-----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, HTKqXljf4jFDFTl/u/NC2rXDtzeVoKHqyXYMs9cIFiXRvXFbYVSBBl2db88ny6Vz fIi5t9/JEv8hkb1MgjwcfQ== 0000950131-99-006264.txt : 19991115 0000950131-99-006264.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950131-99-006264 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 10-Q SEC ACT: SEC FILE NUMBER: 333-38209 FILM NUMBER: 99749917 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 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________ COMMUNICATIONS INSTRUMENTS, INC. (Exact name of registrant as specified in its charter) North Carolina 56-182-82-70 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 Ridgefield Blvd, Suite 200, 28806 Asheville, NC (Zip Code) (Address of principal executive offices) (828) 670-5300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Part 1. Financial Information Item 1. Financial Statements COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Amounts)
September 30, December 31, 1999 1998 -------------- --------------- (Unaudited) (1) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 802 $ 469 Accounts receivable (less allowance for doubtful accounts: September 30, 1999 - $375, 1998 - $479) 23,594 15,598 Inventories 26,908 26,656 Deferred income taxes 2,102 2,246 Other current assets 3,752 1,622 ------------- -------------- Total current assets 57,158 46,591 ------------- -------------- PROPERTY, PLANT AND EQUIPMENT, net 41,142 22,841 ------------- -------------- OTHER ASSETS: Environmental assets 1,523 1,560 Goodwill (net of accumulated amortization: September 30, 1999 - $3,371, 1998 - $1,872) 64,060 39,971 Intangible assets, net 31,661 18,705 Other noncurrent assets 354 213 ------------- -------------- Total other assets 97,598 60,449 ------------- -------------- TOTAL ASSETS $ 195,898 $ 129,881 ============= ============== LIABILITIES AND STOCKHOLDER'S DEFICIENCY CURRENT LIABILITIES: Accounts payable $ 13,782 $ 7,405 Accrued interest 712 2,799 Other accrued liabilities 8,502 6,334 Due to Parent 765 458 Current portion of long-term debt 6,479 5,637 ------------- -------------- Total current liabilities 30,240 22,633 LONG-TERM DEBT 181,613 133,044 ACCRUED ENVIRONMENTAL REMEDIATION COSTS 2,329 2,353 DEFERRED INCOME TAXES 14,024 7,041 OTHER NONCURRENT LIABILITIES 594 665 ------------- -------------- Total liabilities 228,800 165,736 ------------- -------------- CONTINGENCIES STOCKHOLDER'S DEFICIENCY: Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding - - Additional paid in capital 22,317 17,317 Accumulated deficit (55,171) (53,194) Accumulated other comprehensive income (loss) (48) 22 ------------- -------------- Total stockholder's deficiency (32,902) (35,855) ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY $ 195,898 $ 129,881 ============= ==============
(1) Derived from December 31, 1998 audited consolidated financial statements See notes to unaudited condensed consolidated financial statements COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) (In Thousands)
Three months ended Nine Months Ended -------------------------------- ----------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ---------------- -------------- -------------- -------------- Net sales $ 45,560 $ 34,933 $ 128,689 $ 88,585 Cost of sales 33,972 23,920 95,845 60,137 ---------------- -------------- -------------- -------------- Gross profit 11,588 11,013 32,844 28,448 Operating expenses: Selling expenses 2,940 2,639 9,173 6,210 General and administrative expenses 2,858 2,824 8,469 6,615 Research and development expenses 460 391 1,319 990 Amortization of goodwill and other intangibles 1,241 677 3,233 1,096 ---------------- -------------- -------------- -------------- Total operating expenses 7,499 6,531 22,194 14,911 ---------------- -------------- -------------- -------------- Operating income 4,089 4,482 10,650 13,537 Interest expense, net (4,676) (3,522) (13,027) (8,978) Other income (expense), net 180 (145) 179 (142) ---------------- -------------- -------------- -------------- Income (loss) before income taxes and extraordinary item (407) 815 (2,198) 4,417 Provision for (benefit from) income taxes 79 360 (221) 1,817 ---------------- -------------- -------------- -------------- Income (loss) before extraordinary item (486) 455 (1,977) 2,600 Extraordinary item - early extinguishment of debt (less income tax benefit of $234) 0 0 0 351 ---------------- -------------- -------------- -------------- Net income (loss) (486) 455 (1,977) 2,249 Other comprehensive income (loss): Foreign currency translation adjustment 44 51 (70) 52 ---------------- -------------- -------------- -------------- Other comprehensive income (loss) 44 51 (70) 52 ---------------- -------------- -------------- -------------- Comprehensive income (loss) $ (442) $ 506 $ (2,047) $ 2,301 ================ ============== ============== ==============
See notes to unaudited condensed consolidated financial statements. COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
Nine Months Ended September 30, ------------------------ 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (1,977) $ 2,249 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 9,726 4,907 Deferred income taxes (828) (927) Extraordinary loss - 585 Loss on disposal of assets - 76 Other - 16 Changes in operating assets and liabilities, net of effects of acquisitions: Decrease (increase) in accounts receivable 825 (2,549) Decrease (increase) in inventories 3,952 (718) (Increase) decrease other current assets (105) 197 Increase in accounts payable 507 1,095 Increase in accrued liabilities 415 987 Decrease in accrued interest (2,087) (2,437) Changes in other assets and liabilities (210) (27) ---------- ---------- Net cash provided by operating activities 10,218 3,454 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses, net of cash received (60,261) (47,675) Purchases of property, plant and equipment (2,830) (1,915) Investment in joint ventures (144) (95) ---------- ---------- Net cash used in investing activities (63,235) (49,685) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit (1,200) 13,800 Borrowings under long-term debt agreements 55,000 35,000 Repayments under long-term debt agreements (3,512) (1,000) Net repayments under former line of credit - (5,800) Loan proceeds - 100 Payment of loan financing fees (1,702) (821) Payment of capital lease obligations (68) (65) Advances from parent 307 115 Repayments of amounts owed to former stockholders of subsidiary - (113) Payment of note to ibex shareholders (450) - Additional paid-in capital (from parent) 5,000 5,000 Other (25) 107 ---------- ---------- Net cash provided by financing activities 53,350 46,323 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 333 92 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 469 298 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 802 $ 390 ========== ==========
Supplemental schedule of noncash investing and financing activities: During the period ended September 30, 1999, the noninterest bearing note payable to the former owners of ibex Aerospace, Inc. was reduced by $400 as a result of an amendment to the purchase agreement. This amendment also resulted in a decrease of goodwill of $269. See notes to unaudited condensed consolidated financial statements Communications Instruments, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands except share amounts) 1. Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Communications Instruments, Inc. and its wholly owned subsidiaries (the "Company"). The Company's subsidiaries, Kilovac Corporation ("Kilovac"), which became a wholly owned subsidiary on September 18, 1997, Electro-Mech S.A. ("Electro-Mech"), Corcom, Inc. ("Corcom"), which became a wholly owned subsidiary on June 19, 1998, Products Unlimited Corporation ("Products"), which became a wholly owned subsidiary on March 19,1999, operate facilities in Carpenteria, California (Kilovac), Juarez, Mexico (Electro-Mech and Corcom), Libertyville, Illinois (Corcom), Sterling and Prophetstown, Illinois (Products), Sabula and Guttenburg, Iowa (Products) and Munich, Germany (Corcom). The interim financial data as of and for the quarters and the nine months ended September 30, 1999 and September 30, 1998 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, it does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In management's opinion, all adjustments (consisting only of adjustments of a normal recurring nature) necessary for a fair presentation have been included. The December 31, 1998 financial information was derived from audited consolidated financial statements, but excludes certain disclosures included in the Company's audited consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1998 as well as the other information included in the Company's annual report filed on Form 10-K. The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results for the year ending December 31, 1999 or any other interim period. 