SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-9487
CORCOM, INC
(Exact name of registrant as specified in its charter)
Illinois 36-2307626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
844 E. Rockland Road, Libertyville, Illinois 60048
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 680-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by checkmark 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 checkmark 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 an amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The aggregate market value has been
computed by reference to the closing price of such stock as of
March 11, 1998: Approximately $23,460,000.
Indicate the number of shares outstanding of the registrant's
common stock as of March 11, 1998: 3,823,243.
Documents incorporated by reference: None
<PAGE>
PART I
Item 1. Business
CORCOM, Inc. is an Illinois corporation incorporated in March, 1955. Except
as otherwise indicated by the context, references herein to "CORCOM" or the
"Company" mean CORCOM, Inc. and its subsidiaries. CORCOM's business consists
of the design, manufacture, and sale of radio frequency interference filters
to the commercial, facility, and military filter markets. The Company also
manufactures and sells a broad line of power entry devices that are used to
connect electronic equipment to an external power source.
Products
Radio frequency interference (RFI) filters are electronic components
used to protect electronic equipment from radio frequency interference
conducted through the AC power cord. They are also used to control the
emission of the RFI generated by electronic equipment so these emissions do
not interfere with other electronic devices. Customers purchase RFI filters
for emission control purposes to bring their equipment into compliance with
government regulations that limit the amount of radio frequency interference
that can be emitted by digital computing devices. The Company also
manufactures a complete line of Signal Sentry(c) products, filtered modular
RJ jacks designed to solve RFI problems on signal lines.
CORCOM maintains a catalog of standard commercial filters that
contains approximately 500 designs, offering a variety of sizes, electrical
configurations, current ratings and environmental capabilities. These filters
consist of electronic circuits utilizing passive electrical components:
inductance coils, capacitors, and resistors. These are enclosed in a metal or
plastic case having terminals, lead wires, or an integral connector, for
attachment to associated equipment. Sales of commercial filters, including
Signal Sentry(c) products, accounted for approximately 72% of net sales in
1997, 75% in 1996, and 70% in 1995.
CORCOM also manufactures and sells RFI filters for the military and
facility markets. Both product lines are similar to commercial filters in
their basic function and design. However, military filters are subject to
extremely high performance requirements as described by military
specification. Facility filters are larger versions of the Company's line of
commercial filters and are used to control RFI conducted through the main
power line feeding secure facilities. Together they represented 5% of 1997
sales, 4% of 1996 sales, and 5% of 1995 sales.
The Company also distributes a line of power entry products that are
used to connect electronic equipment with a power source. These devices come
in a variety of configurations and may include an on-off switch, voltage
selector, fuse holder, and an IEC connector. Some power entry products also
contain an RFI filter. CORCOM's line of power entry products contains items
of its own design, plus some products obtained under a private label
agreement. Sales of power entry devices accounted for 23% of net sales in
1997, 21% in 1996, and 25% in 1995.
In addition to filters and power entry products, the Company
distributes a variety of A/C power cords for use with filters and power entry
products having integral power connectors plus a series of line to line
capacitors used for RFI suppression.
All of the Company's products are marketed under its federally
registered trademark, "CORCOM".
CORCOM filters are designed to meet the requirements of one or more
safety and reliability specifications, such as those of Underwriters
Laboratories (UL), the Canadian Standards Association (CSA), the Verband
Deutscher Electrotechniker (VDE) in Germany, and the Schweizerischer
Elektrotechnischer Verein (SEV) in Switzerland.
All CORCOM filters are designed and built to operate continuously for
at least five years when connected across a live A/C power line. CORCOM
filters must perform without interruption because in most cases they are
energized even when the equipment in which they are installed is switched off.
Markets
CORCOM power line RFI filters are used as electronic pollution
control devices by manufacturers of digital electronic equipment all over the
world. In addition, many filters are used by field service organizations for
installation in sensitive equipment which was manufactured without an
effective filter. Power entry products are sold into the same markets and
through the same channels of distribution. Military filters are sold to
defense contractors and U.S. government agencies for use in sensitive
electronic devices. Facility filters are sold principally to contractors for
installation in screen room test facilities, computer installations, or other
locations containing sensitive electronic equipment.
Over 4,000 customers in the United States and more than 100 customers
in other countries purchased filters and power entry products from CORCOM or
its distributors in 1997. No single customer accounted for more than 10% of
sales in 1997, 1996, or 1995.
Distribution
Sales of CORCOM products in the United States are obtained by 18
independent sales representative firms which call on major original equipment
manufacturers (OEM's), government contractors, U.S. government agencies, and
independent electronic parts distributors. There are 28 United States
distributor firms which carry the Company's products; these distributors
service the smaller OEM's and the service organizations. Both representatives
and distributors handle other types of products, and some distributors carry
competing lines.
Export sales are conducted through combination
representative/distributor organizations. Representative sales are on a
commission basis with shipments directly to OEM's. On a distributor basis,
filters and power entry products are imported and sold to customers within
their countries.
The Company has 35 international representative/distributors plus
wholly-owned subsidiaries in Germany and Mexico. This network sold into 24
countries in 1997. Primary export markets include Canada, Germany, the
United Kingdom, France, Italy, Spain, Sweden, Japan, South Korea, Taiwan, and
Hong Kong. International catalogs are published in German and English.
During 1997 the Company closed its direct sales office in Hong Kong but
continues to serve this market through local distributors. Total
international sales, which include the sales from Corcom's German subsidiary,
totaled $9,933,000 in 1997 (27.0% of net sales), $9,490,000 in 1996 (28.6% of
net sales) and $7,688,000 in 1995 (25.1% of net sales).
Export sales from the United States are invoiced in United States
dollars while sales of the Company's German subsidiary are invoiced in German
Deutschmarks. All international sales are subject to factors such as changes
in foreign exchange rates, protective tariffs, tax policy and export/import
controls.
CORCOM supports the marketing of its products by wide distribution of
its catalogs, by advertising in technical publications, and via an
informational internet site on the worldwide web. Advertising and catalog
costs for the Company were approximately $289,000, $284,000, and $209,000 in
1997, 1996, and 1995, respectively.
Backlog
The Company's backlog of orders with firm delivery schedules was
approximately $8,260,000 on January 31, 1998, compared to $9,296,000 on
January 31, 1997. The backlog consists principally of special orders and
scheduled increments of volume contracts. Most catalog items are shipped
from inventory. Typical lead time for special orders is 12-14 weeks. Over 80%
of all orders are scheduled for delivery within 6 months. The Company does
not believe that its business is subject to seasonal variations.
Competition
Although industry statistics generally are not available, CORCOM
believes that in the United States it accounts for approximately 25% of
commercial and industrial power line interference filters, exclusive of
military applications. Competition principally includes Schaffner A.G. of
Switzerland; Delta of Taiwan; Aerovox, Inc.; Stanford Applied Engineering,
Inc.; as well as a number of lesser participants. CORCOM believes that its
sales volume is approximately equal to the aggregate volume of its three
principal United States competitors. In Europe the principal competitors are
Schaffner A.G., Siemens, Timonda and Eichoff. In the Far East CORCOM's
principal competitor is Delta. Many of the competitors are firms much larger
than CORCOM, with far greater financial resources, broader product lines and
larger marketing organizations.
CORCOM believes that its position in the commercial and industrial
power line interference filter market results from a number of factors,
including the Company's concentration on this market sector, its emphasis on
application engineering to meet individual customer requirements, its
reputation for high product reliability and quality, its broad catalog line,
and its ability to provide standard items from inventory and/or local
distributor stock. The Company believes that these factors have to date
enabled CORCOM products to achieve high acceptance in the marketplace.
Because the Company's products are an integral part of the digital
electronic equipment produced by its OEM customers, there will always be the
possibility of a customer electing to produce its own RFI filters and power
entry products rather than purchase the Company's products.
CORCOM's major competitor in power entry products is Schaffner A.G.
of Zurich, Switzerland. The Company believes that the two companies comprise
approximately half the market for these devices in the United States, with
each company having approximately the same market share.
Production, Testing, and Assembly
CORCOM's products are composed of electrical components such as
capacitors and inductors and connectors which are wired into specific circuit
configurations, soldered, assembled into metal or plastic housings, and
tested. Materials and components generally are available from multiple
sources, and loss of a particular supplier would not be expected to have a
materially adverse effect on the Company's operations.
Engineering
The Engineering Department is divided into four sections -
Applications, Catalog, Support, and Manufacturing Engineering. Applications
Engineering provides assistance to key OEM accounts as well as customers
within specific geographic regions. Catalog Engineering develops new products
based on input from Marketing, and maintains and improves existing catalog
products through new technologies. Support Engineering consists of Safety
Engineering, which ensures compliance with safety regulations worldwide, and
Test Engineering, which develops and maintains all testing and inspection
equipment. Manufacturing Engineering verifies that the necessary equipment,
tooling and processes are in place, and updates manufacturing on new and
developing techniques and processes. The costs associated with the
Engineering Department were $1,333,000 in 1997. This compares to $1,220,000
in 1996 and $1,247,000 in 1995.
ISO Registration
CORCOM's manufacturing facilities were granted ISO 9001 registration
in 1995 by Underwriters Laboratories. This registration validates a company's
management system to the internationally accepted ISO 9001 standard relative
to the design, manufacturing, and quality of the products it manufactures.
ISO registration is seen as a benefit to CORCOM's customers, as well as a
vehicle to promote a continuous improvement philosophy within the Company.
Government Regulations
The Federal Communications Commission (FCC) has adopted regulations
to reduce the interference potential of electronic equipment having circuitry
"that generates and uses timing signals or pulses at a rate in excess of
10,000 pulses (cycles) per second and uses digital techniques." This
definition includes essentially all A/C powered computers and other digital
equipment. Although the FCC has exempted several specific types of devices,
compliance with these rules has been required for most types of A/C powered
digital equipment since October, 1983.
CORCOM believes that in most cases compliance with the FCC requirements
will require the suppression of conducted RFI through the use of power line
interference filters, and these are now considered a standard component in
most A/C powered digital electronic equipment.
