<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1996
REGISTRATION NO. 333-08397
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CII TECHNOLOGIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3625 56-1828272
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
1396 CHARLOTTE HIGHWAY
FAIRVIEW, NORTH CAROLINA 28730
(704) 628-1711
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
RAMZI A. DABBAGH
CHIEF EXECUTIVE OFFICER
CII TECHNOLOGIES INC.
1396 CHARLOTTE HIGHWAY
FAIRVIEW, NORTH CAROLINA 28730
(704) 628-1711
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
WILSON S. NEELY, ESQ. GLENN W. REED, ESQ.
SIMPSON THACHER & BARTLETT GARDNER, CARTON & DOUGLAS
425 LEXINGTON AVENUE 321 NORTH CLARK STREET
NEW YORK, NEW YORK 10017 CHICAGO, ILLINOIS
(212) 455-2000 (312) 245-8446
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 1, 1996.
PROSPECTUS
3,500,000 SHARES
[LOGO] CII TECHNOLOGIES (TM)
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") are being
issued and sold by CII Technologies Inc. (the "Company"). Prior to the
Offering, there has been no public market for the Common Stock. It is currently
anticipated that the initial public offering price will be between $7.00 and
$9.00 per share. See "Underwriting" for information relating to the
determination of the initial offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "CIIT."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...................... $ $ $
Total(3)....................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 525,000 additional shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The Common Stock is being offered by the several Underwriters when, as and if
delivered to and accepted by them and subject to their right to reject orders
in whole or in part. It is expected that delivery of certificates for the
shares of Common Stock will be made on or about , 1996.
WILLIAM BLAIR & COMPANY FURMAN SELZ
The date of this Prospectus is , 1996
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information and financial statements, including the notes thereto,
contained elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) gives effect to a 2.5-for-1 stock split of
each share of the Company's Common Stock to be effected prior to consummation
of the Offering; (ii) assumes the Kilovac Share Exchange and the Preferred
Exchange (as described under "Certain Relationships and Related Transactions--
Kilovac Acquisition" and "--Preferred Exchange") have been completed; and (iii)
assumes the Underwriters' over-allotment option is not exercised. See
"Underwriting." Unless otherwise indicated, all amounts and statistical
information presented herein for fiscal 1995, other than financial statement
information and information contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," is presented on a pro forma
basis after giving effect to the acquisitions of Kilovac Corporation
("Kilovac") and the Hartman Electrical Manufacturing Division (the "Hartman
Division" or "Hartman") of Figgie International, Inc. ("Figgie"). Unless the
context otherwise specifically requires, references to the "Company" include
CII Technologies Inc. and its consolidated operating subsidiaries, together
with the historical business and operations undertaken by Communications
Instruments, Inc. (the "Predecessor").
THE COMPANY
The Company is a leading designer, manufacturer and marketer of a broad line
of high performance electromechanical and electronic products and solenoids for
customers in the commercial/industrial equipment, commercial airframe,
defense/aerospace, communications, automatic test equipment and automotive
industries. The Company's relays are used to control current or signals in
electrical and electronic circuits and are technological building blocks for a
wide range of products. While the Company is a broad-based supplier of general
and special purpose relays and solenoids, it has focused on manufacturing high
performance relay products and targeting customized applications of these
products to meet the needs of the markets it serves. The Company's high
performance relays are sophisticated, complex devices that have been engineered
for highly reliable performance over substantial periods of time, often in
adverse operating environments. The Company sells its products to more than
2,100 customers, including Boeing, AT&T, Rockwell, Hewlett Packard, McDonnell
Douglas and General Motors.
To further penetrate and expand the size and number of markets that it
serves, the Company seeks to leverage its broad product offering, its
reputation for quality, innovation and technological leadership, its diverse
and efficient manufacturing capabilities and its wide and diversified customer
base. In addition, the Company's successful implementation of its acquisition
strategy and integration of acquired companies and product lines into its
operations have produced significant growth in the Company's revenues. Since
its inception in 1980, the Company has completed 13 acquisitions for an
aggregate consideration of approximately $36.0 million. In October 1995 the
Company acquired Kilovac (the "Kilovac Acquisition") and in July 1996 the
Company completed the acquisition of the Hartman Division (the "Hartman
Acquisition"). Net sales of Kilovac and Hartman for 1995 represented 21.5% and
25.5%, respectively, of the Company's pro forma net sales for 1995.
The Company believes that these acquisitions have enabled it to become one of
the five largest relay manufacturers in North America. The Company plans to
enhance its growth by strategically acquiring product lines and manufacturing
operations to obtain new product capabilities and technologies, to further
increase market penetration with both existing and new customers, and to expand
manufacturing and assembly capabilities.
Electromechanical and electronic products (which are used to direct and
control electrical currents and signal transmissions) and solenoids (which are
used to convert electrical energy into mechanical motion) have a myriad of
commercial and industrial applications. The Company currently manufactures and
assembles more than 750 types of relays and solenoids and believes that it has
one of the largest and most diverse product portfolios of any manufacturer in
its industry. The Company believes that its sales as a sole source supplier of
high performance relays and solenoids represented approximately 53% of its net
sales for 1995.
3
<PAGE>
The Company currently manufactures high performance relays at its four
facilities in the United States and general purpose relays at its facility in
Mexico. The Company also maintains several subcontracting relationships with
manufacturers in the People's Republic of China, and the Company has entered
into a joint venture in India which has recently commenced construction of a
manufacturing facility. The Company believes that its domestic and
international manufacturing capabilities allow it to provide to its customers
high quality products at globally competitive prices.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by
the Company............ 3,500,000 shares
Common Stock to be
Outstanding After the
Offering............... 6,862,500 shares (1)
Use of Proceeds......... Repayment of indebtedness and redemption of preferred
stock. See "Use of Proceeds."
Nasdaq National Market
Symbol................. CIIT
</TABLE>
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(1) Includes (i) 250,000 shares to be issued upon the completion of this
Offering to CII Associates, L.P., (the "Partnership") (assuming an initial
public offering price of $8.00 per share) in exchange for the surrender by
the Partnership of shares of the Company's Preferred Stock having an
aggregate liquidation preference at the date of exchange of $2.0 million
(the "Preferred Exchange") and (ii) 562,500 shares anticipated to be issued
upon the completion of this Offering as part of the Kilovac Share Exchange,
assuming an initial public offering price of $8.00 per share. The actual
number of shares issuable in the Preferred Exchange and the Kilovac Share
Exchange will be calculated by dividing $2.0 million and $4.5 million,
respectively, by the initial public offering price per share in the
Offering. See "Certain Relationships and Related Transactions--Kilovac
Acquisition and "--Preferred Exchange". Excludes 100,000 shares reserved
for issuance upon the exercise of options to be granted under the Company's
1996 Management Stock Plan at or about the time of the Offering.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
---------------------------- -----------------------------
PRO
JANUARY 1, MAY 11, PRO FORMA
1993 TO 1993 TO FORMA AS ADJUSTED
MAY 10, DECEMBER 31, AS ADJUSTED JULY 2, JUNE 30, JUNE 30,
1993(1) 1993(1) 1994 1995 1995(2) 1995 1996 1996(3)
---------- ------------ ------- ------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $8,378 $17,095 $31,523 $39,918 $68,408 $18,568 $27,455 $38,280
Cost of sales.......... 6,684 14,448 24,330 28,687 46,622 13,568 19,011 27,104
------ ------- ------- ------- ------- ------- ------- -------
Gross profit........... 1,694 2,647 7,193 11,231 21,786 5,000 8,444 11,176
Selling expenses....... 713 1,344 2,382 3,229 4,961 1,409 2,382 2,538
General and
administrative
expenses.............. 586 1,150 2,248 3,334 5,738 1,296 2,369 2,943
Research and develop-
ment.................. 21 41 103 301 1,463 78 461 461
Amortization of
goodwill and other
intangible assets..... 45 117 177 251 831 110 246 401
Special compensation
charge(4)............. -- -- -- 1,300 1,300 -- -- --
Environmental
expenses(5)........... -- -- -- 951 951 -- -- --
Special acquisition
expenses(6)........... 153 266 -- 2,064 2,064 915 -- --
------ ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................ 176 (271) 2,283 (199) 4,478 1,192 2,986 4,833
Interest expense....... 77 1,086 1,833 2,997 1,965 1,138 1,820 983
Other income
(expense)............. 42 -- -- 2 (81) 2 201 186
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes and minority
interest.............. 141 (1,357) 450 (3,194) 2,432 56 1,367 4,036
Income tax expense
(benefit)............. -- (499) 178 (1,076) 1,094 22 554 1,622
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)...... 141 (858) 272 (2,153) 1,338 34 762 2,414
Preferred stock
dividend.............. -- 102 185 210 -- 92 186 --
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)
available for common
stock................. $ 141 $ (960) $ 87 $(2,363) $ 1,338 $ (58) $ 576 $ 2,414
====== ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
common share.......... $ (0.38) $ 0.03 $ (0.93) $ 0.20 $ (0.02) $ 0.23 $ 0.35
======= ======= ======= ======= ======= ======= =======
Average shares
outstanding........... 2,494 2,510 2,535 6,848 2,525 2,550 6,863
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(3)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $11,598 $17,601 $22,402
Total assets.............................. 49,081 66,231 70,605
Total debt................................ 30,808 43,782 24,085
Cumulative redeemable preferred stock..... 4,683 4,683 --
Total stockholders' equity (deficit)...... (1,929) (1,929) 28,340
</TABLE>
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(1) The statement of operations data for the period ended May 10, 1993
represent the results of the Predecessor from January 1, 1993 and the
statement of operations data for the period from May 11, 1993 to December
31, 1993 represent the results of the Company. In allocating the purchase
price in connection with the CII Acquisition, the Company recorded an
increase in inventory to estimated fair market value of $986,000 which was
reflected in cost of sales from May 11, 1993 to December 31, 1993. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--General" and "Selected Consolidated Financial Information."
(2) Gives effect to (i) the Hartman Acquisition and the Kilovac Acquisition,
(ii) the Kilovac Share Exchange, (iii) the Preferred Exchange and (iv) the
sale by the Company of 3,500,000 shares of Common Stock in the Offering at
an assumed initial public offering price of $8.00 per share and the
application of the proceeds therefrom as described in "Use of Proceeds",
including, without limitation, the repayment of debt and the redemption of
outstanding cumulative redeemable preferred stock and the elimination of
accrued and unpaid dividends in connection therewith, in each case as
adjusted to reflect the corresponding tax expenses/benefits associated
with such
5
<PAGE>
adjustments and as if such transactions had occurred on January 1, 1995. See
"Use of Proceeds," "Capitalization," "Pro Forma Condensed Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Certain Relationships and Related
Transactions--Kilovac Acquisition," "--Preferred Exchange" and the Company's
Consolidated Financial Statements and the Notes thereto.
(3) Gives effect to (i) the Hartman Acquisition, (ii) the Kilovac Share
Exchange, (iii) the Preferred Exchange and (iv) the sale by the Company
of 3,500,000 shares of Common Stock in the Offering at an assumed initial
public offering price of $8.00 per share and the application of the
proceeds therefrom as described in "Use of Proceeds," including, without
limitation, the repayment of a portion of outstanding debt and the
redemption of a portion of the outstanding cumulative redeemable
preferred stock and the elimination of accrued and unpaid dividends in
connection therewith, in each case as adjusted to reflect the
corresponding tax expenses/benefits associated with such adjustments and
as if such transactions had occurred on January 1, 1995 in the case of
the statement of operations data and at June 30, 1996 in the case of
balance sheet data.
(4) Reflects a special compensation charge of $1.3 million which represents
(i) the difference between the purchase price of Common Stock purchased
by seven employees on December 1, 1995 and the estimated fair market
value of such shares (based upon the appraised value on December 1, 1995)
and (ii) a related special cash bonus granted by the Company to the same
seven employees to pay taxes associated with such stock.
(5) Reflects a non-recurring charge of $951,000 which represents primarily
the costs incurred to date and the present value of the estimated future
costs payable by the Company over the next 30 years for groundwater
remediation at the Fairview facility. See "Business--Environmental
Matters."
(6) Special acquisition expenses in 1993 consist primarily of costs related
to the relocation of a facility following the acquisition of Midtex
Relays and costs associated with relocating the operations acquired from
West Coast Electrical Manufacturing Co. and CP Clare. Such expenses in
1995 include costs primarily related to (i) the relocation of certain
assets acquired from HiG Relays and Deutsch Relays, and (ii) the write-
off of an agreement with a business development consultant. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations."
(7) Gives effect to the Hartman Acquisition, as if such event had occurred on
June 30, 1996.
6
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in the forward-looking statements as a
result of certain of the risk factors set forth below and elsewhere in this
Prospectus. Prospective purchasers of the Common Stock should consider
carefully the following specific information, together with the other
information set forth in this Prospectus, before purchasing any shares of
Common Stock offered hereby.
EXPANSION THROUGH ACQUISITIONS
The overall relay and solenoid markets are relatively mature and stable.
Accordingly, the Company has and will continue to pursue a business strategy
of growing its business and product lines through strategic acquisitions in
order to grow at a faster rate than the markets it serves. The Company's
ability to continue to expand through acquisitions, however, will depend upon
the availability of suitable acquisition candidates, the Company's ability to
consummate such transactions and, in certain circumstances, the availability
of financing on terms acceptable to the Company. There can be no assurance
that the Company will be effective in making acquisitions. Such transactions
involve numerous risks, including possible adverse short-term effects on the
Company's operating results and the market price of the Company's Common
Stock. While the Company regularly evaluates potential acquisition candidates
in the ordinary course of its business, as of the date of this Prospectus
there are no commitments or agreements with respect to any acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Acquisition Strategy."
INTEGRATION OF ACQUIRED BUSINESSES
The Company seeks to effectively consolidate acquired product lines and
assets into its business and, through eliminating overhead and benefiting from
synergies with the Company's existing manufacturing techniques and sales
force, increase the profit margins of the acquired assets. The success of any
acquisition will depend in large part on the Company's ability to effectively
integrate the acquired assets into its existing business. Integrating acquired
businesses may, for example, result in a loss of customers of the acquired
businesses and, if the acquired company has significant losses when purchased,
may have a short-term dilutive effect on the Company's results of operations.
The process of consolidating acquired businesses requires significant
management attention, may place significant demands on the Company's
operations, information systems and financial resources, and may also result
in costs that may adversely affect the Company's results of operations. The
failure to effectively integrate acquired businesses with the Company's
operations could adversely affect the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business--
Acquisition Strategy," and "--Sales and Distribution."
