Attached files
| file | filename |
|---|---|
| 8-K/A - 8-K/A - CPI International Holding Corp. | cpih-20151124x8ka.htm |
| EX-99.3 - EXHIBIT 99.3 - CPI International Holding Corp. | cpih-201511248kaxex993.htm |
| EX-99.1 - EXHIBIT 99.1 - CPI International Holding Corp. | cpih-201511248kaxex991.htm |
Exhibit 99.2
TABLE OF CONTENTS
Page | ||
ASC SIGNAL HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data - unaudited)
June 30, 2015 | September 30, 2014 | ||||||
Assets | |||||||
Current | |||||||
Cash and cash equivalents | $ | 210 | $ | 184 | |||
Accounts receivable, net of allowances of $30 (2014 - $51) | 7,250 | 4,848 | |||||
Inventories, net | 10,521 | 8,390 | |||||
Prepaid expenses | 275 | 453 | |||||
18,256 | 13,875 | ||||||
Property and equipment, net (Note 4) | 511 | 553 | |||||
Other assets | 120 | 125 | |||||
$ | 18,887 | $ | 14,553 | ||||
Liabilities and Shareholders’ Deficiency | |||||||
Current | |||||||
Line of credit and term loan (Note 6) | $ | 6,992 | $ | 3,404 | |||
Accounts payable | 6,424 | 3,803 | |||||
Accrued liabilities | 1,378 | 1,179 | |||||
Customer deposits | 3,489 | 5,413 | |||||
Lease obligation | — | 153 | |||||
Note payable (Note 5) | — | 5,000 | |||||
18,283 | 18,952 | ||||||
Management fees (Note 8) | 4,772 | 4,352 | |||||
Loan payable (Note 7) | 1,807 | 2,068 | |||||
24,862 | 25,372 | ||||||
Commitments and contingencies (Notes 3 and 13) | |||||||
Shareholders’ Deficiency | |||||||
Class A convertible preferred stock, $.01 par value, 300 shares authorized and 76 shares issued and outstanding (aggregate liquidation preference of $7,556) (Note 9) | 1 | 1 | |||||
Common stock, $0.01 par value, 400 shares authorized, and zero and 14 issued and outstanding as of June 30, 2015 and September 30, 2014, respectively | — | — | |||||
Additional paid-in capital (Note 5) | 11,538 | 9,038 | |||||
Accumulated other comprehensive loss | (1,020 | ) | (342 | ) | |||
Accumulated deficit | (16,494 | ) | (19,516 | ) | |||
(5,975 | ) | (10,819 | ) | ||||
$ | 18,887 | $ | 14,553 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
ASC SIGNAL HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands - unaudited)
Nine Months Ended | |||||||
June 30, 2015 | June 30, 2014 | ||||||
Revenue | |||||||
Customer sales | $ | 32,022 | $ | 21,063 | |||
Freight revenue | 230 | 227 | |||||
32,252 | 21,290 | ||||||
Cost of revenues | 20,489 | 15,634 | |||||
Gross margin | 11,763 | 5,656 | |||||
Expenses: | |||||||
General and administration | 2,405 | 2,051 | |||||
Sales and marketing | 1,954 | 1,819 | |||||
Research and development | 1,379 | 1,192 | |||||
Product line management | 1,284 | 1,048 | |||||
Interest expense | 897 | 981 | |||||
Management fees (Note 8) | 423 | 599 | |||||
Foreign currency exchange loss | 282 | 69 | |||||
Restructuring costs | 121 | 198 | |||||
8,745 | 7,957 | ||||||
Income (loss) from operations | 3,018 | (2,301 | ) | ||||
Income tax recovery | (4 | ) | — | ||||
Net income (loss) | 3,022 | (2,301 | ) | ||||
Other comprehensive loss, net of tax | |||||||
Foreign currency translation | (678 | ) | (296 | ) | |||
Total other comprehensive loss, net of tax | (678 | ) | (296 | ) | |||
Comprehensive income (loss) | $ | 2,344 | $ | (2,597 | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ASC SIGNAL HOLDINGS CORPORATION
CONSDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
For the Nine Months Ended June 30, 2015 and 2014
(Amounts in thousands - unaudited)
Class A Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at September 30, 2014 | 76 | $ | 1 | 14 | $ | — | $ | 9,038 | $ | (342 | ) | $ | (19,516 | ) | $ | (10,819 | ) | ||||||||||||
