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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2006, | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to . |
Commission File Number:001-33337
COLEMAN CABLE, INC.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
Delaware | 36-4410887 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1530 Shields Drive
Waukegan, Illinois 60085
(Address of principal executive offices) (Zip Code)
Waukegan, Illinois 60085
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(847) 672-2300
(847) 672-2300
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | |
Common Stock, par value $0.001 per share | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports 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 requirement for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006 was $0.
Common shares outstanding as of March 15, 2007 16,786,895
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report onForm 10-K incorporates by reference portions of the registrant’s Proxy Statement for its 2007 Annual Meeting of Stockholders to be held on May 14, 2007.
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TRADEMARKS
Our trademarks, service marks and trade names referred to in this report include American Contractor®, Barontm,Booster-in-a-Bag®, CCI®, Clear Signaltm, Coilex®, Cool Colorstm, Corra/Clad®, Luma-Site®, Maximum Energy®, Oswego Wiretm, Plencote®, Polar-Flextm, Polar-Rig 125®, Polar Solar®, Power Station®, Push-Locktm, Quadnector®, Road Power®, Royal®, Seoprene®, Signal®, Tri-Source®, Trinector® and X-Treme Boxtm, among others.
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PART I
ITEM 1. | Business |
Cautionary Note Regarding Forward-Looking Statements
Various statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These statements may be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report, including certain statements contained in “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed under “Risk Factors,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
• | disruptions in the supply or fluctuations in the price of copper and other raw materials; | |
• | increased competition from other wire and cable manufacturers, including foreign manufacturers; | |
• | general economic conditions and changes in the demand for our products by key customers; | |
• | pricing pressures causing margins to decrease; | |
• | our level of indebtedness; | |
• | the integration of the proposed acquisition of Copperfield, LLC; | |
• | failure to identify, finance or integrate acquisitions; and | |
• | other risks and uncertainties, including those described under “Risk Factors.” |
Given these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any of these statements or to publicly announce the results of any revisions to any of these statements to reflect future events or developments.
Introduction
We are a leading designer, developer, manufacturer and supplier of electrical wire and cable products in the U.S. We supply a broad line of wire and cable products, resulting from our management of more than 22,500 manufacturing and shipping stock keeping units (“SKUs”), which enable us to offer our customers a single source for many of their wire and cable product requirements. As a result of a review of our SKU’s in December 2006, we reduced our historically reported number to those SKU’s used in the last three years. We sell our products to more than 8,300 active customers in diverse end markets, including a wide range of specialty distributors, retailers and original equipment manufacturers (“OEMs”). We believe we possess leading market shares in many of the end markets we serve largely as a result of our broad product line, brand recognition, flexible manufacturing platform and distribution capabilities, and engineering and design expertise.
Our primary product lines include industrial power cable, electronic and communication wire and cable, low voltage cable, assembled wire and cable products and fabricated bare wire products. These include highly engineered cable products to meet customer specific electrical and mechanical requirements ranging from high performance military cables designed for harsh environments, submersible cables designed for underwater
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environments, and flexible cables designed for aircraft boarding bridges, industrial boom lifts, and wind power turbines.
Our business currently is organized into three reportable segments: electrical/wire and cable distributors; specialty distributors and OEMs; and consumer outlets. Within these segments, we sell our products into multiple channels, including electrical distribution, wire and cable distribution, OEM/government, heating, ventilation, air conditioning and refrigeration (“HVAC/R”), irrigation, industrial/contractor, security/home automation, recreation/transportation, copper fabrication, retail and automotive.
We manufacture our products in six domestic facilities and supplement our production with domestic and international sourcing. We utilize a flexible manufacturing platform whereby a number of our key products can be produced at multiple facilities. We utilize sophisticated inventory modeling capabilities to provide best in class customer service through our four primary distribution centers. As a result, we have the ability to fill diverse orders with a broad array of products within 24 hours.
From 2004 to 2006, our revenues grew from $285.8 million in 2004 to $423.4 million in 2006, a CAGR of 68%. During that same period, operating income grew from $19.2 million in 2004 to $48.6 million in 2006. For the twelve months ended December 31, 2006, our revenues and operating income were $423.4 million and $48.6 million, respectively, compared to $346.2 million and $27.8 million for the twelve months ended December 31, 2005.
Recent Development
On March 11, 2007, we signed a definitive agreement to acquire all the equity interests in Copperfield, LLC for $213 million in cash. Management believes that the ColemanCable-Copperfield combination will result in one of the premier U.S. based manufacturers of electrical and electronic wire and cable products. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Proposed Copperfield, LLC Acquisition.”
Company History
We were incorporated in Delaware in 1999 by our current principal shareholders. The majority of our operations came from Coleman Cable Systems, Inc., our predecessor company, which was formed in 1970 and which we acquired in 2000. G. Gary Yetman, our President and Chief Executive Officer, joined our predecessor in 1986, and Richard N. Burger, our Executive Vice President, Chief Financial Officer, Secretary and Treasurer, joined our predecessor in 1996. Our principal executive offices are located at 1530 Shields Drive, Waukegan, Illinois 60085, and our telephone number is(847) 672-2300.
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Industry Overview
We operate in the wire and cable manufacturing market. We sell primarily through industrial distributors, with electrical distributors being the largest segment, and related consumer markets. The wire and cable market is a fragmented market characterized by a large number of public companies and privately owned companies throughout the U.S. The industry has been undergoing consolidation, and over the past few years some large market participants have been willing to divest businesses that are underperforming or not perceived as good growth opportunities. This current market environment has caused a ripple effect in the market, disrupting many customer relationships, which we believe will benefit us as a consistent provider of service with broad product offerings.
Copper comprises one of the major cost components for cable and wire products. Cable and wire manufacturers are typically able to pass through the changes in the cost of copper to the customer. However, there can be timing delays for pricing implementations of varying lengths depending on the type of product, competitive conditions, particular customer arrangements and inventory management. On a cost basis, our products typically make up a small component of the end products that are used in each of our end markets. As a result, our customers are less sensitive to the fluctuation in the price of copper because our products make up a small portion of their total purchases.
Competitive Strengths
We believe our competitive strengths include the following:
Broad Product Offering. We supply a broad line of wire and cable products, resulting from our management of more than 22,500 manufacturing and shipping SKUs over our primary product lines, including industrial power cable, electronic and communication wire and cable, low voltage cable, assembled wire and cable products and fabricated bare wire products. We sell nearly all of our product lines across each of our segments, enabling us to offer our customers a single source for many of their wire and cable product requirements.
Diversified End Markets/Customer Base. Across our three reportable segments, electrical/wire and cable distributors, specialty distributors and OEMs, and consumer outlets, we develop our products for sale into over eleven distinct end markets. Outside of electrical distribution, which accounted for 26.5% of 2006 net sales, no other channels represented more than 11.1% of revenue. We sell our products to more than 8,300 active customers, including a wide range of specialty distributors, retailers and OEMs. We believe that our broad product line and diverse customer base have contributed to greater stability in net sales and operating profit margin than a number of our competitors.
Leading Market Shares in Multiple Channels. We believe we possess leading market shares in many of the distribution channels we serve largely as a result of our broad product offering, brand recognition, flexible manufacturing platform and distribution capabilities. We believe we are a leading supplier within a number of our channels, including HVAC/R, irrigation and industrial/contractor. Our market position within these channels enable us to introduce new products and product categories to this diverse customer base.
Experienced Management Team. Our senior management team has, on average, over 20 years of experience in the wire and cable industry and 14 years with the company. Our President and Chief Executive Officer, G. Gary Yetman, joined our predecessor in 1986 and has served as Chief Executive Officer since 1999.
Strong Brand Recognition. We market our products under several brands and trademarks, including Baron, Signal, Polar Solar, Royal, Road Power and Seoprene, among others. Our brands are recognized for their consistent quality and dependability in the markets we serve. We have been delivering our products under some of these well known brands for over 20 years.
Engineering and Design Capabilities. We utilize our engineering and design capabilities to supply our customers with customized cabling solutions to meet specific electrical and mechanical demands. Examples of our solutions include high performance military cables designed for harsh environments, submersible cables designed for underwater environments, flexible cables designed for aircraft boarding bridges and industrial boom lifts, and power and control cables for wind turbines.
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Supply Chain Management. We have the ability to fill diverse orders with a broad array of products within 24 hours. We are able to achieve this efficiency by optimizing our flexible manufacturing platform, sophisticated inventory modeling systems and distribution platform. We are able to promptly execute order fulfillment using a radio frequency inventory tracking system deploying slotting, directedput-a-way and picking route facilitating paperless inventory flow.
Growth Strategy
The key elements of our growth strategy are summarized below:
Pursue Growth Opportunities in Existing and Complementary Markets. We believe we have significant opportunities to grow our business by increasing our penetration within our existing customer base, adding new customers, expanding our already broad product offering, and pursuing additional marketing channels.
Selectively Pursue Strategic Acquisitions. As a leading manufacturer in our core markets, we believe we are well-positioned to benefit from the consolidation of manufacturers in these markets. We believe our management has the ability to identify and integrate strategic acquisitions as evidenced by the successful integration of six businesses since 1996. We will continue to selectively consider acquisitions that improve our market position within our existing target markets, expand our product offerings or end markets, or increase our manufacturing efficiency. See “Management’s Discussion and “Analysis of Financial Condition and Results of Operations — Overview — Proposed Copperfield, LLC Acquisition.”
Manage Cost Structure Through Operating Efficiency and Productivity Improvements. We continue to evaluate our operating efficiency and productivity and are focused on lowering our manufacturing and distribution costs. We plan to more fully integrate our copper production, realign plant production, add and continue to improve warehouse efficiencies as part of our 2007 capital plan. We also intend to add internal capacity for new products and new product development while continuing to implement new software to enhance our order execution capabilities throughout our supply chain. We have enhanced our international sourcing capabilities by opening an engineering and sourcing office in Shenzhen, China. We believe that these initiatives will provide significant savings and improve operating profits.
Expand Product Lines. We are actively seeking to identify, develop and commercialize new products that use our core technology and manufacturing competencies.
Product Overview
Our primary product lines include industrial power cable, electronic and communication wire and cable, low voltage cable, assembled wire and cable products and fabricated bare wire products. We sell virtually all of our product lines across each of our three segments, except that we sell our fabricated bare wire products only to specialty distributors and OEMs. Our products begin with bare wire. The core component of most of our products is copper wire that we manufacture internally and acquire from third parties based on a number of factors, including cost. We sell bare copper wire in a variety of gauges. These copper wires are drawn from copper rod into the desired gauges of solid and stranded copper wires. In the majority of our products, a thermoplastic insulation is extruded over the bare wire (in a wide array of compounds, quantities, colors and gauges) and then cabled (twisted) together with other insulated wires. An outer jacket is then extruded over the cabled product. This product is then coiled or spooled and packaged for sale or processed further into a cable assembly.
Industrial Power Cable
Our industrial power cable product line includes portable cord, machine tool wiring, welding, mining, pump, control, stage/lighting, diesel/locomotive and metal clad cables and other power cord products. These are medium power supply cables used for permanent or temporary connections between a power source (such as a power panel, receptacle or transformer) and a device (such as a motor, light, transformer or control panel). These products are used in construction, industrial MRO and OEM applications, such as airline support systems, wind turbines, cranes, marinas, offshore drilling, fountains, car washes, sports lighting, construction, food processing, forklifts, mining and military applications. Our brands in this product line include Royal, Seoprene, Corra/Clad and Polar-Rig 125.
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Electronic and Communication Wire and Cable
Our electronic and communication wire and cable product line includes telephone, security, coaxial, industrial automation, twinaxial, fire alarm, plenum and home automation cables. These cables permanently connect devices, and they provide power, signal, voice, data or video transmissions from a device (such as a camera, bell or terminal) to a source (such as a control panel, splice strip or video recorder). These products are used in applications such as telecommunication, security, fire detection, access control, video monitoring, data transmission, intercom and home entertainment systems. Our primary brands in this product line include Signal, Plencote, Soundsational and Clear Signal.
Low Voltage Cable
Our low voltage cable products are comprised of thermostat wire and irrigation cables. These cables permanently connect devices, and they provide low levels of power between devices in a system (such as a thermostat and the switch on a furnace, or a timer and a switch, device or sensor). They are used in applications such as HVAC/R, energy management, home sprinkler systems and golf course irrigation. We sell many of our low voltage cables under the Baron, BaroStat and BaroPak brand names.
Assembled Wire and Cable Products
Our assembled wire and cable products include multiple types of extension cords, as well as ground fault circuit interrupters, portable lighting (incandescent, fluorescent and halogen), retractable reels, holiday items, recreational vehicle (“RV”) cords and adapters, and surge and strip products. For the automotive aftermarket we offer booster cables, battery cables and battery accessories. Our brands in this area of our business include Polar Solar, Power Station, American Contractor, Road Power,Booster-in-a-Bag, Tri-Source, Trinector, Quadnector, Luma-Site, Coilex, Stripes and Cool Colors.
Fabricated Bare Wire Products
Our fabricated bare wire products conduct power or signals and include stranded, bunched and single-end copper, copper clad steel and various copper alloy wire. In this area, we process copper rod into stranding for use in our electronic and electrical wire and cable products or for sale to others for use in their products. We use most of our copper wire production to produce our finished products. Our primary brand in this product line is Oswego Wire.
Product Development
Our product development is an important part of our business. It is a collaborative initiative, involving the product management, engineering, manufacturing, purchasing, global sourcing and sales teams. New product concepts originate from a number of sources, including field input (sales/agent/customer), product management/engineering creation, outside inventors, raw material vendors, import supplier collaborations and traditional product line lengthening. Our product managers coordinate most of these projects with active support from other areas of our organization. Recent new product additions include enhanced control and automation cables, high-flex robotic cable and an expanded line of electronic commercial and security cable.
Our customers realize the benefits of our manufacturing capabilities and our proven design experience by collaborating with our engineers to develop product solutions for present and future needs. Such applications range from specially designed and manufactured cables for underwater environments in the entertainment industry to high performance cables for the U.S. Military and the Department of Defense for use in severe terrain and hostile environments.
End Market Overview
We classify our business segments based upon the end markets that they serve. Our segments consist of electrical/wire and cable distributors, specialty distributors and OEMs, and consumer outlets/end markets.
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Financial data for our business segments is as follows:
Year Ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Net sales: | ||||||||||||
Electrical/Wire and Cable Distributors | $ | 95,810 | $ | 114,561 | $ | 147,411 | ||||||
Specialty Distributors and OEMs | 133,457 | 171,926 | 219,957 | |||||||||
Consumer Outlets | 56,525 | 59,694 | 55,990 | |||||||||
Total | $ | 285,792 | $ | 346,181 | $ | 423,358 | ||||||
Operating income: | ||||||||||||
Electrical/Wire and Cable Distributors | $ | 9,010 | $ | 13,643 | $ | 23,830 | ||||||
Specialty Distributors and OEMs | 13,112 | 14,693 | 28,096 | |||||||||
Consumer Outlets | 3,399 | 3,465 | 3,421 | |||||||||
Total | 25,521 | 31,801 | 55,347 | |||||||||
General corporate | (6,274 | ) | (4,029 | ) | (6,787 | ) | ||||||
Consolidated operating income | $ | 19,247 | $ | 27,772 | $ | 48,560 | ||||||
For additional information about our business segments, see Note 14 to our consolidated financial statements.
Electrical/Wire and Cable Distributors
We market industrial power cables, electronic and communication cables, low voltage wire and assembled products for sale in the electrical/wire and cable distributors segment. We sell these products under brands such as Signal, Royal, Seoprene, Baron and Polar Solar for use primarily in construction, industrial MRO, data communication and fire safety applications. In this segment, our success has been largely attributable to the breadth of our product offering, customer-focused manufacturing and distribution capabilities and strong customer relationships. Certain of our products are used in major telecommunications and home automation systems.
Electrical Distribution
The electrical distribution channel represents our oldest and largest customer base and is the preferred purchasing channel for many of the primary professional users of our products. Our customers include national and regional buying groups, national chains, and independent distributors. We believe we are a leading supplier of the principal products that we sell in this market, based on domestic sales. This channel accounted for $112.3 million or 26.5% of our net sales for the year ended December 31, 2006.
Wire and Cable Distribution
In this channel, we market our products through wire and cable distributors and electronic distributors. Key customers in this channel are national and regional independent distributors. This channel accounted for $35.1 million or 8.3% of our net sales for the year ended December 31, 2006.
Specialty Distributors and OEMs
OEM/Government
We design and manufacture specialty products for several OEM markets and government agencies and subcontractors. Our OEM products serve a variety of industries including marine, lighting mobile equipment and entertainment. In this channel, we focus ondesign-and-build solutions. We provide service with quality product performance geared specifically to customer demand requirements. We sell our government products mainly to the U.S. Department of Defense, which uses these products primarily for military operations. Electronic products include Qualified Products List (“QPL”) coaxial cable and electrical products produced to military specifications.
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Several small business military distributors meeting special contracting requirements also participate in this channel. This area of our business is highly dependent on the budget and activities of the Department of Defense. This channel accounted for $35.7 million or 8.4% of our net sales for the year ended December 31, 2006.
HVAC/R
We manufacture and market low voltage control cables for the HVAC/R industry under the Baron brand. We also supply related cords, safety and power supply cords, assemblies and air conditioner whips. In this market, we supply a large and diverse customer base that includes the largest and most highly recognized independent distributors and OEM manufacturers serving the industry. We offer our customers a single source for their HVAC/R cable requirements and work closely with our customers to develop products specific to their needs. This led to the development of our innovative and popular BaroPak packaging and of our BaroStat II damage resistant cable. We believe we are a leading supplier of the principal products that we sell in the HVAC/R market, based on domestic sales. The prominence of the Baron brand, our reputation for innovation, and our customer-focused manufacturing and distribution capabilities have contributed substantially to our leadership position in this segment. This channel accounted for $32.3 million or 7.6% of our net sales for the year ended December 31, 2006.
Irrigation
We produce wire and cable and related products under the Baron brand for use in commercial and residential sprinkler systems, low voltage lighting applications and well pumps. Our customers for these products are turf and landscape distributors, golf course distributors and submersible pump distributors. We believe we are a leading supplier of the principal products that we sell in the irrigation market, based on domestic sales. This channel accounted for $41.1 million or 9.7% of our net sales for the year ended December 31, 2006.
Industrial/Contractor
We manufacture and import various professional builders’ products sold through distributors that focus on the commercial construction and industrial markets. These products include professional grade extension cords, ground-fault circuit interrupters, industrial cord reels, custom cords, trouble lights, portable halogen lights, electrical/electronic cables, and temporary lighting. Among the brands that we distribute to this end market are Polar Solar, Luma-Site and X-Treme Box. Our customers in the industrial/contractor channel include commercial contractor supply distributors, industrial distributors, welding distributors, national industrial/MRO supply companies, rental companies and mail order companies selling to this channel. In this channel, we rely on three major types of customers: specialty, tool and fastener distributors; MRO/industrial catalog houses and retail/general construction supply houses; and equipment rental companies. We believe we are a leading supplier of many of the products that we sell in the industrial/contractor market, based on domestic sales, as a result of our broad product line, customer-focused manufacturing and distribution capabilities. This channel accounted for $30.4 million or 7.2% of our net sales for the year ended December 31, 2006.
Security/Home Automation
We market electronic and communication wire and cable to security, audio-video, residential and commercial distributors. The products we sell in this channel are used primarily in residential and light commercial applications. These products include fire alarm, burglar alarm, data, coaxial, home automation and security cables. Many of these products are marketed under the Signal brand name. Sales are augmented by private label products sold to national distributors. This channel accounted for $47.2 million or 11.1% of our net sales for the year ended December 31, 2006.
Recreation/Transportation
We market to this channel RV and manufactured housing wiring products, such as machine tool wire, portable cord, power cords, and adapters, as well as coaxial, speaker, alarm and other cable. We sell these products to manufactured housing and RV OEM distributors and to RV aftermarket distributors. This channel accounted for $17.3 million or 4.1% of our net sales for the year ended December 31, 2006.
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Copper Fabrication
We manufacture non-insulated bare and tinned copper, copper clad steel, nickel-plated copper and cadmium copper in various sizes of single-end, bunched and stranded constructions for use in various applications, including appliances, fire alarms, security systems, electronics, automotive telecommunication, military, industrial, high temperature and geophysical. Our customers for these products are other channels within the company, as well as other small specialized wire and cable manufacturers. We use most of our copper wire production to produce our finished products. However we evaluate this channel based on our third party business. We believe that our ability to provide specialty products is a competitive strength. This channel accounted for $16.0 million or 3.9% of our net sales for the year ended December 31, 2006.
Consumer Outlets
We sell a wide variety of products to the retail channel and automotive aftermarket. One major customer of this segment accounted for approximately 22.3% of the segment’s sales for the year ended December 31, 2006, and we expect sales to this customer to continue at similar levels during 2007. Sales to this segment are typically strongest in the fourth quarter, servicing holiday and seasonal requirements.
Retail
We manufacture and import a wide range of products that are marketed to the retail channel, including an array of extension cords, incandescent and fluorescent trouble lights, surge and strip products, and electrical/electronic cables. We sell these products under the American Contractor, Push-Lock, Tri-Source, Power Station, Trinector and Cool Colors brand names, among others. Our retail products are sold to a number of prominent national and regional mass merchandisers, home centers, hardware distributors, warehouse clubs and other consumer retailers. We believe that we have gained market share over the past several years and believe that we are a key supplier to this market. Merchandising, packaging and line extensions have been important contributors to our penetration in this market. We import products to supplement our domestic manufacturing capabilities. In addition, we engage in electronic commerce and inventory management with our major retail customers who have been leaders in these initiatives and demand high precision execution from their vendor partners. This channel accounted for $39.6 million or 9.3% of our net sales for the year ended December 31, 2006.
Automotive
We manufacture and import a wide range of products that are marketed to the automotive aftermarket, such as battery booster cables, battery cables and battery accessories. Our major automotive products brand names are Road Power, Polar-Glo,Booster-in-a-Bag and Maximum Energy. Much of the product sold to this channel is private-labeled for our customers. Our principal customers in this segment include prominent national and regional retailers. We compete with companies with domestic production capabilities as well as with companies that import products from Asia. Our automated booster cable manufacturing process provides us with a low-cost basis by which to produce the only domestically manufactured UL listed booster cables. We believe we possess a competitive advantage over foreign competitors who, due to the long transit times, are not adequately equipped to provide a rapid response to consumer demand for booster cables, which is driven by cold weather and can be unpredictable. Similar to the retail channel, we have the ability to conduct electronic transactions with our customers. Our global sourcing initiatives provide a valuable supplement to our domestic manufacturing activities. This channel accounted for $16.4 million or 3.9% of our net sales for the year ended December 31, 2006.
Competition
The market segments in which we compete are highly competitive. Each of our product segments competes with at least one major competitor; however, due to the diversity of our product offering, most of our competitors do not offer the entire spectrum of our product lines. Many of our products are made to industry specifications and, therefore, may be interchangeable with our competitors’ products. Some of our competitors are large and well-established companies, such as Belden, General Cable and American Insulated Wire, and have financial resources that may be superior to ours.
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The primary competitive factors for our products are similar across our segments. These factors include breadth of product offering, inventory availability, delivery time, price, quality, customer service and relationships, brand recognition and logistics capabilities. We believe we can compete effectively on the basis of each of these factors as they apply to our segments. We believe our key competitive strengths are our:
• | strong market presence across multiple end markets; | |
• | highly diversified and stable revenue base; | |
• | flexible operating model; | |
• | successful focus on reducing operating costs; | |
• | proven track record of consistent financial performance; and | |
• | experienced and dedicated management team. |
Manufacturing and Sourcing
We currently have six manufacturing facilities and four primary distribution centers that are supplemented with a network of satellite distribution centers. While we operate our primary distribution centers, our Los Angeles distribution center is an agent-owned warehouse that is not exclusive to our products. All of our satellite distribution centers are owned by agents. In these cases, in addition to receiving selling commissions, the agents receive commissions for warehousing our products. We upgraded our warehouse management software at our largest distribution facility in November 2003 and at a second distribution facility in January 2005. In March 2006, we upgraded our warehouse management system, gaining new processing capabilities, such as radio frequency identification. We plan to install comparable systems at our other distribution facilities.
