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 MARCH 31, 20002001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM___________TO___________FROM __________ TO _________
CII TECHNOLOGIES, INC.
(formerly known as
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, North Carolina (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
CII TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
March 31, December 31,
2001 2000
1999
--------------- ---------------- ------------------
(Unaudited) (1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 178939 $ 6,045807
Accounts receivable (less allowance for doubtful accounts:
March 31, 2001 - $531, 2000 - $776, 1999 - $621) 27,427 23,658$447) 28,255 27,629
Inventories 27,521 27,49829,755 31,033
Deferred income taxes 2,472 2,4713,598 3,598
Other current assets 3,735 3,441
----------------- ------------------
Total current assets 66,282 66,508
----------------- ------------------
PROPERTY, PLANT AND EQUIPMENT, net 36,381 37,337
----------------- ------------------
OTHER ASSETS:
Cash restricted for environmental remediation 233 233
Environmental settlement receivable 1,250 1,250
Other current assets 2,214 2,232
------------ ------------
Total current assets 61,295 63,387
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 39,559 40,747
------------ ------------
OTHER ASSETS:1,368 1,368
Goodwill (net of accumulated amortization: March 31, 2001
- $6,852 2000 - $4,560
1999 - $3,985) 64,317 64,892$6,293) 62,024 62,583
Intangible assets, net 29,818 30,53726,436 27,282
Other noncurrent assets 463 462
------------ ------------561 464
----------------- ------------------
Total other assets 94,598 95,891
------------ ------------90,389 91,697
----------------- ------------------
TOTAL ASSETS $195,452 $200,025
============ ============$ 193,052 $ 195,542
================= ==================
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $14,693 $13,141$ 13,288 $ 13,453
Accrued interest 1,633 4,1921,606 4,125
Other accrued liabilities 7,922 7,84211,525 10,544
Current portion of long-term debt 7,206 7,694
------------ ------------8,560 8,592
----------------- ------------------
Total current liabilities 31,454 32,86934,979 36,714
LONG-TERM DEBT 180,987 182,975175,604 175,738
ACCRUED ENVIRONMENTAL REMEDIATION COSTS 1,953 1,9531,774 1,824
DUE TO PARENT 1,891 1,8663,441 3,087
DEFERRED INCOME TAXES 13,433 13,73312,434 12,811
OTHER LIABILITIES 418 455
------------ ------------406 405
----------------- ------------------
Total liabilities 230,136 233,851
------------ ------------228,638 230,579
----------------- ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIENCY:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid in capital 22,317 22,317
Accumulated deficit (56,825) (56,019)(57,610) (57,138)
Accumulated other comprehensive loss (176) (124)
------------- -------------(293) (216)
----------------- ------------------
Total stockholder's deficiency (34,684) (33,826)
------------- -------------(35,586) (35,037)
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY $195,452 $200,025
============= =============$ 193,052 $ 195,542
================= ==================
(1) Derived from December 31, 1999 audited consolidated financial statements
See notes to unaudited condensed consolidated financial statements
CII TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In Thousands)
Three months ended
---------------------------------------------------------------------
March 31, March 31,
2001 2000
1999
-------- --------
------------- ------------
Net sales $ 48,17452,171 $ 33,85248,174
Cost of sales 39,042 36,077
24,327
-------- --------------------- ------------
Gross profit 13,129 12,097 9,525
Operating expenses:
Selling expenses 3,815 3,345 2,808
General and administrative expenses 3,208 3,170 2,637
Research and development expenses 549 457 384
Amortization of goodwill and other intangibles 1,128 1,233
755
-------- --------Facility relocation charges 50 0
------------- ------------
Total operating expenses 8,750 8,205 6,584
-------- --------
Operating income 4,379 3,892
2,941
Interest expenseExpense (4,764) (4,859) (3,645)
Other income (expense), net (24) 2
(10)
-------- --------------------- ------------
Loss before income taxes (409) (965)
(714)
BenefitExpense (benefit) from income taxes 63 (159)
(139)
-------- --------------------- ------------
Net loss (472) (806) (575)
Other comprehensive loss:
Foreign currency translation adjustment (77) (52)
(83)
-------- --------------------- ------------
Other comprehensive loss (77) (52)
(83)
-------- --------------------- ------------
Comprehensive loss $ (549) $ (858)
$ (658)
======== ===================== ============
See notes to unaudited condensed consolidated financial statements
CII TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
March 31,
-----------------------------------------------------
2001 2000 1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES: ----------- -------------
Net loss $(472) (806) $ (575)
Adjustments to reconcile net loss to net cash
used inprovided by (used in) operating activities:
Depreciation and amortization 3,456 3,819 2,424
Deferred income taxes (377) (300) (276)
Changes in operating assets and liabilities:
Accounts receivable (626) (3,769)
Inventories 1,278 (23)
Current assets (294) 18
Accounts payable (165) 1,552
Accrued liabilities net of
effects of acquisitions:
Increase in accounts receivable (3,769) (1,976)
(Increase) decrease in inventories (23) 752
Decrease in other current assets 18 5
Increase in accounts payable 1,552 91
Increase in accrued liabilities932 866
789
Decrease in accruedAccrued interest (2,519) (2,559)
(2,315)
Changes in otherOther assets and liabilities (5) (24)
(52)
------ ----------------- -------------
Net cash used inprovided by (used in) operating activities 1,208 (1,226) (1,133)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (786) (60,125)
Purchases of property, plant and equipment (1,088) (1,128)
(656)Investment in joint ventures (100) -
Other investing activities (7) (5)
-
------ ----------------- -------------
Net cash used in investing activities (1,919) (60,781)
------ ------(1,195) (1,133)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) borrowings under line of credit 2,100 (100) 4,305
Borrowings under long-term debt agreements - 55,000
Principal payments under long-term debt agreements (2,266) (2,363) (1,000)
Payment of loan fees - (211) (1,656)
Payment of capital lease obligations - (13) (16)
Advances from Parent 352 25
87
Additional paid-in capital (from Parent)Repayments of amounts owed to former stockholders
of subsidiary - 5,000(786)
Other (67) (60)
(67)
------ ----------------- -------------
Net cash provided by (used in) provided by financing activities (2,722) 61,653
------ ------119 (3,508)
NET DECREASEINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 132 (5,867) (261)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 807 6,045
469
------ ----------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $939 178
$ 208
====== ================= =============
See notes to unaudited condensed consolidated financial statements
CII Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands except share amounts)thousands)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of CII Technologies, Inc. (formerly known as 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. de C.V. ("Electro-Mech"), Corcom, Inc. ("Corcom"), which became a wholly owned subsidiary on June 19,
1998, and
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 Company also has
the CII Division, which operates in North Carolina and the Hartman Division,
which operates in Ohio.
The interim financial data as of and for the quartersthree months ended March 31, 20002001
and March 31, 19992000 are unaudited and have been prepared in accordance with
accounting principles generally accepted accounting principlesin the United States for interim
financial information. Accordingly, it does not include all of the information
and notes required by accounting principles generally accepted accounting principlesin the United
States 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, 19992000
financial information was derived from audited consolidated financial
statements, but excludes certain disclosures included in the Company's audited
consolidated financial statements. Certain reclassifications have been made to
the 19992000 financial information in order to conform with the 20002001 presentation.
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, 19992000 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, 20002001 or any other interim period.