Redemption of common stock and gain on extinguishment of note payable (Note 5) | — | — | (14 | ) | — | 2,500 | — | — | 2,500 | ||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | (678 | ) | — | (678 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | — | 3,022 | 3,022 | |||||||||||||||||||||
Balance at June 30, 2015 | 76 | $ | 1 | — | $ | — | $ | 11,538 | $ | (1,020 | ) | $ | (16,494 | ) | $ | (5,975 | ) | ||||||||||||
Class A Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
Balance at September 30, 2013 | 76 | $ | 1 | 14 | $ | — | $ | 9,038 | $ | 66 | $ | (16,112 | ) | $ | (7,007 | ) | |||||||||||||
Foreign currency translation | — | — | — | — | — | (296 | ) | — | (296 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | — | (2,301 | ) | (2,301 | ) | |||||||||||||||||||
Balance at June 30, 2014 | 76 | $ | 1 | 14 | $ | — | $ | 9,038 | $ | (230 | ) | $ | (18,413 | ) | $ | (9,604 | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ASC SIGNAL HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands - unaudited)
Nine Months Ended | |||||||
June 30, 2015 | June 30, 2014 | ||||||
Cash flows from operating activities | |||||||
Net income (loss) for the period | $ | 3,022 | $ | (2,301 | ) | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities | |||||||
Depreciation and amortization | 137 | 129 | |||||
Change in operating assets and liabilities | |||||||
Accounts receivable | (2,402 | ) | 3,310 | ||||
Inventories | (2,131 | ) | (1,621 | ) | |||
Prepaid expenses | 183 | (52 | ) | ||||
Accounts payable | 2,621 | 2,247 | |||||
Accrued liabilities | 199 | (635 | ) | ||||
Customer deposits | (1,924 | ) | 2,213 | ||||
Management fees payable | 420 | 691 | |||||
Cash flow from operations | 125 | 3,981 | |||||
Cash flows from investing activities | |||||||
Purchases of property and equipment | (139 | ) | (177 | ) | |||
Cash flows from financing activities | |||||||
Proceeds from line of credit | 1,420 | (3,052 | ) | ||||
Proceeds from term loan | 2,500 | — | |||||
Repayment of term loan | (333 | ) | — | ||||
Repayment of note payable - related party | (2,500 | ) | — | ||||
Repayment of lease obligations | (153 | ) | (254 | ) | |||
934 | (3,306 | ) | |||||
Effect of currency exchange rates | (894 | ) | (346 | ) | |||
Net increase in cash and cash equivalents | 26 | 152 | |||||
Cash and cash equivalents at beginning of period | 184 | 359 | |||||
Cash and cash equivalents at end of period | $ | 210 | $ | 511 | |||
Supplemental cash flow disclosures | |||||||
Cash paid for interest | $ | 897 | $ | 981 | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except for per share data)
1.Business Operations
ASC Signal Holdings Corporation (ASC) was formed on September 26, 2007 (Inception Date), as a Delaware corporation. ASC filed an amended and restated certificate of incorporation on January 31, 2008. ASC and its wholly owned subsidiaries (the Company) are a global manufacturer of advanced satellite, radar and high-frequency antennas for broadcast, government, military and enterprise communications applications with sales to customers in over 100 countries. In addition to hardware, the Company provides solutions-based services such as turn-key system design, engineering, installation test and maintenance, product integration and program management. The Company also offers a variety of value-added services such as RF testing, custom fabrication, build-to-print capabilities, supply chain management and logistics. ASC and its predecessor companies have been in business for over forty years.
The Company's main operation is conducted on a 16 acre facility that it owns in Whitby, Ontario. It also has an office in Plano, Texas. The Company has a 48 acre antenna test range facility located in Caddo Mills, Texas and is leasing a 65 acre antenna test range facility located in Whitby, Ontario.