2. Recapitalization, Acquisitions and Joint Venture Recapitalization On September 18, 1997, the Company entered into a series of recapitalization transactions (collectively the "Transactions"). The Transactions are described below. Code, Hennessy & Simmons III, L.P., certain members of Company management and certain other investors acquired approximately 87% of the capital stock of CII Technologies, Inc., a Delaware Corporation (the "Parent"). Communications Instruments, Inc. is a wholly owned subsidiary of the Parent. Certain of the Parent's existing stockholders, including certain members of management, retained approximately 13% of the Parent's capital stock (collectively, the "Recapitalization"). Concurrently, the Company issued $95.0 million of 10% Senior Subordinated Notes due 2004 (the "Old Notes") pursuant to an Indenture, dated September 18, 1997, by and among Communications Instruments, Inc., Kilovac, Kilovac International, Inc. ("Kilovac International") and Norwest Bank Minnesota, National Association (the "Indenture") through a private placement offering permitted by Rule 144A of the Securities Act of 1933, as amended (the "Offering"). On January 30, 1998, the Company filed a registration statement with the Securities and Exchange Commission for the registration of its 10% Senior Subordinated Notes due 2004, Series "B" (the "Notes") to be issued in exchange for the Old Notes (the "Exchange"). The registration statement became effective on January 30, 1998 and the Exchange was completed on March 9, 1998. Also, on September 18, 1997, the Company borrowed approximately $2.7 million pursuant to a senior credit facility with a syndicate of financial institutions providing for revolving loans of up to $25.0 million that was subsequently retired in connection with the acquisition of Corcom on June 19, 1998 (the "Old Senior Credit Facility"). The Company repaid approximately $29.3 million of outstanding obligations under the then existing credit facility (the "Old Credit Facility"), including a success fee of approximately $1.5 million in connection therewith and certain other liabilities (the "Refinancing"). Additionally, the Company paid a dividend of approximately $59.4 million to the Parent, which was used by the Parent in conjunction with the proceeds of issuances of the Parent's common stock (approximately $9.8 million), the Parent's preferred stock (approximately $2.0 million) and junior subordinated debt of the Parent (approximately $12.7 million) as follows: approximately $71.5 million was used to purchase shares of the Parent's capital stock from existing shareholders; approximately $3.5 million was used to pay Recapitalization and other financing expenses; and approximately $7.6 million was used to repay certain indebtedness of the Parent. Acquisitions Acquisitions, unless otherwise noted below, are accounted for as purchases. The purchase prices are allocated to the assets acquired and liabilities assumed based on their fair values, and any excess cost is allocated to goodwill. The fair value of significant property, plant and equipment and intangibles and other assets acquired are determined generally by appraisals. Products Unlimited On March 19, 1999, the Company purchased all of the outstanding equity securities of Products (the "Products Acquisition"), a manufacturer and marketer of relays, transformers, and contactors for the HVAC industry. Pursuant to the Stock Purchase Agreement, the Company paid approximately $59.4 million. In addition, if Products achieves certain sales targets for the years ending December 31, 1999 and December 31, 2000, the Company will make additional payments to the former shareholders of Products not to exceed $4.0 million in the aggregate. The payment of the purchase price and related fees was financed by the issuance of $55.0 million of Tranche Term B loans, in accordance with an amendment to the Senior Credit Facility (as defined), the contribution of $5.0 million in additional paid in capital by the Parent, and a draw on the revolving loan portion of the Company's Senior Credit Facility (as defined). Products has manufacturing facilities in Sterling and Prophetstown, Illinois and Sabula and Guttenberg, Iowa and has approximately 1,000 employees. The allocation of purchase price is subject to final determination based on changes in certain estimates of asset valuations and determinations of liabilities assumed that may occur within the first year of operations. Management believes that there may be material changes to the allocation of the purchase price to certain assets and liabilities. Cornell Dubilier On July 24, 1998, the Company purchased certain assets and assumed certain liabilities of the Cornell Dubilier electronics relay division ("CD") for $848 (the "CD Acquisition"). During 1998, CD was consolidated into the Company's Midtex Division. The CD Acquisition was financed through a draw on the Company's Senior Credit Facility. Pro forma financial information is not presented relating to the CD Acquisition, as this entity was not a significant subsidiary of the Company in 1998. Corcom, Inc. On June 19, 1998, the Company acquired all of the outstanding capital stock of Corcom, an Illinois corporation pursuant to the merger of RF Acquisition Corp., a newly formed wholly owned subsidiary of the Company, with and into Corcom (the "Corcom Merger"). The Company paid $13.00 per share to the shareholders of Corcom in exchange for the shares received in the Corcom Merger (approximately $51.1 million in the aggregate). The Company used a portion of the proceeds of $48.1 million of borrowings under a $60.0 million credit facility entered into with the Bank of America National Trust and Savings Association on June 19, 1998 (the "Senior Credit Facility"), additional paid-in capital of $5.0 million contributed by the Parent, and $7.4 million in cash from Corcom to finance the Merger, repay $7.4 million of debt and fund the related merger costs. Corcom is an electromagnetic interference filter manufacturer located in Libertyville, Illinois. Wilmar Electronics Inc. On May 6, 1998, the Company purchased certain assets and assumed certain liabilities of Wilmar Electronics Inc. ("Wilmar") for approximately $2.1 million (the "Wilmar Acquisition"). Wilmar was a producer of high performance protective relays. Wilmar was consolidated into the Company's Kilovac subsidiary in June 1998. The Wilmar acquisition was financed with a draw on the Company's Old Senior Credit Facility. Pro forma financial information is not presented relating to the Wilmar Acquisition as this entity was not a significant subsidiary of the Company in 1998. Genicom Relays Division On December 1, 1997, the Company acquired certain assets and assumed certain liabilities of the Genicom Relays Division ("GRD") of Genicom Corporation ("Genicom") for approximately $4.7 million (the "GRD Acquisition"). GRD, located in Waynesboro, Virginia, is a manufacturer of high performance signal relays. The GRD Acquisition was financed by a draw on the Company's Old Senior Credit Facility. The Company has announced the relocation of the manufacturing in its Waynesboro, VA facility to its facilities in North Carolina. These plans were finalized in late 1998. The relocation will be completed by the end of 1999. The estimated costs of this facility relocation, including estimated costs of employee separation and preparing the North Carolina facilities for the relocation, are approximately $1.1 million. Management expects that a significant portion of these costs will be expensed as incurred during 1999. Approximately $685 of these costs were expensed in the nine months ended September 30, 1999. ibex Aerospace Inc. On October 31, 1997, the Company acquired certain assets and assumed certain liabilities of ibex Aerospace Inc. ("ibex") for approximately $2.0 million (the "ibex Acquisition"). Of the $2.0 million, approximately $1.3 million was paid at closing. The company issued a noninterest bearing note payable to the sellers in the amount of $850 (discounted to $697) for the remainder of the purchase price. This note was payable on October 31, 1999. Ibex was a manufacturer and marketer of high current electromechanical relays for critical applications in the military and commercial aerospace markets. In 1998, ibex was consolidated into the Company's Hartman Division ("Hartman"). The transaction was financed through a draw on the Company's Old Senior Credit Facility and the issuance of the note payable to the sellers discounted to $697. In September 1999, the Company and the sellers agreed to adjust the purchase price of ibex and reduce the amount of the note payable by $400. The remaining note payable balance of $450 was repaid by the Company in September 1999. The reduction in purchase price less applicable expenses was credited to goodwill. Kilovac Corporation - 20% Purchase On September 18, 1997, the Company purchased for approximately $4.5 million the remaining 20% of the outstanding stock of Kilovac that the Company did not then own (the "Kilovac Purchase"). The transaction was financed through proceeds from the Recapitalization and the issuance of senior subordinated notes. On October 11, 1995, the Company had purchased an 80% ownership interest in Kilovac for an aggregate purchase price of approximately $15.681 million including acquisition costs of approximately $1.3 million. Kilovac designs and manufactures high voltage electromechanical relays. The Company was obligated to purchase the remaining 20% interest in Kilovac at the option of the selling shareholders on either December 31, 2000 or December 31, 2005, or upon the occurrence of certain events, if earlier, at an amount determined in accordance with the terms of the purchase agreement. An estimated $2.3 million ($468, net of tax at September 30, 1999 and December 31, 1998) was initially payable to the sellers upon the future realization of potential tax benefits associated with a net operating loss carryforward. The following summarizes the purchase price allocations as of the respective dates of acquisitions:
Kilovac ibex GRD Wilmar Corcom CD Products Purchase Acquisition Acquisition Acquisition Merger Acquisition Acquisition Current assets $ 47 $ 1,041 $ 3,887 $ 381 $ 12,761 $ 505 $ 15,050 Property, plant and equipment 169 150 2,045 80 7,374 82 21,237 Intangibles and other assets 4,577 1,493 24 2,023 35,550 380 39,738 Liabilities assumed (293) (965) (1,273) (356) (10,635) (119) (15,901) ------- ------- ------- ------- -------- ------- -------- Purchase price, net of acquired cash $ 4,500 $ 1,719 $ 4,683 $ 2,128 $ 45,050 $ 848 $ 60,124 ======= ======= ======= ======= ======== ======= ========
The following unaudited nine months of 1998 pro forma financial information shows the results of operations as though the Corcom Merger and the Products Acquisition occurred as of January 1, 1998. The following unaudited nine months of 1999 pro forma financial information shows the results of operations as though the Products Acquisition occurred as of January 1, 1999. These results include, but are not limited to, the straight-line amortization of excess purchase price over the net assets acquired over a thirty-year period and an increase in interest expense as a result of the debt borrowed to finance the transactions.