2. Recapitalization Acquisitions and Joint Ventures
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 CIIT
Holdings, Inc. (formerly known as CII Technologies Inc.), a Delaware Corporation (the "Parent"). CII Technologies, Inc. (formerly known as Communications
Instruments, Inc.)The Company 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 CII Technologies, Inc. (formerly known as Communications
Instruments, Inc.),The Company, 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 primarily for the HVAC industry.
Pursuant to the Stock Purchase Agreement, the Company paid approximately $59.4
million for the outstanding capital stock of Products. In addition, if Products
achieves certain sales targets for the years ending December 31, 1999 and
December 31, 2000, the Company will make additional payments to the former
shareholders of Products not to exceed $4.0 million in the aggregate. For the
year ended December 31, 1999, the Company accrued approximately $786 in
accordance with the terms of the agreement which was then paid in February 2000.
For the year ending December 31, 2000, the Company could be required to make an
additional payment not to exceed approximately $3.2 million. The payment of the
purchase price and related fees was financed by the issuance of $55.0 million of
Tranche Term B loans, in accordance with an amendment to the Senior Credit
Facility (as defined), the contribution of $5.0 million in additional paid in
capital by the Parent, and a draw on the revolving loan portion of the Company's
Senior Credit Facility (as defined). Products has manufacturing facilities in
Sterling and Prophetstown, Illinois and Sabula and Guttenberg, Iowa.
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 factory located in Juarez, Mexico. 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, which
was located in Waynesboro, Virginia, was a manufacturer of high performance
signal relays. The GRD Acquisition was financed by a draw on the Company's Old
Senior Credit Facility.
The Company finalized its plans to relocate the manufacturing in the Waynesboro,
VA facility to its facilities in North Carolina in 1998. The costs of this
facility relocation, including estimated costs of employee separation and
preparing the North Carolina facilities for the relocation, totaled
approximately $1.1 million, of which approximately $911 was expensed in 1999 in
cost of goods sold.
Under the terms of the purchase agreement with Genicom, the Company was entitled
to recover up to $500 for inventory unsold or unused during the two years
following the acquisition. In December 1999, the Company submitted a claim
against Genicom for the $500. In March 2000,
Genicom filed a Chapter 11 bankruptcy petition in Federal Bankruptcy Court. As a
result, the Company recorded a valuation reserve of $500 against this receivable
in 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. 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 note payable by $400. The remaining note payable of
$450 was repaid by the Company in September 1999. The reduction in purchase
price resulted in a reduction of goodwill.
Pro forma financial information is not presented relating to the ibex
Acquisition as this entity was not a significant subsidiary of the Company in
1997.
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 $15.7 million including
acquisition costs of approximately $1.3 million. Kilovac designs and
manufactures high voltage electromechanical relays. The Company was obligated to
purchase the remaining 20% interest in Kilovac at the option of the selling
shareholders on either December 31, 2000 or December 31, 2005, or upon the
occurrence of certain events, if earlier, at an amount determined in accordance
with the terms of the purchase agreement. An estimated $2.3 million ($468, net
of tax at March 31, 2000 and December 31, 1999) was initially payable to the
sellers upon the future realization of potential tax benefits associated with a
net operating loss carryforward.
Pro forma financial information is not presented relating to the purchase of the
remaining 20% ownership of Kilovac as Kilovac's accounts have been consolidated
into the Company's financial statements since October 1995.
The following summarizes the purchase price allocations as 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 $12,904 $505 $14,320
Property, plant and equipment 169 150 2,045 80 7,374 82 21,427
Intangibles and other assets 4,577 1,493 24 2,023 35,777 380 40,692
Liabilities assumed (293) (965) (1,273) (356) (11,005) (119) (17,078)
------ ------ ------ ------ ------- ---- -------
Purchase price, net of
acquired cash $4,500 $1,719 $4,683 $2,128 $45,050 $848 $59,361
====== ====== ====== ====== ======= ==== =======
The following unaudited first quarter 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.
Three Months ended
March 31, 1999
--------------
Net sales $49,099
Operating income 4,766
Net loss (200)
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 (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. LtdLtd. (the "Chinese Joint
Venture"). Each party holds 50% of the shares of the new company. The Company
accounts for the Chinese Joint Venture using the equity method. The Chinese
Joint Venture is a manufacturer and marketer of relays, filters and sub-
assemblies.relay components. The Company's
initial investment was approximately $144. The Chinese Joint Venture began
production in March 1999. In February, 2001, the Company and Shanghai CI
Electric Appliance Co., Ltd., each invested an additional $100. The outstanding
investment in the Chinese Joint Venture at December 31, 19992000 and March 31, 20002001
was $164$266 and $166,$361, respectively.
In November 1995, the Company formed a joint venture in India with Guardian
Controls Ltd., an Indian Company, a bank and certain financial investors. The
Company has a 40% interest in the joint venture which was formed for the purpose
of manufacturing relays, relay components, and sub-assemblies in India for the
domestic Indian market and global markets. The Company accounts for the Indian
joint venture using the equity method. The joint venture started production
during the fourth quarter of 1996. The recorded value of the investment in the
joint venture at December 31, 19992000 and March 31, 20002001 was $116$155 and $114,$148,
respectively.
3. Inventories
Components of inventory are as follows:
March 31, December 31,
2001 2000 1999
---- ----
Finished goods $6,967 $7,446$ 8,113 $ 8,498
Work-in-process 9,769 8,71510,084 9,600
Raw materials and supplies 17,295 18,16817,374 18,894
Reserve for obsolescence (6,510) (6,831)
------- -------(5,816) (5,959)
-------- --------
Total $27,521 $27,498
======= =======$ 29,755 $ 31,033
======== ========
4. Long-TermLong -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-termLong-term debt at March 31, 2000 consists primarily of the $95.0
million Notes and revolving loans of $12.5 million and term loans of $80.6
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. CII Technologies, Inc. (formerly known as Communications
Instruments, Inc.), its wholly owned subsidiaries, including Kilovac, Kilovac
International, Inc., 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.of:
March 31, December 31,
2001 2000
---- ----
10% Senior Subordinated Notes $ 95,000 $ 95,000
Senior Credit Facility - Term 73,114 75,380
Senior Credit Facility - Revolver 16,000 13,900
Note Payable 50 50
---------- ----------
184,164 184,330
Less: Current Portion (8,560) (8,592)
---------- ----------
Total $ 175,604 $ 175,738
========== ==========
Interest on the 10% Senior Subordinated Notes (the "Notes") is payable
semi-annually in arrears on March 15 and September 15 of each year. The Notes
will mature on September 15, 2004, unless previously redeemed, and the Company
will not be required to make any mandatory redemption or sinking fund payment
prior to maturity except in connection with a change in ownership. The Notes may
be redeemed, in whole or in part, at any time on or after September 15, 2001 at
the option of the Company, at the redemption prices set forth in the Indenture,
plus, in each case, accrued and unpaid interest and premium, if any, to the date
of the redemption. In addition, at any time prior to September 15, 2000, theThe Company may atand its option, with the net cash proceeds of an Equity Offering (as
defined in the Indenture), redeem up to 33.3% in aggregate principal amount ofwholly owned subsidiaries, Kilovac,
Kilovac International, Corcom, and Products have guaranteed the Notes aton a redemption price of 110% offull,
unconditional, and joint and several basis, which guarantees are fully secured
by the principal amount thereof, plus
accrued and unpaid interest to the date of redemption, provided that not less
than $63.4 million aggregate principal amount of the Notes remains outstanding
immediately after the occurrenceassets of such redemption.guarantors.