The Company faces business risks associated with developing products in a competitive market. The Company's success will be dependent on delivering high quality products, hiring and retaining qualified people and securing contracts with target customers and strategic partners.
The Company is continuing to build its backlog by converting sales opportunities into revenues. The Company will
also pursue customer deposits with these orders as it has in the past. The Company's line of credit was renewed on October 30,
2014 with a maturity date of September 30, 2015. The Seller Note Payable was settled on October 30, 2014 and replaced with a
PNC term note as explained more fully in Note 5. On September 17, 2015, the Company repaid all of the PNC term note as
explained in Note 14.
The Company has evaluated whether any subsequent events that require recognition or disclosure in the accompanying
consolidated financial statements and related notes thereto have taken place through November 24, 2015, the date these unaudited condensed consolidated financial statements were available to be issued. Subsequent events are explained in Note 14.
Basis of Consolidation
The condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of such financial statements. These condensed consolidated financial
statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto attached as
Exhibit 99.1 in this Current Report on Form 8-K/A for the fiscal year ended September 30, 2014. The condensed
consolidated balance sheet as of September 30, 2014 has been derived from the financial statements at that date. The results of
operations and cash flows for the interim period ended June 30, 2015 are not necessarily indicative of results to be expected for
the full year.
The unaudited condensed consolidated financial statements include the wholly owned subsidiaries: ASC Signal
Corporation, ASC Signal International Corporation, ASC Signal Global Corporation and ASCS Canadian Signal Corporation.
All inter-company balances and transactions have been eliminated in consolidation. All amounts are in U.S. dollars unless
otherwise noted.
6
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
2. | Summary of Significant Accounting Policies |
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. The more significant areas requiring the use of management estimates and assumptions relate to inventory valuation and deferred income taxes. Actual results could differ from those estimates.
Financial Instruments
The Company accounts for the fair value of assets and liabilities utilizing a valuation framework which includes a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity's own assumptions about market data (unobservable inputs). Fair value is identified as the price that would be received to sell an asset or paid to transfer a liability at the measurement date (an exit price). The Company's financial instruments include cash and cash equivalents, accounts receivable, line of credit, lease obligations and accounts payable and accrued liabilities. The carrying amounts of these financial instruments approximate fair value due to their short maturity. The Company's note payable and loan payable are also financial instruments. The carrying value of the note payable approximates fair value due to its short maturity. The carrying value of the loan payable approximates fair value due to its variable interest rate.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The Company believes it maintains cash and cash equivalents with high quality financial institutions. At times, such deposits may exceed the amount insured by the Federal Deposit Insurance Corporation.
Accounts Receivable and Concentration of Credit Risk
Trade receivables, which are stated at net realizable value, potentially subject the Company to credit risk. Sales are made to both commercial and governmental entities located throughout the world. Accounts receivable are typically due within 30 days. Amounts outstanding for longer than the payment terms are considered past due. The Company provides a reserve for all expected uncollectible accounts. When uncollectible accounts are written off in a period subsequent to their recording date, they are first charged against the established reserve and, therefore, only any write off in excess of the established reserve is charged to expense in the period written off. Estimated losses are based on experience and management's opinion of the current status of existing receivables. As of June 30, 2015 and September 30, 2014, the Company had recorded an allowance of $30 and $51 for uncollectable accounts, respectively.
Two customers accounted for 15% and 11% of accounts receivable as of June 30, 2015 (June 30, 2014 – 0% and 0%)
respectively, and 16% and 18% of revenue (June 30, 2014 – 0% and 0%), respectively for the nine months ended June 30,
2014.
7
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
Inventories
Inventories include materials, labor and manufacturing overhead and are valued at the lower of cost (first-in, first-out) or market and consist of the following:
June 30, 2015 | September 30, 2014 | ||||||
Raw materials | $ | 2,728 | $ | 4,315 | |||
Work in process | 3,933 | 1,677 | |||||
Finished goods | 3,860 | 2,398 | |||||
$ | 10,521 | $ | 8,390 | ||||
The Company provides for a reserve at period end for any inventory amounts that are deemed to be excess or obsolete. Inventory that meets the Company's definition of excess or obsolete are reserved for, based on expected future sales using historical data. This reserve is based on the age of the inventory items as well as historical sales data for individual items. At June 30, 2015 and September 30, 2014, the Company has an inventory reserve of $1,281and $1,734, respectively.