RISKS RELATED TO THE HARTMAN ACQUISITION
In connection with its recently completed Hartman Acquisition, the Company
has assumed a contractual obligation to produce and sell relay components of
electrical load management systems. This contract accounted for $1.9 million,
or 10.8%, of Hartman's revenues for fiscal 1995 and, for the first six months
of 1996, $2.4 million, or 22.2%, of Hartman's revenues (6.3% of the Company's
pro forma net sales for the first six months of 1996). This contract is
unprofitable, and, in connection with the Hartman Acquisition, the Company has
assumed a reserve previously established by Hartman of approximately $2.2
million in anticipation of losses that the Company expects to incur as this
contract is fulfilled over the next two years. To the extent that actual
losses attributable to this contract exceed the amount reserved therefor, the
Company's results of operations may be adversely affected. A decline in
purchases made under this contract could adversely affect profitability if
Hartman is not able to reduce its fixed costs or if the Company does not
increase revenue to offset the loss of this contract.
7
<PAGE>
Due to the nature of the industry that Hartman serves, its customer base is
highly concentrated. Approximately 86% and 91% of net sales in 1994 and 1995,
respectively, were to Hartman's ten largest customers. Four customers in 1994
and three customers in 1995 exceeded 10% of Hartman's net sales. Sales to
these customers accounted for 47.9% of net sales in 1994 and 47.0% of net
sales in 1995. The loss of one or more of these customers could have a
material adverse effect on the Company's result of operations.
INTERNATIONAL OPERATIONS AND FOREIGN INSTABILITY
General. In fiscal 1995, approximately 19.1% of the Company's cost of sales
was attributable to operations located outside the United States, consisting
primarily of the operations of the Company's Midtex Division located in
Juarez, Mexico and the operations of several Asian-based subcontractors which
supply the Company with finished goods, sub-assemblies and raw materials.
Foreign manufacturing is subject to various risks, including exposure to
currency fluctuations, political and economic instability, the imposition of
foreign tariffs and other trade barriers, and changes in governmental
policies. While the Company has not historically experienced material adverse
effects due to its foreign operations, the Company's foreign operations may
incur increased costs and experience delays or disruptions in product
deliveries that could cause loss of revenue and damage to customer
relationships.
A portion of the Company's cost of sales and net sales is derived from
international operations which are conducted in foreign currencies. Changes in
the value of these foreign currencies relative to the U.S. dollar in the past
have affected, and in the future may affect, the Company's results of
operations and financial position. In fiscal 1995, the devaluation of the
Mexican peso relative to the U.S. dollar had a favorable impact on the
Company's results of operations. An increase in the value of the peso relative
to the U.S. dollar in the future may have an adverse effect on the Company's
results of operations. The Company has not engaged in currency hedging
transactions in the past, though it may undertake currency hedging in the
future.
A significant portion of the Company's manufacturing, testing, and assembly
operations are performed in Mexico and by subcontractors located in China,
India, Taiwan, and Japan. In certain of these locations, there is a limited
pool of skilled workers. There can be no assurance that the Company or its
subcontractors will be able to continue to hire and train sufficiently skilled
personnel as the Company expands its international manufacturing operations.
Mexico. Mexico has recently experienced economic, political and civil
instability that have contributed to the devaluation of the peso, as well as
other adverse economic and social effects. In fiscal 1995, approximately 11.2%
of the Company's products were manufactured or assembled in its facility in
Juarez, Mexico, where approximately one-fourth of the Company's total labor
force is located. While the Company believes that it has adequate access to
and from Mexico to transport partially finished and fully assembled goods, any
disruption in the political or economic stability of that country could
substantially and adversely affect the Company's operations. While the Company
believes that its relations with its Mexican work force is good, economic
instability and the devaluation of the peso may have a destabilizing effect on
the workforce which could have a material adverse effect on the Company.
China. A portion of the Company's general purpose relays, solenoids and sub-
assemblies are produced in subcontract facilities in China. Since 1980, China
has enjoyed "most favored nation" ("MFN") status under United States tariff
laws, which provides the most favorable category of United States import
duties. China's MFN status is annually reviewed by Congress. The loss of MFN
status for China would result in a substantial increase in the duty for
products manufactured in China and imported into the United States. The
Company retains a business agent in China to assist the Company in developing
subcontracting arrangements. The Company believes that the loss of China's MFN
status or the services of the Company's agent in China is not likely to have a
long-term adverse effect on the Company's business because the Company is
prepared to shift its manufacturing to other countries or develop
relationships with new business agents. However, such a loss in either case
could have a short-term adverse effect until alternative manufacturing or
business arrangements could be made.
8
<PAGE>
India. The Indian Joint Venture commenced production of relays in the third
quarter of 1996. The Company trained the employees of the Indian Joint Venture
in its North Carolina facilities and has transferred the assembly equipment
for certain of its product lines to the Indian Joint Venture's facility. India
has from time to time experienced social and civil unrest relating to ethnic,
religious and political differences among India's population. This unrest has
occasionally caused significant economic disruptions within India. Future
changes in government policies, and social, political, economic or other
future developments in or affecting India may adversely affect the operations
of, and the Company's economic interest in, the Indian Joint Venture. The
Company does not have a controlling interest in the Indian Joint Venture. In
addition, there can be no assurance that the operations of the Indian Joint
Venture will support the manufacturing capability and international sales
objectives of the Company. See "Business--Facilities--Indian Joint Venture."
DEPENDENCE ON INDEPENDENT SALES REPRESENTATIVES AND DISTRIBUTORS
The Company conducts virtually all of its sales through independent sales
representatives and distributors. The Company's distributors are not subject
to minimum purchase requirements and certain of these distributors sell
competing products. The sales representatives and distributors can discontinue
marketing the Company's products with minimal notice. The loss of, or a
significant reduction in sales volume through, one or more of the Company's
independent sales representatives or distributors could have a material
adverse effect on the Company's operating results. See "Business--Sales and
Distribution."
DEPENDENCE ON SENIOR MANAGEMENT
The Company's future performance will depend, in part, upon the efforts and
abilities of the Company's senior management employees. The loss of service of
one or more of these persons could have an adverse effect on the Company's
business and development. The Company has entered into employment agreements
with Ramzi A. Dabbagh (the Company's Chairman, President and Chief Executive
Officer) and G. Daniel Taylor (the Company's Executive Vice President of
Business Development), each of which agreements terminates in May 1998, and
the Company maintains key-man life insurance on Messrs. Dabbagh and Taylor.
The Company has also entered into employment agreements with Michael A.
Steinback (President of the CII Division) and David Henning (Chief Financial
Officer of the Company), which agreements expire in April 1997 and December
1996, respectively, and are automatically renewed each year. The success of
certain recent and future acquisitions completed by the Company may also
depend, in part, on the Company's ability to retain key management of the
acquired businesses. The President of the Kilovac Division, Douglas Campbell,
is expected to leave his position upon the expiration of his employment
agreement in December 1996. The Company has selected a senior member of the
management team of the Kilovac Division to replace Mr. Campbell and has
entered into employment agreements with four key executives of the Kilovac
Division, each of which expires on October 31, 1998. See "Management--
Employment Agreements."
COMPETITION
The markets in which the Company operates are highly competitive. Several of
the Company's competitors have greater financial, marketing, manufacturing and
distribution resources than those of the Company. There can be no assurance
that the Company will be able to compete successfully in the future against
its existing competitors or that the Company will not experience increased
price competition, which could adversely affect the Company's results of
operations. The Company also faces competition for acquisition opportunities
from its large competitors. Barriers to entry exist in the high performance
relay markets in the form of stringent commercial and military qualifications
required to sell products to certain customers or for certain applications.
The Company holds military qualifications (QPL) for 29 of its product types.
Obtaining and maintaining these qualifications is contingent upon successful
completion of rigorous facility and product testing on a regular basis and at
significant cost. The elimination by the military or certain commercial
customers of such qualification requirements would lower these barriers to
entry and enable other relay manufacturers to sell products to such customers.
See "Business--Competition."
9
<PAGE>
COMPLIANCE WITH MILITARY QUALIFICATIONS
During 1995, approximately $9.7 million (14.2%) of the Company's total
revenue was derived from the sale of military qualified products. Maintaining
military qualifications is dependent upon successful completion of rigorous
environmental and life testing of the Company's qualified products on a
regular basis. From time to time, test failures occur in specific lots of
relays which exceed a predetermined statistical limit. When that occurs the
Company interrupts the production and shipping of the individual family of
products involved while the cause of the failures is investigated and
corrected. The Company does not resume production and shipment until the
report of the incident and a corrective action plan has been approved by the
governmental authority responsible for product qualifications. Historically,
such problems have occurred infrequently and production delays have been
brief. If a testing problem occurs in the future which cannot be resolved
quickly or if a proposed corrective action is not acceptable to the
government, production and shipping delays could be extended and the
operations of the Company could be adversely affected.
DEPENDENCE ON RAW MATERIALS AND LIMITED OR SOLE SOURCE SUPPLIERS
The Company's business is dependent upon maintaining access to adequate
supplies of certain raw materials, such as copper, silver, gold, palladium,
tin, iron, nickel, magnesium, cobalt and/or alloys of those raw materials. The
Company also requires specific types of plastic and ceramic materials and
glass for the manufacture of its products. Certain grades of these materials
are obtained from limited or single source suppliers. The Company does not
have long-term guaranteed supply agreements with its suppliers. While the
Company has not previously experienced significant interruptions in raw
material supplies, there can be no assurance that in the future significant
disruption or termination of the supply of these materials or a significant
increase in cost of these materials will not occur, which could result in a
material adverse effect on the Company's operations.
UNCERTAINTY OF INTELLECTUAL PROPERTY PROTECTION AND POSITION
The Company holds seven patents and has a number of applications for patents
pending. There can be no assurance that the Company's patents will prove to be
enforceable, that any patents will be issued with respect to those for which
applications have been made, or that competitors will not develop functionally
similar devices outside the protection of any patents the Company has or may
obtain. The Company has from time to time received, and may in the future
receive, communications from third parties alleging that certain of the
Company's products or technologies infringe the proprietary rights of such
third parties. There can be no assurance that the Company is not infringing
the proprietary rights of any third party. In addition, there can be no
assurance that, if the Company is so infringing the property rights of any
third party, a license to such rights would be available on commercially
reasonable terms, if at all. In the event of any such infringement, the
Company's results of operations could be materially and adversely affected.
See "Business--Proprietary Rights."
TECHNICAL OBSOLESCENCE
The markets for the Company's products are characterized by technological
change and new product introductions. To remain competitive, the Company must
continue to develop new process and manufacturing capabilities to meet
customers' needs and new product requirements, continue to enhance existing
products and introduce new products that reduce size, increase performance and
reliability and allow for improved manufacturing efficiency. If the Company is
unable to develop such new capabilities, or is unable to design, develop and
introduce competitive new products on a timely basis, its future operating
results may be materially and adversely affected.
ENVIRONMENTAL MATTERS
The Company is subject to various foreign, federal, state and local
environmental laws and regulations. The Company believes its operations are in
material compliance with such laws and regulations. However, there can be no
assurance that violations will not occur or be identified, or that
environmental laws and regulations will not change in the future, in a manner
that could materially and adversely affect the Company.
10
<PAGE>
Under certain circumstances, such environmental laws and regulations may
also impose joint and several liability for investigation and remediation of
contamination at locations owned or operated by the Company or its
predecessors, or at locations at which wastes or other contamination
attributable to the Company or its predecessors have come to be located. The
Company can give no assurance that such liability at facilities the Company
currently owns or operates, or at other locations, will not arise or be
asserted against the Company or entities for which it may be responsible. Such
other locations could include, for example, facilities formerly owned or
operated by the Company (or an entity or business that the Company has
acquired), or locations to which wastes generated by the Company (or an entity
or business that the Company has acquired) have been sent. The Company has
been identified as a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"), for investigation and remediation costs at two sites
neither owned nor operated by the Company. In addition, soil and groundwater
contamination has been identified at and about the Company's Fairview, North
Carolina facility, and that site has been included in the North Carolina
Department of Environmental, Health, & Natural Resources' Inactive Hazardous
Waste Sites Priority List. The Mansfield, Ohio property, at which the Company
recently has acquired operations in connection with the Hartman Acquisition,
may contain contamination at levels that will require further investigation
and may require soil and/or groundwater remediation. At each of these
locations, the Company could become subject to liability that, except under
certain circumstances, is joint and several for the total cost of
investigating and remediating the site. Such liability, or liability at
locations yet to be identified, could under certain circumstances materially
and adversely affect the Company. See "Business--Environmental Matters."
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offering and the Preferred Exchange, CII Associates,
L.P. (the "Partnership") will own in the aggregate approximately 35.0% of the
outstanding Common Stock of the Company (and 32.5% of the outstanding Common
Stock if the Underwriters exercise their over-allotment option in full).
Consequently, the Partnership, through its Common Stock holdings and its
representation on the current Board of Directors, which includes three
nominees designated by it, may exercise significant influence over the
policies and direction of the Company. See "Certain Relationships and Related
Transactions--Preferred Exchange" and "Ownership of Common Stock."
USE OF PROCEEDS TO REPAY DEBT OWING TO EXISTING STOCKHOLDERS
After the application of approximately $13.0 million of the net proceeds
(including approximately $558,000 for the success fee) to repay a portion of
amounts owing to its senior lenders, $1.45 million of the net proceeds will be
used to repay promissory notes held by Mr. Dabbagh and three other original
stockholders of the Predecessor. In addition, $7.5 million of the net proceeds
will be used to repay amounts owing under the Company's subordinated
promissory notes held by CII Associates, L.P. (the "Partnership"), which is
controlled by Stonebridge Partners and is the Company's principal stockholder,
and $2.7 million of the net proceeds will be used to redeem a portion of the
Company's outstanding Preferred Stock held by the Partnership (the remainder
of which will be exchanged for shares of Common Stock in the Preferred
Exchange), including all accrued and unpaid dividends on such Preferred Stock.
See "Use of Proceeds" and "Ownership of Common Stock."
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company, as amended in
connection with the Offering, contain special notice and other provisions the
effect of which could be to discourage non-negotiated takeover attempts, which
some stockholders might otherwise deem to be in their interests. As a Delaware
corporation, the Company is also subject to certain provisions of Delaware
corporation law which may also discourage or make more difficult a takeover
attempt. See "Description of Capital Stock--Certain Certificate of
Incorporation, Bylaw and Statutory Provisions Affecting Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICES
Upon completion of the Offering, the Kilovac Share Exchange and the
Preferred Exchange, the Company will have 6,862,500 shares of Common Stock
outstanding (7,387,500 if the Underwriters' over-allotment option
11
<PAGE>
is exercised in full). The 3,500,000 shares of Common Stock offered hereby
(plus an additional 525,000 shares if the Underwriters' over-allotment option
is exercised in full) will be freely tradeable without restriction or
registration under the Securities Act, by persons other than "affiliates" (as
defined under the Securities Act) of the Company. All the remaining 3,362,500
shares of Common Stock are "restricted securities," as that term is defined
under Rule 144 ("Rule 144") promulgated under the Securities Act, and must be
sold pursuant to Rule 144 or another exemption from registration under the
Securities Act. Substantially all of such restricted securities will be
subject to "lock-up" agreements under which the holders of such shares will
agree not to sell or otherwise dispose of any shares of Common Stock for a
period of 365 days without the prior written consent of the Representatives of
the Underwriters. In addition, the 3,362,500 shares of Common Stock held by
the Company's current stockholders and the participants in the Kilovac Share
Exchange and the Preferred Exchange have certain rights with respect to the
registration of their restricted securities under the Securities Act. See
"Certain Relationships and Related Transactions--Registration Rights" and
"Underwriting."