We primarily manufacture our products domestically; however, we continually seek to identify domestic and international manufactured products that we can outsource to provide cost savings. Our goal is to optimize the balance between the relatively higher levels of service and shorter delivery times of our domestic manufacturing operations with the lower costs and longer delivery times associated with foreign sourcing.
For the year ended December 31, 2006, we imported approximately $48.5 million of products, which were primarily assembled products. In outsourcing products, we strive to maintain consistency between products produced domestically and overseas so that our customers can rely on us to provide them with consistent products from one order to the next.
We maintain an international engineering and sourcing office in Shenzhen, China to complement and improve our sourcing and product management activities. The Shenzhen office works as an extension of our headquarters in Waukegan, Illinois to provide liaison activities related to developing new product programs such as expanding our holiday and promotional product offerings, qualifying new suppliers and products, and providing ongoing oversight of the product and service quality from our Asian sources.
Sales and Marketing
Our corporate marketing group includes a product management team that focuses on the management of specific product categories across our multiple distribution channels. To maximize the accessibility of our offering to a diverse end-user customer base, we market our products through a variety of distribution channels. We have separate internal sales and marketing groups dedicated to each of our end markets. Our internal sales team directs our national networks of manufacturers’ representatives, who are the primary links to our target markets. These representatives are independent contractors dedicated to specific channels and generally carry our products to the exclusion of competing products. In 2006, we utilized approximately 122 manufacturers’ representative agencies with approximately 732 sales people selling our products. Sales to distributors, retailers and OEMs are directed through the development of print brochures, industry trade advertising, trade exhibitions, website applications and direct outside sales presentations to distributors and end users by both our employees and independent manufacturers’ representatives.
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Raw Materials
Copper is the primary raw material that we use to manufacture each of our products. Other significant raw materials are plastics, such as polyethylene and polyvinyl chloride, aluminum, linerboard and wood reels. There are a limited number of domestic and foreign suppliers of copper and these other raw materials. We typically have supplier agreements with terms of one to two years that do not impose minimum purchase requirements. The cost of a raw material purchased during the term of a supplier agreement is subject to the market price for the raw material at the time of purchase. Our centralized procurement department makes an ongoing effort to reduce and contain raw material costs. We generally do not engage in speculative raw material commodity contracts. We attempt to reflect raw material price changes in the sale price of our products.
Foreign Sales and Assets
Sales to customers outside the U.S. represented less than 1.7% of our net sales in each of the last three years. These foreign sales were $2.8 million in 2004, $7.9 million in 2005 and $7.3 million in 2006. We do not currently, and did not during 2004, 2005 or 2006, have any long-lived assets located outside the U.S.
Backlog and Shipping
Our product lines have no significant order backlog because we follow the industry practice of stocking finished goods to meet customer demand on ajust-in-time basis. We believe that the ability to fill orders in a timely fashion is a competitive factor in the markets in which we operate. As a result of higher demand for our products during the late fall and early winter months, we typically build up our inventory levels during the third and early fourth quarters of the year. In addition, receivables related to increased shipments during the late fall and early winter months are collected during the late fourth and early first quarters of the year.
Patents and Trademarks
We own five U.S. patents and three foreign patents covering products. We also own a number of registered trademarks. While we consider our patents and trademarks to be valuable assets, we do not consider any single patent or trademark to be of such material importance that its absence would cause a material disruption of our business. No patent or trademark is material to any one segment.
Employees
As of December 31, 2006, we had 845 employees, with approximately 32% of our employees represented by one labor union. Our current collective bargaining agreement expires December 22, 2009. We consider our labor relations to be good, and we have not experienced any significant labor disputes.
Regulation and Potential Environmental Liability
As a manufacturer and distributor of wire and cable products, we are subject to a number of industry standard-setting authorities, such as Underwriters Laboratories, the Telecommunications Industry Association, the Electronics Industries Association and the Canadian Standards Association.
In addition, many of our products are subject to the requirements of federal, state and local or foreign regulatory authorities. We also are subject to federal, state, local and foreign environmental protection laws and regulations governing our operations and the use, handling, disposal and remediation of hazardous substances currently or formerly used by us. A risk of environmental liability is inherent in our current and former manufacturing activities in the event of a release or discharge of a hazardous substance generated by us. We are party to one environmental claim, which is described below under the heading “Legal Proceedings.” There can be no assurance that the costs of complying with environmental, health and safety laws and requirements in our current operations, or that the potential liabilities arising from past releases of or exposure to hazardous substances, will not result in future expenditures by us that could materially and adversely affect our financial position, results of operations or cash flows.
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Tax Audit
On April 24, 2006, the IRS issued a Notice of Proposed Adjustment claiming that we were not entitled to tax deductions in connection with our prepayment of certain management fees and our payment of certain factoring costs to CCI Enterprises, Inc., our wholly-owned subsidiary. We have appealed the IRS findings. If our appeal of the IRS findings is unsuccessful, our obligation will be to indemnify our shareholders on record as of the effective date of the Tax Matters Agreement. See “Corporate Governance — What Related Person Transactions Do We Have? — Tax Matters Agreement” of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2007. We accrued estimated costs of $0.5 million which is included in other loss in the accompanying consolidated statements of operations in the fourth quarter of 2006, but we cannot guarantee the ultimate resolution will not exceed this amount. See Note 7 to the Consolidated Financial Statements for additional information.
ITEM 1A. | Risk Factors |
Disruptions in the supply of copper and other raw materials used in our products could cause us to be unable to meet customer demand, which could result in the loss of customers and net sales.
Copper is the primary raw material that we use to manufacture our products. Other significant raw materials that we use are plastics, such as polyethylene and polyvinyl chloride, aluminum, linerboard and wood reels. There are a limited number of domestic and foreign suppliers of copper and these other raw materials. We typically have supplier agreements with terms of one to two years for our raw material needs that do not require us to purchase a minimum amount of these raw materials. If we are unable to maintain good relations with our suppliers or if there are any business interruptions at our suppliers, we may not have access to a sufficient supply of raw materials. If we lose one or more key suppliers and are unable to locate an alternative supply, we may not be able to meet customer demand, which could result in the loss of customers and net sales.
Fluctuations in the price of copper and other raw materials, as well as fuel and energy, and increases in freight costs could increase our cost of goods sold and affect our profitability.
The prices of copper and our other significant raw materials, as well as fuel and energy costs, are subject to considerable volatility; this volatility has affected our profitability and we expect that it will continue to do so in the future. For example, from 2004 to 2006, the average selling price of copper cathode on the COMEX increased from $1.29 per pound in 2004 to $3.10 per pound in 2006, an increase of 140.3%. During that same period, our revenues and operating income grew from $285.8 million and $19.2 million, respectively, in 2004 to $423.4 million and $48.6 million, respectively, in 2006. These increases in our revenues and operating income were due, in part, to our ability to pass increased copper prices on to our customers. Our agreements with our suppliers generally require us to pay market price for raw materials at the time of purchase. As a result, volatility in these prices, particularly copper prices, can result in significant fluctuations in our cost of goods sold. If the cost of raw materials increases and we are unable to increase the prices of our products, or offset those cost increases with cost savings in other parts of our business, our profitability would be reduced. We generally do not engage in activities to hedge the price of our raw materials. As a result, increases in the price of copper and other raw materials may affect our profitability if we cannot effectively pass these price increases on to our customers.
In addition, we pay the freight costs on certain customer orders. In the event that freight costs increase substantially, due to fuel surcharges or otherwise, our profitability would decline.
The markets for our products are highly competitive, and our inability to compete with other manufacturers in the wire and cable industry could harm our net sales and profitability.
The markets for wire and cable products are highly competitive. We compete with at least one major competitor in each of our business lines. Many of our products are made to industry specifications and may be considered fungible with our competitors’ products. Accordingly, we are subject to competition in many of our markets primarily on the basis of price. We must also be competitive in terms of quality, availability, payment terms and customer service. We are facing increased competition from products manufactured in foreign countries that in many cases are comparable in terms of quality but are offered at lower prices. For example, in 2003, we experienced a decline in net sales due principally to the loss of several customers who opted for foreign sourcing, where labor
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costs are lower. Unless we can produce our products at competitive prices or purchase comparable products from foreign sources on favorable terms, we may experience a decrease in our net sales and profitability. Some of our competitors have greater resources, financial and otherwise, than we do and may be better positioned to invest in manufacturing and supply chain efficiencies and product development. We may not be able to compete successfully with our existing competitors or with new competitors.
Our net sales, net income and growth depend largely on the economic strength of the markets that we serve, and if these markets become weaker, we could suffer decreased sales and net income.
Many of our customers use our products as components in their own products or in projects undertaken for their customers. Our ability to sell our products is largely dependent on general economic conditions, including how much our customers and end-users spend on information technology, new construction and building, maintaining or reconfiguring their communications network, industrial manufacturing assets and power transmission and distribution infrastructures. A general weakening in any or all of these economic conditions could adversely affect both: (i) the aggregate results of our reportable business segments — electrical/wire and cable distributors, specialty distributors and OEMs, and consumer outlets; and (ii) our sales into the multiple channels within these business segments, including electrical distribution, wire and cable distribution, OEM/government, heating, ventilation, air-conditioning, recreation/transportation, copper fabrication, retail and automotive. In the early 2000s, many companies significantly reduced their capital equipment and information technology budgets, and construction activity that necessitates the building or modification of communication networks and power transmission and distribution infrastructures slowed considerably as a result of a weakening of the U.S. and foreign economies. As a result, our net sales and financial results declined significantly in those years.
We are dependent upon a number of key customers. If they were to cease purchasing our products, our net sales and profitability would likely decline.
We are dependent upon a number of key customers, although none of our customers accounted for more than 6.0% of our net sales for the year ended December 31, 2006. Our customers can cease buying our products at any time and can also sell products that compete with our products. The loss of one or more key customers, or a significant decrease in the volume of products they purchase from us, could result in a drop in our net sales and a decline in our profitability. In addition, a disruption or a downturn in the business of one or more key customers could reduce our sales and could reduce our liquidity if we were unable to collect amounts they owe us.
We face pricing pressure in each of our markets, and our inability to continue to achieve operating efficiency and productivity improvements in response to pricing pressure may result in lower margins.
We face pricing pressure in each of our markets as a result of significant competition and industry over capacity, and price levels for many of our products (after excluding price adjustments related to the increased cost of copper) have declined over the past few years. We expect pricing pressure to continue for the foreseeable future. A component of our business strategy is to continue to achieve operating efficiencies and productivity improvements with a focus on lowering purchasing, manufacturing and distribution costs. We may not be successful in lowering our costs. In the event we are unable to lower these costs in response to pricing pressure, we may experience lower margins and decreased profitability.
We have significant indebtedness outstanding and may incur additional indebtedness that could negatively affect our business.
We have a significant amount of indebtedness. On December 31, 2006, we had approximately $122.5 million of indebtedness, comprised of $120 million under our 9.875% Senior Notes due 2012 (“senior notes”) and $2.5 million of capital leases and other debt. On October 11, 2006, we paid off substantially all of the outstanding indebtedness under our credit facility.
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Our high level of indebtedness and dependence on indebtedness could have important consequences to our shareholders, including the following:
• | our ability to obtain additional financing for capital expenditures, potential acquisition opportunities or general corporate or other purposes may be impaired; | |
• | a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, reducing the funds available to us for other purposes; | |
• | it may place us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and | |
• | we may be more vulnerable to economic downturns, may be limited in our ability to respond to competitive pressures and may have reduced flexibility in responding to changing business, regulatory and economic conditions. |
Our ability to satisfy our debt obligations will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. Each of these factors is, to a large extent, dependent on economic, financial, competitive and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our debt obligations, we will need to refinance our existing debt, issue additional equity securities or securities convertible into equity securities, obtain additional financing or sell assets. Our business may not be able to generate cash flow or we may not be able to obtain funding sufficient to satisfy our debt service requirements.
We may not have the ability to repurchase our senior notes upon a change of control as required by the indenture governing our senior notes.
Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all of our outstanding senior notes at 101% of the principal amount plus accrued and unpaid interest to the date of repurchase. We may not have sufficient funds to make the required repurchase in cash at such time or the ability to arrange necessary financing on acceptable terms. In addition, our ability to repurchase our senior notes in cash may be limited by law or the terms of other agreements relating to our debt outstanding at the time. If we fail to repurchase any of our senior notes submitted in a change of control offer, it would constitute an event of default under the indenture, which could, in turn, constitute an event of default under our other debt instruments, even if the change of control itself would not cause a default. This could result in the acceleration of our payment obligations under all of our debt instruments and, if we are unable to meet those payment obligations, this could have an adverse material effect on our business, financial condition and results of operations.
Growth through acquisitions is a significant part of our strategy and we may not be able to successfully identify, finance or integrate acquisitions in order to grow our business.
Growth through acquisitions has been, and we expect it to continue to be, a significant part of our strategy. We regularly evaluate possible acquisition candidates. We may not be successful in identifying, financing and closing acquisitions on favorable terms. Potential acquisitions may require us to obtain additional financing or issue additional equity securities or securities convertible into equity securities, and any such financing and issuance of equity may not be available on terms acceptable to us or at all. If we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing shareholders could be diluted, which, in turn, could adversely affect the market price of our stock. If we finance an acquisition with debt, it could result in higher leverage and interest costs. Further, we may not be successful in integrating any such acquisitions that are completed. Integration of any such acquisitions may require substantial management, financial and other resources and may pose risks with respect to production, customer service and market share of existing operations. In addition, we may acquire businesses that are subject to technological or competitive risks, and we may not be able to realize the benefits expected from such acquisitions.
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If we are unable to retain senior management and key employees, we may experience operating inefficiencies and increased costs, resulting in diminished profitability.
Our success has been largely dependent on the skills, experience and efforts of our senior management and key employees. The loss of any of our senior management or other key employees could result in operation inefficiencies and increased costs. We may be unable to find qualified replacements for these individuals if their services were no longer available, and, if we do identify replacements, the integration of those replacements may be disruptive to our business.
Advancing technologies, such as fiber optic and wireless technologies, may make some of our products less competitive and reduce our net sales.
Technological developments could cause our net sales to decline. For example, a significant decrease in the cost and complexity of installation of fiber optic systems or a significant increase in the cost of copper-based systems could make fiber optic systems superior on a price performance basis to copper systems and could have a material adverse effect on our business. Also, advancing wireless technologies, as they relate to network and communication systems, may reduce the demand for our products by reducing the need for premises wiring. Wireless communications depend heavily on a fiber optic backbone and do not depend as much on copper-based systems. An increase in the acceptance and use of voice and wireless technology, or introduction of new wireless or fiber-optic based technologies, may have a material adverse effect on the marketability of our products and our profitability. If wireless technology were to significantly erode the markets for copper-based systems, our sales of copper premise cables could face downward pressure.
If our goodwill or other intangible assets become impaired, we may be required to recognize charges that would reduce our income.
Under accounting principles generally accepted in the U.S., goodwill and certain other intangible assets are not amortized but must be reviewed for possible impairment annually, or more often in certain circumstances if events indicate that the asset values are not recoverable. Such reviews could result in an earnings charge for the impairment of goodwill, which would reduce our income without any change to our underlying cash flow. We will continue to monitor financial performance indicators across our various operating segments particularly in the Recreation/Transportation, Retail and Automotive operating segments, which had combined goodwill balances of $4.3 million at December 31, 2006.
We have incurred restructuring charges in the past and may incur additional restructuring charges in the future.
Over the last five years, we have incurred approximately $3.6 million in charges related to restructuring our production facilities, $1.3 million of additional costs associated with the closing of our Miami Lakes, Florida facility in 2006, and $0.1 million associated with the closing of our Siler City, North Carolina facility in 2006. We estimate the total cost to close the Siler City facility will be $0.8 million. Under our current growth plan, we intend to continue to realign plant production, which may result in additional and potentially significant restructuring charges.
Some of our employees belong to a labor union and certain actions by such employees, such as strikes or work stoppages, could disrupt our operations or cause us to incur costs.
As of December 31, 2006, we employed 845 persons, approximately 32.0% of whom are covered by a collective bargaining agreement, which expires on December 22, 2009. If unionized employees were to engage in a concerted strike or other work stoppage, if other employees were to become unionized, or if we are unable to negotiate a new collective bargaining agreement when the current one expires, we could experience a disruption of operations, higher labor costs or both. A strike or other disruption of operations or work stoppage could reduce our ability to manufacture quality products for our customers in a timely manner.
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We may be unable to raise additional capital to meet capital expenditure needs if our operations do not generate sufficient funds to do so.
Our business is expected to have continuing capital expenditure needs. If our operations do not generate sufficient funds to meet our capital expenditure needs for the foreseeable future, we may not be able to gain access to additional capital, if needed, particularly in view of competitive factors and industry conditions. In addition, recent increases in the cost of copper have increased our working capital requirements. If we are unable to obtain additional capital, or unable to obtain additional capital on favorable terms, our liquidity may be diminished and we may be unable to effectively operate our business.
We are subject to current environmental and other laws and regulations.
We are subject to the environmental laws and regulations of each jurisdiction where we do business. We are currently, and may in the future be, held responsible for remedial investigations andclean-up costs of certain sites damaged by the discharge of hazardous substances, including sites that have never been owned or operated by us but at which we have been identified as a potentially responsible party under federal and state environmental laws. As a result of our 2000 merger with Riblet Products Corporation, we may be subject to potential liability under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601et seq. We have established reserves for such potential liability and believe those reserves to be adequate; however, there is no guarantee that such reserves will be adequate or that additional liabilities will not arise. See “Legal Proceedings.” Changes in environmental and other laws and regulations in both domestic and foreign jurisdictions could adversely affect our operations due to increased costs of compliance and potential liability for noncompliance.
Disruption in the importation of our raw materials and products and the risks associated with international operations could cause our operating results to decline.
We source certain raw materials and products from outside the U.S. Foreign material purchases expose us to a number of risks, including unexpected changes in regulatory requirements and tariffs, possible difficulties in enforcing agreements, exchange rate fluctuations, difficulties in obtaining import licenses, economic or political instability, embargoes, exchange controls or the adoption of other restrictions on foreign trade. Although we currently manufacture the vast majority of our products in the U.S., to the extent we decide to establish foreign manufacturing facilities, our foreign manufacturing sales would be subject to similar risks. Further, imports of raw materials and products are subject to unanticipated transportation delays that affect international commerce.
Complying with Section 404 of the Sarbanes-Oxley Act of 2002 may strain our resources and divert management.
We will be required under Section 404 of the Sarbanes-Oxley Act of 2002 to furnish a report by our management on the design and operating effectiveness of our internal controls over financial reporting with our annual report onForm 10-K for our fiscal year ending December 31, 2007. Since this is the first time that we have had to furnish such a report, we expect to incur material costs and to spend significant management time to comply with Section 404. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to hire additional accounting and financial staff with appropriate experience and technical accounting knowledge, and we may not be able to do so in a timely fashion.
We have risks associated with inventory.
Our business requires us to maintain substantial levels of inventory. We must identify the right mix and quantity of products to keep in our inventory to meet customer orders. Failure to do so could adversely affect our sales and earnings. However, if our inventory levels are too high, we are at risk that an unexpected change in circumstances, such as a shift in market demand, drop in prices, or default or loss of a customer, could have a material adverse impact on the net realizable value of our inventory.
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Changes in industry standards and regulatory requirements may adversely affect our business.
As a manufacturer and distributor of wire and cable products, we are subject to a number of industry standard setting authorities, such as Underwriters Laboratories. In addition, many of our products are subject to the requirements of federal, state, local or foreign regulatory authorities. Changes in the standards and requirements imposed by such authorities could have an adverse effect on us. In the event that we are unable to meet any such standards when adopted, our business could be adversely affected.
ITEM 1B. | Unresolved Staff Comments |
None.
ITEM 2. | Properties |
As of December 31, 2006, we owned or leased the following primary facilities:
Approximate | ||||||||
Location | Type of Facility | Square Feet | Leased or Owned | |||||
Texarkana, Arkansas | Manufacturing, Warehouse | 106,700 | Owned | |||||
Gurnee, Illinois | Warehouse | 75,000 | Leased | |||||
North Chicago, Illinois | Manufacturing | 23,277 | Leased | |||||
Waukegan, Illinois | Offices | 30,175 | Leased | |||||
Waukegan, Illinois | Manufacturing | 212,530 | Owned — 77,394 Leased — 135,136 | |||||
Waukegan, Illinois | Warehouse | 180,000 | Leased | |||||
East Longmeadow, Massachusetts | Manufacturing, Warehouse | 90,000 | Leased | |||||
Oswego, New York | Manufacturing, Warehouse | 115,000 | Owned | |||||
Siler City, North Carolina* | Closed | 86,000 | Owned | |||||
Hayesville, North Carolina | Manufacturing | 104,000 | Owned |
* | On November 14, 2006, we approved a plan to close this facility and move its manufacturing operations to other facilities. |
All of our properties are used in all of our business segments with the exception of the North Chicago, Illinois facility, which is used in the electrical/wire and cable distributors and specialty distributors and OEMs segments, and the Oswego, New York facility, which is used in the specialty distributors and OEMs segment.
We believe that our existing facilities are adequate for our operations. We do not believe that any single leased facility is material to our operations and, if necessary, we could readily obtain a replacement facility. Our real estate assets are pledged to secure our credit facility.
ITEM 3. | Legal Proceedings |
We are involved in legal proceedings and litigation arising in the ordinary course of our business. In those cases where we are the defendant, plaintiffs may seek to recover large and sometimes unspecified amounts or other types of relief and some matters may remain unresolved for several years. We believe that none of the routine litigation that we now face, individually or in the aggregate, will be material to our business. However, an adverse determination could be material to our financial position, results of operations or cash flows in any given period. We maintain insurance coverage for litigation that arises in the ordinary course of our business and believe such coverage is adequate.
We are party to one environmental claim. The Leonard Chemical Company Superfund site consists of approximately 7.1 acres of land in an industrial area located a half mile east of Catawba, York County, South Carolina. The Leonard Chemical Company operated this site until the early 1980s for recycling of waste solvents. These operations resulted in the contamination of soils and groundwaters at the site with hazardous substances. In
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1984, the U.S. Environmental Protection Agency listed this site on the National Priorities List. Riblet Products Corporation, with which we merged in 2000, was identified through documents as a company that sent solvents to the site for recycling and was one of the companies receiving a special notice letter from the Environmental Protection Agency identifying it as a party potentially liable under the Comprehensive Environmental Response, Compensation, and Liability Act for cleanup of the site.
In 2004, we along with other “potentially responsible parties” (“PRPs”) entered into a consent decree with the Environmental Protection Agency requiring the performance of a remedial design and remedial action (“RD/RA”) for this site. We have entered into a site participation agreement with other PRPs for fulfillment of the requirements of the consent decree. Under the site participation agreement, we are responsible for a 9.19% share of the costs for the RD/RA. We recorded an accrual in 2004 for $0.4 million for this liability; the environmental remediation cost and our share has remained unchanged as of December 31, 2006.
On March 16, 2005, we received notice from a PRP group that we had potential liability at the HIMCO Dump Site in Elkhart, Indiana as a result of the activities of Riblet Products Corporation and that we could resolve those potential liabilities by a commitment to pay a cashout settlement and an administrative assessment to cover past and future group expenses on a per capita basis. We recorded an accrual in 2004 for $71,000 for this liability. On September 20, 2006, we settled the pending lawsuit with HIMCO for $86,000, which resulted in an additional charge of $15,000 in the third quarter of 2006.
Although no assurances are possible, we believe that our accruals related to environmental, litigation and other claims are sufficient and that these items and our rights to available insurance and indemnity will be resolved without material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. | Submission of Matters to a Vote of Security Holders |
None.
