UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM __________ TO _________
CII TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-182-82-70
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Ridgefield Blvd., Suite 200, 28806
Asheville, North Carolina (Zip Code)
(Address of principal executive offices)
(828) 670-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
Part 1. Financial Information
Item 1. Financial Statements
CII TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
September 30, December 31,
2001 2000
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 724 $ 807
Accounts receivable (less allowance for doubtful accounts:
September 30, 2001 - $551, 2000 - $447) 25,850 27,629
Inventories 27,661 31,033
Deferred income taxes 2,459 3,598
Other current assets 3,121 3,441
--------- ---------
Total current assets 59,815 66,508
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 34,286 37,337
--------- ---------
OTHER ASSETS:
Cash restricted for environmental remediation 1,318 1,368
Goodwill (net of accumulated amortization: September 30, 2001 - $7,993
2000 - $6,293) 60,883 62,583
Intangible assets, net 24,685 27,282
Other noncurrent assets 615 464
--------- ---------
Total other assets 87,501 91,697
--------- ---------
TOTAL ASSETS $ 181,602 $ 195,542
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 10,845 $ 13,453
Accrued interest 1,270 4,125
Other accrued liabilities 9,355 10,544
Current portion of long-term debt 9,298 8,592
--------- ---------
Total current liabilities 30,768 36,714
LONG-TERM DEBT 167,658 175,738
ACCRUED ENVIRONMENTAL REMEDIATION COSTS 1,473 1,824
DUE TO PARENT 4,407 3,087
DEFERRED INCOME TAXES 11,775 12,811
OTHER LIABILITIES -- 405
--------- ---------
Total liabilities 216,081 230,579
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIENCY:
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding -- --
Additional paid in capital 22,317 22,317
Accumulated deficit (56,539) (57,138)
Accumulated other comprehensive loss (257) (216)
--------- ---------
Total stockholder's deficiency (34,479) (35,037)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY $ 181,602 $ 195,542
========= =========
See notes to unaudited condensed consolidated financial statements
CII TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In Thousands)
Three months ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- -------------- ------------- -------------
Net sales $ 44,063 $ 54,469 $ 145,827 $ 155,898
Cost of sales 31,261 40,321 105,929 116,160
--------- --------- --------- ---------
Gross profit 12,802 14,148 39,898 39,738
--------- --------- --------- ---------
Operating expenses:
Selling expenses 3,013 3,685 10,455 10,434
General and administrative expenses 2,699 3,222 8,811 9,493
Research and development expenses 555 555 1,663 1,491
Amortization of goodwill and other intangibles 1,146 1,230 3,430 3,694
Facility relocation charges 0 21 67 821
--------- --------- --------- ---------
Total operating expenses 7,413 8,713 24,426 25,933
--------- --------- --------- ---------
Operating income 5,389 5,435 15,472 13,805
Interest expense, net (4,198) (4,947) (13,448) (14,714)
Other income, net 252 32 103 112
--------- --------- --------- ---------
Income (loss) before income taxes 1,443 520 2,127 (797)
Provision for income taxes 803 433 1,528 357
--------- --------- --------- ---------
Net income (loss) 640 87 599 (1,154)
Other comprehensive income (loss):
Foreign currency translation adjustment 85 (76) (41) (134)
--------- --------- --------- ---------
Other comprehensive income (loss) 85 (76) (41) (134)
--------- --------- --------- ---------
Comprehensive income (loss) $ 725 $ 11 $ 558 $ (1,288)
========= ========= ========= =========
See notes to unaudited condensed consolidated financial statements
CII TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Nine Months Ended
September 30,
--------------------------
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 599 $ (1,154)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 10,395 10,718
Deferred income taxes 103 (900)
Loss (gain) on sale of assets 51 (66)
Other -- (72)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable 1,779 (3,826)
Inventories 2,909 (2,203)
Current assets 320 (938)
Accounts payable (2,608) 3,456
Accrued liabilities (1,894) 2,275
Accrued interest (2,855) (2,359)
Other assets and liabilities (55) (268)
-------- --------
Net cash provided by operating activities 8,744 4,663
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 425 189
Purchases of property, plant and equipment (3,038) (3,818)
Investment in joint ventures (100) --
Other investing activities (19) (37)
-------- --------
Net cash used in investing activities (2,732) (3,666)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayment) under line of credit 2,600 (825)
Principal payments under long-term debt agreements (9,974) (5,727)
Payment of loan fees -- (213)
Payment of capital lease obligations -- (19)
Advances from parent 1,320 1,017
Repayments of amounts owed to former stockholders of subsidiary -- (786)
Other (41) (112)
-------- --------
Net cash used in financing activities (6,095) (6,665)
NET DECREASE IN CASH AND CASH EQUIVALENTS (83) (5,668)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 807 6,045
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 724 $ 377
======== ========
See notes to unaudited condensed consolidated financial statements
CII Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of CII Technologies, Inc. and its wholly owned subsidiaries (the
"Company"). The Company and it's subsidiaries, Kilovac Corporation ("Kilovac"),
Electro-Mech S.A. de C.V. ("Electro-Mech"), Corcom, Inc. ("Corcom"), and
Products Unlimited Corporation ("Products"), operate facilities in Asheville and
Fairview, NC, Carpenteria, California, Juarez, Mexico, Libertyville, Sterling
and Prophetstown, Illinois, Sabula and Guttenburg, Iowa, Mansfield, Ohio and
Munich, Germany.
The interim financial data as of and for the nine months ended September 30,
2001 and September 30, 2000 is unaudited and has been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information. Accordingly, the interim financial data does not include
all of the information and notes required by accounting principles generally
accepted in the United States for complete financial statements. In management's
opinion, all adjustments (consisting only of adjustments of a normal recurring
nature) necessary for a fair presentation have been included. The December 31,
2000 financial information is derived from audited consolidated financial
statements, but excludes certain disclosures included in the Company's audited
consolidated financial statements. Certain reclassifications have been made to
the 2000 financial information in order to conform with the 2001 presentation.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
year ended December 31, 2000 as well as the other information included in the
Company's annual report filed on Form 10-K. The results of operations and cash
flows for the interim periods presented are not necessarily indicative of the
results for the year ending December 31, 2001 or any other interim period.
2. Recapitalization and Joint Ventures
Recapitalization
On September 18, 1997, the Company entered into a series of recapitalization
transactions (collectively the "Transactions"). The Transactions are described
below.
Code, Hennessy & Simmons III, L.P., certain members of Company management and
certain other investors acquired approximately 87% of the capital stock of CIIT
Holdings, Inc., a Delaware Corporation (the "Parent"). The Company is a wholly
owned subsidiary of the Parent. Certain of the Parent's existing stockholders,
including certain members of management, retained approximately 13% of the
Parent's capital stock (collectively, the "Recapitalization").
Concurrently, the Company issued $95.0 million of 10% Senior Subordinated Notes
due 2004 (the "Old Notes") pursuant to an Indenture, dated September 18, 1997,
by and among The Company, Kilovac, Kilovac International, Inc. ("Kilovac
International") and Norwest Bank Minnesota, National Association (the
"Indenture") through a private placement offering permitted by Rule 144A of the
Securities Act of 1933, as amended (the "Offering"). On January 30, 1998, the
Company filed a registration statement with the Securities and Exchange
Commission for the registration of its 10% Senior Subordinated Notes due 2004,
Series "B" (the "Notes") to be issued in exchange for the Old Notes (the
"Exchange"). The registration statement became effective on January 30, 1998
and the Exchange was completed on March 9, 1998. Additionally, the Company paid
a dividend of approximately $59.4 million to the Parent.