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, may
adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of additional
equity securities. See "Shares Eligible for Future Sale."
DILUTION
The estimated initial public offering price is higher than the pro forma net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in the Offering will therefore incur immediate dilution in net
tangible book value per share of Common Stock of approximately $6.61. See
"Dilution."
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active public market will develop for the
Common Stock after the Offering. The initial public offering price will be
determined through negotiations among the Company and the Representatives of
the Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. See "Underwriting" for factors to be considered in
determining the initial public offering price of the Common Stock.
12
<PAGE>
THE COMPANY
OVERVIEW
The Company is a leading designer, manufacturer and marketer of a broad line
of high performance electromechanical and electronic products and solenoids
for customers in the commercial/industrial equipment, commercial airframe,
defense/aerospace, communications, automatic test equipment and automotive
industries. The Company's relays are used to control current or signals in
electrical and electronic circuits, and are technological building blocks for
a wide range of products. While the Company is a broad-based supplier of
general and special purpose relays and solenoids, it has focused on
manufacturing high performance relay products and targeting customized
applications of these products to meet the needs of the markets it serves. The
Company's high performance relays are sophisticated, complex devices that have
been engineered for highly reliable performance over substantial periods of
time, often in adverse operating environments. The Company sells its products
to more than 2,100 customers including Boeing, AT&T, Rockwell, Hewlett
Packard, McDonnell Douglas and General Motors.
Relays are electrically operated switches which are used to control current
or signals in electrical or electronic circuits. Solenoids are
electromechanical devices which convert electric power into mechanical motion.
Because relays and solenoids are used to perform a basic function, they are
found in thousands of electrical and electronic devices. The Company's
business strategy has been to focus on providing high performance, highly
reliable products with sophisticated and customized applications. The
operations of the Company are conducted through its CII division, which
manufactures high performance signal level relays and solenoids (the "CII
Division"); the Midtex division, which manufactures general purpose relays
(the "Midtex Division"); the Kilovac division, which manufactures high
performance high voltage relays (the "Kilovac Division"); and the Hartman
Division, which manufactures high performance high current relays.
Communications Instruments, Inc. was initially formed in 1980 by Ramzi
Dabbagh (the Chairman, President and Chief Executive Officer of the Company)
and a group of private investors. The Company made its initial acquisition of
several relay and switch products from the CP Clare division of General
Instruments in 1980, and, since that initial acquisition, Mr. Dabbagh and his
management team have pursued a growth strategy of acquiring manufacturers of
relay products and related components, often consolidating the acquired
companies and/or their product lines into the Company's manufacturing
facilities, and eliminating significant overhead. The Company has completed 13
acquisitions since 1980 for an aggregate consideration of approximately $36.0
million, including the purchase of stand-alone companies, divisions of larger
companies and individual product lines. The Company believes that these
acquisitions have enabled it to become one of the five largest relay
manufacturers in North America.
In order to provide liquidity for the original shareholder group and
position the Company for future growth, Stonebridge Partners, together with
the management team, acquired the Predecessor in May 1993 (the "CII
Acquisition"). Since the CII Acquisition, the Company has acquired a high
performance relay product line of Deutsch Relays Inc. (the "Deutsch
Acquisition"), purchased certain assets of HiG Relays Inc. (the "HiG
Acquisition") and purchased in October 1995 an 80% interest in Kilovac, a
California-based relay manufacturer. Kilovac is a leading global supplier of
high voltage and direct current relays. See "Certain Relationships and Related
Transactions--Kilovac Acquisition." In July 1996 the Company purchased from
Figgie the assets of its Hartman Division. Hartman is a leading manufacturer
of high performance power relays with high current switching capability. These
high performance power relays have applications in the primary and secondary
power distribution circuits used in the commercial and military airframe,
aerospace and rail transportation industries. A significant portion of
Hartman's products are custom designed to meet customer requirements and
specifications. The Company believes that Hartman derived approximately 88% of
its 1995 revenues from sales as a sole source supplier. The Company also
recently acquired a 28% interest in a joint venture, CII Guardian
International Limited, to be operated in India with Guardian Controls Ltd., a
company with which the Company has had a longstanding business relationship
(the "Indian Joint Venture"). The Indian Joint Venture facility commenced
13
<PAGE>
production of relays for the Company's global markets in the third quarter of
1996 and is expected to expand into the manufacturing of sub-assemblies and
solenoids. The Company has also developed manufacturing capability in The
People's Republic of China ("China") through subcontracting arrangements with
five manufacturers, which provide general purpose relays, sub-assemblies and
solenoids to the Company.
The Company's executive offices are located at 1396 Charlotte Highway,
Fairview, North Carolina, 28730, and its telephone number is (704) 628-1711.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be $24.6
million (assuming an initial public offering price of $8.00 per share), after
deducting the estimated underwriting discounts and estimated offering expenses
payable by the Company.
The Company intends to use the net proceeds of the Offering as follows: (i)
approximately $12.4 million will be used to repay a portion of the $36.5
million owing under the Company's senior credit facility (the "Credit
Facility"), approximately $9.8 million of which was incurred in October 1995
to finance the Kilovac Acquisition and approximately $13.0 million of which
was incurred in July 1996 to finance the Hartman Acquisition;
(ii) approximately $1.45 million will be used to repay senior subordinated
promissory notes held by Mr. Dabbagh and three other original shareholders of
the Predecessor (the "Seller Notes"); (iii) approximately $1.7 million will be
used to repay the senior subordinated promissory note issued by the Company to
the Partnership on October 11, 1995 in connection with the Kilovac Acquisition
(the "Kilovac Note"); (iv) approximately $5.5 million will be used to repay
amounts (including interest) owing under the promissory note issued by the
Company to the Partnership in connection with the CII Acquisition (the "CII
Note"); (v) $300,000 will be used to repay three subordinated promissory notes
issued by the Company and held by the Partnership (the "Capital Notes"); and
(vi) approximately $2.7 million will be used to redeem a portion of the
Company's outstanding Cumulative Redeemable Preferred Stock held by the
Partnership (the remainder of which will be exchanged for shares of Common
Stock in the Preferred Exchange), including all accrued and unpaid dividends
on such Preferred Stock. In connection with the consummation of the initial
public offering, the Company will also pay to its senior lenders a success fee
in the amount of $558,000 (based on the assumed initial public offering
price).
The amounts outstanding under the Credit Facility are due on July 2, 2001,
and consist of revolving loans bearing interest at the lender's reference rate
plus 1.5% per annum, as well as term loans bearing interest at the lender's
reference rate plus 2% per annum. The Seller Notes and the Capital Notes each
bear interest at 9.25% per annum and mature on May 11, 2003. The CII Note
bears interest at 9.25% per annum and one-half of the unpaid principal of such
note is due on each of May 31, 2002 and May 31, 2003. The Kilovac Note also
bears interest at 9.25% per annum, and one-half of the unpaid principal on
that note is due on each of October 11, 2004 and October 11, 2005. Amounts due
under the CII Note and the Kilovac Note, $1.4 million and $115,000,
respectively, represent accrued and unpaid interest, bearing interest, in each
case, at an 11.75% per annum penalty rate.
If the Underwriters' over-allotment is exercised, the additional proceeds
received will be used by the Company to repay amounts owing to its senior bank
lenders under the Credit Facility.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
in the past and currently intends to retain its earnings to finance future
acquisitions and for general corporate purposes and therefore does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Any future determination to pay cash dividends will be made by the
Board of Directors in light of the Company's earnings, financial condition,
capital and other cash requirements and such other factors as the Board of
Directors deems relevant at such time. The Company's credit facilities have in
the past and are likely to continue to contain significant restrictions on the
Company's ability to pay cash dividends.
15
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and consolidated
capitalization of the Company (i) as of June 30, 1996 and (ii) as adjusted to
give effect to (a) the Kilovac Share Exchange, (b) the Hartman Acquisition,
(c) the Preferred Exchange and (d) the sale of 3,500,000 shares of the Common
Stock at an assumed initial public offering price of $8.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
This table should be read in conjunction with the Company's consolidated
financial statements, including the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt(1)............... $ 3,037 $ 37
========== ===========
Long-term obligations(1):
Revolving loans(2)................................. $ 7,548 $ 12,062
Term loans......................................... 12,750 12,000
Seller Notes....................................... 1,450 --
Capital Notes...................................... 300 --
Capitalized lease obligation....................... 23 23
Subordinated notes payable to the Partnership...... 5,700 --
---------- -----------
Total long-term debt............................. 27,771 24,085
Accrued interest on subordinated note.............. 1,470 --
Cumulative Redeemable Preferred Stock, $.01 par
value, 170,000 shares authorized; 40,000 shares
Preferred Stock and 40,000 shares Preferred
Stock Series A issued and outstanding, actual;
5,000,000 shares authorized
and none issued and outstanding, as adjusted(3)... 4,683 --
Common stock, $.01 par value, subject to put
options, 400,000 shares issued and
outstanding(4).................................... 165 --
---------- -----------
Total long-term obligations...................... 34,089 24,085
Stockholders' equity (deficit):
Common stock, $.01 par value, 2,550,000 shares
authorized and 2,150,000 shares issued and
outstanding, actual; and 25,000,000 shares
authorized and 6,862,500 shares issued and
outstanding, as adjusted.......................... 22 69
Additional paid-in capital......................... 745 32,003
Retained earnings (deficit)........................ (2,660) (3,696)
Currency translation adjustment.................... (36) (36)
---------- -----------
Total stockholders' equity (deficit)............. (1,929) 28,340
---------- -----------
Total capitalization........................... $ 32,160 $ 52,425
========== ===========
</TABLE>
- --------
(1) For a further description of the Company's debt, see Note 5 of Notes to
Consolidated Financial Statements.
(2) Approximately $13.0 million of the proceeds from the Offering will be used
to repay amounts incurred in July 1996 to finance the Hartman Acquisition.
Shortly after the consummation of the Offering, the Company expects to
amend its senior credit facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
(3) Includes accrued and unpaid dividends on the Cumulative Redeemable
Preferred Stock in the amount of $683,000.
(4) See Note 11 of Notes to Consolidated Financial Statements.
16
<PAGE>
DILUTION
As of June 30, 1996, the net tangible book value (deficit) applicable to the
Company's Common Stock, giving effect to the Hartman Acquisition, the Kilovac
Share Exchange and the Preferred Exchange, was $(22.1) million, or $(6.59) per
share. Net tangible book value per share is determined by dividing the net
tangible book value (tangible assets less liabilities) of the Company by the
number of shares of Common Stock outstanding at that date, in each case giving
effect to the Hartman Acquisition, the Kilovac Share Exchange and the
Preferred Exchange as if such transactions occurred on June 30, 1996. After
giving effect to the sale of 3,500,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $8.00 per
share) and the application of the net proceeds therefrom, the pro forma net
tangible book value applicable to the Company's Common Stock as of June 30,
1996 would have been $9.5 million, or $1.39 per share. This represents an
immediate increase in pro forma net tangible book value of $7.98 per share to
existing stockholders and an immediate dilution of $6.61 per share to
investors purchasing shares in the Offering. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $8.00
Net tangible book value (deficit) per share before the Offer-
ing........................................................... $(6.59)
Increase per share attributable to new investors............... 7.98
------
Pro forma net tangible book value per share after the Offering... 1.39
-----
Dilution per share to new investors.............................. $6.61
=====
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1996, the
difference between the effective consideration paid by the Company's existing
stockholders for shares of Common Stock, the consideration paid by the
purchasers of the 3,500,000 shares of Common Stock to be sold by the Company
in the Offering, and the consideration paid by the participants in the Kilovac
Share Exchange:
<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)... 2,800,000 40.8% $ 3,025,600 8.5% $1.08
New investors.............. 3,500,000 51.0 28,000,000 78.8 8.00
Participants in the Kilovac
Share Exchange............ 562,500 8.2 4,500,000(3) 12.7 8.00
--------- ----- ----------- -----
Total.................... 6,862,500 100.0% $35,525,600 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Excludes 100,000 shares of Common Stock reserved for issuance upon the
exercise of options to be granted by the Company under the Company's 1996
Management Stock Plan at or about the time of the Offering at an exercise
price equal to the initial offering price.
(2) Includes Common Stock issued to the Partnership in the Preferred Exchange.