Executive Officers of the Company
Name | Age | Position | ||||
G. Gary Yetman | 52 | President, Chief Executive Officer and Director | ||||
Richard N. Burger | 56 | Executive Vice President, Chief Financial Officer, Secretary and Treasurer | ||||
Jeffrey D. Johnston | 51 | Senior Vice President, Operations and Assistant Secretary |
Key Employees of the Company
J. Kurt Hennelly | 43 | Vice President, Supply Chain | ||||
Kenneth A. McAllister | 61 | Group Vice President, Specialty Group and Consumer Group | ||||
Kathy Jo Van | 42 | Group Vice President, Electrical Group |
Mr. Yetmanjoined our predecessor company in 1986 and has served as President and Chief Executive Officer and as a director of the company since December 1999. Prior to his current role, Mr. Yetman held various senior management positions with our predecessor company and within the electrical industry. As described in the section entitled “Executive Compensation — Discussion of Summary Compensation and Grant of Plan Based Award Tables — Employment Agreements” of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2007, Mr. Yetman’s employment agreement gives him the right to one director seat on the board of directors of the company and each of its affiliates.
Mr. Burgerwas named Executive Vice President, Chief Financial Officer, Secretary and Treasurer in December 1999. Mr. Burger joined our predecessor company in July 1996 as Chief Financial Officer. Prior to that time, Mr. Burger served in senior level financial, administrative and manufacturing operations positions at Burns Aerospace Corporation, including as its President and Chief Executive Officer.
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Mr. Johnstonwas named Senior Vice President, Operations in January 2000. In December 2000, Mr. Johnston was also appointed Assistant Secretary of the company. From April 1995 until January 2000, he served as Vice President, Operations. Prior to joining our predecessor company, Mr. Johnston spent five years in senior manufacturing positions with CommScope, Inc. and nine years with Sealed Air Corporation in various management and manufacturing capacities.
Mr. Hennellywas named Vice President, Supply Chain in February 2007. He served as Group Vice President, Consumer Group and Global Sourcing since January 2005. Prior to that, he had been Vice President, Global Sourcing since December 2002, and in July 2004, he was given the additional responsibilities of Vice President, Consumer Group. Before holding these positions, Mr. Hennelly served as the Vice President, Engineering from June 2001 to November 2002 and as the Director of Manufacturing from April 1997 to May 2001. Prior to these roles, Mr. Hennelly held a variety of management positions in manufacturing, engineering, materials management and quality assurance since joining our predecessor company in 1987.
Mr. McAllisterwas named Group Vice President, Specialty Group and Consumer Group in February 2007. Prior to that, he had been Group Vice President, Specialty Group since January 2005. He joined the company in October 2002 as Vice President, Wire and Cable, and was also responsible for our OEM/Government sales channel. Prior to joining the company, Mr. McAllister held positions at General Cable Corporation as Vice President of OEM/Specialty Sales from 2000 to 2002, Vice President and General Manager, Industrial/Electronics Products from 1997 to 2000, Vice President and General Manager Datacom/Electronic Products from 1994 to 1997. He was Group Vice President at Carol Cable for their electronic and OEM divisions from 1984 to 1994. Prior to that time, Mr. McAllister held various other managerial positions in marketing and engineering at Alpha Wire, Hubbell Wiring Devices and Thomas & Betts Corporation.
Ms. Vanwas named Group Vice President, Electrical Group in January 2005. Prior to that, Ms. Van had been Vice President, Electrical Distribution since January 2003 and, from July 2000 until that time, she served as Vice President, Business Development and National Sales Manager for our electrical distribution business. Prior to joining the company, Ms. Van worked in the electrical distribution industry for 13 years with distributors of various sizes, including WESCO Distribution, Englewood Electric and Midwest Electric.
PART II
ITEM 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our only authorized, issued and outstanding class of capital stock is our common stock. Our common stock is listed on NASDAQ under symbol “CCIX.” The table below sets forth, for the calendar quarter indicated, the reported high and low sales prices and amount of any cash dividends declared:
2007 | ||||||||||||
Sales Price | Cash | |||||||||||
High | Low | Dividends | ||||||||||
First Quarter through March 8, 2007* | $ | 16.00 | $ | 15.75 | $ | — |
* | The Company started trading on NASDAQ on March 1, 2007. On March 8, 2007, the closing price of our common stock on NASDAQ was $15.99. |
As of March 8, 2007, there were 28 record holders of our common stock.
We had conducted our business as an S corporation under Subchapter S of the Internal Revenue Code (the “Code”) (and comparable state laws). Accordingly, our shareholders had been responsible for federal and substantially all state income tax liabilities arising out of our operations. For all periods prior to the C corporation conversion, we had provided our shareholders with funds for the payment of these income taxes. On October 10, 2006, we terminated our S corporation status, and after that date we are treated for federal and state income tax purposes as a C corporation under Subchapter C of the Code and, as a result, are subject to state and federal income taxes.
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We do not anticipate that we will pay any dividends on our common stock in the foreseeable future as we intend to retain any future earnings to fund the development and growth of our business. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and conditions, legal requirements and other factors that our board of directors deems relevant. Our credit facility and the indenture governing our senior notes each contains restrictions on the payment of dividends to our shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Secured Credit Facility” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Notes.” In addition, our ability to pay dividends is dependent on our receipt of cash dividends from our subsidiaries.
ITEM 6. | Selected Consolidated Financial Data |
The following table sets forth selected historical consolidated financial information for the periods presented. The financial data as of and for each of the five years in the period ended December 31, 2006 has been derived from our audited consolidated financial statements and notes thereto, which have been audited by Deloitte & Touche LLP.
Prior to October 10, 2006, we were treated as an S corporation, with the exception of our wholly-owned C corporation subsidiary, for federal and, where applicable, state income tax purposes. Accordingly, our shareholders were responsible for federal and substantially all state income tax liabilities arising out of our operations other than those conducted by our C corporation subsidiary. On October 10, 2006, the day before we consummated the 2006 Private Placement, we ceased to be an S corporation and became a C corporation and, as such, we are subject to federal and state income tax. The unaudited pro forma statement of operations data presents our pro forma provision for income taxes and pro forma net income as if we had been a C corporation for all periods presented. In addition, the selected historical consolidated financial information and the pro forma statement of operations data reflect the 312.6079 for 1 stock split that we effected on October 10, 2006.
Our consolidated financial statements have been prepared in accordance with GAAP. Historical results are not necessarily indicative of the results we expect in future periods. The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this report.
Year Ended December 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
(In thousands except for per share data) | ||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Net sales | $ | 243,492 | $ | 233,555 | $ | 285,792 | $ | 346,181 | $ | 423,358 | ||||||||||
Cost of goods sold | 203,416 | 198,457 | 240,260 | 292,755 | 341,642 | |||||||||||||||
Gross profit | 40,076 | 35,098 | 45,532 | 53,426 | 81,716 | |||||||||||||||
Selling, engineering, general and administrative expenses | 21,239 | 18,262 | 26,475 | 25,654 | 31,760 | |||||||||||||||
Restructuring charges(1) | 2,100 | 249 | (190 | ) | — | 1,396 | ||||||||||||||
Operating income | 16,737 | 16,587 | 19,247 | 27,772 | 48,560 | |||||||||||||||
Interest expense, net | 11,563 | 10,087 | 11,252 | 15,606 | 15,933 | |||||||||||||||
Loss on early extinguishment of debt | — | — | 13,923 | — | — | |||||||||||||||
Other (income) loss, net(2) | (16 | ) | (110 | ) | (13 | ) | (1,267 | ) | 497 | |||||||||||
Income (loss) before income taxes | 5,190 | 6,610 | (5,915 | ) | 13,433 | 32,130 | ||||||||||||||
Income tax expense(3) | 1,420 | 1,558 | 3,092 | 2,298 | 2,771 | |||||||||||||||
Net income (loss) | $ | 3,770 | $ | 5,052 | $ | (9,007 | ) | $ | 11,135 | $ | 29,359 | |||||||||
Per Common Share Data(4): | ||||||||||||||||||||
Net income (loss) per share | ||||||||||||||||||||
Basic | $ | 0.33 | $ | 0.44 | $ | (0.76 | ) | $ | 0.87 | $ | 2.15 |
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Year Ended December 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
(In thousands except for per share data) | ||||||||||||||||||||
Diluted | 0.27 | 0.36 | (0.76 | ) | 0.87 | $ | 2.15 | |||||||||||||
Weighted average shares outstanding | ||||||||||||||||||||
Basic | 11,482 | 11,467 | 11,795 | 12,749 | 13,637 | |||||||||||||||
Diluted | 13,983 | 13,968 | 11,795 | 12,749 | 13,637 | |||||||||||||||
Pro Forma Statement of Operations Data: | ||||||||||||||||||||
Income (loss) before income taxes | $ | 5,190 | $ | 6,610 | $ | (5,915 | ) | $ | 13,433 | $ | 32,130 | |||||||||
Pro forma income tax expense (benefit)(3) | 2,020 | 2,614 | (2,362 | ) | 5,351 | 12,400 | ||||||||||||||
Pro forma net income (loss) | 3,170 | 3,996 | (3,553 | ) | 8,082 | 19,730 | ||||||||||||||
Pro Forma Per Common Share Data(4): | ||||||||||||||||||||
Pro forma net income (loss) per share | ||||||||||||||||||||
Basic | $ | 0.28 | $ | 0.35 | $ | (0.30 | ) | $ | 0.63 | $ | 1.45 | |||||||||
Diluted | 0.23 | 0.29 | (0.30 | ) | 0.63 | 1.45 | ||||||||||||||
Other Financial Data: | ||||||||||||||||||||
EBITDA(5) | $ | 22,670 | $ | 22,300 | $ | 10,735 | $ | 33,883 | $ | 53,497 | ||||||||||
Capital expenditures | 2,534 | 2,345 | 4,714 | 6,171 | 2,702 | |||||||||||||||
Cash interest expense | 9,935 | 8,323 | 6,499 | 14,813 | 15,187 | |||||||||||||||
Depreciation and amortization expense(6) | 5,917 | 5,603 | 5,398 | 4,844 | 5,434 | |||||||||||||||
Net cash provided by (used in) operating activities | 13,062 | 16,770 | (10,067 | ) | (10,340 | ) | 30,048 | |||||||||||||
Net cash provided by (used in) investing activities | (2,362 | ) | (1,611 | ) | (4,701 | ) | (1,789 | ) | (2,578 | ) | ||||||||||
Net cash provided by (used in) financing activities | (10,716 | ) | (15,155 | ) | (15,753 | ) | 11,153 | (12,794 | ) | |||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 45 | $ | 49 | $ | 1,034 | $ | 58 | $ | 14,734 | ||||||||||
Working capital | 40,453 | 35,276 | 62,756 | 90,107 | 115,083 | |||||||||||||||
Total assets | 164,667 | 166,991 | 197,056 | 221,388 | 235,745 | |||||||||||||||
Total debt(7) | 118,920 | 106,768 | 159,727 | 169,300 | 122,507 | |||||||||||||||
Total shareholders’ equity | 23,814 | 27,365 | 2,200 | 13,071 | 77,841 |
(1) | Restructuring charges include: (i) $2.1 million in 2002 for costs associated with the closure of our El Paso, Texas facility, including the write-off of fixed assets and facility exit costs and severance; (ii) $0.2 million in 2003 for costs associated with the relocation of our cord operations from our Waukegan, Illinois facility to Miami, Florida; (iii) income of $0.2 million recorded in 2004 reflects the reversal of accruals recorded in prior years, which were deemed to no longer be necessary; and (iv) $1.3 million of costs associated with the closing of the leased manufacturing and distribution facility located in Miami Lakes, Florida and $0.1 million associated with the closing of the owned facility located in Siler City, North Carolina in 2006. | |
(2) | Other expense included $0.5 million in December 2006 for estimated costs accrued pursuant to the Tax Matters Agreement. Other income, net was $1.3 million due to the sale of zero coupon bonds in May 2005. See Note 6 to our consolidated financial statements for more information regarding this gain. | |
(3) | Prior to October 10, 2006, we were treated as an S corporation, with the exception of our wholly-owned C corporation subsidiary, for federal and, where applicable, state income tax purposes. Accordingly, our shareholders were responsible for federal and substantially all state income tax liabilities arising out of our operations other than those conducted by our C corporation subsidiary. On October 10, 2006, the day before we consummated the 2006 Private Placement, we ceased to be an S corporation and became a C corporation and, as such, we are subject to federal and state income tax. As a result of the termination of our S corporation status, we recorded a one-time non-cash charge of approximately $0.3 million to our income tax provision to recognize the estimated amount of previously unrecognized net deferred income tax liability. |
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(4) | The financial data reflects the retroactive presentation of the 312.6079 for 1 stock split that was effected on October 11, 2006. | |
(5) | EBITDA represents net income (loss) before interest expense, income tax expense and depreciation and amortization expense. EBITDA is a performance measure and liquidity measure used by our management, and we believe it is commonly reported and widely used by investors and other interested parties as a measure of a company’s operating performance and ability to incur and service debt. Our management believes that EBITDA is useful to investors in evaluating our operating performance because it provides a means to evaluate the operating performance of our business on an ongoing basis using criteria that are used by our internal decision-makers for evaluation and planning purposes, including the preparation of annual operating budgets and the determination of levels of operating and capital investments. In particular, our management believes that EBITDA is a meaningful measure because it allows management to readily view operating trends, perform analytical comparisons and identify strategies to improve operating performance. For example, our management believes that the inclusion of items such as taxes, interest expense and interest income can make it more difficult to identify and assess operating trends affecting our business and industry. Furthermore, our management believes that EBITDA is a performance measure that provides investors, securities analysts and other interested parties with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies in our industry. Finally, EBITDA also closely tracks Consolidated EBITDA, a liquidity measurement that is used in calculating financial covenants in both our credit facility and the indenture for our senior notes. | |
EBITDA’s usefulness as a performance measure is limited by the fact that it excludes the impact of interest expense, depreciation and amortization expense and taxes. We borrow money in order to finance our operations; therefore, interest expense is a necessary element of our costs and ability to generate revenue. Similarly, our use of capital assets makes depreciation and amortization expense a necessary element of our costs and ability to generate income. Since we, effective as of October 10, 2006, in addition to our C corporation subsidiary are subject to state and federal income taxes, any measure that excludes tax expense has material limitations. | ||
Due to these limitations, we do not, and you should not, use EBITDA as the only measure of our performance and liquidity. | ||
We also use, and recommend that you consider, net income in accordance with GAAP as a measure of our performance or cash flows from operating activities in accordance with GAAP as a measure of our liquidity. | ||
The following is a reconciliation of net income (loss), as determined in accordance with GAAP, to EBITDA. |
Year Ended December 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net income (loss) | $ | 3,770 | $ | 5,052 | $ | (9,007 | ) | $ | 11,135 | $ | 29,359 | |||||||||
Interest expense, net | 11,563 | 10,087 | 11,252 | 15,606 | 15,933 | |||||||||||||||
Income tax expense | 1,420 | 1,558 | 3,092 | 2,298 | 2,771 | |||||||||||||||
Depreciation and amortization expense(6) | 5,917 | 5,603 | 5,398 | 4,844 | 5,434 | |||||||||||||||
EBITDA | $ | 22,670 | $ | 22,300 | $ | 10,735 | $ | 33,883 | $ | 53,497 | ||||||||||
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The following is a reconciliation of cash flow from operating activities, as determined in accordance with GAAP, to EBITDA. |
Year Ended December 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Net cash flow from operating activities | $ | 13,062 | $ | 16,770 | $ | (10,067 | ) | $ | (10,340 | ) | $ | 30,048 | ||||||||
Interest expense, net | 11,563 | 10,087 | 11,252 | 15,606 | 15,933 | |||||||||||||||
Income tax expense | 1,420 | 1,558 | 3,092 | 2,298 | 2,771 | |||||||||||||||
Loss on early extinguishment of debt | — | — | (13,923 | ) | — | — | ||||||||||||||
Deferred income tax assets and liabilities | (846 | ) | 338 | 18 | 581 | (679 | ) | |||||||||||||
Gain (loss) on sale of fixed assets | (1,467 | ) | 60 | 13 | 7 | (502 | ) | |||||||||||||
Gain (loss) on sale of investment — net | — | — | — | 1,267 | 11 | |||||||||||||||
Stock-based compensation | — | — | (1,648 | ) | — | (1,412 | ) | |||||||||||||
Changes in operating assets and liabilities | 70 | (5,238 | ) | 22,857 | 24,354 | 7,327 | ||||||||||||||
Non-cash interest income | 338 | 227 | 245 | 110 | — | |||||||||||||||
Non-cash interest expense | (1,470 | ) | (1,502 | ) | (1,104 | ) | — | — | ||||||||||||
EBITDA | $ | 22,670 | $ | 22,300 | $ | 10,735 | $ | 33,883 | $ | 53,497 | ||||||||||
EBITDA includes the effects of restructuring charges, bad debt write off (recovery) related to the bankruptcy of a major customer, a special bonus to certain members of senior management, the loss on early extinguishment of debt, professional services to one of our directors for services rendered in connection with the exploration of development of strategic alternatives, the expenses pursuant to the Tax Matters Agreement and certain other matters. Restructuring charges are described in footnote (1) above. 2003 EBITDA includes a bad debt recovery of $0.1 million, 2004 EBITDA includes a bad debt recovery of $0.3 million, a special senior management bonus of $3.0 million and a loss on early extinguishment of debt of $13.9 million, and 2006 EBITDA includes $0.8 million of cash paid and $0.5 million of stock to one of our directors for professional services and $0.5 million of expenses related to the Tax Matters Agreement. Changes in operating assets and liabilities exclude amortization of debt issuance costs, which is included in interest expense. | ||
(6) | Depreciation and amortization expense does not include amortization of debt issuance costs, which is included in interest expense. | |
(7) | Net of unamortized discount of $2.4 million as of December 31, 2002 and $2.0 million as of December 31, 2003. |
ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described under “Item 1A, Risk Factors” and elsewhere in this report. We assume no obligation to update any of these forward-looking statements. You should read the following discussion in conjunction with our consolidated financial statements and the notes thereto included in this report.
Overview
We are a leading designer, developer, manufacturer and supplier of electrical wire and cable products in the U.S. We supply a broad line of wire and cable products, which enables us to offer our customers a single source of supply for many of their wire and cable product requirements. We manufacture bare copper wire, some of which we use to produce our products and some of which we sell to other producers. We sell our products to a variety of customers, including a wide range of specialty distributors, retailers and original equipment manufacturers (“OEMs”). We develop our products for sale into multiple end markets, including electrical distribution, wire and cable distribution, OEM/government, HVAC/R, irrigation, industrial/contractor, recreation/transportation, copper fabrication, retail and automotive. We manufacture our products in six domestic manufacturing facilities and supplement our domestic production with international and domestic sourcing. Virtually all of our products are sold to customers located in the United States and Canada.
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Our net sales, to some extent, follow general business cycles. The diversity of our end markets and customer bases, however, tends to protect our financial results from downturns in any particular industry or geographic area. We also have experienced, and expect to continue to experience, certain seasonal trends in net sales and cash flow. Net sales are generally higher in the third and fourth quarters due to increased buying in anticipation of, and during, the winter months and holiday season.
The primary component of our cost of goods sold is the cost of raw materials. Because labor costs have historically represented less than 10% of our cost of goods sold, competition from products produced in countries having lower labor rates has not affected our financial results significantly. For the twelve-month period ended December 2006, copper costs, including fabrication, have been estimated by us, based on the average COMEX price, to be approximately 60.9% of our cost of goods sold. We buy copper from domestic and international suppliers, and the price we pay depends largely on the price of copper on international commodities markets.
The price of copper is particularly volatile and can affect our net sales and profitability. The daily selling price of copper cathode on the COMEX averaged $3.10 per pound during the twelve months ended December 31, 2006, up 84.5% from the twelve months ended December 31, 2005. The average copper price on the COMEX was $2.57 and $2.60 for months ended January and February 2007, respectively. We purchase copper at the prevailing market price. We generally attempt to pass along to our customers changes in the prices of copper and other raw materials. Our ability to pass along price increases is greater when copper prices increase quickly and significantly. Gradual price increases may be more difficult to pass on to our customers and may affect our short-term profitability. Conversely, the prices of our products tend to fall more quickly in the event the price of copper drops significantly over a relatively short period of time and more slowly in the event of more gradual decreases in the price of copper. Our specialty distributors and OEMs segment offers a number of products that are particularly sensitive to fluctuations in copper prices. Other factors affecting product pricing include the type of product involved, competitive conditions, including underutilized manufacturing capacity in our industry, and particular customer arrangements.
We had conducted our business as an S corporation under Subchapter S of the Code (and comparable state laws). Accordingly, our shareholders were responsible for federal and substantially all state income tax liabilities arising out of our operations. For all periods prior to the C corporation conversion, we provided our shareholders with funds for the payment of these income taxes. On October 10, 2006, we terminated our S corporation status, and are treated for federal and state income tax purposes as a C corporation under Subchapter C of the Code and, as a result, are subject to state and federal income taxes.
We declared dividends to our S corporation shareholders in amounts expected to be sufficient to cover estimated taxes associated with our 2006 S corporation taxable earnings. We paid dividends to our shareholders in this regard of approximately $1.8 million on October 10, 2006.
As a result of the termination of our S corporation status, we recorded a one-time non-cash charge of approximately $0.3 million to our income tax provision to recognize the estimated amount of previously unrecognized net deferred income tax liability. The Company entered into a Tax Matters Agreement with its existing shareholders that provides for, among other things, the indemnification of these shareholders for any increase in their tax liability, including interest and penalties, and reimbursement of their expenses (including attorneys’ fees) related to the period prior to the Company’s conversion to a C corporation, including as a result of the ongoing IRS examination.
The Internal Revenue Service (“IRS”) has audited our tax returns for the years 2002, 2003 and 2004, and proposed certain adjustments that are currently being disputed. We have appealed the IRS findings. If our appeal of the IRS findings is unsuccessful, our obligation will be to indemnify our shareholders on record as of the effective date of the Tax Matters Agreement. We accrued estimated costs of $0.5 million in the fourth quarter of 2006 which is included in other loss in the accompanying Consolidated Statement of Operations related to the Tax Matters Agreement, but we cannot guarantee that the actual payments relating to this matter will not exceed this amount.
On October 9, 2006, our board adopted a stock incentive plan that provides for the granting of options to purchase 1,650,000 shares of our common stock. On October 11, 2006, options to purchase 405,000 shares were awarded to G. Gary Yetman (230,000 shares); Richard N. Burger (115,000 shares); Jeffrey D. Johnston (60,000 shares) and, on October 10, 2006, options to purchase 420,000 shares were granted to other employees. One third of the 825,000 options issued to our employees will vest at the end of each of the first three anniversaries
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of the date of grant. These options will expire ten years after the date of grant and will be exercisable at a price per share equal to $15.00.
We estimate the fair value of the stock options to be granted using the Black-Scholes option-pricing model. We estimated the fair value of the stock options granted using the following assumptions: (i) a risk free interest rate of 4.74%; (ii) an expected dividend yield of 0.00%; (iii) an expected option term of 7.0 years; and (iv) expected volatility of 45.0%. Based on these assumptions, the option value per common share was $8.09 and the total fair value of the options granted was $6.7 million. Assuming 2% annual employee turnover, we estimate that our total expense relating to our stock incentive plan will be $6.4 million. We expensed $0.9 million in the fourth quarter of 2006; we expect to expense $3.5 million in the year ending December 31, 2007; $1.5 million in the year ending December 31, 2008; and $0.5 million in the year ending December 31, 2009. See “New Accounting Pronouncements” in this section and “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Securities Authorized for Issuance under Equity Compensation Plans.”
On September 4, 2006, our board of directors approved a payment to one of our directors of $0.8 million in cash and 37,500 shares of our common stock valued at $0.5 million for additional services rendered in connection with the exploration and development of strategic alternatives and certain other matters. We expensed $1.3 million related to these services in the twelve months ended December 31, 2006.
Proposed Copperfield, LLC Acquisition. — From time to time, we consider acquisition opportunities that could materially increase the size of our business operations. On March 11, 2007, we signed a definitive agreement to acquire all of the equity interests in Copperfield, LLC (“Copperfield”) for $213 million in cash. Management believes that the Coleman Cable-Copperfield combination will result in one of the premier U.S. based manufacturers of electrical and electronic wire and cable products.