Joint Ventures
In January 1999, the Company formed a joint venture, Shanghai CII Electronics
Co. Ltd. with Shanghai CI Electric Appliance Co. Ltd. (the "Chinese Joint
Venture"). Each party holds 50% of the shares of the company. The Company
accounts for the Chinese Joint Venture using the equity method. The Chinese
Joint Venture is a manufacturer and marketer of relay components. The Company's
initial investment was approximately $144. The Chinese Joint Venture began
production in March 1999. In February, 2001, the Company and Shanghai CI
Electric Appliance Co., Ltd., each invested an additional $100. The outstanding
investment in the Chinese Joint Venture at December 31, 2000 and September 30,
2001 was $266 and $436, respectively.
In November 1995, the Company formed a joint venture in India with Guardian
Controls Ltd., an Indian Company, a bank and certain financial investors. The
Company has a 40% interest in the joint venture which was formed for the purpose
of manufacturing relays, relay components, and sub-assemblies in India for the
domestic Indian market and global markets. The Company accounts for the Indian
joint venture using the equity method. The joint venture started production
during the fourth quarter of 1996. The recorded value of the investment in the
joint venture at December 31, 2000 and September 30, 2001 was $155 and $136,
respectively.
3. Inventories
Components of inventory are as follows:
September 30, December 31,
2001 2000
---- ----
Finished goods $ 8,045 $ 8,498
Work-in-process 8,611 9,600
Raw materials and supplies 16,534 18,894
Reserve for obsolescence (5,529) (5,959)
-------- --------
Total $ 27,661 $ 31,033
======== ========
4. Long -Term Debt
Long-term debt consists of:
September 30, December 31,
2001 2000
---- ----
10% Senior Subordinated Notes $ 95,000 $ 95,000
Senior Credit Facility - Term 69,031 75,380
Senior Credit Facility - Revolver 12,900 13,900
Note Payable 25 50
--------- ---------
176,956 184,330
Less: Current Portion (9,298) (8,592)
--------- ---------
Total $ 167,658 $ 175,738
========= =========
Interest on the 10% Senior Subordinated Notes (the "Notes") is payable
semi-annually in arrears on March 15 and September 15 of each year. The Notes
will mature on September 15, 2004, unless previously redeemed, and the Company
will not be required to make any mandatory redemption or sinking fund payment
prior to maturity except in connection with a change in ownership. Beginning
September 15, 2001, the Notes may be redeemed, in whole or in part, at the
option of the Company, at the redemption prices set forth in the Indenture,
plus, in each case, accrued and unpaid interest and premium, if any, to the date
of the redemption. The Company and its wholly owned subsidiaries, Kilovac,
Kilovac International, Corcom, and Products have guaranteed the Notes on a full,
unconditional, and joint and several basis, which guarantees are fully secured
by the assets of such guarantors.
The Senior Credit Facility provides for a maximum credit facility of $115.0
million limited by outstanding indebtedness under the initial $90.0 million term
loan agreements (as amended) or availability on the borrowing base, as defined
in the loan agreement. All funds may be borrowed as either a base rate loan or
LIBOR loan. For base rate loans and LIBOR loans an applicable margin is added to
the base rate interest rate or the LIBOR interest rate based on a Consolidated
Senior Leverage Ratio Level (as defined in the Senior Credit Facility). The base
rate interest rate is the higher of a Reference Rate (as defined) or the federal
funds rate plus 1/2%. The weighted average borrowing rate, calculated based on
borrowings outstanding at September 30, 2000 and September 30, 2001 under base
rate and LIBOR loans was 9.973% and 6.795%, respectively.
The terms of the Senior Credit Facility and the Notes place certain restrictions
on the Company including, but not limited to, the Company's ability to incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments (as defined), consummate certain asset sales, enter into
certain transactions with affiliates, merge or consolidate with any person or
sell, assign, transfer, lease, convey or otherwise dispose of the assets of the
Company and its subsidiaries. The Senior Credit Facility has a Mandatory
prepayment clause based upon a calculation of excess cash flow (as defined in
the Senior Credit Facility). Excess cash payments of $850 and $398 were made on
March 30, 2000 and 2001, respectively. The Senior Credit Facility also contains
financial covenants including interest coverage ratios, leverage ratios,
limitations on capital expenditures and minimum levels of earnings before
interest, taxes, depreciation and amortization, as defined by the Senior Credit
Facility. As of September 30, 2001, the Company was in compliance with all of
the terms of the Notes and the covenants of the Senior Credit Facility. The
Company, its wholly owned subsidiaries, including Kilovac, Kilovac
International, Corcom, Products and the Parent have guaranteed the Senior Credit
Facility on a full, unconditional, and joint and several basis which guarantees
are fully secured by the assets of such guarantors.
Letters of credit outstanding under the Senior Credit Facility were $100 at
September 30, 2001 and December 31, 2000.
As of September 30, 2001, the Company had available unused borrowing capacity of
approximately $12.0 million under the Senior Credit Facility.
5. Contingencies
Litigation - From time to time the Company is a party to certain lawsuits and
administrative proceedings that arise in the conduct of its business. While the
outcome of the lawsuits and proceedings cannot be predicted with certainty,
management believes that the lawsuits and proceedings, either singularly or in
the aggregate, will not have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
Environmental Remediation - The Company has been identified as a potentially
responsible party ("PRP") for investigation and cleanup costs at two sites under
the Federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"). CERCLA provides for joint and several liability
for the costs of remediating a site, except under certain circumstances.
However, the Company believes it will be allocated responsibility for a
relatively small percentage of the cleanup costs at each of these sites, and in
both instances other PRP's will also be required to contribute to such costs.
Although the Company's total
liability for cleanup costs at these sites cannot be predicted with certainty,
the Company does not currently believe that its share of those costs will have a
material adverse effect on the Company's financial position or results of
operations.
Soil and groundwater contamination has been identified at and about the
Company's Fairview, North Carolina facility resulting in that site's inclusion
in the North Carolina Department of Environmental, Health & Natural Resource's
Inactive Hazardous Waste Sites Priority List. The Company believes that the
Fairview contamination relates to the past activities of a prior owner of the
Fairview property (the "Prior Owner"). On May 11, 1995, the Company entered into
a settlement agreement (the "Settlement Agreement) with the Prior owner,
pursuant to which the Prior Owner agreed to provide certain funds for the
investigation and remediation of the Fairview contamination in exchange for a
release of certain claims by the Company. In accordance with the Settlement
Agreement, the Prior Owner has placed $3.0 million in escrow to fund further
investigation, the remediation of contaminated soils and the installation and
running of a groundwater remediation system at the Fairview facility. The
Company has used escrowed funds to complete investigation and soil cleanup
activities, construct a groundwater treatment system and run that system for the
past four years. As of September 30, 2001, approximately $1.3 million remained
in the interest bearing escrow account. The Company has entered into an
Administrative Order on Consent with the State of North Carolina to clean up the
site and is responsible for investigation, soil remediation and groundwater
remediation costs in excess of the escrowed amount, if any. The Company does not
believe that the total investigation and remediation costs will exceed the
amounts along with the interest earned on those amounts that the Prior Owner has
deposited pursuant to the Settlement Agreement, to such an extent that it will
have a materially adverse affect on the Company's financial position or results
of operations. The Company has accrued a liability for the total remediation
costs of $1.5 million as of September 30, 2001. The Company, as the current
owner of a contaminated property, could be held responsible for the entire cost
of investigating and remediating the site.