Outside the United States, RFI is controlled by national and regional
regulation. In Europe, the European Union (EU) has established directives to
control RFI which, in most respects, take into account the recommendations of
the special committee on radio interference (CISPR) of the International
Electrotechnical Commission (IEC). As of January 1, 1996, all electrical or
electronic products under the scope of the EU directives intended for sale or
distribution in the EU countries must display the CE marking for proof of
compliance with the EU specifications. These specifications in many respects
are similar to the FCC rules. It is therefore possible for a manufacturer
using a CORCOM filter to produce equipment in such a manner that it complies
with both FCC and international interference control regulations as well as
domestic and foreign safety requirements.
Patents
The Company holds 12 patents. It may be possible for competitors of
CORCOM to copy aspects of its products even though the Company regards these
as proprietary. However, the Company believes that patent protection is of
less importance than the knowledge and experience of its management and
personnel and their ability to develop and market the Company's products.
The Company will apply for patents if and when it develops patentable
processes or products. The Company is not aware that the manufacture and
sale of its products, including those presently under development, require it
to obtain any licenses from others, although it may be necessary or desirable
in the future to obtain licenses for one or more of its future products.
Employees
On January 31, 1998, CORCOM had 672 full-time employees, of whom 576
were engaged in production activities, 19 in product development and related
activities, 23 in sales and marketing, and 54 in general and administrative
capacities. The Company considers its employee relations to be excellent.
The Company has not experienced any work stoppage due to a labor dispute in
over 31 years.
Recent Development
On March 10, 1998 Corcom, Inc. (the "Registrant") entered into an
Agreement and Plan of Merger by and among Communications Instruments, Inc.,
a North Carolina corporation ("CII"), RF Acquisition Corp., an Illinois
corporation and wholly owned subsidiary of CII ("Merger Sub") and the
Registrant (the "Merger Agreement"). CII is owned by Code Hennessy &
Simmons, LLC, a Chicago based private investment firm, and CII management.
Pursuant to the Merger Agreement, (a) CII will acquire all of the
Registrant's issued and outstanding shares of common stock for $13.00 per
share in cash, or approximately $51.2 million, and (b) Merger Sub will merge
with and into Registrant (the "Merger"), with Registrant being the surviving
corporation in the Merger.
The closing of the Merger is subject to the satisfaction of certain
conditions, including, among other matters, approval by the holders of
two-thirds of the issued and outstanding shares of common stock of the
Registrant, certain regulatory approvals and receipt by CII of debt financing
necessary to consummate the Merger, a commitment for which has been provided
by Bank of America National Trust and Savings Association. This financing is
subject to certain conditions, including the execution of a definitive credit
agreement satisfactory to Bank of America. A copy of the Merger Agreement is
attached as Exhibit 2.1 to the registrant's Current Report on Form 8-K (date
of report March 10, 1998) and is hereby incorporated by reference.
CII also entered into an agreement with Werner E. Neuman, the President of
the Registrant, and James A. Steinback, a Director of the Registrant, whereby
such individuals agreed to vote in favor of the Merger. These two individuals
hold approximately 31% of the shares outstanding. A copy of this voting
agreement is attached as Exhibit 99.1 to the aforesaid Form 8-K and is hereby
incorporated by reference.
A copy of the press release of the Registrant, dated March 11, 1998, is
attached as Exhibit 99.2 to the aforesaid Form 8-K and is hereby incorporated
by reference.
Item 2. Properties
The following table contains information about the Company's principal
facilities at February 26, 1998:
Location Sq. Footage Owned or Leased (1) Type of Facility
Libertyville, IL 35,000 Lease expiring 1999 Office, research,
Manufacturing
and warehouse
El Paso, Texas 16,000 Lease expiring 1998 Office and warehouse
Ciudad Juarez, Mexico 47,000 Beneficially owned Office and
manufacturing
Ciudad Juarez, Mexico 13,000 Lease expiring 2000 Office,
manufacturing, and
warehouse
Martinsried, Germany 7,000 Lease expiring 2000 Office and
warehouse
__________
(1) For further information regarding lease rentals and foreign properties, see
Notes 7 and 8 to consolidated financial statements
In 1997, 1996, and 1995 the major portion of the Company's production was
performed in Mexico.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's common stock is traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol: CORC. The range of high
and low sales prices for such stock for the Company's two most recent fiscal
years, as shown in the monthly statistical reports furnished to the Company
by The Nasdaq Stock Market has been as follows:
Period High Low
1997: 1st Quarter $8.75 $6.50
2nd Quarter $8.25 $6.25
3rd Quarter $10.25 $7.25
4th Quarter $10.00 $8.50
1996: 1st Quarter $7.87 $5.00
2nd Quarter $12.75 $6.00
3rd Quarter $10.50 $7.25
4th Quarter $10.00 $6.25
The approximate number of record holders of the Company's common
stock at December 31, 1997 (including participants in security position
listings) was greater than 500.
The Company has declared no cash dividends with respect to its common
stock and presently intends to retain all earnings for use in its business.
It is anticipated that such dividends will not be paid to holders of common
stock in the foreseeable future.
Item 6. Selected Financial Data.
Year Ended December 31:
1997 1996 1995 1994 1993
(In thousands except per share data)
Net sales $36,788 $33,166 $30,660 $26,726 $25,854
Income (loss):
Before income taxes
and extraordinary item $5,013 $3,683 $2,967 $1,310 $(1,993)
Net income (loss) $3,003 $5,472 $2,786 $1,243 $(2,047)
Net income (loss) per
common and common
equivalent share:
Basic EPS $.79 $1.45 $.76 $.35 $(.57)
Diluted EPS $.76 $1.38 $.72 $.33 $(.57)
At December 31:
Total assets $24,978 $23,227 $17,394 $14,816 $16,936
Long-term debt $40 $102 $162 $213 $1,256
No cash dividends were declared during the five years in the period ended
December 31, 1997.
Notes:
(1) Loss before income taxes in 1993 includes restructuring costs of
$2,051,000.
(2) The benefit from the utilization of net operating loss carryforwards in
1994($381,000), 1995 ($848,000), 1996 ($1,122,000), and 1997 ($ 0 ) is
included in the provision for income taxes. An additional component to the
1996 benefit is a $2,000,000 reversal of valuation allowance.
(3) Earnings per share amounts prior to 1997 have been restated as required by
FAS No.128 "Earnings per Share." See the notes to the consolidated
financial statements beginning on page F-7.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
CORCOM's net sales for 1997 were $36,788,000, an increase of 10.9% from the
$33,166,000 reported for the previous year. The bulk of the increase came in
the form of a volume increase in the Company's North American commercial
filter business, the result of an increase in the overall electronics market.
There were no appreciable price changes year to year. Between 1995 and 1996,
sales increased 8.2%. Most of this increase came as a result of volume
increases in the Company's North American and European commercial filter
businesses. The increase in North America was the result of an increase in
the overall electronics market. The increase in Europe was principally
attributable to more stringent European RFI/EMI testing regulations which
went into effect January 1, 1996. There were no appreciable price changes in
this period either.
The Company's backlog of orders with firm delivery schedules was
$8,260,000 as of January 31, 1998, compared to $9,296,000 as of January 31,
1997 and $10,346,000 on January 31, 1996. There has been a reduction in the
last two years of very long lead time orders by certain of the Company's
customers; however the value of orders deliverable in the upcoming 13 week
period has remained relatively constant over the last two years.
In 1997 the Company's gross margins improved to 39.1% of sales from
the 37.9% reported in 1996. This was primarily the result of cost reductions
in certain raw materials used by the Company, coupled with the leveraging
impact of higher production levels on the Company's fixed production-related
costs. The period 1995 to 1996 also showed an improvement in gross margins
from 37.1% in 1995 to 37.9% in 1996. This improvement was due to a shift in
mix to more profitable European sales partially offset by an increase in the
peso-based costs at the Company's Mexican production facility as a result of
the inflation in that currency during 1996. Since a portion of the Company's
costs are Mexican peso- based, should the value of that currency increase
relative to the dollar, or if inflation in Mexico escalates, the Company's
manufacturing costs could rise.
Engineering expenses in 1997, at $1,333,000, were about 9.3% higher than the
$1,220,000 incurred in 1996, the result of resources added to this area in
1997 to keep up with rising demand. In 1996, engineering expenses were
approximately the same as they were in 1995. As a percent of revenue,
engineering expenses remained about the same in 1997, at 3.6% of sales,
as they were in 1996.
Selling, administrative and other expenses were $545,000, or 7%,
higher in 1997 than in 1996, the majority of which was due to higher
commission and sales expenses on the higher 1997 revenue and higher incentive
compensation costs on higher 1997 pretax income. Sales, administrative and
other expenses increased $704,000, or 10%, from 1995 to 1996. The major
components of this increase were higher sales commission and sales expenses
on the higher levels of sales in 1996.
Interest expense was $10,000 in 1997 as compared with $16,000 and
$71,000 for 1996 and 1995 respectively. Interest expense for 1997 and 1996
represents the interest portion of lease payments on certain equipment leases
only. Interest expense for 1995 includes not only the interest portion of the
Company's lease payments, but interest expense on cash borrowings against the
Company's line of credit for a portion of that year. There have been no cash
borrowings since 1995.
The Company recorded interest income from its cash and investments of
$306,000 in 1997. This was $172,000 higher than in 1996 as a result of the
increase in the Company's cash balances in this period. Interest income in
1996 was $127,000 higher than 1995, also the result of an increase in the
Company's level of cash.
The Company's pre-tax earnings for 1997 were $5,013,000. This
compares to pre-tax earnings of $3,683,000 and $2,967,000 in 1996 and 1995
respectively. The primary reasons for the improvement are discussed above.
The Company recorded a provision for income tax expense of $2,010,000
in 1997. This represents approximately 40% of pretax earnings. In 1996, the
Company recorded a net income tax benefit of $1,789,000. The principal
component of this benefit was a $2,000,000 reversal of part of the valuation
allowance which existed as of December 31, 1995 as related to existing tax
net operating loss (NOL) carryforwards. Since it became apparent in 1996 that
there were no longer any uncertainties surrounding the ultimate utilization
of these NOL's, the valuation allowances against this deferred asset were
removed, resulting in the negative income tax expense in the period. In 1995,
the Company had recorded a minimal provision for income tax expense of
$181,000, or 6.1% of pretax earnings.