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%. At March 31, 2000, LIBOR borrowing
rates ranged from 8.4375% to 9.8125%. At March 31, 2000, the base rate-borrowing
rate was 10.75%. The weighted average borrowing rate, calculated based on
borrowings outstanding at March 31, 19992000 and March 31, 20002001 under base rate and
LIBOR loans was 8.03%9.29% and 9.29%8.74%, respectively.
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 $26.6 million
due in full by June 19, 2003, and a Tranche B Term Loan of $54.0 million due in
full by March 15, 2004. The Tranche A term loan is payable as follows: $4.9
million remaining in 2000, $7.8 million in 2001, $9.3 million in 2002, $4.6
million in 2003. The Tranche B term loan is payable as follows: $413 remaining
in 2000, $550 in 2001, $550 in 2002, $26.7 million in 2003 and $25.8 million in
2004.
The terms of the Senior Credit Facility and the IndentureNotes place certain restrictions
on the Company including, but not limited to, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments (as defined), consummate certain asset sales, enter into
certain transactions with affiliates, merge or consolidate with any 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 excessExcess cash payment waspayments of $850 and $398 were made on
March 30, 2000 in the amount of $850.and 2001, respectively. The Senior Credit Facility also contains
financial covenants including interest coverage ratios, leverage 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 March 31, 2000,2001, the Company was in compliance with all of the
terms of the IndentureNotes and the covenants of the Senior Credit Facility. The Company,
its wholly owned subsidiaries, including Kilovac, Kilovac International, Corcom,
Products 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.
Letters of credit outstanding under the Senior Credit Facility were $100 at
March 31, 20002001 and December 31, 1999.
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.2000.
As of March 31, 2000,2001, the Company had available unused borrowing capacity of
approximately $12.4$8.9 million under the Senior Credit Facility.
5. Contingencies
Litigation - From time to time the Company is a party to certain lawsuits and
administrative proceedings that arise in the conduct of its business. While the
outcome of 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.
Environmental Remediation - The Company has been notified by the State of North
Carolina Department of Environment, Health & Natural Resources ("NCDHNR") that
its manufacturing facility in Fairview, North Carolina has sites containing
hazardous wastes resulting from activities by a prior owner (the "Prior Owner").
Additionally, the Company has been identified as a potentially
responsible party ("PRP") for remediationinvestigation and cleanup costs at two superfund sites which formerly were used by hazardous
waste disposal companies employed byunder
the Company.
Several areasFederal Comprehensive Environmental Response, Compensation and Liability Act
of soil1980, as amended ("CERCLA"). CERCLA provides for joint and several liability
for the costs of remediating a site, except under certain circumstances.
However, the Company believes it will be allocated responsibility for a
relatively small percentage of the cleanup costs at each of these sites, and in
both instances other PRP's will also be required to contribute to such costs.
Although the Company's total liability for cleanup costs at these sites cannot
be predicted with certainty, the Company does not currently believe that its
share of those costs will have a material adverse effect on the Company's
financial position or results of operations.
Soil and groundwater contamination hadhas been notedidentified at and about the
Company's Fairview, North Carolina facility resulting in that site's inclusion
in the North Carolina Department of Environmental, Health & Natural Resource's
Inactive Hazardous Waste Sites Priority List. The Company believes that the
Fairview facility,contamination relates to the most seriouspast activities of which is TCE contamination in the
groundwater. Remedial investigations have been undertaken at the facility and
the NCDHNR has placed the facility on the Inactive Hazardous Sites Inventory.
Soil remediation was completed in January 1996 and the groundwater remediation
system was formally set in operation on April 1, 1997.
In the acquisition agreementa prior owner of the
Predecessor Company, the Company obtained
indemnity from the selling shareholders for any environmental clean up costs as
a result of existing conditions which would not be paid by the Prior Owner. The
indemnity was limited to the extent of amounts owed to the selling shareholders
through the subordinated note.Fairview property (the "Prior Owner"). On May 11, 1995, the Company reachedentered into
a settlement agreement (the "Settlement Agreement) with the Prior Owner.owner,
pursuant to which the Prior Owner agreed to provide certain funds for the
investigation and remediation of the Fairview contamination in exchange for a
release of certain claims by the Company. In accordance with the Settlement
Agreement, the Prior Owner has placed $1.75$3.0 million in escrow to fund further
investigation, the remediation of contaminated soils and the installation and
start-uprunning of a groundwater remediation system at the Fairview facility. The
Company has used escrowed funds to complete investigation and soil cleanup
activities, construct a groundwater treatment system and run that system for the
past four years. As of March 31, 2001, approximately $1.4 million remained in
the interest bearing escrow account. The Company has entered into an
Administrative Order on Consent with the State of North Carolina to clean up the
site and is responsible for investigation, soil remediation and start-upgroundwater
remediation costs in excess of the escrowed amount, if any. The Settlement Agreement further providesCompany does not
believe that after the groundwatertotal investigation and remediation system has been operating at 90% of its intended capacity for three years,costs will exceed the
Company will provide toamounts along with the interest earned on those amounts that the Prior Owner has
deposited pursuant to the Settlement Agreement, to such an estimateextent that it will
have a materially adverse affect on the Company's financial position or results
of the then present value of
the cost to continue operating and maintaining the system for an additional 27
years. After receiving the estimate, the Prior Owner is to deposit with the
escrow agent an additional sum equal to 90% of the estimate, up to a maximum of
$1.25 million, unless it provides a substantially lower estimate. In that case,
any substantial differences are to be resolved through negotiation or expedited
arbitration.operations. The Company has reflectedaccrued a liability for the present valuetotal remediation
costs of the receivable,
discounted at 5% ($1.25$1.8 million at December 31, 1999 andas of March 31, 2000,
respectively)2001. The Company, as the current owner of
a contaminated property, could be held responsible for the entire cost of
investigating and remediating the escrowed cash as restricted assets.
In October, 1995, the Company released the selling shareholders from their
indemnity obligation. The environmental remediation liability is recorded at the
present value, discounted at 5%, of the best estimate of the cash flows to
remediate and monitor the remediation over the estimated thirty-year remediation
period, which was developed by a third party environmental consultant based on
experience with similar remediation projects and methods and taking inflation
into consideration.
Total amounts estimated to be paid related to environmental liabilities are
approximately $3.6 million calculated as follows at March 31, 2000:
2000 $ 130
2001 130
2002 130
2003 130
2004 130
Thereafter 2,990
------
3,640
Discount to present value -1,687
------
Liability at present value $1,953
======site.
Assets recorded in relation to the above environmental liabilities are
approximately $1.48$1.37 million at December 31, 19992000 and March 31, 2000,
respectively.2001.
In connection with the Company's purchase of certain assets and certain
liabilities of Hartman Electrical Manufacturing ("Hartman"), a division of
Figgie International, Inc., which is now known as Scott Technologies, Inc.
("Figgie"STI") (the "Hartman Acquisition"), the Company entered into an agreement
pursuant to which it leased from a wholly-owned subsidiary of FiggieSTI a
manufacturing facility in Mansfield, Ohio, (the "Mansfield Property") at which
Hartman has conducted operations (the "Lease"). The Mansfield Property may
contain contamination at levels that will require further investigation and may
require soil and/or groundwater remediation. The Company may become subject to liability for remediation of such contamination at
and/or from such property, which liability may be joint and several except under
certain circumstances. The Lease included an indemnity byof
the Lessorlessor to the Company, guaranteed by Figgie,STI, for certain environmental
liabilities in connection with the Mansfield Property, subject to a dollar
limitation of $12.0 million (the "Indemnification Cap"). In addition, in connection with the Hartman
Acquisition, Figgie had placed $515 in escrow for environmental remediation
costs at the Mansfield Property to be credited towards the Indemnification Cap
as provided in the lease (the "Escrowed Funds").
