-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WBQylnFCAf3AWUcDuo1WvX0VANlevO/lrTiWfV89o4oL0cnJF9grp1NPhABem7zn Ggfy895PTAAZD3Pa8kURyA== 0000950131-99-003602.txt : 19990607 0000950131-99-003602.hdr.sgml : 19990607 ACCESSION NUMBER: 0000950131-99-003602 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990319 ITEM INFORMATION: FILED AS OF DATE: 19990604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATIONS INSTRUMENTS INC CENTRAL INDEX KEY: 0001053916 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 561828270 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 333-38209 FILM NUMBER: 99640821 BUSINESS ADDRESS: STREET 1: 1396 CHARLOTTE HIGHWAY STREET 2: P O BOX 520 CITY: FAIRVIEW STATE: NC ZIP: 28730 BUSINESS PHONE: 8286281711 MAIL ADDRESS: STREET 1: 1396 CHARLOTTE HIGHWAY STREET 2: P O BOX 520 CITY: FAIRVIEW STATE: NC ZIP: 28730 8-K/A 1 AMENDED 8-K FORM 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 4, 1999 (MARCH 19, 1999) COMMUNICATIONS INSTRUMENTS, INC. (Exact name of registrant as specified in its charter) North Carolina 56-182-82-70 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1396 Charlotte Highway, Fairview, NC 28730 (Address of principal executive offices) (Zip Code) (828) 628-1711 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name or former address, if changed since last report) The undersigned Registrant hereby amends the following item and exhibit of its Current Report on Form 8-K, dated April 5, 1999, relating to events occurring on March 19, 1999, as set forth on the pages attached hereto. Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED The audited consolidated balance sheets for Products Unlimited Corporation and subsidiaries ("Products") as of August 31, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1998, the unaudited consolidated balance sheet as of February 28, 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for the six months ended February 28, 1998 and 1999, together with a report of the independent public accountants, are hereby filed as a part of this Report on Form 8-KA in the form as attached as Exhibit 99.2. (b) PRO FORMA FINANCIAL INFORMATION The required pro forma financial information for the transaction that is the subject of this Report on Form 8-K/A is hereby filed as part of this Report in the form attached as Exhibit B. (c) EXHIBITS 99.2 Financial Statements of Business Acquired SIGNATURES Pursuant to the requirements 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. COMMUNICATIONS INSTRUMENTS, INC. DATE: JUNE 4, 1999 BY: /s/ Richard Heggelund -------------------------------- NAME: RICHARD L. HEGGELUND TITLE: CHIEF FINANCIAL OFFICER Item 7 - -------------------------------------------------------------------------------- COMMUNICATIONS INSTRUMENTS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information (the "Pro Forma Financial Information") is based on the historical financial statements of Communications Instruments, Inc., a North Carolina corporation (the "Company"), included in the Company's Form 10-K and the Company's quarterly report filed on Form 10-Q. On March 19, 1999, the Company purchased all of the outstanding equity securities of Products Unlimited Corporation, an Iowa corporation ("Products"), a manufacturer and marketer of relays, transformers, and contactors for the HVAC industry (the "Products Acquisition"). Pursuant to the Stock Purchase Agreement the Company paid approximately $59.4 million, excluding expenses. In addition, if Products achieves certain sales targets for the years ending December 31, 1999 and December 31, 2000, the Company will make additional payments to the former shareholders of Products not to exceed $4.0 million in the aggregate. The payment of the purchase price and related fees was financed by the issuance of $55.0 million of Tranche Term B loans, in accordance with an amendment to the Senior Credit Facility (as defined), the contribution of $5.0 million in additional paid-in capital by CII Technologies, Inc., the Company's parent (the "Parent"), and a draw on the revolving portion of the Company's Senior Credit Facility (as defined). Products has manufacturing facilities in Sterling and Prophetstown, Illinois and Sabula and Guttenberg, Iowa and employs approximately 1,000 people. The Company does not intend to change the use of the acquired assets. The allocation of purchase price is subject to final determination based on changes in certain estimates of the asset valuations and determinations of liabilities assumed that may occur within the first year of operations. Management believes that there may be material changes to the allocation of the purchase price to certain assets and liabilities due to potential changes in asset valuations and determinations of liabilities assumed. On June 19, 1998, the Company acquired all of the outstanding capital stock of Corcom, Inc., an Illinois corporation ("Corcom") pursuant to the merger of RF Acquisition Corp., a newly formed wholly-owned subsidiary of the Company, with and into Corcom (the "Merger"). The Company paid $13.00 per share to the shareholders of Corcom in exchange for the shares received in the Merger (approximately $51.1 million in the aggregate). The Company used a portion of the proceeds of $48.1 million of borrowings under a $60.0 million credit facility entered into with the Bank of America National Trust and Savings Association on June 19, 1998 (the "Senior Credit Facility"), additional paid in capital of $5.0 million contributed by the Parent, and $7.4 million in cash from Corcom to finance the Merger, repay $7.4 million of debt associated with the Old Senior Credit Facility (as defined) and fund the related merger costs. Corcom is an electromagnetic interference filter manufacturer located in Libertyville, Illinois. The unaudited pro forma statement of operations for the year ended December 31, 1998 gives effect to the Corcom Merger and the Products Acquisition as if such events were consummated on January 1, 1998. The unaudited pro forma statement of operations for the three months ended March 31, 1999 gives effect to the Products Acquisition as if such event was consummated on January 1, 1998. The pro forma adjustments are based on available information and certain assumptions that the Company believes are reasonable. The pro forma financial information does not purport to be indicative of the results that would have been obtained had such transactions described above occurred as of the assumed dates. In 1 addition, pro forma financial information does not purport to project the Company's results of operations for any future date or period. The pro forma financial information should be read in conjunction with the financial statements of the Company contained in its Form 10-K filed on March 31, 1999, financial statements of Corcom contained in the Company's Form 8-K filed on July 6, 1998 and the financial statements of Products filed within this Form 8-KA. Statements made by the Company which are not historical facts are forward looking statements that involve risks and uncertainties. Actual results could differ materially from those expressed or implied in forward looking statements. All such forward looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Important factors that could cause future financial performance to differ materially from past results and from those expressed or implied in this document, include, without limitation, the risks of acquisition of businesses (including limited knowledge of the businesses acquired and potential misrepresentations from sellers), changes in business strategy or development plans, dependence on independent sales representatives and distributors, environmental regulations, availability of financing, competition, reliance on key management personnel, ability to manage growth, loss of customers and a variety of other factors. 2 COMMUNICATIONS INSTRUMENTS, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS For the Twelve Months Ended December 31, 1998