Assets recorded in relation to the above environmental liabilities are
approximately $1.37 million at December 31, 2000 and $1.32 at September 30,
2001.
In connection with the Company's purchase of certain assets and certain
liabilities of Hartman Electrical Manufacturing ("Hartman"), a division of
Figgie International, Inc., which is now known as Scott Technologies, Inc.
("STI") (the "Hartman Acquisition"), the Company entered into an agreement
pursuant to which it leased from a wholly-owned subsidiary of STI a
manufacturing facility in Mansfield, Ohio, (the "Mansfield Property") at which
Hartman has conducted operations (the "Lease"). The Mansfield Property may
contain contamination at levels that will require further investigation and may
require soil and/or groundwater remediation. The Lease included an indemnity of
the lessor to the Company, guaranteed by STI, for certain environmental
liabilities in connection with the Mansfield Property, subject to a dollar
limitation of $12.0 million. On or about January 5, 2000, the Company entered
into an agreement with the Lessor in which it purchased the property and certain
equipment. This agreement followed the decision by the Lessor's registered
environmental consultant that no further environmental remediation was needed at
the property so long as the property was restricted to industrial usage. The
agreement preserves the Lease indemnity but reduces the indemnity cap to
$1,000,000 over ten years if the former owner does not seek and obtain a
covenant not to sue from the Ohio EPA relating to the site and reduces the cap
to $0 over ten years if it obtains a covenant not to sue relating to the site
from the Ohio EPA. In either event, the agreement leaves in place the Company's
right to seek contribution or indemnity under common law or statute from STI for
environmental problems. As an owner of the Mansfield Property, the Company may
become subject to liability for remediation of such contamination at and/or from
such property, which liability may be joint and several except under certain
circumstances. The Company believes that actual remediation costs, if any, will
not exceed STI's indemnification obligation. If there are remediation costs that
the Company is held liable for and the Company is unable to obtain, or is
delayed in obtaining indemnification from STI for any reason, the Company could
be adversely affected. The Company does not maintain environmental impairment
liability insurance.
6. Segment Disclosure
The Company has five business units which have been aggregated into two
reportable segments that are managed separately because each operating segment
represents a strategic business platform that offers different products and
serves different markets.
The Company's two reportable operating segments are: (i) the High Performance
Group ("HPG") and (ii) the Specialized Industrial Group ("SIG"). HPG includes
Communications Instruments Division, Kilovac and Hartman. Products manufactured
by HPG include high performance signal level relays and power relays, high
voltage and power switching relays, solenoids and other electronic products. SIG
includes Corcom, Products and the Midtex Brand. The SIG group manufactures RFI
filters, general purpose relays, transformers and definite purpose contactors.
The accounting policies of the operating segments are the same as those of the
Company. Intersegment sales, which are eliminated in consolidation, are recorded
at standard cost.
In evaluating financial performance, management focuses on operating income as a
segment's measure of profit or loss. Operating income is before interest
expense, interest income, other income and expense, income taxes and
extraordinary items. Financial information for the Company's operating segments
and a reconciliation of reportable segment net sales, operating income, and
assets to the Company's consolidated totals are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Net sales: ---- ---- ---- ----
High Performance Group $ 23,178 $ 20,873 $ 69,065 $ 60,782
Specialized Industrial Group 20,885 33,628 76,780 95,511
Intersegment elimination (1) - (32) (18) (385)
--------- --------- ---------- ---------
$ 44,063 $ 54,469 $ 145,827 $ 155,898
========= ========= ========= =========
Operating income:
High Performance Group $ 5,763 $ 3,240 $ 15,385 $ 9,114
Specialized Industrial Group 444 3,134 2,758 7,341
Corporate (818) (939) (2,671) (2,650)
--------- --------- ---------- ---------
5,389 5,435 15,472 13,805
--------- --------- ---------- ---------
Interest expense, net (4,198) (4,947) (13,448) (14,714)
Other income (expense), net 252 32 103 112
--------- --------- ---------- ---------
Consolidated loss before income taxes $ 1,443 $ 520 $ 2,127 $ (797)
========= ========= ========= =========
Depreciation and amortization expense:
High Performance Group $ 2,569 $ 2,913
Specialized Industrial Group 6,874 6,933
Corporate 88 17
--------- ---------
9,531 9,863
Amortization of debt issuance costs (2) 864 855
--------- ---------
Consolidated depreciation and amortization expense $ 10,395 $ 10,718
========= =========
Purchases of property, plant and equipment:
High Performance Group $ 1,643 $ 1,550
Specialized Industrial Group 1,380 2,131
Corporate 15 137
--------- ---------
Consolidated capital expenditures $ 3,038 $ 3,818
========= =========
September 30, December 31,
2001 2000
---- ----
Assets:
High Performance Group $ 63,671 $ 63,460
Specialized Industrial Group 114,451 126,211
Corporate 3,480 5,871
---------- ----------
Consolidated assets $ 181,602 $ 195,542
========== ==========
(1) - represents net sales between HPG and SIG
(2) - included on the consolidated statements of cash flows as depreciation
and amortization and included in the consolidated statement of operations
as interest expense. Management does not consider these costs in managing
the operations of the reportable segments.
7. Guarantor Subsidiaries
The 10% Senior Subordinated Notes due on September 15, 2004 are fully and
unconditionally guaranteed on a secured, joint and several basis by Kilovac,
Kilovac International, Corcom, and Products, all of which are wholly owned
subsidiaries of CII Technologies, Inc. (the "Guarantor Subsidiaries"). The
following unaudited condensed consolidating financial data illustrates the
composition of CII Technologies, Inc. (the "Primary Guarantor") and the
Guarantor Subsidiaries as of September 30, 2000 and 2001.
Investments in Guarantor Subsidiaries are accounted for by the Primary Guarantor
on the equity method for purposes of the supplemental consolidating
presentation. Earnings of Guarantor Subsidiaries are, therefore, reflected in
the Primary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate the Primary Guarantor's investment in Guarantor
Subsidiaries and intercompany balances and transactions.