The Company's net income after tax in 1997 was $3,003,000 ($.76 per
share, diluted). This compares to net earnings of $5,472,000 ($.1.38 per
share, diluted) and $2,786,000 ($.72 per share, diluted) in 1996 and 1995
respectively. The decrease from 1996 to 1997 is due to the effect of the 1996
tax credit described in the paragraph above. If both 1995 and 1996 earnings
were taxed at the full statutory 40% rate, proforma diluted earnings per share
for these two periods would have been $.46 and $.56, respectively. Weighted
average shares outstanding (diluted) for 1997 were 3,952,000, a decrease of
5,000 shares from the 3,957,000 weighted average shares outstanding reported
for 1996. The decrease was the net effect of the issuance of the 48,000
shares on exercise of stock options by certain key employees in 1996, the
dilutive effect of existing unexercised stock options, and the purchase by the
Company throughout 1997 of 98,300 shares for the treasury. Weighted average
shares outstanding in 1996 were 3,957,000, an increase of 90,000 shares from
the 3,867,000 reported in 1995. This increase was the joint result of the
issuance of 75,000 shares on exercise of stock options by certain key
employees in 1996, and the dilutive effect of existing unexercised stock
options.
Liquidity and Capital Resources
As of December 31, 1997, the Company had cash reserves on hand of
$8,232,000 as compared with $4,789,000 cash on hand as of December 31, 1996.
This cash is invested in money-market, Eurodollar, and other conservative
and liquid vehicles. In addition to current cash reserves, the Company's
loan agreement with American National Bank and Trust Company of Chicago was
renewed on December 31, 1996 and is now in effect until April 30, 1998.
This agreement is an unsecured line of credit with maximum borrowings of
$4,000,000, or 80% of eligible accounts receivable, whichever is less.
Interest on this loan is the Company's choice of either LIBOR plus 150 basis
points, or the Bank's prime rate. There were no borrowings against this
agreement as of either December 31, 1997 or 1996.
As of December 31, 1997, the Company had foreign income tax
carryforwards of $1,894,000, principally in Hong Kong, Mexico and the West
Indies. Approximately $1,485,000 of the foreign NOL carryforwards have no
expiration date. The company had no domestic income tax NOL carryforwards
remaining as of December 31, 1997.
Management feels that existing cash balances and the existing bank
line of credit will be sufficient to support its cash needs through 1998.
In 1997, the Company began converting its computer systems to be year 2000
compliant. Most of the Company's business software consists of externally
written, generic "packages" which have already been upgraded to be year 2000
compliant by their publishers. These upgraded versions have been made
available to the Company as part of its normal software licensing and/or
maintenance agreements. In certain cases, installation of the upgraded
systems may require additional purchased hardware or software which would be
recorded as assets and amortized. In addition to its main purchased business
software, but to a much lesser extent, the Company also has some internally
developed systems and subsystems which are in the process of being made year
2000 compliant. The Company does not believe it will encounter any material
problems with this conversion. Management does not feel that the cost of this
conversion will be material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this
report following Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors - The following table sets forth information with respect to each
director according to information furnished the Company by him:
Name, Age, and
Position Presently
Held within the Principal Occupations Director of
Company During Past Five Years Company Since
- ---------------------- ------------------------------- -------------
Bruce P. Anderson, 63 President, Sumer Incorporated 1997
Member of executive (electronic component
manufacturers' representative)
Carolyn A. Berry, 63 Private investor 1996
Member of audit
committee
Werner E. Neuman, 72 President of the Company 1955
President
Herbert L. Roth, 74 Self-employed as a financial 1976 (A)
Member of audit consultant and general manager
committee of several real-estate
partnerships
James A. Steinback, 54 Chairman, President & Treasurer 1991
Chairman of audit of Magnecraft Electric Co, Inc.
committee (manufacturer of electronic
components)
Gene F. Straube, 69 President, Straube Associates, 1983
Member of audit Inc. (electronics manufacturers'
committee representative)
Renato Tagiuri, 78 Professor Emeritus, Graduate 1986
Chairman of executive School of Business Administration,
compensation committee Harvard University; consultant in
management of human resources
(A) - Also a director of the Company from 1956 - 1962
Herbert L. Roth is also a director of Shelby Williams Industries, Inc. There
is no family relationship between any director or executive officer of the
Company. Herbert L. Roth is the brother of Walter Roth, who is Secretary of
the Company and a partner of the law firm of D'Ancona & Pflaum. During the
last fiscal year the Company retained D'Ancona & Pflaum as legal counsel and
such retainer is continuing during the current fiscal year.
Each director shall hold office until the next annual meeting of shareholders
or until their respective successors shall have been elected and qualified.
Executive Officers - The following table sets forth information about the
Company's executive officers:
Principal Occupation and Position and Office with
Name Age Registrant
- ------------------ --- -------------------------------------------------
Werner E. Neuman 72 President and Director since 1955; Treasurer
from 1955 until April, 1980, and again from
March, 1981 until August, 1981.
Thomas J. Buns 48 Vice President and Treasurer since April, 1991.
Michael P. Raleigh 36 Vice President of Engineering and Quality
Assurance since August, 1995. Vice President
of Engineering from July, 1993 to August, 1995.
Director of Engineering from May, 1992 to July,
1993.
Fernando A. Pena 40 Vice President of Manufacturing since January,
1997. Vice President and General Manager,
Corcom S.A. from May, 1992 to December, 1996.
General Manager, Corcom S.A. from December,
1988 to May, 1992.
The officers of the registrant are elected annually by the Board of
Directors at the first meeting of the Board held after each annual meeting of
shareholders. Each officer holds office until his successor shall have been
duly elected and shall have qualified or until his death or until he shall
resign or shall have been removed as provided in the next sentence. Any
officer may be removed by the Board whenever in its judgment the best
interests of the registrant would be served thereby. Mr. Neuman and Mr. Buns
have employment agreements with the registrant. These agreements are
described in Item 11 below.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company is advised, based on a review of forms submitted to it,
that Mr. Steinback filed two late reports under Section 16(a) of the
Securities Exchange Act of 1934 covering the late reporting of three
transactions during 1997; and Mr. Straube filed two late reports covering
three such transactions. In addition, it appears that Mr. Steinback may have
failed to file one report covering one transaction.
Item 11. Executive Compensation
There is shown below certain information concerning the compensation of each
executive officer of the Company whose total annual salary and bonus exceeded
$100,000 for 1997.
Summary Compensation Table
Awards
Securities
Underlying
Name & Principal Salary Bonus Options All Other
Position Year ($) ($) (shares) Comp ($) (1)
- ---------------- ----- ------- ------- ------- ---------
Werner E. Neuman 1997 230,000 178,450 0 5,679
President 1996 220,000 170,924 0 8,341
1995 212,000 155,000 10,000 8,098
Thomas J. Buns 1997 115,000 89,000 0 6,767
Vice President & 1996 110,000 88,160 0 7,630
Treasurer 1995 106,000 77,500 10,000 7,021
Michael P. Raleigh(2) 1997 100,000 77,400 0 4,428
Vice President of 1996 90,000 65,916 0 3,855
Engineering and 1995 80,000 22,422 5,000 1,209
Quality Assurance
Fernando A. Pena(3) 1997 110,000 85,400 0 2,203
Vice President of
Manufacturing
- -----------
(1) Consists of Company's "matching" contributions under its 401(k) plan;
payments under the Company's medical reimbursement plan, which covers all
officers of the Company who are employees and provides certain medical
benefits not to exceed $5,000 for any one participant (and his family) in any
fiscal year; and Company payments for $100,000 term life insurance for
officers (such officers have no interest in any cash surrender value under
such policies). Such payments were as follows for the years 1997, 1996, and
1995: 401(k) plan: Neuman: $2,375, $2,375, and $2,310; Buns: $1,437, $2,344,
$1,770; Raleigh $1,497, $1,686, $1,209; Pena (for 1997 only): $1,648. Medical
plan: Neuman: $1,311, $4,176, $4,185; Buns: $5,000, $5,000, $5,000; Raleigh:
$2,931, $2,169, $0; Pena (1997 only): $555. Insurance: Neuman: $1,993,
$1,790, $1,603; Buns: $330, $286, $251; Raleigh: $0, $0, $0; Pena (1997 only):
$0. The aggregate amount of any perquisites or other personal benefits was
less than 10% of the total of annual salary and bonus and is not included in
the above table.
(2) Mr. Raleigh became an executive officer upon his election to this position
in August, 1995. Prior to such election he was the Company's Vice President
of Engineering.
(3) Mr. Pena became an executive officer upon his election to this position
effective January, 1997. Prior to such election he was the Company's Vice
President and General Manager, Corcom S.A..
The Company has adopted an executive profit sharing bonus plan for 1998 based
upon meeting certain goals for pre-tax, pre-bonus earnings for 1998. If goals
are met, certain percentages of earnings will be allocated to a bonus pool to
be split by the executives in proportion to their individual salaries.
Similar plans were in effect for 1997, 1996, and 1995. Bonuses earned under
such plans are set forth in the above table.
Mr. Neuman has an agreement with the Company for his employment as President
at a minimum compensation of $150,000 per annum for a term to continue in
effect until terminated by either party on specified written prior notice.
In the event of the death of Mr. Neuman while in the employ of the Company,
the Company shall pay an amount equal to twice the annual basic compensation
in effect at the time of death to Mr. Neuman's wife, children or estate. Such
amount shall be paid in equal monthly installments over 24 months following
the month of death. Upon a termination of Mr. Neuman's employment for any
reason, other than death, subsequent to a change in control (as defined), Mr.
Neuman shall be entitled to all amounts then due to him under the agreement
and to a lump sum termination payment equal to 250% of the average of his
annual minimum and bonus compensation for services during the three years
preceding such termination of employment.Upon written notice by Mr. Neuman to
the Company that a change in control is intended or contemplated or shall
occur in the future, the Company will be obligated to place in escrow the
amounts necessary to fund the amounts due to Mr. Neuman as described in the
preceding sentence. Mr. Buns has an agreement with the Company for his
employment at a minimum basic compensation of $80,000 per annum. The
agreement may be terminated by either party on six months prior written
notice. Upon a termination of employment for any reason by the Company,
other than cause (as defined), or death, subsequent to a change in control
(as defined), Mr. Buns shall be entitled to all amounts then due him and to a
lump sum termination payment equal to 100% of the average of his annual
minimum and bonus compensation for services during the year preceding such
termination.
Employee Stock Options
The Company has stock option plans under which stock options are
granted to key employees. All options are incentive stock options and are
granted at 100% of fair market value at time of grant, except that options
granted to Werner E. Neuman are granted at 110% of fair market value at time
of grant. All options become exercisable 40% after one year, 60% after two
years, 80% after three years, and 100% after four years after date of grant,
and expire five years after date of grant.