(3) Reflects non-cash consideration recorded in respect of the issuance of
562,500 shares of Common Stock in exchange for the 20% interest in Kilovac
not currently owned by the Company.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information as of the dates
and for the periods indicated were derived from the audited consolidated
financial statements of the Company, except data as of, and for the six months
ended, July 2, 1995 and June 30, 1996 which were derived from the unaudited
consolidated financial statements of the Company but include all adjustments
(consisting of normal recurring adjustments) which management considers
necessary for a full presentation of results for these periods. The results of
operations for the six months ended June 30, 1996 are not necessarily
indicative of the results of operations that may be expected for the full
year. The following selected consolidated financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and the related notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------- ------------------------------------------------------------------------
FISCAL YEARS ENDED DECEMBER
31, SIX MONTHS ENDED
----------------------------- -----------------------------
FISCAL NINE PRO
YEAR MONTHS JANUARY 1, MAY 11, PRO FORMA
ENDED ENDED 1993 TO 1993 TO FORMA JUNE AS ADJUSTED
MARCH 31, DECEMBER 31, MAY 10, DECEMBER 31, AS ADJUSTED JULY 2, 30, JUNE 30,
1992 1992(1) 1993(2) 1993(2) 1994 1995 1995(3) 1995 1996 1996(4)
--------- ------------ ---------- ------------ ------- ------- ----------- ------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales....... $20,318 $15,346 $ 8,378 $17,095 $31,523 $39,918 $68,408 $18,568 $27,455 $38,280
Cost of sales... 14,214 10,270 6,684 14,448 24,330 28,687 46,622 13,568 19,011 27,104
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... 6,104 5,076 1,694 2,647 7,193 11,231 21,786 5,000 8,444 11,176
Selling
expenses....... 1,381 1,065 713 1,344 2,382 3,229 4,961 1,409 2,382 2,538
General and
administrative
expenses....... 1,253 842 586 1,150 2,248 3,334 5,738 1,296 2,369 2,943
Research and
development.... 77 44 21 41 103 301 1,463 78 461 461
Amortization of
goodwill and
other
intangible
assets......... 70 53 45 117 177 251 831 110 246 401
Special
compensation
charge(5)...... -- -- -- -- -- 1,300 1,300 -- -- --
Environmental
expenses(6).... -- -- -- -- -- 951 951 -- -- --
Special
acquisition
expenses(7).... -- -- 153 266 -- 2,064 2,064 915 -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)......... 3,323 3,072 176 (271) 2,283 (199) 4,478 1,192 2,986 4,833
Interest
expense........ 289 93 77 1,086 1,833 2,997 1,965 1,138 1,820 983
Other income
(expense)...... 14 100 42 -- -- 2 (81) 2 201 186
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before taxes
and minority
interest....... 3,048 3,079 141 (1,357) 450 (3,194) 2,432 56 1,367 4,036
Income tax
expense
(benefit)...... -- -- -- (499) 178 (1,076) 1,094 22 554 1,622
Income
applicable to
minority
interest in net
income of
subsidiary..... -- -- -- -- -- 35 -- -- 51 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)......... 3,048 3,079 141 (858) 272 (2,153) 1,338 34 762 2,414
Preferred stock
dividend....... -- -- -- 102 185 210 -- 92 186 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)
available for
common stock... $ 3,048 $ 3,079 $ 141 $ (960) $ 87 $(2,363) $ 1,338 $ (58) $ 576 $ 2,414
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income
(loss) per
common share... $ (0.38) $ 0.03 $ (0.93) $ 0.20 $ (0.02) $ 0.23 $ 0.35
======= ======= ======= ======= ======= ======= =======
Average shares
outstanding.... 2,494 2,510 2,535 6,848 2,525 2,550 6,863
<CAPTION>
BALANCE SHEET
DATA:
(AT PERIOD END)
<S> <C> <C> <C> <C> <C> <C> <C>
Working
capital........ $ 6,284 $ 6,853 $ 8,235 $ 7,313 $ 7,659 $ 9,904 $ 9,810
Total assets.... 11,561 10,825 14,593 25,425 26,836 48,986 29,167
Total debt...... 2,451 1,065 4,292 17,393 17,947 30,902 19,835
Cumulative
redeemable
preferred
stock.......... -- -- -- 2,102 2,287 4,497 2,379
Total
stockholders'
equity
(deficit)...... 6,958 8,538 7,782 (969) (837) (2,505) (916)
<CAPTION>
COMPANY
-----------------------------------
SIX MONTHS ENDED
-----------------------------------
JUNE 30, 1996
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(8) AS ADJUSTED(4)
------- ----------- --------------
<S> <C> <C> <C>
BALANCE SHEET
DATA:
(AT PERIOD END)
Working
capital........ $11,598 $17,601 $22,402
Total assets.... 49,081 66,231 70,605
Total debt...... 30,808 43,782 24,085
Cumulative
redeemable
preferred
stock.......... 4,683 4,683 --
Total
stockholders'
equity
(deficit)...... (1,929) (1,929) 28,340
</TABLE>
18
<PAGE>
- --------
(1) Reflects the change of the Predecessor's fiscal year end from March 31 to
December 31.
(2) The statement of operations data for the period ended May 10, 1993
represent the results of the Predecessor from January 1, 1993 and the
statement of operations data for the period from May 11, 1993 to December
31, 1993 represent the results of the Company. In allocating the purchase
price for the CII Acquisition, the Company recorded an increase in
inventory of $986,000 which was reflected in cost of sales from May
11,1993 to December 31, 1993 due to the revaluation of inventory to fair
market value. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
(3) Gives effect to (i) the Hartman Acquisition and the Kilovac Acquisition,
(ii) the Kilovac Share Exchange, (iii) the Preferred Exchange and (iv)
the sale by the Company of 3,500,000 shares of Common Stock in the
Offering at an assumed initial public offering price of $8.00 per share
and the application of the proceeds therefrom, as described in "Use of
Proceeds" including, without limitation, the repayment of a portion of
outstanding debt and the redemption of a portion of the outstanding
cumulative redeemable preferred stock and the elimination of accrued and
unpaid dividends in connection therewith, in each case as adjusted to
reflect the corresponding tax benefits associated with such adjustments
and as if such transactions had occurred on January 1, 1995. See "Use of
Proceeds," "Capitalization," "Pro Forma Condensed Consolidated Financial
Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Certain Relationships and Related
Transactions--Kilovac Acquisition", "--Preferred Exchange" and the
Company's Consolidated Financial Statements and the Notes thereto.
(4) Gives effect to (i) the Hartman Acquisition, (ii) the Kilovac Share
Exchange, (iii) the Preferred Exchange and (iv) the sale by the Company
of 3,500,000 shares of Common Stock in the Offering at an assumed initial
public offering price of $8.00 per share and the application of the
proceeds therefrom as described in "Use of Proceeds," including, without
limitation, the repayment of a portion of outstanding debt and the
redemption of a portion of the outstanding cumulative redeemable
preferred stock and the elimination of accrued and unpaid dividends in
connection therewith, in each case as adjusted to reflect the
corresponding tax expenses/benefits associated with such adjustments and
as if such transactions had occurred on January 1, 1995 in the case of
the statement of operations data, and at June 30, 1996 in the case of
balance sheet data.
(5) Reflects a special compensation charge of $1.3 million which represents
(i) the difference between the purchase price of Common Stock purchased
by seven employees on December 1, 1995 and the estimated fair market
value of such shares (based upon the appraised value on December 1, 1995)
and (ii) a related special cash bonus granted by the Company to the same
seven employees to pay taxes associated with such stock.
(6) Reflects a non-recurring charge of $951,000 which represents primarily
the costs incurred to date and the present value of the estimated future
costs payable by the Company over the next 30 years for groundwater
remediation at the Fairview facility. See "Business--Environmental
Matters."
(7) Special acquisition expenses in 1993 consist primarily of costs related
to the relocation of a facility following the acquisition of Midtex
Relays and costs associated with relocating the operations acquired from
West Coast Electrical Manufacturing Co. and CP Clare. Such expenses in
1995 include costs primarily related to (i) the relocation of certain
assets acquired from HiG Relays and Deutsch Relays and (ii) the write-off
of an agreement with a business development consultant. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
(8) Gives effect to the Hartman Acquisition, as if such event had occurred on
June 30, 1996.
19
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The pro forma condensed consolidated statement of operations data for the
fiscal year ended December 31, 1995 gives effect to (i) the October 1995
purchase of 80% of the outstanding capital stock of Kilovac ($14.5 million
plus expenses); (ii) the July 1996 purchase of the assets of Figgie's Hartman
Division ($12.0 million plus expenses); (iii) the Kilovac Share Exchange ($4.5
million of stock plus expenses); (iv) the Preferred Exchange (based on an
initial public offering price of $8.00 per share) and (v) the initial public
offering of 3,500,000 shares of the Company's Common Stock at an assumed
initial public offering price of $8.00 per share and the application of the
net proceeds therefrom as follows: the repayment of debt owing under the
Credit Facility (approximately $12.4 million), the repayment of amounts
(including interest) owing under the CII Note (approximately $5.5 million),
the redemption of the outstanding cumulative redeemable preferred stock not
exchanged for Common Stock pursuant to the Preferred Exchange, including
accrued and unpaid dividends (approximately $2.7 million), the repayment of
the Kilovac Note (approximately $1.7 million), the repayment of the Seller
Notes (approximately $1.45 million), the payment of the success fee owing to
the Company's senior lenders (approximately $558,000) and the repayment of the
Capital Notes ($300,000), as if each such transaction had occurred on January
1, 1995. See "Use of Proceeds," "Certain Relationships and Related
Transactions--Kilovac Acquisition" and "--Preferred Exchange" and "The
Company."
The pro forma condensed consolidated statement of operations data for the
six months ended June 30, 1996 and the pro forma condensed consolidated
balance sheet at June 30, 1996 give effect to (i) the July 1996 purchase of
the assets of Figgie's Hartman Division ($12.0 million plus expenses); (ii)
the Kilovac Share Exchange ($4.5 million of stock plus expenses); (iii) the
Preferred Exchange (based on an initial public offering price of $8.00 per
share) and (iv) the initial public offering of 3,500,000 shares of the
Company's Common Stock at an assumed initial public offering price of $8.00
per share and the application of the net proceeds therefrom as described in
the previous paragraph, as if each such transaction had occurred on January 1,
1995 and June 30, 1996, respectively. See "The Company" and "Use of Proceeds."
The pro forma condensed consolidated financial information should be read in
conjunction with the consolidated financial statements of the Company, Kilovac
and the Hartman Division and the related notes thereto included elsewhere in
this Prospectus and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The pro forma condensed consolidated
financial information does not purport to represent what the Company's actual
results of operations would have been had such transactions occurred on such
dates nor does it purport to predict or indicate the results of future
operations.
20
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE ADJUSTMENTS
KILOVAC FROM KILOVAC FOR THE
JANUARY 1, ADJUSTMENTS ADJUSTMENTS ACQUISITION OFFERING
1995 TO FOR THE FOR THE AND THE KILOVAC AND THE
OCTOBER 11, KILOVAC HARTMAN HARTMAN SHARE PREFERRED
COMPANY(1) 1995 ACQUISITION HARTMAN ACQUISITION(10) ACQUISITION EXCHANGE(16) EXCHANGE(17)
---------- ------------ ----------- ------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Net sales....... $39,918 $11,029 $ -- $17,461 $ -- $68,408 $ -- $ --
Cost of sales... 28,687 6,453 (174)(6) 11,417 219 (11) 46,602 20 --
------- ------- ------- ------- ----- ------- ----- -------
Gross profit.... 11,231 4,576 174 6,044 (219) 21,806 (20) --
Selling
expenses....... 3,229 1,287 -- 445 -- 4,961 --
General and
administrative
expenses....... 3,334 1,240 -- 1,171 (11)(12) 5,734 4 --
Research and
development.... 301 547 -- 615 -- 1,463 -- --
Amortization of
goodwill and
other
intangible
assets......... 251 -- 270 (7) -- 115 (13) 636 195 --
Special
compensation
charge(2)...... 1,300 -- -- -- -- 1,300 -- --
Environmental
expenses(3).... 951 -- -- 850 (850)(14) 951 -- --
Special
acquisition
expenses(4).... 2,064 -- -- -- -- 2,064 -- --
------- ------- ------- ------- ----- ------- ----- -------
Operating income
(loss)......... (199) 1,502 (96) 2,963 527 4,697 (219) --
Interest
expense........ 2,997 35 1,002 (8) 1,632 (248)(15) 5,418 -- (3,453)
Other income
(expense)...... 2 9 -- (92) -- (81) -- --
------- ------- ------- ------- ----- ------- ----- -------
Income (loss)
before taxes
and minority
interest....... (3,194) 1,476 (1,098) 1,239 775 (802) (219) 3,453
Income tax
expense
(benefit)(5)... (1,076) 561 (402) 496 310 (111) (82) 1,287
Income
applicable to
minority
interest in net
income of
subsidiaries... 35 -- 43(9) -- -- 78 (78) --
------- ------- ------- ------- ----- ------- ----- -------
Net income
(loss)......... (2,153) 915 (739) 743 465 (769) (59) 2,166
Preferred stock
dividend....... 210 -- -- -- -- 210 -- (210)
------- ------- ------- ------- ----- ------- ----- -------
Net income
(loss)
available for
common stock... $(2,363) $ 915 $ (739) $ 743 $ 465 $ (979) $ (59) $ 2,376
======= ======= ======= ======= ===== ======= ===== =======
Net income
(loss) per
common share... $ (0.93)
=======
Average shares
outstanding.... 2,535 563 3,750
<CAPTION>
PRO FORMA
AS
ADJUSTED(18)
--------------
<S> <C>
STATEMENT OF
OPERATIONS
DATA:
Net sales....... $68,408
Cost of sales... 46,622
--------------
Gross profit.... 21,786
Selling
expenses....... 4,961
General and
administrative
expenses....... 5,738
Research and
development.... 1,463
Amortization of
goodwill and
other
intangible
assets......... 831
Special
compensation
charge(2)...... 1,300
Environmental
expenses(3).... 951
Special
acquisition
expenses(4).... 2,064
--------------
Operating income
(loss)......... 4,478
Interest
expense........ 1,965(19)
Other income
(expense)...... (81)
--------------
Income (loss)
before taxes
and minority
interest....... 2,432
Income tax
expense
(benefit)(5)... 1,094
Income
applicable to
minority
interest in net
income of
subsidiaries... --
--------------
Net income
(loss)......... 1,338
Preferred stock
dividend....... --
--------------
Net income
(loss)
available for
common stock... $ 1,338
==============
Net income
(loss) per
common share... $ 0.20
==============
Average shares
outstanding.... 6,848
</TABLE>
- -------
(1) Includes the results of operations of Kilovac from October 12, 1995 (the
date following the date of the Kilovac Acquisition) to December 31, 1995,
including net sales, gross profit and operating income of $3.7 million,
$1.8 million and $562,000, respectively.
(2) Reflects a special compensation charge of $1.3 million which represents
(i) the difference between the purchase price of Common Stock purchased
by seven employees on December 1, 1995 and the estimated fair market
value of such shares (based upon the appraised value on December 1, 1995)
and (ii) a related special cash bonus granted by the Company to the same
seven employees to pay taxes associated with such stock.
(3) Reflects a non-recurring charge of $951,000 which represents primarily
the costs incurred to date and the present value of the estimated future
costs payable by the Company over the next 30 years for groundwater
remediation at the Fairview facility. See "Business--Environmental
Matters."
(4) Special acquisition expenses primarily reflect costs related to (i) the
relocation of certain assets acquired from HiG Relays and Deutsch Relays
and (ii) the write-off of an agreement with a business development
consultant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
21
<PAGE>
(5) Assumes an effective tax rate of 42.0% for Kilovac, 40.0% for Hartman and
45.0% for the pro forma as adjusted data.
(6) Reflects (i) decreased depreciation expenses relating to longer estimated
lives of certain equipment acquired in the Kilovac Acquisition and (ii)
the amortization of certain tooling expenditures previously expensed as
incurred by Kilovac.
(7) Reflects the amortization of goodwill ($185,000) and other intangible
assets ($85,000) recorded in connection with the Kilovac Acquisition.
(8) Reflects additional interest expense associated with $9.8 million of
senior debt and $1.7 million of subordinated debt incurred to finance the
Kilovac Acquisition. The interest rate on the $9.8 million senior debt is
10.5%. An increase of 1/8% in the interest rate would increase interest
expense by $12,000 for the year and a decrease of 1/8% in the interest
rate would lower the interest expense by $12,000 for the year. The
subordinated debt has a fixed interest rate of 9.25%.
(9) Reflects the 20% of Kilovac not held by the Company.
(10) The Company has accounted for the Hartman Acquisition as a purchase,
applying the provisions of Accounting Principles Board Opinion No. 16.
The purchase price has been allocated to the acquired assets and assumed
liabilities based on their estimated relative fair values as of the
closing. Such allocations are subject to final determination based on
valuations and other studies that may be completed after the closing.
Management believes that there will be no material changes to the
allocation of purchase price.
