Item 1. Business
General
Amphenol Corporation ("Amphenol" or the "Company") is a leading designer, manufacturer and marketer of electrical, electronic and fiber optic connectors, interconnect systems and coaxial and flat-ribbon cable. The primary end markets for the Company's products are telephone, wireless and data communications systems; cable television systems; commercial and military aerospace electronics; automotive and mass transportation applications; and industrial factory automation equipment. For the year ended December 31, 1997, approximately 53% of the Company's net sales were to the worldwide communications market (including 23% for the cable television market), 24% were for commercial and military aerospace and other military electronics applications and 23% were for industrial, transportation and other applications. The Company focuses on optimizing its mix of higher margin application-specific products in its product offerings and maintaining continuing programs of productivity improvement. As a result of these initiatives, the Company's operating profit margin has increased from 13.5% in fiscal year 1993 to 17.6% in fiscal year 1997.
The Company designs and manufactures connectors and interconnect systems which are used primarily to conduct electrical and optical signals for a wide range of sophisticated electronic applications. The Company believes, based primarily on published market research, that it is one of the largest connector manufacturers in the world and the leading supplier of high performance environmental connectors that require superior performance and reliability under conditions of stress and in hostile environments. Such conditions are frequently encountered in commercial and military aerospace applications and other demanding industrial applications such as natural resource exploration, medical instrumentation and off-road construction. In addition, the Company has developed a broad range of interconnect products to serve the rapidly growing markets of wireless communications including cellular and personal communication networks and fiber optic networks; electronic commerce including smart cards and electronic purse applications; and automotive safety products including airbags, pretensioner seatbelts and anti-lock braking systems. The Company is also one of the leaders in developing interconnect products for factory automation and machine tools and develops interconnect products for mass transportation applications. The Company believes that the worldwide industry for interconnect products and systems is highly fragmented with over 1,000 producers of connectors worldwide, of which the 10 largest accounted for a combined market share of approximately 37% in 1997. The Company estimates that the total sales for the industry were approximately $29 billion in 1997.
The Company's Times Fiber subsidiary is the world's second largest producer of coaxial cable for the cable television market. The Company believes that Times Fiber is one of the lowest cost producers of coaxial cable for the cable television market, and that it is one of the technological leaders in increasing the bandwidth of coaxial cable products. The Company's coaxial cable and connector products are used in cable television systems including full service cable television/telecommunication systems being installed by cable operators and telecommunication companies offering video, voice and data services. The Company also is a major supplier of coaxial cable to the developing international cable television markets. In addition, the Company has developed coaxial cable products, in conjunction with connector products, used in the infrastructure for wireless communication systems.
The Company is a global manufacturer employing advanced manufacturing processes. The Company's products are manufactured and assembled at facilities in the United States, Canada, Mexico, Germany, France, the United Kingdom, the Czech Republic, Estonia, Taiwan, Japan, India and the People's Republic of China. The Company's connector products are sold through its global sales force and independent manufacturers' representatives to thousands of original equipment manufacturers ("OEMs") in 51 countries throughout the world as well as
through a global network of electronics distributors. The Company's coaxial cable products are primarily sold to cable television operators and to telecommunication companies who have entered the broadband communications market. In 1997, approximately 58% of the Company's net sales were in North America, 28% were in Europe and 14% were in Asia and other countries.
Product Development
The Company's product development strategy is to offer a broad range of products to meet the specific interconnect requirements of its customers in its target markets. The Company's market focus is primarily in interconnect products for the: (1) wireless, telecom and data communications market; (2) broadband communications, primarily cable television and the developing markets for full service television, telephone and data communication broadband networks; (3) commercial and military aerospace markets; (4) industrial markets, primarily factory automation and mass transportation; and (5) automotive electronics, primarily automotive safety devices such as airbags, pretensioner seatbelts and anti-lock braking systems. The Company implements its product development strategy through product design teams and collaboration arrangements with customers which result in obtaining approved vendor status for the customer's new products and programs. The Company further seeks to have its products become widely accepted within the industry for similar applications and products manufactured by other potential customers, thereby providing additional sources of future revenue. The development of application-specific products has decreased the significance of standard products which generally experience greater pricing pressure. In addition to product design teams and customer collaboration arrangements, the Company uses key account managers to manage customer relationships on a global basis such that the Company can bring to bear its total resources to meet the worldwide needs of its multinational customers. The Company is also focused on making strategic acquisitions in certain markets to further broaden and enhance its product offerings and expand its global capabilities.
Product Groups
The following table sets forth the dollar amounts of the Company's net sales for each major product group. For a discussion of factors affecting changes in sales by product category, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."
1997 1996 1995 - -------------------------------------------------------------------------------- (dollars in thousands) Net sales by product group: Commercial, radio frequency and industrial interconnect products, cable assemblies and flat-ribbon cable $451,525 $388,941 $370,619 High performance environmental connectors 246,036 208,071 174,329 Coaxial cable 186,787 179,209 238,285 -------- -------- -------- $884,348 $776,221 $783,233 ======== ======== ======== Net sales by geographic area: United States operations $462,349 $397,023 $394,563 International operations (1) 421,999 379,198 388,670 -------- -------- -------- $884,348 $776,221 $783,233 ======== ======== ======== - ----------
(1) Includes international coaxial cable sales, which are primarily export sales.
Commercial, Radio Frequency and Industrial Interconnect Products, Cable Assemblies and Flat-Ribbon Cable. The Company produces a broad range of commercial and industrial interconnect products. Such products include: fiber optic interconnect products and systems used in fiber optic networks for voice, video and data communications; chip card acceptor interconnect devices and readers used in conjunction with smart cards and electronic purses (a system for cashless monetary transactions); industrial interconnect products used in a variety of applications such as factory automation equipment, mass transportation applications including railroads and marine transportation; and automotive safety products including interconnect devices and systems used in automotive airbags, pretensioner seatbelts and anti-lock braking systems. The Company designs and produces a broad range of radio frequency connector products used in telecommunications, computer and office equipment, instrumentation equipment, local area networks, aerospace and military electronic applications. The Company's radio frequency connectors are used in base stations, hand held sets and other components of cellular and personal communications networks. The Company has also developed a broad line of radio frequency connectors for coaxial cable for full service cable television/telecommunication networks. The Company also designs and produces highly-engineered cable assemblies. Such assemblies are specially designed by the Company in conjunction with OEM customers for specific applications, primarily for computer, communications and office equipment systems. The cable assemblies utilize the Company's connector and cable products as well as components purchased from others. The Company is also a leading producer of flat-ribbon cable, a cable made of wires assembled side by side such that the finished cable is flat. Flat-ribbon cable is used to connect internal components in systems with space and component configuration limitations. The product is used in computer and office equipment components as well as in a variety of telecommunications applications.
High Performance Environmental Connectors. The Company believes, based primarily on published market research, that it is the largest supplier of circular, military-specification connectors; such connectors require superior performance and reliability under conditions of stress and in hostile environments. High performance environmental connectors are generally used to interconnect electronic and fiber optic systems in sophisticated aerospace, military, commercial and industrial equipment. These applications present demanding technological requirements in that the connectors are subject to rapid and severe temperature changes, vibration, humidity or nuclear radiation. Frequent applications of these connectors include aircraft, guided missiles, radar, military vehicles, equipment for spacecraft, energy, medical instrumentation and geophysical applications and off-road construction equipment. Specially designed high performance environmental connectors, which include fiber optic, filtered, nonmetallic, diode and breakaway connectors, are manufactured to specific customer input/output configurations.
Coaxial Cable. The Company designs, manufactures and markets coaxial cable primarily for use in the cable television industry. The Company manufactures two primary types of coaxial cable: semi-flexible, which has an aluminum tubular shield, and flexible, which has one or more braided metallic shields. Semi-flexible coaxial cable is used in the trunk and feeder distribution portion of cable television systems, and flexible cable (also known as drop cable) is used primarily for hookups from the feeder cable to the cable television subscriber's residence. Flexible cable is also used in other communications applications.
The rapid developments in fiber optic technologies, digital compression (which allows several channels to be transmitted within the same bandwidth that a single analog channel currently requires) and other communication technologies, including the Company's development of higher capacity coaxial cable, have resulted in technologies which are expected to give cable television systems channel capacity in excess of 500 channels. Such expanded channel capacity, along with other component additions, will permit cable operators to offer full service networks with a variety of capabilities including near video-on-demand, pay-per-view special events, home shopping networks, interactive entertainment and education services, telephone services and high-speed access to data resources such as the Internet. With respect to expanded channel capacity systems, cable
operators have generally adopted, and the Company believes that for the foreseeable future will continue to adopt, a cable system using both fiber optic cable and coaxial cable. Such systems combine the advantages of fiber optic cable in transmitting clear signals over a long distance without amplification, with the advantages of coaxial cable in ease of installation, low cost and compatibility with the receiving components of the customer's communications devices. The Company believes that while system operators are likely to increase their use of fiber optic cable for the trunk and feeder portions of the cable systems, there will be an ongoing need for high capacity coaxial cable for the local distribution and street-to-the-home portions of the cable system.
U.S. cable system designs are increasingly being employed in international markets where cable television penetration is low. For example, it is estimated that in 1997 only 28% of the television households in Europe subscribed to some form of multichannel television service as compared to an estimated subscription rate of 66% in the U.S. The estimated subscription rates in the Asian and Latin American markets were even lower at approximately 14% and 11%, respectively. In terms of television households, it is estimated that there were 248 million television households in Europe, 377 million in Asia and 93 million in Latin America. This compares to an estimated 96 million television households in the U.S. In 1997, the Company had sales of coaxial cable in approximately 50 countries, and the Company believes the development of cable television systems in international markets presents a significant opportunity to increase sales of its coaxial cable products.
International Operations
The Company believes that its global presence is an important competitive advantage as it allows the Company to provide quality products on a timely and worldwide basis to its multinational customers. Approximately 48% of the Company's sales for the year ended December 31, 1997 were outside the United States. Approximately 59% of such international sales were in Europe. The Company has manufacturing and assembly facilities in the United Kingdom, Germany, France, the Czech Republic, Estonia and sales offices in most European markets. The European operations generally have strong positions in their respective local markets. Local operations coordinate product design and manufacturing responsibility with the Company's other operations around the world. The balance of the Company's international activities are located primarily in Canada, Mexico and the Far East, which includes manufacturing facilities in Taiwan, India, Japan and the People's Republic of China. The Company's manufacturing and assembly facilities generally serve the respective local markets. In addition, the Company has low cost manufacturing and assembly sources in Scotland, Estonia, the Czech Republic, Mexico and the People's Republic of China to serve regional and world markets.