Nine Months ended September 30, ------------- 1999 1998 ---- ---- Net sales $143,936 $151,032 Operating income 12,475 17,831 Income (loss) before extraordinary item (1,602) 1,453 Net income (loss) (1,602) 1,102
The unaudited pro forma financial information presented above does not purport to be indicative of either (i) the results of operations had the Products Acquisition taken place on January 1, 1999 or had the Corcom Merger and the Products Acquisition taken place on January 1, 1998 or (ii) future results of operations of the combined businesses. Joint Ventures In January 1999, the Company formed a joint venture, Shanghai CII Electronics Co. Ltd. with Shanghai CI Electric Appliance Co. Ltd (the "Chinese Joint Venture"). Each party holds 50% of the shares of the new company. The new joint venture is a manufacturer and marketer of relay components. The Company's investment was approximately $144. The Chinese Joint Venture began production in March 1999. 3. Inventories Components of inventory are as follows:
September 30, December 31, 1999 1998 ---- ---- Finished goods $ 7,219 $ 6,786 Work-in-process 8,042 9,093 Raw materials and supplies 18,170 17,401 Reserve for obsolescence (6,523) (6,624) ------- ------- Total $26,908 $26,656 ======= =======
4. Long -Term Debt On June 19, 1998, the Company retired the Old Senior Credit Facility and borrowed approximately $48.1 million pursuant to a senior credit facility with a syndicate of financial institutions providing for revolving loans of up to $25.0 million and term loans of $35.0 million (the "Senior Credit Facility"). On March 19, 1999 the Company was issued a Tranche B Term Loan of $55.0 million as an amendment to the Senior Credit Facility. The Company's long-term debt at September 30, 1999 consists primarily of the $95.0 million Notes and revolving loans of $8.5 million and term loans of $84.5 million under the Senior Credit Facility. The Company and its wholly owned subsidiaries, Kilovac, Kilovac International, Inc., Corcom, Inc., Products Unlimited Corporation, Marc Industries, Inc., SOL Industries, Inc., and GW Industries, Inc. have guaranteed the Notes on a full, unconditional, and joint and several basis, which guarantees are fully secured by the assets of such guarantors. Communications Instruments, Inc., its wholly owned subsidiaries, including Kilovac, Kilovac International, Inc. and Corcom, Inc., Products Unlimited Corporation, Marc Industries, Inc., SOL Industries, Inc., GW Industries, Inc. and the Parent have guaranteed the Senior Credit Facility on a full, unconditional, and joint and several basis which guarantees are fully secured by the assets of such guarantors. Interest on the Notes is payable semi-annually in arrears on March 15 and September 15 of each year, and commenced on March 15, 1998. The Notes will mature on September 15, 2004, unless previously redeemed, and the Company will not be required to make any mandatory redemption or sinking fund payment prior to maturity except in connection with a change in ownership. The Notes may be redeemed, in whole or in part, at any time on or after September 15, 2001 at the option of the Company, at the redemption prices set forth in the Indenture, plus, in each case, accrued and unpaid interest and premium, if any, to the date of the redemption. In addition, at any time prior to September 15, 2000, the Company may at its option, redeem up to 33.3% in aggregate principal amount of the Notes at a redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption, with the net cash proceeds of an Equity Offering (as defined in the Indenture), provided that not less than $63.4 million aggregate principal amount of the Notes remains outstanding immediately after the occurrence of such redemption. The Senior Credit Facility provides for a maximum credit facility of $115.0 million limited by outstanding indebtedness under the initial $90.0 million term loan agreements (as amended) or availability on the borrowing base, as defined in the loan agreement. All funds may be borrowed as either a base rate loan or LIBOR loan. For base rate loans and LIBOR loans an applicable margin is added to the base rate interest rate or the LIBOR interest rate based on a Consolidated Senior Leverage Ratio Level (as defined in the Senior Credit Facility). The base rate interest rate is the higher of a Reference Rate (as defined) or the federal funds rate plus 1/2%. The "Reference Rate" means the rate of interest announced by the lender as "Reference Rate." At September 30, 1999, LIBOR borrowing rates ranged from 7.875% to 8.6875%. At September 30, 1999, the base rate-borrowing rate was 9.75%. The weighted average borrowing rate, calculated based on borrowings outstanding at September 30, 1999 under base rate and LIBOR loans was 8.36%. The Senior Credit Facility provides a line of credit of $25.0 million due on June 19, 2003, a Tranche A term loan with a remaining balance of $29.6 million due in full by June 19, 2003, and a Tranche B Term Loan of $54.9 million due in full by March 15, 2004. The Tranche A term loan is payable as follows: $1.4 million remaining in 1999, $6.3 million in 2000, $7.8 million in 2001, $9.3 million in 2002, $5.0 million in 2003. The Tranche B term loan is payable as follows: $138 remaining in 1999, $550 in 2000, $550 in 2001, $550 in 2002, $26.7 million in 2003 and $26.4 million in 2004. The terms of the Senior Credit Facility and the Indenture place restrictions on the Company including, but not limited to the Company's ability to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments (as defined), consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with any person or sell, assign, transfer, lease, convey or otherwise dispose of the assets of the Company and its subsidiaries. The Senior Credit Facility has a Mandatory prepayment clause based upon a calculation of excess cash flow (as defined in the Senior Credit Facility). The first excess cash payment date is 90 days after the last day of fiscal year ending December 31, 1999. The Senior Credit Facility also contains financial covenants including interest coverage ratios, leverage ratios, fixed charge coverage ratios, limitations on capital expenditures and minimum levels of earnings before interest, taxes, depreciation and amortization, as defined by the Senior Credit Facility. As of September 30, 1999, the Company was in compliance with all of the terms of the Indenture and the covenants of the Senior Credit Facility. Letters of credit outstanding under the Senior Credit Facility were $100 at September 30, 1999 and $950 at December 31, 1998. The Senior Credit Facility requires the Company to pay commitment fees at an annual rate of 0.5% on the undrawn amount of the Senior Credit Facility, subject to adjustment based on the Consolidated Senior Leverage Ratio of the Company. As of September 30, 1999, the Company had available unused borrowing capacity of approximately $16.4 million under the Senior Credit Facility. 5. Contingencies From time to time the Company is a party to certain lawsuits and administrative proceedings that arise in the conduct of its business. While the outcome of the lawsuits and proceedings cannot be predicted with certainty, management believes that the lawsuits and proceedings, either singularly or in the aggregate, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. 