Pro Forma Pro Forma Pro Forma Adjustments As Adjusted Adjustments for the for the for the Corcom Corcom Products Company Corcom (16) Merger (1) Merger (7) Products (8) Acquisition (9) Pro Forma (15) ======== =========== ======= ======== ======== =========== ========= Net sales $120,030 $16,284 $ - $136,314 $60,877 $ - $197,191 Cost of sales 81,285 11,032 (54) (2) 92,263 50,571 (842) (10) 141,992 -------- ------- ------- -------- ------- ------- -------- Gross profit 38,745 5,252 54 44,051 10,306 842 55,199 Selling expense 8,635 1,741 - 10,376 2,321 (18) (11) 12,679 General and administrative expenses 8,935 4,292 (2,049) (3) 11,178 2,040 (638) (12) 12,580 Research and development expenses 1,328 183 - 1,511 341 - 1,852 Amortization of goodwill and other intangible assets 1,769 - 878 (4) 2,647 - 2,264 (13) 4,911 -------- ------- ------- -------- ------- ------- -------- Income (loss) from operations 18,078 (964) 1,225 18,339 5,604 (766) 23,177 Interest expense (income), net 12,552 (198) 1,758 (5) 14,112 845 4,175 (14) 19,132 Other expense (income), net 171 - - 171 166 337 -------- ------- ------- -------- ------- ------- -------- Income (loss) before income taxes and extraordinary item 5,355 (766) (533) 4,056 4,593 (4,941) 3,708 Provision for (benefit from) income taxes (6) 2,371 221 (414) 2,178 1,792 (1,591) 2,379 -------- ------- ------- -------- ------- ------- -------- Income (loss) before extraordinary item $ 2,984 $ (987) $ (119) $ 1,878 $ 2,801 $(3,350) $ 1,329 ======== ======= ======= ======== ======= ======= ========
3 COMMUNICATIONS INSTRUMENTS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (1) The Company has accounted for the Corcom Merger as a purchase, applying the provisions of Accounting Principles Board Opinion No. 16. The purchase price has been allocated to the acquired assets and assumed liabilities based upon their estimated relative fair values as of the closing of the Corcom Merger. The Company used a portion of the proceeds of $48.1 million of borrowings under the Senior Credit Facility, additional paid-in capital of $5.0 million contributed by the Parent (as defined), and $7.4 million in cash from Corcom to finance the Merger, repay $7.4 million of debt associated with the Old Senior Credit Facility and fund the related merger costs. The purchase price was allocated to the net assets of Corcom based on their relative fair value, as follows (in thousands):
Current assets $ 12,761 Property, plant and equipment 7,374 Intangible and other assets 35,550 Liabilities assumed (10,635) -------- Total purchase price, including expenses $ 45,050 ========
Management believes that there will be no material changes to the allocation of the purchase price. (2) Adjustment reflects a lower depreciation expense based on the fair value of the assets purchased ($54,000). Does not give effect to the write-off of $392,000 due to the purchase accounting adjustment for the increase of inventories to estimated fair market value in connection with the Corcom Merger. (3) Adjustment reflects a lower depreciation expense based on the fair value of the assets purchased ($9,000) and the removal of expenses associated with the Merger (approximately $2.0 million). (4) Adjustment reflects $349,000 of amortization of goodwill and $529,000 of amortization of other intangible assets recorded in connection with the Corcom Merger. Goodwill is amortized over 30 years due to the long life cycles of the products. Other intangible assets are amortized over lives ranging from 2.5 years to 30 years. (5) Adjustment reflects primarily the additional interest expense associated with approximately $40.7 million of incremental bank debt incurred to finance the Corcom Merger. The interest rate assumed with respect to such bank debt is 8.125%, the rate in effect at the date of the Corcom Merger. An increase 4 in this rate of 1/8% would increase interest expense by approximately $51,000 for the year and a decrease of 1/8% would lower interest expense by approximately $51,000 for the year. (6) Assumes an effective tax rate of 77.7% for the Corcom Merger and 57.8% for the Products Acquisition. The effective tax rate was computed based upon statutory rates adjusted for certain known permanent differences in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". (7) Adjustments give effect to the Corcom Merger as if such event had occurred on January 1, 1998. (8) Products' historical fiscal year-end was based on an August 31 year-end date. As such, and for purposes of filing Products' historical results on a basis consistent with the Company's fiscal year-end, Products' unaudited 1998 statement of operations was derived by adding Products' unaudited operating results for the period from September 1, 1998 through December 31, 1998 to the audited amounts for the fiscal year ended August 31, 1998, and then by deducting the unaudited operating results for the period from September 1, 1997 through December 31, 1997. Products' unaudited historical financial information presented herein excludes the effects of its former investments in limited real estate partnerships, as such investments were sold by Products prior to the Products Acquisition and were therefore not acquired by the Company. (9) The Company has accounted for the Products Acquisition as a purchase, applying the provisions of Accounting Principles Board Opinion No. 16. The purchase price has been allocated to the acquired assets and assumed liabilities based upon their estimated relative fair market values as of the close date of the Products Acquisition. The payment of the purchase price and related fees was financed by the issuance of $55.0 million of Tranche Term B loans, in accordance with an amendment to the Senior Credit Facility (as defined), the contribution of $5.0 million in additional paid-in capital by the Parent, and a draw on the revolving portion of the Company's Senior Credit Facility (as defined). The purchase price was allocated to the net assets of Products based on their relative fair value, as follows (in thousands): Current assets $ 15,046 Property, plant and equipment 21,237 Intangible and other assets 39,711 Liabilities assumed (15,869) -------- Total purchase price, including expenses $ 60,125 ========