Customers
The Company's products are used in a wide variety of applications by numerous customers, none of whom accounted for more than 5% of the Company's sales for 1997 (except for sales under contract with the U.S. Government and its subcontractors, which accounted for 9% of 1997 sales). The Company's participation across a broad spectrum of government programs is such that the Company believes that no one government program accounted for more than 2% of 1997 net sales. The Company's products are sold both directly to OEMs, cable system operators, telecommunication companies and through distributors. There has been a trend on the part of OEM customers to consolidate their lists of qualified suppliers to companies that have a global presence, can meet quality and delivery standards, have a broad product portfolio and design capability, and have competitive prices. The Company has focused its global resources to position itself to compete effectively in this environment. The Company has concentrated its efforts on service and productivity improvements including advanced computer aided design and manufacturing systems, statistical process controls and just-in-time inventory programs to increase product quality and shorten product delivery schedules. The Company's strategy is to provide a broad selection of products in the areas in which it competes. The Company has achieved a preferred supplier designation from many of its OEM customers.
The Company's sales to distributors represented approximately 27% of the Company's 1997 sales. The Company's recognized brand names including "Amphenol," "Times Fiber," "Pyle-National," "Spectra-Strip," "Sine," "Tuchel," "Kai Jack" and "Socapex," together with the Company's strong connector design-in position (products that are specified in the plans and qualified by the OEM), enhance its ability to reach the secondary market through its network of distributors. The Company believes that its distributor network represents a competitive advantage.
Manufacturing
The Company employs advanced manufacturing processes including molding, stamping, plating, turning, extruding, die casting and assembly operations as well as proprietary process technology for flat-ribbon and coaxial cable production. The Company's manufacturing facilities are generally vertically integrated operations from the initial design stage through final design and manufacturing. Outsourcing of certain fabrication processes is used when cost-effective. Substantially all of the Company's manufacturing facilities are certified to the ISO9000 series of quality standards.
The Company employs a global manufacturing strategy to lower its production costs and to improve service to customers. The Company sources its products on a worldwide basis with manufacturing and assembly operations in the United States, Canada, Mexico, the United Kingdom, France, Germany, the Czech Republic, Estonia, Taiwan, India, Japan and the People's Republic of China. To better serve high volume OEM customers, the Company has established just-in-time facilities near major customers.
The Company's policy is to maintain strong cost controls in its manufacturing and assembly operations. The Company has undertaken programs to rationalize its production facilities, reduce plant and corporate overhead expense and maximize the return on capital expenditures. The programs to improve productivity are ongoing.
The Company purchases a wide variety of raw materials for the manufacture of its products, including precious metals such as gold and silver used in plating; brass, copper, aluminum and steel used for cable, contacts and connector shells; and plastic materials used for cable and connector bodies and inserts. All such raw materials are readily available throughout the world and are purchased locally from a variety of suppliers. The Company is not dependent upon any one source for raw materials or if one source is used, alternate sources of supply are available.
Research and Development
The Company's research, development and engineering expenditures for the creation and application of new and improved products and processes were $15.3 million, $14.6 million and $15.7 million (excluding customer sponsored programs representing expenditures of $0.2 million, $0.9 million and $1.3 million) for 1997, 1996 and 1995, respectively. The Company's research and development activities focus on selected product areas and are performed by individual operating divisions. Generally, the operating divisions work closely with OEM customers to develop highly engineered products that meet the customer's needs. The Company continues to focus its research and development efforts primarily on those product areas that it believes have the potential for broad market applications and significant sales within a one-to-three year period.
Trademarks and Patents
The Company owns a number of active patents worldwide. While the Company considers its patents to be valuable assets, the Company does not believe that its competitive position is dependent on patent protection
or that its operations are dependent on any individual patent. The Company regards its trademarks "Amphenol," "Pyle-National," "Tuchel," "Socapex," "Spectra-Strip," "Sine," "Kai Jack" and "Times Fiber" to be of value in its businesses. The Company has exclusive rights in all its major markets to use these registered trademarks.
Competition
The Company encounters competition in substantially all areas of its business. The Company competes primarily on the basis of product quality, price, engineering, customer service and delivery time. Competitors include large, diversified companies, some of which have substantially greater assets and financial resources than the Company, as well as medium to small companies. In the area of coaxial cable for cable television, the Company believes that it and CommScope, Inc. are the primary providers of such cable; however, CommScope is larger than the Company in this market. In addition, the Company faces competition from smaller companies that have concentrated their efforts in one or more areas of the coaxial cable market.
Backlog
The Company estimates that its backlog of unfilled orders was $209.2 million and $207.4 million at December 31, 1997 and 1996, respectively. Orders typically fluctuate from quarter to quarter based on customer demands and general business conditions. Unfilled orders may be cancelled prior to shipment of goods; however, such cancellations historically have not been material. It is expected that all or a substantial portion of the backlog will be filled within the next 12 months. Significant elements of the Company's business, such as sales to the cable television industry, distributors, the computer industry, and other commercial customers, generally have short lead times. Therefore, backlog may not be indicative of future demand.
Employees
As of December 31, 1997, the Company had approximately 6,900 full-time employees worldwide. Of these employees, approximately 4,900 were hourly employees, of which approximately 3,000 were represented by labor unions, and the remainder were salaried. Beginning on October 21, 1995, the Company experienced a seven day work stoppage at its plant in Sidney, New York when approximately 1,000 hourly employees represented by the International Association of Machinists and Aerospace Workers rejected a Company proposal and voted to strike upon the expiration of their then current collective bargaining contract. A new three year contract was approved and the work stoppage ended on October 28, 1995. The Sidney, New York plant manufactures interconnect products used primarily in the aerospace industry and other commercial and industrial markets. The one week work stoppage did not involve any other operation of the Company. The Company has not had any other work stoppages in the past ten years. In 1997, the United Steelworkers International Union, AFL-CIO established a union, affecting approximately 500 employees, at the Company's plant in Chatham, Virginia, the Company's primary plant for the production of coaxial cable. The Company is in the process of negotiating the initial contract with the union. The Company believes that it has a good relationship with its unionized and non-
unionized employees.
Cautionary Statements for Purposes of Forward Looking Information
Statements made by the Company in written or oral form to various persons, including statements made in filings with the SEC, that are not strictly historical facts are "forward looking" statements. Such statements should be considered as subject to uncertainties that exist in the Company's operations and business environment. The following includes some, but not all, of the factors or uncertainties that could cause the Company to fail to conform with expectations and predictions:
- - A global economic slowdown in any one, or all, of the Company's market segments.
- - The effects of extreme changes in monetary and fiscal policies in the U.S. and abroad including extreme currency fluctuations and unforeseen inflationary pressures.
- - Drastic and unforeseen price pressure on the Company's products or significant cost increases that cannot be recovered through price increases or productivity improvements.
- - Increased difficulties in obtaining a consistent supply of basic materials like steel, aluminum, copper, gold or plastic resins at stable pricing levels.
- - Unpredictable difficulties or delays in the development of new product programs.
- - Significant changes in interest rates or in the availability of financing for the Company or certain of its customers.
- - Rapid escalation of the cost of regulatory compliance and litigation.
- - Unexpected government policies and regulations affecting the Company or its significant customers.
- - Unforeseen intergovernmental conflicts or actions, including but not limited to armed conflict and trade wars.
- - Difficulties and unanticipated expense of assimilating newly-acquired businesses.
- - Any difficulties in obtaining or retaining the management and other human resource competencies that the Company needs to achieve its business objectives.
- - The risks associated with any technological shifts away from the Company's technologies and core competencies. For example, a technological shift away from the use of coaxial cable in cable television/ telecommunication systems could have a substantial impact on the Company's coaxial cable business.
- - Unforeseen interruptions to the Company's business with its largest customers and distributors resulting from, but not limited to, strikes, financial instabilities or inventory excesses.
Item 2.
Item 2. Properties
The table below presents the location, size and function of the Company's principal manufacturing and assembly facilities as of January 31, 1998. The Company's principal executive offices are located in Wallingford, Connecticut.
Square Location Feet Function -------- ------ --------
United States:
Chatham, VA 175,000 coaxial cable manufacturing Chatham, VA (1) 100,000 coaxial cable warehousing Chatham, VA (1) 40,000 coaxial cable manufacturing and warehousing Danbury, CT (1) 170,000 RF connector manufacturing Danville, VA (1) 80,000 coaxial cable warehousing Elmhurst, IL (1) 10,000 industrial connector assembly Endicott, NY 125,000 cable assembly Hamden, CT 60,000 cable manufacturing Hamden, CT (1) 25,000 cable warehousing Lisle, IL (1) 28,000 fiber optic connector manufacturing Meriden, CT (1) 82,250 cable manufacturing Mt. Clemens, MI (1) 71,360 industrial connector manufacturing and assembly Nogales, AZ (1) 20,250 connector warehousing and assembly Parsippany, NJ (1) 32,500 RF connector manufacturing Phoenix, AZ (1) 12,000 coaxial cable warehousing Sidney, NY 685,000 high performance environmental connector manufacturing and assembly Wallingford, CT (1) 28,800 Executive offices
Canada:
Renfrew, Ontario (1) 26,000 coaxial cable manufacturing Scarborough, Ontario (1) 88,000 high performance connector manufacturing Belleville, Ontario (1) 6,000 ceramic tubes, planar and discrete filter manufacturing
Mexico:
Nogales (1) 27,558 connector assembly Nogales (1) 12,700 connector assembly Nogales (1) 57,884 connector assembly
United Kingdom:
Greenock, Scotland (1) 10,000 cable assembly Nottingham, England (1) 11,000 high performance environmental connector manufacturing and cable assembly Romsey, England (1) 24,000 cable manufacturing and cable assembly Whitstable, England 135,000 connector manufacturing, cable assembly and coaxial cable warehousing Germany:
Heilbronn 130,000 connector manufacturing and cable assembly
Czech Republic:
Klucouska (1) 16,300 connector assembly
Estonia:
Tallinn (3) 10,750 connector and cable assembly
France:
Dole 121,000 connector manufacturing Thyez 125,000 connector manufacturing
Taiwan
Taoyuan Hsien (1) 15,700 cable assembly Tainan (1) 64,600 RF connector manufacturing and assembly
Japan:
Ritto-cho, Shiga (1) 15,700 connector and cable assembly and warehousing
India:
Pune (2) 53,400 connector manufacturing and assembly Bangalore 12,200 connector manufacturing and assembly
China:
Changzhou 35,000 coaxial cable manufacturing and warehousing Changzhou 30,000 connector and cable assembly Shenzen (3) 75,000 cable and connector manufacturing and assembly
(1) These facilities are leased. Such leases expire at various times through 2008. (2) This facility is owned but is situated on property subject to a long term lease arrangement, expiring in 2065. (3) Dedicated contract manufacturing facility.