6. Segment Disclosure The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, during the fourth quarter of 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The adoption of SFAS No. 131 results in revised and additional disclosures but had no effect on the financial position or results of operations of the Company. The information for the nine months ended September 30, 1998 has been restated from the prior year's presentation in order to conform to the 1999 presentation. The Company has six business units which have separate management teams and infrastructures that offer electronic products. These business units have been aggregated into two reportable segments that are managed separately because each operating segment represents a strategic business platform that offers different products and serves different markets. The Company's two reportable operating segments are: (i) the High Performance Group ("HPG") and (ii) the Specialized Industrial Group ("SIG"). HPG includes the Communications Instruments Division, Kilovac and Hartman. Products manufactured by HPG include high performance signal level relays and power relays, high voltage and power switching relays, solenoids and other electronic products. SIG includes Corcom, Midtex Division and Products. The SIG group manufactures RFI filters, general purpose relays, contactors and transformers. The accounting policies of the operating segments are the same as those of the Company. Intersegment sales, which are eliminated in consolidation, are recorded at standard cost. In evaluating financial performance, management focuses on operating income as a segment's measure of profit or loss. Operating income is before interest expense, interest income, other income and expense, income taxes and extraordinary items. Financial information for the Company's operating segments and a reconciliation of reportable segment net sales, operating income, and assets to the Company's consolidated totals are as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales: High Performance Group $ 17,550 $ 22,738 $ 57,334 $ 68,583 Specialized Industrial Group 28,126 12,329 71,858 20,355 Intersegment elimination (1) (116) (134) (503) (353) -------- -------- -------- -------- Consolidated net sales $ 45,560 $ 34,933 $128,689 $ 88,585 ======== ======== ======== ======== Operating income: High Performance Group $ 2,211 $ 4,216 $ 6,846 $ 13,133 Specialized Industrial Group 2,370 938 5,984 2,122 Corporate Allocations (2) (492) (672) (2,180) (1,718) ------- -------- -------- -------- Consolidated operating income 4,089 4,482 10,650 13,537 ------- -------- -------- -------- Interest expense, net (4,676) (3,522) (13,027) (8,978) Other income (expense), net 180 (145) 179 (142) ------- -------- -------- -------- Consolidated income (loss) before income taxes $ (407) $ 815 $ (2,198) $ 4,417 ======= ======== ======== ======== Depreciation and amortization expense: High Performance Group $ 3,599 $ 3,407 Specialized Industrial Group 5,373 970 -------- -------- 8,972 4,377 Amortization of debt issuance costs (3) 754 530 -------- -------- Consolidated depreciation and amortization expense $ 9,726 $ 4,907 ======== ======== Purchases of property, plant and equipment: High Performance Group $ 1,397 $ 1,546 Specialized Industrial Group 1,431 369 Corporate Allocation (2) 2 - -------- -------- Consolidated capital expenditures $ 2,830 $ 1,915 ======== ========
September 30, December 31, 1999 1998 ---- ---- Assets: High Performance Group $ 64,869 $ 69,351 Specialized Industrial Group 131,029 60,530 --------- -------- Consolidated assets $ 195,898 $129,881 ========= ========
(1) - represents net sales between HPG and SIG (2) - represents the Corporate general and administrative expenses. Management does not consider these costs in managing the operations of the reportable segments (3) - included on the consolidated statements of cash flows as depreciation and amortization and included in the consolidated statement of operations as interest expense. Management does not consider these costs in managing the operations of the reportable segments 7. New Accounting Pronouncements The Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for all fiscal quarters of fiscal years beginning after June 15, 1999 (the effective date has been extended to all fiscal quarters of fiscal years beginning after June 15, 2000 by the issuance in June 1999 of SFAS No. 137). The new standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has not determined at this time what impact, if any, that this new accounting standard will have on its financial statements. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Some of the matters discussed below and elsewhere herein contain forward-looking statements regarding the future performance of the Company and future events. These matters involve risks and uncertainties that could cause actual results to differ materially from the statements contained herein. The following discussion and analysis provides information which management believes is relevant to an understanding of the operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this quarterly report as well as in the Registrant's Annual Report for the year ended December 31, 1998 on Form 10-K Overview In March 1999, the Company purchased all of the outstanding equity securities of Products, a manufacturer and marketer of relays, transformers, and contactors for the HVAC industry. Pursuant to the Stock Purchase Agreement, the Company paid approximately $59.4 million. In addition, if Products achieves certain sales targets for the years ending December 31, 1999 and December 31, 2000, the Company will make additional payments to the former shareholders of Products not to exceed $4.0 million in the aggregate. The payment of the purchase price and related fees was financed by the issuance of $55.0 million of Tranche Term B loans, in accordance with an amendment to the Senior Credit Facility (as defined), the contribution of $5.0 million in additional paid in capital by the Parent, and a draw on the revolving loan portion of the Company's Senior Credit Facility (as defined). Products has manufacturing facilities in Sterling and Prophetstown, Illinois and Sabula and Guttenberg, Iowa and has approximately 1,000 employees. The acquisition has been accounted for under the purchase method of accounting. In July 1998, the Company purchased certain assets and assumed certain liabilities of Cornell Dubilier's electronics relay division ("CD") for $848,000 (the "CD Acquisition"). The CD Acquisition was financed with a draw on the Company's Senior Credit Facility. In June 1998, the Company acquired all of the outstanding capital stock of Corcom, Inc., an Illinois corporation ("Corcom") pursuant to the merger of RF Acquisition Corp., a newly formed wholly owned subsidiary of the Company, with and into Corcom (the "Corcom Merger"). The Company paid $13.00 per share to the shareholders of Corcom in exchange for the shares received in the Merger (approximately $51.1 million in the aggregate). The Company used a portion of the proceeds of $48.1 million of borrowings under a credit facility entered into with the Bank of America National Trust and Savings Association on June 19, 1998 (the "Senior Credit Facility"), additional paid in capital of $5.0 million contributed by the Parent, and $7.4 million in cash from Corcom to finance the Merger, repay $7.4 million of debt (the "Old Senior Credit Facility") and fund the related merger costs. Corcom is an electromagnetic interference filter manufacturer located in Libertyville, Illinois. In May 1998, the Company purchased certain assets and assumed certain liabilities of Wilmar Electronics Inc. ("Wilmar") for approximately $2.1 million (the "Wilmar Acquisition"). Wilmar was consolidated into the Kilovac Subsidiary in June 1998. The Wilmar Acquisition was financed with a draw on the Company's Old Senior Credit Facility. In December 1997, the Company purchased certain assets and assumed certain liabilities of Genicom Relays Division ("GRD") of Genicom Corporation for $4.7 million (the "GRD Acquisition"). The Company financed the GRD Acquisition with funds borrowed on the Old Senior Credit Facility. In October 1997, the Company purchased 100% ownership in ibex Aerospace Inc. ("ibex") for $2.0 million, excluding expenses (the "ibex Acquisition"). ibex was a wholly owned subsidiary of SOFIECE of Paris, France. The ibex operation was consolidated into the Company's Hartman division in 1998. Of the $2.0 million purchase price, approximately $1.3 million was paid at closing, and the remainder of the purchase price was paid by the Company through the issuance of a non-interest bearing note in the amount of $850,000 to the sellers, which note was payable on October 31, 1999. The Company financed the $1.3 million paid at closing with funds borrowed on the Old Senior Credit Facility. In September 1999, the Company and the sellers agreed to adjust the purchase price of ibex and reduce the note payable by $400,000. The remaining note payable of $450,000 was repaid by the Company in September 1999. The reduction in purchase price less applicable expenses was credited to goodwill. Due to the Company's historical growth through acquisitions, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Results of Operations The following table sets forth information derived from the unaudited condensed consolidated statements of operations expressed as a percentage of net sales for the periods indicated. There can be no assurance that the trends in operating results will continue in the future.
