stock plan restricted stock awards totaling 3,314 shares of
the Company's Common Stock were outstanding as of December 31, 1990 as part
of long-term performance unit awards granted under the Incentive
Compensation Program. Restricted stock award shares were granted to key
employees without payment to the Company. Recipients had all the rights of
shareholders except that the shares were held in the Company's custody and
could not be disposed of until the restrictions and conditions established
upon issuance were satisfied. If such restrictions and conditions were not
satisfied, the respective shares were forfeited.
On the date of grant, the market value of the restricted stock award shares
was added to Common Stock and paid-in-capital and an equal amount was
deducted from common stockholders' equity in the unearned portion of
restricted stock awards. This unearned portion was being amortized to
compensation expense over the vesting period for the awards. The charges to
compensation expense for the earned portion of both the cash and restricted
stock awards for the six months ended June 30, 1991 were $16,000.
All restricted stock awards were cancelled in connection with the Plan of
Reorganization and, accordingly, no payments were made in connection with
the Restricted Stock Awards in 1992.
8. BENEFIT PLANS
The Company's Profit Sharing and Savings Plan was amended on January 1, 1985
to allow participating employees to authorize payroll deferrals of up to 10
percent of their total compensation and to contribute such amounts to the
plan. For the first six months of 1991, the Company matched a participant's
contribution by making contributions equal to 100% of that portion of a
participant's deferred compensation which did not exceed 3% of the
compensation payable to such participant. Employee and Company
contributions are considered tax deferred to the employee under Section
401(k) of the Internal Revenue Code. During the six months ended June 30,
1991, the Company's contributions amounted to $259,000. At June 30, 1991,
there were 590 participants in the plan.
9. RESTRUCTURING OF OPERATIONS
In the second quarter of 1991, the Company provided $469,000 for
restructuring charges as part of a Company-wide cost reduction program. The
restructuring charges were made to provide for employee terminations,
facility consolidation costs and the write-down of assets to net realizable
value.
57
10. DISCONTINUED OPERATIONS
On May 14, 1991, the Company entered into an agreement with Nitsuko America
Corporation ("NTK America") to sell specified inventory that it owns to NTK
America at a price equal to the Company's carrying value of such inventory.
This transaction, which closed on July 1, 1991, resulted in the sale of
$9,020,000 of inventory to NTK America. The Company received $500,000 of
this amount in June 1991. The remaining amount of $8,520,000 was recorded
as a current receivable as of June 30, 1991 and was being paid to the
Company monthly over the last six months of the year beginning with July
1991.
Additionally, the Company will license on a nonexclusive basis all of its
telephone equipment technology to NTK America for a period of five years,
during which, the Company will have an exclusive right to distribute certain
equipment manufactured by NTK America's parent, Nitsuko Corporation ("NTK")
in Canada, and a nonexclusive right to distribute certain other NTK products
in the United States and in Canada, as more fully described in Note 16 to
the Successor Company Consolidated Financial Statements.
As a result of the foregoing, the Company commenced discontinuation of its
distribution operations. Accordingly, the operating results for this
segment have been classified as discontinued operations for the six months
ended June 30, 1991. Additionally, in connection with the Company's
decision to exit this segment of the business, a provision of $3,100,000 was
set up on the second quarter of 1991 to reflect the writedown of assets
related to this segment to net realizable value and to provide for certain
phaseout costs.
During the third quarter of 1992, the Company's Canadian subsidiary sold its
key system distribution business to Nitsuko America Corporation ("NTK
America") which completed the Company's discontinuation of its distribution
operations. The Company has reported the results of this transaction in
discontinued operations and all prior year financial statements have been
restated accordingly.
11. EXTRAORDINARY ITEM
As a result of the Plan of Reorganization, the principal amount of the
Company's secured debt due HCR Partners ($31,594,000) was exchanged for 75%
ownership in the Company. Accrued interest on HCR Partners secured debt
($3,124,000) and warrants to purchase 1,000,000 shares of the Company's
Common Stock held by HCR Partners were extinguished. Since Management
estimated the net assets of the Company at $21,096,000 (refer to Note 3),
the exchange and cancellation transactions relative to HCR Partners resulted
in an extraordinary gain to the Company of $18,896,000. The gain was
determined to be nontaxable for Federal tax purposes and therefore no tax
expense has been provided.