(11) Reflects (i) increased depreciation expenses corresponding to a higher
appraised value of certain equipment acquired in the Hartman Acquisition,
of which $207,000 is attributable to the capitalization of tooling and
(ii) the reclassification of building depreciation to rent expense since
the Company is leasing Hartman's facility. Does not give effect to the
write-off of $903,000 due to the purchase accounting adjustment for the
increase of inventories to estimated fair market value in connection with
the Hartman Acquisition. The lease of the Hartman facility is a 10 year
lease, terminable at the Company's option. The first 5 years have an
average annual rent of approximately $85,000 and years 6-10 will have an
annual rent of approximately $159,000. For pro forma purposes, it was
assumed the lease would end in five years because management expects to
relocate locally within the next five years.
(12) Reflects reclassification of depreciation expense to cost of sales
($11,000).
(13) Reflects the amortization of goodwill ($115,000) recorded in connection
with the Hartman Acquisition. Goodwill is amortized over 30 years.
(14) Reflects certain environmental expense associated with liabilities not
assumed by the Company.
(15) Reflects elimination of allocated debt service ($1.6 million), offset by
additional interest expense associated with approximately $13.0 million
of bank debt incurred to finance the Hartman Acquisition. The interest
rate assumed on the $13.0 million of senior debt is 10.25% on the term
debt ($9.0 million) and 9.75% on the revolver debt ($4.0 million). An
increase in these rates of 1/8% would increase interest expense by
$16,000 for the year and a decrease of 1/8% would lower interest expense
by $16,000 for the year.
(16) Reflects pro forma statement of operations data to give effect to the
Kilovac Share Exchange as adjusted to reflect the corresponding tax
benefit and as if such transaction had occurred on January 1, 1995. See
"Certain Relationships and Related Transactions--Kilovac Acquisition."
(17) Reflects pro forma statement of operations data to give effect to (i) the
sale by the Company of 3,500,000 shares of Common Stock in the Offering
at an assumed initial public offering price of $8.00 per share and the
application of the proceeds therefrom, as described in "Use of Proceeds,"
including without limitation, the repayment of a portion of outstanding
debt and the redemption of a portion of the outstanding cumulative
redeemable preferred stock, the elimination of accrued and unpaid
dividends in connection therewith and the elimination of the accrued
success fee ($340,000) and (ii) the Preferred Exchange, in each case as
adjusted to reflect the corresponding tax expenses associated with these
adjustments and, in each case as if such transactions had occurred on
January 1, 1995. See "Use of Proceeds", "Capitalization" and "Certain
Relationships and Related Transactions--Preferred Exchange."
(18) Reflects pro forma statement of operations data, as adjusted to give
effect to (i) the Hartman Acquisition and the Kilovac Acquisition, (ii)
the Kilovac Share Exchange, (iii) the Preferred Exchange and (iv) the
sale by the Company of 3,500,000 shares of Common Stock in the Offering
at an assumed initial public offering price of $8.00 per share and the
application of the proceeds therefrom, as described in "Use of Proceeds",
in each case as if such transactions had occurred on January 1, 1995. See
"Use of Proceeds," "Capitalization," "Pro Forma Condensed Consolidated
Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Certain Relationships
and Related Transactions--Kilovac Acquisition" and "--Preferred Exchange"
and the Company's Consolidated Financial Statements and the Notes
thereto.
(19) Reflects new debt of $24.1 million with an assumed interest rate of
8.00%.
22
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE
ADJUSTMENTS OFFERING
FOR THE KILOVAC AND THE PRO FORMA
HARTMAN SHARE PREFERRED AS
COMPANY HARTMAN ACQUISITION(1) PRO FORMA EXCHANGE(7) EXCHANGE(8) ADJUSTED(9)
------- ------- -------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $27,455 $10,825 $ -- $38,280 $ -- $ -- $38,280
Cost of sales........... 19,011 7,942 141 (2) 27,094 10 -- 27,104
------- ------- ----- ------- ----- ------ -------
Gross profit............ 8,444 2,883 (141) 11,186 (10) -- 11,176
Selling expenses........ 2,382 156 -- 2,538 -- -- 2,538
General and
administrative
expenses............... 2,369 578 (6)(3) 2,941 2 -- 2,943
Research and
development............ 461 -- -- 461 -- -- 461
Amortization of goodwill
and other intangible
assets................. 246 -- 57 (4) 303 98 -- 401
------- ------- ----- ------- ----- ------ -------
Operating income
(loss)................. 2,986 2,149 (192) 4,943 (110) -- 4,833
Interest expense........ 1,820 791 (98)(5) 2,513 -- (1,530) 983 (10)
Other (income) expense.. (201) 15 -- (186) -- -- (186)
------- ------- ----- ------- ----- ------ -------
Income (loss) before
taxes and minority
interest............... 1,367 1,343 (94) 2,616 (110) 1,530 4,036
Income tax expense
(benefit)(6)........... 554 536 (38) 1,052 (44) 614 1,622
Income applicable to
minority interest in
net income of
subsidiaries........... 51 -- -- 51 (51) -- --
------- ------- ----- ------- ----- ------ -------
Net income (loss)....... 762 807 (56) 1,513 (15) 916 2,414
Preferred stock
dividend............... 186 -- -- 186 -- (186) --
------- ------- ----- ------- ----- ------ -------
Net income (loss)
available for common
stock.................. $ 576 $ 807 $ (56) $ 1,327 $ (15) $1,102 $ 2,414
======= ======= ===== ======= ===== ====== =======
Net income per common
share.................. $ 0.23 $ 0.35
======= =======
Average shares
outstanding............ 2,550 563 3,750 6,863
</TABLE>
- --------
(1) The Company has accounted for the Hartman Acquisition as a purchase,
applying the provisions of Accounting Principles Board Opinion No. 16. The
purchase price has been allocated to the acquired assets and assumed
liabilities based upon their estimated relative fair values as of the
closing. Such allocations are subject to final determination based on
valuations and other studies that may be completed after the closing.
Management believes that there will be no material changes to the
allocation of purchase price.
(2) Reflects (i) increased depreciation expenses corresponding to a higher
appraised value of certain equipment acquired in the Hartman Acquisition,
of which $103,000 is attributable to the capitalization of tooling and
(ii) reclassification of building depreciation to rent expense since the
Company is leasing Hartman's facility. Does not give effect to the write-
off of $903,000 due to the purchase accounting adjustment for the increase
of inventories to estimated fair market value in connection with the
Hartman Acquisition. The lease of the Hartman facility is a 10 year lease,
terminable at the Company's option. The first 5 years have an average
annual rent of approximately $85,000 and years 6-10 will have an annual
rent of approximately $159,000. For pro forma purposes, it was assumed the
lease would end in five years because management expects to relocate
locally within the next five years.
(3) Reflects reclassification of depreciation expense to cost of sales
($6,000).
(4) Reflects the amortization of goodwill ($57,000) recorded in connection
with the Hartman Acquisition. Goodwill is amortized over 30 years.
(5) Reflects elimination of allocated debt service ($791,000) offset by
additional interest expense associated with approximately $13.0 million of
bank debt incurred to finance the Hartman Acquisition. The interest rate
assumed on the $13.0 million of senior debt is
23
<PAGE>
10.25% on the term debt ($9.0 million) and 9.75% on the revolver debt ($4.0
million). An increase in these rates of 1/8% would increase interest expense
by $8,000 for the six month period and a decrease of 1/8% would lower
interest expense by $8,000 for the six month period.
(6)Assumes an effective tax rate of 39.9% for Hartman and 40.2% for the pro
forma as adjusted data.
(7) Reflects pro forma statement of operations data to give effect to the
Kilovac Share Exchange as adjusted to reflect the corresponding tax
benefit and as if such transaction had occurred on January 1, 1995. See
"Certain Relationships and Related Transactions--Kilovac Acquisition."
(8) Reflects pro forma statement of operations data to give effect to (i) the
sale by the Company of 3,500,000 shares of Common Stock in the Offering at
an assumed initial public offering price of $8.00 per share and the
application of the proceeds therefrom, as described in "Use of Proceeds,"
including without limitation, the repayment of a portion of outstanding
debt and the redemption of a portion of the outstanding cumulative
redeemable preferred stock, the elimination of accrued and unpaid
dividends in connection therewith and the elimination of the accrued
success fee ($91,000) and (ii) the Preferred Exchange, in each case as
adjusted to reflect the corresponding tax expenses associated with these
adjustments and as if such transactions had occurred on January 1, 1995.
See "Use of Proceeds", "Capitalization" and "Certain Relationships and
Related Transactions--Preferred Exchange."
(9) Reflects pro forma statement of operations data, as adjusted to give
effect to (i) the Hartman Acquisition and the Kilovac Acquisition, (ii)
the Kilovac Share Exchange (iii) the Preferred Exchange and (iv) the
Offering and the application of the estimated net proceeds therefrom,
including, without limitation, the repayment of debt and the redemption of
a portion of the outstanding cumulative redeemable preferred stock and the
elimination of accrued and unpaid dividends in connection therewith, in
each case as adjusted to reflect the corresponding tax expenses/benefits
associated with such adjustments and as if such events occurred on January
1, 1995.
(10) Reflects new debt of $24.1 million at an assumed interest rate of 8.00%
for six months.
24
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
THE OFFERING,
ADJUSTMENTS FOR THE KILOVAC SHARE PRO FORMA
THE HARTMAN EXCHANGE AND THE AS
COMPANY HARTMAN ACQUISITION(1) PRO FORMA PREFERRED EXCHANGE ADJUSTED(14)
-------- -------- --------------- --------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable,
net.................. $ 8,616 $ 2,809 $ -- $ 11,425 $ -- $ 11,425
Inventories........... 10,671 6,503 903 (2) 18,077 47 (9) 18,124
Other current assets.. 3,813 28 (64)(2) 3,777 -- 3,777
-------- -------- ------- -------- ------- --------
Total current
assets............. 23,100 9,340 839 33,279 47 33,326
Property, plant and
equipment, net......... 12,672 1,339 1,833 (3) 15,844 169 (9) 16,013
Goodwill................ 7,596 -- 3,453 (4) 11,049 5,094 (10) 16,143
Other assets............ 5,713 1,427 (1,081)(5) 6,059 (936)(11) 5,123
-------- -------- ------- -------- ------- --------
$ 49,081 $ 12,106 $ 5,044 $ 66,231 $ 4,374 $ 70,605
======== ======== ======= ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses..... $ 6,719 $ 6,126 $(1,950)(6) $ 10,895 $ (87) $ 10,808
Accrued interest...... 1,667 -- -- 1,667 (1,667)(12) --
Current portion of
long-term debt....... 3,037 489 (489)(6) 3,037 (3,000)(12) 37
Current payable due to
minority stockholders
of subsidiary........ 79 -- -- 79 -- 79
-------- -------- ------- -------- ------- --------
Total current
liabilities........ 11,502 6,615 (2,439) 15,678 (4,754) 10,924
Long-term debt.......... 20,321 -- 12,974 (7) 33,295 (9,210)(12) 24,085(16)
Notes payable to
stockholders........... 7,450 -- -- 7,450 (7,450)(12) --
Other long-term debt,
minority interest and
other.................. 6,889 372 (372)(8) 6,889 367 (13) 7,256
Capital stock subject to
mandatory redemption/
put option(15)......... 4,848 -- -- 4,848 (4,848)(12) --
-------- -------- ------- -------- ------- --------
Total long-term
obligations........ 39,508 372 12,602 52,482 (21,141) 31,341
Stockholders' equity
(deficit):
Common stock.......... 22 -- -- 22 43 69
Additional paid in
capital.............. 745 -- -- 745 31,262 32,003
Retained earnings
(deficit)............ (2,660) 5,119 (5,119) (2,660) (1,036) (3,696)
Currency translation
loss................. (36) -- -- (36) -- (36)
Total stockholder's
equity............. (1,929) 5,119 (5,119) (1,929) 30,269(12) 28,340
-------- -------- ------- -------- ------- --------
$ 49,081 $ 12,106 $ 5,044 $ 66,231 $ 4,374 $ 70,605
======== ======== ======= ======== ======= ========
Number of shares
outstanding............ 2,550 2,550 4,313 6,863
</TABLE>
(Footnotes continued on following page)
25
<PAGE>
- --------
(1) The Company has accounted for the Hartman Acquisition as a purchase,
applying the provisions of Accounting Principles Board Opinion No. 16. The
purchase price has been allocated to the acquired assets and assumed
liabilities based upon their estimated relative fair values as of the
closing. The following summarizes the purchase price allocation of the
Hartman Acquisition as of the date of the consummation of the acquisition
(July 2, 1996):
<TABLE>
<S> <C>
Current Assets $10,229
Property & Equipment 3,172
Intangibles & Other Assets 3,799
Liabilities Assumed (4,176)
-------
Purchase Price $13,024
=======
</TABLE>
Such allocations are subject to final determination based on valuations and
other studies that may be completed after the closing. Management believes
that there will be no material changes to the allocation of purchase price.
(2) Reflects the purchase accounting adjustment to increase inventories to
estimated fair market value in connection with the Hartman Acquisition
($903,000) offset by the reclassification of the deposit for the Hartman
Acquisition previously made by the Company ($50,000) and the elimination
of Hartman's current assets not purchased by the Company ($14,000).
(3) Reflects (i) the capitalization of tooling previously expensed by Hartman
($1.4 million) and (ii) the purchase accounting adjustment to increase
equipment to estimated fair market value ($1.0 million), offset by (iii)
the elimination of the Hartman building not purchased by the Company
($613,000).
(4) Reflects the goodwill adjustment in connection with the Hartman
Acquisition.
(5) Reflects deferred financing costs relating to the Hartman Acquisition
($346,000), offset by the elimination of Hartman's prepaid pension asset
for the pension obligations not assumed by the Company ($1.4 million).
(6) Reflects the elimination of the following liabilities not assumed in
connection with the Hartman Acquisition: (i) environmental liability
($850,000), (ii) the current portion of a capital lease obligation
($489,000) and (iii) other accrued expenses ($929,000).
(7) Reflects estimated long-term debt incurred to finance the Hartman
Acquisition.
(8) Reflects the elimination of the long-term portion of the capital lease
obligation not assumed by the Company in connection with the Hartman
Acquisition.
(9) Reflects the purchase accounting adjustments to increase inventories
($47,000) and property plant and equipment ($169,000) to estimated fair
market value in connection with the Kilovac Share Exchange.
(10) Reflects the goodwill adjustment in connection with the Kilovac Share
Exchange.
(11) Reflects other intangible assets ($458,000) resulting from the Kilovac
Share Exchange offset by the write-off of deferred financing costs due to
the satisfaction of senior bank indebtedness with the estimated proceeds
of the Offering ($1.0 million) and the write-off of pre-paid offering
costs in connection with the Offering ($383,000).