No individual grants of stock options were made during the last
completed fiscal year to any of the executive officers named in the summary
compensation table.
Shown below is information with respect to exercises of stock options
during the last completed fiscal year by the executive officers named in the
summary compensation table and the fiscal year-end value of unexercised
options.
Aggregated Option Exercises in the Last Fiscal Year and FY-End Option Values
Value of
Number of Shares Unexercised In-
Underlying Unexercised the-money Options
Shares Options at FY End (#) at FY End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable
- ----------- ------------ -------- --------------------- ------------------
Werner E.
Neuman 0 0 42,000/8,000 409,000/78,000
Thomas J.
Buns 6,000 39,750 40,000/8,000 390,000/78,000
Michael P.
Raleigh 0 0 9,000/4,000 88,000/39,000
Fernando A.
Pena 5,000 41,875 11,000/4,000 107,000/39,000
Prior to May 22, 1997, the Company paid each director who is not an
employee of the Company the sum of $500 plus expenses for each board meeting
physically attended, plus an annual retainer of $5,000 payable in equal
quarterly installments. Commencing May 22, 1997, these sums increased to
$1,000 and $6,000 respectively.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following information is furnished as of March 11, 1998 (except as
otherwise indicated) to indicate beneficial ownership of the Company's common
stock by each director, by certain executive officers of the Company, by all
directors and executive officers as a group, and by each person known to the
Company to be the beneficial owner of more than 5% of the Company's
outstanding common stock Such information has been furnished to the Company
by the indicated owners. Unless otherwise indicated, beneficial ownership is
direct.
Amount
Name (and address if more than 5%) Beneficially
of Beneficial Owner Owned Percent
- ---------------------------------- ------------ --------
Directors:
Bruce P. Anderson............... 100 Less than 1%
Carolyn A. Berry................ 583,000 (A) 15.2%
Omicron Capital Partners ("Omicron")
980 Ikena Circle
Honolulu, HI 96821
Werner E. Neuman................ 972,899 (B) 25.3%
c/o Corcom, Inc.
844 E. Rockland Rd.
Libertyville, IL 60048
Herbert L. Roth................. 34,500 (C) Less than 1%
James A. Steinback.............. 259,500 (D) 6.8%
MSD Inc.
211 Waukegan Rd.
Northfield, IL 60093
Gene F. Straube................. 56,454 (E) 1.5%
Renato Tagiuri.................. 55,750 (F) 1.5%
Additional Executive Officers:
Thomas J. Buns.................. 54,000 (G) 1.4%
Michael P. Raleigh.............. 14,310 (H) Less than 1%
Fernando A. Pena................ 19,000 (I) Less than 1%
All directors and executive officers
as a group...................... 2,049,513 (J) 51.9%
Additional 5% owners:
Dimensional Fund Advisors, Inc.. 211,000 (K) 5.5%
("Dimensional")
1299 Ocean Av.
Santa Monica, CA 90401
FMR Corp..................... 381,400 (L) 10.0%
82 Devonshire St.
Boston, MA 02109
(A) Shares are owned by Omicron, a general partnership whose partners are
Carolyn A. Berry individually and as personal representative of the estate of
George B. Berry.
(B) Includes 28,000 stock options deemed exercised solely for purposes of
showing total shares owned by Mr. Neuman. Also includes 33 shares owned by
Mr. Neuman's spouse, as to which he disclaims beneficial ownership.
(C) Includes 12,000 stock options deemed exercised solely for purposes of
showing total shares owned by Mr. Roth.
(D) Consists of 253,500 shares owned by a corporation of which Mr. Steinback
is the controlling stockholder, and 6,000 stock options deemed exercised
solely for purposes of showing total shares owned by Mr. Steinback.
(E) Consists of 26,750 shares owned by Mr. Straube, 23,704 shares owned by
Straube Associates, Incorporated, of which Mr. Straube is president, a
director and majority shareholder, and 6,000 stock options deemed exercised
solely for purposes of showing total shares owned by Mr. Straube. Does not
include 1,100 shares held by Straube Associates Profit Sharing Plan.
(F) Includes 18,000 stock options deemed exercised solely for purposes of
showing total shares owned by Mr. Tagiuri.
(G) Includes 28,000 stock options deemed exercised solely for purposes of
showing total shares owned by Mr. Buns.
(H) Includes 10,000 stock options deemed exercised solely for purposes of
showing total shares owned by Mr. Raleigh.
(I) Includes 14,000 stock options deemed exercised solely for purposes of
showing total shares owned by Mr. Pena.
(J) Includes 122,000 stock options deemed exercised solely for purposes of
showing total shares owned by such group.
(K) The Company has been advised by communication from Dimensional dated
February 6, 1998, as follows: The above holding was as of December 31, 1997
and Dimensional, a registered investment advisor, is deemed to have
beneficial ownership of 211,000 shares, all of which are held in portfolios
of DFA Investment Dimensions Group, Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware business
trust, or the DFA Group Trust and DFA Participation Group Trust, investment
vehicles for qualified employee benefit plans, all of which Dimensional
serves as investment manager. Dimensional disclaims beneficial ownership of
all such shares.
(L) Schedule 13F-E shows no voting power and sole power to dispose or direct
the disposition of 381,400 shares at December 31, 1997; and that Fidelity
Management & Research Company, a wholly owned subsidiary of FMR Corp. and an
investment advisor, is the beneficial owner of 381,400 shares as a result of
acting as investment advisor to various investment companies.
Note:
The Merger Agreement described in Item 1 under "Recent Development"
will, if consummated, result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
Gene F. Straube, a director of the Company, is president, a director
and majority shareholder of Straube Associates, Incorporated ("Associates")
and Straube Associates Mountain States, Incorporated ("Mountain"), sales
representatives of the Company. Commissions received by Associates and
Mountain from the Company for 1997 were approximately $187,980 and $107,248,
respectively, and it is anticipated that the sales representation will
continue during 1998. Associates and Mountain are compensated on the same
basis as other representatives of the Company. The Company is advised by
Associates and Mountain that commissions received by Associates and Mountain
from the Company during their last fiscal years were in excess of 5% of their
consolidated gross revenue for their last full fiscal years and that such
commissions during their current fiscal years are also expected to exceed 5%
of their consolidated gross revenues for their last full fiscal years.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The lists of financial statements and schedules are submitted in a
separate section of this report following Item 14. The exhibit index
immediately precedes the index.
(b) No report on Form 8-K was filed during the last quarter of the period
covered by this report. Subsequent to the end of the period, the Company
filed a Current Report on Form 8-K (date of report March 10, 1998), covering
items 5 and 7 to report the execution of the Merger Agreement.
(c) List of exhibits: see exhibit index immediately preceding exhibits
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8 AND ITEM 14 (a)(1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1997
CORCOM, INC.
LIBERTYVILLE, ILLINOIS
<PAGE>
CORCOM, INC. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page (s)
_________
Report of Independent Accountants F-2
The following consolidated financial statements of Corcom, Inc.
and Subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1997 and 1996 F-3
Consolidated Statements of Income for each of the three
years ended December 31, 1997 F-4
Consolidated Statements of Stockholders' Equity for each
of the three years ended December 31, 1997 F-5
Consolidated Statements of Cash Flow for each of the
three years ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7 to F-13
The following consolidated financial statement schedule
of Corcom, Inc. and Subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts F-14
All other schedules for which provision is made in the applicable regulation
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders and Board of Directors
Corcom, Inc.
Libertyville, Illinois
We have audited the consolidated financial statements and related financial
statement schedules of Corcom, Inc. and Subsidiaries listed in the index on
page F-1 of this Form 10-K. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and related 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 and related
schedules are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements and related schedules. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Corcom, Inc. and
Subsidiaries as of December 31, 1997 and 1996 and the consolidated results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included herein.
S/S Coopers & Lybrand, L.L.P.
Chicago, Illinois
February 27, 1998
F-2
<PAGE>
CORCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
(Amounts in thousands, except share information)
ASSETS 1997 1996
Current Assets:
Cash and cash equivalents $8,232 $ 4,789
Accounts receivable, net of allowance for 4,599 4,688
uncollectible accounts of $60 in 1997 and
$76 in 1996
Inventories 6,192 6,691
Deferred income tax asset, net 885 2,000
Other current assets 596 682
Total current assets 20,504 18,850
Property, plant and equipment:
Land 340 340
Buildings and improvements 844 936
Leasehold improvements 456 516
Machinery and equipment 16,206 15,017
Furniture and fixtures 1,477 1,582
19,323 18,391
Less: accumulated depreciation 14,849 14,014
4,474 4,377
Total assets $24,978 $23,227
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 62 $ 59
Accounts payable 767 1,368
Other accrued liabilities 2,077 1,728
Total current liabilities 2,906 3,155
Long-term debt, net of current maturities 40 102
Commitments (Note 7)
Stockholders' Equity:
Common stock, no par value; 10,000,000 14,134 14,057
shares authorized; 3,863,543 (1997) and
3,815,543 (1996) issued and outstanding
Retained earnings 9,026 6,023
Accumulated exchange rate adjustments (283) (110)
Less treasury shares at cost ; 98,300 (1997) (845) 0
and 0 (1996)
Total stockholders'equity 22,032 19,970
Total liabilities and $24,978 $23,227
stockholders' equity
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CORCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the three years ended December 31, 1997
(Amounts in thousands, except share information)
1997 1996 1995
Net Sales $36,788 $33,166 $30,660
Costs and expenses:
Cost of sales 22,394 20,582 19,287
Engineering expenses 1,333 1,220 1,247
Selling , administrative and 8,344 7,799 7,095
other expenses
32,071 29,601 27,629
Operating income 4,717 3,565 3,031
Interest expense 10 16 71
Interest income (306) (134) (7)
Income before provision for income 5,013 3,683 2,967
taxes
Provision (benefit) for income taxes 2,010 (1,789) 181
Net income $3,003 $5,472 $2,786
Earnings-Per-Share Data:
Net Income:
Basic EPS $.79 $1.45 $.76
Diluted EPS $.76 $1.38 $.72
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CORCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the three years ended December 31, 1997
(Amounts in thousands except share information)
Common Stock Cost of
Issued Retained Accumul. Common
------------------- Earnings Exch Rate Stock in
Shares Amount (Deficit) Adjustmts Treasury
---------- -------- --------- --------- --------
Balance at
January 1, 1995 3,619,543 $ 13,749 $ (2,235) $ (82) $ 0
Stock options 121,000 193
exercised for $1.00
to $2.50 per share
Net income 2,786
Exchange rate adjustments 54
Balance at
December 31, 1995 3,740,543 13,942 551 (28) 0
Stock options 75,000 115
exercised for $1.00
to $3.00 per share
Net income 5,472
Exchange rate adjustments (82)
Balance at
December 31, 1996 3,815,543 14,057 6,023 (110) 0
Purchase of 98,300
shares for treasury (845)
Stock options 48,000 77
exercised for $1.13
to $3.25 per share
Net income 3,003
Exchange rate adjustments (173)
Balance at
December 31, 1997 3,863,543 $14,134 $9,026 $(283) $(845)
The accompanying notes are an integral part of the consolidated financial
statements
F-5
<PAGE>
CORCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three years ended December 31, 1997
(Amounts in Thousands)
____
1997 1996 1995
Cash flows from operating activities:
Net income $3,003 $5,472 $2,786
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for uncollectible accounts 26 33 77
receivable
Restructuring costs (36) (25) (263)
Depreciation 1,189 1,028 1,105
Deferred tax expense (benefit) 1,117 (2,000)
Changes in operating assets and
liabilities:
Trade accounts receivable 63 436 (1,009)
Inventories 326 298 (599)
Other current assets 86 (151) 41
Accounts payable (601) 345 (212)
Accrued liabilities 385 63 696
Net cash provided by 5,558 5,499 2,622
operating activities
Cash flows from investing activities:
Expenditures for property, plant and (1,288) (1,657) (1,454)
equipment
Net cash used in investing (1,288) (1,657) (1,454)
activities
Cash flows from financing activities:
Common stock purchased for treasury (845)
Net payments under bank line of credit (483)
Stock options exercised 77 115 193
Principal payments on long-term debt (59) (55) (63)
Decrease in cash overdraft 0 0 (130)
Net cash (used in) provided (827) 60 (483)
by financing activities
Net increase in cash and cash equivalents 3,443 3,902 685
Cash and cash equivalents at beginning 4,789 887 202
of year
Cash and cash equivalents at end of year $8,232 $4,789 $887
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 10 $ 16 $ 71
Income taxes 824 223 181
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
CORCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Corcom, Inc.