Property and Equipment
Property and equipment, including major renewals and improvements, are capitalized and stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computers, machinery and equipment are depreciated over estimated useful lives ranging from three to eight years; building is depreciated over an estimated life of 30 years; and leasehold improvements are depreciated over the shorter of 10 years or the remaining life of the lease.
Impairment of Long-lived Assets
Upon the occurrence of a triggering event, the Company evaluates its property and equipment for impairment and assesses their recoverability based upon anticipated future cash flows. If changes in circumstances lead management to believe that any of its long-lived assets may be impaired, the Company will (a) evaluate the extent to which the remaining book value of the asset is recoverable by comparing the future un discounted cash flows estimated to be associated with the asset to the asset's carrying amount and (b) write down the carrying amount to market value or discounted cash flow value to the extent necessary. Management of the Company has determined that no such impairment existed at June 30, 2015 and September 30, 2014.
Research and Development
Research and development costs are expensed as incurred. These costs primarily consist of salaries, consulting fees, development materials and supplies directly involved in the research and development of new technology. Research and development costs totaled $1,379 and $1,192 for the nine months ended June 30, 2015 and 2014, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective income taxes bases and operating loss and tax credit carry forwards.
8
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company evaluates its uncertain tax positions and recognizes a loss contingency when it is probable that a liability has been incurred as of the date of the consolidated financial statements and the amount of the loss can be reasonably estimated. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized.
Share-based Payment
The Company measures its share-based compensation costs based on the grant-date fair value of the share-based award. Awards are considered granted when all required approvals are obtained and when the participant begins to benefit from, or be adversely affected by, subsequent changes in the prices of the underlying shares and, regarding awards containing performance conditions, when the Company and the participant reach a mutual understanding of the key terms of the performance conditions. Additionally, accruals for compensation costs for share-based awards with performance conditions are based on the probable outcome of such performance conditions. The Company estimates the fair value of each stock option grant by using the Black-Scholes option-pricing model. Assumptions are evaluated and revised, as necessary, to reflect market conditions and experience. During the nine months ended June 30, 2015 and 2014, the Company recognized $Nil of compensation costs under its share-based payment arrangements. This compensation cost is included as part of general and administrative expense in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).
Revenue Recognition
The Company recognizes revenue on most of its products when they are shipped, collectability is reasonably assured and pricing is fixed and determinable. The Company also recognizes revenue from services provided to its customers at the point in time when those services are provided. In some cases, the Company receives deposits from customers before the product is shipped. Deposits on these products are deferred on the accompanying consolidated balance sheet until the revenue is recognized. Such customer deposits totaled $3,489 and $5,413 at June 30, 2015 and September 30, 2014, respectively.
In specific instances, the customer takes ownership of the product but does not take immediate delivery. In those instances, the Company recognizes revenue when certain criteria are met, including: all risks of ownership have passed to the buyer; the customer has made a fixed, written commitment to purchase the goods; the buyer has requested the transaction be on a bill-and-hold basis and had a substantial business purpose for placing the goods on a bill-and-hold basis; the delivery date is fixed and consistent with the buyer's business purpose; the underlying goods are on hand, segregated from other products and are ready for delivery; and there are no specific performance obligations remaining such that the earnings process is not complete. During the nine months ended June 30, 2015, the Company recognized $3,134 in revenue for sales where delivery had not occurred as of June 30, 2015. During the nine months ended June 30, 2014, the Company recognized $1,449 in revenue for sales where delivery had not occurred as of June 30, 2014.
Shipping and Handling
All amounts billed to customers in a sale transaction related to shipping and handling are classified as freight revenues, and the corresponding costs incurred by the Company to ship the goods are included in cost of revenues in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).