Duringmillion. On or about January 5, 2000, the Company entered
into an agreement with the former
owners of the Mansfield PropertyLessor in which the Companyit purchased the property and certain
equipment and released $515 of funds contributed by the former owners of
Hartman and held in escrow from the date the Company acquired Hartman.equipment. This agreement followed the decision by the former owner'sLessor's registered
environmental consultant that no further environmental remediation was needed at
the property asso long as the property was restricted to industrial usage. The
agreement preserves the Lease indemnity but reduces the indemnity cap to
$1.0 million$1,000,000 over nineten years if the former owner does not seek and obtain a
covenant not to sue from the Ohio EPA relating to the site and reduces the cap
to zero$0 over ten years if the former ownerit obtains a covenant not to sue relating to the site
from the Ohio EPA. In either event, the agreement leaves in place the Company's
right to seek contribution or indemnity under common law or statute from the former ownersSTI for
environmental issuesproblems. As an owner of the Mansfield Property, the Company may
become subject to liability for remediation of such contamination at and/or from
such property, which liability may be joint and requires the former owners to complete some soil cleanup actions within six
months of closing. The transaction was closed on January 7, 2000.several except under certain
circumstances. The Company believes that actual remediation costs, if any, will
not exceed STI's indemnification obligation. If there are remediation costs that
the Indemnification Cap. If such
costs exceed the CapCompany is held liable for and the Company is unable to obtain, or is
delayed in obtaining indemnification or contributionfrom STI for any
reason, the Company could be
materially and adversely affected. The Company does not maintain
environmental impairment liability insurance.
6. Segment Disclosure
The Company has five 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, Products and the Midtex Brand. The SIG group
manufactures RFI filters, general purpose relays, transformers and definite
purpose contactors.
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
March 31,
2001 2000
---- ----
2000 1999
----- ----
Net sales:
High Performance Group $ 19,25122,651 $ 20,31919,251
Specialized Industrial Group 29,568 29,131 13,706
Intersegment elimination (1) (48) (208)
(173)
-------- --------
Consolidated net sales---------- ----------
$ 52,171 $ 48,174
$ 33,852
======== ================== ==========
Operating income:
High Performance Group $ 2,8774,053 $ 2,5962,877
Specialized Industrial Group 1,171 1,862
1,141
Corporate (845) (847)
(796)
-------- --------
Consolidated operating income---------- ----------
4,379 3,892
2,941
-------- ------------------ ----------
Interest expense, net (4,764) (4,859) (3,645)
Other income (expense), net (24) 2
(10)
-------- ------------------ ----------
Consolidated loss before income taxes $ (409) $ (965)
$ (714)
======== ================== ==========
Depreciation and amortization expense:
High Performance Group $ 1,255851 $ 1,1961,255
Specialized Industrial Group 2,301 2,282
1,021
Corporate 15 3
-
-------- ------------------ ----------
3,167 3,540 2,217
Amortization of debt issuance costs (2) 289 279
207
-------- ------------------ ----------
Consolidated depreciation and amortization expense $ 3,456 $ 3,819
$ 2,424
======== ================== ==========
Purchases of property, plant and equipment:
High Performance Group $ 686574 $ 436686
Specialized Industrial Group 514 432
220
Corporate - 10
-
-------- ------------------ ----------
Consolidated capital expenditures $ 1,088 $ 1,128
$ 656
======== ================== ==========
March 31, December 31,
2001 2000
1999
-------- ------------ ----
Assets:
High Performance Group $ 60,53864,365 $ 59,76963,460
Specialized Industrial Group 129,547 128,787123,335 126,211
Corporate 5,367 11,469
-------- --------5,352 5,871
---------- ----------
Consolidated assets $195,452 $200,025
======== ========$ 193,052 $ 195,542
========== ==========
(1) - represents net sales between HPG and SIG
(2) - included on the consolidated statements of cash flows as depreciation
and amortization and included in the consolidated statement of operations as
interest expense. Management does not consider these costs in managing the
operations of the reportable segmentssegments.
7. Guarantor Subsidiaries
The 10% Senior Subordinated Notes due on September 15, 2004 are fully and
unconditionally guaranteed on a secured, joint and several basis by Kilovac,
Kilovac International, Corcom, Products, all of which are wholly owned
subsidiaries of CII Technologies, Inc. (the "Guarantor Subsidiaries"). The
following unaudited condensed consolidating financial data illustrates the
composition of CII Technologies, Inc. (the "Primary Guarantor") and the
Guarantor Subsidiaries as of March 31, 2000 and 2001.
Investments in Guarantor Subsidiaries are accounted for by the Primary Guarantor
on the equity method for purposes of the supplemental consolidating
presentation. Earnings of Guarantor Subsidiaries are, therefore, reflected in
the Primary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate the Primary Guarantor's investment in Guarantor
Subsidiaries and intercompany balances and transactions.
Condensed Consolidating Balance Sheet
As of March 31, 2001
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Cash and cash equivalents $ 588 $ 351 $ - $ 939
Accounts receivable 10,262 17,993 - 28,255
Inventories 14,494 15,261 - 29,755
Other current assets 3,972 3,361 - 7,333
------------------ --------------- -------------- -----------
Total current assets 29,316 36,966 - 66,282
Property, plant and equipment, net 9,694 26,687 - 36,381
Goodwill and other intangible assets, net 8,489 79,971 - 88,460
Investments and intercompany with
and in subsidiaries 116,570 (122,470) 5,900 -
Other assets 1,886 43 - 1,929
------------------ --------------- -------------- -----------
Total other assets 126,945 (42,456) 5,900 90,389
Total assets $ 165,955 $ 21,197 $ 5,900 $ 193,052
======================================================================
Accounts payable $ 4,856 $ 8,432 $ - $ 13,288
Other current liabilities 16,180 5,511 - 21,691
------------------ --------------- -------------- -----------
Total current liabilities 21,036 13,943 - 34,979
Long term debt 175,604 - - 175,604
Other non current liabilities 4,901 13,154 - 18,055
------------------ --------------- -------------- -----------
Total liabilities 201,541 27,097 - 228,638
Total stockholder's equity (35,586) (5,900) 5,900 (35,586)
------------------ --------------- -------------- -----------
Total liabilities and stockholder's equity $ 165,955 $ 21,197 $ 5,900 $ 193,052
======================================================================
Condensed Consolidating Balance Sheet
As of December 31, 2000
(In thousands)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Cash and cash equivalents $ 654 $ 153 $ - $ 807
Accounts receivable 9,048 18,581 - 27,629
Inventories 14,319 16,714 - 31,033
Other current assets 3,590 3,449 - 7,039
------------------ --------------- -------------- -----------
Total current assets 27,611 38,897 - 66,508
Property, plant and equipment, net 9,875 27,462 - 37,337
Goodwill and other intangible assets, net 8,825 81,040 - 89,865
Investments and intercompany with and in
and in subsidiaries 120,573 (125,326) 4,753 -
Other assets 1,789 43 - 1,832
------------------ --------------- -------------- -----------
Total other assets 131,187 (44,243) 4,753 91,697
Total assets $ 168,673 $ 22,116 $ 4,753 $ 195,542
========================================================================
Accounts payable $ 4,497 $ 8,956 $ - $ 13,453
Other current liabilities 17,462 5,799 - 23,261
------------------ --------------- -------------- -----------
Total current liabilities 21,959 14,755 - 36,714
Long term debt 175,738 - - 175,738
Other non current liabilities 6,013 12,114 - 18,127
------------------ --------------- -------------- -----------
Total liabilities 203,710 26,869 - 230,579
Total stockholder's equity (35,037) (4,753) 4,753 (35,037)
------------------ --------------- -------------- -----------
Total liabilities and stockholder's equity $ 168,673 $ 22,116 $ 4,753 $ 195,542