and its wholly-owned subsidiaries (the Company). Intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less as cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The first-in,
first-out method is used to determine cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
related assets or terms of the related leases for leasehold improvements, if
shorter. Estimated useful lives range from three to eight years.
Amounts incurred for maintenance and repairs are charged to operations as
incurred. Expenditures for improvements are capitalized. Upon sale or
retirement, the related cost and accumulated depreciation are removed from
the respective accounts and any resulting gain or loss is included in the
consolidated statements of income.
Treasury Stock
In March, 1997 the Board of Directors authorized the repurchase, at
management's discretion, of up to 200,000 shares of the Company's stock.
Shares repurchased under this authorization were used to offset the dilution
caused by the Company's employee stock option plan. The Company's repurchases
of shares of common stock are recorded as "Treasury Stock" and result in a
reduction of "Stockholders' Equity."
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes". The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred income
taxes are recorded to reflect the tax consequences on future years of
differences between the basis of assets and liabilities for income tax and
for financial reporting purposes using enacted tax rates in effect for the
year in which the differences are expected to reverse. In addition, the
amounts of any future tax benefits are reduced by a valuation allowance to the
extent such benefits are not expected to be fully realized.
Translation of Foreign Currencies
The Company measures foreign assets, liabilities, equity, and results of
operations in the functional currencies of the countries in which it operates
except for its operations in Mexico for which the U.S. dollar is the
functional currency. The Company translates foreign currency financial
statements by translating balance sheet accounts at the current exchange rate
in effect at year-end and income statement accounts at the average exchange
rates during the year.
Translation adjustments result from the process of translating foreign
currency financial statements into U.S. dollars. These translation
adjustments, which are generally not included in the determination of net
income, are reported separately as a component of stockholders' equity.
F-7
<PAGE>
Revenue Recognition
Sales to customers are recorded at the time of shipment net of estimated
discounts and allowances.
Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of stock options. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income Summary" (SFAS 130) for
financial statements issued for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. Management does not
believe this statement will have a material impact on its financial
statements.
The Company will implement the provisions of Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131) for financial statements issued for periods beginning
after December 15, 1997. SFAS 131, which is based on the management approach
to segment reporting, includes requirements to report selected segment
information quarterly and entity-wide disclosures about products and services,
major customers, and the material countries in which the entity holds assets
and reports revenues. Management does not believe this statement will have
a material impact on its financial statements.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS 132), effective for
fiscal years beginning after December 15, 1997, standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligation and fair values
of plan assets and eliminates certain disclosures that are no longer useful.
Management has yet to determine the impact of this pronouncement on its
financial statements.
2. Inventories
The Company's inventories consist of the following at December 31 (in
thousands):
1997 1996
Finished products $2,188 $2,693
Raw materials and work-in-process 4,004 3,998
$6,192 $6,691
F-8
<PAGE>
3. Accrued Liabilities
Accrued liabilities consist of the following at December 31 (in thousands):
1997 1996
Accrued payroll, incentive bonus $1,430 $1,045
and commissions
Other 647 683
$2,077 $1,728
4. Bank Notes Payable
The Company has a loan agreement with a bank which provides for a revolving
line of credit through April 30, 1998, of up to $4,000,000, limited by a
borrowing base calculated as a percentage of eligible accounts receivable,
with interest at the bank's base rate (8.5% at December 31, 1997) or LIBOR
plus 1.5%. There were no borrowings in 1997 or 1996. Under the provisions
of the agreement the Company is subject to certain covenants which, among
other things, restrict the payment of dividends to a calculation based upon
net income.
5. Income Taxes
Income before provision for income taxes consisted of the following as of
December 31:
1997 1996 1995
(In thousands)
Domestic $4,349 $3,138 $2,184
Foreign 664 545 783
$5,013 $3,683 $2,967
The provision (benefit) for income taxes is comprised of the following:
1997 1996 1995
(In thousands)
Current income tax expenses:
State $ 41 $ 1 $ 1
Domestic 615 65 80
Foreign 237 145 100
$ 893 $ 211 $ 181
Deferred income tax
expenses(credits):
Domestic 1,117 (2,000) --
$ 2,010 $(1,789) $ 181
The provision (benefit) for income tax differs from a provision computed at
the U.S. statutory rate as follows:
1997 1996 1995
(In thousands)
Statutory rate provision $1,704 $1,252 $1,008
State taxes, net 256 188 151
Effect of utilization of net (1,309) (998)
operating loss carryforwards
Reduction of valuation allowance (2,000)
Other 50 80 20
$2,010 $ (1,789) $ 181
F-9
<PAGE>
The components of the deferred tax asset and the tax effect are as follows at
December 31:
1997 1996
--------------------- ------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
---------- -------- ----------- ---------
Inventory valuation $ 479 $ 192 $ 322 $ 129
Fixed assets 72 29 158 63
Reserve for lease 57 23 94 37
cancellation
Self-insurance 30 12 30 12
Allowance for doubtful 60 24 60 24
accounts
Foreign NOL carryforwards 1,894 388 1,296 280
Domestic NOL -- -- 3,870 1,548
carryforwards
Other 61 24 58 24
Alternative minimum tax -- 581 -- 163
credit
Subtotal $ 2,653 $ 1,273 $ 5,888 $ 2,280
Valuation allowance (388) (280)
Total $ 885 $ 2,000
As of December 31, 1997, the Company maintained a valuation allowance with
respect to the deferred tax asset as a result of the uncertainty of ultimate
realization of foreign NOL carryforwards. The Company had foreign income tax
carryforwards of $1,894,000, principally in Hong Kong, Mexico and the West
Indies. Approximately $1,485,000 of the foreign NOL carryforwards have no
expiration date.
6. Employee Benefit Plans
The Company has established certain stock-based compensation plans, described
below, for the benefit of certain officers, key employees, and directors. The
Company accounts for these plans under APB Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related Interpretations. Accordingly,
no compensation expense has been recognized related to these plans. Under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), compensation expense is measured based
on the fair value method. The Company has adopted the disclosure-only
provisions of SFAS 123.
The Company has stock option plans which provide for the granting of options
to certain officers, key employees, and directors. The option price per
share is not less than the market price at the date of grant. Options granted
under the officer and key employee plan become exercisable at 40% one year
from date of grant and an additional 20% per year thereafter. Options granted
under the directors' plan become exercisable six months after date of grant.
All unexercised options expire five years after the date of grant.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: (1)
expected volatility of 57.6%, (2) risk-free interest rate of 6.9% in 1995
and 5.9% in 1994, and (3) expected life of 4.13 to 4.26 years. The Company
has declared no cash dividends during 1997, 1996, and 1995.
There were no stock options granted in 1997. The weighted average fair value
of stock options, calculated using the Black-Scholes option pricing model,
granted during 1996 and 1995, respectively, was $3.68 and $1.63. Had the
Company elected to apply the provisions SFAS 123 regarding recognition of
compensation expense to the extent of the calculated fair value of
compensatory options, or shares, the Company's net income would have been
reduced to the following pro-forma amounts:
1996 1995
Net Income
As reported $5,472,000 $2,786,000
Pro Forma $5,361,600 $2,671,600
A summary of the status of the Company's stock options as of December 31,
1997, 1996, and 1995 and changes during the year ended on those dates is
presented below:
F-10
<PAGE>
1997 1996 1995
------------------ ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding 248,000 $2.55 293,000 $1.84 350,000 $1.49
at beginning
of year
Granted 30,000 $7.00 70,000 $3.19
Exercised 48,000 $1.61 75,000 $1.54 121,000 $1.60
Forfeited
Expired 6,000 $2.25
Outstanding 200,000 $2.78 248,000 $2.55 293,000 $1.84
at end of
year
Options 168,000 $2.83 178,000 $2.71 168,000 $1.65
exercisable
at year end
Under the Company's defined contribution incentive savings plan, covering
substantially all United States employees, Company contributions are based on
varying percentages of the participants' total contributions. The aggregate
contributions made by the Company to the savings plan and charged to
operations were $42,000 (1997), $38,000 (1996), and $34,000 (1995).