9
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
Government Taxes from Revenue Transactions
Various governmental entities are entitled to taxes on the Company's revenue transactions with its customers. The Company presents these taxes on a net basis in the condensed consolidated statements of operations and comprehensive income (loss).
Foreign Currency
Gains and losses from foreign currency transactions are currently reflected in income. Foreign currency losses included in net income (loss) for the nine months ended June 30, 2015 and 2014, amounted to $282 and $67, respectively.
At the transaction date, each asset, liability, revenue and expense denominated in a foreign currency is translated into United States dollars by the use of the exchange rate in effect at that date. At the reporting date, unsettled monetary assets and liabilities are translated into United States dollars by using the exchange rate in effect at the reporting date and the related translation differences are recognized in net loss.
Non-monetary assets and liabilities that are measured at historical cost are translated into United States dollars by using the exchange rate in effect at the date of the initial transaction and are not subsequently restated.
The Company has identified the functional currency of certain of its other subsidiaries with foreign operations as the applicable local currency. The translation of the balance sheet from the applicable local currency to the Company's reporting currency (United States dollars) is performed using the exchange rate in effect at the balance sheet date. Revenue and expense accounts are translated using the average exchange rate experienced during the period. Adjustments from its functional currency to the reporting currency resulting from the translation of the Company's subsidiary financial statements are not included in the determination of net income (loss), but are reported as accumulated other comprehensive income (loss), a separate component of shareholders' deficiency. Net foreign currency translation losses for the nine months ended June 30, 2015 and 2014 amounted to $678 and $296, respectively.
Advertising
Advertising costs are expensed as incurred and include costs of advertising and other activities designed to enhance demand for the Company's products. Advertising costs were $416 and $318 for the nine months ended June 30, 2015 and 2014, respectively.
3. | Lease Obligations |
The Company has operating leases for certain of its office and warehouse space. The facility leases have escalating clauses in which the monthly lease payments increase an insignificant amount each year, and these increases are not based on any other factors such as sales or other contingencies rentals. Rental expense under operating leases the nine months ended June 30, 2015 and 2014 was approximately $122 and $124, respectively.
10
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
4. | Property and Equipment |
Property and equipment consisted of the following at June 30, 2015:
June 30, 2015 | September 30, 2014 | ||||||
Computers, machinery and equipment | $ | 2,117 | $ | 2,022 | |||
Land and buildings | 310 | 310 | |||||
Leasehold improvements | 31 | 31 | |||||
$ | 2,458 | $ | 2,363 | ||||
Less - accumulated depreciation | (1,947 | ) | (1,810 | ) | |||
Property and equipment, net | $ | 511 | $ | 553 | |||
Depreciation expense was $137 and $129 for the nine months ended June 30, 2015 and 2014, respectively.
5. | Note Payable |
As part of the 2008 acquisition with Andrew Corporation (Andrew or the Seller), the Company issued a note (First
Seller Note) to the Seller in the principal amount of $2,500. The First Seller Note accrued interest at the prime interest rate of
3.25%. As a result of the transition of certain manufacturing operations from Andrew, the Company issued another $2,500 note
(Second Seller Note) to Andrew in exchange for inventory. Total interest paid to the Seller during the nine months ended
June 30, 2015 and 2014 was $Nil and $383 respectively.
In October 2014, the Company entered into an agreement with Andrew to fully retire the note payable and redeem the
14 common shares owned by Andrew, for total consideration of $2,500. The excess of the combined carrying value of the debt
and the par value of the common shares over the total consideration paid was treated as a capital transaction and has been
recorded through additional paid in capital
In October 2014, the Company entered into an agreement with PNC Bank for a $2,500 term loan that will amortize
over five years at prime plus 4.25%. The term loan had maturity date of September 30, 2015. On September 17, 2015, the
Company repaid all of the outstanding principal and interest associated with the term, as explained in Note 14. Total interest
paid to PNC Bank during the nine months ended June 30, 2015 was $363.