========================================================================
Condensed Consolidated Statement of Income
For the three months ended March 31, 2001
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net sales $ 19,329 $ 32,890 $ (48) $ 52,171
Cost of sales 13,909 25,181 (48) 39,042
------------------ --------------- -------------- -----------
Gross margin 5,420 7,709 - 13,129
Operating and other expenses 5,311 9,374 (1,147) 13,538
------------------ --------------- -------------- -----------
Income (loss) before income taxes 109 (1,665) 1,147 (409)
Income tax expense (benefit) 581 (518) - 63
------------------ --------------- -------------- -----------
Net income (loss) $ (472) $ (1,147) $ 1,147 $ (472)
------------------------------------------------------------------------
Condensed Consolidated Statement of Income
For the three months ended March 31, 2000
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net sales $ 16,406 $ 31,976 $ (208) $ 48,174
Cost of sales 12,128 24,157 (208) 36,077
------------------ --------------- -------------- -----------
Gross margin 4,278 7,819 - 12,097
Operating and other expenses 5,471 8,417 (826) 13,062
------------------ --------------- -------------- -----------
Income (loss) before income taxes (1,193) (598) 826 (965)
Income tax expense (benefit) (387) 228 - (159)
------------------ --------------- -------------- -----------
Net income (loss) $ (806) $ (826) $ 826 $ (806)
------------------------------------------------------------------------
Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 2001
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net cash provided by (used in)
operating activities $ (1,229) $ 1,290 $ 1,147 $ 1,208
Cash flows from investing activities:
Purchases of property,
plant & equipment (286) (802) - (1,088)
Other investing activities (107) - - (107)
------------------- --------------- -------------- -----------
Cash used in investing activities (393) (802) - (1,195)
Cash flows from financing activities:
Repayments on long term debt (166) - - (166)
Other financing activities 575 (290) - 285
------------------- --------------- -------------- -----------
Cash provided by (used in) financing activities 409 (290) - 119
Net increase (decrease) in cash (1,213) 198 1,147 132
Cash and cash equivalents, beginning of period 654 153 - 807
Cash and cash equivalents, end of period $ (559) $ 351 $ 1,147 $ 939
===========================================================================
Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 2000
(In thousands)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net cash provided by (used in)
operating activities $ (2,944) $ 892 $ 826 $ (1,226)
Cash flows from investing activities:
Purchases of property,
plant & equipment (572) (556) - (1,128)
Other investing activities - (5) - (5)
------------------- --------------- -------------- -----------
Cash used in investing activities (572) (561) - (1,133)
Cash flows from financing activities:
Repayments on long term debt (2,476) - - (2,476)
Other financing activities (186) (846) - (1,032)
------------------- --------------- -------------- -----------
Cash used in financing activities (2,662) (846) - (3,508)
Net (decrease) increase in cash (6,178) (515) 826 (5,867)
Cash and cash equivalents, beginning of period 5,976 69 - 6,045
Cash and cash equivalents, end of period $ (202) $ (446) $ 826 $ 178
============================================================================
8. New Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 133, as amended by SFAS
No. 137,138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The new standard establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company has
not determined at this time whatin the past and does not anticipate in the future to engage in derivative or
hedging activities. Therefore, the adoption of SFAS No. 138 has not had a
significant impact if any, that this new accounting
standard will have on its financial statements.
8. Subsequent Eventcondition or results of operations.
9. Other Matters
On April 13, 2000 the Company announced the relocation plan of itsthe Midtex
Product Lines from one of its Juarez, Mexico facility. These product lines will be merged into
existing Company divisions andfacilities to the Company's Joint
Ventures facilities.Ventures. The relocations are
planned to beginbegan in 2000.April 2000 and were completed by April 30,
2001. The estimated costs of the product line relocations, including primarily employee
separation
costs of approximately $711, and preparing current facilities for the
relocation, arewas approximately $850. Management expects substantially all$900, of these costs to bewhich $50 was expensed during the second quarter of 2000.three
months ended March 31, 2001.
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 forward looking statements are identified by the use of words such as
"plans", "will", "expects", "intends" and similar words indicating a discussion
of something other than historical facts. 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, 19992000 on Form 10-K.
Overview
On April 13, 2000, the Company announced the relocation of its Midtex Product
Lines from its Juarez, Mexico facility. These product lines will be merged into
existing Company divisions and Joint Ventures facilities. The relocations are
planned to begin in 2000. The estimated costs of the product line relocations,
including employee separation costs and preparing current facilities for the
relocation, are approximately $850. Management expects substantially all of
these costs to be expensed during the second quarter of 2000.
In March 1999, the Company purchased all of the outstanding equity securities of
Products, a manufacturer and marketer of relays, transformers, and contactors
primarily for the HVAC industry. Pursuant to the Stock Purchase Agreement, the
Company paid approximately $59.4 million for all of the outstanding capital
stock of Products. In addition, if Products achieves certain sales targets for
the years ending December 31, 1999 and December 31, 2000, the Company will make
additional payments to the former shareholders of Products not to exceed $4.0
million in the aggregate. For the year ended December 31, 1999, the Company
accrued approximately $786,000 in accordance with the terms of the agreement
which was then paid in February 2000. For the year ending December 31, 2000, the
Company could be required to make an additional payment not to exceed
approximately $3.2 million. The payment of the purchase price and related fees
was financed by the issuance of $55.0 million of Tranche Term B loans, in
accordance with an amendment to the Senior Credit Facility (as defined), the
contribution of $5.0 million in additional paid in capital by the Parent, and a
draw on the revolving loan portion of the Company's Senior Credit Facility (as
defined). Products has manufacturing facilities in Sterling and Prophetstown,
Illinois and Sabula and Guttenberg, Iowa.
In July 1998, the Company purchased certain assets and assumed certain
liabilities of Cornell Dublier'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
("Genicom") for $4.7 million (the "GRD Acquisition"). The Company financed the
GRD Acquisition with funds borrowed on the Old Senior Credit Facility. Under the
terms of the purchase agreement with Genicom, the Company was entitled to
recover up to $500,000 for inventory unsold or unused during the two years
following the acquisition. In December 1999, the Company submitted a claim
against Genicom for $500,000. In March 2000, Genicom filed a Chapter 11
bankruptcy petition in Federal Bankruptcy Court. As a result, the Company
recorded a valuation reserve of $500,000 against this receivable in 1999.
In October 1997, the Company purchased 100% ownership in ibex Aerospace Inc.
("ibex") for $2.0 million, excluding expenses (the "ibex Acquisition"). ibex was
a wholly owned subsidiary of SOFIECE of Paris, France. The ibex operation was
consolidated into the Company's Hartman division in 1998. Of the $2.0 million
purchase price, approximately $1.3 million was paid at closing, and the
remainder 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 balance of $450,000 was
paid by the Company in September, 1999. The reduction in purchase price resulted
in a reduction of goodwill.