The Company estimates that during 1997 its principal manufacturing facilities operated at between 70% and 95% of capacity.
In addition to the facilities described above, the Company leases various warehouses and sales and administrative offices.
Item 3.
Item 3. Legal Proceedings
On January 23, 1997 the Board of Directors approved, subject to shareholder approval and certain other closing conditions, and the Company entered into an agreement and plan of merger (the "Merger Agreement"), with NXS Acquisition Corp., a wholly owned subsidiary of KKR 1996 Fund L.P., a limited partnership formed at the direction of Kohlberg Kravis Roberts & Co. L.P. The Merger Agreement contemplated that approximately 90% of the Company's Class A common stock would be converted into $26.00 in cash and approximately 10% of such shares would be retained by the stockholders. The proposed transaction was announced to the public on January 23, 1997 and on that same date the Company and its directors were named as defendants in a complaint filed in the Court of Chancery in the State of Delaware by stockholders of the Company, individually and as a class action on behalf of all stockholders of the Company. An identical complaint was subsequently filed by other stockholders of the Company. In general, the complaints alleged that the Company's directors breached their fiduciary duties to stockholders when they approved the Merger Agreement. On May 9, 1997 the parties to the
lawsuits signed a Memorandum of Understanding which effectively settled the lawsuits. The terms of the settlement are subject to the approval of the Court of Chancery in the State of Delaware which the Company expects to receive. The terms of settlement as set forth in the Memorandum of Understanding will have no material effect on the Company's financial condition or results of operations.
The Company and its subsidiaries have been named as defendants in several other legal actions in which various amounts are claimed arising from normal business activities. Although the amount of any ultimate liability with respect to such matters cannot currently be precisely determined, in the opinion of management, such matters are not expected to have a material effect on the Company's financial condition or results of operations.
Certain operations of the Company are subject to federal, state and local environmental laws and regulations which govern the discharge of pollutants into the air and water, as well as the handling and disposal of solid and hazardous wastes. The Company believes that its operations are currently in substantial compliance with all applicable environmental laws and regulations and that the costs of continuing compliance will not be material to the Company's financial condition or results of operations.
Subsequent to the acquisition of Amphenol from Allied Signal Corporation ("Allied") in 1987, Amphenol and Allied have been named jointly and severally liable as potentially responsible parties in relation to several environmental cleanup sites. Amphenol and Allied have jointly consented to perform certain investigations and remedial and monitoring activities at two sites and they have been jointly ordered to perform work at another site. The responsibility for costs incurred relating to these sites is apportioned between Amphenol and Allied based on an agreement entered into in connection with the acquisition. For sites covered by this agreement, to the extent that conditions or circumstances occurred or existed at the time of or prior to the acquisition, the first $13.0 million of costs are borne by Amphenol and were incurred as of December 31, 1996. Allied is obligated to pay 80% of the excess over $13 million and 100% of the excess over $30 million. Allied representatives are presently working closely with the Company in addressing the most significant potential environmental liabilities including the Sidney Center landfill and the Richardson Hill landfill projects, as described below.
Owners and occupiers of sites containing hazardous substances, as well as generators of hazardous substances, are subject to broad liability under various federal and state environmental laws and regulations, including expenditures for cleanup costs and damages arising out of past disposal activities. Such liability in many cases may be imposed regardless of fault or the legality of the original disposal activity. The Company is currently performing investigative and monitoring activities at its manufacturing site in Sidney, New York. In addition, the Company is currently voluntarily performing monitoring, investigation, design and cleanup activities at two local, public off-site disposal sites previously utilized by the Sidney facility and others. The Company is also performing proposed remedial design activities and currently is negotiating with respect to a third site. The Company and Allied have entered into an administrative consent order with the United States Environmental Protection Agency (the "EPA") and are presently determining necessary and appropriate remedial measures for one such site (the "Richardson Hill" landfill) used by Amphenol and other companies, which has been designated a "Superfund" site on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. With respect to the second site, (the "Route 8" landfill), used exclusively by Amphenol, the Company initiated a remediation program pursuant to a Consent Order with the New York Department of Environmental Protection and is continuing to monitor the results of those remediation efforts. In December 1995 the Company and Allied received a letter from the EPA demanding that the Company and Allied accept responsibility for the investigation and cleanup of the Sidney Center landfill, another Superfund Site. The Sidney Center landfill was a municipal landfill site utilized by the Company's Sidney facility and other local towns and businesses. The Company has acknowledged that it sent general plant refuse but no hazardous waste to the Sidney Center landfill site. In 1996 the Company and Allied received a unilateral order from the EPA directing the Company and Allied to perform certain investigation, design and cleanup activities at the Sidney Center landfill site. The Company and Allied responded to the unilateral order by agreeing to undertake certain remedial design activities. In 1997
the EPA filed a lawsuit against the Company and Allied seeking to recover $2.7 million for past costs expended by the EPA in connection with activities at the Sidney Center landfill site and seeking to affix liability upon the Company and Allied for all additional costs to be incurred in connection with all further investigations, design and cleanup activities at the site. The Company has successfully joined four local municipalities as co-defendants in the lawsuit. The Company and Allied intend to continue to vigorously defend the lawsuit although remedial design work for the Sidney Center landfill site has continued pursuant to the 1996 unilateral order. The Company also is engaged in remediating or monitoring environmental conditions at several of its other manufacturing facilities and has been named as a potentially responsible party for cleanup costs at several other off-site disposal sites. During 1997, the Company spent approximately $.5 million net of indemnification payments received from Allied in connection with investigating, remediating and monitoring environmental conditions at these facilities and sites. Amphenol expects such expenditures, net of indemnification payments expected from Allied, to be less than $.5 million in 1998.
Since 1987, the Company has not been identified nor has it been named as a potentially responsible party with respect to any other significant on-site or off-site hazardous waste matters. In addition, the Company believes that all of its manufacturing activities and disposal practices since 1987 have been in material compliance with all applicable environmental laws and regulations. Nonetheless, it is possible that the Company will be named as a potentially responsible party in the future with respect to additional Superfund or other sites. Although the Company is unable to predict with any reasonable certainty the extent of its ultimate liability with respect to any pending or future environmental matters, the Company believes, based upon all information currently known by management about the Company's manufacturing activities, disposal practices and estimates of liability with respect to all known environmental matters, that any such liability will not be material to its financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders
A Special Meeting in lieu of the 1997 Annual Meeting of the Stockholders of the Company was held on May 14, 1997 to (i) vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of January 23, 1997 and as amended as of April 9, 1997 between the Company and NXS Acquisition Corp. (the "Merger Agreement") ("Proposal 1"); (ii) elect two directors to serve either until their terms expire at the 2000 Annual Meeting of Stockholders of the Company or until their successors shall have been elected or appointed (as the case may be) and qualified; provided, that if the Merger Agreement was approved and adopted by the stockholders of the Company, the directors of the Company immediately after the effective time of the closing of the Merger Agreement would be Martin H. Loeffler and the then current directors of NXS Acquisition Corp. ("Proposal 2"); and (iii) ratify the selection of Price Waterhouse LLP as independent auditors of the Company ("Proposal 3"). Proposal 1 was approved by the stockholders of the Company by a vote of 34,749,400 FOR to 319,360 AGAINST, with 164,335 ABSTENTIONS. As a result of the approval of Proposal 1 Martin H. Loeffler, Henry R. Kravis, George R. Roberts, Michael W. Michelson, Marc S. Lipschultz and Andrew Clarkson became directors of the Company effective with the closing of the Merger. Proposal 3, the ratification of the selection of Price Waterhouse LLP as independent auditors of the Company, was approved by the stockholders of the Company by a vote of 38,265,947 FOR to 26,889 AGAINST, with 177,060 ABSTENTIONS. Subsequent to this special meeting a current report on Form 8-K dated June 20, 1997 was filed with the Securities and Exchange Commission on June 20, 1997, reporting information under Items 4 and 7 thereof that Deloitte and Touche LLP had been appointed as the Registrant's certified public accountants replacing Price Waterhouse LLP effective June 13, 1997.
Item 4.1 Executive Officers
The following table sets forth the name, age and position with the Company of each person who was an executive officer of Amphenol as of December 31, 1997. Officers are elected to serve at the discretion of the Board of Directors in accordance with the By-Laws of the Company. The By-Laws of the Company provide that
the Board of Directors shall elect the officers of the Company at its first meeting held after the Annual Meeting of Stockholders of the Company. All officers of the Company are elected to hold office until their successors are chosen and qualified, or until their earlier resignation or removal.
Name Age Position ---- --- --------
Martin H. Loeffler 53 Chairman of the Board, Chief Executive Officer and President
Edward G. Jepsen 54 Executive Vice President and Chief Financial Officer
Timothy F. Cohane 45 Senior Vice President
Edward C. Wetmore 41 Secretary and General Counsel
Diana G. Reardon 38 Controller and Treasurer
Martin H. Loeffler has been a Director of Amphenol since December 1987 and Chairman of the Board since May 1997. He has also served as President and Chief Operating Officer of Amphenol since July 1987. He has been President and Chief Executive Officer of the Company since May 1996.
Edward G. Jepsen has been Executive Vice President and Chief Financial Officer of Amphenol since May 1989 and Senior Vice President and Director of Finance since November 1988. He was also a Director of Amphenol from January 1991 to May 1997.