Condensed Consolidating Balance Sheet
As of September 30, 2001
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
---------------- ------------ ----------- ----
Cash and cash equivalents $ 506 $ 218 $ - $ 724
Accounts receivable 10,667 15,183 - 25,850
Inventories 14,117 13,544 - 27,661
Other current assets 2,638 2,942 - 5,580
------------------- ------------ ----------- ---------
Total current assets 27,928 31,887 - 59,815
Property, plant and equipment, net 9,009 25,277 - 34,286
Goodwill and other intangible assets, net 7,780 77,788 - 85,568
Investments and intercompany with
and in subsidiaries 111,945 (116,044) 4,099 -
Other assets 996 937 - 1,933
------------------- ------------ ----------- ---------
Total other assets 120,721 (37,319) 4,099 87,501
Total assets $ 157,658 $ 19,845 $ 4,099 $ 181,602
=================== ============= =========== =========
Accounts payable $ 4,246 $ 6,599 $ - $ 10,845
Other current liabilities 15,153 4,770 - 19,923
------------------- ------------ ----------- ---------
Total current liabilities 19,399 11,369 - 30,768
Long term debt 167,658 - - 167,658
Other non current liabilities 5,080 12,575 - 17,655
------------------- ------------ ----------- ---------
Total liabilities 192,137 23,944 - 216,081
Total stockholder's equity (34,479) (4,099) 4,099 (34,479)
------------------- ------------ ----------- ---------
Total liabilities and stockholder's equity $ 157,658 $ 19,845 $ 4,099 $ 181,602
=================== ============ =========== =========
Condensed Consolidating Balance Sheet
As of December 31, 2000
(In thousands)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
----------------- ------------ ----------- ----
Cash and cash equivalents $ 654 $ 153 $ - $ 807
Accounts receivable 9,048 18,581 - 27,629
Inventories 14,319 16,714 - 31,033
Other current assets 3,590 3,449 - 7,039
------------------ ------------ ----------- ----------
Total current assets 27,611 38,897 - 66,508
Property, plant and equipment, net 9,875 27,462 - 37,337
Goodwill and other intangible assets, net 8,825 81,040 - 89,865
Investments and intercompany with and in
and in subsidiaries 120,573 (125,326) 4,753 -
Other assets 1,789 43 - 1,832
------------------ ------------ ----------- ----------
Total other assets 131,187 (44,243) 4,753 91,697
Total assets $ 168,673 $ 22,116 $ 4,753 $ 195,542
=================== ============ =========== ==========
Accounts payable $ 4,497 $ 8,956 $ - $ 13,453
Other current liabilities 17,462 5,799 - 23,261
------------------ ------------ ----------- ----------
Total current liabilities 21,959 14,755 - 36,714
Long term debt 175,738 - - 175,738
Other non current liabilities 6,013 12,114 - 18,127
------------------ ------------ ----------- ----------
Total liabilities 203,710 26,869 - 230,579
Total stockholder's equity (35,037) (4,753) 4,753 (35,037)
------------------ ------------ ----------- ----------
Total liabilities and stockholder's equity $ 168,673 $ 22,116 $ 4,753 $ 195,542
================== ============ =========== ==========
Condensed Consolidated Statement of Income
For the nine months ended September 30, 2001
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net sales $ 56,725 $ 89,120 $ (18) $ 145,827
Cost of sales 38,123 67,824 (18) 105,929
--------- --------- --------- ---------
Gross margin 18,602 21,296 -- 39,898
Operating and other expenses 15,162 24,686 (2,077) 37,771
--------- --------- --------- ---------
Income (loss) before income taxes 3,440 (3,390) 2,077 2,127
Income tax expense (benefit) 2,841 (1,313) -- 1,528
--------- --------- --------- ---------
Net income (loss) $ 599 $ (2,077) $ 2,077 $ 599
========= ========= ========= =========
Condensed Consolidated Statement of Income
For the nine months ended September 30, 2000
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net sales $ 51,615 $ 104,678 $ (395) $ 155,898
Cost of sales 38,693 77,862 (395) 116,160
--------- --------- --------- ---------
Gross margin 12,922 26,816 -- 39,738
Operating and other expenses 13,813 26,691 31 40,535
--------- --------- --------- ---------
Income (loss) before income taxes (891) 125 (31) (797)
Income tax expense (benefit) 263 94 -- 357
--------- --------- --------- ---------
Net income (loss) $ (1,154) $ 31 $ (31) $ (1,154)
========== ========== ========== ==========
Condensed Consolidated Statement of Income
For the three months ended September 30, 2001
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net sales $ 18,666 $ 25,397 $ -- $ 44,063
Cost of sales 11,798 19,463 -- 31,261
-------- -------- -------- --------
Gross margin 6,868 5,934 -- 12,802
Operating and other expenses 4,777 7,477 (895) 11,359
-------- -------- -------- --------
Income (loss) before income taxes 2,091 (1,543) 895 1,443
Income tax expense (benefit) 1,451 (648) -- 803
-------- -------- -------- --------
Net income (loss) $ 640 $ (895) $ 895 $ 640
======== ======== ======== ========
Condensed Consolidated Statement of Income
For the three months ended September 30, 2000
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net sales $ 17,492 $ 37,009 $ (32) $ 54,469
Cost of sales 13,328 27,025 (32) 40,321
-------- -------- -------- --------
Gross margin 4,164 9,984 -- 14,148
Operating and other expenses 4,090 8,994 544 13,628
-------- -------- -------- --------
Income (loss) before income taxes 74 990 (544) 520
Income tax expense (benefit) (13) 446 -- 433
-------- -------- -------- --------
Net income (loss) $ 87 $ 544 $ (544) $ 87
======== ======== ======== ========
Condensed Consolidated Statement of Cash Flows
For the nine months ended September 30, 2001
(In thousands)
(Unaudited)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net cash provided by (used in)
operating activities $ 604 $ 6,063 $ 2,077 $ 8,744
Cash flows from investing activities:
Purchases of property,
plant & equipment (654) (2,384) -- (3,038)
Other investing activities 306 -- -- 306
------- ------- ------- -------
Cash used in investing activities (348) (2,384) -- (2,732)
Cash flows from financing activities:
Repayments on long term debt (7,374) -- -- (7,374)
Other financing activities 1,320 (41) -- 1,279
------- ------- ------- -------
Cash provided by (used in) financing activities (6,054) (41) -- (6,095)
------- ------- ------- -------
Net increase (decrease) in cash (5,798) 3,638 2,077 (83)
Cash and cash equivalents, beginning of period 654 153 -- 807
------- ------- ------- -------
Cash and cash equivalents, end of period $(5,144) $ 3,791 $ 2,077 $ 724
======= ======= ======= =======
Condensed Consolidated Statement of Cash Flows
For the nine months ended September 30, 2000
(In thousands)
CII Technologies, Inc Guarantor
(Primary Guarantor) Subsidiaries Elimination Cons
------------------- ------------ ----------- ----
Net cash provided by (used in)
operating activities $ (4,657) $ 7,264 $ 2,056 $ 4,663
Cash flows from investing activities:
Purchases of property,
plant & equipment (1,269) (2,549) -- (3,818)
Other investing activities 189 (37) -- 152
-------- -------- -------- --------
Cash used in investing activities (1,080) (2,586) -- (3,666)
Cash flows from financing activities:
Repayments on long term debt (6,552) -- -- (6,552)
Other financing activities (1) (112) -- (113)
-------- -------- -------- --------
Cash used in financing activities (6,553) (112) -- (6,665)
-------- -------- -------- --------
Net (decrease) increase in cash (12,290) 4,566 2,056 (5,668)
Cash and cash equivalents, beginning of period 5,976 69 -- 6,045
-------- -------- -------- --------
Cash and cash equivalents, end of period $ (6,314) $ 4,635 $ 2,056 $ 377
======== ======== ======== ========
8. New Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 133, as amended by SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The new standard establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company has
not engaged in the past and does not anticipate engaging in the future in
derivative or hedging activities. Therefore, the adoption of SFAS No. 138 has
not had a significant impact on its financial condition or results of
operations.
The Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other
Intangible Assets, effective for all fiscal quarters of fiscal years beginning
after January 1, 2002. The new standard discontinues amortization of goodwill
and indefinite lived intangible assets, and requires an annual review for
impairment. The Company has not yet measured the impact on its results of
operations of the adoption of SFAS No. 142.
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
Some of the matters discussed below and elsewhere herein contain forward-looking
statements regarding the future performance of the Company and future events.
These forward looking statements are identified by the use of words such as
"plans", "will", "expects", "intends" and similar words indicating a discussion
of something other than historical facts. These matters involve risks and
uncertainties that could cause actual results to differ materially from the
statements contained herein. The following discussion and analysis provides
information which management believes is relevant to an understanding of the
operations and financial condition of the Company. This discussion and analysis
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included in this quarterly report as well as in the
Registrant's Annual Report for the year ended December 31, 2000 on Form 10-K.