Due to the Company's historical growth through acquisitions, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
Results of Operations
The following table sets forth 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 sales growth
or operating
results will continue in the future.
Three Months Ended
March 31
-------------------------------------
2001 2000
1999
----- --------- ----
Net sales 100.0% 100.0%
Cost of sales 74.8% 74.9% 71.9%
Gross profit 25.2% 25.1% 28.1%
Selling expenses 7.3% 6.9% 8.3%
General and administrative expenses 6.1% 6.6% 7.8%
Research and development expenses 1.1% 0.9% 1.1%
Amortization of goodwill and other intangibles 2.2% 2.6%
2.2%Facility relocation charges 0.1% 0.0%
Operating income 8.4% 8.1% 8.7%
Discussion of Consolidated Results of Operations
Three Months Ended March 31, 20002001 Compared to Three Months Ended March 31, 19992000
Net sales of the Company for the quarter ended March 31, 2000,2001, increased $14.3$4.0
million, or 42.3%8.3%, to $48.2$52.2 million from $33.9$48.2 million for the corresponding
period in 1999. Excluding the effect of the Products Acquisition, net sales of
the Company for the quarter ended March 31, 2000, increased $570,000, or 1.8%,
to $32.3 million from $31.7 million for the corresponding period in 1999.2000. This increase is due primarily to (i) a strong automatic test equipment market,
(ii) a recoveringdemand in the
military/defense, market, (iii) a strong communications market,HVAC, industrial and (iv) growth in the industrial equipment marketcommercial airframe markets, and (ii)
introduction of new products, partially offset by (v)(iii) continued price pressure
and (iv) a slowdown in an increasingly competitive global market place (vi)
an expected slow down insome of the commercial airframe market and (vii) a slower than
expected ramp up of production to meet customer demand.Company's served markets.
Gross profit of the Company for the quarter ended March 31, 2000,2001, increased $2.6$1.0
million, or 27.0%8.5%, to $12.1$13.1 million from $9.5$12.1 million for the corresponding
period in 1999.2000. Gross profit as a percentage of net sales decreased to 25.1%
from 28.1% for the same period in 1999. Excluding the effect of the Products
Acquisition, gross profit of the Company for the quarter ended March 31, 2000,
increased $380,000, or 4.2%, to $9.5 million from $9.1 million for the
corresponding period in 1999. Excluding the effect of the Products Acquisition,
gross profit as a percentage of net sales increased to 29.5%25.2%
from 28.8%25.1% for the correspondingsame period in 1999.2000. The increase in gross marginprofit as a
percentage of net sales is due primarily to (i) cost incurred in the quarter ended March 31,
1999 of approximately $250,000 for a portion of the costs of relocating the
Waynesboro, VA facility, (ii) lower overhead costs in 2000 due to the relocation
of the Waynesboro, VA facility, (iii) higher sales volume and (iv) continued cost reductions and
manufacturing efficiencies partially offset by (v)(ii) labor and material
inflation, (iii) continued price pressure, inand (iv) an increasingly competitive global market place (vi) unfavorable foreign exchange
rates and (vii) costs associated with a slower than expected ramp up of
production to meet higher customer demand.mix shift.
Selling expenses for the Company for the quarter ended March 31, 2000,2001, increased
$537,000,$470,000, or 19.1%14.1%, to $3.3$3.8 million from $2.8$3.3 million for the same corresponding
period in 1999.2000. Selling expenses as a percentage of net sales decreasedincreased to 6.9%7.3%
from 8.3%6.9% in the same period in 1999. Excluding the effect of the Products
Acquisition, selling expenses for the Company for the quarter ended March 31,
2000, increased $1,000 to $2.7 million. Excluding the effect of the Products
Acquisition, selling expenses as a percentage of net sales decreased to 8.4%
from 8.6%
for the same period in 1999.2000. This decreaseincrease in selling expenses as a
percentage of net sales is due primarily to a restructuring of(i) higher expenses necessary to
promote the Company's business, and (ii) higher commissions and the control
of fixed costs.on higher net sales,
partially offset by continued cost reductions.
General and administrative expenses for the Company for the quarter ended March
31, 2000, increased $533,000, or 20.2%,2001, decreased $38,000, to $3.2 million from $2.6$3.2 million in 1999.2000. General
and administrative expenses as a percentage of net sales decreased to 6.6%6.1% from
7.8%6.6% for the corresponding period in 1999. Excluding the effect of
the Products Acquisition, general and administrative expenses for the Company
for the quarter ended March 31, 2000 increased $38,000, or 1.5%. Excluding the
effect of the Products Acquisition,2000. This decrease in general and
administrative expenses as a percentage of net sales remainedis due primarily to the
same at 8.2% for the corresponding period
in 1999.control of fixed costs and continued cost reductions.
Research and development expenses for the Company for the quarter ended March
31, 2000,2001, increased $73,000,$92,000, or 19.0%20.1%, to $457,000$549,000 from $384,000$457,000 for the
corresponding period in 1999. Excluding the effect of the Products Acquisition,
research2000. Research and development expenses as a percentage
of net sales remained steady at 1.0% for the quarter ended March 31, 2000,
decreased $7,000, or 1.9%, to $371,000 from $378,000 for the correspondingsame period in 1999.2000.
Amortization of goodwill and other intangibles for the Company for the quarter
ended March 31, 2000, increased $478,000, or 63.3%,2001, decreased to $1.2$1.1 million from $755,000$1.2 million for the
corresponding period in 1999. Excluding the effect of the
Products Acquisition, amortization of goodwill and other intangibles2000.
Facility relocation charges for the Company for the quarterthree months ended March 31, 2000, decreased $2,000, or 0.3%,2001 were
$50,000 as compared to $672,000 from $674,000no expenses for the correspondingsame period in 1999.2000. The charges in
2001 are in connection with the Company's planned relocation of its Midtex
Facility. The facility relocation charges include but are not limited to
employee separation charges and costs to relocate the product lines to the
Company's Joint Ventures. The relocation of the Midtex Facility was completed by
April 30, 2001.
Interest expense of the Company for the three months ended March 31, 2000,
increased $1.2 million,2001,
decreased $95,000, or 33.3%2.0%, to $4.9$4.8 million from $3.6$4.9 million for the
corresponding period in 1999.2000. The increasedecrease was due primarily to the increased
debt levels associated with financing the Products Acquisition and an increase
indecreased
interest rates partially offset byand lower debt.
The income tax benefitexpense of the Company for the three months ended March 31, 20002001
was 16.5%15.4% of loss before income taxes as compared to 19.5%an income tax benefit of
16.5% of loss before income taxes for the corresponding period in 1999.2000. The
decreased benefit percentageexpense is due primarily to some of the amortization of goodwill amortizationand intangibles
not deductible for tax purposes of
the Products Acquisition.purposes.
Segment Discussion
Three Months Ended March 31, 20002001 Compared to Three Months Ended March 31, 19992000
High Performance Group
Net sales of HPG decreasedincreased by $1.1$3.4 million, or 5.3%17.7%, to $19.3$22.7 million from
$20.3$19.3 million for the corresponding period in 1999.2000. This decreaseincrease is due
primarily to (i) a slower than expected ramp up of production to meet customerstrong demand driven
by a strong automatic test market, and a recovering military/defense market,
(ii) an expected slow down in the military/defense and commercial airframe
market andmarkets, (ii) introduction of new products, partially offset by (iii) continued
price pressure in an increasingly competitive global market place.pressure.