Copperfield, currently majority owned by Spell Capital Partners, is one of the largest private fabricators and insulators of copper electrical wire and cable in the United States. Copperfield sells its wire and cable products to industrial distributors and OEMs which operate in a diversified set of end markets including electrical, recreational vehicle, transportation, appliance and welding cable sectors. Copperfield estimates that its revenues, net income and EBITDA for the twelve months ended December 31, 2006 will be approximately $520 million, $15.8 million and $35.3 million, respectively. The strategic acquisition of Copperfield broadens the scope of Coleman Cable’s product offering, further strengthens its strategic relationships with industrial distributors and increases Coleman’s end-market diversity.
Coleman Cable anticipates meaningful expense synergies from the realignment of the combined company’s manufacturing footprint and the expected purchasing opportunities resulting from the combination. Excluding expense synergies, Coleman Cable expects the acquisition of Copperfield to be accretive to earnings per share for 2007. Coleman Cable intends to use debt financing to consummate the acquisition. The transaction, which is subject to customary closing conditions and approval by necessary regulatory authorities, is expected to be completed during the second quarter of 2007.
EBITDA means earnings from continuing operations before net interest, income taxes, depreciation, and amortization. Other companies may define EBITDA differently and, as a result, Copperfield’s measure of EBITDA may not be directly comparable to EBITDA of other companies. Copperfield’s estimated 2006 EBITDA results from the addition to Copperfield’s 2006 net income ($15.8 million) of the following amounts: interest ($12.7 million), taxes ($0 million, as a result of its LLC status) and depreciation and amortization ($6.8 million). Coleman Cable’s management believes that EBITDA allows investors to evaluate and compare the operating performance of a company irrespective of its capital structure. EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance or cash flows from operating activities in accordance with GAAP as a measure of liquidity.
Business Segment Information
We have three business segments: (i) electrical/wire and cable distributors; (ii) specialty distributors and OEMs; and (iii) consumer outlets. These segment classifications are based on an aggregation of customer groupings and distribution channels because this is how we manage and evaluate our business. We sell virtually all of our products across each of our three segments, except that our fabricated bare wire products sales are only in our
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specialty distributors and OEMs segment. For the twelve months ended December 31, 2006, the electrical/wire and cable distributors segment, the specialty distributors and OEMs segment, and the consumer outlets segment represented approximately 34.8%, 52.0% and 13.2% of our net sales on a consolidated basis, respectively. Our consumer outlets segment, which is our smallest in terms of net sales, accounts for an even smaller percentage of our profitability because of increased competition from foreign suppliers and the delays we may encounter in passing along copper price increases to large retailers. To remain competitive, we are purchasing more labor-intensive products from foreign sources for this segment. Our segment information presented below includes a separate line for corporate adjustments, which consist of items not allocated to a particular business segment, including costs for employee relocation, discretionary bonuses, professional fees, restructuring expenses, management fees and intangible amortization. Theperiod-to-period comparisons set forth in this section include information about our three segments.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, the consolidated statement of operations data in thousands of dollars and as a percentage of net sales.
Year Ended December 31, | ||||||||||||||||||||||||
2004 | 2005 | 2006 | ||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Net sales | $ | 285,792 | 100.0 | % | $ | 346,181 | 100.0 | % | $ | 423,358 | 100 | % | ||||||||||||
Gross profit | 45,532 | 15.9 | 53,426 | 15.4 | 81,716 | 19.3 | ||||||||||||||||||
Selling, engineering, general and administrative expenses | 26,475 | 9.3 | 25,654 | 7.4 | 31,760 | 7.5 | ||||||||||||||||||
Restructuring | (190 | ) | (0.1 | ) | — | — | 1,396 | 0.3 | ||||||||||||||||
Operating income | 19,247 | 6.7 | 27,772 | 8.0 | 48,560 | 11.5 | ||||||||||||||||||
Interest expense, net | 11,252 | 3.9 | 15,606 | 4.5 | 15,933 | 3.8 | ||||||||||||||||||
Loss on early extinguishment of debt | 13,923 | 4.9 | — | — | — | — | ||||||||||||||||||
Other (income) loss, net | (13 | ) | (0.0 | ) | (1,267 | ) | (0.4 | ) | 497 | 0.1 | ||||||||||||||
Income (loss) before income taxes | (5,915 | ) | (2.1 | ) | 13,433 | 3.9 | 32,130 | 7.6 | ||||||||||||||||
Income tax expense | 3,092 | 1.1 | 2,298 | 0.7 | 2,771 | 0.7 | ||||||||||||||||||
Net income (loss) | $ | (9,007 | ) | (3.2 | ) | $ | 11,135 | 3.2 | $ | 29,359 | 6.9 | |||||||||||||
Capital expenditures | $ | 4,714 | $ | 6,171 | $ | 2,702 | ||||||||||||||||||
Depreciation | $ | 5,398 | $ | 4,844 | $ | 5,434 |
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Net sales — Net sales for the year ended December 31, 2006 were $423.4 million compared to $346.2 million for the year ended December 31, 2005, an increase of $77.2 million, or 22.3%. The increase in net sales was due primarily to price increases driven by the significant increase in the cost of raw materials, primarily copper, for 2006 compared to 2005. There was a 10.9% decline in volume in 2006 due to decreased demand from existing customers, somewhat offset by the addition of new customers. Also contributing to the volume decline was a shift in the product mix in our consumer outlets segment from higher weight products, such as extension cords, to lower weight products, such as data, thermostat and coaxial cables and a change in manufacturing process in our automotive channel. Otherwise, product mix in units for these periods was relatively consistent. Volume changes between comparative years are measured in total pounds shipped.
Gross profit — Gross profit margin for the year ended December 31, 2006 was 19.3% compared to 15.4% for the year ended December 31, 2005. The increase in the gross profit margin was due in part to the ability to secure pricing increases sooner than increased copper and other raw material cost increases were reflected in inventory and cost of goods sold. In addition, gross profit increases were due to reduced costs due to manufacturing efficiency improvements made during the prior year. Gross profit improved due to the ability to reduce shipping and other distribution expenses, and to spread fixed costs over a significantly higher revenue base.
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Selling, engineering, general and administrative — SEG&A expense for the year ended December 31, 2006 was $31.8 million compared to $25.7 million for the year ended December 31, 2005, an increase of $6.1 million. The increase between the two periods resulted primarily from increased sales commissions due to a higher revenue base, an increase in the accrual of management bonuses due to improved profitability, increased depreciation expense, and an increase in professional fees paid to Shmuel D. Levinson for services rendered in connection with the exploration and development of strategic alternatives and certain other matters.
Restructuring Charges — Restructuring charges for the year ended December 31, 2006 were $1.4 million. These expenses were the result of the planned closures of our Miami Lakes and Siler City facilities. Restructuring charges included $0.1 million of employee severance costs, $0.7 million of lease termination costs, $0.3 million of equipment relocation costs and $0.3 million of other closing costs.
Interest expense, net and loss on early extinguishment of debt — Interest expense, net was $15.9 million for year ended December 31, 2006, compared to $15.6 million of interest expense, net for year ended December 31, 2005, an increase of $0.3 million. The increase in interest expense was due primarily to higher average borrowings under our revolving line of credit resulting primarily from increased inventory costs.
Other (income) loss, net — Other loss, net, for the year ended December 31, 2006 included $0.5 million for estimated costs accrued pursuant to the Tax Matters Agreement compared to $1.3 million of income, for the year ended December 31, 2005 which was due to the sale of zero coupon bonds in May 2005, in connection with the settlement of the Copperweld Corporation capital lease obligation.
Income tax expense — Income tax expense was $2.8 million for the year ended December 31, 2006 compared to $2.3 million for the year ended December 31, 2005. Income tax expense increased primarily because of a change from S corporation status to C corporation status in October 2006, resulting in increased corporation tax expense.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment in thousands of dollars, segment net sales as a percentage of total net sales and segment operating income as a percentage of segment net sales.
Year Ended December 31, | ||||||||||||||||
2005 | 2006 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
(In thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Electrical/Wire and Cable Distributors | $ | 114,561 | 33.0 | % | $ | 147,411 | 34.8 | % | ||||||||
Specialty Distributors and OEMs | 171,926 | 49.8 | 219,957 | 52.0 | ||||||||||||
Consumer Outlets | 59,694 | 17.2 | 55,990 | 13.2 | ||||||||||||
Total | $ | 346,181 | 100.0 | % | $ | 423,358 | 100.0 | % | ||||||||
Operating income: | ||||||||||||||||
Electrical/Wire and Cable Distributors | $ | 13,643 | 11.9 | % | $ | 23,830 | 16.2 | % | ||||||||
Specialty Distributors and OEMs | 14,693 | 8.5 | 28,096 | 12.8 | ||||||||||||
Consumer Outlets | 3,465 | 5.8 | 3,421 | 6.1 | ||||||||||||
Total | 31,801 | 55,347 | ||||||||||||||
Corporate | (4,029 | ) | (6,787 | ) | ||||||||||||
Consolidated operating income | $ | 27,772 | $ | 48,560 | ||||||||||||
Electrical/Wire and Cable Distributors
Net sales for our electrical/wire and cable distributors segment for the year ended December 31, 2006 were $147.4 million compared to $114.6 million for the year ended December 31, 2005, an increase of $32.8 million, or
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28.6%. This increase was due primarily to selling price increases as a result of inflationary increases in raw material costs, as well as the addition of strategic new customers. There was a decrease in volume of 4.0% primarily due to a decline in the residential construction market and energy related business in 2005 that did not repeat in 2006.
Operating income for our electrical/wire and cable distributors segment for the year ended December 31, 2006 was $23.8 million compared to $13.6 million for the year ended December 31, 2005, an increase of $10.2 million, or 75.0%. This increase was attributed to our ability to secure price increases to offset increases in raw material costs, reduce shipping and other distribution expenses, and the ability to spread fixed costs across a larger revenue base.
Specialty Distributors and OEMs
Net sales for our specialty distributors and OEMs segment for the year ended December 31, 2006 were $220.0 million compared to $171.9 million for the year ended December 31, 2005, an increase of $48.1 million, or 28.0%. The increase was due to selling price increases associated with increases in raw material costs and increased security/home automation channel sales as a result of market share gains. These increases offset decreases in the other channels in this segment due to market conditions. There was an overall decline in volume of 9.4% due to market conditions, offset by increases in the security/home automation, irrigation and copper fabrication channels due to market share gains.
Operating income for our specialty distributors and OEMs segment for the year ended December 31, 2006 was $28.1 million compared to $14.7 million for the year ended December 31, 2005, an increase of $13.4 million, or 91.2%. This increase was due primarily to volume and pricing initiatives, improved manufacturing efficiencies, reduced shipping and other distribution expenses, and the spreading of fixed costs over a larger revenue base.
Consumer Outlets
Net sales for our consumer outlets segment for the year ended December 31, 2006 were $56.0 million compared to $59.7 million for the year ended December 31, 2005, a decrease of $3.7 million, or 6.2%. This decrease was due to a volume decline of 25.5%, which was partially offset by price increases. The volume decline was due primarily to a decrease in orders from consumer outlet customers who had higher than expected inventory as a result of soft 2005 year-end retail sales. In addition, the prior year included an initial stocking order for a major account that was not repeated in 2006 and the completion of a sales program at a specific account. Also contributing to the volume decline was a shift in product mix from higher weight products, such as extension cords, to lower weight products, such as data, thermostat and coaxial cables, and a change in manufacturing process affecting our automotive products.
Operating income for our consumer outlets segment for the year ended December 31, 2006 was $3.4 million compared to $3.5 million for the year ended December 31, 2005, a decrease of $0.1 million or 2.9%. This decline was due to the combination of sales decreases and additional operating expenses in our overall operating segment. These were partially off-set by gains on the sale of commodity contracts, reduced shipping and other distribution expenses, cost savings realized from our Miami facility closure, and manufacturing process improvements affecting our automotive products.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
Net sales — Net sales for the year ended December 31, 2005 were $346.2 million compared to $285.8 million for the year ended December 31, 2004, an increase of $60.4 million, or 21.1%. The increase in net sales was due primarily to price increases driven by the significant increase in the cost of raw materials, primarily copper, for 2005 compared to 2004. There was a 6.8% growth in volume in 2005 due to increased demand from existing customers, as well as the addition of new customers. Product mix for each of the years ended December 31, 2004 and 2005 was relatively consistent, with the exception of our consumer outlets segment in which there was an increase in sales of products not traditionally sold through the retail channel due to a new customer and a change in manufacturing process in our automotive channel. Volume changes between comparative years are measured in total pounds shipped.
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Gross profit — Gross profit margin for the year ended December 31, 2005 was 15.4% compared to 15.9% for the year ended December 31, 2004. The decrease in the gross profit margin for the year ended December 31, 2005 was due principally to the significant increase in the cost of raw materials, primarily copper, that was not fully passed along to existing customers, and inefficiencies of $2.2 million related to the manufacturing consolidation of certain product lines in two of our facilities in the first nine months of 2005. These negative factors were offset in part by the addition of new customers and some pricing increases.
Selling, engineering, general and administrative — SEG&A expense for the year ended December 31, 2005 was $25.7 million compared to $26.5 million for the year ended December 31, 2004, a decrease of $0.8 million. The decrease in 2005 was due primarily to the payment of special bonuses in 2004 in connection with the issuance of our senior notes. This was partially offset by increased selling commissions related to increased sales volume, and increases in payments for professional and management services due to our new reporting structure associated with the issuance of our senior notes.
Interest expense, net and loss on early extinguishment of debt — Interest expense, net was $15.6 million for year ended December 31, 2005, compared to $11.3 million of interest expense, net and $13.9 million of loss on early extinguishment of debt for year ended December 31, 2004, a decrease of $9.6 million. The decrease in 2005 was due primarily to the payment of make-whole premiums and other costs in connection with our September 2004 debt refinancing partially offset by an increase in interest for payment obligations on our senior notes and an increase in amortization expense related to the September 2004 debt refinancing.
Other income, net — Other income, net, for the year ended December 31, 2005 was $1.3 million due to the sale of zero coupon bonds in May 2005, in connection with the settlement of the Copperweld Corporation capital lease obligation.
Income tax expense — Income tax expense was $2.3 million for the year ended December 31, 2005 compared to $3.1 million for the year ended December 31, 2004. Income tax expense decreased primarily because of a decline in the taxable income of our wholly owned C corporation subsidiary, which decline was a result of lower shared services income and elimination of the intercompany factoring of the accounts receivable.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment in thousands of dollars, segment net sales as a percentage of total net sales and segment operating income as a percentage of segment net sales.
Year Ended December 31, | ||||||||||||||||
2004 | 2005 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
(In thousands) | ||||||||||||||||
Net sales: | ||||||||||||||||
Electrical/Wire and Cable Distributors | $ | 95,810 | 33.5 | % | $ | 114,561 | 33.0 | % | ||||||||
Specialty Distributors and OEMs | 133,457 | 46.7 | 171,926 | 49.8 | ||||||||||||
Consumer Outlets | 56,525 | 19.8 | 59,694 | 17.2 | ||||||||||||
Total | $ | 285,792 | 100.0 | % | $ | 346,181 | 100.0 | % | ||||||||
Operating income: | ||||||||||||||||
Electrical/Wire and Cable Distributors | $ | 9,010 | 9.4 | % | $ | 13,643 | 11.9 | % | ||||||||
Specialty Distributors and OEMs | 13,112 | 9.8 | 14,693 | 8.5 | ||||||||||||
Consumer Outlets | 3,399 | 6.0 | 3,465 | 5.8 | ||||||||||||
Total | 25,521 | 31,801 | ||||||||||||||
Corporate | (6,274 | ) | (4,029 | ) | ||||||||||||
Consolidated operating income | $ | 19,247 | $ | 27,772 | ||||||||||||
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Electrical/Wire and Cable Distributors
Net sales for our electrical/wire and cable distributors segment for the year ended December 31, 2005 were $114.6 million compared to $95.8 million for the year ended December 31, 2004, an increase of $18.8 million, or 19.6%. This increase was due primarily to selling price increases as a result of increases in the cost of raw materials combined with slight market share gains. There was an increase in volume of 8.2% in 2005 due to growth in the industrial and residential construction markets combined with market share gains.
Operating income for our electrical/wire and cable distributors segment for the year ended December 31, 2005 was $13.6 million compared to $9.0 million for the year ended December 31, 2004, an increase of $4.6 million, or 51.1%. This increase was attributable to price and volume increases, which spread fixed costs across a larger revenue base, and a reduction in operating expenses attributable to the consolidation of distribution centers and decreased selling costs.
Specialty Distributors and OEMs
Net sales for our specialty distributors and OEMs segment for the year ended December 31, 2005 were $171.9 million compared to $133.5 million for the year ended December 31, 2004, an increase of $38.4 million, or 28.8%. The increase was due to selling price increases associated with cost increases in raw material prices and increased security/home automation channel sales as a result of the addition of new customers. Additionally, 2005 included the revenue from the additions of OEM/government and industrial MRO customers. These increases were partially offset by a decrease in the irrigation channel that resulted from market conditions. There was 12.7% volume growth in 2005 due to the growth in the security/home automation and OEM markets combined with market share gains.
Operating income for our specialty distributors and OEMs segment for the year ended December 31, 2005 was $14.7 million compared to $13.1 million for the year ended December 31, 2004, an increase of $1.6 million, or 12.2%. The increase was due primarily to higher sales volume at higher prices attributable to increased business in the industrial, OEM, recreation and transportation, and security/home automation channels and the ability to pass along raw material cost increases to a majority of our customers, which spread fixed costs across a larger revenue base. This was offset by losses due to inefficiencies in some our manufacturing operations due to plant realignments.
Consumer Outlets
Net sales for our consumer outlets segment for the year ended December 31, 2005 were $59.7 million compared to $56.5 million for the year ended December 31, 2004, an increase of $3.2 million, or 5.7%. The increase in net sales was due primarily to price increases associated with increases in the cost of raw materials. There was a decline in volume as measured in pounds shipped of 7.7%. This was due to a shift in product mix from higher weight products, such as extension cords, to lower weight products, such as LAN cables, in our retail channel and a change in manufacturing process in our automotive channel.
Operating income for our consumer outlets segment for the year ended December 31, 2005 was $3.5 million compared to $3.4 million for the year ended December 31, 2004, an increase of $0.1 million or 2.9%. This increase included $0.2 million of gains relating to outstanding commodity contracts. This was offset by a decline in operating income of $0.1 million due primarily to the impact of the increased cost of base raw materials, specifically copper, that could not be passed along to our customers and was somewhat offset by cost savings realized from a new manufacturing process in the automotive channel.
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Liquidity and Capital Resources
Debt
As of December 31, 2006, we had the following long-term debt (including capital lease obligations) outstanding:
As of | ||||
December 31, | ||||
2006 | ||||
(In thousands) | ||||
Credit facility | $ | — | ||
Senior notes | 120,000 | |||
Capital lease obligations | 1,129 | |||
Other debt | 1,378 | |||
Total debt | $ | 122,507 | ||
Senior Secured Credit Facility
Our credit facility dated as of September 28, 2004, with Wachovia Bank, National Association (“agent”) matures September 28, 2009, and is an asset-based credit loan whereby we may receive from time to time an aggregate amount of advances not to exceed the lesser of (i) $75 million or (ii) the sum of 85% of eligible accounts receivable and 55% of eligible inventory, with a sublimit for letters of credit of up to $5 million. Interest is payable at the agent’s prime rate plus a range of 0.25% to 1.25% (based on our Leverage Ratio, as defined in the credit facility, at the end of any fiscal quarter), or, at our option, the eurodollar rate plus a range of 1.75% to 2.75% (based on our Leverage Ratio) at the end of any fiscal quarter). The credit facility accrued interest at an average rate of 5.7%, and our average borrowed amount was $38.6 million for the twelve-month period ended December 31, 2006.
Our credit facility is secured by substantially all of our assets, including accounts receivable, inventory and any other tangible and intangible assets (including real estate, machinery and equipment and intellectual property), as well as by a pledge of all of the capital stock of each of our domestic subsidiaries and 65% of the capital stock of our foreign subsidiaries, if any.
The credit facility contains financial covenants, including, but not limited to, a fixed charge coverage ratio and a leverage ratio. In addition, the credit facility contains affirmative and negative covenants relating to limitations on dividends and other restricted payments, indebtedness, liens, investments, guarantees, mergers and acquisitions, sales of assets, affiliate transactions, maintaining excess cash, issuing capital stock, sale and lease back transactions and leases. The restricted payment covenant, among other things, limits our ability to pay dividends on our common stock. Under the credit facility, Permitted Periodic Dividend payments are allowed only if (i) no event of default or unmatured event of default has occurred or is continuing under the credit facility or would result from the payment of the Permitted Periodic Dividend, and (ii) we could borrow at least $10 million under the credit facility after giving effect to the Permitted Periodic Dividend. The credit facility defines “Permitted Periodic Dividend” as the payment by us to holders of our common stock of an aggregate amount of up to the sum of (a) 50% of our consolidated net income (as defined in the credit facility) for the fiscal year prior to the fiscal year in which such payment is made (the “Applicable Income Year”) less (b) the aggregate amount of tax distributions payable to our shareholders for the Applicable Income Year. The financial covenants in the credit facility:
• | require us to maintain a Leverage Ratio that does not exceed 6.5 to 1.0 as of the last day of each fiscal quarter; and | |
• | require us to maintain a Fixed Charge Coverage Ratio (as defined in the credit facility) of not less than 1.1 to 1.0 as of the last day of each fiscal quarter. |
As of December 31, 2006, our Leverage Ratio was 2.3 to 1.0 and our Fixed Charge Coverage Ratio was 1.8 to 1.0. Our capital expenditures in the twelve months ended December 31, 2006 were $2.7 million.
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On August 14, 2006, we executed an amendment to the credit agreement; among other things, this amendment:
• | modified a “change of control” provision in our credit facility so that, in contrast to the prior version of the provision under which a default would have occurred if either G. Gary Yetman or Richard N. Burger ceased to hold their executive positions and suitable replacements were not found within 180 days, a “change of control” will now occur under the credit facility only if either (i) we fail to own 100% of the outstanding capital stock of the other borrowers and guarantors under the credit facility or (ii) during the twenty-four months following the date of such amendment of the credit facility, certain members of our board of directors cease to constitute a majority of the members of our board of directors; | |
• | permits us to issue common stock; | |
• | permitted us to amend our certificate of incorporation as described under “Description of Capital Stock;” | |
• | permitted us to repurchase shares of our common stock in connection with the 2006 Private Placement; and | |
• | eliminated a restriction on our ability to maintain excess cash. |
As of December 31, 2006, we were in compliance with all of the covenants contained in the credit facility.
On October 11, 2006, we paid off substantially all of the outstanding indebtedness under our credit facility. As of December 31, 2006, we had no outstanding borrowings under our credit facility, and we had $74.3 million of additional borrowing capacity under the borrowing base.
Our ability to incur additional indebtedness is limited by the covenants contained in the credit facility. Under the credit facility, we may not incur any liability or indebtedness other than permitted indebtedness, which is defined as:
• | indebtedness with respect to revolving loans, letters of credit or other obligations under the credit facility; | |
• | trade payables incurred in the ordinary course of business; | |
• | purchase money indebtedness incurred to purchase fixed assets, provided that the total of permitted purchase money indebtedness may not exceed $1.0 million at any time, the purchase money indebtedness when incurred does not exceed the purchase price of the assets financed and no purchase money indebtedness may be refinanced for a principal amount in excess of the principal amount then outstanding; | |
• | indebtedness under specified types of hedging agreements entered into to manage interest rate, exchange rate or commodity risks; | |
• | existing indebtedness specifically identified in schedules to the credit facility and certain refinancings thereof; and | |
• | indebtedness under the senior notes. |
In addition, the credit facility prohibits us from entering into operating leases pursuant to which the aggregate payments thereunder would exceed $5.0 million per year.
We are also prohibited by the credit facility from:
• | changing or amending any document relating to the subordination, terms of payment or required prepayments of our senior notes; | |
• | making any covenant or event of default in the indenture relating to our senior notes more restrictive; and | |
• | making any prepayment on our senior notes, except for scheduled payments required pursuant to the terms of the senior notes or the indenture. |
We have the right to terminate our existing credit facility and put a new, more favorable credit facility in place. The termination of our credit facility could result in anon-cash,pre-tax charge to earnings of up to $0.8 million in our financial statements for the period in which the termination occurs.