Results of Operations
The following table sets forth information derived from the condensed
consolidated statements of operations expressed as a percentage of net sales for
the periods indicated. There can be no assurance that the trends in operating
results will continue in the future.
Nine months Ended Three Months Ended
September 30 September 30
-------------------------------------------
2001 2000 2001 2000
----- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 72.6% 74.5% 70.9% 74.0%
Gross profit 27.4% 25.5% 29.1% 26.0%
Selling expenses 7.2% 6.7% 6.8% 6.8%
General and administrative expenses 6.0% 6.1% 6.1% 5.9%
Research and development expenses 1.1% 1.0% 1.3% 1.0%
Amortization of goodwill and other intangibles 2.4% 2.4% 2.7% 2.3%
Facility relocation charges 0.1% 0.5% 0.0% 0.0%
Operating income 10.6% 8.8% 12.2% 10.0%
Discussion of Consolidated Results of Operations
Nine months Ended September 30, 2001 Compared to Nine months Ended September 30,
2000
Net sales of the Company for the nine months ended September 30, 2001, decreased
$10.1 million, or 6.5%, to $145.8 million from $155.9 million for the
corresponding period in 2000. This decrease is due primarily to (i) a continued
general economic slowdown in some of the Company's served markets and (ii)
continued price pressure partially offset by (iii) strong demand in the
military/defense and commercial airframe markets, (iv) introduction of new
products, (v) expanded geographic marketing initiatives, and (vi) continued
competitive share gain.
Gross profit of the Company for the nine months ended September 30, 2001,
increased $160,000, or less than 1%, to $39.9 million from $39.7 million for the
corresponding period in 2000. Gross profit as a percentage of net sales
increased to 27.4% from 25.5% for the same period in 2000. The increase in gross
profit as a percentage of net sales is due primarily to continued strong cost
reductions and manufacturing efficiencies partially offset by continued price
pressure.
Selling expenses for the Company for the nine months ended September 30, 2001,
remained the same at $10.4 million for the corresponding period in 2000. Selling
expenses as a percentage of net sales increased to 7.2% from 6.7% in the same
period in 2000. This increase in selling expenses as a percentage of net sales
is due primarily to the same expenses necessary to promote the Company's
business during a low revenue period.
General and administrative expenses for the Company for the nine months ended
September 30, 2001, decreased $700,000, or 7.2%, to $8.8 million from $9.5
million in 2000. General and administrative expenses as a percentage of net
sales decreased to 6.0% from 6.1% for the corresponding period in 2000. This
decrease in general and administrative expenses as a percentage of net sales is
due primarily to the control of costs and continued cost reductions.
Research and development expenses for the Company for the nine months ended
September 30, 2001, increased $172,000, or 11.5%, to $1.7 million from $1.5
million for the corresponding period in 2000. Research and development expenses
as a percentage of net sales increased to 1.1% from 1.0% for the same period in
2000. Research and development expenses as a percentage of net sales increased
primarily due to increased new product development activities.
Amortization of goodwill and other intangibles for the Company for the nine
months ended September 30, 2001, decreased to $3.4 million from $3.7 million for
the corresponding period in 2000.
Facility relocation charges for the nine months ended September 30, 2001 were
$67,000 as compared to $821,000 for the same period in 2000. The charges in 2001
and in 2000 were in connection with the Company's planned relocation of its
Midtex Facility. The facility relocation charges include but are not limited to
employee separation charges and costs to relocate the product lines to the
Company's Joint Ventures. The relocation of the Midtex Facility was completed by
April 30, 2001.
Interest expense of the Company for the nine months ended September 30, 2001,
decreased $1.3 million or 8.6%, to $13.4 million from $14.7 million for the
corresponding period in 2000. The decrease was due primarily to decreased
interest rates and lower debt.
The income tax expense of the Company for the nine months ended September 30,
2001 was 71.8% of income before income taxes as compared to an income tax
expense of 44.8% of loss before income taxes for the corresponding period in
2000. The high effective tax rates are due primarily to a portion of the
amortization of goodwill and intangibles not deductible for tax purposes.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Net sales of the Company for the quarter ended September 30, 2001, decreased
$10.4 million, or 19.1%, to $44.1 million from $54.5 million for the
corresponding period in 2000. This decrease is due primarily to (i) a continued
general economic slowdown in some of the Company's served markets, and (ii)
continued price pressure, partially offset by (iii) strong demand in the
military/defense and commercial airframe markets, (iv) introduction of new
products, (v) expanded geographic marketing initiatives, and (vi) continued
competitive share gain.
Gross profit of the Company for the quarter ended September 30, 2001, decreased
$1.3 million, or 9.5%, to $12.8 million from $14.1 million for the corresponding
period in 2000. Gross profit as a percentage of net sales increased to 29.1%
from 26.0% for the same period in 2000. The increase in gross profit as a
percentage of net sales is due primarily to continued strong cost reductions
and manufacturing efficiencies partially offset by continued price pressure.
Selling expenses for the Company for the quarter ended September 30, 2001,
decreased $672,000, or 18.2%, to $3.0 million from $3.7 million for the
corresponding period in 2000. Selling expenses as a percentage of net sales
remained the same at 6.8% in the same period in 2000.
General and administrative expenses for the Company for the quarter ended
September 30, 2001, decreased $523,000, or 16.2%, to $2.7 million from $3.2
million in 2000. General and administrative expenses as a percentage of net
sales increased to 6.1% from 5.9% for the corresponding period in 2000. This
increase in general and administrative expenses as a percentage of net sales is
due primarily to lower net sales partially offset by the control of costs and
continued cost reductions.
Research and development expenses for the Company for the quarter ended
September 30, 2001, remained the same at $555,000 for the corresponding period
in 2000. Research and development expenses as a percentage of net sales
increased to 1.3% from 1.0% for the corresponding period in 2000. Research and
development expenses as a percentage of net sales increased primarily due to
lower net sales and increased new product development activities.
Amortization of goodwill and other intangibles for the Company for the quarter
ended September 30, 2001, decreased $84,000 or 6.8% to $1.1 million from $1.2
million in 2000.
There were no facility relocation charges for the three months ended September
30, 2001 as compared to $21,000 for the same period in 2000. The charges in 2000
were in connection with the Company's planned relocation of its Midtex Facility.
The facility relocation charges include but are not limited to employee
separation charges and costs to relocate the product lines to the Company's
Joint Ventures. The relocation of the Midtex Facility was completed by April 30,
2001.
Interest expense of the Company for the three months ended September 30, 2001,
decreased $749,000, or 15.1%, to $4.2 million from $4.9 million for the
corresponding period in 2000. The decrease was due primarily to decreased
interest rates and lower debt.
The income tax expense of the Company for the three months ended September 30,
2001 was 55.6% of profit before income taxes as compared to an income tax
expense of 83.3% of income before income taxes for the corresponding period in
2000. The high effective tax rates are due primarily to a portion of the
amortization of goodwill and intangibles not deductible for tax purposes.
Segment Discussion
Nine months Ended September 30, 2001 Compared to Nine months Ended September 30,
2000
High Performance Group
Net sales of HPG for the nine months ended September 30, 2001 increased by $8.3
million, or 13.6%, to $69.1 million from $60.8 million for the corresponding
period in 2000. This increase is due primarily to (i) strong demand in the
military/defense and commercial airframe markets, (ii) the introduction of new
products, (iii) expanded geographic marketing initiatives, and (iv) continued
competitive share gain partially offset by (v) continued price pressure.