Such allocations of purchase price are subject to final determination based on valuations and other studies that will be completed after the closing. Management believes that there may be material changes to the allocation of the purchase price. (10) Adjustment reflects a lower depreciation expense based on the fair value of the assets purchased including buildings previously leased ($177,000), the elimination of the rent expense allocated to cost of goods sold as the buildings are part of the acquired assets and are now owned rather than leased ($458,000) and terminated officers' salaries ($207,000) not replaced. Does not give effect to the write-off of approximately $363,000 related to the write-up of inventories to estimated fair market value under purchase accounting in connection with the Products Acquisition. 5 (11) Adjustment reflects the elimination of the rent expense allocated to selling expenses as the buildings are part of the acquired assets and are now owned rather than leased ($18,000). (12) Adjustment reflects the elimination of (i) terminated officers' salaries ($725,000) not replaced, (ii) rent expense allocated to general and administrative expenses as the buildings are part of the acquired assets and are now owned rather than leased ($18,000), and (iii) a lower depreciation expense based on the fair value of the assets purchased ($19,000) offset by expense to add management personnel ($124,000). (13) Adjustment reflects $860,000 of amortization of goodwill and approximately $1.4 million of amortization of other intangible assets recorded in connection with the Products Acquisition. Goodwill is amortized over 30 years due to the long life cycles of the products. Other intangible assets are amortized over lives ranging from 2 years to 30 years. (14) Adjustment reflects primarily the additional interest expense associated with approximately $56.9 million of incremental bank debt incurred to finance the Products Acquisition. The interest rate assumed with respect to such bank debt is 8.25% the rate in effect at the date of the Products acquisition. An increase in this rate of 1/8% would increase interest expense by approximately $72,000 for the year and a decrease of 1/8% would lower interest expense by approximately $72,000 for the year. (15) Adjustments give effect to the Products Acquisition and the Corcom Merger as if such events had occurred on January 1, 1998. (16) Corcom historical financial information is for the period from January 1, 1998 through June 18, 1998. 6 COMMUNICATIONS INSTRUMENTS, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS For the Three Months Ended March 31, 1999
Pro Forma Adjustments for the Products Company Products (1) Acquisition (2) Pro Forma (9) Net sales $33,852 $ 15,247 $ - $49,099 Cost of sales 24,327 12,093 (134) (3) 36,286 ------- -------- ------- ------- Gross profit 9,525 3,154 134 12,813 Selling expense 2,808 531 (3) (4) 3,336 General and administrative expenses 2,637 2,596 (2,230) (5) 3,003 Research and development expenses 384 85 - 469 Amortization of goodwill and other intangible assets 755 - 484 (6) 1,239 ------- -------- ------- ------- Income (loss) from operations 2,941 (58) 1,883 4,766 Interest expense, net 3,645 205 906 (7) 4,756 Other expense (income), net 10 (16) (6) ------- -------- ------- ------- Income (loss) before income taxes (714) (247) 977 16 Provision for (benefit from) income taxes (139) (96) 451 (8) 216 ------- -------- ------- ------- Net income (loss) $ (575) $ (151) $ 526 $ (200) ======= ======== ======= =======
7 COMMUNICATIONS INSTRUMENTS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (1) Represents Products' unaudited operating results for the period from January 1, 1999 - March 18, 1999 (date prior to date of acquisition by the Company). Products' unaudited results for the period presented herein exclude the effects of its former investments in limited real estate partnerships, as such investments were sold by Products prior to the Products Acquisition, and were therefore not acquired by the Company. (2) The Company has accounted for the Products Acquisition as a purchase, applying the provisions of Accounting Principles Board Opinion No. 16. The purchase price has been allocated to the acquired assets and assumed liabilities based upon their estimated relative fair values as of the closing of the Products Acquisition. The payment of the purchase price and related fees was financed by the issuance of $55.0 million of Tranche Term B loans, in accordance with an amendment to the Senior Credit Facility (as defined), the contribution of $5.0 million in additional paid-in capital by the Parent, and a draw on the revolving portion of the Company's Senior Credit Facility (as defined). The purchase price was allocated to the net assets of Products based on their relative fair value, as follows (in thousands): Current assets $ 15,046 Property, plant and equipment 21,237 Intangible and other assets 39,711 Liabilities assumed (15,869) -------- Total purchase price, including expenses $ 60,125 ========
Such allocations of purchase price are subject to final determination based on valuations and other studies that will be completed after the closing. Management believes that there may be material changes to the allocation of the purchase price. (3) Adjustment reflects a lower depreciation expense based on the fair value of the assets purchased including buildings previously leased ($54,000), the elimination of the rent expense allocated to cost of goods sold as the buildings are part of the acquired assets and are now owned rather than leased ($73,000) and terminated officers' salaries ($7,000) not replaced. Does not give effect to the write-off of approximately $363,000 related to the write-up of inventories to estimated fair market value under purchase accounting in connection with the Products Acquisition. 