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In connection with our execution on March 11, 2007 of a definitive agreement to purchase all of the equity interest of Copperfield, LLC for $213 million, we entered into financing arrangements with certain affiliates of Wachovia Bank, N.A. These arrangements would provide for a new $200 million senior secured revolving credit facility and additional acquisition financing that will take the form of either the issuance of $100 million of notes having the same terms as our existing Senior Notes or a $100 million term loan.
Based on the foregoing, we believe that, after giving effect to the acquisition of Copperfield and the consummation of the financing arrangements described in the preceding paragraph, cash flow from operations and borrowings under our new $200 million senior secured revolving credit facility will be sufficient to fund our operations, debt service and capital expenditures for the foreseeable future.
Senior Notes
Our senior notes have an aggregate principal amount of $120.0 million, bear interest at a fixed rate of 9.875% and mature in 2012. The notes are guaranteed by our domestic restricted subsidiaries (as defined in the indenture). The indenture includes a covenant that prohibits us from incurring additional indebtedness (other than certain permitted indebtedness, including but not limited to the maximum availability under our credit facility), unless our Consolidated Fixed Charge Coverage Ratio (as defined in the indenture) is greater than 2.0 to 1.0. As of December 31, 2006, our Consolidated Fixed Charge Coverage Ratio was 3.3 to 1.0. Upon the occurrence of a Change of Control (as defined in the indenture), we must offer to repurchase the notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase. The indenture also contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to: make restricted payments; create liens; pay dividends; consolidate, merge or sell substantially all of our assets; enter into sale and leaseback transactions; and enter into transactions with affiliates. As of December 31, 2006, we were in compliance with all of the covenants contained in the indenture. We may redeem some or all of the notes at any time on or after October 1, 2008, at redemption prices set forth in the indenture. In addition, before October 1, 2007, we may redeem up to 35% of the original aggregate principal amount of the notes at a redemption price equal to 109.875% of their aggregate principal amount, plus accrued interest, with the cash proceeds from certain kinds of equity offerings.
Other
In addition, we lease various manufacturing, office and warehouse properties and office equipment under capital leases that expire at various dates through 2009. The total minimum payments under the leases at December 31, 2006 were approximately $1.3 million, including $0.2 million representing interest.
We have a $1.0 million mortgage on a manufacturing facility requiring monthly payments of $9,432 and bearing interest at 5.75% per annum. The outstanding balance of the loan at December 31, 2006 was $0.7 million.
Current and Future Liquidity
In general, we require cash for working capital, capital expenditures, debt repayment and interest. Our working capital requirements increase when we experience strong incremental demand for products or significant copper price increases.
Our management assesses the future cash needs of our business by considering a number of factors, including:
• | our historical earnings and cash flow performance; | |
• | management’s assessment of our future working capital needs; | |
• | our current and projected debt service expenses; | |
• | management’s planned capital expenditures; and | |
• | our ability to borrow additional funds under the terms of our credit facility and our senior notes. |
Based on the foregoing, we believe that cash flow from operations and borrowings under our credit facility will be sufficient to fund our operations, debt service and capital expenditures for the foreseeable future.
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On October 10, 2006, we filed the amended and restated certificate of incorporation with the Secretary of State of the State of Delaware. The amended and restated certificate of incorporation included, among other changes, the following: (i) an increase in the number of authorized shares of our common stock, par value $0.001 per share, to 75,000,000, (ii) an increase in the number of authorized shares of preferred stock, par value $0.001 per share, to 10,000,000, and (iii) a 312.6079 for 1 stock split of our common stock.
On October 11, 2006, we consummated the 2006 Private Placement in which we sold 8,400,000 shares of our common stock at a sale price of $15.00 per share. We received net proceeds of approximately $114.8 million (after the purchaser’s discount, placement fees and other offering expenses). We used approximately $61.4 million of the net proceeds to purchase and retire 4,400,003 shares from our existing shareholders. Of the remaining net proceeds of approximately $53.4 million, we used (i) approximately $52.8 million to repay substantially all of the indebtedness then outstanding under our credit facility and (ii) the remaining $0.6 million for working capital and general corporate purposes. Since the 2006 Private Placement, we have incurred (and expect to continue to incur) additional indebtedness under our credit facility.
Even following the 2006 Private Placement and the corresponding repayment of all of the indebtedness then outstanding under our credit facility, if we experience a deficiency in earnings with respect to our fixed charges in the future, we would need to fund the fixed charges through a combination of cash flows from operations and borrowings under our credit facility. If cash flow generated from our operations, together with borrowings under our credit facility, is not sufficient to fund our operations, debt service and capital expenditures and we need to seek additional sources of capital, the limitations contained in the credit facility and the indenture relating to our senior notes on our ability to incur debt could prevent us from securing additional capital through the issuance of debt. In that case, we would need to secure additional capital through other means, such as the issuance of equity, which, until the most recent amendment to the credit agreement, would have required a waiver under our credit facility. In addition, we may not be able to obtain additional debt or equity financing on terms acceptable to us, or at all. If we were not able to secure additional capital, we could be required to delay development of products or forego acquisition opportunities.
Net cash provided by operating activities for the twelve months ended December 31, 2006 was $30.0 million compared to net cash used by operating activities of $10.3 million for the twelve months ended December 31, 2005. The primary factors contributing to the increase in cash provided by operating activities for the twelve months ended December 31, 2006 compared to 2005 were: (i) a $18.2 million increase in net income; (ii) a $18.9 million decrease in cash used by inventories, primarily due to better inventory management and economies of scale as a result of the closure of our facilities, partially offset by commodity price increases; and (iii) a $1.6 million decrease in cash used by prepaid expenses and other assets. These factors were partially offset by increases in the use of cash by (i) accounts payable of $10.9 million due to a difference in the timing of payments and (ii) accounts receivable of $6.7 million due to a difference in the timing of collections.
Net cash used in investing activities for the twelve months ended December 31, 2006 was $2.6 million due to $2.7 million of capital expenditures, slightly offset by $0.1 million of proceeds from the sale of fixed assets and investments.
Net cash used by financing activities for the twelve months ended December 31, 2006 was $12.8 million, reflecting net revolver repayments of $46.0 million, the payment of long-term debt of $0.8 million, the payment of $61.4 million of stock repurchases due to our private equity offering, and $19.4 million of distributions to shareholders. This use of cash was off-set by the cash provided from our private equity offering of $114.8 million.
During the third quarter ended September 30, 2005, we experienced a theft of inventory as a result of break-ins at our manufacturing facility located in Miami Lakes, Florida. We believe we will recover the amount of the loss, net of deductibles, under our insurance policy. As a result of the loss, we reduced the cost of inventory by $1.3 million and recorded an insurance receivable, which is included in prepaid expenses and other current assets in the condensed consolidated balance sheet. In order to deter future thefts, we completed a third-party analysis of our security processes at all of our facilities and warehouses and made any necessary adjustments; however, we cannot assure you that future incidents of theft will not occur.
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On April 14, 2006, our board of directors approved a plan to close our leased assembled manufacturing and distribution facility located in Miami Lakes, Florida based on an evaluation of this facility in the long-term operation of our business. Our board determined that the efficient utilization of our manufacturing assets would be enhanced by partial relocation of production to our plant in Waukegan, Illinois supplemented by additional international sourcing.
The closure of our Miami Lakes facility was completed in the third quarter of 2006. We have spent $1.3 million to close the Miami Lakes facility. The charges consist of $0.1 million of employee severance costs, $0.7 million of lease termination costs, $0.2 million of equipment relocation costs, and $0.3 million of other closing costs.
On November 14, 2006, we approved a plan to close our manufacturing facility and sell the building and property located in Siler City, North Carolina. We determined that the efficient utilization of our manufacturing assets would be enhanced by partial relocation of production to our plants in Hayesville, North Carolina and Waukegan, Illinois supplemented by additional international sourcing.
We estimate the cost of the closure and realignment to be approximately $0.8 million, which includes cash expenditures of approximately $0.1 million for severance costs and $0.7 million for other costs related to the closure. We expect that the closure will be complete by the end of the first quarter of 2007. The related costs reflected in our financial statements for the fourth quarter of 2006 were $0.1 million and the remaining amounts will be reflected in the first quarter of 2007.
Seasonality
We have experienced, and expect to continue to experience, certain seasonal trends in net sales and cash flow. Larger amounts of cash are generally required during the second and third quarters of the year to build inventories in anticipation of higher demand during the late fall and early winter months. In general, receivables related to higher sales activities during the late fall and early winter months are collected during the late fourth and early first quarter of the year.
Contractual Obligations
The following table sets forth information about our contractual obligations and commercial commitments as of December 31, 2006:
Payments Due by Period | ||||||||||||||||||||
Less Than | After | |||||||||||||||||||
Total | 1 Year | 2-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Current and long-term debt obligations (including interest) | 189,661 | 12,456 | 24,444 | 23,735 | 129,026 | |||||||||||||||
Capital lease obligations (including interest) | 1,318 | 509 | 809 | — | — | |||||||||||||||
Operating lease obligations | 7,584 | 2,219 | 2,050 | 1,644 | 1,671 | |||||||||||||||
Purchase obligations | 27,210 | 27,210 | — | — | — |
We will be required to make future cash contributions to our defined contribution savings plans. The estimate for these contributions is approximately $0.7 million during 2007. Estimates of cash contributions to be made after 2007 are difficult to determine due to the number of variable factors that impact the calculation of defined contribution savings plans. We will also be required to make interest payments on our revolving debt and other variable rate debt. The interest payments to be made on our revolving debt and other variable debt are based on variable interest rates, and the amounts of the borrowings under our credit facility depend upon our working capital requirements.
Purchase obligations primarily consist of purchase orders and other contractual arrangements for inventory and raw materials.
We anticipate being able to meet our obligations as they come due.
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Off-Balance Sheet Assets and Obligations
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
We recognize sales of our products when the products are shipped to customers and title passes to the customer in accordance with the terms of sale. We record customer promotional allowances as a reduction of net sales when it is probable that the allowance will be granted and the amount of the allowance can be reasonably estimated. Our promotional allowances are primarily related to the volumes of purchases by various customer groups during specified time periods. Accordingly, to calculate our ultimate related promotional costs, we estimate during each period each customer’s potential for achieving the related purchase volumes based primarily on our sales history with each customer. Subsequent period changes in our estimates have not been material in the prior three years.
Allowance for Uncollectible Accounts
We record an allowance for uncollectible accounts to reflect management’s best estimate of losses inherent in our receivables as of the balance sheet date. In calculating the allowance for uncollectible accounts, we consider both the current financial condition of individual customers and historical write-off patterns.
Inventories
Inventories include material, labor and overhead costs and are recorded at the lower of cost or market on the FIFO basis. In applying FIFO, we evaluate the realizability of our inventory on aproduct-by-product basis. In circumstances where inventory levels are in excess of anticipated market demand, where inventory is deemed technologically obsolete or not saleable due to condition or where inventory cost exceeds net realizable value, we record a charge to cost of goods sold and reduce the inventory to its net realizable value.
Plant and Equipment
Plant and equipment are carried at cost and are depreciated over their estimated useful lives, ranging from three to twenty years, using principally the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes. The carrying value of all long-lived assets is evaluated periodically in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, to determine if adjustment to the depreciation period or the carrying value is warranted. If events and circumstances indicate that the long-lived assets should be reviewed for possible impairment, we use projections to assess whether future cash flows on a non-discounted basis related to the tested assets are likely to exceed the recorded carry amount of those assets to determine if write-down is appropriate. If we identify impairment, we will report a loss to the extent that the carrying value of the impaired assets exceeds their fair values as determined by valuation techniques appropriate in the circumstances that could include the use of similar projections on a discounted basis.
Goodwill
SFAS No. 142,Goodwill and Other Intangible Assets, addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, we do not amortize goodwill, but goodwill is subject to our annual impairment testing at December 31. Potential impairment exists if the carrying amount of net assets of an
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operating segment, including goodwill, is greater than the fair value of net assets of an operating segment. To the extent possible, we identify specific net assets at the operating segment level. Net assets such as inventory, fixed assets and accounts payable are allocated to each operating segment for purposes of recognizing and measuring goodwill impairment. Allocations are based on manufactured cost of goods sold by operating segment. Goodwill was allocated to each operating segment based on the relative fair value of each operating segment. Fair value was based on the income approach using a calculation of discounted estimated future cash flows from our annual long-range planning process. The calculation of impairment loss compares the implied fair value of each operating segment’s goodwill with the carrying value of that goodwill. Various factors, including a deterioration in the future prospects for any of our operating segments or a decision to exit an operating segment, could result in impairment charges.
Income Taxes
Through October 9, 2006, we conducted our business as an S corporation, with the exception of our wholly-owned C corporation subsidiary, for federal and state income tax purposes. Accordingly, our shareholders had been responsible for federal and substantially all state income tax liabilities arising out of our operations. For all periods prior to the C corporation conversion dividends had been paid to shareholders at amounts that approximated the shareholders’ current tax liability arising from their ownership in the company. One of our subsidiaries is a C corporation and, as such, is subject to federal and state income tax. As of October 10, 2006, the day before we consummated the 2006 Private Placement, we ceased to be an S corporation and became a C corporation and, as such, we became subject to federal and state income taxes. The unaudited pro forma statements of operations data included elsewhere in this report present our pro forma provision for income taxes and net income as if we had been a C corporation for all periods presented. For further information reference “Selected Consolidated Financial Data.”
We account for income taxes at the subsidiary in accordance with SFAS No. 109,Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates. A provision for income tax expense is recognized for income taxes payable for the current period, plus the net changes in deferred tax amounts. We periodically assess the reliability of deferred tax assets and the adequacy of deferred tax liabilities, including the results of local, state or federal statutory tax audits.
The Internal Revenue Service is currently examining our 2002, 2003 and 2004 federal income tax returns. Management believes that the ultimate outcome of this examination will not result in a material adverse impact on our consolidated financial position, cash flow or results of operations.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin 51, Consolidated Financial Statements. FIN No. 46 requires that unconsolidated variable interest entities be consolidated by their primary beneficiary and applies immediately to variable interest entities created after January 31, 2003. In December 2003, the FASB revised certain provisions of FIN No. 46 and modified the effective date for all variable interest entities existing before January 31, 2003 to the first period ending March 15, 2004. Adoption of FIN No. 46 in 2004 did not have an impact on our financial position, results of operations, or cash flows.
In November 2004, the FASB issued SFAS No. 151,Inventory Costs — An Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and was adopted by us in the first quarter of 2006. Adoption of SFAS No. 151 did not have a material impact on our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is
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effective for periods beginning after June 15, 2005. Adoption of SFAS No. 153 did not have an impact on our financial position, results of operations or cash flows.
In December 2004, the FASB issued the revised SFAS No. 123,Share-Based Payment. SFAS No. 123R supersedes APB No. 25 and requires the recognition of compensation expense over the vesting period for all share-based payments, including stock options, based on the fair value of the instrument at the grant date. SFAS No. 123R is effective starting with the first interim period beginning after June 15, 2005. We apply SFAS No. 123R to the 1,650,000 shares of our common stock reserved for issuance under our stock incentive plan. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -Securities Authorized for Issuance under Equity Compensation Plans.”
In March 2005, the FASB issued Interpretation (“FIN”) No. 47,Accounting for Conditional Asset Retirement Obligations, which clarifies guidance provided by SFAS No. 143,Accounting for Asset Retirement Obligations. FIN No. 47 is effective for companies with fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a significant impact on our financial position, results of operations or cash flows.
In July 2006, the FASB issued FIN No. 48,Accounting for Uncertainty in Income Taxes. FIN No. 48 establishes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in the financial statements. FIN No. 48 also offers guidelines to determine how much of a tax benefit to recognize in the financial statements. Under FIN No. 48, the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the taxing authority should be recognized. FIN No. 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by us in the first quarter of 2007. We do not expect the adoption of FIN No. 48 to have a material impact on our financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements in accounting pronouncements where fair value is the relevant measurement attribute. However, for some entities, the application of this statement will change current practice for financial statements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and is required to be adopted by us in the first quarter of 2008. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We adopted SAB No. 108 effective December 31, 2006. The adoption of SAB 108 did not have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years after November 15, 2007. We do not believe that the adoption of the provisions of SFAS No. 159 will materially impact our consolidated financial statements.
ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Our principal market risks are exposure to changes in commodity prices, primarily copper prices, and interest rates on borrowings.
Commodity Risk. We generally do not enter into arrangements to hedge price fluctuations for copper or other commodities used to manufacture our products, although we have done so from time to time, primarily in our consumer outlets segment. The terms of these hedging arrangements generally are less than one year. There were no hedging arrangements outstanding as of December 31, 2006.
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Interest Rate Risk. We have exposure to changes in interest rates on a portion of our debt obligations. The interest rate on our credit facility is based on either the lenders’ prime rate or LIBOR. As of December, 31 2006 we have no borrowings against our credit facility; however, if we choose to exercise this option, a one percentage point change in LIBOR would affect our annual interest expense.
ITEM 8. | Financial Statements and Supplementary Data |
Our consolidated financial statements, including the Notes thereto, and other information are included in this report beginning onpage F-1.
ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
ITEM 9A. | Controls and Procedures |
Our management, including our Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures (as defined in Exchange ActRules 13a-15(b) and15d-15(e)), as of December 31, 2006. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting (as defined in Exchange ActRule 13a-15(d) and15d-15(f)) during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | Other Information |
None.
PART III
ITEM 10. | Directors and Executive Officers of the Registrant |
This item is incorporated by reference to the sections entitled “Proposal No. 1: Election of Directors”, “Corporate Governance — Did Our Insiders Comply with Section 16(a) Beneficial Ownership Reporting in 2006?”, “Corporate Governance — How are Directors Nominated?” and “Corporate Governance — The Committees of the Board — The Audit Committee” of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2007, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
Code of Ethics
Prior to the listing of our common stock on NASDAQ, our board of directors adopted a code of ethics applicable to all of our directors, officers and employees. The Company has posted this code of ethics on its internet site (colemancable.com under “Investors”). The Company intends to disclose on its internet site any amendments to, or waivers from, its code of ethics that are required to be publicly disclosed pursuant to the rules of the SEC or NASDAQ.
ITEM 11. | Executive Compensation |
This item is incorporated by reference to the to the sections entitled “Executive Compensation” and “Corporate Governance — Compensation Committee Interlocks and Insider Participation” of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2007, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
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ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
This item is incorporated by reference to the section entitled “Information About Our Common Share Ownership” and “Proposal No. 2: Approval of an Amendment to the Company’s Long-Term Incentive Plan” of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2007, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
ITEM 13. | Certain Relationships and Related Transactions |
This item is incorporated by reference to the sections entitled “Corporate Governance — Director Independence”, “Corporate Governance — What is our Related party Transactions Approval Policy and What Procedures Do We Use To Implement It?” and “Corporate Governance — What Related Person Transactions Do We Have?” of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2007, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
ITEM 14. | Principal Accountant Fees and Services |
This item is incorporated by reference to the section entitled “Proposal No. 3: Ratification of Appointment of Independent Auditors — Independent Auditor Fee Information” of the definitive proxy statement for the Annual Meeting of Stockholders to be held on May 14, 2007, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
PART IV
ITEM 15. | Exhibits and Financial Statement Schedules |
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements appearing in Item 8, which is incorporated herein by reference.
(2) Financial Statement Schedules
None.
(3) Exhibits
See index to exhibits.
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Coleman Cable, Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 |
All Schedules are omitted because they are not applicable, not required or because the required information is included in the Consolidated Financial Statements or Notes thereto.
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Coleman Cable, Inc.
Coleman Cable, Inc.