Nine months Ended Three Months Ended September 30 September 30 ------------------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 74.5% 67.9% 74.6% 68.5% Gross profit 25.5% 32.1% 25.4% 31.5% Selling expenses 7.1% 7.0% 6.5% 7.6% General and administrative expenses 6.6% 7.5% 6.3% 8.1% Research and development expenses 1.0% 1.1% 0.9% 1.1% Amortization of goodwill and other intangibles 2.5% 1.2% 2.7% 1.9% Operating income 8.3% 15.3% 9.0% 12.8%
Discussion of Consolidated Results of Operations Nine Months Ended September 30, 1999 Compared to Nine months Ended September 30, 1998 Net sales of the Company for the nine months ended September 30, 1999, increased $40.1 million, or 45.3%, to $128.7 million from $88.6 million for the corresponding period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, net sales of the Company for the nine months ended September 30, 1999, decreased $13.2 million, or 15.1%, to $74.4 million from $87.6 million for the corresponding period in 1998. This decrease is due primarily to (i) a softening in military/defense and the automatic test equipment markets, (ii) a 1998 peak in a certain type of relay use in the communications market (iii) a 12 day labor strike at one of the Divisions in September, (iv) the relocation of operations due to required requalifications in the customer base, partially offset by (v) the effect of the Wilmar Acquisition and the CD Acquisition. Gross profit of the Company for the nine months ended September 30, 1999, increased $4.4 million, or 15.5%, to $32.8 million from $28.4 million for the corresponding period in 1998. Gross profit as a percentage of net sales decreased to 25.5% from 32.1% for the same period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, gross profit of the Company for the nine months ended September 30, 1999, decreased $7.5 million, or 26.8%, to $20.6 million from $28.1 million for the corresponding period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, gross profit as a percentage of net sales decreased to 27.7% from 32.1% for the corresponding period in 1998. The decrease in gross margin as a percentage of net sales is due primarily to (i) lower gross profits as a percentage of net sales for acquired companies, (ii) a charge of approximately $683,000 in 1999 for a portion of the costs of relocating the Waynesboro, VA facility, and (iii) lower volumes at lower sales prices in an increasingly competitive market partially offset by continued cost reductions. Selling expenses for the Company for the nine months ended September 30, 1999, increased $3.0 million, or 47.7%, to $9.2 million from $6.2 million for the same corresponding period in 1998. Selling expenses as a percentage of net sales increased to 7.1% from 7.0% in the same period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, selling expenses for the Company for the nine months ended September 30, 1999, decreased $24,000, or 0.4%, to $6.1 million. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, selling expenses as a percentage of net sales increased to 8.2% from 7.0% for the same period in 1998. This increase in selling expenses as a percentage of net sales is due primarily to the slightly higher costs associated with a newly organized Corporate Sales and Marketing Department in addition to lower revenues. General and administrative expenses for the Company for the nine months ended September 30, 1999, increased $1.9 million, or 28.0%, to $8.5 million from $6.6 million in 1998. General and administrative expenses as a percentage of net sales decreased to 6.6% from 7.5% for the corresponding period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, general and administrative expenses for the Company for the nine months ended September 30, 1999 decreased $391,000, or 8.2%, to $6.1 million from $6.5 million for the corresponding period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, general and administrative expenses as a percentage of net sales increased to 7.8% from 7.4% for the corresponding period in 1998. This increase in general and administrative expenses as a percentage of net sales is primarily attributed to a larger decline in revenues for the period relative to the decline experienced in general and administrative expenses for the same period. Research and development expenses for the Company for the nine months ended September 30, 1999, increased $329,000, or 33.2%, to $1.3 million from $990,000 for the corresponding period in 1998. Excluding Corcom for the period for June 19 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, research and development expenses for the nine months ended September 30, 1999, increased $28,000, or 2.8%, to $1.0 million from $983,000 for the corresponding period in 1998. Amortization of goodwill and other intangibles for the Company for the nine months ended September 30, 1999, increased $2.1 million, or 195.0%, to $3.2 million from $1.1 million for the corresponding period in 1998. Excluding Corcom for the period for June 19 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, amortization of goodwill and other intangibles for the Company for the nine months ended September 30, 1999, increased $25,000, or 2.4%, to $1.1 million. This increase is due primarily to the amortization of goodwill due to the CD Acquisition (third quarter of 1998) and the Wilmar Acquisition (second quarter of 1998). Interest expense of the Company for the nine months ended September 30, 1999, increased $4.0 million, or 45.1%, to $13.0 million from $9.0 million for the corresponding period in 1998. The increase was due primarily to the increased debt levels associated with financing the Corcom Merger, the Products Acquisition, and the CD Acquisition. Income taxes of the Company for the nine months ended September 30, 1999 were 10.1% of loss before income taxes as compared to 41.1% of income before income taxes for the corresponding period in 1998. The decreased effective tax rate as a percentage of pre-tax income (loss) is due primarily to the effect of goodwill amortization not deductible for tax purposes from the Corcom Merger and the Products Acquisition. Extraordinary item for the nine months ended September 30, 1998 reflects the write-off of $585,000 of unamortized deferred financing costs associated with the early retirement of the Old Senior Credit Facility net of taxes of $234,000. Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Net sales of the Company for the quarter ended September 30, 1999, increased $10.6 million, or 30.4%, to $45.6 million from $34.9 million for the corresponding period in 1998. Excluding the effect of the Products Acquisition, net sales of the Company for the quarter ended September 30, 1999, decreased $5.1 million, or 14.7%, to $29.8 million from $34.9 million for the corresponding period in 1998. This decrease is due primarily to (i) a softening in military/defense and the automatic test equipment markets, (ii) a 1998 peak in a certain type of relay use in the communications market (iii) a 12 day labor strike at one of the Divisions in September partially offset by (iv) the effect of the Wilmar Acquisition and the CD Acquisition. Revenues were also unfavorably impacted by the relocation of operations due to required requalifications in the customer base. Gross profit of the Company for the quarter ended September 30, 1999, increased $575,000, or 5.2%, to $11.6 million from $11.0 million for the corresponding period in 1998. Gross profit as a percentage of net sales decreased to 25.4% from 31.5% for the same period in 1998. Excluding the effect of the Products Acquisition, gross profit of the Company for the quarter ended September 30, 1999, decreased $2.1 million, or 19.2%, to $8.9 million from $11.0 million for the corresponding period in 1998. Excluding the effect of the Products Acquisition, gross profit as a percentage of net sales decreased to 29.9% from 31.5% for the corresponding period in 1998. The decrease in gross margin as a percentage of net sales is due primarily to (i) lower gross profits as a percentage of net sales for acquired companies, (ii) a charge of approximately $319,000 in 1999 for a portion of the costs of relocating the Waynesboro, VA facility, and (iii) lower volumes at lower sales prices in an increasingly competitive market partially offset by continued cost reductions. Selling expenses for the Company for the quarter ended September 30, 1999, increased $301,000, or 11.4%, to $2.9 million from $2.6 million for the corresponding period in 1998. Selling expenses as a percentage of net sales decreased to 6.5% from 7.6% in the same period in 1998. Excluding the effect of the Products Acquisition, selling expenses for the Company for the quarter ended September 30, 1999, decreased $266,000, or 10.1%, to $2.4 million from $2.6 million for the corresponding period in 1998. Excluding the effect of the Products Acquisition, selling expenses as a percentage of net sales increased to 8.0% from 7.6% for the same period in 1998. This increase in selling expenses as a percentage of net sales is due primarily to the slightly higher costs associated with a newly restructured Corporate Sales and Marketing Department against lower revenues, partially offset by restructuring of the Company's commission system. General and administrative expenses for the Company for the quarter ended September 30, 1999, increased $34,000, or 1.2%, to $2.9 million from $2.8 million in 1998. General and administrative expenses as a percentage of net sales decreased to 6.3% from 8.1% for the corresponding period in 1998. Excluding the effect of the Products Acquisition, general and administrative expenses for the Company for the quarter ended September 30, 1999 decreased $391,000, or 13.8%. Excluding the effect of the Products Acquisition, general and administrative expenses as a percentage of net sales increased to 8.2% from 8.1% for the corresponding period in 1998. This increase in general and administrative expenses as a percentage of net sales is primarily attributed to a larger decline in revenues for the period relative to the decline