8 (4) Adjustment reflects the elimination of the rent expense allocated to selling expenses as the buildings are part of the acquired assets and are now owned rather than leased ($3,000). (5) Adjustment reflects the elimination of (i) terminated officers' salaries ($102,000) not replaced, (ii) rent expense allocated to general and administrative expenses as the buildings are part of the acquired assets and are now owned rather than leased ($3,000), (iii) nonrecurring expenses related to and incurred as a direct result of the Products Acquisition (approximately $2.2 million) and (iv) a lower depreciation expense based on the fair value of the assets purchased ($6,000) offset by an expense to add management personnel. ($31,000). (6) Adjustment reflects $184,000 of amortization of goodwill and approximately $300,000 of amortization of other intangible assets recorded in connection with the Products Acquisition. Goodwill is amortized over 30 years due to the long life cycles of the products. Other intangible assets are amortized over lives ranging from 2 years to 30 years. (7) Adjustment reflects primarily the additional interest expense associated with approximately $56.9 million of incremental bank debt incurred to finance the Products Acquisition. The interest rate assumed with respect to such bank debt is 8.25%, the rate in effect at the date of the Products merger. An increase in this rate of 1/8% would increase interest expense by approximately $18,000 for the three months and a decrease of 1/8% would lower interest expense by approximately $18,000 for the three months. (8) Assumes an effective tax rate of 48.6% for the Products Acquisition. The effective tax rate was computed based upon statutory rates adjusted for certain known permanent differences in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". (9) Adjustments give effect to the Products Acquisition as if such event had occurred on January 1, 1998. 9 EX-99.2 2 FINANCIAL STATEMENTS OF BUSINESS ACQUIRED EXHIBIT 99.2 - -------------------------------------------------------------------------------- Products Unlimited Corporation and Subsidiaries Consolidated Balance Sheets as of August 31, 1997 and 1998 and the Related Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for each of the Three Years in the Period Ended August 31, 1998 and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Stockholders of Products Unlimited Corporation: We have audited the accompanying consolidated balance sheets of Products Unlimited Corporation and subsidiaries (the "Company") as of August 31, 1997 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 1997 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1998 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Chicago, Illinois June 2, 1999 PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Dollars in Thousands Except Share Amounts) - ------------------------------------------------------------------------------- August 31, --------------------- 1997 1998 ASSETS CURRENT ASSETS: Accounts receivable (less allowance for doubtful accounts: 1997 - $25, 1998 - $25) $ 7,183 $ 8,328 Inventories 2,885 3,117 Advances for equipment 679 5 Prepaids and other current assets 474 1,011 -------- -------- Total current assets 11,221 12,461 PROPERTY, PLANT AND EQUIPMENT - Net 12,132 12,962 OTHER ASSETS: Deferred income taxes 430 275 Equity investments in limited partnerships 3,703 5,343 -------- -------- Total other assets 4,133 5,618 -------- -------- TOTAL ASSETS $ 27,486 $ 31,041 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 2,168 $ 2,793 Revolving credit facility 1,369 1,309 Accounts payable 3,184 3,546 Accrued liabilities: Wages and commissions 1,078 1,331 Insurance 589 389 Other 360 303 -------- -------- Total current liabilities 8,748 9,671 LONG-TERM DEBT 7,332 7,508 -------- -------- Total liabilities 16,080 17,179 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Class B Common stock - $1.00 par value; 50,000 shares authorized, 1,000 shares issued and outstanding 1 1 Preferred stock - no par value; 50,000 shares authorized, 1,000 shares issued and outstanding Additional paid-in capital 863 863 Notes receivable from stockholders (1,058) (1,398) Retained earnings 11,600 14,396 -------- -------- Total stockholders' equity 11,406 13,862 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,486 $ 31,041 ======== ========
See notes to consolidated financial statements. -2- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands) - --------------------------------------------------------------------------------
Year Ended August 31, ----------------------------- 1996 1997 1998 NET SALES $49,745 $53,057 $57,424 COST OF SALES 40,554 43,142 47,833 ------- ------- ------- GROSS MARGIN 9,191 9,915 9,591 OPERATING EXPENSES: Selling expenses 1,986 2,195 2,381 General and administrative expenses 2,118 2,103 1,734 Research and development expenses 319 307 365 ------- ------- ------- Total operating expenses 4,423 4,605 4,480 ------- ------- ------- OPERATING INCOME 4,768 5,310 5,111 INTEREST EXPENSE AND OTHER FINANCING COSTS-Net (818) (855) (833) OTHER EXPENSE-Net (122) (13) (172) ------- ------- ------- INCOME OF CONSOLIDATED GROUP BEFORE INCOME TAXES 3,828 4,442 4,106 INCOME TAX EXPENSE (1,479) (1,706) (1,579) ------- ------- ------- INCOME OF CONSOLIDATED GROUP 2,349 2,736 2,527 EQUITY IN LOSS OF LIMITED PARTNERSHIPS- Net of tax benefits of $116, $139, and $130 and low income housing credits of $329, $494, and $494 for 1996, 1997, and 1998, respectively 87 269 269 ------- ------- ------- NET INCOME $ 2,436 $ 3,005 $ 2,796 ======= ======= =======
See notes to consolidated financial statements. -3- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in Thousands Except Share Amounts) - ---------------------------------------------------------------------------------------------------------------------------------- Notes Additional Receivable Total Common Stock Preferred Stock Paid-in From Retained Stockholders' Shares Amount Shares Amount Capital Stockholders Earnings Equity BALANCES - August 31, 1995 1,000 $ 1 1,000 $863 $ 6,159 $ 7,023 Issuance of notes receivable from stockholders $ (157) (157) Net income 2,436 2,436 ------ ------ ------ ------ ---- ------- ------- ------- BALANCES - August 31, 1996 1,000 1 1,000 863 (157) 8,595 9,302 Issuance of notes receivable from stockholders (901) (901) Net income 3,005 3,005 ------ ------ ------ ------ ---- ------- ------- ------- BALANCES - August 31, 1997 1,000 1 1,000 863 (1,058) 11,600 11,406 Issuance of notes receivable from stockholders (340) (340) Net income 2,796 2,796 ------ ------ ------ ------ ---- ------- ------- ------- BALANCES - August 31, 1998 1,000 $ 1 1,000 $863 $(1,398) $14,396 $13,862 ====== ====== ====== ====== ==== ======= ======= =======
See notes to consolidated financial statements. -4-
PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------ Year Ended August 31, ----------------------------------- 1996 1997 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,436 $ 3,005 $ 2,796 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 2,075 2,716 3,111 Deferred income taxes 116 (37) 155 Loss (gain) on disposal of property, plant and equipment 25 10 Equity in loss of limited partnerships 358 364 355 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (2,414) 1,256 (1,145) Decrease (increase) in inventories (160) 550 (232) Decrease (increase) in advances for equipment (679) 674 Decrease (increase) in prepaids and other current assets (359) 427 (537) Increase (decrease) in accounts payable 1,251 (1,356) 362 Increase (decrease) in accrued wages and commissions 392 177 253 Increase (decrease) in accrued insurance 13 266 (200) Increase (decrease) in accrued other liabilites (386) 45 (57) ------- ------- ------- Net cash provided by operating activities 3,322 6,759 5,545 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (3,418) (5,709) (4,139) Proceeds from disposal of property, plant and equipment 75 188 Investments in and contributions to limited partnerships (3,464) (961) (1,995) ------- ------- ------- Net cash used in investing activities (6,882) (6,595) (5,946) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit facility 306 (900) (60) Borrowings under long-term debt agreements 4,776 3,712 2,969 Principal payments under long-term debt agreements (1,365) (2,075) (2,168) Funds advanced to stockholders represented by noted receivable (157) (901) (340) ------- ------- ------- Net cash provided by (used in) financing activities 3,560 (164) 401 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- -- -- CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR -- -- -- ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR $ -- $ -- $ -- ======= ======= ======= SEE NOTES 6 AND 8 FOR INTEREST AND TAXES PAID, RESPECTIVELY
See notes to consolidated financial statements. -5- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unless Specified, Dollars In Thousands Except Share Amounts) - -------------------------------------------------------------------------------- 1. BUSINESS DESCRIPTION Products Unlimited Corporation and subsidiaries, an Iowa corporation (the "Company"), is engaged in the design, manufacture and distribution of electro-mechanical products primarily to the heating, ventilating, and air conditioning ("HVAC") industry. Manufacturing and assembly operations are performed primarily in Sterling, Illinois; Guttenberg, Iowa; Prophetstown, Illinois; and Sabula, Iowa. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The accompanying consolidated financial statements include the following: Products Unlimited Corporation, GW Industries, Inc., Marc Enterprises, Inc., Products Unlimited Export Corporation, and S.O.L. Industries, Inc. All intercompany transactions have been eliminated in consolidation. Equity Investments in Limited Partnerships - The Company records its investments in real estate limited partnerships (the "Limited Partnerships"), which invest in low income housing properties and related tax credits, on the equity method. Acquisition, selection and other costs related to the acquisition of the Limited Partnerships are capitalized to the investment account and are being amortized on a straight-line basis over the estimated lives of the underlying assets, which is 27.5 years. Cash and Cash Equivalents - All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Revenue Recognition - Sales and the related cost of sales generally are recognized upon shipment of products sold, net of estimated discounts and allowances. Warranty Costs - Estimated warranty costs are provided based on known claims and historical claims experience. Inventories - Inventories are stated at the lower of cost (first-in, first- out method) or market. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 39 years. Income Taxes - The Company accounts for income taxes using an asset and liability approach as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting basis and tax basis of assets and liabilities. An allowance is provided whenever management believes it is more likely than not that tax benefits will not be utilized. Employee Benefit Plans - The Company maintains a qualified 401(k) plan to provide retirement benefits to substantially all employees. Employees can elect to withhold between 1% and 15% of their -6- pre-tax earnings. The plan provides for the employer to match 50% of all employee contributions up to 5% of the employees' annual salary. Long-Lived Assets - The Company analyzes the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the Company determines it is unable to recover the carrying value of the assets, the assets will be written down using an appropriate method. Management does not believe current events or circumstances provide evidence to suggest that carrying values have been impaired. Research and Development - Research and development costs are charged to expense as incurred. Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Examples of significant estimates and assumptions made in the preparation of these financial statements include the Company's allowance for doubtful accounts, reserves for inventory obsolescence, warranty accrual, insurance- related accruals, and provision for losses, if any, to be incurred on fixed price sales contracts. Commodity Contracts - The Company uses options and swaps, individually or in combination, to reduce the effects of fluctuations in raw material prices of copper and silver. All contracts meet the risk reduction and correlation criteria and are recorded using hedge accounting. Effectiveness is measured based upon high correlation between commodity gains and losses on the contracts and those on the firm commitment. Under hedge accounting, the gain or loss on the hedge is deferred and recorded as a component of the underlying inventory purchase. Deferred gains or losses were not significant at August 31, 1997 and 1998. Differences between the contract price and market price are settled monthly. The fair value of open contracts was not significant at August 31, 1997 and 1998. Fair Value of Financial Instruments - The estimated fair values of the Company's financial instruments, including primarily cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying values at August 31, 1997 and 1998, due to their nature. The fair value of the Company's indebtedness is estimated using the current rates that would be available for such a borrowing. Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. The Company's customers are concentrated in the HVAC industry. The Company's customers are not concentrated in any specific geographical region. The Company generally does not require customers to provide collateral related to such accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors relating to the credit risk of specific customers, historical trends and other information. New Accounting Standards - The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for all fiscal quarters beginning after June 15, 2000. The new standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has not determined at this time what impact, if any, that this new accounting standard will have on its financial statements. -7- In 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which must be adopted by fiscal year 1999. These Statements will have no effect on the Company's financial position or net income. 3. INVENTORIES Inventories consist of the following at August 31:
1997 1998 Finished goods $ 872 $1,168 Work-in-process 851 1,083 Raw materials and supplies 1,162 866 ------ ------ Total $2,885 $3,117 ====== ======
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at August 31:
1997 1998 Leasehold improvements $ 752 $ 643 Machinery and equipment 17,814 20,324 ------- ------- 18,566 20,967 Less accumulated depreciation and amortization (6,434) (8,005) ------- ------- Total $12,132 $12,962 ======= =======
Property, plant and equipment generally are depreciated using the following lives: leasehold improvements - lesser of term of lease or useful lives, generally 5 to 39 years; and machinery and equipment - 3 to 10 years. 5. EQUITY INVESTMENTS IN LIMITED PARTNERSHIPS The Company owned an equity investment in three Limited Partnerships as of August 31, 1998. Two of the interests were acquired in 1995 and one in 1998. The Limited Partnerships owned as of August 31, 1998, invest in residential low income rental projects consisting of 101 apartment units. The mortgage loans on these projects are payable to banks and the other liabilities consist of fees payable to the developers and contractors. The Company, as a limited partner of the Limited Partnerships, is entitled to 99% of the profits and losses in the Limited Partnerships. Equity in losses of Limited Partnerships are recognized in the financial statements until the limited partnership account is reduced to a zero balance. Losses incurred after the limited partnership investment account is reduced to zero are not recognized. No cumulative amount of unrecognized equity in losses exists for any of the years presented. -8- Distributions from the Limited Partnerships are accounted for as a return of capital until the investment balance is reduced to zero. Subsequent distributions are recognized as income. The difference between the investment per the accompanying balance sheets at August 31, 1997 and 1998, and the equity per the Limited Partnerships' combined financial statements is due primarily to costs capitalized to the investment account and minimal distributions recognized as income. Selected financial information for the combined financial statements of the Limited Partnerships, at August 31, 1997 and 1998 and for each of the three years in the period ended August 31, 1998, is as follows:
August 31, -------------------- Balance Sheets 1997 1998 Land and buildings, net $6,343 $7,711 Total assets 6,769 7,730 Mortgage payable 1,896 2,316 Total liabilities 3,029 2,379 Equity of the limited 3,740 5,351 partnerships
Year Ended August 31, --------------------------------- Statements of Operations 1996 1997 1998 Total revenues $ 33 $ 365 $ 360 Interest expense 221 249 177 Depreciation and amortization 76 231 231 Total expenses 395 733 719 Net loss (362) (368) (359)
In contemplation of the sale of the Company to Communications Instruments, Inc., the Company sold its equity investments in Limited Partnerships to a syndication fund, a nonrelated third party, on February 13, 1999 (see Note 13). 6. INDEBTEDNESS Indebtedness consists of the following at August 31: -9-
1997 1998 Revolving credit facility with Firstar Bank, Iowa, .50% below prime rate announced by Firstar $ 1,369 $ 1,309 ======= ======= Long-term debt: Note payable to Firstar Bank, Iowa, 8.00% interest rate, due October 1, 1997 $ 77 Note payable to Firstar Bank, Iowa, 8.25% interest rate, due April 1, 2001 5,719 $ 4,328 Note payable to Firstar Bank, Iowa, 7.75% interest rate, due January 1, 2002 2,704 2,174 Note payable to Firstar Bank, Iowa, 8.25% interest rate, due July 1, 2002 1,000 840 Note payable to Firstar Bank, Iowa, 7.35% interest rate, due August 1, 2003 2,959 ------- ------- 9,500 10,301 Less - current portion (2,168) (2,793) ------- ------- Total $ 7,332 $ 7,508 ======= =======
Long-term debt maturities at August 31, 1998 are as follows: 1999 $ 2,793 2000 3,024 2001 2,652 2002 1,186 2003 646 Thereafter ------- Total $10,301 =======
The Company has a revolving credit facility with Firstar Bank, Iowa. As of August 31, 1998, the Company could borrow up to $5,000 under this facility. All indebtedness requires monthly principal and interest payments until maturity when any remaining principal balance and interest shall be due. The revolving credit facility is secured by inventory, accounts receivable, and equipment. Remaining indebtedness is collateralized by all assets of the Company. The Company was in compliance with all debt covenants or received necessary waivers at August 31, 1997 and 1998. The carrying value of indebtedness approximates fair value because the floating interest rates reflect market rates and the fixed rates approximate market rates currently available to the Company for similar indebtedness. Interest paid amounted to $807, $925 and $877 for the years ended August 31, 1996, 1997 and 1998, respectively. All the indebtedness referred to above was retired in connection with Communications Instruments, Inc. purchase of the Company on March 19, 1999 (see Note 13). 7. LEASES The Company leases four manufacturing facilities from the stockholders of the Company (see Note 12) under noncancelable operating leases which have remaining terms from one to five years and which provide for various renewal options. The Company also leases a third party warehouse on a monthly basis based upon square footage occupied. No formal agreement exists for this lease. Total rent -10- expense charged to operations for all operating leases was $509, $524 and $521 for the years ended August 31, 1996, 1997 and 1998, respectively. Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at August 31, 1998 are as follows: 1999 $523 2000 370 2001 17 ---- Total $910 ====
The four manufacturing facilities leased by the Company from the stockholders were purchased by Communications Instruments, Inc. on March 19, 1999 (see Note 13). 8. INCOME TAXES The significant components of income tax expense are:
August 31, ----------------------------------- 1996 1997 1998 Current tax expense: Federal $1,094 $1,411 $1,153 State 269 332 271 ------ ------ ------ Total current tax expense 1,363 1,743 1,424 Deferred tax expense (benefit) 116 (37) 155 ------ ------ ------ Total tax expense $1,479 $1,706 $1,579 ====== ====== ======
Income tax payments amounted to $1,276, $1,471 and $1,156 for the years ended August 31, 1996, 1997 and 1998, respectively. The Company's effective tax rate differs from the statutory rate for the following reasons:
Year Ended August 31, ------------------------------------------- 1996 1997 1998 Provision at statutory federal tax rate 34.0% 34.0% 34.0% Effective state income tax rate 4.3 4.3 4.3 Nondeductible meals, entertainment and penalties 0.3 0.1 0.1 ---- ---- ---- 38.6% 38.4% 38.4% ==== ==== ====
-11- Deferred income taxes consisted of the following at August 31:
1997 1998 Current deferred tax assets: Inventory costs capitalization $ 154 $ 45 Other 67 67 ----- ----- Total current deferred tax assets 221 112 ----- ----- Long-term deferred tax assets: Fixed assets 45 64 Accrued expenses 164 99 ----- ----- Total long-term deferred tax assets 209 163 ----- ----- Deferred tax assets, net $ 430 $ 275 ===== =====