7. Leases
The Company leases certain facilities and equipment under operating leases.
The leases generally require the Company to pay real estate taxes, insurance,
and maintenance costs. Rental expense amounted to $544,000 (1997), $547,000
(1996), and $597,000 (1995).
Future minimum rental commitments as of December 31, 1997 for noncancelable
leases (principally real estate) are as follows:
(In thousands)
1998 $ 528
1999 317
2000 188
$1,033
8. Business Information by Geographic Area
The Company's operations consist of one business segment: the design,
manufacture, and sale of radio frequency interference filters for digital
electronic equipment to the commercial, military, and facility filter markets.
Operations are conducted principally in the United States, Mexico, and
Germany. The net assets of the Company's operations located outside the
United States at December 31 were: $2,727,000 (1997), $3,080,000 (1996), and
$2,660,000 (1995).
Foreign sales and operations may be subject to various risks including, but
not limited to, possible unfavorable exchange rate fluctuations, governmental
regulations (including import and export controls), restrictions on currency
repatriation and labor relations laws.
Intercompany transactions consist of the transfer of raw material between the
United States parent and its manufacturing subsidiary and the purchase of
finished goods by the United States parent or its German subsidiary. Raw
materials are transferred at cost. Finished goods are purchased at
predetermined transfer prices that allow the parent or its manufacturing
subsidiary to recover cost plus an operating profit.
No single customer accounted for 10% of net sales for any of the years
presented.
F-11
<PAGE>
Interest and dividend income, interest expense and general corporate expenses
are not allocated to specific geographic areas. Corporate assets consist of
cash and cash equivalents.
( In Thousands)
United States(A) Germany
1997 1996 1995 1997 1996 1995
Revenues:
Net sales $28,901 $24,935 $24,098 $7,650 $7,445 $5,424
Intercompany 5,004 5,840 4,013 28 8 3
transfers
Geographic area $33,905 $30,775 $28,111 $7,678 $7,453 $5,427
totals
Operating income $5,311 $4,411 $3,458 $119 $108 $215
(loss)
Identifiable assets
at December 31:
Operating Assets $13,710 $14,877 $13,249 $1,815 $2,101 $1,640
Corporate Assets
Total Assets
Other Consolidated
1997 1996 1995 1997 1996 1995
Revenues:
Net sales $237 $786 $1,138 $36,788 $33,166 $30,660
Intercompany 4,287 3,607 3,079 9,319 9,455 7,095
transfers
Geographic area $4,524 $4,393 $4,217 $46,107 $42,621 $37,755
totals
Elimination of (9,319) (9,455) (7,095)
intercompany
transfers
Net sales $36,788 $33,166 $30,660
Operating income $287 $75 $255 $5,717 $4,594 $3,928
Interest income 296 118 (64)
(expense)
General corporate (1,000) (1,029) (897)
expenses
Income before income $5,013 $3,683 $2,967
taxes
Identifiable assets
at December 31:
Operating Assets $1,221 $1,460 $1,618 $16,746 $18,438 $16,507
Corporate Assets 8,232 4,789 887
Total Assets $24,978 $23,227 $17,394
(A) Direct export sales of $2,046,000, $1,259,000, and $1,126,000 for 1997,
1996, and 1995, respectively, are included under "United States."
F-12
<PAGE>
9. Earnings Per Share Data
The following is a reconciliation of the numerators and the denominators of
the basic and diluted EPS computation for net income.
Weighted
Net Avg
Income Shares Per Share
(Numerator) (Denominator) Amounts
Year ended December 31, 1997:
Basic EPS
Income available to common $3,003,000 3,817,217 $ .79
stockholders
Effect of Dilutive Options 134,291
Diluted EPS
Income available to common $3,003,000 3,951,508 $ .76
stockholders plus assumed
conversions
Year ended December 31, 1996:
Basic EPS
Income available to common $5,472,000 3,784,844 $1.45
stockholders
Effect of Dilutive Options 172,000
Diluted EPS
Income available to common $5,472,000 3,956,844 $1.38
stockholders plus assumed
conversions
Year ended December 31, 1995:
Basic EPS
Income available to common $2,786,000 3,686,605 $.76
stockholders
Effect of Dilutive Options 180,004
Diluted EPS
Income available to common $2,786,000 3,866,609 $.72
stockholders plus assumed
conversions
10. Subsequent Event [unaudited]
On March 10, 1998 the Company entered into an Agreement and Plan of Merger
by and among Communications Instruments, Inc., a North Carolina corporation
("CII"), RF Acquisition Corp., an Illinois corporation and wholly owned
subsidiary of CII ("Merger Sub") and the Company (the "Merger Agreement").
CII is owned by Code Hennessy & Simmons, LLC, a Chicago based private
investment firm, and CII management. Pursuant to the Merger Agreement, (a)
CII will acquire all of the Company's issued and outstanding shares of
common stock for $13.00 per share in cash, or approximately $51.2 million,
and (b) Merger Sub will merge with and into the Company (the "Merger"), with
the Company being the surviving corporation in the Merger.
The closing of the Merger is subject to the satisfaction of certain
conditions, including, among other matters, approval by the holders of two-
thirds of the issued and outstanding shares of common stock of the Company,
certain regulatory approvals and receipt by CII of debt financing necessary
to consummate the Merger, a commitment for which has been provided by Bank of
America National Trust and Savings Association. This financing is subject
to certain conditions, including the execution of a definitive credit
agreement satisfactory to Bank of America.
CII also entered into an agreement with Werner E. Neuman, the President and
Chairman of the Board of Directors of the Company, and James A. Steinback, a
Director of the Company, whereby such individuals agreed to vote in favor of
the Merger. These two individuals hold approximately 31% of the shares
outstanding.
F-13
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CORCOM, INC. AND SUBSIDIARIES
Column A Column B Column C Column D Column E
------------------- ---------- --------- --------- ----------
Additions Deductions
--------- ----------
Balance at Charged to Balance at
Beginning Costs and End
Description of Period Expenses Describe Period
------------------- ---------- ---------- --------- ----------
Year ended December 31, 1997:
Allowance for doubtful $76 $26 $42(A) $60
accounts
Reserve for excess and 558 252 319(B) 491
obsolete inventories
Year ended December 31, 1996:
Allowance for doubtful $80 $33 $37(A) $76
accounts
Reserve for excess and 583 386 411(B) 558
obsolete inventories
Year ended December 31, 1995:
Allowance for doubtful $145 $77 $142(A) $80
accounts
Reserve for excess and 523 489 429(B) 583
obsolete inventories
Note A - Uncollectible accounts written off, net of recoveries
Note B - Obsolete inventories disposed of and written off
F-14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 18, 1998
CORCOM, INC.
(Registrant)
By:
s/s Thomas J. Buns
Thomas J. Buns
Vice President & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
WERNER E. NEUMAN* President and Director )
(Werner E. Neuman) (Principal Executive Officer) )
)
THOMAS J. BUNS Vice President and Treasurer )
(Thomas J. Buns) (Principal Financial and )
Accounting Officer) )
)
BRUCE P. ANDERSON* Director )
(Bruce P. Anderson) )
)
CAROLYN A. BERRY* Director )
(Carolyn A. Berry) )
Director )
) March 18, 1998
HERBERT L. ROTH* Director )
(Herbert L. Roth) )
)
JAMES A. STEINBACK* Director )
(James A. Steinback) )
)
GENE F. STRAUBE* Director )
(Gene F. Straube) )
)
RENATO TAGIURI* Director )
(Renato Tagiuri) )
* By Thomas J. Buns
Thomas J. Buns
Attorney-in-fact
<PAGE>
Exhibit Index
Exhibit
No. Description
2.1 Agreement and Plan of Merger dated as of March 10, 1998 by and among
Corcom, Inc., Communications Instruments, Inc. and RF Acquisitions Corp,
filed as Exhibit 2.1 to registrant's Current Report on Form 8-K (date of
report March 10, 1998) and hereby incorporated by reference.
3.1 Registrant's Articles of Incorporation and all amendments thereto, filed
as Exhibit 3.1 to registrant's 10-Q for the quarter ended July 2, 1994
and hereby incorporated by reference.
3.2 Registrant's By-laws, as amended, filed as Exhibit 3 (ii) to registrant's
Form 10-Q for the quarter ended July 3, 1993 and hereby incorporated by
reference.
10.1 Office space lease between registrant and Komotsu Dresser Corporation,
filed as Exhibit 10.1 to registrant's Form 10-Q for the quarter ended
July 2, 1994 and hereby incorporated by reference.
10.2* Medical reimbursement plan, filed as Exhibit 13.11 to registrant's
registration statement on Form S-1, Reg. No. 2-67474, and hereby
incorporated by reference.
10.3* CORCOM, Inc. 1985 Key Employee's Incentive Stock Option Plan, filed as
Exhibit 10.7 to registrant's Form 10-K for 1985, and hereby incorporated
by reference.
10.4* CORCOM, Inc. 1991 Director's Stock Option Plan, filed as Exhibit 10.5 to
registrant's Form 10-K for 1990, and hereby incorporated by reference.
10.5* Amendment to CORCOM, Inc. 1991 Director's Stock Option Plan as adopted
in March, 1992, filed as Exhibit 10.7 to registrant's Form 10-K for
1991, and hereby incorporated by reference.
10.6* Amendments to 1985 Key Employees' Incentive Stock Option Plan, as
adopted in February, 1987, filed as Exhibit 10.9 to registrant's Form
10-K for 1986 and hereby incorporated by reference.
10.7* CORCOM, Inc. 1988 Key Employees' Incentive Stock Option Plan, filed as
Exhibit 10.13 to registrant's Form 10-K for 1987, and hereby
incorporated by reference.
10.8* Employment agreement between Werner E. Neuman and registrant, dated
November 9, 1988, filed as Exhibit 10.15 to registrant's Form 10-K for
1988, and hereby incorporated by reference.
10.9* Amendment to employment agreement between Werner E. Neuman and
registrant dated August 15, 1990, filed as Exhibit 19.2 to registrant's
Form 10-Q for the quarter ended September 29, 1990 and hereby
incorporated by reference.
10.10* Employment agreement between Thomas J. Buns and registrant dated
November 18, 1991, filed as exhibit 10.19 to registrant's Form 10-K for
1991 and hereby incorporated by reference.