experienced in general and administrative expenses for the same period and the removal of duplicate expenses at the Company's Waynesboro, VA facility. Research and development expenses for the Company for the quarter ended September 30, 1999, increased $69,000, or 17.6%, to $460,000 from $391,000 for the corresponding period in 1998. Excluding the effect of the Products Acquisition, research and development expenses for the quarter ended September 30, 1999, increased $4,000, or 1.0%, to $395,000 from $391,000 for the corresponding period in 1998. Amortization of goodwill and other intangibles for the Company for the quarter ended September 30, 1999, increased $564,000, or 83.3%, to $1.2 million from $677,000 for the corresponding period in 1998. Excluding the effect of the Products Acquisition, amortization of goodwill and other intangibles for the Company for the quarter ended September 30, 1999, decreased $5,000, or 0.7%, to $672,000 from $677,000 for the corresponding period in 1998. Interest expense of the Company for the three months ended September 30, 1999, increased $1.2 million, or 32.8%, to $4.7 million from $3.5 million for the corresponding period in 1998. The increase was due primarily to the increased debt levels associated with financing the Products Acquisition and increased interest rates. Income tax expense of the Company for the three months ended September 30, 1999 was 19.4% of loss before income taxes as compared to 44.2% of income before income taxes for the corresponding period in 1998. The change in the effective tax rate is due primarily to the goodwill amortization not deductible for tax purposes of the Products Acquisition. Segment Discussion Nine months Ended September 30, 1999 Compared to Nine months Ended September 30, 1998 High Performance Group Net sales of HPG decreased by $11.2 million, or 16.4%, to $57.3 million from $68.6 million for the corresponding period in 1998. This decrease is due primarily to (i) a softening in military/defense and the automatic test equipment markets and (ii) a recovering economic slow down in Asia (iii) a 12 day labor strike at one of the Divisions in September partially offset by (iv) the effect of the Wilmar Acquisition. Revenues were also unfavorably impacted by the relocation of operations due to required requalifications in the customer base. Operating income of HPG decreased $6.3 million, or 47.9%, to $6.8 million from $13.1 million for the same period in 1998. Operating income of HPG as a percentage of net sales of HPG decreased to 11.9% from 19.1% for the same period in 1998. The decrease in operating income as a percentage of net sales is due primarily to lower sales prices in an increasingly competitive market, lower revenues and approximately $683,000 in 1999 of expenses in connection with the relocation of the Waynesboro, VA facility partially offset by cost reductions and removal of duplicate expenses at the Company's Waynesboro, VA facility. Specialized Industrial Group Net sales of SIG increased $51.5 million, or 253.0%, to $71.9 million from $20.4 million for the same period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, net sales of SIG decreased $1.8 million, or 9.4%, to $19.4 million from $17.6 million for the same period in 1998. This decrease is due primarily to a 1998 peak in a certain type of relay used in the communications market partially offset by the CD Acquisition. Operating income of SIG increased $3.9 million, or 182.0%, to $6.0 million from $2.1 million for the same period in 1998. Operating income of SIG as a percentage of SIG net sales decreased to 8.3% from 10.4% for the same period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, operating income of SIG decreased $115,000, or 5.5%, to $2.0 million from $2.1 million for the corresponding period in 1998. Excluding Corcom for the period from June 19, 1998 to June 30, 1998 and January 1, 1999 to June 30, 1999 and the effect of the Products Acquisition, operating income of SIG as a percentage of SIG net sales increased to 11.2% from 10.7% for the same period in 1998. This increase in operating income as a percentage of net sales is due primarily to synergies attained in the Corcom Merger. Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 High Performance Group Net sales of HPG decreased by $5.2 million, or 22.8%, to $17.5 million from $22.7 million for the corresponding period in 1998. This decrease is due primarily to (i) a softening in military/defense and the automatic test equipment markets, (ii) a 12 day labor strike at one of the Divisions in September partially offset by (iii) the effect of the Wilmar Acquisition. Revenues were also unfavorably impacted by the relocation of operations due to required requalifications in the customer base. Operating income of HPG decreased $2.0 million, or 47.6%, to $2.2 million from $4.2 million for the same period in 1998. Operating income of HPG as a percentage of net sales of HPG decreased to 12.6% from 18.5% for the same period in 1998. The decrease in operating income as a percentage of net sales is due primarily to lower sales prices in an increasingly competitive market, lower revenues and approximately $319,000 in 1999 of expenses in connection with the relocation of the Waynesboro, VA facility partially offset by cost reductions and the removal of duplicate expenses at the Company's Waynesboro, VA facility. Specialized Industrial Group Net sales of SIG increased $15.8 million, or 128.1%, to $28.1 million from $12.3 million for the same period in 1998. Excluding the effect of the Products Acquisition, net sales of SIG increased $44,000, or 0.4%, to $12.4 million from $12.3 million for the same period in 1998. This increase is due primarily to growth in the filter market. Operating income of SIG increased $1.4 million, or 152.7%, to $2.4 million from $938,000 for the same period in 1998. Operating income of SIG as a percentage of SIG net sales increased to 8.4% from 7.6% for the same period in 1998. Excluding the effect of the Products Acquisition, operating income of SIG increased $288,000, or 30.7%, to $1.2 million from $938,000 for the corresponding period in 1998. Excluding the effect of the Products Acquisition, operating income of SIG as a percentage of SIG net sales increased to 9.9% from 7.6% for the same period in 1998. This increase in operating income as a percentage of net sales is due primarily to synergies attained in the Corcom Merger. Liquidity and Capital Resources Although there can be no assurances, the Company anticipates that its cash flow generated from operations and borrowings under the Senior Credit Facility will be sufficient to fund the Company's working capital needs, planned capital expenditures, scheduled interest payments (including interest payments on the Notes and amounts outstanding under the Senior Credit Facility) and its business strategy for the next twelve months. However, the Company may require additional funds if it enters into strategic alliances, acquires significant assets or businesses or makes significant investments in furtherance of its growth strategy. The ability of the Company to satisfy its capital requirements will depend upon the future financial performance of the Company, which in turn will be subject to general economic conditions and to financial, business, and other factors, including factors beyond the Company's control. At September 30, 1999, the Company had available unused borrowing capacity of approximately $16.4 million under the Senior Credit Facility. Cash Provided by Operating Activities For the nine months ended September 30, 1999, cash provided by operating activities was $10.2 million, compared to $3.5 million for the same period in 1998. The increase in cash provided by operations is due primarily to improved collections of accounts receivable and a reduction in inventory partially offset by lower net income. The days' sales outstanding for accounts receivable was approximately 48.3 trade days at December 31, 1998 and approximately 47.0 at September 30, 1999. The average days' sales outstanding decreased due to better collections. The Company's inventories increased from $26.7 million at December 31, 1998 to $26.9 million at September 30, 1999. This increase is due to the Products Acquisition ($4.2 million) offset by improved inventory management. Inventory turns were 4.9 at September 30, 1999 and 2.9 at December 31, 1998. The Company's accounts payable increased from $7.4 million at December 31, 1998 to $13.8 million at September 30, 1999. Of this increase, $5.3 million was due to the Products Acquisition with the remainder due to payables management. Cash Used in Investing Activities Capital Expenditures were $2.8 million for the nine months ended September 30, 1999 and $1.9 million for the corresponding period in 1998. Acquisition spending totaled $60.3 million for the nine months ended September 30, 1999 due to the Products Acquisition and was $47.7 million for the nine months ended June 30, 1998 due to the Wilmar Acquisition, the Corcom Merger and the CD Acquisition. Investment in joint ventures was $144,000 for the nine months ended September 30, 1999 and $95,000 for the corresponding period in 1998. Cash Provided By Financing Activities Cash provided by financing activities for the nine months ended September 30, 1999 was $53.4 million compared to $46.3 million for the same period in 1998. This increase is due primarily to financing the Products Acquisition through additional borrowings under the amended Senior Credit Facility as well as additional paid-in capital from the Parent partially offset by working capital improvements. Adjusted EBITDA Adjusted EBITDA represents income (loss) before interest expense (net), income taxes, depreciation and amortization, and before any gain (loss) on disposal of assets, adjusted for extraordinary, unusual, and nonrecurring items, and additional charges to cost of sales and general and administrative costs resulting from the fair value adjustments to inventory and fixed assets pursuant to Accounting Principles Board Opinion