9. COMMITMENTS AND CONTINGENCIES From time to time, the Company is a party to certain lawsuits and administrative proceedings that arise in the conduct of its business. While the outcome of these lawsuits and proceedings cannot be predicted with certainty, management believes that the lawsuits and proceedings, either singularly or in the aggregate, would not have a material adverse effect on the financial condition or results of operations of the Company. 10. EMPLOYEE BENEFITS The Company has a 401(k) tax deferred retirement investment plan in which employees can elect to withhold between 1% and 15% of their pre-tax earnings. The plan is offered to all employees who have completed at least six (6) months of service with the Company and have completed at least 1000 hours of service during those six months. The plan has a 100% vesting clause in which all employee contributions and Company match amounts immediately vest. The Company matches 50% of all employees contributions up to 5% of the employees' annual salary. Employer contributions amounted to $114, $129 and $156 for the years ended August 31, 1996, 1997, and 1998. During 1996, the Company adopted a continuous improvement profit sharing plan in order to reward employees for improvements in the Company's operating results. All employees participate in the plan in which annual pay-out is determined by the stockholders of the Company, based upon a profitability indicator. This profitability indicator corresponds to a bonus amount as a percent of an employees' annual salary. Continuous improvement bonuses amounted to $81, $106 and $221 for the years ended August 31, 1996, 1997, and 1998. The Company also provides annual bonuses to certain key members of management. These bonuses are determined on a discretionary basis by the stockholders of the Company using factors such as length of service and contributions to key facets of the Company's operations. In addition to the annual bonus, another discretionary bonus is given to one key member of management for his role in the automation -12- and reengineering of certain plants. Total discretionary bonuses amounted to $499, $624 and $587 for the years ended August 31, 1996, 1997, and 1998. 11. SIGNIFICANT CUSTOMERS AND SUPPLIERS The Company's top ten customers constitute approximately 57%, 55% and 56% of net sales in 1996, 1997 and 1998, respectively. No single customer has accounted for more than 10% of the Company's net sales since 1996. The Company maintains both formal and informal sales agreements with its top ten customers, which are a mix of annual renewals and long-term contracts renewed on an annual basis. The Company's top ten suppliers constitute approximately 75% of purchases in 1996, 1997 and 1998. Copper wire, lamination steel, transformer bobbins, plastics and stampings are the primary materials purchased from these suppliers. 12. RELATED PARTY TRANSACTIONS The Company has numerous related party loans. The total outstanding balance disclosed below includes the Company's payment of life insurance premiums on behalf of the stockholders, in addition to other loaned amounts. The remaining balances represent loans with certain key employees. The following represents the outstanding principal balance for each individual as of August 31, 1997 and 1998:
Related Party 1997 1998 Gary Schreiner, stockholder $ 922 $1,248 Edward Chernoff, stockholder 150 150 Steve Schreiner, employee 31 Ben Shade, employee 26 18
The Company purchases a majority of its production machinery and equipment from Eagle Automation, which is wholly owned by a stockholder of the Company. The following reflects the Company's transactions with Eagle Automation over the three years ended August 31, 1998:
Transactions with Eagle Automation 1996 1997 1998 Purchases from $3,084 $3,573 $2,044 Net payable to, at August 31 479 5 Advances to, at August 31 200
The Company's largest customer is Motors & Armatures, a company that is wholly owned by a stockholder of the Company. The following reflects the Company's transactions with Motors & Armatures over the three years ended August 31, 1998:
Transactions with Motors & Armatures 1996 1997 1998 Sales to $5,239 $5,026 $5,288 Net receivable from, at August 31 367 322 474
13. SUBSEQUENT EVENTS (UNAUDITED) On March 19, 1999, Communications Instruments, Inc. ("CII") purchased all of the outstanding equity securities of the Company (the "Stock Purchase"). Pursuant to the Stock Purchase Agreement, CII paid approximately $59,400. In addition, if the Company achieves certain sales targets for the 12-month -13- periods ending December 31, 1999 and 2000, CII will make additional payments to the former stockholders of the Company not to exceed $4,000 in the aggregate. In connection with the Stock Purchase by CII, all the Company's indebtedness, including the revolving credit facility and notes payable to Firstar Bank of Cedar Rapids, Iowa, was paid in full. In connection with the Stock Purchase by CII, CII acquired four manufacturing facilities previously leased by the Company from the former stockholders of the Company. The Company sold its equity investments in real estate limited partnerships that invest in low income housing properties and related tax credits on February 13, 1999, for approximately $2,700, as such investments were excluded from the terms of the Stock Purchase Agreement. The sale of these investments resulted in a significant loss of approximately $2,600 to the Company, which management believes is attributable primarily to conditions of the sale that did not favor the Company, including, among other things, the limited time in which the sale could take place. * * * * * * -14- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in Thousands Except Share Amounts) - -------------------------------------------------------------------------------- February 28, 1999 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,573 Accounts receivable (less allowance for doubtful accounts: $25) 11,379 Inventories 4,407 Prepaids and other current assets 1,576 -------- Total current assets 18,935 PROPERTY, PLANT AND EQUIPMENT - Net 14,906 DEFERRED INCOME TAXES 275 -------- TOTAL ASSETS $ 34,116 ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 2,793 Revolving credit facility 5,524 Accounts payable 3,283 Accrued liabilities: Wages and commissions 1,031 Insurance 504 Other 326 -------- Total current liabilities 13,461 LONG-TERM DEBT 7,063 -------- Total liabilities 20,524 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Class B Common stock - $1.00 par value; 50,000 shares authorized, 1,000 shares issued and outstanding 1 Preferred stock - no par value; 50,000 shares authorized, 1,000 shares issued and outstanding Additional paid-in capital 863 Notes receivable from stockholders (1,863) Retained earnings 14,591 -------- Total stockholders' equity 13,592 -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,116 ========