We have audited the accompanying consolidated balance sheets of Coleman Cable, Inc., and subsidiaries (the “Company”) as of December 31, 2005 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Coleman Cable, Inc. and subsidiaries as of December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
March 19, 2007
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Thousands, except per share data) | ||||||||||||
NET SALES | $ | 285,792 | $ | 346,181 | $ | 423,358 | ||||||
COST OF GOODS SOLD | 240,260 | 292,755 | 341,642 | |||||||||
GROSS PROFIT | 45,532 | 53,426 | 81,716 | |||||||||
SELLING, ENGINEERING, GENERAL AND ADMINISTRATIVE EXPENSES | 26,475 | 25,654 | 31,760 | |||||||||
RESTRUCTURING CHARGES | (190 | ) | — | 1,396 | ||||||||
OPERATING INCOME | 19,247 | 27,772 | 48,560 | |||||||||
INTEREST EXPENSE, NET | 11,252 | 15,606 | 15,933 | |||||||||
LOSS ON EARLY EXTINGUISHMENT OF DEBT | 13,923 | — | — | |||||||||
OTHER (INCOME), LOSS, NET | (13 | ) | (1,267 | ) | 497 | |||||||
INCOME (LOSS) BEFORE INCOME TAXES | (5,915 | ) | 13,433 | 32,130 | ||||||||
INCOME TAX EXPENSE | 3,092 | 2,298 | 2,771 | |||||||||
NET INCOME (LOSS) | $ | (9,007 | ) | $ | 11,135 | $ | 29,359 | |||||
EARNINGS PER COMMON SHARE DATA | ||||||||||||
NET INCOME (LOSS) PER SHARE | ||||||||||||
Basic | $ | (0.76 | ) | $ | 0.87 | $ | 2.15 | |||||
Diluted | (0.76 | ) | 0.87 | 2.15 | ||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | ||||||||||||
Basic | 11,795 | 12,749 | 13,637 | |||||||||
Diluted | 11,795 | 12,749 | 13,637 | |||||||||
PRO FORMA DATA | ||||||||||||
PRO FORMA NET INCOME (LOSS) | ||||||||||||
Income (loss) before income taxes | $ | (5,915 | ) | $ | 13,433 | $ | 32,130 | |||||
Pro forma income tax expense (benefit) (unaudited) | (2,362 | ) | 5,351 | 12,400 | ||||||||
Pro forma net income (loss) (unaudited) | $ | (3,553 | ) | $ | 8,082 | $ | 19,730 | |||||
PRO FORMA NET INCOME (LOSS) PER SHARE (UNAUDITED) | ||||||||||||
Basic | $ | (0.30 | ) | $ | 0.63 | $ | 1.45 | |||||
Diluted | (0.30 | ) | 0.63 | 1.45 |
See notes to consolidated financial statements.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2005 | 2006 | |||||||
(Thousands, except per share data) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 58 | $ | 14,734 | ||||
Accounts receivable, less allowance for uncollectible accounts of $1,876 and $2,092, respectively | 58,840 | 62,318 | ||||||
Inventories, net | 67,889 | 66,765 | ||||||
Deferred income taxes | 206 | 2,136 | ||||||
Prepaid expenses and other current assets | 2,890 | 2,739 | ||||||
Total current assets | 129,883 | 148,692 | ||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
Land | 579 | 579 | ||||||
Buildings and leasehold improvements | 7,732 | 7,636 | ||||||
Machinery, fixtures and equipment | 44,894 | 45,125 | ||||||
53,205 | 53,340 | |||||||
Less accumulated depreciation and amortization | (28,889 | ) | (31,762 | ) | ||||
Construction in progress | 948 | 244 | ||||||
Property, plant and equipment, net | 25,264 | 21,822 | ||||||
GOODWILL AND INTELLECTUAL PROPERTY, NET | 60,651 | 60,638 | ||||||
DEFERRED DEBT ISSUANCE COSTS, NET AND OTHER ASSETS | 5,590 | 4,593 | ||||||
TOTAL ASSETS | $ | 221,388 | $ | 235,745 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Current portion of long-term debt | $ | 874 | $ | 936 | ||||
Accounts payable | 22,126 | 13,091 | ||||||
Accrued liabilities | 16,776 | 19,582 | ||||||
Total current liabilities | 39,776 | 33,609 | ||||||
LONG-TERM DEBT | 168,426 | 121,571 | ||||||
DEFERRED INCOME TAXES | 115 | 2,724 | ||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Common stock, par value $0.001; 31,260 and 75,000 shares authorized, respectively; and 12,749 and 16,786 shares issued and outstanding, respectively | 13 | 17 | ||||||
Additional paid-in capital | 25,546 | 80,421 | ||||||
Accumulated deficit | (12,488 | ) | (2,597 | ) | ||||
Total shareholders’ equity | 13,071 | 77,841 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 221,388 | $ | 235,745 | ||||
See notes to consolidated financial statements.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
(Thousands) | ||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | (9,007 | ) | $ | 11,135 | $ | 29,359 | |||||
Adjustments to reconcile net income (loss) to net cash flow from operating activities: | ||||||||||||
Depreciation and amortization | 6,102 | 5,792 | 6,382 | |||||||||
Noncash interest expense | 1,104 | — | — | |||||||||
Stock-based compensation | 1,648 | — | 1,412 | |||||||||
Loss on early extinguishment of debt | 13,923 | — | — | |||||||||
Noncash interest income | (245 | ) | (110 | ) | — | |||||||
Deferred tax provision | (18 | ) | (581 | ) | 679 | |||||||
(Gain) loss on the sales of fixed assets | (13 | ) | (7 | ) | 502 | |||||||
Gain on sale of investment — net | — | (1,267 | ) | (11 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (11,309 | ) | (10,227 | ) | (3,478 | ) | ||||||
Inventories | (13,981 | ) | (17,755 | ) | 1,124 | |||||||
Prepaid expenses and other assets | (560 | ) | (1,417 | ) | 142 | |||||||
Accounts payable | (2,407 | ) | 1,985 | (8,869 | ) | |||||||
Accrued liabilities | 4,696 | 2,112 | 2,806 | |||||||||
Net cash flow from operating activities | (10,067 | ) | (10,340 | ) | 30,048 | |||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures | (4,714 | ) | (6,171 | ) | (2,702 | ) | ||||||
Proceeds from the sale of fixed assets | 13 | — | 42 | |||||||||
Proceeds from sale of investment | — | 4,382 | 82 | |||||||||
Net cash flow from investing activities | (4,701 | ) | (1,789 | ) | (2,578 | ) | ||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||
Net borrowings (repayments) under revolving loan facilities | 47,810 | 16,180 | (46,000 | ) | ||||||||
Early retirement of debt | (124,601 | ) | (3,822 | ) | — | |||||||
Proceeds of issuance of common stock, net | — | — | 114,851 | |||||||||
Issuance of senior notes, net | 113,392 | — | — | |||||||||
Repayment of long-term debt | (3,686 | ) | (941 | ) | (793 | ) | ||||||
Borrowings of long-term debt | 644 | — | — | |||||||||
Repurchase of common stock | — | — | (61,384 | ) | ||||||||
Repurchase of warrants | (3,000 | ) | — | — | ||||||||
Dividends paid to shareholders | (14,806 | ) | (264 | ) | (19,468 | ) | ||||||
Net cash flow from financing activities | 15,753 | 11,153 | (12,794 | ) | ||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 985 | (976 | ) | 14,676 | ||||||||
CASH AND CASH EQUIVALENTS — Beginning of year | 49 | 1,034 | 58 | |||||||||
CASH AND CASH EQUIVALENTS — End of year | $ | 1,034 | $ | 58 | $ | 14,734 | ||||||
NONCASH ACTIVITY | ||||||||||||
Reduction of carrying value of Oswego fixed assets and capital lease obligation | $ | — | $ | 1,878 | $ | — | ||||||
Capital lease obligation | — | 34 | — | |||||||||
Unpaid capital expenditures | — | 166 | — | |||||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||
Income taxes paid | $ | 2,568 | $ | 2,792 | $ | 1,259 | ||||||
Cash interest paid | 6,499 | 14,813 | 15,187 |
See notes to consolidated financial statements.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Retained | ||||||||||||||||||||
Common | Additional | Earnings | ||||||||||||||||||
Stock | Common | Paid-in | (Accumulated | |||||||||||||||||
Outstanding | Stock | Capital | Deficit) | Total | ||||||||||||||||
(Thousands) | ||||||||||||||||||||
BALANCE — January 1, 2003 | 11,468 | $ | 12 | $ | 26,899 | $ | 454 | $ | 27,365 | |||||||||||
Repurchase of warrants | — | — | (3,000 | ) | — | (3,000 | ) | |||||||||||||
Stock-based compensation | 1,281 | 1 | 1,647 | — | 1,648 | |||||||||||||||
Net loss | — | — | — | (9,007 | ) | (9,007 | ) | |||||||||||||
Dividends | — | — | — | (14,806 | ) | (14,806 | ) | |||||||||||||
BALANCE — December 31, 2004 | 12,749 | 13 | 25,546 | (23,359 | ) | 2,200 | ||||||||||||||
Net income | — | — | — | 11,135 | 11,135 | |||||||||||||||
Dividends | — | — | — | (264 | ) | (264 | ) | |||||||||||||
BALANCE — December 31, 2005 | 12,749 | 13 | 25,546 | (12,488 | ) | 13,071 | ||||||||||||||
Repurchase of common stock | (4,400 | ) | (4 | ) | (61,380 | ) | — | (61,384 | ) | |||||||||||
Common stock issuance, net of issuance costs | 8,400 | 8 | 114,843 | — | 114,851 | |||||||||||||||
Stock-based compensation | 37 | — | 1,412 | — | 1,412 | |||||||||||||||
Net income | — | — | — | 29,359 | 29,359 | |||||||||||||||
Dividends | — | — | — | (19,468 | ) | (19,468 | ) | |||||||||||||
BALANCE — December 31, 2006 | 16,786 | $ | 17 | $ | 80,421 | $ | (2,597 | ) | $ | 77,841 | ||||||||||
See notes to consolidated financial statements.
F-6
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts in thousands except per share data)
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations, Principles of Consolidation and Basis of Presentation
The Company manufactures and markets electrical and electronic wire and cable products for consumer, commercial and industrial applications. The financial statements include the accounts of Coleman Cable, Inc. and its wholly-owned subsidiaries (the “Company”). All intercompany accounts and transactions have been eliminated in consolidation. The financial statements and footnotes reflect retroactive presentation for the 312.6079 for 1 stock split that occurred on October 10, 2006. On October 10, 2006, the Company terminated its S corporation status, and is treated for federal and state income tax purposes as a C corporation under Subchapter C of the Internal Revenue Code (the “Code”), and, as a result, is subject to state and federal income taxes, in addition to its wholly owned subsidiary CCI Enterprises, Inc. (the “Subsidiary”) which continues to be a C corporation (See Note 7).
Unaudited Pro Forma Data
The Company terminated its S corporation status and became a C corporation effective October 10, 2006. The unaudited pro forma data included in the consolidated statements of operations gives retroactive presentation as if the Company had been a C corporation for 2004, 2005 and 2006. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Company had been a C corporation for 2004, 2005 and 2006, or that may result in the future.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates are required for several matters, including inventory valuation, determining the allowance for uncollectible accounts and accruals for sales incentives, depreciation, amortization and recoverability of long-lived assets as well as establishing restructuring, self-insurance, legal, environmental and tax accruals. Actual results could differ from those estimates. Summarized below is the activity for the allowance for uncollectible accounts:
2004 | 2005 | 2006 | ||||||||||
Balance — January 1 | $ | 1,373 | $ | 1,655 | $ | 1,876 | ||||||
Provisions | 653 | 369 | 294 | |||||||||
Write-offs and credit allowances, net of recovery | (371 | ) | (148 | ) | (78 | ) | ||||||
Balance — December 31 | $ | 1,655 | $ | 1,876 | $ | 2,092 | ||||||
Revenue Recognition
The Company recognizes sales of its products when the products are shipped to customers and title passes to the customer in accordance with the terms of sale. Billings for shipping and handling costs are recorded as sales and related costs are included in cost of goods sold. A provision for payment discounts, product returns and customer rebates is estimated based upon historical experience and other relevant factors and is recorded within the same period that the revenue is recognized.
Cash and Cash Equivalents
The Company considers short-term investments with an original maturity of three months or less to be cash equivalents. Outstanding checks in excess of funds on deposit included were $1,425 and $146 at December 31, 2005 and 2006, respectively.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
Inventories include material, labor and overhead costs and are recorded at the lower of cost or market on thefirst-in, first-out (“FIFO”) basis. The Company estimates losses for excess and obsolete inventory at its net realizable value based on the aging of the inventory and the evaluation of the likelihood of recovering the inventory costs based on anticipated demand and selling price.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated over their estimated useful lives, ranging from 3 to 20 years, using the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes. The estimated useful lives of buildings range from 5 to 20 years; leasehold improvements have a useful life equal to the shorter of the useful life of the asset or the lease term; and estimated useful lives of machinery, fixtures and equipment range from 3 to 8 years.
The carrying value of all long-lived assets is evaluated periodically in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, to determine if adjustment to the depreciation period or the carrying value is warranted. If events and circumstances indicate that the long-lived assets should be reviewed for possible impairment, the Company uses projections to assess whether future cash flows on a non-discounted basis related to the tested assets are likely to exceed the recorded carrying amount of those assets to determine whether write-down is appropriate. If the Company identifies impairment, it will report a loss to the extent that the carrying values of the impaired assets exceed their fair values as determined by valuation techniques appropriate in the circumstances that could include the use of similar projections on a discounted basis.
Software Development
Statement of Position (“SOP”)No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, provides guidance on the accounting for the cost of computer software developed or obtained for internal use. In accordance withSOP No. 98-1, the Company expenses costs associated with software developed for use in the Company’s operations during the preliminary project and the post-implementation/operational stages and capitalizes the costs incurred in the application development stage. These costs consist primarily of outside consulting services and internal development costs and are amortized on a straight-line basis over the estimated useful life of the software, which is three years. As of December 31, 2005 and December 31, 2006, the amounts capitalized were approximately $1,550 and $2,583, respectively, which are included in machinery, fixtures and equipment in the consolidated balance sheets. Accumulated amortization was approximately $993 and $1,580 as of December 31, 2005 and 2006, respectively.
Goodwill, Intellectual Property and Long-Lived Assets
SFAS No. 142,Goodwill and Other Intangible Assets,addresses the financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill is not amortized, but requires testing for potential impairment on an annual basis or whenever events or changes in circumstances indicate that its value may be impaired. In accordance with SFAS No. 144, the carrying value of all long-lived assets with definite lives, primarily property, plant and equipment, as described above is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred. Intangible assets are amortized over their estimated useful lives.
Income Taxes
Through October 9, 2006, the Company conducted its business as an S corporation, with the exception of the Company’s wholly owned C corporation subsidiary, CCI Enterprises, under Subchapter S of the Code (and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
comparable state laws). Accordingly, the Company’s shareholders had been responsible for federal and substantially all state income tax liabilities arising out of its operations. For all periods prior to the C corporation conversion, the Company had provided its shareholders with funds for the payment of these income taxes. On October 10, 2006, the Company terminated its S corporation status, and is treated for federal and state income tax purposes as a C corporation under Subchapter C of the Code, and, as a result, is subject to state and federal income taxes.
The Company accounts for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates. A provision for income tax expense is recognized for income taxes payable for the current period, plus the net changes in deferred tax amounts.
Financial Instruments and Hedging
Financial instruments include working capital items and debt. The book values of cash and cash equivalents, trade receivables and trade payables are considered to be representative of their respective fair values because of the immediate or short-term maturity of these financial instruments. The Company also believes that the fair value of the Company’s debt instruments with third parties approximates the book value.
Concentrations of credit risk arising from trade accounts receivable are due to selling to a number of customers in a particular industry. The Company performs ongoing credit evaluations of its customers’ financial condition and obtains collateral or other security when appropriate. No customer accounted for more than 10% of accounts receivable as of December 31, 2005 and December 31, 2006.
Cash and cash equivalents are placed with a financial institution that the Company believes has an adequate credit standing. Fromtime-to-time the Company enters into commodity contracts to hedge against future cost increases. The terms of the contracts are of less than one year. There were contracts with a value of $292 at December 31, 2005, which were included in cost of goods in the accompanying consolidated financial statements. There were no outstanding contracts at December 31, 2006.
Stock-based Compensation
The Company recognizes compensation expense over the vesting period for all share-based payments, including stock options based on the fair value of the instrument at grant date in accordance with the SFAS No. 123(R)Share-based Payment. The Company’s stock-based compensation arrangements are detailed in Note 10.
Earnings (Loss) per Common Share
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for each period presented. Diluted earnings per common share are based on the weighted average number of common shares outstanding and the dilutive effect of the potential exercise of outstanding stock options.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,Inventory Costs — an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and was required to be adopted by the Company in the first quarter of 2006. Adoption of SFAS No. 151 did not have a material impact on the Company’s financial position, results of operations or cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for periods beginning after June 15, 2005. Adoption of SFAS No. 153 did not have a material impact on the Company’s financial position, results of operations or cash flows.
In December 2004, the FASB issued the revised SFAS No. 123(R),Share-Based Payment. SFAS No. 123(R) supercedes APB No. 25 and requires the recognition of compensation expense over the vesting period for all share-based payments, including stock options, based on the fair value of the instrument at the grant date. The Company accounts for the 1,650 shares of common stock reserved for issuance under its stock incentive plan (see Note 10) in accordance with SFAS No. 123(R).
In March 2005, the FASB issued FIN No. 47,Accounting for Conditional Asset Retirement Obligations, which clarifies guidance provided by SFAS No. 143,Accounting for Asset Retirement Obligations. The adoption of FIN No. 47 did not have an impact on the Company’s financial position, results of operations or cash flows.
In July 2006, the FASB issued Interpretation FIN No. 48,Accounting for Uncertainty in Income Taxes. FIN No. 48 establishes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in the financial statements. FIN No. 48 also offers guidelines to determine how much of a tax benefit to recognize in the financial statements. Under FIN No. 48, the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the taxing authority should be recognized. FIN No. 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company in the first quarter of 2007. The Company does not expect the adoption of FIN No. 48 to have a material impact on the Company’s financial position, results of operation or cash flows.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements in accounting pronouncements where fair value is the relevant measurement attribute. However, for some entities, the application of this statement will change current practice for financial statements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and is required to be adopted by the Company in the first quarter of 2008. The Company does not expect the adoption of SFAS No. 157 to have a material impact on the Company’s financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The Company adopted SAB No. 108 effective December 31, 2006. The adoption of SAB 108 did not have an impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years after November 15, 2007. The Company does not believe that the adoption of the provisions of SFAS No. 159 will materially impact our consolidated financial statements.
2. | RESTRUCTURING CHARGES |
In 2003, the Company’s management approved the adoption of a restructuring plan to move the cord operations from its Waukegan, Illinois facility to Miami Lakes, Florida. In 2004, the Company reversed $190 of accruals recorded in 2003 to income as such accruals were deemed no longer necessary.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On April 14, 2006, the Company announced the closing of its leased manufacturing and distribution facility located in Miami Lakes, Florida based on an evaluation of this facility in the long term operation of its business. The Company determined that the efficient utilization of its manufacturing assets would be enhanced by partial relocation of production to the Company’s plant in Waukegan, Illinois and supplemented by additional international sourcing.
As of December 31, 2006, the Company has spent $1,277 to close its Miami Lakes facility. The charges consist of $77 of employee severance costs, $662 of lease termination costs, $217 of equipment relocation costs and $321 for other closing costs. The Company completed the closure of the facility and does not anticipate any additional costs.
On November 14, 2006, the Company approved a plan to close its manufacturing facility and sell the building and property located in Siler City, North Carolina. The Company determined that the efficient utilization of its manufacturing assets would be enhanced by partial relocation of production to the Company’s plants in Hayesville, North Carolina and Waukegan, Illinois supplemented by additional international sourcing. As of December 31, 2006 the Company has charged to expense $119 to close the Siler City, facility, which includes approximately $70 for severance costs, $45 for equipment relocation costs, and $4 for other costs related to the closure. The Company estimates spending an additional $658 in the first quarter 2007 to complete the plant closure consisting of $30 of employee severance costs, $281 of equipment relocation costs and $347 for other closing costs.
The following table summarizes the restructuring activity from December 31, 2003 through December 31, 2006:
Employee | Lease | Equipment | Other | |||||||||||||||||
Severance | Termination | Relocation | Closing | |||||||||||||||||
Costs | Costs | Costs | Costs | Total | ||||||||||||||||
BALANCE — December 31, 2003 | $ | 310 | $ | 90 | $ | — | $ | — | $ | 400 | ||||||||||
Provision (income) | (190 | ) | — | — | — | (190 | ) | |||||||||||||
Uses | (120 | ) | (90 | ) | — | — | (210 | ) | ||||||||||||
BALANCE — December 31, 2004 and 2005 | — | — | — | — | — | |||||||||||||||
Provision | 147 | 662 | 262 | 325 | 1,396 | |||||||||||||||
Uses | (77 | ) | (662 | ) | (262 | ) | (325 | ) | (1,326 | ) | ||||||||||
BALANCE — December 31, 2006 | $ | 70 | $ | — | $ | — | $ | — | $ | 70 | ||||||||||
3. | INVENTORIES |
Inventories consisted of the following:
December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Raw materials | $ | 13,158 | $ | 16,295 | $ | 11,975 | ||||||
Work in progress | 3,468 | 3,537 | 3,293 | |||||||||
Finished products | 33,508 | 48,057 | 51,497 | |||||||||
Total | $ | 50,134 | $ | 67,889 | $ | 66,765 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. | ACCRUED LIABILITIES |
Accrued liabilities consisted of the following:
December 31, | ||||||||
2005 | 2006 | |||||||
Salaries, wages and employee benefits | $ | 4,814 | $ | 5,117 | ||||
Sales incentives | 6,093 | 7,359 | ||||||
Income taxes | 24 | 568 | ||||||
Interest | 3,121 | 3,023 | ||||||
Other | 2,724 | 3,515 | ||||||
Total | $ | 16,776 | $ | 19,582 | ||||
5. | GOODWILL AND INTELLECTUAL PROPERTY |
Intellectual property included in the accompanying consolidated balance sheets represents trademarks acquired in 2003 with an original cost of $50 and accumulated amortization of $27 and $40 as of December 31, 2005 and 2006. Related amortization expense was $12, $12, and $13 for 2004, 2005 and 2006, respectively. Intellectual property has been allocated to the Corporate segment.
As described in Note 13, the Company has eleven operating segments which are aggregated into the Company’s three reportable business segments. Goodwill was allocated as of January 1, 2002 as follows:
Electrical/Wire and Cable Distributors | $ | 25,023 | ||
Specialty Distributors and OEM’s | 31,696 | |||
Consumer Outlets | 3,909 | |||
$ | 60,628 | |||
The amount of goodwill allocated to each operating segment has not changed since 2002. The Company’s review for potential goodwill impairment required by the provisions of SFAS No. 142 is performed at the operating segment level of the Company. The Company performs an annual review for potential goodwill impairment testing in the fourth quarter of each year. The Company’s review indicated that the fair value of each of the eleven operating segments, based primarily on discounted cash flow projections, exceeded the carrying value of each segment’s allocated share of net assets, and accordingly, there was no goodwill impairment indicated in any year.
The Company will continue to monitor financial performance indicators across the various operating segments, particularly in the Recreation/Transportation, Retail and Automotive operating segments, which had combined goodwill balances of $4,326 at December 31, 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. | DEBT |
December 31, | ||||||||
2005 | 2006 | |||||||
Revolving credit facility | $ | 46,000 | $ | — | ||||
Senior notes | 120,000 | 120,000 | ||||||
Capital lease obligations (refer to Note 9) | 1,489 | 1,129 | ||||||
Other long-term debt, annual interest rates up to 6.5%, payable through 2019 | 1,811 | 1,378 | ||||||
169,300 | 122,507 | |||||||
Less current portion | (874 | ) | (936 | ) | ||||
Total long-term debt | $ | 168,426 | $ | 121,571 | ||||
Annual maturities of long-term debt for each of the next five years and thereafter in the aggregate are as follows:
2007 | $ | 936 | ||
2008 | 1,050 | |||
2009 | 391 | |||
2010 | 10 | |||
Subsequent to 2011 | 120,120 | |||
Total debt maturities | $ | 122,507 | ||
On September 28, 2004, the Company completed a comprehensive refinancing of its bank debt. The refinancing included the following: (i) the private placement of8-year senior unsecured notes (the “Notes”) and (ii) a new senior secured revolving credit facility (the “Revolving Credit Facility”), which became effective on that date. The Company received net proceeds of $113,392 from the Notes and borrowed $27,810 under the Revolving Credit Facility. The Company used the net proceeds from this refinancing transaction to repay the outstanding indebtedness of $77,739 plus accrued interest and other fees of $270 under the then- existing senior secured revolving credit facility and term loans. The Company also paid $36,862 plus accrued interest and other fees of $974 to redeem in full the 15% subordinated notes due 2008, a make-whole premium to the previous lenders of $10,000 and repurchased for $3,000 the outstanding warrants originally issued in connection with the subordinated notes. In connection with the refinancing, the Company also made a non-tax related distribution to shareholders of $14,110 and paid to certain members of senior management a special cash bonus and a stock bonus of $1,390 and $1,648, respectively. The Notes were issued in the amount of $120,000, bear interest at a fixed rate of 9.875% and mature in 2012. In connection with the refinancing, the Company incurred fees and expenses totaling $6,608, which are included in “debt issuance costs, net and other assets” in the accompanying consolidated balance sheets. The applicable fees and expenses are amortized over the respective lives of the Revolving Credit Facility and the Notes on a straight-line basis over 5 and 8 years, respectively. Amortization was $935 and $935 for periods ended December 31, 2005 and 2006, respectively. Accumulated amortization was $1,169 and $2,104 as of December 31, 2005 and 2006, respectively. In connection with this refinancing, the Company recorded a loss on early extinguishment of debt of $13,923. This loss consisted of the aforementioned make-whole premium and the write-off of the unamortized balance of $2,235 of previously deferred debt issuance costs.
The indenture governing the Company’s 9.875% unsecured notes due in 2012 (“the Notes”) contains covenants that, among other things, limit the Company’s ability and the ability of certain of its subsidiaries to: incur additional indebtedness; make restricted payments; create liens; pay dividends; consolidate, merge or sell substantially all of its assets; enter into sale and leaseback transactions; and enter into transactions with affiliates. As of December 31, 2006, the Company was in compliance with all of the covenants contained in the indenture.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s senior secured revolving credit facility (the “Revolving Credit Facility”) will mature on September 28, 2009 and is an asset-based lending agreement whereby the Company can receive advances based on the lesser of $75,000 or the sum of 85% of eligible accounts receivable and 55% of inventories. The Revolving Credit Facility contains a $5,000 limit for letters of credit with outstanding letters of credit reducing the total amount available for borrowing under the Revolving Credit Facility. The Revolving Credit Facility is secured by substantially all of the Company’s assets, including accounts receivable, inventory and any other tangible and intangible assets. Interest is payable at the bank’s prime rate plus a range of 0.25% to 1.25%, or at the option of the Company, LIBOR plus 1.75% to 2.75%. The Company classifies the portion of the Revolving Credit Facility that is expected to be paid within the next year as a current liability. The Revolving Credit Facility accrued interest at an average rate of 5.7% and 7.0% and the Company’s average borrowed amount was $38,596 and $34,825 in the years ended December 31, 2005, and December 31, 2006, respectively. All borrowings outstanding under the credit facility were repaid on October 11, 2006 in connection with the private placement. As of December 31, 2006, the Company had $74,313 of additional borrowing capacity.
The Revolving Credit Facility contains more restrictive covenants than the indenture governing the Notes, which consist of certain financial covenants, including, but not limited to, a fixed charge coverage ratio and a leverage ratio. In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants relating to limitations on dividends and other indebtedness, liens, investments, guarantees, mergers and acquisitions, sales of assets, capital expenditures and leases.
The Company’s indenture governing the Notes and Revolving Credit Facility contain covenants that limit the Company’s ability to pay dividends. Under these covenants the Company could not declare excess cash flow dividends for the year ended December 31, 2006. The Company does not anticipate paying any dividends on its common stock in the foreseeable future.
On August 14, 2006 the Company entered into an amendment to the Revolving Credit Facility which (i) modified the change of control provision to narrow the circumstances that would amount to a default, (ii) allowed the Company to alter its certificate of incorporation to increase the authorized share capital of the company to effect an equity issuance, and (iii) added a provision that allowed the Company to issue up to 9,980 shares of its common stock on or before December 1, 2006 for proceeds that would be used to repurchase up to 5,980 shares of common stock of the Company and pay down the lesser of $75,000 or the outstanding principal of the Revolving Credit Facility on the date of the equity issuance.