6.Line of Credit
The Company has a $9,500 line of credit (the Line) with PNC Bank (the Bank). The Line is collateralized by
substantially all of the assets of the Company. Availability on the Line is determined primarily by the level of the Company's
accounts receivable and inventory (the borrowing base). The relationship between the Company and the Bank includes a
lockbox relationship whereby the Bank substantially has access to the Company's operating account. All cash receipts collected
by the Company are deposited into a lockbox, which the Bank uses to pay down certain outstanding amounts drawn from the
Line. When the Company needs to disburse funds for any reason (payroll, vendor payments, etc.), the Company draws down
exactly enough from the Line from which to make these payments. The agreement associated with this Line has been extended
and was scheduled to expire on September 30, 2015, at which time all amounts due under the line become immediately payable.
On September 17, 2015, the Company repaid all of the outstanding principal and interest associated with its line of credit, as
explained in Note 14. All amounts outstanding under the Line as of June 30, 2015 are classified as current liabilities in the
accompanying condensed consolidated balance sheet.
11
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
Interest on the Line is calculated by applying a contract rate defined as follows:
Contract Rate shall mean an interest rate per annum equal to (i) the sum of the Alternate Base Rate plus the Applicable
Margin with respect to Domestic Rate Loans and (ii) the sum of the Eurodollar Rate plus the Applicable Margin with respect to
Eurodollar Rate Loans.
Alternate Base Rate shall mean, for any day, a rate per annum equal to the highest of (i) the Base Rate in effect on such
day, (ii) the sum of the Federal Funds Open Rate in effect on such day plus one half of one percent (0.5%), (iii) the sum of the
Daily LlBOR Rate in effect on such day plus one percent (1.0%), so long as a Daily LlBOR Rate is offered, ascertainable and
not unlawful, and (iv) 3.0%.
Applicable Margin shall mean (a) 475 basis points for Eurodollar Rate Loans that are Revolving Advances, (b) 375
basis points for Domestic Rate Loans that are Revolving Advances, (c) five hundred twenty five (525) basis points for
Eurodollar Rate Loans that are Term Loans, and (d) four hundred twenty five (425) basis points for Domestic Rate Loans that
are Term Loans.
The Line contains certain financial and reporting covenants with which the Company was in compliance as of June 30,
2015.
7. | Loan Payable |
The Company has entered into a mortgage agreement with Ontario Wealth Management Corporation for $2,068. The
mortgage has an annual interest rate of 10.75% with monthly interest only payments of $20 and matures October 1, 2016. The
loan is secured with title to the land and a general security agreement. On September 17, 2015, the Company repaid all of the
outstanding principal and interest associated with its loan payable, as explained in Note 14.
8. | Related-Party Transactions |
As mentioned in Note 3, the two notes payable totaling $5,000 held by the Company was fully discharged based on an
agreement with Andrew, a shareholder of the Company, for total consideration of $2,500. During the nine months ended
June 30, 2015 and 2014, the Company also paid $268 and $282 respectively, in rental expense to Andrew.
Resilience Capital, the major shareholder of the Company, provides management and consulting services to the
Company and receives compensation for these services. During the nine months ended June 30, 2015 and 2014, the Company
incurred $423 and $599 of expenses, respectively, for these services. The amount due to Resilience as of June 30, 2015 was
$4,772, and the amount is classified as long term as Resilience has agreed not to demand repayment within the next twelve
months. The amount is unsecured with an 8% interest rate. On September 17, 2015, Communications & Power Industries LLC
(CPI), a wholly owned subsidiary of CPI International Holding Corp., acquired all of the issued and outstanding equity
securities of the Company, as explained more fully in Note 14. The amount due to Resilience was repaid in full subsequent the
acquisition.
As of June 30, 2015, PNC Bank holds 2 preferred shares of the Company.
12
ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
9. | Capital Stock |
The Company has authorized 700 shares of capital stock, consisting of 300 shares of preferred stock and 400 shares of common stock. The common and preferred stock have par values of $0.01 per share. At all times, the Company reserves a number of shares of unissued common stock for the purpose of effecting the conversion of its issued and outstanding shares of preferred stock and the exercise of all outstanding warrants and options to purchase the Company's common stock. The Company has reserved twelve shares of common stock for possible future issuance under its stock option plan (Note 10). As of June 30, 2015, 76 shares of preferred stock were issued and outstanding. In October 2014, the Company redeemed all 14 of the issued and outstanding shares of common stock held by the Seller, leaving zero common shares issued and outstanding as of June 30, 2015.