Timothy F. Cohane has been a Vice President of Amphenol since December 1991. He was also a Director of Amphenol from June 1987 to May 1997. He has been President and Chief Operating Officer of the Company's Times Fiber subsidiary since 1994.
Edward C. Wetmore has been Secretary and General Counsel of Amphenol since 1987.
Diana G. Reardon has been Treasurer of Amphenol since March 1992 and Controller since July 1994. Prior to that she served as Assistant Controller of the Company.
See accompanying notes to consolidated financial statements.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company effected the initial public offering of its Class A Common Stock in November 1991. The Company's Common Stock has been listed on the New York Stock Exchange since that time under the symbol "APH." The following table sets forth on a per share basis the high and low sales prices for the Common Stock for both 1997 and 1996 as reported on the New York Stock Exchange.
1997 1996 ------------ ------------- High Low High Low ---- --- ---- --- First Quarter 26 21 3/4 26 20 1/8 Second Quarter 38 7/8 24 1/8 27 5/8 19 7/8 Third Quarter 43 1/2 39 1/16 22 7/8 18 3/4 Fourth Quarter 56 44 23 19
As of February 27, 1998 there were 47 holders of record of the Company's Common Stock. A significant number of outstanding shares of Common Stock are registered in the name of only one holder, which is a nominee of The Depository Trust Company, a securities depository for banks and brokerage firms. The Company believes that there are a significant number of beneficial owners of its Common Stock.
Since its initial public offering in 1991, the Company has not paid any cash dividends on its Common Stock and it does not have any present intention to commence payment of any cash dividends. The Company intends to retain earnings to provide funds for the operation and expansion of the Company's business and to repay outstanding indebtedness.
The Company's debt agreements contain covenants restricting the payment of dividends on, or repurchases of, the Company's Common Stock. The Company's Bank Agreement, which contains the most restrictive provision, in effect permits the declaration and payment of cash dividends on, or repurchase of, Common Stock only if, immediately after giving effect to any such proposed action, the accumulated amount of all dividends and repurchases since May 1997 does not exceed 50% of the Company's cumulative consolidated net income (as defined) since May 1997, and the Company has met the required leverage ratio. As of December 31, 1997, there was no amount available under this provision for future dividends. In addition, the Bank Agreement provides that the Company may repurchase Common Stock with the proceeds received from substantially concurrent equity contributions or issuances of new shares of Common Stock.
Item 6.
Item 6. Selected Financial Data
(dollars in thousands, except per share data)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the results of operations for the three fiscal years ended December 31, 1997 has been derived from and should be read in conjunction with the consolidated financial statements contained herein.
Results of Operations
The following table sets forth the components of net income before extraordinary item as a percentage of net sales for the periods indicated.
1997 Compared to 1996
Net sales were $884.3 million for the year ended December 31, 1997 compared to $776.2 million for 1996. Sales of commercial, radio frequency and industrial interconnect products, cable assemblies and flat-ribbon cable for 1997 increased 16% compared to 1996 ($451.5 million - 1997; $388.9 million - 1996). Such increase is primarily due to increased sales of interconnect products and cable assemblies for wireless communications, data applications and smart card acceptor devices, including electronic purse applications and product line acquisitions. Sales of high performance environmental connectors for 1997 increased 18% compared to 1996 ($246.0 million - 1997; $208.1 million - 1996). The increase is primarily attributable to strong demand for the Company's application- specific products for new and enhanced electronic aerospace and avionics interconnect systems for space, military and commercial aviation applications. Sales of coaxial cable products primarily for cable television applications for 1997 increased 4% ($186.8 million - 1997; $179.2 million - 1996) primarily due to a 14% increase in international coaxial cable television sales primarily related to South America and Asia, partially offset by a 3% decline in U.S. coaxial cable sales as a result of soft demand and competitive pricing pressures.
Geographically, sales in the United States in 1997 increased 16% compared to 1996 ($462.3 million - 1997; $397.0 million - 1996); international sales for 1997, including export sales, increased 11% in U.S. dollars ($422.0 million - 1997; $379.2 million - 1996) and increased approximately 18% in local currencies compared to 1996. The comparatively stronger U.S. dollar in 1997 had the currency translation effect of decreasing net sales by approximately $24.6 million when compared to foreign currency translation rates in 1996.
The gross profit margin as a percentage of net sales (including depreciation in cost of sales) decreased to 33% in 1997 from 34% in 1996. The decrease is generally attributable to sales price reductions on the Company's coaxial cable products partially offset by increased sales of higher margin application-specific connector products, increased efficiencies due to increased production rates for certain connector products and continuing cost control programs.
Selling, general and administrative expenses as a percentage of sales declined to approximately 14% in 1997 compared to approximately 15% in 1996 primarily as a result of higher sales volume in the 1997 period.
Interest expense was $64.7 million for 1997 compared to $24.6 million for 1996. The increase is due to increased debt levels resulting from the Merger and Recapitalization in May 1997 (Note 2).
Other expenses, net for 1997 was $1.1 million, a decrease of $2.6 million from 1996. See Note 9 to the Company's Consolidated Financial Statements for details of the components of other expenses, net.
The provision for income taxes for 1997 was at an effective rate of 41.2% compared to an effective rate of 38.4% in 1996. The increase is generally attributable to non-deductible expenses (goodwill amortization) being a higher percentage of pre-tax income.
1996 Compared to 1995
Net sales were $776.2 million for the year ended December 31, 1996 compared to $783.2 million for 1995. Sales of commercial, radio frequency and industrial interconnect products, cable assemblies and flat-ribbon cable for 1996 increased 4.9% compared to 1995 ($388.9 million - 1996; $370.6 million - 1995). Such increase is primarily due to increased sales of cable
assembly and interconnect products including fiber optics, smart card reader devices, automotive safety devices (airbags and pretensioner seatbealts) and communications related interconnect products. Sales of high performance environmental connectors for 1996 increased 19.4% compared to 1995 ($208.1 million - 1996; $174.3 million - 1995). The increase is primarily attributable to strong demand for the Company's application- specific products for new and enhanced electronic aerospace and avionics interconnect systems for space, military and commercial aviation applications. Sales of coaxial cable products primarily for cable television applications for 1996 declined 24.8% ($179.2 million - 1996; $238.3 million - 1995) primarily due to: (1) a decline in U.S. coaxial cable television sales which declined from $115.4 million in 1995 to $94.5 million in 1996, of which $18.4 million of the decline is attributable to diminished sales of coaxial cable to regional Bell operating companies ("RBOCs") that slowed their construction of broadband systems in 1996, and reduced sales to a major U.S. cable operator in the latter part of 1996 as that operator reduced expenditures for the rebuilding of its systems; and (2) a decline in international coaxial cable television sales which declined from $122.9 million in 1995 to $84.7 million in 1996, of which $29.1 million of the decline is attributable to reduced sales to a foreign cable operator as that operator selected local sourcing for its cable requirements, and reduced sales to companies in a foreign country as that country is undergoing a regulation of cable television franchises which slowed the construction of new systems.
Geographically, sales in the United States in 1996 increased 0.6% compared to 1995 ($397.0 million - 1996; $394.6 million - 1995); international sales for 1996, including export sales, declined 2.4% in U. S. dollars ($379.2 million - 1996; $388.7 million - 1995) and increased approximately .5% in local currencies compared to 1995. The comparatively stronger U.S. dollar in 1996 had the currency translation effect of decreasing net sales by approximately $11.4 million when compared to foreign currency translation rates in 1995.
Changes in net sales for 1996 compared to 1995 are primarily due to changes in unit volume and product mix as opposed to changes in unit prices.
The gross profit margin as a percentage of net sales (including depreciation in cost of sales) increased to 34% in 1996 from 33% in 1995. The increase is generally attributable to increased sales of higher margin application-specific connector products, increased efficiencies due to increased production rates for certain connector products and continuing cost control programs, the effect of which was partially offset by lower coaxial cable sales.
Selling, general and administrative expenses as a percentage of sales for 1996 remained constant at approximately 15% when compared to 1995.
Interest expense was $24.6 million for 1996 compared to $25.5 million for 1995. The decrease is due to generally lower average debt outstanding during the year.
Other expenses, net for 1996 was $3.7 million, a decrease of $.8 million from 1995. See Note 9 to the Company's Consolidated Financial Statements for details of the components of other expenses, net.
The provision for income taxes for 1996 was at an effective rate of 38.4% compared to an effective rate of 40% in 1995.
Liquidity and Capital Resources
Cash provided by operating activities totaled $86.3 million, $68.2 million and $79.2 million for 1997, 1996, 1995 respectively. In 1997 cash from operating activities of $86.3 million, proceeds from the sale of marketable securities of $7.4 million and the sale of receivables of $10 million, and net funds available from the Merger and Recapitalization (Note 2) of $17.9 million were used to fund debt reduction of $85.5 (of which $65 million represents a prepayment of term loan borrowings under the Company's Bank Agreement). The decrease in cash from operating activities in 1996 compared to 1995 is primarily attributable to increased cash tax payments in certain foreign jurisdictions, increased cash payments to the Company's pension plans and increases in inventory.
Cash from operating activities was also used for capital expenditures ($24.1 million, $20.4 million and $20.4 million in 1997, 1996 and 1995 respectively), acquisitions ($4.0 million - 1997; $29.5 million - 1996) and to repurchase in the open market the Company's common stock ($52.7 million - 1996). In 1995 the Company also used the cash flow from operations for debt reduction ($50.4 million - 1995).
In conjunction with the Merger and Recapitalization (Note 2), the Company entered into a $900 million Bank Agreement with a syndicate of financial institutions, comprised of a $150 million revolving credit facility that expires in the year 2004 and a $750 million term loan facility - $350 million (Tranche A) maturing over a 7 year period ending 2004, $200 million (Tranche B) maturing in 2005 and $200 million (Tranche C) maturing in 2006. In October 1997, the Company negotiated an amendment to the term loan under the Bank Agreement. The amendment extinguished the Tranche B and C indebtedness with borrowings under a new $375 million Term Loan Tranche B. The new Term Loan Tranche B has required amortization in 2005 and 2006. At December 31, 1997, the Company had prepaid $65 million of the term loan. The credit agreement requires the maintenance of certain interest coverage and leverage ratios, and includes limitations with respect to, among other things, indebtedness, and restricted payments, including dividends on the Company's common stock. At December 31, 1997 there were $685 million of borrowings outstanding under the term loan facility and there were no amounts outstanding under the revolving credit facility.