The Company was in compliance at December 31, 2006 with all covenants in the Revolving Credit Facility.
The Notes and the Revolving Credit Facility both have restrictions on dividend distributions to shareholders, including but not limited to, a percentage of net income (less distributions for tax purposes). The distributions for tax purposes are computed at the shareholder applicable tax rate. Distributions for tax purposes are not restricted so long as the Company qualifies as an S corporation; on October 10, 2006 the Company terminated its S corporation status. The Company paid $14,818 of tax distributions in the twelve months ended December 31, 2006 of which $1,940 were paid in the fourth quarter. The Company paid $4,650 of discretionary dividends to shareholders in the twelve months ended December 31, 2006.
In connection with the purchase of the Oswego Wire Incorporated facility (“Oswego”) and certain related equipment Oswego acquired the rights and assumed the capital lease obligation of Copperweld Corporation (“Copperweld”) under a certain Amended and Restated Sale Agreement (“Sale Agreement”) between Copperweld and the County of Oswego Industrial Development Agency (“IDA”). Terms of the Sale Agreement specified payment of $5,700 on July 1, 2012 with interest to be paid quarterly through that date on the outstanding balance at a rate of 55% of prime. In order to secure payment of the loan, in 1987, the Company purchased and placed in a dedicated fund $675 of 8.7% zero coupon bonds issued by the Municipal Authority of Westmoreland County, Pennsylvania, redeemable in the amount of $5,700 on July 1, 2012. Upon maturity, the proceeds of the investment in the zero coupon bonds were to be used to fulfill the obligation under the Sale Agreement. The bonds were expected
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to be held to maturity, and were carried at their original cost of $675 plus accumulated interest of $2,330 at December 31, 2004.
On May 16, 2005, Oswego and Copperweld reached a definitive agreement regarding the accelerated payment of the $5,700 lease obligation due under the Sale Agreement. Oswego sold the zero coupon bonds for $4,382 and made a cash payment of $3,822 to Copperweld, in exchange for complete settlement of Oswego’s obligations under the Amended and Restated Sale Agreement and the conveyance by Copperweld to Oswego of all of Copperweld’s rights, title and interest in and to the Oswego facility, free and clear of any liens and encumbrances held by Oswego County. The Company recognized a gain of $1,267 related to the sale of the zero coupon bonds, which is included in “Other income” and reduced the carrying value of the Oswego fixed assets by $1,878, the amount by which the lease obligation exceeded the amount paid to settle the obligation.
The Company has notes issued to the IDA for the financing of certain machinery and capital improvements. The notes include $3,300 for a machinery loan requiring 108 monthly payments of $40, which bears interest at 5.97% per annum. The outstanding balance of the loan at December 31, 2005 and 2006 was $1,262 and $930, respectively. A capital improvement loan on the building was also obtained for $200, requiring 240 monthly payments and bearing interest at 6.25% per annum. The balance of the loan at December 31, 2005 and December 31, 2006 was $163 and $155, respectively.
Interest expense was $11,503, $15,722 and $15,995 net of interest income of $251, $116 and $62 for 2004, 2005 and 2006, respectively.
7. | INCOME TAXES |
Through October 9, 2006 the Company conducted business as an S corporation under Subchapter S of the Code (and comparable state laws). Accordingly, the Company’s shareholders have been responsible for federal and substantially all state income tax liabilities arising out of its operations. For all periods prior to the C corporation conversion, the Company has provided its shareholders with funds for the payment of these income taxes. On October 10, 2006, the Company terminated its S corporation status, and is treated for federal and state income tax purposes as a C corporation under Subchapter C of the Code and, as a result, is subject to state and federal income taxes.
As a result of the termination of the Company’s S corporation status, the Company recorded an income tax provision of $346 to recognize the estimated amount of previously unrecognized net deferred income tax liability.
The Company declared dividends to its former S corporation shareholders in amounts expected to be sufficient to cover estimated taxes associated with its 2006 S corporation taxable earnings. The Company paid dividends to its shareholders in this regard of $1,800 on October 10, 2006.
The income tax expense consists of the following:
2004 | 2005 | 2006 | ||||||||||
Current | $ | 3,074 | $ | 2,879 | $ | 2,092 | ||||||
Deferred | 18 | (581 | ) | 679 | ||||||||
Income tax expense | $ | 3,092 | $ | 2,298 | $ | 2,771 | ||||||
The Company’s deferred taxes result primarily from the tax effect of differences between the financial and tax basis of assets and liabilities based on enacted tax laws. Valuation allowances, if necessary, are provided against deferred tax assets that are not likely to be realized. No such valuation allowances have been recorded as of December 31, 2005 and 2006.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Prior to November 30, 2005, the Company also recognized deferred taxes as a result of the factoring of intercompany receivables, which was discontinued as of that date. The Subsidiary sold all remaining factored accounts receivable back to the Company.
Significant components of the Subsidiary’s deferred tax (assets) and liabilities as of December 31, 2005 and 2006 are as follows:
2005 | 2006 | |||||||
Deferred tax assets: | ||||||||
Reserves not deducted for tax: | ||||||||
Allowance for uncollectible accounts | $ | — | $ | (492 | ) | |||
Legal reserves | — | (151 | ) | |||||
Employee benefits | (151 | ) | (426 | ) | ||||
Other | (95 | ) | (230 | ) | ||||
Inventories | — | (1,299 | ) | |||||
Stock based compensation | — | (350 | ) | |||||
Deferred tax liabilities: | ||||||||
Depreciation & amortization | 115 | 3,074 | ||||||
Other | 40 | 462 | ||||||
Net deferred tax liability (asset) | $ | (91 | ) | $ | 588 | |||
The income tax expense differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the years ended December 31, 2004, 2005 and 2006. A reconciliation of the statutory federal income tax amount to the income tax expense recorded on the Company’s income statement is as follows:
2004 | 2005 | 2006 | ||||||||||
Income taxes (benefit) at U.S. Federal statutory rate | $ | (2,011 | ) | $ | 4,702 | $ | 10,924 | |||||
Increase (decrease) in income taxes resulting from: | ||||||||||||
Non-taxable S corporation (income) losses | 4,917 | (2,649 | ) | (9,348 | ) | |||||||
State taxes (net of federal tax benefit) | 168 | 81 | 652 | |||||||||
S to C corporation conversion | — | — | 346 | |||||||||
Other | 18 | 164 | 197 | |||||||||
Income taxes | $ | 3,092 | $ | 2,298 | $ | 2,771 | ||||||
The Internal Revenue Service is currently reviewing the Company’s 2002, 2003, and 2004 federal income tax returns. Management believes that the ultimate outcome of this examination will not result in a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows. Refer to“Tax Matters Agreement”in Note 8 for additional information.
8. | COMMITMENTS AND CONTINGENCIES |
Operating Leases
The Company leases certain of its buildings, machinery and equipment under operating lease agreements that expire at various dates over the next ten years. Rent expense for such leases was $2,919, $3,104, and $3,225 for
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2004, 2005 and 2006, respectively. Minimum future rental payments under noncancellable operating leases, with initial lease terms in excess of one year, for each of the next five years and thereafter in the aggregate are as follows:
2007 | $ | 2,219 | ||
2008 | 1,108 | |||
2009 | 942 | |||
2010 | 872 | |||
2011 | 772 | |||
Subsequent to 2011 | 1,671 | |||
Total minimum rental payments | $ | 7,584 | ||
Capital Leases
The Company leases various manufacturing, office and warehouse properties and office equipment under capital leases that expire at various dates through 2009. The assets are amortized/depreciated over the shorter of their related lease terms or their estimated productive lives.
Minimum future lease payments under capital leases as of December 31, 2006 are as follows:
2007 | $ | 509 | ||
2008 | 509 | |||
2009 | 300 | |||
Subsequent to 2009 | — | |||
Total minimum lease payments | 1,318 | |||
Less amounts representing interest | 189 | |||
Present value of net minimum lease payments | 1,129 | |||
Less current portion | 397 | |||
Long-term obligations under capital leases | $ | 732 | ||
Obligations under capital leases are included within debt in the accompanying consolidated balance sheets (see Note 6). The gross amount of assets recorded under capital leases as of December 31, 2005 and 2006 was $1.8 and $1.3, respectively.
Employee Benefits
The Company provides defined contribution savings plans for management and other employees. The plans provide for fixed matching contributions based on the terms of such plans to the accounts of plan participants. Additionally, the Company, with the approval of its Board of Directors, may make discretionary contributions. The Company expensed $386, $440, and $723 related to these savings plans during 2004, 2005 and 2006, respectively.
Legal Matters
The Company was party to two environmental claims, one of which was settled in 2006. The Leonard Chemical Company Superfund site consists of approximately 7.1 acres of land in an industrial area located a half mile east of Catawba, York County, South Carolina. The Leonard Chemical Company operated this site until the early 1980’s for recycling of waste solvents. These operations resulted in the contamination of soils and groundwaters at the site with hazardous substances. In 1984, the U.S. Environmental Protection Agency listed this site on the National Priorities List. Riblet Products Corporation, with which the Company merged in 2000, was identified through documents as a company that sent solvents to the site for recycling and was one of the companies receiving a special notice letter from the
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Environmental Protection Agency identifying it as a party potentially liable under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) for cleanup of the site.
In 2004, the Company along with other “potentially responsible parties” (“PRPs”) entered into a Consent Decree with the Environmental Protection Agency requiring the performance of a remedial design and remedial action (“RD/RA”) for this site. The Company has entered into a Site Participation Agreement with the other PRPs for fulfillment of the requirements of the Consent Decree. Under the Site Participation Agreement, the Company is responsible for 9.19% share of the costs for the RD/RA. The Company recorded an accrual in 2004 for $380 for this liability, and the estimated remediation cost and the Company’s share remained unchanged as of December 31, 2006.
On March 16, 2005, the Company received notice from a PRP Group that the Company had potential liability at the HIMCO Dump Site in Elkhart, Indiana as a result of the activities of Riblet Products Corporation, and the Company could resolve those potential liabilities by a commitment to pay a cashout settlement and an administrative assessment to cover past and future group expenses on a per capita basis. The Company recorded an accrual in 2004 of $71 for this liability. On September 20, 2006, the Company settled the pending lawsuit with HIMCO for $86, which resulted in an additional charge of $15 in 2006.
The Company believes that its accruals related to the environmental, litigation and other claims are sufficient and that these items and its rights to available insurance and indemnity will be resolved without material adverse effect on its financial position, results of operations and liquidity, individually or in the aggregate. The Company cannot, however, provide assurance that this will be the case.
Self-Insurance
The Company is self-insured for health costs for covered individuals in three of its facilities and believes that it maintains adequate accruals to cover the retained liability. The accrual for self-insurance liability is determined by management and is based on claims filed and an estimate of claims incurred but not yet reported. The Company’s self-insurance expenses were $750, $962, and $1,033 in 2004, 2005 and 2006, respectively.
Tax Matters Agreement
In connection with the closing of the 2006 Private Placement, the Company entered into a Tax Matters Agreement with its existing shareholders that provides for, among other things, the indemnification of these shareholders for any increase in their tax liability, including interest and penalties, and reimbursement of their expenses (including attorneys’ fees) related to the period prior to the Company’s conversion to a C corporation, including as a result of the ongoing IRS examination. The Company has appealed the IRS findings. If the Company’s appeal of the IRS findings is unsuccessful the Company’s obligation will be to indemnify the shareholders pursuant to the Tax Matters Agreement. The Company recorded an accrual in 2006 of $508 which is included in other loss in the accompanying consolidated statement of operations for the estimated costs regarding this matter.
9. | SHAREHOLDERS’ EQUITY |
On October 11, 2006, the Company consummated a private placement of 8,400 shares of its common stock at a price of $15.00 per share (the “2006 Private Placement”). Pursuant to the 2006 Private Placement, the Company received net proceeds of approximately $114,851 (after the purchaser’s discount and placement fees). The Company used approximately $61,384 of the net proceeds to purchase and retire 4,400 shares from its existing shareholders. Of the remaining net proceeds of approximately $53,467 the Company used (i) approximately $52,750 to repay substantially all of the indebtedness then outstanding under its credit facility and (ii) the remaining $717 for working capital and general corporate purposes. As a result of the Company’s sale of 8,400 shares, and its repurchase of 4,400 shares, the 2006 Private Placement increased the number of the Company’s outstanding shares by 4,000.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. | EARNINGS PER SHARE |
There was no diluted effect on the weighted average common shares outstanding for the stock options outstanding.
11. | STOCK-BASED COMPENSATION |
On October 9, 2006, the Company put into place a stock incentive plan that provides for the granting of options to purchase 1,650 shares of its common stock. On October 10 and 11, 2006, options to purchase 420 and 405 shares respectively, were granted to employees. One third of the 825 options granted will vest at the end of each of the first three anniversaries of the date of grant. The options will expire ten years after the date of grant and will be exercisable at $15.00 per share.
The Company estimated the fair value of the stock options granted using the Black Scholes option-pricing model, with the following assumptions being utilized:
Dividend yield | 0 | % | ||
Expected volatility | 45 | % | ||
Risk-free interest rate | 4.74 | % | ||
Expected life of options | 7 years |
The Company does not expect to pay dividends in the foreseeable future and therefore used a 0% dividend yield. Given the Company’s limited history, the expected volatility and expected life factors were determined based on average volatilities and lives calculated in relation to similar companies.
Based on these assumptions, the option value per common share is $8.09 and the total fair value of the options granted is $6,674 at grant date. The risk-free interest rate was based on zero coupon U.S. Government issues at the time of grant.
The Company accounts for stock-based compensation using the fair value method in accordance with SFAS No. 123(R), Share-Based Payment. The Company recorded $881 in total compensation expense and a $350 deferred tax asset relative to stock-based compensation arrangements during fiscal 2006. Assuming a forfeiture rate of 2%, the Company estimates that its total expense relating to stock options granted will be $6,416. The Company expects to expense $3,459 in fiscal 2007, $1,534 in fiscal 2008, and $542 in fiscal 2009. No options were exercised or forfeited in fiscal 2006.
Changes in stock options are as follows:
Weight | ||||||||||||||||
Average | ||||||||||||||||
Weighted-Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Terms | Value | |||||||||||||
Outstanding January 1, 2006 | — | — | ||||||||||||||
Granted | 825 | $ | 15.00 | |||||||||||||
Exercised | — | — | ||||||||||||||
Forfeited or expired | — | — | ||||||||||||||
Outstanding December 31, 2006 | 825 | $ | 15.00 | 1.78 | — | |||||||||||
Vested or expected to vest | 809 | 15.00 | 1.78 | — | ||||||||||||
Exercisable | — | — | ||||||||||||||
Fair value of options granted during the year | $ | 8.09 |
Intrinsic value for stock options is defined as the difference between the current market value of the Company’s common stock and the exercise price of the stock option.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. | RELATED PARTY TRANSACTIONS |
In July 2004, the Company entered into an operating lease for the corporate office located in Waukegan, Illinois (the ”Corporate Office”) with a third-party lessor. The lease was negotiated at the then-prevailing market terms. In 2005, substantially all of the shareholders of the Company contributed cash equity to form HQ2 Properties, LLC (”HQ2”), which then purchased the Corporate Office in August 2005. HQ2 assumed the existing lease on the same terms from the previous lessor, with the exception of the lease term, which was extended from 2014 to 2015. Rent paid to HQ2 for the twelve months ended December 31, 2005 and 2006 was $148 and $359, respectively.
Two of the Company’s shareholders have consulting arrangements with the Company whereby, in addition to their service as directors of the Company, they provide advice and counsel on business planning and strategy, including advice on potential acquisitions. Pursuant to this arrangement, and for their service as directors, the Company paid each eligible individual fees of $100, $250 and $213 for the years ended December 31, 2004, 2005 and 2006, respectively. As of October 2006, in addition to these services, each will receive annually $75 as annual compensation for their services as co-chairmen of the Board of Directors. For the year ended December 31, 2006, $38 was expensed for their services asco-chairmen.
On September 4, 2006, the Company approved a payment to one of its directors of $750 in cash and 37 shares of the Company’s stock valued at $531 for additional services rendered to the Company in connection with the exploration and development of strategic alternatives and certain other matters. The Company expensed $1,281 as professional fees related to these services in fiscal 2006.
13. | INVENTORY THEFT |
During the quarter ended September 30, 2005, the Company experienced a theft of inventory as a result of break-ins at the manufacturing facility located in Miami Lakes, Florida. The Company believes it will recover the amount of the loss, net of deductibles, under its insurance policy. As a result of the loss, the cost of inventory was reduced by $1,280 and an insurance receivable was recorded and is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets as of December 31, 2005 and 2006.
14. | BUSINESS SEGMENT INFORMATION |
The Company has three reportable business segments: Electrical/Wire and Cable Distributors, Specialty Distributors and OEMs, and Consumer Outlets. These reportable segment classifications are based on an aggregation of customer groupings and distribution channels because this is the way the Company’s chief operating decision maker, the chief executive officer, evaluates the Company’s results of each operating segment.
The Company has aggregated its operating segments into three reportable business segments in accordance with the criteria defined in SFAS No. 131,Disclosure about Segments of an Enterprise and Related Information. The Company’s operating segments have common production processes and manufacturing capacity. Accordingly, the Company does not identify all of its net assets to its operating segments. Depreciation expense is not allocated to the Company’s segments but is included in its manufacturing overhead cost pools and is absorbed into product cost (and inventory) as each product passes through the Company’s numerous manufacturing work centers. Accordingly, as products are sold across multiple segments, it is impracticable to determine the amount of depreciation expense included in the operating results of each operating segment.
Revenues by business segment represent sales to unaffiliated customers and no one customer or group of customers under common control accounted for more that 6.0% of consolidated net sales. Export sales are not material. The Company no longer records intercompany activity.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
End Markets | Principal Products | Applications | Customers | |||
Electrical/Wire and Cable Distributors | ||||||
Electrical Distribution | Industrial power, electronic and communication cables, low voltage wire and assembled products | Construction and industrial MRO applications | Buying groups, national chains and independent distributors | |||
Wire and Cable Distribution | Industrial power, electronic and communication cables and low voltage wire | Construction and industrial MRO applications | Independent distributors | |||
Specialty Distributors and OEMs | ||||||
OEM/Government | Custom cables | Various marine, lighting, mobile equipment, entertainment and military applications | OEMs and governmental agencies/ subcontractors | |||
HVAC/R | Thermostat cable and assembled products | Services the electric controls for HVAC/R | Independent distributors and consignment manufacturers | |||
Irrigation | Irrigation, sprinkler and polyethylene golf course cables | Commercial and residential sprinkler systems, low voltage lighting applications and well pumps | Turf and landscape, golf course and submersible pump distributors | |||
Industrial/Contractor | Extension cords, ground fault circuit interrupters, industrial cord reels, custom cords, trouble lights, portable halogen lights and electrical/electronic cables | Various commercial construction and industrial applications | Specialty, tool and fastener distributors; MRO/industrial catalog houses and retail/ general construction supply houses | |||
Security/Home Automation | Electronic and communication wire and cables | Security, home automation, audio, data communication and fire safety | Security, audio-video, residential and commercial distributors | |||
Recreation/Transportation | Machine tool wire, portable cords and adapters, and coaxial, speaker alarm and other cable | RV wiring products | Manufactured housing OEMs and RV aftermarket suppliers |
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
End Markets | Principal Products | Applications | Customers | |||
Copper Fabrication | Specialty copper products | Appliances, fire alarms, security systems, electronics, automotive, telecommunications, military, industrial, high temperature and geophysical | Other channels within the Company and other small specialized wire and cable manufacturers | |||
Consumer Outlets | ||||||
Retail | Extension cords, trouble lights, surge and strip and electrical/electronic cable products | Wide variety of consumer applications | National and regional mass merchandisers, home centers, hardware distributors, warehouse clubs and other consumer retailers | |||
Automotive | Battery booster cables, battery cables and accessories | Broad spectrum of automotive applications | National and regional retailers |
Segment operating income represents income from continuing operations before interest income or expense, other income and income taxes. Corporate consists of items not charged or allocated to a particular segment, including costs for employee relocation, discretionary bonuses, professional fees, restructuring, management fees and intangible amortization. The accounting policies of the segments are the same as those described in Note 1.
Financial data for the Company’s business segments are as follows:
2004 | 2005 | 2006 | ||||||||||
Net sales: | ||||||||||||
Electrical/Wire & Cable Distributors | $ | 95,810 | $ | 114,561 | $ | 147,411 | ||||||
Specialty Distributors & OEMs | 133,457 | 171,926 | 219,957 | |||||||||
Consumer Outlets | 56,525 | 59,694 | 55,990 | |||||||||
Consolidated net sales | $ | 285,792 | $ | 346,181 | $ | 423,358 | ||||||
Operating income: | ||||||||||||
Electrical/Wire & Cable Distributors | $ | 9,010 | $ | 13,643 | $ | 23,830 | ||||||
Specialty Distributors & OEMs | 13,112 | 14,693 | 28,096 | |||||||||
Consumer Outlets | 3,399 | 3,465 | 3,421 | |||||||||
25,521 | 31,801 | 55,347 | ||||||||||
Corporate | (6,274 | ) | (4,029 | ) | (6,787 | ) | ||||||
Consolidated operating income | $ | 19,247 | $ | 27,772 | $ | 48,560 | ||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net sales of the Company’s principal products by targeted end market are as follows:
End Markets | 2004 | 2005 | 2006 | |||||||||
Electrical/Wire and Cable Distributors: | ||||||||||||
Electrical Distribution | $ | 79,897 | $ | 92,582 | $ | 112,330 | ||||||
Wire and Cable Distribution | 15,913 | 21,979 | 35,081 | |||||||||
Specialty Distributors and OEMs: | �� | |||||||||||
OEM/Government | 22,369 | 29,798 | 35,725 | |||||||||
HVAC/R | 23,787 | 28,212 | 32,286 | |||||||||
Irrigation | 24,061 | 24,901 | 41,091 | |||||||||
Industrial/Contractor | 19,812 | 24,258 | 30,392 | |||||||||
Security/Home Automation | 21,040 | 35,568 | 47,182 | |||||||||
Recreation/Transportation | 12,907 | 18,070 | 17,311 | |||||||||
Copper Fabrication | 9,481 | 11,119 | 15,970 | |||||||||
Consumer Outlets: | ||||||||||||
Retail | 39,474 | 42,364 | 39,559 | |||||||||
Automotive | 17,051 | 17,330 | 16,431 | |||||||||
Consolidated net sales | $ | 285,792 | $ | 346,181 | $ | 423,358 | ||||||
The Company has restated its segment reporting of Copper Fabrication sales for all periods to reflect sales to third parties only as that is how the chief operating decision maker evaluates the results of this operating segment.
15. | SUPPLEMENTAL GUARANTOR INFORMATION |
The payment obligations of the Company under the Notes and the Revolving Credit Agreement (see Note 6) are guaranteed by certain of the Company’s wholly owned subsidiaries (Guarantor Subsidiaries). Such guarantees are full, unconditional and joint and several. The following supplemental financial information sets forth, on a combined basis, balance sheets, statements of income and statements of cash flows for Coleman Cable, Inc. (Parent) and the Company’s Guarantor Subsidiaries — CCI Enterprises, Inc., CCI International, Inc., and Oswego Wire Incorporated.