10.11* Executive bonus plan for 1995, filed as Exhibit 10.11 to registrant's
Form 10-K for 1994 and hereby incorporated by reference.
10.12* Executive bonus plan for 1996, filed as Exhibit 10.10 to registrant's
Form 10-K for 1995 and hereby incorporated by reference.
10.13* Executive bonus plan for 1997, filed as Exhibit 10.14 to registrant's
Form 10-K for 1996 and hereby incorporated by reference.
10.14* Executive bonus plan for 1998.
10.15* CORCOM, Inc. 1994 Directors' Stock Option Plan, filed as Exhibit 10.24
to registrant's Form 10-K for 1993, and hereby incorporated by
reference.
10.16 Credit Agreement with American National Bank and Trust Company of
Chicago dated December 31, 1996, filed as Exhibit 10.16 to registrant's
Form 10-K for 1996 and hereby incorporated by reference.
10.17* CORCOM, Inc. 1997 Key Employees' Incentive Stock Option Plan, filed as
Exhibit 10.1 to registrants Form 10-Q for the quarter ended June 28,
1997 and hereby incorporated by reference
10.18 ABN AMRO engagement letter dated March 7, 1996 as amended January 16,
1998
22.1 Significant subsidiaries of the registrant are listed below:
Subsidiary State or Other
Jurisdiction of Incorporation or Organization
Corcom S.A. de C.V Mexico
23.1 Consent of Coopers & Lybrand, LLP
24.1 Power of Attorney
27.1 Financial Data Schedule (EDGAR only)
99.1 Voting Agreement dated as of March 10, 1998 by and among RF Acquisition
Corp, James A. Steinback, and Werner E. Neuman filed as Exhibit 99.1 to
registrant's Current Report on Form 8-K (date of report March 10, 1998)
and hereby incorporated by reference.
99.2 Press Release dated March 11, 1998 filed as Exhibit 99.2 to registrant's
Current Report on Form 8-K (date of report March 10, 1998) and hereby
incorporated by reference
* - Management contract or compensatory plan
<PAGE>
Exhibit 10.14
1998 Executive Bonus Plan
If the pre-tax, pre-bonus earnings of Corcom, Inc. exceed $3,939,000, the
bonus pool is six percent (6%) of such pre-tax, pre-bonus earnings. In
addition, once Corcom's pretax, pre-bonus earnings exceed $5,000,000, there
will be allocated an additional three percent (3%) of all pre-tax, pre-bonus
earnings to the bonus pool.
<PAGE>
Exhibit 10.18
ABN AMRO engagement letter dated March 7, 1996 as amended January 16, 1998
Chicago Dearborn Company
One First National Plaza, Suite 3350
Chicago, IL 60603
March 7,1996
Mr. Werner E. Neuman
President
Corcom, Inc.
844 East Rockland Road
Libertyville, IL 60048-3375
Dear Mr. Neuman:
The Chicago Dearborn Company ("Chicago Dearborn") is pleased to set forth
the terms of this engagement letter agreement (the "Agreement") relating to
its retention for financial advisory services by Corcom, Inc. ("Corcom").
1. Description of Engagement. Chicago Dearborn agrees to act as the
exclusive financial advisor and agent for Corcom to provide financial
advisory and investment banking services in connection with a financial
evaluation of Corcom and a review of financial and strategic alternatives.
The terms of this Agreement shall extend from the date of this letter for a
period of twelve months thereafter, and may be extended on a quarter-to-
quarter basis by mutual written consent of the parties hereto, hereinafter
referred to as the "Term".
2. Services to be Provided. In connection with its financial evaluation
of Corcom, a review of financial and strategic alternatives and a Transaction,
as defined herein, Chicago Dearborn will, or will stand ready to:
Review the businesses, operations and assets of Corcom; Analyze the historical
and projected financial performance of Corcom;
Prepare an information package describing the business and prospects of
Corcom;
Formulate a strategy for discussions and negotiations with potential partners;
Compile a list of potential partners and, at Corcom's request, contact
potential partners to present the opportunity and distribute the information
package;
Coordinate and assist in due diligence meetings with potential partners;
Assist in the negotiations and execution of a definitive purchase agreement
pursuant to a Transaction, as defined herein
Render an opinion to the Board of Directors of Corcom, if requested, as to the
fairness of any Transaction, as defined herein, to the shareholders of Corcom
from a financial point of view; and
Provide, as deemed appropriate by Chicago Dearborn, additional financial
advisory services related to a Transaction, as defined herein.
3. Compensation. In consideration of Chicago Dearborn providing, or
standing ready to provide, the financial advisory services described in
paragraph 2 above, Corcom agrees to pay to Chicago Dearborn the following:
a) a non-refundable Retainer of $25,000 per quarter, due and payable in
advance, with the first quarter payable upon signing of this Agreement, and
with such Retainer to be credited against any Financial Advisory Fee payable
pursuant to paragraph 3b below, and
b) in the event there is a transaction or series of transactions
("Transaction") whereby, directly or indirectly, control or a material
interest in the stock or assets of Corcom is transferred for consideration,
including, without limitation, by means of a merger, consolidation, sale of
assets, sale of stock, stock or rights offering, tender or exchange offer,
leveraged buyout, the formation of a joint venture or partnership,
recapitalization, restructuring, business combination or investment by
another entity involving Corcom, Corcom agrees to pay Chicago Dearborn a
Financial Advisory Fee equal to:
(i) $150,000 on the first $10.0 million of the Transaction Value,
as defined in paragraph 4 below, and
(ii) 1.50% of the Transaction Value, as defined in paragraph 4
below, in excess of $10.0 million.
c) If so requested by the Board of Directors of Corcom, Chicago Dearborn
shall render one or more opinions ("Opinions"), verbal or written, regarding
the terms of any proposed Transaction, from a financial point of view. In such
an event, Corcom will pay Chicago Dearborn a one time opinion fee (the
"Opinion Fee") of $100,000 in cash upon delivery of the first of such
Opinions. Corcom agrees that (a) the Opinions shall be used solely by the
Board of Directors of Corcom, including any Committee thereof, in considering
the terms of the proposed Transaction and (b) Corcom shall not furnish the
Opinions or any summaries or excerpts thereof to any other person or persons
or use the Opinions for any other purpose without the prior written approval
of Chicago Dearborn; provided, however, that in any event, Corcom is hereby
authorized to use or introduce into evidence or otherwise refer to the
Opinions in connection with any litigation relating to the proposed
Transaction or as otherwise required, in the reasonable judgment of counsel
for Corcom, by law. Corcom also may, in its discretion, publish or refer to
the Opinions in any proxy statement or otherwise in connection with the
proposed Transaction, so long as Chicago Dearborn gives its prior written
consent to such publication or reference, which consent shall not be
unreasonably withheld. The Opinion Fee shall be credited against the
Financial Advisory Fee payable under paragraph 3b above.
Subject to the provisions set forth in paragraph 11 herein, this Financial
Advisory Fee shall be payable in immediately available funds on the closing
date of a Transaction regardless of whether such closing occurs during the
Term or such Transaction is initiated during the Term and is closed within
nine months of the Term. Corcom's obligation to pay the Financial Advisory
Fee shall be contingent solely upon closing of a Transaction. The Financial
Advisory Fee shall not include any fees earned by Chicago Dearborn or others
for furnishing services other than as provided herein, such as fees payable
in connection with the placement or arrangement of any debt or equity
financing necessary to consummate a Transaction or advisory work unrelated to
the Transaction including, without limitation, advisory fees associated with
any divestitures of assets by Corcom following a Transaction.
4. Definition of Transaction Value. "Transaction Value" shall be defined
as the total consideration paid for the stock (including stock options or
stock issuable pursuant to stock options) or assets of Corcom and will be the
sum of all cash, the market value of any securities issued (if the securities
are not readily marketable, the market value will be established at fair
value or by mutual agreement) as consideration towards the purchase of such
stock or assets, the present value of (i) any non-compete payments payable
pursuant to a Transaction, (ii) any post-closing adjustments, (iii) any
contingent future payments (such amounts to be determined in good faith
negotiations between Corcom and Chicago Dearborn) using a discount rate of 10%
per annum, and the unpaid principal amount of any funded-debt obligation
(debt for borrowed money including, without limitation, any interest-bearing
debt or capitalized lease obligation) of Corcom assumed or discharged pursuant
to a Transaction, or in the case of a purchase of stock of Corcom, the amount
of such obligations at the time of closing of a Transaction.
5. Expenses. In addition to the Financial Advisory Fee and Retainer
described in paragraph 3 above, Corcom agrees to promptly reimburse Chicago
Dearborn, upon request, for all reasonable travel and external legal fees and
other out-of-pocket expenses incurred in performing the financial advisory
services hereunder regardless of whether a Transaction is consummated. Corcom
will not reimburse out-of-pocket expenses in excess of $20,000 without having
granted its prior approval, provided such approval will not be unreasonably
withheld.
6. Indemnification. Corcom agrees to: (i) indemnify and hold harmless
Chicago Dearborn, its directors, officers, agents, employees, and any
individual(s) who may be deemed to control Chicago Dearborn (collectively
"Indemnified Persons") against all losses, claims, damages, penalties,
judgments, liabilities and expenses of every kind whatsoever (including,
without limitation, all reasonable expenses of litigation or preparation
therefor, including reasonable attorney's fees, whether or not an Indemnified
Person is a party thereto) (collectively, "Liabilities"), which any of the
Indemnified Persons may pay or incur arising out of or relating to this
Agreement or the Transaction; and (ii) expressly and irrevocably waive any
and all rights and objections which it may have against any Indemnified
Persons in respect of any Liabilities arising out of or relating to this
Agreement or the Transaction, except, in each case, to the extent that such
Liabilities arise primarily from an Indemnified Person's gross negligence or
willful misconduct.
Corcom further agrees not to settle any claim, litigation or proceeding
(whether or not any Indemnified Person is a party thereto) relating to this
Agreement or Transaction without Chicago Dearborn's prior written consent
unless: (i) such settlement releases all the Indemnified Persons from any and
all Liabilities related to this Agreement or the Transaction; and (ii) the
entire settlement amount and all costs of settlement are borne by Corcom.