12. ACQUISITIONS AND DIVESTITURES
In the fourth quarter of 1990, the Company's Canadian subsidiary acquired
the business of CTG, Inc. a Toronto based telephone interconnect company
which operates in various locations throughout Canada. The Company's
Canadian subsidiary received cash of $3,361,000 in exchange for liabilities
assumed in connection with this acquisition. The consideration to be paid
for this acquisition is a royalty based on sales with a minimum
consideration of approximately $3,000,000. The minimum amount is to be paid
in equal quarterly installments over five years.
59
The minimum royalty has been recorded as a liability. Any future
adjustments to this amount will be recorded and paid as incurred. The
acquisition was accounted for as a purchase and, accordingly, the results of
operations of the business have been included in the consolidated financial
statements from the acquisition date. The cost of this acquisition exceeded
the fair market value of net tangible assets by $4,512,000 and is being
amortized over a ten-year period.
13. BUSINESS SEGMENT AND GEOGRAPHIC AREAS
The Company primarily sells, installs and services its products through a
domestic and Canadian network of sales and service facilities to primarily
small to medium sized customers. An analysis of the Company's operations by
geographic location is as follows:
United
States Canada Eliminations Consolidated
------------- ----------- ------------ ------------
Six Months Ended
June 30, 1991
- - - - ----------------
Sales to unaffiliated
companies $ 36,351,000 $15,190,000 $ -- $ 51,541,000
=========== ========== ========= ===========
Pretax-tax income (loss) $(40,738,000) $ 616,000 $ 5,000 $(40,117,000)
=========== ========== ========= ===========
59
TIE/communications, Inc. and Subsidiaries
PREDECESSOR COMPANY
SCHEDULE VIII: VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning Cost and End of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- ----------
Six Months Ended
June 30, 1991
- - - - ----------------
Allowance for
doubtful accounts $3,287,000 $867,000 $923,000* $3,231,000
* Bad debts written off.
60
TIE/communications, Inc. and Subsidiaries
(Amounts in $000's)
PREDECESSOR COMPANY
SCHEDULE IX: SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Weighted Maximum Average Weighted
Balance Average Amount Amount Average
Category of at End of Interest Outstanding Outstanding Interest Rate
Borrowing (1) Period Rate During Period During Period(2) During Period(3)
- - - - --------- ------ ------- ------------- ------------- -------------
Six Months Ended
June 30, 1991
- - - - --------------
<S> <C> <C> <C> <C> <C>
Banks $12 8.3% $20 $16 12.5%
Other financial
institutions 10 0% 10 10 0%
-- -- --
All categories $22 4.5% $30 $26 7.7%
== == ==
</TABLE>
(1) At June 30, 1991, all the short-term borrowings outstanding were incurred by
domestic subsidiaries.
(2) The average borrowings were determined based on the amounts outstanding at
the end of each month.
(3) The weighted average interest rate during the period was calculated by
dividing the actual interest expense in each period by the average amount
outstanding during the period.
61
TIE/communications, Inc. and Subsidiaries
PREDECESSOR COMPANY
SCHEDULE X: SUPPLEMENTARY INCOME STATEMENT INFORMATION
Charged to Costs and Expenses
-----------------------------
Six Months Ended
June 30, 1991
----------------
Maintenance and repair $ 704,000
Depreciation and amortization 3,048,000
Taxes, other than payroll and income tax *
Royalties *
Advertising costs *
- - - - ------------------
* Less than 1% of net sales.
62
Item 9. Changes in and Disagreements with Accounts on Accounting and Financial
Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information as to directors required by this item is incorporated by
reference to information under the caption "Election of Directors" in the Proxy
Statement. The information as to executive officers is included in Part 1 of
this report, "Executive Officers of the Registrant".
Item 11. Executive Compensation
The information required by this item is incorporated by reference to
information under the caption "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to
information under the caption "Security Ownership of Certain Beneficial Owners"
in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to
information under the caption "Executive Compensation" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements and Schedules: See Item 8.
2. Exhibits: See Exhibit Index on Page 65.
(b) Reports on Form 8-K: On or about November 29, 1993, the Registrant filed
a report on Form 8-K/A amending its Form 8-K for September 17, 1993.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TIE/communications, Inc.
By: /s/ George N. Benjamin, III
November 14, 1994 George N. Benjamin, III, President
By: /s/ Jane E. Closterman
Jane E. Closterman, Corporate Controller