The following is a summary of the rights, preferences and terms of the Company's common and preferred stock:
Dividends
Cash dividends to shareholders may be declared and paid on the common stock and are made at the discretion of the Board of Directors subject to limitations under the Company's credit agreement with the Bank. Upon a dividend being declared and paid to common shareholders, preferred shareholders are entitled to receive an equal dividend or other distribution of such securities or property at an equal value, as they would have received if all outstanding shares of preferred stock had been converted into common stock on the date of such event.
Liquidation Preference
In the event of a change in control, qualified public offering of the Company or any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of the preferred stock are entitled to receive, in preference to the holders of the common stock, an amount equal to one hundred dollars ($100.00) per share (as adjusted to reflect any stock split, combination, reclassification or similar event involving the preferred stock). Any other remaining assets of the Company shall be made available for distribution to the common shareholders.
Conversion
Each share of preferred stock is convertible to one share of common stock, at the option of the holder, at any time without payment of further consideration. The conversion ratio will be adjusted for any stock split or combination.
Voting
Holders of preferred and common shares have voting rights and are entitled to one vote per share held.
10. | Stock Options and Warrants |
Stock Options
The Company issues stock options under its 2008 Equity and Performance Incentive Plan (the Plan). Options granted under the Plan may be either incentive stock options or nonqualified stock options. Options may be granted to employees, directors, consultants, advisors and independent contractors. Incentive stock options shall be granted only to employees of the Company. The Plan, as amended, provides for the grant of a maximum of eight shares of common stock. The option price for incentive stock options shall not be less than the fair market value of a share of common stock on the date of grant. Options granted under the Plan have a life of 10 years. Options granted under the Plan generally vest over three years. Upon exercise of stock options, the Company intends to issue new shares to the grantees.
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ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
The following table summarizes the activity of the Plan, including the number of shares under option (Number) and the weighted average exercise price (Price):
Number | Price | |||||
Outstanding at September 30, 2014 | 10,519 | $ | 100 | |||
Granted | — | — | ||||
Exercised | — | — | ||||
Canceled | — | — | ||||
Outstanding at June 30, 2015 | 10,519 | $ | 100 | |||
Vested at June 30, 2015 | 5,234 | $ | 100 | |||
Vested at September 30, 2014 | 5,029 | $ | 100 | |||
At June 30, 2015, the Company had 10,519 outstanding stock options, all with an exercise price of $100, and these stock options had a weighted average remaining contractual life of 3.6 years as of the year then ended and begin to expire in 2018 through 2022. Of these 10,519 stock options, 5,234 vest over a three-year period from the grant date. The remaining 5,285 options are performance based and only vest upon a change of control of the Company and if the grantee is still an employee of the Company at the change of control date. The exercise of all of these options is contingent upon the ultimate sales price of the Company related to the change in control being valued at greater than $100 per share. Due to the uncertainty of these future events, the fair value for these performance-based shares is indeterminate until these uncertain future events occur.
The weighted-average grant date fair value of the time-based vesting options granted is $40 per share. At June 30, 2015, there was no unrecognized stock compensation expense expected to be recognized over the next quarter and over the next fiscal year. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model which incorporates ranges of assumptions for inputs. The expected volatility is based on the historical volatility of public companies in the wireless communications and satellite industries and the Company's expectations regarding stock volatility in the future. Until sufficient employee information is accumulated, the Company uses an averaging calculation to estimate option exercise and employee termination behavior within the valuation model. This calculation computes a blend of the total contractual life of the option and the vesting period. The risk-free interest rate is based on the United States three-year Treasury bill yield curve in effect at the time of grant for periods within the contractual life of the option.
Warrants
At June 30, 2015, the Company had 7,770 warrants outstanding and exercisable, all with an exercise price of $115 per share, with no expiration date.