In July 1997, the Company entered into interest rate protection agreements that effectively fix the Company's interest cost on $450 million of borrowings under the Bank Agreement to the extent that LIBOR interest rates remain below 7% for $300 million of borrowings and below 8% for $150 million of borrowings.
The Company's EBITDA as defined in the Bank Agreement was $188.5 million and $168.2 million for 1997 and 1996, respectively. EBITDA is not a defined term under Generally Accepted Accounting Principles (GAAP) and is not an alternative to operating income or cash flow from operations as determined under GAAP. The Company believes that EBITDA provides additional information for determining its ability to meet future debt service requirements; however, EBITDA does not reflect cash available to fund cash requirements.
The Company's primary ongoing cash requirements will be for debt service, capital expenditures and product development activities. The Company's debt service requirements consist primarily of principal
and interest on bank borrowings and interest on Senior Subordinated Notes due 2007. The Company has not paid, and does not have any present intention to commence payment of, cash dividends on its Common Stock. The Company expects that ongoing requirements for debt service, capital expenditures and product development activities will be funded by internally-generated cash flow and availability under the Company's revolving credit facility. The Company expects that capital expenditures in 1998 will not exceed $35.0 million. The Company's required debt amortization in 1998 is $.2 million; the Company's required cash interest payments for 1998, at current interest rates, are estimated at approximately $76.0 million.
Environmental Matters
Subsequent to the acquisition of Amphenol Corporation in 1987, Amphenol and Allied have been named jointly and severally liable as potentially responsible parties in relation to several environmental cleanup sites. Amphenol and Allied have jointly consented to perform certain investigations and remedial and monitoring activities at two sites and they have been jointly ordered to perform work at another site. The responsibility for costs incurred relating to these sites is apportioned between Amphenol and Allied based on an agreement entered into in connection with the acquisition. For sites covered by this agreement, to the extent that conditions or circumstances occurred or existed at the time of or prior to the acquisition, the first $13.0 million of costs are borne by Amphenol and were incurred as of December 31, 1996. Allied is obligated to pay 80% of the excess over $13.0 million and 100% of the excess over $30.0 million. Management does not believe that the costs associated with resolution of these or any other environmental matters will have a material adverse effect on the Company's financial condition or results of operations.
Inflation and Costs
The cost of the Company's products is influenced by the cost of a wide variety of raw materials, including precious metals such as gold and silver used in plating; aluminum, copper, brass and steel used for contacts, shells and cable; and plastic materials used in molding connector bodies, inserts and cable. In general, increases in the cost of raw materials, labor and services have been offset by price increases, productivity improvements and cost saving programs.
Risk Management
The Company has to a significant degree mitigated its exposure to currency risk in its business operations by manufacturing and procuring its products in the same country or region in which the products are sold so that costs reflect local economic conditions. In other cases involving U.S. export sales, raw materials are a significant component of product costs for the majority of such sales and raw material costs are generally dollar based on a worldwide scale, such as basic metals and petroleum derived materials.
Future Accounting Changes
In June 1996 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." The Company adopted the Statement effective January 1, 1997. Adoption of the Statement had no effect on the Company's financial condition or results of operations.
In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128 (FAS 128), "Earnings per Share." The statement established new standards for computing and disclosure of earnings per share ("EPS") and requires restatement of prior years EPS information. The statement requires dual presentation of "basic" EPS and "diluted" EPS. Basic EPS is based on the weighted average number of common shares outstanding, excluding common stock equivalents. Diluted EPS reflects the potential dilution of EPS that could occur if securities or other contracts to issue common shares were exercised. The Company has adopted the Statement and the appropriate disclosure is reflected in the accompanying Consolidated Statement of Income.
In June 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive Income" which requires a statement of comprehensive income to be included in the financial statements for fiscal years beginning after December 15, 1997. The Company will include such statement beginning with the first quarter of 1998.
In addition, in June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures About Segments of an Enterprise and Related Information" which requires disclosure of certain information about operating segments and about products and services, the geographic areas in which a company operates and their major customers. The Company is in the process of evaluating the effect this new standard will have on disclosures in the Company's financial statements. Any resulting change in disclosure will be reflected in the year ended December 31, 1998 financial statements.
Information Systems and the Year 2000
As is the case with most other companies using computers in their operations, the Company is in the process of addressing the Year 2000 issue. The Company is currently engaged in a comprehensive project to upgrade its computer facilities such that they will consistently and properly recognize the Year 2000. Many of the Company's systems include new hardware and packaged software recently purchased from large vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram or replace and test all of its software for Year 2000 compliance, and the Company expects to complete the project in early 1999. The estimated cost for this project could range as high as $3.0 million, including the cost of new systems some of which will be capitalized. This cost is being funded through operating cash flows. Failure by the Company and/or vendors and customers to complete Year 2000 compliance work in a timely manner could have a material adverse effect on certain of the Company's operations.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Management
Management is responsible for the integrity and objectivity of the financial statements and other information appearing in this annual report on Form 10-K. The financial statements have been prepared in conformity with generally accepted accounting principles and include amounts based on management's best estimates and judgments, with due consideration given to materiality. The Company maintains a system of internal accounting controls and procedures intended to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and accounted for in accordance with management's authorization.
Deloitte & Touche LLP has been engaged to audit the financial statements in accordance with generally accepted auditing standards. They obtain an understanding of the Company's accounting policies and controls, and conduct such tests and related procedures as they consider necessary to arrive at their opinion. The Board of Directors has appointed an Audit Committee composed of outside directors. The Audit Committee meets periodically with representatives of management and Deloitte & Touche LLP to discuss and review their activities with respect to internal accounting controls and financial reporting and auditing.
Independent Auditors' Report To the Board of Directors and Shareholders of Amphenol Corporation
We have audited the accompanying consolidated balance sheet of Amphenol Corporation and subsidiaries as of December 31, 1997, and the related consolidated statements of income, changes in shareholders' equity (deficit), and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Amphenol Corporation and its subsidiaries at December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Stamford, Connecticut January 14, 1998
Report of Independent Accountants To the Board of Directors and Shareholders of Amphenol Corporation
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, changes in shareholders' equity, retained earnings and of cash flow present fairly, in all material respects, the financial position of Amphenol Corporation and its subsidiaries at December 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Hartford, Connecticut
January 14, 1997, except as to the restatement of net income per common share for the two years ended December 31, 1996 as described in Note 1 under the caption "Net Income per Share," which is as of March 25, 1998.
Consolidated Statement of Income (dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheet (dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity (Deficit)
(dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
Consolidated Statement of Cash Flow (dollars in thousands, except per share data)
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (dollars in thousands, except per share data)
Note 1 - Summary of Significant Accounting Policies
Operations
Amphenol Corporation ("Amphenol" or the "Company") is in one business segment which consists of designing, manufacturing and marketing connectors, cable and interconnect systems, principally for telephone, wireless and data communication systems; cable television; commercial and military aerospace electronics equipment; automotive and mass transportation applications; and industrial factory automation equipment.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation and Investments
The consolidated financial statements include the accounts of the Company and its subsidiaries. Other assets at December 31, 1996, includes an investment in equity securities deemed available-for-sale and is recorded at its market value at that date of $8,187, and the cumulative appreciation in market value over the cost basis of the investment, net of deferred tax, of $3,687 is recorded as a component of shareholders' equity (deficit). Such investment was sold in 1997 and the gain is reported in Other Expenses, net (Note 9).
Cash and Short-Term Cash Investments
Cash and short-term cash investments consist of cash and liquid investments with a maturity of less than three months.
Inventories
Inventories are stated at the lower of standard cost, which approximates average cost, or market. The principal components of cost included in inventories are materials, direct labor and manufacturing overhead.
Depreciable Assets
Property, plant and equipment are carried at cost. Depreciation and amortization of property, plant and equipment are provided on a straight-line basis over the respective asset lives determined on a composite basis by asset group or on a specific item basis using the estimated useful lives of such assets which range from 3 to 12 years for machinery and equipment and 20 to 40 years for buildings. It is the Company's policy to periodically review fixed asset lives.
Deferred Debt Issuance Costs
Deferred debt issuance costs are being amortized on the interest method over the term of the related debt and such amortization is included in interest expense.
Excess of Cost over Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired (goodwill) is being amortized on the straight-line basis over a period of 40 years. Accumulated amortization was $96,973 and $85,657 at December 31, 1997 and 1996, respectively. Management continually reassesses the appropriateness of both the carrying value and remaining life of goodwill. Such reassessments are based on forecasting cash flows, on an undiscounted basis, and other factors. In the event an impairment is indicated, the amount of the impairment would be based on estimated discounted cash flows.
Revenue Recognition
Sales and related cost of sales are recognized upon shipment of products. Sales and related cost of sales under long-term contracts with commercial customers and the U.S. Government are recognized as units are delivered or services provided.
Retirement Pension Plans
Costs for retirement pension plans include current service costs and amortization of prior service costs over periods of up to thirty years. It is the Company's policy to fund current pension costs in conformance with minimum funding requirements and maximum tax deductible limitations. The expense of retiree medical benefit programs is recognized
during the employees' service with the Company as well as amortization of a transition obligation recognized on adoption of the accounting principle in 1993.
Income Taxes
Deferred income taxes are provided for revenue and expenses which are recognized in different periods for income tax and financial statement purposes. Deferred income taxes are not provided on undistributed earnings of foreign affiliated companies which are considered to be permanently invested.
Research and Development
Research, development and engineering expenditures for the creation and application of new and improved products and processes were $15,313, $14,550 and $15,740, excluding customer sponsored programs representing expenditures of $214, $927 and $1,272, for the years 1997, 1996 and 1995, respectively.
Environmental Obligations
The Company recognizes the potential cost for environmental remediation activities when assessments are made, remedial efforts are probable and related amounts can be reasonably estimated; potential insurance reimbursements are not recorded. The Company regularly assesses its environmental liabilities through reviews of contractual commitments, site assessments, feasibility studies and formal remedial design and action plans.