Operating income of HPG increased $281,000,$1.2 million, or 10.8%40.9%, to $2.9$4.1 million from
$2.6$2.9 million for the same period in 1999.2000. Operating income of HPG as a
percentage of HPG net sales of HPG increased to 14.9%17.9% from 12.8%14.9% for the same period in
1999.2000. The increase in operating income as a percentage of net sales is due
primarily to (i) a charge in the quarter ended March 31, 1999 of
approximately $300,000 for a portion of the costs of relocating the Waynesboro,
VA facility, (ii) lower overhead costs in 2000 due to the relocation of the
Waynesboro, VA facility, (iii) higher sales volume in some of the product lines,
(iv) control of fixed costs, (v)and (ii) continued cost reductions
and manufacturing efficiencies partially offset by (vi)(iii) labor and material
inflation, (iv) continued price pressure, in an increasingly competitive global marketplace
and (vii) costs associated with a slower than expected ramp up of production to
meet customer demands.(v) higher commission on higher
revenues.
Specialized Industrial Group
Net sales of SIG increased $15.4 million,$437,000, or 112.5%1.5%, to $29.1$29.6 million from $13.7$29.1
million for the same period in 1999. Excluding the effect of the Products
Acquisition, net sales of SIG increased $1.7 million, or 14.8%, to $13.2 million
from $11.5 million for the same period in 1999.2000. This increase is due primarily to (i)
a strong communications market, and (ii) growthdemand in the HVAC and industrial marketmarkets, (ii) introduction of new
products, partially offset by (iii) continued price pressure and (iv) a slowdown
in an increasingly
competitive global marketplace.some of the Company's served markets.
Operating income of SIG increased $721,000,decreased $691,000, or 63.2%37.1%, to $1.9$1.2 million from $1.1$1.9
million for the same period in 1999.2000. Operating income of SIG as a percentage of
SIG net sales decreased to 6.4%4.0% from 8.3%6.4% for the same period in 1999. Excluding
the effect of the Products Acquisition, operating income of SIG increased
$229,000 or 23.8%, to $1.2 million from $964,000 for the corresponding period in
1999. Excluding the effect of the Products Acquisition, operating income of SIG
as a percentage of SIG net sales increased to 9.0% from 8.3% for the same period
in 1999.2000. This
increasedecrease in operating income as a percentage of net sales is due primarily to
(i) higher sales volumes,an unfavorable mix shift, (ii) labor and material inflation, (iii) continued
price pressure, and (iv) increased selling expenses necessary to promote the
Company's business, partially offset by (v) continued cost reductions and
(iii)manufacturing efficiencies, and (vi) the control of fixed costscosts.
Liquidity and Capital Resources
Cash provided by operating activities for the three months ended March 31, 2001
was $1.2 million, compared to cash used in operating activities of $1.2 million
for the same period in 2000. The $2.4 million increase in cash provided by
operations is due primarily to (i) accounts receivable increasing at a lower
rate than in 2000, (ii) a decrease in inventory, (iii) a decrease in interest
expense contributing to a lower net loss in 2001 than in 2000, partially offset
by (iv) a decrease in accounts payable.
The days' sales outstanding for accounts receivable was approximately 46.1 trade
days at March 31, 2001 and approximately 49.6 at December 31, 2000. The average
days' sales outstanding decreased due to the Company's continued price pressurefocus on
improving its collection efforts.
The Company's inventories increased from $27.6 million at December 31, 2000 to
$28.3 million at March 31, 2001. Inventory turns were 5.1 at March 31, 2001 and
4.8 at December 31, 2000. The Company continually focuses on improving its
inventory management.
The Company has historically financed its operations through a combination of
internally generated funds and secured borrowings.
Capital expenditures were $1.1 million for the three months ended March 31, 2001
and $1.1 million for the corresponding period in 2000. Additional investments in
joint ventures was $100,000 for the three months ended March 31, 2001.
The Company has a borrowing arrangement with a bank which provides for a maximum
credit facility of $115.0 million (including $3.0 million for stand-by letters
of credit), limited by outstanding indebtedness under the initial $35.0 million
term loan agreement ("Tranche A") and the $55.0 million term loan agreement
("Tranche B") or availability on the borrowing base, as defined in the loan
agreement (the "Senior Credit Facility"). The amount available for borrowings
under the Senior Credit Facility at March 31, 2001 was approximately $8.9
million. All funds may be borrowed as either a base rate loan or LIBOR loan. For
base rate loans and LIBOR loans an increasingly competitive global marketplaceapplicable 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 weighted average borrowing rate, calculated based on borrowings
outstanding at March 31, 2000 and (v) unfavorable foreign exchange
rates.
LiquidityMarch 31, 2001 under base rate and Capital ResourcesLIBOR loans
was 9.29% and 8.74%, respectively. The Senior Credit Facility requires the
Company to pay commitment fees 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.
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 March 31, 2000,Instruments governing the Company had available unused borrowing capacity of approximately $12.4 million
underCompany's indebtedness, including the Senior Credit
Facility.Facility and the Company's Senior Subordinated Notes (the "Notes"), contain
financial and other covenants that restrict, among other things, the Company's
ability to incur additional indebtedness, incur liens, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, merge or consolidate with any other person
or sell, assign transfer, lease, convey or otherwise dispose of substantially
all of the assets of the Company.
Such limitations, together with the highly leveraged nature of the Company,
could limit corporate and operating activities, including the Company's ability
to respond to changing market conditions, to provide for unanticipated capital
investments or to take advantage of business opportunities.
The Company expectswas in compliance with its financial covenants as of March 31, 2001.
The Senior Credit Facility has a mandatory prepayment clause (the "Excess Cash
Payment") which requires that capital expendituresexcess cash flow (as defined in the Senior Credit
Facility) be used to prepay the Senior Credit Facility within 90 days after the
last day of the fiscal year. The Excess Cash Payment was $850 and $398 for the
remainder of fiscal 2000
will be approximately $3.8 million.
Cash Used in Operating Activities
For the three monthsyears ended March 31, 2000, cash used in operating activities was
$1.2 million, compared to $1.1 million for the same period in 1999. The increase
in cash used in operations was primarily due to (i) an increase in accounts
receivable due to higher revenues in the first quarter of 2000 as compared to
the fourth quarter of 1999 at comparable days' sales outstanding, (ii) a slight
increase in inventory, (iii) higher interest expense due to increased interest
rates partially, offset by an increase in accounts payable.
The days' sales outstanding for accounts receivable was approximately 47.0 trade
days at December 31, 1999 and approximately 47.3 at March 31, 2000. The Company
continually focuses on increasing its collection efforts.
The Company's inventories of $27.5 million remained substantially the same from
December 31, 1999 to March 31, 2000. Inventory turns were 5.3 at March 31, 2000, and 4.6 at December 31, 1999. The Company continues to focus on improving its
inventory management.
The Company's accounts payable increased from $13.1 million at December 31, 1999
to $14.7 million at March 31, 2000.
Cash Used in Investing Activities
Capital expenditures were $1.1 million for the three months ended March 31, 2000
and $656,000 million for the corresponding period in 1999. Of this increase in
capital expenditures, approximately $230,000 is attributable to Products.
Acquisition spending totaled $786,000 for the three months ended March 31, 2000
and $60.1 million for the three months ended March 31, 1999 due to the Products
Acquisition.