(12) Reflects (i) the net proceeds from the Offering ($24.6 million) used to
reduce indebtedness and accrued interest thereon, and to redeem a portion
of the outstanding cumulative redeemable preferred stock including
accrued and unpaid dividends, (ii) the issuance of Common Stock in
connection with the Kilovac Share Exchange ($4.5 million of stock) and
the Preferred Exchange ($2.0 million of stock) and (iii) the
reclassification of the Common Stock subject to put options ($165,000)
and the elimination of the minority interest in subsidiary ($86,000),
offset by the payment of the unaccrued success fee in connection with the
Offering ($81,000) and the write-off of the unamortized deferred
financing costs ($1.0 million). The payment of the unaccrued portion of
the success fee ($81,000) will be an extraordinary nonrecurring charge in
the period the Offering is consummated and the write-off of the
unamortized deferred financing costs ($1.0 million) will be classified as
an extraordinary item upon the repayment of the debt in the same period.
(13) Reflects the purchase accounting adjustment to increase deferred tax
liabilities in connection with the Kilovac Share Exchange ($271,000) and
a note payable to minority shareholders in respect of future income tax
refunds ($659,000) offset by the payment of the accrued portion of a
success fee ($477,000) to the Company's senior lenders and the
elimination of the minority interest in subsidiary in connection with the
Kilovac Share Exchange ($86,000).
(14) Gives effect to (i) the Hartman Acquisition, (ii) the Kilovac Share
Exchange, (iii) the Preferred Exchange and (iv) the sale by the Company
of 3,500,000 shares of Common Stock in the Offering at an assumed initial
public offering price of $8.00 per share, and as if such transactions had
occurred on June 30, 1996. See "Use of Proceeds," "Capitalization," "Pro
Forma Condensed Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Relationships and Related Transactions--Kilovac
Acquisition" and "--Preferred Exchange" and the Company's Consolidated
Financial Statements and Notes thereto.
(15) See Note 11 of Notes to Consolidated Financial Statements.
(16) The Company expects to have commitments of term debt repayment for the
next five years of $600,000 per quarter under the expected new credit
facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Communications Instruments, Inc. was initially formed in 1980 by Ramzi
Dabbagh (the Company's Chairman, President and Chief Executive Officer) and a
group of private investors. The Company made its initial acquisition of
several relay and switch products from the CP Clare division of General
Instruments in 1980, and, since that initial acquisition, Mr. Dabbagh and his
management team have pursued a growth strategy of acquiring manufacturers of
relay products and related components, often consolidating the acquired
companies and/or their product lines into the Company's manufacturing
facilities and eliminating significant overhead. In order to provide liquidity
for the original shareholder group and to position the Company for future
growth, in May 1993 CII was acquired by the Company (the "CII Acquisition") in
a leveraged buyout transaction sponsored by Stonebridge Partners and members
of management. The $21.0 million acquisition price was financed by $11.6
million of senior bank debt; the proceeds of $4.0 million of subordinated
notes issued to CII Associates, L.P., a partnership controlled by Stonebridge
Partners (the "Partnership"); $2.0 million aggregate redemption value of
preferred stock issued to the Partnership; approximately $2.0 million of notes
issued to shareholders of the Predecessor (including a note of approximately
$370,000 issued to Mr. Dabbagh, of which approximately $223,000 is currently
owing to Mr. Dabbagh); and $960,000 of common equity issued to the Partnership
and members of management. The CII Acquisition was accounted for as a purchase
for financial reporting purposes and, accordingly, the assets and liabilities
of the Predecessor were recorded at their estimated fair values at the date of
acquisition.
The Company has in the past and will continue in the future to focus its
efforts on growing its business internally and through acquisitions. Since the
CII Acquisition, the Company has completed 13 acquisitions of other companies
or product lines for aggregate consideration of $36.0 million, including the
1995 Kilovac Acquisition and the Hartman Acquisition which was consummated in
July 1996. The Company has historically financed its acquisitions through a
combination of secured bank debt and internally generated funds.
In October 1995 the Company acquired an 80% interest in Kilovac, which was
financed with $9.8 million of secured bank debt, $1.7 million of subordinated
debt and the issuance of $2.0 million of preferred stock. Kilovac's operations
and facility were maintained as a stand-alone operation and therefore
significant integration costs were not incurred. The Company will exchange
562,500 shares of its Common Stock (based upon an assumed initial public
offering price of $8.00 per share) for the remaining 20% interest in Kilovac
in conjunction with the consummation of the Offering. See "Certain
Relationships and Related Transactions--Kilovac Acquisition."
In July 1996 the Company purchased the assets of the Hartman Division from
Figgie for $12.0 million plus expenses. The Company financed the Hartman
Acquisition with secured bank debt, and a portion of the proceeds obtained in
the Offering will be utilized to repay a portion of this debt. See "The
Company" and "Use of Proceeds." In connection with the Hartman Acquisition,
the Company has assumed a reserve previously established by Hartman of
approximately $2.2 million in anticipation of losses that the Company expects
to incur as a significant unprofitable Hartman contract is fulfilled over the
next two years.
As described herein, the amount of integration costs incurred by the Company
in connection with each acquisition depends upon the size and nature of the
acquisition. During the initial integration phase of smaller acquisitions, the
Company typically has incurred integration-related selling, general and
administrative expenses for training of staff members, for the conversion of
information systems and for duplicate rents and other operating costs in
connection with the consolidation of facilities.
The Company intends to utilize a portion of the proceeds of the Offering
made hereby to pay a portion of the amounts outstanding under its senior
credit facility. See "Use of Proceeds." In connection therewith, upon the
closing of the Offering (expected to occur during the quarter ending December
31, 1996), the Company is required to pay a one-time success fee of
approximately $558,000 (assuming an initial public offering price of $8.00 per
share) to its senior lender, of which $81,000 has not been accrued and which
will be expensed at the time of the Offering, and will incur an expense of
$1.0 million relating to the write-off of deferred financing charges.
27
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information derived
from the consolidated statements of operations expressed as a percentage of
net sales, and the percentage change in such items compared to the same period
in the prior year. There can be no assurance that the trends in sales growth
or operating results will continue in the future.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES PERCENTAGE INCREASE
-------------------------------------------- -----------------------------------
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED SIX MONTHS
-------------- ----------------- ENDED JULY 2,
MAY 11- MAY 11- 1995 TO SIX
DEC. 31, JULY 2, JUNE 30, DEC. 31, 1993 1994 TO MONTHS ENDED
1993 1994 1995 1995 1996 TO 1994 1995 JUNE 30, 1996
-------- ------ ------ ------- -------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 84.4% 26.6% 47.9%
Cost of sales........... 84.5 77.2 71.9 73.1 69.2 68.4 17.9 40.1
----- ------ ------ ----- ----- ----- ----- -----
Gross profit............ 15.5 22.8 28.1 26.9 30.8 171.7 56.1 68.9
Selling expenses........ 7.9 7.6 8.1 7.6 8.7 77.2 35.6 69.1
General and
administrative
expenses............... 6.7 7.1 8.4 7.0 8.6 95.5 48.3 82.8
Research and
development............ 0.2 0.3 0.8 0.4 1.7 151.2 192.2 491.0
Amortization of goodwill
and other intangible
assets................. 0.7 0.6 0.6 0.6 0.9 51.3 41.8 123.6
Special compensation
charge................. -- -- 3.3 -- -- -- -- --
Environmental expenses.. -- -- 2.4 -- -- -- -- --
Special acquisition
expenses............... 1.6 -- 5.2 4.9 -- * -- *
----- ------ ------ ----- ----- ----- ----- -----
Operating income
(loss)................. (1.6) 7.2 (0.5) 6.4 10.9 * * 150.5
Interest expenses....... 6.4 5.8 7.5 6.1 6.6 68.8 63.5 59.9
Other income (expense).. -- -- -- -- 0.7 -- -- *
----- ------ ------ ----- ----- ----- ----- -----
Income (loss) before
taxes.................. (7.9) 1.4 (8.0) 0.3 5.0 * * *
Income tax expense
(benefit).............. (2.9) 0.6 (2.7) 0.1 2.0 * * *
----- ------ ------ ----- ----- ----- ----- -----
Income applicable to
minority interest in
net income of
subsidiaries........... -- -- 0.1 -- 0.2 -- -- --
----- ------ ------ ----- ----- ----- ----- -----
Net income (loss)....... (5.0) 0.9 (5.4) 0.2 2.8 * * *
Preferred stock
dividend............... (0.6) 0.6 0.5 0.5 0.7 81.4 13.5 102.2
----- ------ ------ ----- ----- ----- ----- -----
Net income (loss)
available for common
stock (5.6)% 0.3% (5.9)% (0.3)% 2.1% * * *
===== ====== ====== ===== ===== ===== ===== =====
</TABLE>
- --------
* Not Meaningful.
Six Months Ended June 30, 1996 Compared to Six Months Ended July 2, 1995
Net sales for the six months ended June 30, 1996 increased $8.9 million, or
47.9%, to $27.5 million from $18.6 million for the corresponding period in
1995. Excluding the Kilovac Acquisition, net sales of the Company for the six
months ended June 30, 1996 increased by $1.2 million, or 6.4%, compared to the
corresponding period in 1995. The increase was due to growth in sales of high
performance relays ($2.6 million) and electronic products ($800,000), which
growth was partially offset by the expiration of a significant general purpose
relay contract ($890,000), increased competition for certain general purpose
relays ($596,000), peak demand of certain general purpose relays ($495,000)
and a decrease in sales of certain mature general purpose relay products
($200,000). Management believes that a portion of the mature general purpose
relay market will decline from the current revenue levels at approximately 10-
15% a year or $200,000 to $300,000 for six months.
The Company's gross profit for the six months ended June 30, 1996 increased
by $3.4 million to $8.4 million compared to the same period in 1995. Gross
profit as a percentage of net sales increased to 30.8% for the six months
ended June 30, 1996 from 26.9% for the same period in 1995. The increase in
gross profit was due in part to the acquisition of Kilovac. Excluding Kilovac,
the Company's gross profit for the six months ended June 30, 1996 increased by
$151,000, or 3.0%, from gross profit in the same period in 1995, and gross
profit as a percentage of net sales decreased from 26.9% for the six months
ended July 2, 1995 to 26.1% for the same period in 1996. The increase in
dollar amount was primarily due to the implementation of increased prices on
28
<PAGE>
certain of the Company's high performance products and cost reductions in both
materials and manufacturing expenses and was partially offset by lower margins
for high performance relays due to start-up costs incurred at the Company's
new Asheville facility.
Selling expenses increased to $2.4 million for the six months ended June 30,
1996 from $1.4 million for the corresponding period in 1995. The increase in
dollar amount of expense was primarily due to the acquisition of Kilovac.
Excluding Kilovac, selling expenses for the Company for the six months ended
June 30, 1996 were $1.4 million (7.3% of net sales), which represented an
increase of $28,000 from such expenses in the corresponding period in 1995.
Selling expense without Kilovac decreased from 7.6% of net sales in the first
half of 1995 to 7.3% for the same period in 1996. This increase in dollar
amount was primarily due to an increase in commissions associated with the
Company's additional sales.
General and administrative expenses increased to $2.4 million for the six
months ended June 30, 1996 from $1.3 million for the corresponding period in
1995. This increase was due primarily to the acquisition of Kilovac. Excluding
Kilovac, general and administrative expenses were $1.6 million, or 8.0% of net
sales, for the six months ended June 30, 1996, which represents an increase of
$284,000, or 21.9%, from general and administrative expenses for the
corresponding period in 1995. The increase in general and administrative
expenses (excluding Kilovac) was primarily due to the start-up of production
at the new Asheville facility and the addition of new management.
Research and development expenses increased to $461,000, or 1.7% of net
sales, for the six months ended June 30, 1996 compared to $78,000, or 0.4% of
net sales, for the corresponding period in 1995. The increase in dollar amount
was primarily due to the $356,000 of research and development expenses of
Kilovac.
Amortization of goodwill and other intangible assets was $246,000, or 0.9%
of net sales, for the six months ended June 30, 1996 compared to $110,000, or
0.6% of net sales, for the corresponding period in 1995. The increase in
dollar amount primarily reflects amortization of goodwill and other intangible
assets related to the acquisition of Kilovac ($174,000), offset by the
completed amortization of intangible assets associated with the acquisition of
the Sigma Relay Division of Pacific Scientific Co. (consummated in July 1990)
($38,000).
Special acquisition expenses were $915,000 for the first half of 1995. No
special acquisition expenses were incurred in the first half of 1996. The
costs in the first half of 1995 primarily related to the relocation of certain
assets acquired in the Hi-G Acquisition and the Deutsch Acquisition to the new
manufacturing facility in Asheville, N.C. and the commencement of production
at that facility.
Interest expense increased to $1.8 million in the six months ended June 30,
1996 from $1.1 million for the same period in 1995. The increase reflects
additional borrowings incurred to complete the Kilovac Acquisition ($11.5
million), and the accrual of additional amounts due to the Company's bank
lenders and was partially offset by a decrease in market interest rates. In
the first six months of 1995, the average amount of senior debt was
approximately $13.2 million at an average rate of 10.5% and the average amount
of subordinated debt was $5.8 million at a rate of 9.25%, compared to an
average senior debt of $22.6 million at an average rate of 10.3% and an
average amount of subordinated debt of $7.5 million at a rate of 9.25% for the
six months ended June 30, 1996. Interest expense includes the accrual of the
success fee, penalty interest on subordinated debt, amortization of loan
origination fees, non-use fees and other miscellaneous interest expenses
including the portion of rental expense on capitalized leases allocable to
interest.
Other income increased to $201,000 in the six months ended June 30, 1996
from $2,000 for the same period in 1995. Of other income in 1996, $204,000
represents 72% of the net gain on the sale of certain high performance relay
product line assets to the Indian Joint Venture. Due to the Company's 28%
ownership of the Indian Joint Venture, 28% of the net gain has been deferred.
Income taxes were an expense of $554,000 in the six months ended June 30,
1996, compared to expense of $22,000 in the same period of 1995. Income taxes
as a percentage of income before taxes were 40.5% in the six months ended June
30, 1996 and 39.3% for the same period in 1995, with the increase in
percentage due to additional amortization of goodwill from the Kilovac
Acquisition, which is not deductible for income tax purposes.
29
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales for 1995 increased by $8.4 million, or 26.6%, to $39.9 million
from $31.5 million in 1994. The increase was primarily the result of the
acquisition of Kilovac, which represented $3.7 million in sales for the period
from October 12, 1995 (the date following the date of the acquisition) to
December 31, 1995, and the HiG Acquisition and Deutsch Acquisition which
represented $1.7 million and $1.6 million in sales, respectively, from the
date of the acquisition to December 31. Excluding these acquisitions, net
sales of the Company for 1995 increased by $1.4 million, or 4.5%, from sales
in 1994. The Company attributes this increase to increased sales of its high
performance and general purpose relays and solenoid products.