Net Income per Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" during 1997. Net income per share is based on the net income for the period divided by the weighted average common shares outstanding. Net income per share assuming dilution assumes the exercise of outstanding, dilutive stock options using the treasury stock method. The comparative earnings per share data for the prior years presented have been restated.
Derivative Financial Instruments
Derivative financial instruments, which are periodically used by the Company in the management of its interest rate and foreign currency exposures, are accounted for on an accrual basis. Income and expense are recorded in the same category as that arising from the related asset or liability. For example, amounts to be paid or received under interest rate swap agreements are recognized as interest income or expense in the periods in which they accrue.
Note 2 - Merger and Recapitalization
On May 19, 1997, the Company merged with NXS Acquisition Corp., a wholly owned subsidiary of KKR 1996 Fund L.P., KKR Partners II, L.P., and NXS Associates, L.P., limited partnerships formed at the direction of Kohlberg Kravis Roberts & Co. L.P. ("KKR"). The Merger had the effect of affiliates of KKR investing $341,041 in exchange for 13,116,955 shares, or 75% of the Company's common stock. Such equity proceeds , along with $240,000 of proceeds from the sale of 9 7/8% Senior Subordinated Notes due 2007 and borrowings of $750,000 under a $900,000 bank loan agreement ("Bank Agreement") were used to repurchase 40,325,240 shares of the Company's common stock for $1,048,490, purchase all of the Company's outstanding 10.45% Senior Notes and substantially all of the Company's 12 3/4% Subordinated Debentures for $211,153 and pay fees and expenses of $59,436, including $18,000 paid to KKR and $39,292 relating to the issuance of new debt.
The Merger and related transactions have been recorded as a Recapitalization ("Merger and Recapitalization"). Expenses of $17,644 related to the repurchase of the Company's common stock have been reflected as a reduction of additional paid-in capital; other expenses of approximately $2,500, primarily relating to the buyout of certain stock options, are reflected in the accompanying Consolidated Statement of Income. In conjunction with the Merger and Recapitalization, the Company recorded the costs associated with early extinguishment of debt of $12,845, net of tax, as an extraordinary item in the accompanying Consolidated Statement of Income. Such costs included the premium associated with redemption of the Company's 10.45% Senior Notes and 12 3/4% Subordinated Debentures and the write off of unamortized deferred debt issuance costs. Supplemental earnings per share assuming the Merger and Recapitalization was completed at the beginning of 1997 and excluding the impact of related non-recurring expenses is $1.98.
Note 3 - Long-Term Debt
Long-term debt consists of the following:
In conjunction with the Merger and Recapitalization, the Company entered into a $900,000 Bank Agreement with a syndicate of financial institutions, comprised of a $150,000 revolving credit facility that expires in the year 2004 and a $750,000 term loan facility - $350,000 (Tranche A) maturing over a seven-year period ending 2004, $200,000 (Tranche B) maturing in 2005 and $200,000 (Tranche C) maturing in 2006. $56,000 of the term loan was borrowed by the Company's U.K. subsidiary and is denominated in pounds sterling. In October 1997, the Company negotiated a significant amendment and restatement to the term loan under the Bank Agreement. The amendment extinguished the Tranche B and C indebtedness with borrowings under a new $375,000 Term Loan Tranche B with required amortization in 2005 and 2006. In conjunction with the amendment and restatement, the Company incurred an extraordinary loss, net of tax, of $11,702 for the write off of unamortized deferred debt issuance costs. At December 31, 1997, the Company had prepaid $65,000 of the original term loan. Availability under the revolving credit facility at December 31, 1997 was $148,052, after reduction of $1,948 for outstanding letters of credit.
At December 31, 1997, interest under the Bank Agreement generally accrues at 0.5% to 1.0% over prime or 1.75% to 2.25% over LIBOR at the Company's option. The Company also pays certain annual agency and commitment fees. At December 31, 1997 the Company had interest rate protection in the form of swap agreements that together effectively fixed the Company's LIBOR interest rate on $450,000 of floating rate bank debt at 5.76%. Such agreements are in effect to the extent that LIBOR remains below 7% for $300,000 of debt and remains below 8% for an additional $150,000 of debt. These agreements expire in July 2002.
The Bank Agreement requires that the Company satisfy certain financial covenants including interest coverage and leverage ratio tests, and includes limitations with respect to, among other things, (i) incurring debt, (ii) creating or incurring liens, (iii) making other investments, (iv) acquiring or disposing of assets (v) capital expenditures, and (vi) restricted payments, including dividends on the Company's common stock.
The 9 7/8% Senior Subordinated Notes due 2007 are general unsecured obligations of the Company. The notes are subject to redemption at the option of the Company, in whole or in part, beginning in 2002 at 104.938% and declining to 100% by 2005. In addition, at any time prior to 2000, the Company may, at its option, redeem up to $96,000 of the notes at a redemption price of 109.875% with the net cash proceeds of one or more equity offerings.
In conjunction with the Merger and Recapitalization, an existing unsecured revolving credit agreement with a group of banks was terminated, and the existing Senior Notes and the Senior Subordinated Debentures were redeemed.
The maturity of the Company's long-term debt over each of the next five years ending December 31, is as follows: 1998-$212; 1999-$4,748; 2000-$19,044; 2001-$48,027; 2002-$60,530.
Note 4 - Income Taxes
The components of income before income taxes and extraordinary item and the provision for income taxes are as follows:
Year Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Income before taxes and extraordinary item: United States $ 45,354 $ 67,889 $ 69,694 Foreign 41,820 41,776 34,933 -------- -------- -------- $ 87,174 $109,665 $104,627 ======== ======== ======== Current provision: United States $ 21,857 $ 24,174 $ 18,045 Foreign 12,611 15,993 16,144 -------- -------- -------- 34,468 40,167 34,189 -------- -------- -------- Deferred provision: United States 1,407 1,884 7,122 Foreign 35 36 458 -------- -------- -------- 1,442 1,920 7,580 -------- -------- -------- Total provision for income taxes $ 35,910 $ 42,087 $ 41,769 ======== ======== ========
At December 31, 1997, the Company had $21,881 of foreign tax loss carryforwards, of which $2,074 expire at various dates through 2002 and the balance can be carried forward indefinitely, and $348 of tax credit carryforwards that expire in 1999. Accrued income tax liabilities of $8,251 and $11,352 at December 31, 1997 and 1996, respectively, are included in other accrued expenses in the Consolidated Balance Sheet.
Differences between the U.S. statutory federal tax rate and the Company's effective income tax rate are analyzed below:
The Company's deferred tax assets and liabilities, excluding a valuation allowance, were comprised of the following:
December 31, --------------------- 1997 1996 ------- ------- Deferred tax assets: Accrued liabilities and reserves $ 5,583 $ 6,359 Operating loss carryforwards 7,214 4,447 Foreign tax credit carryforwards 348 380 Employee benefits 1,933 6,459 ------- ------- $15,078 $17,645 ======= ======= Deferred tax liabilities: Depreciation $ 8,031 $ 9,351 Marketable securities 1,985 Prepaid pension costs 6,984 4,930 ------- ------- $15,015 $16,266 ======= =======
A valuation allowance of $9,731 and $8,184 at December 31, 1997 and 1996, respectively, has been recorded which relates primarily to foreign net operating loss carryforwards, foreign tax credits and certain deferred tax deductions for which a tax benefit is less likely than not to be received. The net change in the valuation allowance for deferred tax assets resulted in an increase of tax expense of $1,547 in 1997 and a reduction of income tax expense of $4,444 in 1996. The net change in the valuation allowance during 1997 and 1996 related primarily to the foreign net operating loss carryforwards. Changes to certain deferred tax deductions resulted in a decrease to the valuation allowance for 1996. Current and non-current deferred tax assets and liabilities within the same tax jurisdiction are offset for presentation in the Consolidated Balance Sheet.
United States income taxes have not been provided on undistributed earnings of international subsidiaries. The Company's intention is to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. Accordingly, the Company believes that any United States tax on repatriated earnings would be substantially offset by U.S. foreign tax credits. The Company is subject to periodic audits of its various tax returns by government agencies; management does not believe that amounts, if any, which may be required to be paid by reason of such audits will have a material effect on the Company's financial position or results of operations.
Note 5 - Benefit Plans and Other Postretirement Benefits
The Company and its domestic subsidiaries had a number of defined benefit plans covering substantially all U.S. employees. Effective December 31, 1997, the individual U.S. plans were merged into one plan . The information presented below for U.S. plans for 1997 is on the basis of the merged plans. Plan benefits are generally based on years of service and compensation. The plans are noncontributory, except for certain salaried employees. Certain foreign subsidiaries have defined benefit plans covering their employees. The following is a summary of the Company's defined benefit plans' funded status as of the most recent actuarial valuations (December 31, 1997 and 1996).
The weighted-average discount rate and rate of increase in future compensation levels used in determining actuarial present value of the projected benefit obligation was 7.25% (7.5% in 1996 and 1995) and 3.25% (3.50% in 1996 and 1995), respectively. The expected long-term rate of return on assets was 10.5%. Plan assets consist primarily of U.S. equity and debt securities. The largest non-U.S. plan, in accordance with local custom, is unfunded and had an accumulated benefit obligation of approximately $18,656 and $20,485 at December 31, 1997 and 1996 respectively. Such obligation is included in the Consolidated Balance Sheet and the tables above. Pension plans of certain of the Company's other international subsidiaries generally do not determine the actuarial value of accumulated benefits and the value of net assets on the basis shown above. The plans, in accordance with local practices, are generally unfunded. The vested benefit obligations of these plans are not significant.