Cash Flows from Financing Activities
Cash used in financing activities for the three months ended March 31, 2000 was
$2.7 million compared to cash provided by financing activities of $61.7 million
for the same period in 1999. This decrease 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 in 1999.respectively.
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, the non
cash charges resulting from the Parent Stockstock options granted in 2000 and additional charges
to cost of salesin
2001, 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.facility relocation charges. 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 $7.5$7.6 million for the three months ended March 31,
20002001 from $5.2$7.5 million for the corresponding period in 1999. Adjusted EBITDA
increased due to the inclusion of Products for the entire quarter of 2000.
EBITDA was also impacted by (i) costs in 1999 due to the relocation of the
Waynesboro, VA facility, (ii) higher sales volume, (iii) continued costs
reductions and (iv) control of fixed costs, partially offset by (v) continued
price pressure in an increasingly competitive global marketplace, (vi)
unfavorable exchange rates and (vii) costs associated with a slower than
expected ramp up of production to meet customer demand.
Inflation
The Company- ---------
Management does not believe that inflation historically had any materiala significant effect
on the Company's business during 1997 and 1998.business. However, the CompanyManagement does believe that inflation began
to have an unfavorable impact on the Company's business during 1999 and 2000 due
to a tighter U. S.US labor market which
the CompanyManagement believes has caused labor costs to
increase at a higher percentage level than in previous years.
Disclosure Regarding Forward-Looking Statements
- -----------------------------------------------
Statements made by the Company which are not historical facts are forward
looking statements that involve risks and uncertainties. Actual results could
differ materially from those expressed or implied in forward looking statements.
All such forward looking statements are subject to the safe harbor created byprovisions of
the Private Securities Litigation Reform Act of 1995. These forward looking
statements are identified by the use of words such as "plans", "will",
"expects", "intends" and similar words indicating a discussion of something
other than historical facts. 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. The Company makes no commitment to
update any forward looking statements or to disclose any facts, events, or
circumstances after the date hereof that may affect the accuracy of any forward
looking statement.
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
activitiesactivities.
Interest Rate Risk
The Company has exposure to interest rate risk related to certain instruments
entered into for other than trading purposes. Specifically, the Company has in
place the Senior Credit Facility, which consists of two term loans, Tranche A
with a balance of $26.6$20.0 million at March 31, 2000,2001, Tranche B with a balance of
$54.0$53.5 million at March 31, 20002001 and $12.5$16.0 million outstanding on the Revolving
Credit Facility all of which bearsbear interest at variable rates. Borrowings under
the Senior Credit Facility bear interest based on the Lenders' Reference Rate
(as defined in the credit agreement) or EurodollarLIBOR Rate plus an applicable margin.
While changes in the Reference Rate or the EurodollarLIBOR Rate could affect the cost of
funds borrowed in the near future, only $12.0$1.0 million of the Revolving Credit
Facility at March 31, 20002001 was carried at a variable rate, with the remainder of
the Senior Credit Facility
on short term fixed rates. The Company, therefore, believes the effect, if any,
of reasonable possible near-term changes in interest rates on the Company's
consolidated financial position, results of operations and cash flows would not
be material.
In September 1997, the Company consummated an offering of $95,000,000 aggregate
principal amount ofThe Company's 10% Senior Subordinated Notes (the "Notes:), due 2004, (the
"Offering"). Interest on ("the Notes is payable semi-annually in arrears on March
15 and September 15 of each year. The Notes will mature on September 15, 2004,
unless previously redeemed, and the Company will not be required to make any
mandatory redemption or sinking fund payment prior to maturity except in
connection with a change in ownership. The Notes may be redeemed, in whole or in
part at any time, on or after September 15, 2001 at the option of the Company,
at the redemption prices set
forth in the Indenture, plus, in each case, accrued and unpaid interest and
premium, if any, to the date of redemption. In addition, at any time prior to
September 15, 2000, the Company may, at its option, with the net cash proceeds
of an equity offering (as defined in the Indenture), redeem up to 33.3% in
aggregate principal amount of the Notes at a redemption price of 110% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption, provided that not less than $63.4 million aggregate principal amount
of the Notes remains outstanding immediately after the occurrence of such
redemption.
The Company's NotesNotes") are at a fixed
interest rate of 10%. As a result, a change in the fixed rate interest market
would change the estimated fair market value of its fixed rate long termlong-term bond
debt. The Company believes that a 10% change in the long term interest rates
would not have a material effect on the Company's financial conditions, results
of operations or cash flows.
While the Company historically has not used interest rate swaps, it may, in the
future, use interest rate swaps to assist in managing the Company's overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
Foreign Currency Exchange Risk
The Company has seven foreign subsidiaries 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 and loss, 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 $52,000$77,000 in the three
months ended March 31, 20002001 compared to $83,000a net loss of $51,000 in the comparable
period of 1999.2000.
The Company anticipates that it will continue to have exchange gains or losslosses
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 March 31, 2000.
SIGNATURES
CII Technologies, Inc.
(formerly known as
Communications Instruments, Inc.)
May 12, 200015, 2001 /s/ Michael A. Steinback
- ------------- ------------------------------------------------------------------ --------------------------------------------
Date Michael A. Steinback
President and Chief Executive Officer
May 12, 200015, 2001 /s/ Richard L. Heggelund
- ------------- ------------------------------------------------------------------ --------------------------------------------
Date Richard L. Heggelund
Vice President and 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 Amendment of the Company
4.1 Indenture dated as of September 18, 1997 by andamd 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 FormsForm S-4
(File numberNumber 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 onof Form 10-K
(File Number 333-38209)
10.110.3 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,
parentParent 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 AmericaAmerican National Trust and Savings Association and
BancAmerica Securities, Inc., is incorporated herein by reference to
Registration Statement on FormsForm S-4
(File Number 333-38209)
10.8 Pledge Agreements dated as of September 18, 1997 by parent,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 AmericaAmerican 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)333-38209)
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 namenamed 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 stockholdersstockers 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, 199511,1995 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 numberNumber 333-38209)
10.27+ Stock Purchase Agreement dateddaed 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 IBEXibex 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
incorporatedNewman and James A. Steinback is
incororated 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 AmericaAmerican National Trust and Savings Association and certain other
lending institutions from time to time a party thereto is incorporated herein
by reference to Report onof Form 10-K
(File Number 333-38209)
10.32+ Pledge Agreement dated as of June 19,June19, 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 formForm 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 AmericaAmerican 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 AmericaAmerican
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-K10-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.,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 reportReport
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 onof Form 8-K
(File Number 333-38209)
10.40 First Amendment and Waiver to Credit Agreement, among Parent, the Company,
various lenders, and Bank of America N. A.,N.A. as Administrative Agent is incorporated herein by reference to report on Form 10K. (File
Number 333-38209).Agent.
10.41 Second Amendment to Credit Agreement, among Parent, the Company various lenders,
and Bank of America N. A.N.A., as Administrative Agent.Agent, is incorporated herein by
reference to Report on Form 10-Q
(File Number 333-38209)
10.42 Employment Agreement dated as of May 22, 2000 between CII Technologies, Inc.
and John J. Butler
10.43 Employment Agreement dated as of November 3, 2000 between CII Technologies, Inc.
and Ramzi Dabbagh
10.44 1997 CII Technologies, Inc. Stock Option Plan
10.45 Property Transfer and Settlement Agreement dated January, 2000 by and between
STI Properties, Inc., Scott Technologies, Inc. and Communications Instruments,
Inc.
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 for the three months ended March 31, 2000herein
+ 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 the Regulation S-K.