Operating income of HPG for the nine months increased $6.3 million, or 68.8%, to
$15.4 million from $9.1 million for the same period in 2000. Operating income of
HPG as a percentage of HPG net sales increased to 22.3% from 15.0% for the same
period in 2000. The increase in operating income as a percentage of net sales is
due primarily to (i) the control of fixed costs, and (ii) continued strong cost
reductions and manufacturing efficiencies partially offset by (iii) continued
price pressure, and (iv) higher sales commission on higher revenues.
Specialized Industrial Group
Net sales of SIG for the nine months ended September 30, 2001 decreased $18.7
million or 19.6%, to $76.8 million from $95.5 million for the same period in
2000. This decrease is due primarily to (i) a continued general economic
slowdown in some of the Company's served markets, and (ii) continued price
pressure, partially offset by (iii) the introduction of new products, and (iv)
continued competitive share gain.
Operating income of SIG for the nine months ended decreased $4.5 million, or
62.4%, to $2.8 million from $7.3 million for the same period in 2000. Operating
income of SIG as a percentage of SIG net sales decreased to 3.6% from 7.7% for
the same period in 2000. This decrease in operating income as a percentage of
net sales is due primarily to (i) a continued general economic slowdown in some
of the Company's served markets, (ii) labor and material inflation, (iii)
unfavorable currency exchange rates, (iv) continued competitive price pressures
and (v) increased selling expenses necessary to promote the Company's business,
partially offset by (vi) continued strong cost reductions and manufacturing
efficiencies, and (vii) the control of fixed costs.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
High Performance Group
Net sales of HPG for the quarter ended September 30, 2001 increased by $2.3
million, or 11.0%, to $23.2 million from $20.9 million for the corresponding
period in 2000. This increase is due primarily to (i) strong demand in the
military/defense and commercial airframe markets, (ii) introduction of new
products, (iii) expanded geographic marketing initiatives, and (iv) continued
competitive share gain partially offset by (v) continued price pressure.
Operating income of HPG for the quarter ended September 30, 2001 increased $2.6
million, or 77.9%, to $5.8 million from $3.2 million for the same period in
2000. Operating income of HPG as a percentage of HPG net sales increased to
24.9% from 15.5% for the same period in 2000. The increase in operating income
as a percentage of net sales is due primarily to (i) the control of fixed costs,
and (ii) continued strong cost reductions and manufacturing efficiencies
partially offset by (iii) continued price pressure, and (iv) higher sales
commission on higher revenues.
Specialized Industrial Group
Net sales of SIG for the quarter ended September 30, 2001 decreased $12.7
million, or 37.9%, to $20.9 million from $33.6 million for the same period in
2000. This decrease is due primarily to (i) continued general economic slowdown
in some of the Company's served markets compared to a prior year peak demand in
those same served markets and (ii) continued price pressure, partially offset by
(iii) the introduction of new products, and (iv) continued competitive share
gain.
Operating income of SIG for the quarter ended September 30, 2001 decreased $2.7
million, or 85.8%, to $444,000 from $3.1 million for the same period in 2000.
Operating income of SIG as a percentage of SIG net sales decreased to 2.1% from
9.3% for the same period in 2000. This decrease in operating income as a
percentage of net sales is due primarily to (i) a continued general economic
slowdown in some of the Company's served markets, (ii) unfavorable currency
exchange rates, (iii) continued competitive price pressure, partially offset
(iv) continued strong cost reductions and manufacturing efficiencies, and (v)
the control of fixed costs.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30,
2001 increased $4.0 million to $8.7 million from $4.7 million for the same
period in 2000. This increase in cash provided by operations is due primarily to
(i) an increase in income, (ii) lower interest payments, and (iii) continued
focus and improvements on all elements of working capital and operating cash
flows.
The days' sales outstanding for accounts receivable was approximately 52.2 trade
days at September 30, 2001 and 49.6 at December 31, 2000.
The Company's inventories decreased from $31.0 million at December 31, 2000 to
$27.7 million at September 30, 2001. Inventory turns were 4.6 at September 30,
2001 and 4.8 at December 31, 2000. The Company continually focuses on improving
its inventory management.
The Company has historically financed its operations through a combination of
internally generated funds and secured borrowings.
Capital expenditures were $3.0 million for the nine months ended September 30,
2001 and $3.8 million for the corresponding period in 2000. Additional
investments in joint ventures was $100,000 for the nine months ended September
30, 2001.
The Company has a borrowing arrangement with a bank which provides for a maximum
credit facility of $115.0 million (including $3.0 million for stand-by letters
of credit), limited by outstanding indebtedness under the initial $35.0 million
term loan agreement ("Tranche A") and the $55.0 million term loan agreement
("Tranche B") or availability on the borrowing base, as defined in the loan
agreement (the "Senior Credit Facility"). The amount available for borrowings
under the Senior Credit Facility at September 30, 2001 was $12.0 million. All
funds may be borrowed as either a base rate loan or LIBOR loan. For base rate
loans and LIBOR loans an applicable margin is added to the base rate interest
rate or the LIBOR interest rate based on a Consolidated Senior Leverage Ratio
Level (as defined in the Senior Credit Facility). The base rate interest rate is
the higher of a Reference Rate (as defined) or the federal funds rate plus 1/2%.
The weighted average borrowing rate, calculated based on borrowings outstanding
at September 30, 2001 and September 30, 2000 under base rate and LIBOR loans was
6.795% and 9.973%, respectively. The Senior Credit Facility requires the Company
to pay commitment fees of 0.5% on the undrawn amount of the Senior Credit
Facility, subject to adjustment based on the Consolidated Senior Leverage Ratio
of the Company.
Although there can be no assurances, the Company anticipates that its cash flow
generated from operations and borrowings under the Senior Credit Facility will
be sufficient to fund the Company's working capital needs, planned capital
expenditures, scheduled interest payments and its business strategy for the next
twelve months.
However, the Company may require additional funds if it enters into strategic
alliances, acquires significant assets or businesses or makes significant
investments in furtherance of its growth strategy. The ability of the Company to
satisfy its capital requirements will depend upon the future financial
performance of the Company, which in turn will be subject to general economic
conditions and to financial, business, and other factors, including factors
beyond the Company's control.
Instruments governing the Company's indebtedness, including the Senior Credit
Facility and the Company's Senior Subordinated Notes (the "Notes"), contain
financial and other covenants that restrict, among other things, the Company's
ability to incur additional indebtedness, incur liens, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, merge or consolidate with any other person
or sell, assign transfer, lease, convey or otherwise dispose of substantially
all of the assets of the Company.
Such limitations, together with the highly leveraged nature of the Company,
could limit corporate and operating activities, including the Company's ability
to respond to changing market conditions, to provide for unanticipated capital
investments or to take advantage of business opportunities.
The Company was in compliance with its financial covenants as of September 30,
2001. The Senior Credit Facility has a mandatory prepayment clause (the "Excess
Cash Payment"), which requires that excess cash flow (as defined in the Senior
Credit Facility) be used to prepay the Senior Credit Facility within 90 days
after the last day of the fiscal year. The Excess Cash Payment was $850 and $398
for the years ended December 31, 1999 and 2000, respectively.
Adjusted EBITDA
Adjusted EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization, before any gain (loss) on disposal of
assets, adjusted for extraordinary, unusual, and nonrecurring items, the non
cash charges resulting from the Parent stock options granted in 2000 and in
2001, and facility relocation charges. Adjusted EBITDA is not intended to
represent cash flow from operations or net income as defined by generally
accepted accounting principles and should not be considered as a measure of
liquidity or an alternative to, or more meaningful than, operating income or
operating cash flow as an indication of the Company's operating performance.