In accordance with the provisions of SFAS No. 87, the Company recorded a minimum pension liability at December 31, 1996 of $13,572 for circumstances in which the pension plan's accumulated benefit obligation exceeded the fair value of the plan's assets and accrued pension liability. Such liability was partially offset by an intangible asset equal to the unrecognized prior service cost, with the balance recorded as a reduction in shareholders' equity, net of related deferred tax benefits. At December 31, 1997, the fair value of plan assets exceeded the accumulated benefit obligations. The Company maintains self insurance programs for that portion of its health care and workers compensation costs not covered by insurance. The Company also provides certain health care and life insurance benefits to certain eligible retirees through postretirement benefit programs. Beginning in late 1996, the Company implemented changes in its postretirement medical benefit plans such that the Company's share of the cost of such plans for most participants is fixed, and any increase in the cost of such plans will be the responsibility of the retirees. The cost of postretirement health care and life insurance benefit programs charged to expense was approximately $1,823, $2,734, and $2,088 for the years 1997, 1996 and 1995, respectively. The Company expects to fund the benefit costs principally on a pay-as-you-go basis. Since the Company has modified its postretirement medical plans to hold constant its obligation and since the accumulated postretirement benefit obligation ("APBO") and the net postretirement benefit expense are not material in relation to the Company's financial condition or results of operations, management believes any change in medical costs from that estimated will not have a significant impact on the Company. The discount rates used in determining the APBO at December 31, 1997 and 1996 were 7.25% and 7.5%, respectively.
Summary information on the Company's postretirement medical plans as of December 31, 1997 and 1996 is as follows:
Note 6 - Shareholders' Equity (Deficit)
The Company had a stock option plan which authorized the granting of stock options by the Board of Directors for up to a maximum of 1,000,000 shares of Class A Common Stock (the "Old Plan"). In conjunction with the Merger and Recapitalization, all outstanding options under the Old Plan were cancelled and the holders of options with an exercise price less than $26.00 per share were paid the difference between $26.00 and the exercise price. Such amount for all of the then outstanding options was approximately $2.2 million. In May 1997, the Company adopted the 1997 Option Plan (the "New Plan") which authorizes the granting of stock options by a committee of the Board of Directors for up to a maximum of 1,200,000 shares of Common Stock. Options granted under the New Plan vest ratably over a period of five years from the date of grant and are exercisable over a period of ten years from the date of grant. In addition, shares issued in conjunction with the exercise of stock options under the New Plan are generally subject to a Management Stockholders' Agreement which, among other things, places restrictions on the sale or transfer of such shares. At December 31, 1997, no options granted under the New Plan were vested.
Stock option plan activity for 1995, 1996, and 1997 was as follows:
The following table summarizes information about stock options outstanding at December 31, 1997:
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the stock option plans. Accordingly, no compensation cost has been recognized for the plans. Had compensation cost for the stock option plans been determined based on the fair value of the option at date of grant consistent with the requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's income before extraordinary item and net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ---- Income before extraordinary item As reported $51,264 $67,578 $62,858 Pro forma 49,704 66,884 62,366
Income per share before extraordinary item As reported $1.84 $1.45 $1.33 Pro forma 1.79 1.43 1.32
Income per share before extraordinary item - assuming dilution As reported $1.83 $1.45 $1.33 Pro forma 1.78 1.43 1.32
Net income As reported $26,717 $67,578 $62,858 Pro forma 25,157 66,884 62,366
Net income per share As reported $ .96 $1.45 $1.33 Pro forma .90 1.43 1.32
Net income per share - assuming dilution As reported $ .95 $1.45 $1.33 Pro forma .90 1.43 1.32
The fair value of each stock option has been estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1997 1996 1995 ---- ---- ---- Risk free interest rate 5.4% 6.1% 6.6% Expected life 4 years 4 years 4 years Expected volatility 30.0% 30.0% 30.0% Expected dividend yield -- -- --
The weighted-average fair values of options granted during 1997, 1996 and 1995 were $8.36, $7.98 and $9.14, respectively.
Activity in the Company's Shareholders' Equity (Deficit) cumulative valuation adjustment accounts for 1995, 1996 and 1997 is as follows:
Note 7 - Leases
At December 31, 1997, the Company was committed under operating leases which expire at various dates through 2008. Total rent expense under operating leases for the years 1997, 1996, and 1995 was $11,495, $12,216 and $11,594 respectively.
Minimum lease payments under non-cancelable operating leases are as follows:
1998 $ 8,412 1999 6,023 2000 4,340 2001 2,562 2002 1,921 Beyond 2002 3,182 ------- Total minimum obligation $26,440 =======
Note 8 - International Operations
A portion of the Company's revenues and assets relate to international operations. The Company has manufacturing and assembly operations in Canada, Mexico, the United Kingdom, France, Germany, the Czech Republic, Estonia, Taiwan, India, Japan and the Peoples Republic of China and sales offices in a number of other countries. Amounts included in the accompanying consolidated financial statements associated with operations outside the United States consist of the following:
Year Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------------- Net sales: United States operations $ 581,278 $ 503,385 $534,322 International operations: Europe 230,923 233,670 217,143 Other 133,355 92,689 78,442 Eliminations (61,208) (53,523) (46,674) --------- --------- -------- Net sales $ 884,348 $ 776,221 $783,233 ========= ========= ======== Income before extraordinary item: United States operations $ 22,358 $ 42,614 $ 46,493 International operations: Europe 19,387 21,954 16,266 Other 9,519 3,010 99 --------- --------- -------- Income before extraordinary item $ 51,264 $ 67,578 $ 62,858 ========= ========= ======== Identifiable assets: United States operations $ 478,685 $ 473,889 $458,313 International operations: Europe 174,190 172,640 170,319 Other 99,063 75,560 73,406 Eliminations (14,784) (11,427) (12,114) --------- --------- -------- Total assets $ 737,154 $ 710,662 $689,924 ========= ========= ========
Note: Corporate income (loss) and assets are included in United States operations.
The Company had export sales from its United States operations of approximately $88,000, $80,000 and $118,000 in 1997, 1996 and 1995, respectively. The sales were made principally to the Far East, Europe and Latin America.
Pursuant to SFAS No. 52, "Foreign Currency Translation," the financial position and results of operations of all of the Company's significant foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of such subsidiaries have been translated at current exchange rates, and related revenues and expenses have been translated at weighted average exchange rates. The aggregate effect of translation adjustments so calculated is included as a separate component of shareholders' equity. Transaction gains and losses are included in other expenses, net in the accompanying Consolidated Statement of Income.
The Company periodically enters into foreign exchange contracts to hedge its transaction exposures. At December 31, 1997, the Company had no outstanding foreign exchange contracts.
Note 9 - Other Expenses, net
Other income (expense) is comprised as follows:
Year Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 1995 -------- -------- -------- Interest income $ 234 $ 784 $ 134 Foreign currency transaction gains 1,283 339 205 Program fees on sale of accounts receivable (3,671) (3,504) (3,902) Minority interests (1,042) (251) (407) Gain on sale of marketable securities 3,917 Agency and commitment fees (678) (257) (246) Other (1,104) (807) (299) ------- ------- ------- $(1,061) $(3,696) $(4,515) ======= ======= =======
Note 10 - Commitments and Contingencies
In the course of pursuing its normal business activities, the Company is involved in various legal proceedings and claims. Management does not expect that amounts, if any, which may be required to be paid by reason of such proceedings or claims will have a material effect on the Company's financial position or results of operations.
Subsequent to the acquisition of Amphenol from Allied Signal Corporation ("Allied") in 1987, Amphenol and Allied have been named jointly and severally liable as potentially responsible parties in relation to several environmental cleanup sites. Amphenol and Allied have jointly consented to perform certain investigations and remedial and monitoring activities at two sites and they have been jointly ordered to perform work at another site. The responsibility for costs incurred relating to these sites is apportioned between Amphenol and Allied based on an agreement entered into in connection with the acquisition. For sites covered by this agreement, to the extent that conditions or circumstances occurred or existed at the time of or prior to the acquisition, the first $13,000 of costs are borne by Amphenol and had been incurred as of December 31, 1996. Allied is obligated to pay 80% of the excess over $13,000 and 100% of the excess over $30,000. Management does not believe that the costs associated with resolution of these or any other environmental matters will have a material adverse effect on the Company's financial condition or results of operations.
A subsidiary of the Company has an agreement with a financial institution whereby the subsidiary can sell an undivided interest of up to $60,000 in a designated pool of qualified accounts receivable. The agreement expires in May 2004. Under the terms of the agreement, new receivables are added to the pool as collections reduce previously sold accounts receivable. The Company services, administers and collects the receivables on behalf of the purchaser. Fees payable to the purchaser under this agreement are equivalent to rates afforded high quality commercial paper issuers plus certain administrative expenses and are included in other expenses, net, in the accompanying Consolidated Statement of Income. The agreement contains certain covenants and provides for various events of termination. In certain circumstances the Company is contingently liable for the collection of the receivables sold; management believes that its allowance for doubtful accounts is adequate to absorb the expense of any such liability. During 1997, the Company adopted SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Adoption had no effect on the Company's financial statements. At December 31, 1997 and December 31, 1996, approximately $60,000 and $50,000, respectively, in receivables were sold under the agreement and are therefore not reflected in the accounts receivable balance in the accompanying Consolidated Balance Sheet.
Note 11 - Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and short-term cash investments: The carrying amount approximates fair value because of the short maturity of those instruments.
Long-term debt: The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Investments: The fair value of investments is based upon quoted market prices. The fair value equals the carrying value of equity investments, which are classified as available-for-sale.
At December 31, 1996 based on market quotes for the same or similar securities, it is estimated that the Company's 12.75% Subordinated Debentures due 2002 and 10.45% Senior Notes due 2001 were trading at premiums of approximately 15% over book value. At December 31, 1997, based on market quotes for the same or similar securities it is estimated that the Company's 9 7/8% Subordinated Debentures were trading at a premium of 5% over book value. The book value of the Company's other long-term debt approximates fair value.
The Company periodically uses derivative financial instruments. The instruments are primarily used to manage defined interest rate risk, and to a lesser extent foreign exchange and commodity risks arising out of the Company's core activities. During 1995, the Company used forward contracts to hedge certain foreign currency exposures. There were no derivative financial instruments outstanding at December 31, 1996. In 1997, the Company entered into interest rate swaps to limit exposure to interest rate fluctuations on the Company's floating rate bank debt. At December 31, 1997, the Company had $450,000 of interest rate swaps outstanding as described in Note 3. While it is not the Company's intention to terminate the interest rate protection agreements, the fair values were estimated by obtaining quotes from brokers which represented the amounts that the Company would receive or pay if the agreements were terminated at December 31, 1997. These fair values indicated that termination of the agreements at December 31, 1997 would have resulted in a pretax loss of $3,085. Due to the volatility of interest rates, these estimated results may or may not be realized.