See notes to condensed consolidated financial statements. -1- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in Thousands) - ------------------------------------------------------------------------------- Six Months Ended February 28, -------------------- 1998 1999 NET SALES $25,696 $30,877 COST OF SALES 21,244 25,430 ------- ------- GROSS MARGIN 4,452 5,447 OPERATING EXPENSES: Selling expenses 1,236 1,228 General and administrative expenses 859 969 Research and development expenses 185 162 ------- ------- Total operating expenses 2,280 2,359 ------- ------- OPERATING INCOME 2,172 3,088 INTEREST EXPENSE AND OTHER FINANCING COSTS - Net (416) (441) OTHER INCOME - Net 4 24 ------- ------- INCOME OF CONSOLIDATED GROUP BEFORE INCOME TAXES 1,760 2,671 INCOME TAX EXPENSE (665) (1,003) ------- ------- INCOME OF CONSOLIDATED GROUP 1,095 1,668 EQUITY IN LOSS OF LIMITED PARTNERSHIPS - Net of tax benefits of $94 and $29 and low income housing credits of $247 and $247 for 1998 and 1999, respectively 91 201 LOSS ON DISPOSAL OF LIMITED PARTNERSHIPS - Net of tax benefit of $940 (1,674) ------- ------- NET INCOME $ 1,186 $ 195 ======= =======
See notes to condensed consolidated financial statements. -2- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (Dollars in Thousands Except Share Amounts) - -------------------------------------------------------------------------------------------------------------------------- Notes Additional Receivable Common Stock Preferred Stock Paid-in From Shares Amount Shares Amount Capital Stockholders BALANCES - August 31, 1998 1,000 $ 1 1,000 $863 $(1,398) Increases to notes receivable from stockholders (465) Net income ------ ------ ------ ------ ---- ------- BALANCES - February 28, 1999 1,000 $ 1 1,000 $863 $(1,863) ====== ====== ====== ====== ==== =======
- ------------------------------------------------------------------------------- Total Retained Stockholders' Earnings Equity BALANCES - August 31, 1998 $14,396 $13,862 Increases to notes receivable from stockholders (465) Net income 195 195 ------- ------- BALANCES - February 28, 1999 $14,591 $13,592 ======= =======
See notes to condensed consolidated financial statements. -3- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars In Thousands) - ------------------------------------------------------------------------------------------ Six Months Ended February 28, ----------------- 1998 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,186 $ 195 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,578 1,795 Equity in (income) loss of limited partnerships 250 75 Loss on disposal of limited partnerships 2,614 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (1,748) (3,051) Decrease (increase) in inventories 1,189 (1,290) Decrease (increase) in advances for equipment 679 5 Decrease (increase) in prepaids and other current assets (829) (565) Increase (decrease) in accounts payable (668) (263) Increase (decrease) in accrued wages and commissions (320) (300) Increase (decrease) in accrued insurance 16 115 Increase (decrease) in accrued other liabilities 923 23 ------- ------- Net cash provided by (used in) operating activities 2,256 (647) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (1,581) (3,739) Investments in and contributions to limited partnerships (700) Proceeds from disposal of limited partnerships 2,654 ------- ------- Net cash used in investing activities (2,281) (1,085) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit facility 1,259 4,215 Borrowings under long-term debt agreements 950 Principal payments under long-term debt agreements (1,089) (1,395) Funds advanced to stockholders under notes receivable (145) (465) ------- ------- Net cash provided by financing activities 25 3,305 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- 1,573 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- -- ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ 1,573 ======= =======
See notes to condensed consolidated financial statements. -4- PRODUCTS UNLIMITED CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in Thousands) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The condensed consolidated financial statements have been prepared from the Company's books and records without audit and are subject to year-end adjustments. The condensed financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of information for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in this filing. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist of the following at February 28, 1999: Finished goods $1,775 Work-in-process 2,312 Raw materials and supplies 320 ------ Total $4,407 ------
3. CONTINGENCIES From time to time, the Company is a party to certain lawsuits and administrative proceedings that arise in the conduct of its business. While the outcome of the lawsuits and proceedings cannot be predicted with certainty, management believes that the lawsuits and proceedings, either singularly or in the aggregate, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. 4. NEW ACCOUNTING PRONOUNCEMENTS In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, or the Company's fiscal year ending August 31, 1999. SFAS No. 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The requirements of this statement only impact financial statement disclosure. Accordingly, this statements will have no impact on the Company's financial position or the results of its operations. Also in 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. It establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and -5- measure those instruments at fair value. The Company is assessing the impact this statement will have on its statement of financial position and the results of its operations. 5. SUBSEQUENT EVENTS On March 19, 1999, Communications Instruments, Inc. ("CII") purchased all of the outstanding equity securities of the Company (the "Stock Purchase"). Pursuant to the Stock Purchase Agreement, CII paid approximately $59,400. In addition, if the Company achieves certain sales targets for the 12-month periods ending December 31, 1999 and 2000, CII will make additional payments to the former stockholders of the Company not to exceed $4,000 in the aggregate. In connection with the Stock Purchase by CII, all the Company's indebtedness, including the revolving credit facility and notes payable to Firstar Bank of Cedar Rapids, Iowa, was paid in full. In connection with the Stock Purchase by CII, CII acquired four manufacturing facilities previously leased by the Company from the former stockholders of the Company. The Company sold its equity investments in limited partnerships that invest in low income housing properties and related tax credits on February 13, 1999, for approximately $2,700, as such investments were excluded from the terms of the Stock Purchase Agreement. The sale of these investments resulted in a loss of approximately $2,600 to the Company, which management believes is attributable primarily to conditions of the sale which did not favor the Company, including, among other things, the limited time in which the sale could take place. * * * * * * -6- -----END PRIVACY-ENHANCED MESSAGE-----