Adjusted EBITDA is included herein because management believes that certain
investors find it a useful tool for measuring the Company's ability to service
its debt. There are no significant commitments for expenditures of funds not
contemplated by this measure of adjusted EBITDA. Adjusted EBITDA as presented
may not be comparable to other similarly titled measures presented by other
companies and could be misleading unless substantially all companies and
analysts calculate adjusted EBITDA the same.
Adjusted EBITDA for the nine months ended September 30, 2001 increased to $25.3
million from $24.5 million for the corresponding period in 2000. Adjusted EBITDA
for the three months ended September 30, 2001 increased to $8.8 million from
$8.7 million for the same period in 2000.
Inflation
- ---------
Management does not believe that inflation historically had a significant effect
on the Company's business. While Management does believe that inflation began
to have an unfavorable impact on the Company's business during 1999 and 2000 due
to a tighter US labor market which Management believes has caused labor costs to
increase at a higher percentage level than in previous years, the effect of
this inflation has begun to dissipate in 2001.
Disclosure Regarding Forward-Looking Statements
- -----------------------------------------------
Statements made by the Company which are not historical facts are forward
looking statements that involve risks and uncertainties. Actual results could
differ materially from those expressed or implied in forward looking statements.
All such forward looking statements are subject to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These forward looking
statements are identified by the use of words such as "plans", "will",
"expects", "intends" and similar words indicating a discussion of something
other than historical facts. Important factors that could cause future financial
performance to differ materially from past results and from those expressed or
implied in this document, include, without limitation, the risks of acquisition
of businesses (including limited knowledge of the businesses acquired and
potential misrepresentations from sellers), changes in business strategy or
development plans, dependence on independent sales representatives and
distributors, environmental regulations, availability of financing, competition,
reliance on key management personnel, ability to manage growth, loss of
customers and a variety of other factors. The Company makes no commitment to
update any forward looking statements or to disclose any facts, events, or
circumstances after the date hereof that may affect the accuracy of any forward
looking statement.
Item 3:
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risks from changes in interest rates and
foreign currency exchange rates which may adversely affect its results of
operations and financial condition. The Company seeks to minimize these risks
through its regular operating and financing activities.
The Company engages in neither speculative nor derivative financial or trading
activities.
Interest Rate Risk
The Company has exposure to interest rate risk related to certain instruments
entered into for other than trading purposes. Specifically, the Company has in
place the Senior Credit Facility, which consists of two term loans, Tranche A
with a balance of $16.1 million at September 30, 2001, Tranche B with a balance
of $52.9 million at September 30, 2001 and $12.9 million outstanding on the
Revolving Credit Facility all of which bear interest at variable rates.
Borrowings under the Senior Credit Facility bear interest based on the Lenders'
Reference Rate (as defined in the credit agreement) or LIBOR Rate plus an
applicable margin. While changes in the Reference Rate or the LIBOR Rate could
affect the cost of funds borrowed in the near future, only $1.4 million of the
Revolving Credit Facility at September 30, 2001 was carried at a variable rate,
with the remainder of the Senior Credit Facility on short term fixed rates. The
Company, therefore, believes the effect, if any, of reasonable possible
near-term changes in interest rates on the Company's consolidated financial
position, results of operations and cash flows would not be material.
The Company's 10% Senior Subordinated Notes ("the Notes") are at a fixed
interest rate of 10%. As a result, a change in the fixed rate interest market
would change the estimated fair market value of its fixed rate long-term bond
debt. The Company believes that a 10% change in the long term interest rates
would not have a material effect on the Company's financial conditions, results
of operations or cash flows.
While the Company historically has not used interest rate swaps, it may, in the
future, use interest rate swaps to assist in managing the Company's overall
borrowing costs and reduce exposure to adverse fluctuations in interest rates.
Foreign Currency Exchange Risk
The Company has seven foreign subsidiaries or divisions, located in Mexico,
Germany, Jamaica, Barbados and Hong Kong as well as Joint Ventures in India and
China. The Company generates about 18% of its net sales from
customers located outside the United States. The Company's ability to sell its
products in these foreign markets may be affected by changes in economic,
political or market conditions in the foreign markets in which it does business.
The Company experiences foreign currency translations gains and losses, which
are reflected in the Company's consolidated statement of operations and
comprehensive income and loss, due to the strengthening and weakening of the US
dollar against the currencies of the Company's foreign subsidiaries or divisions
and the resulting effect on the valuation of the intercompany accounts and
certain assets of the subsidiaries which are denominated in US dollars. The net
loss resulting from foreign currency translations was $41,000 in the nine months
ended September 30, 2001 compared to a net loss of $134,000 in the comparable
period of 2000. The net gain resulting from foreign currency translations was
$85,000 in the three months ended September 30, 2001 compared to a net loss of
$76,000 for the same period in 2000.
The Company anticipates that it will continue to have exchange gains or losses
from foreign operations in the future.
Part II -Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
See Index of Exhibits.
SIGNATURES
CII Technologies, Inc.
November 14, 2001 /s/ Michael A. Steinback
- ---------------------------- -------------------------------------------
Date Michael A. Steinback
President and Chief Executive Officer
November 14, 2001 /s/ Richard L. Heggelund
- ---------------------------- -------------------------------------------
Date Richard L. Heggelund
Vice President and Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------------------------------------------------------------------
2.1+ Agreement and Plan of Merger, dated as of March 10, 1998, by and among
the Company, RF Acquisition Corp. and Corcom, Inc. is incorporated
herein by reference to Report on Form 8-K (File Number 333-38209)
3.1 Articles of Incorporation of the Company is incorporated herein by
reference to Registration Statement on Form S-4 (File Number 333-38209)
3.2 By-laws of the Company is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
4.1 Indenture dated as of September 18, 1997 by amd among the Company,
Kilovac, Kilovac International and Norwest Bank Minnesota, National
Association, is incorporated herein by reference to Registration
Statement on Form S-4 (File Number 333-38209)
4.2 Purchase Agreement dated as of September 12, 1997 between the Company,
Kilovac and Kilovac International and BancAmerica Securities, Inc., and
Salomon Brothers, Inc., is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
4.3 Registration Rights Agreement dated as of September 18, 1997 between the
Company, Kilovac and Kilovac International and BancAmerica Securities,
Inc. and Salomon Brothers, Inc., is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