An Indemnified Person shall have the right to employ his own counsel in any
suit, action or proceeding arising from the Agreement or the Transaction if
the Indemnified Person reasonably concludes, based on advice of counsel, that
a conflict of interest exists between Corcom and the Indemnified Person which
would materially impact the effective representation of the Indemnified
Person. In the event that the Indemnified Person concludes that such a
conflict of interest exists, the Indemnified Person shall have the right to:
(i) assume and direct the defense of such suit, action, or proceeding on his
own behalf; and (ii) to select counsel which will represent him in any such
action, suit or proceeding, and Corcom shall indemnify the Indemnified Person
for the reasonable legal fees and expenses of such counsel and other out-of-
pocket expenses reasonably incurred by the Indemnified Person.
7. Referral. Corcom acknowledges that, although The First National Bank
of Chicago (the "Bank") has referred Corcom to Chicago Dearborn, neither the
Bank nor any of its affiliates, officers, directors or employees shall have
any responsibility or liability of any kind whatsoever in connection with the
services rendered pursuant to this Agreement. Furthermore, Corcom acknowledges
that Chicago Dearborn is not an affiliate of the Bank.
8. Persons Entitled to Reliance. Corcom recognizes that Chicago Dearborn
has been retained only by the undersigned, and that its engagement of Chicago
Dearborn is not deemed to be on behalf of and is not intended to confer rights
upon any shareholder, owner or partner of Corcom or any other person not a
party hereto as against Chicago Dearborn or any of Chicago Dearborn's
affiliates, the respective directors, officers, agents and employees of
Chicago Dearborn's affiliates or each other person, if any, controlling
Chicago Dearborn or any of Chicago Dearborn's affiliates. Unless otherwise
expressly stated in an opinion letter issued by Chicago Dearborn or otherwise
expressly agreed to by Chicago Dearborn, no one other than Corcom is
authorized to rely upon this engagement of Chicago Dearborn or any statements
or conduct by Chicago Dearborn.
9. Cooperation. In connection with Chicago Dearborn's activities pursuant
to this Agreement, Corcom will cooperate with Chicago Dearborn and will, to
the extent possible, furnish Chicago Dearborn with all information and data
concerning the Transaction and Corcom which Chicago Dearborn deems appropriate
and will, to the extent possible, provide Chicago Dearborn with access to
Corcom's respective officers, directors, employees, financial advisors,
independent accountants and legal counsel. Corcom represents and warrants that
all information made available to Chicago Dearborn by Corcom or contained in
any filing by Corcom with any court or governmental regulatory agency,
commission or instrumentality with respect to any Transaction will, at all
times during the period of the engagement of Chicago Dearborn hereunder, be
complete and correct in all material respects and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances under which such statements are made. Corcom further represents
and warrants that any projections provided by it to Chicago Dearborn will have
been prepared in good faith and will be based upon assumptions which, in light
of the circumstances under which they are made, are reasonable. Corcom
acknowledges and agrees that, in rendering its services hereunder, Chicago
Dearborn will be using and relying on information provided by Corcom or
information available from public sources and other sources deemed reliable
by Chicago Dearborn without independent verification thereof by Chicago
Dearborn or independent appraisal by Chicago Dearborn. Chicago Dearborn does
not assume responsibility for the accuracy or completeness of any of this
information regarding Corcom.
10. Confidentiality
a) Chicago Dearborn agrees to keep confidential non-public information
which it receives from Corcom concerning Corcom and the Transaction and to
disclose that information only with the consent of Corcom or as required by
law or legal process.
b) Corcom agrees to keep confidential non-public information which it
receives from Chicago Dearborn (including, without limitation, opinions and
advice) and to disclose that information only with the consent of Chicago
Dearborn; provided that Corcom may disclose the fact that it has retained
Chicago Dearborn as an advisor, and as required by regulation, law or legal
process.
11. Termination
This Agreement shall become effective upon Corcom's acceptance of this letter.
This Agreement may be terminated during the Term by either Chicago Dearborn or
Corcom giving thirty days prior written notice of termination to the other.
Neither termination of this Agreement nor consummation of the Transaction
contemplated herein shall affect i) any compensation earned by Chicago
Dearborn up to and including the date of termination or consummation; ii) the
reimbursement of expenses incurred by Chicago Dearborn up to the date of
termination or consummation; and iii) paragraphs 3-12, inclusive, of this
Agreement. If this Agreement is terminated by Corcom or this Agreement is
terminated by Chicago Dearborn after a breach of the Agreement by Corcom or
the Agreement's Term expires without renewal, and if a Transaction is
consummated during the period of nine months following a termination for any
of the three foregoing reasons, then the Financial Advisory Fee in respect
of such Transaction shall become due and payable. Notwithstanding anything to
the contrary contained herein, Chicago Dearborn shall not be entitled to any
Financial Advisory Fee pursuant to this Agreement if Chicago Dearborn
terminates this Agreement, other than termination due to Corcom's breach of
terms of this Agreement.
12. Miscellaneous.
a) Corcom may not assign this Agreement. Chicago Dearborn may not assign
this Agreement to any party other than a related affiliate.
b) Corcom agrees that, upon consummation of a Transaction, Chicago
Dearborn has the right to publish a tombstone advertisement in financial
publications at its own expense describing its services hereunder.
c) The Agreement represented by this letter shall be governed by the
laws of the State of Illinois.
Please confirm that the foregoing is in accordance with your understanding of
this Agreement by signing and returning to us a copy of this letter.
Very truly yours,
THE CHICAGO DEARBORN COMPANY
s/s William C. Steinmetz
William C. Steinmetz
Senior Managing Director
ACCEPTED AND AGREED:
CORCOM, INC.
s/s Werner E. Neuman
President
Dated: March 7, 1996
<PAGE>
ABN AMRO Chicago Corporation
208 S. LaSalle St.
Chicago, IL 60604
January 16, 1998
Mr. Werner E. Neuman
President
Corcom, Inc.
844 E. Rockland Rd.
Libertyville, IL 60048
Dear Mr. Neuman;
ABN AMRO Chicago Corporation ("AACC") is pleased to set forth terms of this
amendment agreement (the "Amendment") relating to the engagement letter (the
"Agreement") dated March 7, 1996 between The Chicago Dearborn Company (the
predecessor firm to AACC) and Corcom, Inc. ("Corcom").
All capitalized terms not otherwise defined in this Amendment have the
meanings provided in the Agreement.
Corcom and AACC agree to amend the Agreement as follows:
1. The Agreement will be assigned by The Chicago Dearborn Company to AACC;
2. The Financial Advisory Fee will be $150,000 plus 1.75% of the Transaction
Value in excess of $10 million; and
3. Corcom and AACC acknowledge that the Term of the Agreement expired without
renewal. Corcom and AACC agree to renew the Agreement and be bound by its
terms and conditions effective as of the date of Corcom's execution of this
Amendment (the "Renewed Agreement"). The Term of the Renewed Agreement shall
extend until June 15, 1998. AACC acknowledges that no quarterly Retainers
will be owed following the effectiveness of the Renewed Agreement. Finally,
AACC acknowledges that the quarterly Retainers paid by Corcom in the past
pursuant to the Agreement will be credited against any Financial Advisory Fee
paid to AACC pursuant to the Renewed Agreement.
All terms and conditions in the Agreement not amended herein remain in effect.
Please confirm that the foregoing is in accordance with your understanding of
this Amendment by signing and returning to us a copy of this letter
Very truly yours,
ABN AMRO Chicago Corporation
By: s/s Christopher C. McMahon
Christopher C. McMahon
Managing Director
Accepted and agreed:
CORCOM, INC.
By: s/s Werner E. Neuman
Werner E. Neuman
Its: President
Dated: 1-16-98
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Corcom, Inc. on Form S-8 (File No. 2- 96731, 33-22257, 33-41142, 33-80204, and
333-28873) of our report dated February 27, 1998, on our audits of the
consolidated financial statement schedules of Corcom, Inc. as of December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997, which report is included in this Annual Report on Form 10-K.
s/s Coopers & Lybrand, L.L.P.
Chicago, Illinois
March 19, 1998
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned director
and officers of CORCOM, INC., an Illinois corporation (the "Company"), does
hereby constitute and appoint Werner E. Neuman, Thomas J. Buns and Walter
Roth, and each of them severally, the true and lawful attorneys and agents of
the undersigned, each with full power to act without any other and with full
power of substitution and resubstitution, to do any and all acts and things
and to execute any and all instruments which said attorneys and agents may
deem necessary or desirable to enable the Company to comply with the
Securities Exchange Act of 1934, as amended (the "Act"), and any rules,
regulations and requirements of the Securities and Exchange Commission
thereunder in connection with the filing under the Act of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and all
related matters, including specifically, but without limiting the generality
of the foregoing, power and authority to sign the names of the undersigned
directors and officers in the capacities indicated below to said Form 10-K to
be filed with the Securities and Exchange Commission, to any and all
amendments to said Form 10-K, and to any and all instruments or documents
filed as part of or in connection with any of the foregoing and any and all
amendments thereto; and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents this 16th day of March, 1998.
Capacities Signatures
President and Director s/s Werner E. Neuman
(Principal Executive Officer) Werner E. Neuman
Vice President and Treasurer s/s Thomas J. Buns
(Principal Financial and Accounting Thomas J. Buns
Officer)
Director s/s Bruce P. Anderson
Bruce P. Anderson
Director s/s Carolyn A. Berry
Carolyn A. Berry
Director s/s Herbert L. Roth
Herbert L. Roth
Director s/s James A. Steinback
James A. Steinback
Director s/s Gene F. Straube
Gene F. Straube
Director s/s Renato Tagiuri
Renato Tagiuri
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AND CONSOLIDATED CONDENSED STATEMENT
OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8232
<SECURITIES> 0
<RECEIVABLES> 4599
<ALLOWANCES> 0
<INVENTORY> 6192
<CURRENT-ASSETS> 20504
<PP&E> 19323
<DEPRECIATION> 14849
<TOTAL-ASSETS> 24978
<CURRENT-LIABILITIES> 2906
<BONDS> 0
<COMMON> 14134
0
0
<OTHER-SE> 7898
<TOTAL-LIABILITY-AND-EQUITY> 24978
<SALES> 36788
<TOTAL-REVENUES> 36788
<CGS> 22394
<TOTAL-COSTS> 32071
<OTHER-EXPENSES> (306)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 5013
<INCOME-TAX> 2010
<INCOME-CONTINUING> 3003
<DISCONTINUED> 0
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<NET-INCOME> 3003
<EPS-PRIMARY> .79
<EPS-DILUTED> .76
</TABLE>