Nos. 16 and 17. Adjusted EBITDA is not intended to represent cash flow from operations or net income as defined by generally accepted accounting principles and should not be considered as a measure of liquidity or an alternative to, or more meaningful than, operating income or operating cash flow as an indication of the Company's operating performance. Adjusted EBITDA is included herein because management believes that certain investors find it a useful tool for measuring the Company's ability to service its debt. There are no significant commitments for expenditures of funds not contemplated by this measure of adjusted EBITDA. Adjusted EBITDA as presented may not be comparable to other similarly titled measures presented by other companies and could be misleading unless substantially all companies and analysts calculate adjusted EBITDA the same. Adjusted EBITDA increased to $20.0 million for the nine months ended September 30, 1999 from $18.3 million for the corresponding period in 1998. Adjusted EBITDA increased to $7.5 million for the three months ended September 30, 1999 from $6.8 million for the corresponding period in 1998. Inflation - --------- The Company does not believe inflation has had any material effect on the Company's business over the past three years. Disclosure Regarding Forward-Looking Statements - ----------------------------------------------- Statements made by the Company which are not historical facts are forward looking statements that involve risks and uncertainties. Actual results could differ materially from those expressed or implied in forward looking statements. All such forward looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Important factors that could cause future financial performance to differ materially from past results and from those expressed or implied in this document, include, without limitation, the risks of acquisition of businesses (including limited knowledge of the businesses acquired and potential misrepresentations from sellers), changes in business strategy or development plans, dependence on independent sales representatives and distributors, environmental regulations, availability of financing, competition, reliance on key management personnel, ability to manage growth, loss of customers and a variety of other factors. Year 2000 Compliance - -------------------- The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the "Year 2000 Compliance" issue. As the year 2000 approaches, such systems may be unable to accurately process certain data based information. The Company has identified all significant applications that required modification to ensure Year 2000 Compliance. Many of the Company's systems have hardware and packaged software recently purchased from large vendors who have represented that these systems are Year 2000 compliant. Internal and external resources were used to make the required modifications and were completed and tested by September 1, 1999. The Company's major systems, including its manufacturing, general ledger and payroll systems have been due for upgrades in order to maintain vendor support. The Company, therefore, would have been devoting the efforts of its internal resources to some or all of these projects through the normal course of business even if Year 2000 issues had not existed. The company relies upon third parties for its operations including, but not limited to, suppliers of inventory, software, telephone service, electrical power, water and financial services. The Company is continually communicating with these third parties with whom it does significant business to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. Initial communications with these third parties were completed by June 30, 1999. However, there can be no guarantee that the systems of the other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. If it has been determined that a vendor will not be Year 2000 compliant in a timely manner, the Company will replace them with an alternative vendor. In most cases there are more than one vendor for the Company's purchasing requirements. In the case of no alternative suppliers, the Company will build inventory to maintain production until the situation can be resolved. The Company has verified that its major customers are Year 2000 compliant. If it has been determined that a customer will not be compliant in a timely manner, the Company may request C.O.D. terms. However, in most cases the Company believes that its records will be sufficient to ensure collectability from its customers. The total cost to the Company of these Year 2000 Compliance activities is estimated to be less than $250,000, including any software upgrades, equipment upgrades, incidentals and it is not anticipated to be material to its future financial position, results of operations or cash flows in any given year. All costs have been and will continue to be funded through its regular operating and financing activities. These costs and the date which the Company plans to complete the Year 2000 modification and testing processes were based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. Item 3: Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to market risks from changes in interest rates and foreign currency exchange rates which may adversely affect its results of operations and financial condition. The Company seeks to minimize these risks through its regular operating and financing activities. The Company engages in neither speculative nor derivative financial or trading activities. Interest Rate Risk The Company has exposure to interest rate risk related to certain instruments entered into for other than trading purposes. Specifically, the Company has in place the Senior Credit Facility, which consists of two term loans ($84.5 million at September 30, 1999) and the revolving credit facility ($8.5 million at September 30, 1999), which bears interest at variable rates. (See Note 4 to the unaudited condensed consolidated financial statements). Borrowings under the Senior Credit Facility (both the term loans and revolving credit facility) bear interest based on Lenders' Reference Rate (as defined in the Senior Credit Facility) or LIBOR Rate plus an applicable margin. While changes in the Reference Rate or the LIBOR Rate could affect the cost of funds borrowed in the future, existing amounts outstanding at September 30, 1999 are primarily at fixed rates. The Company, therefore, believes the effect, if any, of reasonably possible near-term changes in interest rates on the Company's consolidated financial position, results of operations and cash flows would not be material. In September 1997, the Company consummated an offering of $95.0 million aggregate principal amount of 10% Senior Subordinated Notes (the "Notes"), due 2004, (the "Offering"). The Company's Notes are at a fixed interest rate of 10%. As a result, a change in the fixed rate interest market would change the estimated fair market value of the Notes. The Company believes that a 10% change in the long-term interest rate would not have a material effect on the Company's financial condition, results of operations and cash flows. While the Company historically has not used interest rate swaps, it may, in the future, use interest rate swaps to assist in managing the Company's overall borrowing costs and reduce exposure to adverse fluctuations in interest rates. Foreign Currency Exchange Risk The Company has seven foreign subsidiaries or divisions, located in Mexico, Germany, Jamaica, Barbados and Hong Kong as well as Joint Ventures in India and China. The Company generates about 18% of its net sales from customers located outside the United States. The Company's ability to sell its products in these foreign markets may be affected by changes in economic, political or market conditions in the foreign markets in which it does business. The Company experiences foreign currency translations gains and losses, which are reflected in the Company's consolidated statement of operations and comprehensive income, due to the strengthening and weakening of the US dollar against the currencies of the Company's foreign subsidiaries or divisions and the resulting effect on the valuation of the intercompany accounts and certain assets of the subsidiaries which are denominated in US dollars. The net loss resulting from foreign currency translations was $70,000 in the nine months ended September 30, 1999 compared to a gain of $52,000 in the comparable period of 1998. The net gain resulting from foreign currency translations was $44,000 in the third quarter of 1999 compared to a gain of $51,000 in the comparable period of 1998. The Company anticipates that it will continue to have exchange gains or loss from foreign operations in the future. Part II - Other Information Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K See Index of Exhibits. The Company did not file any current reports on Form 8-K for the quarterly period ended September 30, 1999. SIGNATURES Communications Instruments, Inc. November 12, 1999 /s/ Ramzi A. Dabbagh - ---------------------------- -------------------------------- Date Ramzi A. Dabbagh Chairman of the Board Chief Executive Officer November 12, 1999 /s/ Richard L. Heggelund - ---------------------------- -------------------------------- Date Richard L. Heggelund Chief Financial Officer INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - -------------------------------------------------------------------------------- 2.1+ Agreement and Plan of Merger, dated as of March 10, 1998, by and among the Company, RF Acquisition Corp. and Corcom, Inc. is incorporated herein by reference to Report on Form 8-K (File Number 333-38209). 