4.4 Supplemental Indenture, dated as of June 18, 1998 between Corcom, Inc.
and Norwest Bank Minnesota, National Association is incorporated herein
by reference to Report of Form 10-K (File Number 333-38209)
10.3 Employment Agreement dated as of May, 1993 between the Company and
Michael A. Steinback is incorporated herein by reference to Registration
Statement on Form S-4
10.4 Employment Agreement dated as of January 7, 1994 between the Company and
David Henning is incorporated herein by reference to Registration
Statement on Form S-4 (File Number 333-38209)
10.5 Management Agreement dated as of September 18, 1997 among the Company,
Parent and CHS Management III, L.P. is incorporated by reference to
Registration Statement on Form S-4 (File Number 333-38209)
10.6 Tax Sharing Agreement dated as of September 18, 1997 between the
Company, Parent, Kilovac International and Kilovac International FSC
Ltd. is incorporated herein by reference to Registration Statement on
Form S-4 (File Number 333-38209)
10.7+ Credit Agreement dated as of September 18, 1997 between the Company,
Parent, various banks, Bank of American National Trust and Savings
Association and BancAmerica Securities, Inc., is incorporated herein by
reference to Registration Statement on Form S-4 (File Number 333-38209)
10.8 Pledge Agreements dated as of September 18, 1997 by Parent, the
Company, Kilovac and Kilovac International in favor of Bank of America
Trust and Savings Association, is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
10.9 Subsidiary Guarantee dated as of September 18, 1997 by Kilovac and
Kilovac International in favor of Bank of American National Trust and
Savings Association, is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
10.10 Security Agreement dated as of September 18, 1997 among Parent, the
Company, Kilovac and Kilovac International in favor of Bank of America
National Trust and Savings Association is incorporated herein by
reference to Registration Statement on Form S-4 (File Number 333-38209)
10.11 Stock Subscription and Purchase Agreement dated as of September 20,
1995, by and among the Company, Kilovac and the stockholders and
optionholders of Kilovac named therein, is incorporated herein by
reference to Registration Statement on Form S-4 (File Number 333-38209)
10.12+ Asset Purchase Agreement dated as of June 27, 1996 between the Company
and Figgie International Inc., is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
10.14 Lease Agreement dated as of July 2, 1996 by and between Figgie
Properties, Inc. and Communications Instruments, Inc. d/b/a Hartman
Division of CII Technologies, Inc. is incorporated herein by reference
to Registration Statement on Form S-4 (File Number 333-38209)
10.15 Second Amendment to Stock Subscription and Purchase Agreement dated as
of August 26, 1996, by and among the Company, Kilovac and certain
selling stockholders, is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
10.16+ Recapitalization Agreement dated as of August 6, 1997 among Parent,
certain investors and certain selling stockholders, is incorporated
herein by reference to Registration Statement on Form S-4 (File Number
333-38209)
10.17 Amendment to the Recapitalization Agreement dated as of September 18,
1997 by and among Parent, certain investors and certain selling
stockholders, is incorporated herein by reference to Registration
Statement on Form S-4 (File Number 333-38209)
10.18 Indemnification and Escrow Agreement dated as of September 18, 1997 by
and among Parent, certain investors, certain selling stockholders and
American National Bank and Trust Company of Chicago, is incorporated
herein by reference to Registration Statement on Form S-4 (File Number
333-38209)
10.19 Stockholders Agreement dated September 18, 1997 by and among Parent and
certain of its stockholders, is incorporated herein by reference to
Registration Statement on Form S-4 (File Number 333-38209)
10.20 Registration Agreement dated as of September 18, 1997 by and among
Parent and certain of its stockers is incorporated by reference to
Registration Statement on Form S-4 (File Number 333-38209)
10.21 Form of Junior Subordinated Promissory Note of Parent is incorporated
herein by reference to Registration Statement on Form S-4 (File Number
333-38209)
10.22 Employment Agreement dated as of October 11,1995 between Kilovac and Dan
McAllister is incorporated herein by reference to Registration Statement
on Form S-4 (File Number 333-38209)
10.26 Asset Purchase Agreement dated as of November 30, 1997 by and between
the Company and Genicom Corporation is incorporated by reference to
Report on Form 8-K (File Number 333-38209)
10.27+ Stock Purchase Agreement daed as of October 31, 1997 by and between the
Company and Societe Financiere D'Investissements Dans L'Equipement et la
Construction Electrique, S.A., the sole stockholder of ibex Aerospace
Technologies, Inc. is incorporated herein by reference to Report on Form
10-K (File Number 333-38209)
10.28+ Asset Purchase Agreement dated May 6, 1998, between Kilovac Corporation,
Zerubavel Heifetz, Cesar Marestaing and Wilmar Electronics, Inc. is
incorporated herein by reference to Report on Form 10-K (File Number
333-38209)
10.29+ Asset Purchase Agreement dated as of July 24, 1998, by and between the
Company and Cornell-Dubilier Electronics, Inc.
10.30 Voting Agreement dated as of March 10, 1998, by and among RF Acquisition
Corp., Werner E. Newman and James A. Steinback is incororated herein by
reference to Report on Form 10-K (File Number 333-38209)
10.31+ Credit Agreement dated as of June 19, 1998, among the Company, Parent,
Bank of American National Trust and Savings Association and certain
other lending institutions from time to time a party thereto is
incorporated herein by reference to Report of Form 10-K (File Number
333-38209)
10.32+ Pledge Agreement dated as of June 19, 1998, among Parent, the Company,
Kilovac and Kilovac International in favor of Bank of America National
Trust and Savings Association is incorporated herein by reference to
Report on Form 10-K (File Number 333-38209)
10.33+ Subsidiary Guarantee dated as of June 19, 1998 by Kilovac, Kilovac
International and Corcom, Inc. in favor of Bank of American National
Trust and Savings Association is incorporated herein by reference to
Report on Form 10-K (File Number 333-38209)
10.34+ Security Agreement dated as of June 19, 1998, among Parent, the
Company, Kilovac, Kilovac International and Corcom, Inc. in favor of
Bank of American National Trust and Savings Association is incorporated
herein by reference to Report on Form 10-K (File Number 333-38209)
10.35+ Stock Purchase Agreement dated March 19, 1999, by and among Products
Unlimited Corporation, the Stockholders of Products Unlimited
Corporation and the Company is incorporated herein by reference to
Report on Form 10-K (File Number 333-38209)
10.36+ Amended and restated Credit Agreement among Parent, the Company,
various lenders, NationsBank, N.A., as an Issuing Lender and Swingline
Lender, and NationsBank, N.A. as the Administrative Agent, is
incorporated herein by reference to Report on Form 8-K (File Number
333-38209)
10.37+ Amended and restated Subsidiary Guaranty by certain subsidiaries of the
Company in favor of NationsBank, N.A. is incorporated herein by
reference to Report on Form 8-K (File Number 333-38209)
10.38+ Amended and restated Security Agreement among Parent, the Company,
certain subsidiaries of the Company and Bank of America National Trust
and Savings Association, as collateral agent, is incorporated herein by
reference to Report on Form 8-K (File Number 333-38209)
10.39+ Amended and restated Pledge Agreement by Parent, the Company and
certain subsidiaries of the Company in favor of Bank of America
National Trust and Savings Association, as collateral agent, is
incorporated herein by reference to Report of Form 8-K (File Number
333-38209)
10.40 First Amendment and Waiver to Credit Agreement, among Parent, the
Company, various lenders, Bank of America N.A. as Administrative Agent.
10.41 Second Amendment to Credit Agreement, among Parent, the Company
various lenders, Bank of America N.A., as Administrative Agent, is
incorporated herein by reference to Report on Form 10-Q (File Number
333-38209)
10.42 Employment Agreement dated as of May 22, 2000 between CII Technologies,
Inc. and John J. Butler incorporated herein by reference to Report on
Form 10-K (File Number 333-38209)
10.43 Employment Agreement dated as of November 3, 2000 between CII
Technologies, Inc. and Ramzi Dabbagh incorporated herein by reference to
Report on Form 10-K (File Number 333-38209)
10.44 1997 CII Technologies, Inc. Stock Option Plan incorporated herein by
reference to Report on Form 10-K (File Number 333-38209)
10.45 Property Transfer and Settlement Agreement dated January, 2000 by and
between STI Properties, Inc., Scott Technologies, Inc. and Communications
Instruments, Inc. incorporated herein by reference to Report on Form 10-K
(File Number 333-38209)
11.1 Statement re-Computation of Per Share Earnings. Not required because the
relevant computations can be clearly determined from the material
contained in the financial statements included herein
+ The Company agrees to furnish supplementally to the Commission a copy of
any omitted schedule to such agreement upon the request of the Commission in
accordance with Item 601 of the Regulation S-K.