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
Net sales | $ | 269,073 | $ | 31,809 | $ | (15,090 | ) | $ | 285,792 | |||||||
Cost of goods sold | 231,941 | 8,319 | — | 240,260 | ||||||||||||
Gross profit | 37,132 | 23,490 | (15,090 | ) | 45,532 | |||||||||||
Selling, engineering, general and administrative expenses | 27,324 | 14,241 | (15,090 | ) | 26,475 | |||||||||||
Restructuring charges | (190 | ) | — | — | (190 | ) | ||||||||||
Operating income | 9,998 | 9,249 | — | 19,247 | ||||||||||||
Interest expense, net | 10,898 | 354 | — | 11,252 | ||||||||||||
Loss on early extinguishment of debt | 13,923 | — | — | 13,923 | ||||||||||||
Other income | (13 | ) | — | — | (13 | ) | ||||||||||
Income (loss) before income taxes | (14,810 | ) | 8,895 | — | (5,915 | ) | ||||||||||
Income tax expense | 168 | 2,924 | — | 3,092 | ||||||||||||
Income from guarantor subsidiaries | 5,971 | — | (5,971 | ) | — | |||||||||||
Net income (loss) | $ | (9,007 | ) | $ | 5,971 | $ | (5,971 | ) | $ | (9,007 | ) | |||||
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
Net sales | $ | 328,421 | $ | 29,747 | $ | (11,987 | ) | $ | 346,181 | |||||||
Cost of goods sold | 283,184 | 9,571 | — | 292,755 | ||||||||||||
Gross profit | 45,237 | 20,176 | (11,987 | ) | 53,426 | |||||||||||
Selling, engineering, general and administrative expenses | 24,458 | 13,183 | (11,987 | ) | 25,654 | |||||||||||
Operating income | 20,779 | 6,993 | — | 27,772 | ||||||||||||
Interest expense, net | 15,089 | 517 | — | 15,606 | ||||||||||||
Other income | — | (1,267 | ) | — | (1,267 | ) | ||||||||||
Income before income taxes | 5,690 | 7,743 | — | 13,433 | ||||||||||||
Income tax expense | 57 | 2,241 | — | 2,298 | ||||||||||||
Income from guarantor subsidiaries | 5,502 | — | (5,502 | ) | — | |||||||||||
Net income | $ | 11,135 | $ | 5,502 | $ | (5,502 | ) | $ | 11,135 | |||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
Net sales | $ | 407,389 | $ | 30,641 | $ | (14,672 | ) | $ | 423,358 | |||||||
Cost of goods sold | 327,840 | 13,802 | — | 341,642 | ||||||||||||
Gross profit | 79,549 | 16,839 | (14,672 | ) | 81,716 | |||||||||||
Selling, engineering, general and administrative expenses | 32,834 | 13,598 | (14,672 | ) | 31,760 | |||||||||||
Restructuring charges | 1,396 | — | — | 1,396 | ||||||||||||
Operating income | 45,319 | 3,241 | — | 48,560 | ||||||||||||
Interest expense, net | 14,996 | 937 | — | 15,933 | ||||||||||||
Other loss, net | 497 | — | — | 497 | ||||||||||||
Income before income taxes | 29,826 | 2,304 | — | 32,130 | ||||||||||||
Income tax expense | 2,219 | 552 | — | 2,771 | ||||||||||||
Income from guarantor subsidiaries | 1,752 | — | (1,752 | ) | — | |||||||||||
Net income | $ | 29,359 | $ | 1,752 | $ | (1,752 | ) | $ | 29,359 | |||||||
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Table of Contents
COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2005
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 38 | $ | 20 | $ | — | $ | 58 | ||||||||
Accounts receivable, net of allowances | 57,402 | 1,438 | — | 58,840 | ||||||||||||
Intercompany receivable | — | 16,449 | (16,449 | ) | — | |||||||||||
Inventories, net | 61,282 | 6,607 | — | 67,889 | ||||||||||||
Deferred income taxes | — | 206 | — | 206 | ||||||||||||
Prepaid expenses and other current assets | 2,025 | 865 | — | 2,890 | ||||||||||||
Total current assets | 120,747 | 25,585 | (16,449 | ) | 129,883 | |||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 18,954 | 6,310 | — | 25,264 | ||||||||||||
GOODWILL AND INTELLECTUAL PROPERTY, NET | 60,510 | 141 | — | 60,651 | ||||||||||||
DEFERRED DEBT ISSUANCE COSTS, NET AND OTHER ASSETS | 5,587 | 3 | — | 5,590 | ||||||||||||
INVESTMENT IN SUBSIDIARIES | 20,728 | — | (20,728 | ) | — | |||||||||||
TOTAL ASSETS | $ | 226,526 | $ | 32,039 | $ | (37,177 | ) | $ | 221,388 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Current portion of long-term debt | $ | 322 | $ | 552 | $ | — | $ | 874 | ||||||||
Accounts payable | 21,156 | 970 | — | 22,126 | ||||||||||||
Intercompany payable | 12,316 | 4,133 | (16,449 | ) | — | |||||||||||
Accrued liabilities | 12,619 | 4,157 | — | 16,776 | ||||||||||||
Total current liabilities | 46,413 | 9,812 | (16,449 | ) | 39,776 | |||||||||||
LONG-TERM DEBT | 167,042 | 1,384 | — | 168,426 | ||||||||||||
DEFERRED INCOME TAXES | — | 115 | — | 115 | ||||||||||||
Common stock | 13 | — | — | 13 | ||||||||||||
Additional paid in capital | 25,546 | 1 | (1 | ) | 25,546 | |||||||||||
Retained earnings (accumulated deficit) | (12,488 | ) | 20,727 | (20,727 | ) | (12,488 | ) | |||||||||
Total shareholders’ equity | 13,071 | 20,728 | (20,728 | ) | 13,071 | |||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 226,526 | $ | 32,039 | $ | (37,177 | ) | $ | 221,388 | |||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2006
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
ASSETS | ||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||
Cash and cash equivalents | $ | 14,719 | $ | 15 | $ | — | $ | 14,734 | ||||||||
Accounts receivable, net of allowances | 60,789 | 1,529 | — | 62,318 | ||||||||||||
Intercompany receivable | — | 16,168 | (16,168 | ) | — | |||||||||||
Inventories, net | 60,007 | 6,758 | — | 66,765 | ||||||||||||
Deferred income taxes | 1,931 | 205 | — | 2,136 | ||||||||||||
Prepaid expenses and other current assets | 2,268 | 1,838 | (1,367 | ) | 2,739 | |||||||||||
Total current assets | 139,714 | 26,513 | (17,535 | ) | 148,692 | |||||||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 16,197 | 5,625 | — | 21,822 | ||||||||||||
GOODWILL AND INTELLECTUAL PROPERTY, NET | 60,497 | 141 | — | 60,638 | ||||||||||||
DEFERRED DEBT ISSUANCE COSTS, NET AND OTHER ASSETS | 4,590 | 3 | — | 4,593 | ||||||||||||
INVESTMENT IN SUBSIDIARIES | 22,480 | — | (22,480 | ) | — | |||||||||||
TOTAL ASSETS | $ | 243,478 | $ | 32,282 | $ | (40,015 | ) | $ | 235,745 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
Current portion of long-term debt | $ | 356 | $ | 580 | $ | — | $ | 936 | ||||||||
Accounts payable | 12,245 | 846 | — | 13,091 | ||||||||||||
Intercompany payable | 12,676 | 3,492 | (16,168 | ) | — | |||||||||||
Accrued liabilities | 17,049 | 3,900 | (1,367 | ) | 19,582 | |||||||||||
Total current liabilities | 42,326 | 8,818 | (17,535 | ) | 33,609 | |||||||||||
LONG-TERM DEBT | 120,686 | 885 | — | 121,571 | ||||||||||||
DEFERRED INCOME TAXES | 2,625 | 99 | — | 2,724 | ||||||||||||
Common stock | 17 | — | — | 17 | ||||||||||||
Additional paid in capital | 80,421 | 1 | (1 | ) | 80,421 | |||||||||||
Retained earnings (accumulated deficit) | (2,597 | ) | 22,479 | (22,479 | ) | (2,597 | ) | |||||||||
Total shareholders’ equity | 77,841 | 22,480 | (22,480 | ) | 77,841 | |||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 243,478 | $ | 32,282 | $ | (40,015 | ) | $ | 235,745 | |||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2004
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income (loss) | $ | (9,007 | ) | $ | 5,971 | $ | (5,971 | ) | $ | (9,007 | ) | |||||
Adjustments to reconcile net income (loss) to net cash flow from operating activities: | ||||||||||||||||
Depreciation and amortization | 5,180 | 922 | — | 6,102 | ||||||||||||
Noncash interest expense | 1,104 | — | — | 1,104 | ||||||||||||
Stock-based compensation | 1,648 | — | — | 1,648 | ||||||||||||
Loss on early extinguishment of debt | 13,923 | — | — | 13,923 | ||||||||||||
Noncash interest income | — | (245 | ) | — | (245 | ) | ||||||||||
Deferred tax provision | — | (18 | ) | — | (18 | ) | ||||||||||
Gain on sale of fixed assets — net | (13 | ) | — | — | (13 | ) | ||||||||||
Equity in consolidated subsidiary | (5,971 | ) | — | 5,971 | — | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | — | (11,309 | ) | — | (11,309 | ) | ||||||||||
Inventories | (13,116 | ) | (865 | ) | — | (13,981 | ) | |||||||||
Prepaid expenses and other assets | (437 | ) | (223 | ) | 100 | (560 | ) | |||||||||
Accounts payable | (2,474 | ) | 67 | — | (2,407 | ) | ||||||||||
Intercompany accounts | (6,764 | ) | 6,764 | — | — | |||||||||||
Accrued liabilities | 4,673 | 123 | (100 | ) | 4,696 | |||||||||||
Net cash flow from operating activities | (11,254 | ) | 1,187 | — | (10,067 | ) | ||||||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures | (3,564 | ) | (1,150 | ) | — | (4,714 | ) | |||||||||
Proceeds from the sale of fixed assets | 13 | — | — | 13 | ||||||||||||
Net cash flow from investing activities | (3,551 | ) | (1,150 | ) | — | (4,701 | ) | |||||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||||||
Net borrowings under revolving loan facilities | 47,810 | — | — | 47,810 | ||||||||||||
Early retirement of debt | (124,601 | ) | — | — | (124,601 | ) | ||||||||||
Issuance of senior notes, net | 113,392 | — | — | 113,392 | ||||||||||||
Repayment of long-term debt | (3,005 | ) | (681 | ) | — | (3,686 | ) | |||||||||
Borrowings of long-term debt | — | 644 | 644 | |||||||||||||
Repurchase of warrants | (3,000 | ) | — | — | (3,000 | ) | ||||||||||
Dividends paid to shareholders | (14,806 | ) | — | — | (14,806 | ) | ||||||||||
Net cash flow from financing activities | 15,790 | (37 | ) | — | 15,753 | |||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | 985 | — | — | 985 | ||||||||||||
CASH AND CASH EQUIVALENTS — Beginning of year | 39 | 10 | — | 49 | ||||||||||||
CASH AND CASH EQUIVALENTS — End of year | $ | 1,024 | $ | 10 | $ | — | $ | 1,034 | ||||||||
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2005
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income (loss) | $ | 11,135 | $ | 5,502 | $ | (5,502 | ) | $ | 11,135 | |||||||
Adjustments to reconcile net income (loss) to net cash flow from operating activities: | ||||||||||||||||
Depreciation and amortization | 4,867 | 925 | — | 5,792 | ||||||||||||
Noncash interest income | — | (110 | ) | — | (110 | ) | ||||||||||
Deferred tax provision | — | (581 | ) | — | (581 | ) | ||||||||||
Gain on sale of fixed assets — net | (7 | ) | — | — | (7 | ) | ||||||||||
Gain on sale of investment — net | — | (1,267 | ) | — | (1,267 | ) | ||||||||||
Equity in consolidated subsidiary | (5,502 | ) | — | 5,502 | — | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (57,402 | ) | 47,175 | — | (10,227 | ) | ||||||||||
Inventories | (14,079 | ) | (3,676 | ) | — | (17,755 | ) | |||||||||
Prepaid expenses and other assets | 1,051 | (168 | ) | (2,300 | ) | (1,417 | ) | |||||||||
Accounts payable | 1,726 | 259 | — | 1,985 | ||||||||||||
Intercompany accounts | 46,705 | (46,705 | ) | — | — | |||||||||||
Accrued liabilities | 919 | (1,107 | ) | 2,300 | 2,112 | |||||||||||
Net cash flow from operating activities | (10,587 | ) | 247 | — | (10,340 | ) | ||||||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures | (5,908 | ) | (263 | ) | — | (6,171 | ) | |||||||||
Proceeds from the sale of investment | — | 4,382 | — | 4,382 | ||||||||||||
Net cash flow from investing activities | (5,908 | ) | 4,119 | — | (1,789 | ) | ||||||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||||||
Net borrowings under revolving loan facilities | 16,180 | — | — | 16,180 | ||||||||||||
Early retirement of debt | — | (3,822 | ) | — | (3,822 | ) | ||||||||||
Repayment of long-term debt | (407 | ) | (534 | ) | — | (941 | ) | |||||||||
Dividends paid to shareholders | (264 | ) | — | — | (264 | ) | ||||||||||
Net cash flow from financing activities | 15,509 | (4,356 | ) | — | 11,153 | |||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (986 | ) | 10 | — | (976 | ) | ||||||||||
CASH AND CASH EQUIVALENTS — Beginning of year | 1,024 | 10 | — | 1,034 | ||||||||||||
CASH AND CASH EQUIVALENTS — End of year | $ | 38 | $ | 20 | $ | — | $ | 58 | ||||||||
NON CASH ACTIVITY | ||||||||||||||||
Reduction in carrying value of Oswego fixed assets and capital lease obligation | $ | — | $ | 1,878 | $ | — | $ | 1,878 | ||||||||
Capital lease obligations | — | 34 | — | 34 | ||||||||||||
Unpaid capital expenditures | 166 | — | — | 166 |
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COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2006
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Total | |||||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 29,359 | $ | 1,752 | $ | (1,752 | ) | $ | 29,359 | |||||||
Adjustments to reconcile net income (loss) to net cash flow from operating activities: | ||||||||||||||||
Depreciation and amortization | 5,470 | 912 | — | 6,382 | ||||||||||||
Noncash interest income | — | — | — | — | ||||||||||||
Stock-based compensation | 1,412 | — | 1,412 | |||||||||||||
Deferred tax provision | 694 | (15 | ) | — | 679 | |||||||||||
Loss on sale of fixed assets — net | 359 | 143 | — | 502 | ||||||||||||
Gain on sale of investment — net | (11 | ) | — | — | (11 | ) | ||||||||||
Equity in consolidated subsidiary | (1,752 | ) | — | 1,752 | — | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (3,387 | ) | (91 | ) | — | (3,478 | ) | |||||||||
Inventories | 1,275 | (151 | ) | — | 1,124 | |||||||||||
Prepaid expenses and other assets | (252 | ) | (973 | ) | 1,367 | 142 | ||||||||||
Accounts payable | (8,745 | ) | (124 | ) | — | (8,869 | ) | |||||||||
Intercompany accounts | 360 | (360 | ) | — | — | |||||||||||
Accrued liabilities | 4,430 | (257 | ) | (1,367 | ) | 2,806 | ||||||||||
Net cash flow from operating activities | 29,212 | 836 | — | 30,048 | ||||||||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures | (2,332 | ) | (370 | ) | — | (2,702 | ) | |||||||||
Proceeds from the sale of fixed assets | 42 | — | — | 42 | ||||||||||||
Proceeds from the sale of investment | 82 | — | — | 82 | ||||||||||||
Net cash flow from investing activities | (2,208 | ) | (370 | ) | — | (2,578 | ) | |||||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||||||
Net borrowings (repayments) under revolving loan facilities | (46,000 | ) | — | — | (46,000 | ) | ||||||||||
Proceeds of issuance of common stock, net | 114,851 | — | — | 114,851 | ||||||||||||
Repayment of long-term debt | (322 | ) | (471 | ) | — | (793 | ) | |||||||||
Borrowings of long-term debt | — | — | — | — | ||||||||||||
Repurchase of common stock | (61,384 | ) | — | — | (61,384 | ) | ||||||||||
Dividends paid to shareholders | (19,468 | ) | — | — | (19,468 | ) | ||||||||||
Net cash flow from financing activities | (12,323 | ) | (471 | ) | — | (12,794 | ) | |||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 14,681 | (5 | ) | — | 14,676 | |||||||||||
CASH AND CASH EQUIVALENTS — Beginning of year | 38 | 20 | — | 58 | ||||||||||||
CASH AND CASH EQUIVALENTS — End of year | $ | 14,719 | $ | 15 | $ | — | $ | 14,734 | ||||||||
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Table of Contents
COLEMAN CABLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. | QUARTERLY RESULTS (UNAUDITED) |
First | Second | Third | Fourth | Total | ||||||||||||||||||||||||||||||||||||
2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | |||||||||||||||||||||||||||||||
Total Net Sales | $ | 74,761 | $ | 90,798 | $ | 82,865 | $ | 114,414 | $ | 93,625 | $ | 114,925 | $ | 94,930 | $ | 103,221 | $ | 346,181 | $ | 423,358 | ||||||||||||||||||||
Gross Profit | 10,161 | 16,569 | 11,689 | 24,628 | 14,677 | 24,228 | 16,899 | 16,291 | 53,426 | 81,716 | ||||||||||||||||||||||||||||||
Total Operating Income | 4,238 | 9,827 | 5,874 | 17,160 | 8,190 | 14,179 | 9,470 | 7,394 | 27,772 | 48,560 | ||||||||||||||||||||||||||||||
Total Net Income | 60 | 5,108 | 2,659 | 12,795 | 3,426 | 9,759 | 4,990 | 1,697 | 11,135 | 29,359 |
As discussed in Note 6, the second quarter of 2005 included a $1,267 gain related to the sale of zero coupon bonds.
As discussed in Note 2 — “Restructuring Charges” the Company announced the closing of its leased manufacturing and distribution facility located in Miami Lakes, Florida. The Company recorded $1,277 in total restructuring expenses to close its Miami Lakes facility. The Company recorded charges of $319, $891 and $67 in the second, third and fourth quarters of 2006, respectively. (See note 2)
As discussed in Note 2 — “Restructuring Charges” the Company approved a plan to close its manufacturing facility and sell the building and property located in Siler City, North Carolina. The Company recorded $119 in total restructuring expenses in the fourth quarter of 2006. (See note 2)
As discussed in note 12 — “Related Party Transactions the Company paid $750 in cash and 37,500 shares of the Company’s stock to one of its directors in the third quarter of 2006, and is recorded in Selling, Engineering, General and Administrative Expenses. (See note 12)
As Discussed in Note 11 — “Stock-Based Compensation” the Company put into place a stock-incentive program. The Company recorded $881 in total compensation expense in the fourth quarter which is included in Selling, Engineering, General and Administrative Expenses. (See note 11)
As discussed in Note 8 “Tax Matters Agreement” the Company accrued $508 in the fourth quarter of 2006 due to the IRS audit pursuant to the Tax Matters Agreement, which is included in other (income) loss net.
17. | SUBSEQUENT EVENTS |
On March 11, 2007, the Company announced that it has agreed to acquire all of the equity interests in Copperfield, LLC for $213,000 in cash. Copperfield is a private fabricator and insulator of copper electrical wire and cable in the United States.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 20th day of March 2007.
COLEMAN CABLE, INC
(Registrant)
By | /s/ G. Gary Yetman |
G. Gary Yetman
President and Chief Executive Officer
POWER OF ATTORNEY
The undersigned officers and directors of Coleman Cable, Inc. hereby severally constitute G. Gary Yetman and Richard N. Burger and each of them singly our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below the Annual Report onForm 10-K filed herewith and any and all amendments thereto, and generally do all such things in our name and on our behalf in our capacities as officers and directors to enable Coleman Cable, Inc. to comply with the provisions of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any one of them on this Annual Report onForm 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 20th day of March 2007.
/s/ G. Gary Yetman G. Gary Yetman | Director, President and Chief Executive Officer | |||
/s/ Richard N. Burger Richard N. Burger | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) | |||
/s/ David Bistricer David Bistricer | Director | |||
/s/ Nachum Stein Nachum Stein | Director | |||
/s/ Shmuel D. Levinson Shmuel D. Levinson | Director | |||
/s/ James G. London James G. London | Director |
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Index to Exhibits
Item No. | Description | |||||
3 | .1 | — | Certificate of Incorporation of Coleman Cable, Inc., as filed with the Delaware Secretary of State on October 10, 2006, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
3 | .2 | — | Amended and Restated By-Laws of Coleman Cable, Inc., effective as of October 11, 2006, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
4 | .1 | — | Registration Rights Agreement dated September 28, 2004 between Coleman Cable, Inc. and Wachovia Capital Markets, LLC, as Initial Purchaser under the Purchase Agreement, incorporated herein by reference to ourForm S-4 filed on April 26, 2005. | |||
4 | .2 | — | Indenture dated as of September 28, 2004 among Coleman Cable, Inc., the Note Guarantors from time to time party thereto and Deutsche Bank Trust Company Americas, as Trustee, incorporated herein by reference to ourForm S-4 filed on April 26, 2005. | |||
4 | .3 | — | Registration Rights Agreement, dated October 11, 2006 between Coleman Cable, Inc. and Friedman, Billings, Ramsey & Co., Inc., incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
4 | .4 | — | Shareholders Agreement, dated October 11, 2006 between Coleman Cable, Inc. and its Existing Holders, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
10 | .1 | — | Credit Agreement dated as of September 28, 2004 among Coleman Cable, Inc. and certain of its U.S. Subsidiaries, as Borrowers, the Lenders named therein, Wachovia Bank, National Association, as Administrative Agent, ING Capital LLC and National City Business Credit, Inc., as Syndication Agents, and PNC Bank, National Association and Associated Bank, National Association, as Documentation Agents, incorporated herein by reference to ourForm S-4 filed on April 26, 2005. | |||
10 | .2 | — | First Amendment and Waiver to Credit Agreement dated as of September 30, 2004 among Coleman Cable, Inc. and certain of its U.S. Subsidiaries, as Borrowers, the Lenders named therein, and Wachovia Bank, National Association, as administrative agent, incorporated herein by reference to ourForm S-4 filed on April 26, 2005. | |||
10 | .3 | — | Second Amendment to Credit Agreement dated as of September 30, 2004 among Coleman Cable, Inc. and certain of its U.S. Subsidiaries, as Borrowers, the Lenders named therein, and Wachovia Bank, National Association, as administrative agent, incorporated herein by reference to ourForm S-4 filed on April 26, 2005. | |||
10 | .4 | — | Lease dated as of September 11, 2003, by and between Panattoni Development Company, LLC and Coleman Cable, Inc., as subsequently assumed by HQ2 Properties, LLC pursuant to an Assignment and Assumption of Lease, dated as of August 15, 2005, amended by First Amendment to Lease, dated as of August 15, 2005, by and between HQ2 Properties, LLC and Coleman Cable, Inc., incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2005. | |||
10 | .5 | — | Third Amendment to Credit Agreement dated as of November 2, 2005 among Coleman Cable, Inc. and certain of its U.S. Subsidiaries, as Borrowers, the Lenders named therein, and Wachovia Bank, National Association, as administrative agent, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2005. | |||
10 | .6 | — | Fourth Amendment to Credit Agreement dated as of August 14, 2006, among Coleman Cable, Inc. and certain of its U.S. Subsidiaries, as Borrowers, the Lenders named therein, and Wachovia Bank, National Association, as administrative agent, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
*10 | .7 | — | Amended and Restated Employment Agreement, dated as of September 1, 2006 by and between Coleman Cable, Inc. and G. Gary Yetman, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
*10 | .8 | — | Amended and Restated Employment Agreement, dated as of September 1, 2006 by and between Coleman Cable, Inc. and Richard N. Burger, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. |
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Table of Contents
Item No. | Description | |||||
*10 | .9 | — | Amended and Restated Employment Agreement, dated as of September 1, 2006 by and between Coleman Cable, Inc. and Jeffrey D. Johnston , incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
*10 | .10 | — | Consulting Agreement dated as of October 11, 2006 by and between Coleman Cable, Inc. and David Bistricer, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
*10 | .11 | — | Consulting Agreement dated as of October 11, 2006 by and between Coleman Cable, Inc. and Nachum Stein, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
*10 | .12 | — | 2006 Long-Term Incentive Plan, incorporated herein by reference to our Quarterly Report onForm 10-Q for the quarter ended September 30, 2006. | |||
*10 | .13 | — | Form of Non-Qualified Stock Option Agreement Under the 2006 Long-Term Incentive Plan, incorporated herein by reference to ourForm S-1 filed on November 16, 2006. | |||
21 | .1 | — | Subsidiaries. | |||
24 | .1 | — | Power of Attorney (included on signature page of this filing). | |||
31 | .1 | — | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31 | .2 | — | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32 | .1 | — | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Denotes management contract or compensatory plan or arrangement. |
E-2