3.1 Articles of Incorporation of the Company is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 3.2 By-laws of the Company is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 3.3 Articles of Incorporation of Kilovac Corporation ("Kilovac") is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 3.4 By-laws of Kilovac Corporation is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 3.5 Articles of Incorporation of Kilovac International, Inc. ("Kilovac International") is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 3.6 By-laws of Kilovac International is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 3.7 Amended and Restated Articles of Incorporation of Corcom, Inc. is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 3.8 By-laws of Corcom, Inc. is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 4.1 Indenture dated as of September 18, 1997 by and among the Company, Kilovac, Kilovac International and Norwest Bank Minnesota, National Association, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 4.2 Purchase Agreement dated as of September 12, 1997 between the Company, Kilovac and Kilovac International and BancAmerica Securities, Inc. and Salomon Brothers, Inc., is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 4.3 Registration Rights Agreement dated as of September 18, 1997 between the Company, Kilovac and Kilovac International and BancAmerica Securities, Inc. and Salomon Brothers, Inc., is incorporated herein by reference to Registration Statement on Forms S-4 (File number 333-38209) 4.4 Supplemental Indenture, dated as of June 18, 1998 between Corcom, Inc. and Norwest Bank Minnesota, National Association is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 10.1 Employment Agreement dated as of May, 1993 between the Company and Ramzi A. Dabbagh is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.2 Employment Agreement dated as of May, 1993 between the Company and G. Dan Taylor is incorporated herein by reference to Registration Statement on Form S-2 (File Number 333-38209) 10.3 Employment agreement dated as of May, 1993 between the Company and Michael A. Steinback is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.4 Employment Agreement dated as of January 7, 1994 between the Company and David Henning is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.5 Management Agreement, dated as of September 18, 1997 among the Company, parent and CHS Management III, L.P. is incorporated by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.6 Tax Sharing Agreement dated as of September 18, 1997 between the Company, Parent, Kilovac International and Kilovac International FSC Ltd. is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.7+ Credit Agreement dated as of September 18, 1997 between the Company, Parent, various banks, Bank of America National Trust and Savings Association and BancAmerica Securities, Inc., is incorporated herein by reference to Registration Statement on Forms S-4 (File Number 333-38209) 10.8 Pledge Agreements dated as of September 18, 1997 by parent, the Company, Kilovac and Kilovac International in favor of Bank of America Trust and Savings Association, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.9 Subsidiary Guarantee dated as of September 18, 1997 by Kilovac and Kilovac International in favor of Bank of America National Trust and Savings Association, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.10 Security Agreement dated as of September 18, 1997 among Parent, the Company, Kilovac and Kilovac International in favor of Bank of America National Trust and Savings Association is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-3820) 10.11 Stock Subscription and Purchase Agreement dated as of September 20, 1995, by and among the Company, Kilovac and the stockholders and optionholders of Kilovac name therein, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.12+ Asset Purchase Agreement dated as of June 27, 1996 between the Company and Figgie International Inc., is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.13 Environmental Remediation and Escrow Agreement, dated as of July 2, 1996, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.14 Lease Agreement dated as of July 2, 1996 by and between Figgie Properties, Inc. and Communications Instruments, Inc. d/b/a Hartman Division of CII Technologies Inc. is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.15 Second Amendment to Stock Subscription and Purchase Agreement dated as of August 26, 1996, by and among the Company, Kilovac and certain selling stockholders, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.16+ Recapitalization Agreement dated as of August 6, 1997 and among Parent, certain investors and certain selling stockholders, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.17 Amendment to the Recapitalization Agreement dated as of September 18, 1997 by and among Parent, certain investors and certain selling stockholders, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.18 Indemnification and Escrow Agreement dated as of September 18, 1997 by and among Parent, certain investors, certain selling stockholders and American National Bank and Trust Company of Chicago, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.19 Stockholders Agreement dated September 18, 1997 by and among Parent and certain of its stockholders, is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.20 Registration Agreement dated as of September 18, 1997 by and among Parent and certain of its stockholders is incorporated by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.21 Form of Junior Subordinated Promissory Note of Parent is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.22 Employment Agreement dated as of October 11, 1995 between Kilovac and Dan McAllister is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.23 Employment Agreement dated as of October 11, 1995 between Kilovac and Pat McPherson is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.24 Employment Agreement dated as of October 11, 1997 between Kilovac and Rick Danchuk is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.25 Employment Agreement dated as of October 11, 1997 between Kilovac and Robert A. Helman is incorporated herein by reference to Registration Statement on Form S-4 (File Number 333-38209) 10.26 Asset Purchase Agreement dated as of November 30, 1997 by and between the Company and Genicom Corporation is incorporated by reference to Report on Form 8-K (File number 333-38209) 10.27+ Stock Purchase Agreement dated as of October 31, 1997 by and between the Company and Societe Financiere D'Investissements Dans L'Equipement et la Construction Electrique, S.A., the sole stockholder of IBEX Aerospace Technologies, Inc. is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 10.28+ Asset Purchase Agreement dated May 6, 1998, between Kilovac Corporation, Zerubavel Heifetz, Cesar Marestaing and Wilmar Electronics, Inc. is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 10.29+ Asset Purchase Agreement dated as of July 24, 1998, by and between the Company and Cornell-Dubilier Electronics, Inc. 10.30 Voting Agreement dated as of March 10, 1998, by and among RF Acquisition Corp., Werner E. Neuman and James A. Steinback is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 10.31+ Credit Agreement dated as of June 19, 1998, among the Company, Parent, Bank of America National Trust and Savings Association and certain other lending institutions from time to time a party thereto is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 10.32+ Pledge Agreement dated as of June 19, 1998, among Parent, the Company, Kilovac and Kilovac International in favor of Bank of America National Trust and Savings Association is incorporated herein by reference to Report on form 10-K (File Number 333-38209) 10.33+ Subsidiary Guarantee dated as of June 19, 1998 by Kilovac, Kilovac International and Corcom, Inc. in favor of Bank of America National Trust and Savings Association is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 10.34+ Security Agreement dated as of June 19, 1998, among Parent, the Company, Kilovac, Kilovac International and Corcom, Inc. in favor of Bank of America National Trust and Savings Association is incorporated herein by reference to Report on Form 10-K (File Number 333-38209) 10.35+ Stock Purchase Agreement dated March 19, 1999, by and among Products Unlimited Corporation, the Stockholders of Products Unlimited Corporation and the Company is incorporated herein by reference to Report on Form 8-K (File Number 333-38209) 10.36+ Amended and restated Credit Agreement among Parent, the Company, various lenders, NationsBank, N.A., as an Issuing Lender and Swingline Lender, and NationsBank, N.A., as the Administrative Agent, is incorporated herein by reference to Report on Form 8-K (File Number 333-38209) 10.37+ Amended and restated Subsidiary Guaranty by certain subsidiaries of the Company in favor of NationsBank, N.A. is incorporated herein by reference to Report on Form 8-K (File Number 333-38209) 10.38+ Amended and restated Security Agreement among Parent, the Company, certain subsidiaries of the Company and Bank of America National Trust and Savings Association, as collateral agent, is incorporated herein by reference to report on Form 8-K (File Number 333-38209) 10.39+ Amended and restated Pledge Agreement by Parent, the Company and certain subsidiaries of the Company in favor of Bank of America National Trust and Savings Association, as collateral agent, is incorporated herein by reference to Report on Form 8-K (File Number 333-38209) 11.1 Statement re-Computation of Per Share Earnings. Not required because the relevant computations can be clearly determined from the material contained in the financial statements included herein. 27 Financial Data Schedule 99.1 Press release dated March 22, 1999, published by the registrant is incorporated herein by reference to Report on Form 8-K (File Number 333-38209). + The Company agrees to furnish supplementally to the Commission a copy of any omitted schedule to such agreement upon the request of the Commission in accordance with Item 601 of Regulation S-K. EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 802 0 23,594 (375) 26,908 57,158 61,946 (20,804) 195,898 30,240 188,092 0 0 0 (32,902) 195,898 45,560 45,560 33,972 33,972 7,319 0 4,676 (407) 79 (486) 0 0 0 (486) 0 0
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