The Company does not utilize financial instruments for trading or other speculative purposes. It is estimated that the carrying value of the Company's other financial instruments at December 31, 1997 and 1996 approximates fair value.
Note 12 - Selected Quarterly Financial Data (Unaudited)
(1) Net income per share assuming dilution is equal to net income per share.
Item 9.
Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure
A current report on Form 8-K dated June 20, 1997 was filed with the Securities and Exchange Commission on June 20, 1997, reporting information under Items 4 and 7 thereof that Deloitte and Touche LLP had been appointed as the Registrant's certified public accountants replacing Price Waterhouse LLP effective June 13, 1997.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 10 with respect to the Directors of the Registrant is incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A within 120 days following the end of the fiscal year covered by this report.
The information required by Item 10 with respect to the Executive Officers of the Registrant has been included in Part I of this Form 10-K in reliance on General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
Item 11.
Item 11. Executive Compensation
Pursuant to Instruction G(3) to Form 10-K, the information required in Item 11 is incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A within 120 days following the end of the fiscal year covered by this report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to Instruction G(3) to Form 10-K, the information required in Item 12 is incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A within 120 days following the end of the fiscal year covered by this report.
Item 13.
Item 13. Certain Relationships and Related Transactions
Pursuant to Instruction G(3) to Form 10-K, the information required in Item 13 is incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A within 120 days following the end of the fiscal year covered by this report.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Consolidated Financial Statements Page
Report of Management 19
Independent Auditors' Reports 19
Consolidated Statement of Income -
Years Ended December 31, 1997, December 31, 1996, and December 31, 1995 20
Consolidated Balance Sheet -
December 31, 1997 and December 31, 1996 21
Consolidated Statement of Changes in Shareholders' Equity (Deficit) -
Years Ended December 31, 1997, December 31, 1996, and December 31, 1995 22
Consolidated Statement of Cash Flow -
Years Ended December 31, 1997, December 31, 1996, and December 31, 1995 23
Notes to Consolidated Financial Statements 24
(a)(2) Financial Statement Schedules for the Three Years Ended December 31, 1997
All financial statement schedules are omitted because they are not applicable or required, or because the required information is included in the consolidated financial statements or notes thereto.
(a) Listing of Exhibits
2.1 Agreement and Plan of Merger dated as of January 23, 1997 between NXS Acquisition Corp. and Amphenol Corporation (incorporated by reference to Current Report on Form 8-K dated January 23, 1997).*
2.2 Amendment, dated as of April 9, 1997, to the Agreement and Plan of Merger between NXS Acquisition Corp. and Amphenol Corporation, dated as of January 23, 1997 (incorporated by reference to the Registration Statement on Form S-4 (registration No. 333-25195) filed on April 15, 1997).*
3.1 Certificate of Merger, dated May 19, 1997 (including Restated Certificate of Incorporation of Amphenol Corporation). (filed as Exhibit 3.1 to the June 30, 1997 10-Q).*
3.2 By-Laws of the Company as of May 19, 1997 - NXS Acquisition Corp. By-Laws (filed as Exhibit 3.2 to the June 30, 1997 10-Q).*
4.1 Indenture between Amphenol Corporation and IBJ Schroeder Bank and Trust Company, as Trustee, dated as of May 19, 1997, relating to Senior Subordinated Notes due 2007 (filed as Exhibit 4.1 to the June 30, 1997 10-Q).*
10.1 Amended and Restated Receivables Purchase Agreement dated as of May 19, 1997 among Amphenol Funding Corp., the Company, Pooled Accounts Receivable Capital Corporation and Nesbitt Burns Securities, Inc., as Agent (filed as Exhibit 10.1 to the June 30, 1997 10-Q).*
10.2 Amended and Restated Purchase and Sale Agreement dated as of May 19, 1997 among the Originators named therein, Amphenol Funding Corp. and the Company (filed as Exhibit 10.2 to the June 30, 1997 10-Q).*
10.3 Credit Agreement dated as of May 19, 1997 among the Company, Amphenol Holding UK, Limited, Amphenol Commercial and Industrial UK, Limited, the Lenders listed therein, The Chase Manhattan Bank, as Syndication Agent, the Bank of New York, as Documentation Agent and Bankers Trust Company, as Administrative Agent and Collateral Agent (filed as Exhibit 10.3 to the June 30, 1997 10-Q).*
Management Contracts and Compensatory Plans (Exhibit 10.4 through 10.11).
10.4 1997 Amphenol Incentive Plan (filed as Exhibit 10.13 to the 1996 10-K).*
10.5 1998 Amphenol Incentive Plan.
10.6 Amended and Restated Salaried Employees Pension Plan of Amphenol Corporation (filed as Exhibit 10.12 to the 1994 10-K).*
10.7 Amended and Restated LPL Technologies Inc. Retirement Plan for Salaried Employees (filed as Exhibit 10.13 to the 1994 10-K).*
- ---------- * Incorporated herein by reference as stated.
10.8 Amphenol Corporation Supplemental Employee Retirement Plan formally adopted effective January 25, 1996 (filed as Exhibit 10.18 to the 1996 10-K).*
10.9 LPL Technologies Inc. and Affiliated Companies Employee Savings/401 (k) Plan, dated and adopted January 23, 1990 (filed as Exhibit 10.19 to the 1991 Registration Statement).*
10.10 Management Agreement between the Company and Dr. Martin H. Loeffler, dated July 28, 1987 (filed as Exhibit 10.7 to the 1987 Registration Statement).*
10.11 Amphenol Corporation Directors' Deferred Compensation Plan.
10.12 Agreement and Plan of Merger among Amphenol Acquisition Corporation, Allied Corporation and the Company, dated April 1, 1987, and the Amendment thereto dated as of May 15, 1987 (filed as Exhibit 2 to the 1987 Registration Statement).*
10.13 Settlement Agreement among Allied Signal Inc., the Company and LPL Investment Group, Inc. dated November 28, 1988 (filed as Exhibit 10.20 to the 1991 Registration Statement).*
10.14 Registration Rights Agreement dated as of May 19, 1997, among NXS Acquisition Corp., KKR 1996 Fund L.P., NXS Associates L.P., KKR Partners II, L.P. and NXS I, L.L.C. (filed as Exhibit 99.5 to Schedule 13D, Amendment No. 1, relating to the beneficial ownership of shares of the Company's Common Stock by NXS I, L.L.C., KKR 1996 Fund, L.P., KKR Associates (1996) L.P., KKR 1996 GP LLC, KKR Partners II, L.P., KKR Associates L.P., NXS Associates L.P., KKR Associates (NXS) L.P., and KKR-NXS L.L.C. dated May 27, 1997).*
10.15 Management Stockholder's Agreement entered into as of May 19, 1997 between the Company and Martin H. Loeffler (filed as Exhibit 10.13 to the June 30, 1997 10-Q).*
10.16 Management Stockholder's Agreement entered into as of May 19, 1997 between the Company and Edward G. Jepsen (filed as Exhibit 10.14 to the June 30, 1997 10-Q).*
10.17 Management Stockholder's Agreement entered into as of May 19, 1997 between the Company and Timothy F. Cohane (filed as Exhibit 10.15 to the June 30, 1997 10-Q).*
10.18 1997 Option Plan for Key Employees of Amphenol and Subsidiaries (filed as Exhibit 10.16 to the June 30, 1997 10-Q).*
10.19 Non-Qualified Stock Option Agreement between the Company and Martin H. Loeffler dated as of May 19, 1997 (filed as Exhibit 10.17 to the June 30, 1997 10-Q).*
10.20 Non-Qualified Stock Option Agreement between the Company and Edward G. Jepsen dated as of May 19, 1997 (filed as Exhibit 10.18 to the June 30, 1997 10-Q).*
- ---------- * Incorporated herein by reference as stated.
10.21 Non-Qualified Stock Option Agreement between the Company and Timothy F. Cohane dated as of May 19, 1997 (filed as Exhibit 10.19 to the June 30, 1997 10-Q).*
10.22 First Amendment to Amended and Restated Receivables Purchase Agreement dated as of September 26, 1997 (filed as Exhibit 10.20 to the September 30, 1997 10-Q).*
10.23 Canadian Purchase and Sale Agreement dated as of September 26, 1997 among Amphenol Canada Corp., Amphenol Funding Corp. and Amphenol Corporation, individually and as the initial servicer (filed as Exhibit 10.21 to the September 30,1997 10-Q).*
10.24 Amended and Restated Credit Agreement dated as of October 3, 1997 among the Company, Amphenol Holding UK, Limited, Amphenol Commercial and Industrial UK, Limited, the Lenders listed therein, The Chase Manhattan Bank, as Syndicated Agent, the Bank of New York, as Documentation Agent and Bankers Trust Company, as Administrative Agent and Collateral Agent (filed as Exhibit 10.22 to the September 30, 1997 10-Q).*
11 Statement regarding computation of per share earnings.
12 Statement regarding computation of ratio of earnings to fixed charges.
16 Letter regarding change in Certifying Accountant (filed as Exhibit 16 to the June 20, 1997 Current Report on Form 8-K).*
22 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27.1 1997 Financial Data Schedule
27.2 1997 Financial Data Schedules - Interim Periods only - Restated.
27.3 1996 Financial Data Schedules - Including Interim Periods only - Restated.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the Town of Wallingford, State of Connecticut on the 27th day of March 1998.
AMPHENOL CORPORATION
/s/ Martin H. Loeffler ----------------------------- Martin H. Loeffler Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and as of the date indicated below.
Signature Title Date
/s/ Martin H. Loeffler Chairman, Chief Executive Officer March 27, 1998 Martin H. Loeffler and President (Principal Executive Officer)
/s/ Edward G. Jepsen Chief Financial Officer March 27, 1998 Edward G. Jepsen (Principal Financial Officer and Principal Accounting Officer)
/s/ Andrew Clarkson Director March 27, 1998 Andrew Clarkson
/s/ G. Robert Durham Director March 27, 1998 G. Robert Durham
/s/ Henry R. Kravis Director March 27, 1998 Henry R. Kravis
/s/ Marc S. Lipschultz Director March 27, 1998 Marc S. Lipschultz
/s/ Michael W. Michelson Director March 27, 1998 Michael W. Michelson
/s/ George R. Roberts Director March 27, 1998 George R. Roberts