The Company's gross profit for 1995 increased by $4.0 million to $11.2
million in 1995 from $7.2 million in 1994. Gross profit as a percentage of net
sales increased from 22.8% in 1994 to 28.1% in 1995. The increases in gross
profit and gross profit as a percentage of net sales were due, in part, to the
acquisition of Kilovac. From October 12, 1995, the date following the date of
the Kilovac Acquisition, to December 31, 1995, Kilovac had a gross profit
margin of 49.6%, as compared to the 28.1% overall gross profit margin of the
Company. Excluding Kilovac, the Company's gross profit for 1995 increased by
$2.2 million, or 30.8%, from gross profit in 1994, and gross profit as a
percentage of net sales increased from 22.8% in 1994 to 25.9% in 1995. This
increase was due to the implementation of increased prices on certain of the
Company's high performance products and cost reductions in both materials and
manufacturing expenses. Gross profit in 1995 was also favorably impacted by
the devaluation of the Mexican peso in that year. The increase in gross profit
was partially offset by integration costs incurred in connection with the
Company's 1995 acquisitions and additional provisions for obsolete inventory
due to an increased level of inventory.
Selling expenses increased to $3.2 million in 1995 from $2.4 million in
1994. The increase in dollar amount of selling expense was primarily due to
the acquisition of Kilovac. Excluding Kilovac, selling expenses for the
Company for 1995 were $2.8 million (7.6% of net sales), which represents an
increase of $371,000 from 1994. The increase in dollar amount was primarily
due to an increase in commissions associated with the Company's additional
sales.
General and administrative expenses increased in 1995 to $3.3 million from
$2.2 million in 1994. The Company attributes this increase primarily to the
acquisition of Kilovac. Excluding Kilovac, general and administrative expenses
of the Company were $2.9 million, or 7.9% of net sales, for 1995, which
represents an increase of $627,000, or 27.9%, from general and administrative
expenses in 1994. The increase in general and administrative expenses was
primarily due to the start-up of production of certain of the Company's high
performance relays at a new facility, the addition of new management and
increased executive compensation and costs incurred reviewing potential
acquisitions.
Research and development expenses increased to $301,000 in 1995, or 0.8% of
net sales, compared to $103,000, or 0.3% of net sales in 1994. The increase
was due primarily to the $181,000 of research and development expenses of
Kilovac from October 12, 1995 to the end of that year.
Amortization of goodwill and other intangible assets was $251,000 in 1995,
or 0.6% of net sales, compared to $177,000, or 0.6% of net sales, in 1994. The
increase in dollar amount primarily reflects the acquisition of Kilovac.
During 1995, the Company recorded a special compensation charge of $1.3
million, which represents (i) the difference between the purchase price of
Common Stock sold to seven employees on December 1, 1995 and the estimated
fair market value of such shares (based upon the appraised value at December
1, 1995) and (ii) a related special cash bonus granted by the Company to the
same seven employees to pay taxes associated with such stock. See "Certain
Relationships and Related Transactions--Issuance of Securities by the
Company."
30
<PAGE>
During 1995 the Company recorded a non-recurring charge of $951,000, which
represents primarily the costs incurred to date and the present value of the
estimated future costs payable by the Company over the next 30 years for
groundwater remediation at the Fairview facility. During 1995 the Company
entered into a settlement with the prior owner of the Fairview facility which
determined the liability, as between the two parties, for current and future
expenses related to the remediation of the facility. See "Business--
Environmental Matters."
Special acquisition expenses were $2.1 million in 1995. These expenses
related primarily to (i) the relocation of certain acquired assets resulting
from the HiG Acquisition and the Deutsch Acquisition to a new manufacturing
facility in Asheville, North Carolina and the commencement of production at
such facility and (ii) the write-off of a contract with a business development
consultant.
Interest expense increased to $3.0 million in 1995 from $1.8 million in
1994. The increase reflects additional borrowings of approximately $13.0
million for the Kilovac Acquisition and HiG Relay asset acquisition, an
increase in market interest rates and an accrual for additional amounts due to
the Company's bank lenders. Average senior debt outstanding for the year ended
December 31, 1995 was $15.6 million at an average interest rate of 10.44%, and
average subordinated debt outstanding was $6.1 million at an interest rate of
9.25%. For the year ended December 31, 1994, the average amount borrowed as
senior debt was $11.2 million at an average rate of 8.83% and the average
borrowed as subordinated debt was $5.8 million at a rate of 9.25%. Interest
expense includes the accrual of the success fee, penalty interest on
subordinated debt, amortization of loan origination fees, non-use fees and
other miscellaneous interest expenses including the portion of rental expense
on capitalized leases allocable to interest.
Income taxes were a benefit of $1.1 million in 1995, compared to an expense
of $178,000 in the same period in 1994. Income taxes (benefit) as a percentage
of income (loss) before taxes were 33.7% in 1995 compared to 39.6% in 1994.
The lower benefit in 1995 was due in part to additional Mexican income taxes
that arose due to changes in Mexican tax law and an increase in nondeductible
expenses.
Year Ended December 31, 1994 Compared to the Period from May 11, 1993 to
December 31, 1993
The Company's net sales increased by $6.0 million, or 23.8%, to $31.5
million in 1994 from $25.5 million for the full year of 1993. Approximately
$2.8 million of the increase was due to the inclusion of the West Coast
Electrical Manufacturing Co. and Midtex Relays acquisitions consummated in
1993 for the full year of 1994. Excluding these acquisitions, the Company's
net sales increased by $3.2 million, or 16.7%. This increase was primarily due
to growth of the Company's high performance and general purpose relays.
Gross profit in 1994 increased to $7.2 million from $2.6 million for the
period from May 11, 1993 to December 31, 1993 (the "1993 Period"). Gross
profit as a percentage of net sales increased to 22.8% in 1994 from 15.5% in
1993. The increase in gross margin dollars primarily reflected the full year
in 1994 contrasted with the 1993 Period, as well as a 1993 purchase accounting
adjustment of $986,000 (reflected in 1993 cost of sales) due to the
revaluation of inventory to fair market value as a result of the CII
Acquisition, and $1.3 million of the 1994 increase reflected the full year
impact of the Company's 1993 acquisitions as well as the Company's
acquisitions in 1994. Excluding the accounting adjustment and acquisitions,
gross profit as a percentage of net sales in 1994 increased from the 1993
Period due to increased volume of general purpose relays and increased
efficiencies at the Company's Midtex Division, increased solenoid business
resulting from new product developments and increased volume and efficiencies
of the Company's high performance relays.
Selling expenses were $2.4 million in 1994 compared to $1.3 million for the
1993 Period. Selling expenses as a percentage of net sales were 7.6% in 1994
compared to 7.9% in 1993. The increase in the dollar amount of selling
expenses resulted from the full year in 1994 contrasted with the 1993 Period,
as well as the full integration of the Midtex operation in 1994 and the
addition of management and commission increases resulting from increased
sales. The percentage decrease in selling expenses from 1993 to 1994 was due
to the integration of the sales representatives of the newly acquired Midtex
Division with the sales network of the CII Division, which resulted in the
reduction of commissions as a percentage of sales.
31
<PAGE>
General and administrative expenses increased in 1994 to $2.2 million, or
7.1% of net sales, from $1.2 million, or 6.7% of net sales, for the 1993
Period. The increase in dollar amount of general and administrative expenses
was due to the full year in 1994 contrasted with the seven months in 1993, as
well as the full year impact of the Company's 1993 acquisitions and the
addition of management and other personnel to support the growth of the
business.
Research and development expenses were $103,000 or 0.3% of net sales in
1994, compared to $41,000, or 0.2% of net sales, for the 1993 Period. The
increase was due to the full year in 1994 contrasted with the 1993 Period, as
well as additional personnel.
Amortization of goodwill and other intangible assets increased to $177,000,
or 0.6% of net sales, in 1994 from $117,000, or 0.7% of net sales, for the
1993 Period.
Special acquisition expenses were $266,000, or 1.6% of net sales, for the
1993 Period. The costs in 1993 were primarily related to the acquisition,
shutdown, relocation and start-up of the solenoid product line and the costs
related to restructuring the Midtex operation. No special acquisition expenses
were incurred in 1994.
Interest expense increased to $1.8 million in 1994 from $1.1 million for the
1993 Period. For the year ended December 31, 1994, the average amount borrowed
as senior debt was $11.2 million at an average rate of 8.83% and the average
amount borrowed as subordinated debt was $5.8 million at a rate of 9.25%. For
the period from May 11, 1993 to December 31, 1993, the average amount borrowed
as senior debt was $11.3 million at an average rate of 7.75% and the average
amount borrowed as subordinated debt was $5.8 million at a rate of 9.25%.
Interest expense includes the accrual of the success fee, penalty interest on
subordinated debt, amortization of loan origination fees, non-use fees and
other miscellaneous interest expenses including the portion of rental expense
on capitalized leases allocable to interest.
Income tax expense was $178,000 in 1994 compared to a benefit of $499,000 in
1993. The rate of income tax expense (benefit) as a percentage of income
before income taxes (benefit) was 39.6% in 1994 and 36.8% in 1993. The
difference in the effective income tax rates was primarily due to the
allocation of sales among the Company's divisions which are located in
different states and subject to varying state tax rates.
32
<PAGE>
Quarterly Comparison
The following table sets forth the results of operations by quarter for
1994, 1995 and the first two quarters of 1996. This information includes all
adjustments, consisting only of normal recurring accruals, that management
considers necessary for a fair presentation of the data when read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The results of operations for historical periods
may not necessarily be indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
----------------------------------------------------------------------------------------
APRIL 3, JULY 3, OCT. 2, DEC. 31, APRIL 2, JULY 2, OCT. 1, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1994 1994 1995 1995 1995 1995(1) 1996 1996
-------- ------- ------- -------- -------- ------- ------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... $7,222 $8,201 $8,334 $7,766 $9,216 $9,352 $9,174 $12,176 $13,119 $14,336
Cost of sales........... 5,856 6,264 6,402 5,808 6,839 6,729 6,763 8,356 9,193 9,818
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Gross profit............ 1,366 1,937 1,932 1,958 2,377 2,623 2,411 3,820 3,926 4,518
Selling expenses........ 562 690 620 510 656 753 708 1,112 1,148 1,234
General and
administrative
expenses............... 541 533 544 630 656 640 733 1,305 1,187 1,182
Research and
development............ 25 30 27 21 39 39 22 201 265 196
Amortization of goodwill
and other intangible
assets................. 34 34 33 76 52 58 51 90 122 124
Special compensation
charge................. -- -- -- -- -- -- -- 1,300 -- --
Environmental expenses.. -- -- -- -- -- -- -- 951 -- --
Special acquisition
expenses............... -- -- -- -- 568 347 222 927 -- --
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Operating income
(loss)................. 204 650 708 721 406 786 675 (2,066) 1,204 1,782
Interest expense........ 414 467 451 501 555 583 579 1,280 874 946
Other income (expense).. 1 (1) -- -- 2 -- -- -- -- 201
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Income (loss) before
taxes and minority
interest............... (209) 182 257 220 (147) 203 96 (3,346) 330 1,037
Income tax expense
(benefit).............. (84) 72 103 87 (59) 81 38 (1,136) 132 422
Income applicable to
minority interest in
net income of
subsidiaries........... -- -- -- -- -- -- -- 35 14 37
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)....... (125) 110 154 133 (88) 122 58 (2,245) 184 578
Preferred stock
dividend............... 46 46 46 47 46 46 46 72 93 93
------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)
available for common
stock.................. $ (171) $ 64 $ 108 $ 86 $ (134) $ 76 $ 12 $(2,317) $ 91 $ 485
====== ====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
- --------
(1) During this fiscal quarter the Kilovac Acquisition was completed.
Backlog
As of June 30, 1996, the Company's backlog was approximately $33.6 million
($23.8 million excluding Kilovac) compared to $20.5 million as of July 2,
1995. Approximately $25.9 million of this backlog ($20.7 million excluding
Kilovac) consisted of orders scheduled to be fulfilled prior to March 31,
1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $2.0 million in 1993, $1.2 million
in 1994 and $1.8 million in 1995. The decrease in cash provided by operating
activities from 1993 to 1994 was primarily due to the growth in the Company's
business which increased working capital requirements. The increase in cash
provided by operating activities from 1994 to 1995 was mainly due to the
reduction in inventory (excluding the effect of acquisitions) and slower
growth of accounts receivable. For the six months ended June 30, 1996, cash
provided by operating activities was $1.3 million, compared to $474,000 for
the same period in 1995. This increase was primarily attributable to improved
profitability, improved collections of accounts receivable, the increase of
accounts payable and a reduction in inventory.
The Company bills its customers upon shipment of products. Engineering sales
represent revenues under fixed price development and cost sharing development
contracts. Revenues under the contracts are recognized
33
<PAGE>
based on the percentage of completion method, measured by the percentage of
costs incurred to date to estimated total costs for each contract. Costs in
excess of contract revenues on cost sharing development contracts are expensed
in the period incurred as research and development costs. Provision for
estimated losses on fixed price development contracts are made in the period
such losses are determined by management. The average days' sales outstanding
for accounts receivable was approximately 51, 55 and 58 trade days at year end
1993, 1994 and 1995, respectively. Average days' sales outstanding at June 30,
1996 was 53. The increase in average days' sales outstanding can be attributed
to increases in foreign sales and corresponding increases in foreign
receivables. The average days' sales outstanding for accounts receivable from
foreign customers has traditionally been in the range of 60 to 90 days.
The Company's inventories increased from $7.5 million at year end 1993 to
$7.9 million at year end 1994. The increase of the Company's inventories from
$7.9 million at year end 1994 to $10.6 million at year end 1995 was
attributable to inventory acquired in connection with the purchase of assets
from HiG Relays ($1.5 million) and the Kilovac Acquisition ($2.0 million) and
increased volume. The increase in inventories from year end 1994 to year end
1995 was favorably offset by the implementation of more efficient
manufacturing and material planning techniques. The Company's inventories
increased from $9.4 million at July 2, 1995 to $10.7 million at June 30, 1996.
The increase was primarily due to the Kilovac Acquisition ($2.3 million) and
was offset by the reduction of inventory associated with the sale of certain
high performance relay product line assets to the Indian Joint Venture
($300,000) and to improved inventory planning techniques.
The Company's accounts payable increased from $1.7 million at year end 1993
to $2.3 million at year end 1994. The increase was primarily the result of
increased purchases to support the Company's growth. The increase of the
Company's payables from $2.3 million at year end 1994 to $2.6 million at year
end 1995 was primarily due to the effect of the acquisition of Kilovac
($783,000) and increases in purchases to support the Company's growth. This
increase between 1994 and 1995 was partially offset by the Company's strategy
to shorten the payment period of its accounts payable. The Company's accounts
payable increased from $2.5 million at July 2, 1995 to $3.2 million at June
30, 1996. This increase was primarily due to the Kilovac Acquisition
($708,000).