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ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
11. | Income Taxes |
The Company's total deferred tax assets, deferred tax asset valuation allowance and deferred tax liabilities are as follows:
June 30, 2015 | September 30, 2014 | ||||||
Current: | |||||||
Employee compensation accruals | $ | 303 | $ | 228 | |||
Other | 346 | 1,089 | |||||
Total current deferred tax assets | 649 | 1,317 | |||||
Noncurrent: | |||||||
Net operating loss carryforwards | 3,099 | 4,324 | |||||
Fixed assets | 33 | (2 | ) | ||||
Lease obligation | — | 57 | |||||
Other | 189 | 410 | |||||
Total noncurrent deferred tax assets | 3,321 | 4,789 | |||||
Valuation allowance | (3,970 | ) | (6,106 | ) | |||
Net deferred tax assets | $ | — | $ | — | |||
A valuation allowance is provided when, in management's assessment, it is more likely than not that some portion of
the deferred income tax assets will not be realized. The Company's valuation allowance at year-end relates primarily to net
operating loss (“NOL”) carryforwards. As of June 30, 2015, the Company had federal and state NOL carryforwards of $8,316
(September 30, 2014 - $11,603). The federal carryforwards begin to expire in 2029 and the state carryforwards begin to expire
in 2027, and these will be carried forward to future years for possible utilization. Additionally, the Company also had Canadian
NOL carryforwards of $Nil as of June 30, 2015 (September 30, 2014 - $Nil), and Canadian investment tax credits of $277 as of
June 30, 2015 (September 30, 2014 - $408), which will begin to expire in 2029.
There was no regular income tax expense for the nine months ended June 30, 2015 and 2014 primarily due to the Company's net losses, as a result of the valuation allowance the Company does not have unrecognized tax benefits.
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The income tax returns filed by the Company remain open to examination in all jurisdictions since its inception in 2007.
12. | Employee Benefit Plans |
Defined Contribution Plan
The Company offers a defined contribution 401(k) plan (the 401(k) Plan) to its eligible employees. The 401(k) Plan covers substantially all U.S. employees and allows participants to defer a portion of their annual compensation on a pretax basis. Company matching contributions vest equally over a five-year period commencing with the employees' start dates. The Company matches a percentage of the employees' contributions up to a maximum' percentage of their total compensation. For Canadian employees, the Company offers a similar plan. The Company contributed $83 and $75 during the nine months ended June 30, 2015 and 2014, respectively.
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ASC SIGNAL HOLDINGS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands except per share data)
13. | Commitments and Contingencies |
In 2010, the Company became aware of volatile organic compound (“VOC”) and other contamination in the soil and groundwater at the Whitby, Ontario industrial site. The Company believes that the contamination originated from the neighboring property which reportedly is used for crystal manufacturing and secondarily from the operational practices of the prior operators of the Company. The Company intends to address these conditions through the implementation of a remediation plan. The Company holds a pair of pollution insurance policies and the insurer has advised that it will indemnify the Company for the remediation costs. The Company expects that the remediation costs will be less than the insurance policy limits. In addition, the Company has filed a civil action against the neighbor and certain other parties to recover certain consequential damages resulting from the contamination. The Company has been informed that one of the defendants in this lawsuit has filed for bankruptcy.
Various lawsuits have been filed against the Company for incidents which arose in the ordinary course of business. In the opinion of management, the outcome of the lawsuits, now pending, is not determinable. Should any loss result from the resolution of these claims, such loss will be charged to operations in the year of resolution.
14. | Subsequent Events |
On September 17, 2015, Communications & Power Industries LLC (CPI), a wholly owned subsidiary of CPI International Holding Corp., entered into and consummated the transactions contemplated by a Stock Purchase Agreement (the Acquisition Agreement) with ASC, The Resilience Fund II, L.P., and certain other securityholders of ASC, pursuant to which CPI acquired all of the issued and outstanding equity securities of the Company on the terms and conditions set forth in the Acquisition Agreement. The aggregate consideration for the acquisition is $52.9 million subject to a customary post-closing adjustment based on, among other things, the amount of working capital of the Company on the closing date.
On September 17, 2015, the Company repaid all of the outstanding principal and interest associated with its note payable, line of credit and loan payable.
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