The Company has historically financed its operations and acquisitions
through a combination of internally generated funds and secured borrowings
under its revolving credit agreement. The Company financed its largest
acquisition, the Kilovac Acquisition, through $9.8 million of secured
borrowings and the issuance of $1.7 million of subordinated debt and $2.0
million of cumulative redeemable preferred stock. The Company financed the
Hartman Acquisition with secured bank debt, and a portion of the proceeds
obtained in the Offering will be utilized to repay a portion of this debt.
Capital expenditures, excluding acquisitions, were $454,000 in 1993,
$444,000 in 1994, $1.1 million in 1995 and $925,000 for the six months ended
June 30, 1996. Capital expenditures were primarily for replacement and
enhancement of production equipment. In 1995, capital expenditures also
included $400,000 for improvements to the Asheville facility, $133,000 for the
acquisition of equipment for a high performance relay product line and
$112,000 of capital expenditures by the Kilovac Division. Acquisition spending
totaled $3.1 million in 1993, $1.1 million in 1994 and $15.0 million in 1995,
and the Company expended approximately $13.0 million in July 1996 for the
Hartman Acquisition.
The Company will apply the estimated net proceeds of the offering ($24.6
million) to repay approximately $12.4 million of the $36.5 million outstanding
under its senior secured credit facility, approximately $8.9 million of its
subordinated debt, including approximately $1.5 million of interest in arrears
and approximately $2.7 million of its preferred stock, which includes accrued
and unpaid dividends thereon. In connection with the initial public offering,
the Company will also pay to its senior lenders a success fee in the amount of
approximately $558,000 (based on the assumed initial public offering price).
The Company has entered into a letter of intent with Bank of America Illinois,
which, upon the execution of definitive documentation at the time of the
Offering, would provide for up to a $40.0 million secured credit facility,
consisting of a $28.0 million revolving credit facility (bearing interest at
LIBOR plus 1.75%) and a $12.0 million term loan facility (bearing
34
<PAGE>
interest at LIBOR plus 2.0%). The facility will be available for working
capital purposes and to finance additional acquisitions and will be secured by
the Company's assets. The Company anticipates that the loan agreement for the
new facility will contain financial covenants including, without limitation,
certain limitations on cash interest coverage, leverage, liquidity and minimum
net worth and certain other customary restrictive covenants. The Company
expects that the facility will be available for five years and that amounts
outstanding under the term loan facility will be repaid in $600,000
installments each fiscal quarter. There can be no assurance that the Company
will be successful in arranging for such a facility or what the final terms of
such facility will be. The Company believes that cash flow generated from
operations and borrowings under the credit facility will be sufficient to fund
the Company's working capital needs, planned capital expenditures, interest
expense and its business strategy for the next twelve months and thereafter
based on the Company's current business plan. However, the Company may require
additional funds if it enters into strategic alliances, acquires significant
assets or businesses or makes significant investments in furtherance of its
growth strategy.
INFLATION
The Company does not believe that inflation has had any material effect on
the Company's business over the past three years.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-Lived Assets to be Disposed Of,"
which will be effective during the Company's year ending December 31, 1996.
The impact of this new standard on 1996 earnings is not expected to be
significant.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes an alternative method of accounting for
employee stock compensation plans based on a fair value methodology. However,
the statement allows an entity to continue to use the accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
has not yet determined whether it will adopt the alternative method of
accounting and has also not yet determined its effect.
35
<PAGE>
BUSINESS
GENERAL
The Company is a leading designer, manufacturer and marketer of a broad line
of high performance electromechanical and electronic products and solenoids
for customers in the commercial/industrial equipment, commercial airframe,
defense/aerospace, communications, automatic test equipment and automotive
industries. The Company's relays are used to control current or signals in
electrical and electronic circuits, and are technological building blocks for
a wide range of products. While the Company is a broad-based supplier of
general and special purpose relays and solenoids, it has focused on
manufacturing high performance relay products and targeting sophisticated and
customized applications of these products to meet the needs of the markets it
serves. The Company's high performance relays are sophisticated, complex
devices that have been engineered for highly reliable performance over
substantial periods of time, often in adverse operating environments. The
Company sells its products to more than 2,100 customers including Boeing,
AT&T, Rockwell, Hewlett Packard, McDonnell Douglas and General Motors.
INDUSTRY OVERVIEW
According to Frost & Sullivan, an industry market research firm, annual
sales of relay products in North America were estimated to be $840 million in
1995. The Company estimates that the high performance relay market is growing
at a 3-4% growth rate per year, in contrast to the less than 1% growth rate
(according to Frost & Sullivan) which characterizes the relay market as a
whole. The relay and solenoid markets are highly fragmented among a large
number of small suppliers.
The Company does not compete in the low-price, mass-produced relay market,
which is dominated by suppliers in the Far East. These suppliers utilize
highly automated lines and/or low-cost labor to produce long runs of standard
relay products. It is impractical for those manufacturers to modify their
product designs or manufacturing processes for the niche markets applications
targeted by the Company within the high performance relay markets. These niche
markets generally produce higher margins for the Company, are less sensitive
to pricing and are more dependent on high reliability, performance, and
meeting specific customer requirements than the markets for standard relay
products. High performance relay products have also proven themselves to be
less susceptible to obsolescence because the users of the sophisticated
equipment of which such high performance products are a component part are
less likely to modify such equipment because of the length of time required,
and cost incurred, to requalify such equipment.
The Company has identified two trends in the relay and solenoid industries
that it believes will have a favorable impact on the Company's future growth.
First, major customers in the primary markets that the Company serves are
consolidating their supplier base in an effort to develop long term strategic
business relationships with a limited number of leading suppliers. Suppliers
must therefore provide a broad range of high quality products, at competitive
prices, together with full service capabilities, including design, engineering
and product management support. These requirements can best be met by
suppliers with sufficient size and financial resources to satisfy such
demands. Although this trend has already resulted in significant consolidation
among suppliers in the relay and solenoid industries, the Company believes
that the new environment provides an opportunity for growth through the
acquisition of related products previously provided by other suppliers and by
acquiring companies or product lines that further enhance its product,
manufacturing and service capabilities.
A second trend is an increase in the technological complexity and
miniaturization of the equipment manufactured by the Company's customers. As
its customers develop increasingly complex mechanisms which require
sophisticated component parts, the Company expects that the demand for its
high performance relays and solenoids which provide the advantages of small
size, light weight, long life, low energy consumption and environmentally
sealed contacts, will increase as well.
36
<PAGE>
OPERATING STRATEGY
The Company seeks to leverage its broad product offering, its reputation for
quality, innovation and technological leadership, its diverse and efficient
manufacturing capabilities and its wide and diversified customer base to
further penetrate and expand the size and number of markets that it serves.
The principal elements of its operating strategy are set forth below:
Expand Product Line Capabilities. The Company manufactures over 750
different types of electromechanical and electronic products and solenoids
that have a wide variety of product applications. This broad product offering
allows it to provide its customers with sophisticated, customized products, as
well as more standard, general purpose products. The Company continuously
seeks to expand its product offering through acquisitions and by using its in-
house engineering and manufacturing resources to design, test and manufacture
new products, both in response to specific requests by existing customers and
in anticipation of potential new applications for its products.
Maintain Leadership Position and Focus on High Performance Markets. The
Company believes it is a leading manufacturer of high performance relays and
is a sole source supplier of over 80 specialty relay types. The Company
believes that its ability to produce proprietary high performance relays has
been fundamental to its success and will enable the Company to grow its
business in the future. This focus on the high performance relay market has
allowed the Company to successfully target and serve leading original
equipment manufacturers in niche markets who are willing to pay premium prices
for the performance advantages offered by the Company's products. The
Company's high performance relays are also critical enabling technologies in
advanced emerging applications such as electric vehicles, automatic heart
defibrillators, global positioning satellites, the Space Station, advanced
communications systems and advanced commercial and military aircraft.
Provide Efficient and Diverse Manufacturing Capability. The Company's
domestic and international manufacturing capability enables it to respond to
its customers' demands for high quality products at competitive prices. The
Company manufactures and assembles its products at five facilities which are
all capable of advanced mechanized assembly. The Company's two North Carolina
facilities produce high performance signal relays and solenoids and each of
these facilities has obtained the "Military Standard 790" certification
promulgated by the United States Department of Defense ("DOD"). The Military
Standard 790 certification is dependent upon the development and detailed
documentation, on an ongoing basis, of the facilities' operating systems,
manufacturing and quality control procedures, which, similar to ISO 9000
facility certification, assure product integrity and reliability among product
lots. The Kilovac Division's facility in southern California manufactures high
performance, high voltage relays, while the Midtex Division's facility in
Juarez, Mexico produces general purpose relays and provides the Company with
low-cost assembly capabilities. The Hartman Division's facility in Mansfield,
Ohio has obtained the Military Standard I 45208 certification promulgated by
the DOD which governs quality control and assurance, and operates under
certain Federal Aviation Administration approvals. This facility manufactures
high power relays and components of electrical power management systems for
the airframe and aerospace industries. The Company has also entered into
agreements with several subcontractors in the Far East to provide low-cost
labor-intensive finished products and sub-assemblies. The Company anticipates
that the Indian Joint Venture will bolster its ability to effectively compete
in the global marketplace by expanding its manufacturing capability and
providing increased flexibility at a lower cost structure. The Company has an
excellent record of manufacturing high quality, highly reliable relays and
solenoids and has experienced a low product return rate. In general, the
Company's diverse manufacturing capabilities allow it to provide its customers
with the specialized relay and solenoid products they require on delivery
schedules that meet the customers' needs.
Leverage Customer Relationships. The Company believes that its long-standing
customer relationships are due, in large part, to its excellent product
reputation and broad product offerings. The Company intends to further expand
its customer relationships by offering complementary and new products to its
existing customer base. For example, the Kilovac Division has established an
Electric Vehicle Product Group that markets high power
37
<PAGE>
and high voltage relays to major automobile manufacturers worldwide. As a
result of this effort, the Company has developed an enhanced understanding of
the automotive relay market and has established industry contacts which
management believes can assist the Company in introducing its low power relays
to certain segments of the automotive market. The Company believes that it is
also the primary supplier to nearly all manufacturers of heart defibrillators,
including customers such as Zoll, Hewlett Packard, and Physio Control. As
these defibrillator manufacturers develop new products, such as the automatic
external defibrillator (a product intended to provide quick and easy access to
a defibrillator in public places), the Company believes that its existing
customer contacts and advance knowledge regarding the relay requirements of
these new products will prove beneficial.
Pursue New Market Opportunities. The Company intends to pursue new market
opportunities for its existing products and new products it develops. The
Company has identified a demand for sophisticated relay and solenoid products
in the transportation, medical, and manufacturing industries due to the more
widespread use of electronics within the systems utilized by these industries.
The Company believes that it is positioned to capitalize on this demand
because it believes its technology is well-suited to meeting the stringent
operating environments and the increased voltage and current requirements of
these new markets. For example, the Company currently sells many of its
products to the commercial and military aircraft industries which are
developing aircraft with greater electric and electronic content and shifting
from 115 volt AC power to 270 volt DC power. The Company has developed several
new products which meet the higher power switching requirements of the new
electrical systems and these products have been selected for use on several
aircraft programs.
Expand International Sales. Primarily as a result of the Kilovac
Acquisition, approximately 14% of the Company's gross sales in 1995 were made
to customers located outside the United States. In an effort to further
increase its international sales, the Company has recently expanded the size
and geographic scope of its European and Asian sales and marketing network by
retaining sales representatives and distributors in England, Norway, Spain,
Portugal, the Benelux countries, Japan, Taiwan, Korea, and Singapore/Malaysia.
In addition, the Company intends to utilize the Kilovac Division's strong
European sales representatives network to market the broad portfolio of
products offered by the CII and Midtex Divisions to facilitate further
international sales expansion.
Invest in New Product Development. The Company intends to continue to devote
engineering resources to developing new products and increasing the
functionality of existing products in an effort to enter new markets and gain
market share in existing markets. The Company's design engineers conduct
internally sponsored research and development and provide similar services to
its customers. The Company's core competencies in high performance design,
processing, sealing and material processing in conjunction with collaborative
efforts with customers allow the Company to introduce new products
effectively. The Company is currently developing a number of new products,
including high performance relays for space satellites, automatic external
defibrillators, advanced aircraft, industrial vehicles and rail
transportation, and solenoids for commercial/industrial equipment.
There can be no assurance given that the Company will be successful in
implementing this strategy. The discussion of the Company's strategy contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in these forward-looking statements as
a result of certain risk factors described elsewhere in this Prospectus. See
"Risk Factors."
ACQUISITION STRATEGY
Since its formation, the Company's growth strategy has been to acquire
manufacturers of relay products and related components and to consolidate the
acquired operations where appropriate into the Company's business. The Company
plans to continue this strategy and also intends to broaden the scope of its
acquisitions to include related component companies and product lines.
38
<PAGE>
Set forth in the table below is a description of the Company's acquisitions
to date, the date of acquisition, the name of the seller or acquired company,
the type of acquisition and a general description of the products acquired.
The aggregate purchase price paid for the acquisitions listed below is
approximately $36.0 million.
<TABLE>
<CAPTION>
DATE NAME OF SELLER OR ACQUIRED COMPANY TYPE OF ACQUISITION PRODUCT TYPES
---- ---------------------------------- ------------------- -------------
<C> <S> <C> <C>
January 1983 Sun Electric Company Product Line Aircraft instrumentation
September 1984 Midland-Ross Corporation Product Line High performance relay
products
January 1985 Automotive Electric Product Line Telecommunications relay
Division of GTE products
June 1986 Branson Corporation Company High performance relay
products
July 1990 Sigma Relay Division of Product Line Custom application relay
Pacific Scientific Co. products
December 1990 Airpax Relay Division of Product Line High performance relay
North American Phillips and solenoid products
January 1993 CP Clare Corporation Product Line Telecommunication relay
products
March 1993 West Coast Electrical Company Solenoid products
Manufacturing Co.
March 1993 Midtex Relays Inc. Company General purpose relay
products
December 1994 Deutsch Relays Inc. Product Line High performance relay
products
January 1995 HiG Relays Inc. Assets High performance
electromechanical and
electronic products
October 1995 Kilovac Corporation Company High voltage relays,
vacuum and gas filled
relays and DC power
relay products
July 1996 Hartman Electrical Division High performance power
Manufacturing relay products and
electrical subsystems
</TABLE>
When acquiring a smaller company or product line, the Company typically
seeks to integrate the acquired operations and to consolidate functions such
as finance, sales, marketing, and engineering, thus eliminating significant
operating cost. Recent acquisitions which have been integrated in this manner
include the acquisition of West Coast Electric Manufacturing Co., the Airpax
Relay Division of North American Phillips, a product line acquired from
Deutsch Relays Inc. and assets of HiG Relays Inc. In the case of the
acquisition of Midtex Relays and the Kilovac Corporation, the acquired
businesses were of such size that the companies were maintained as stand-alone
operations. In addition, as a result of the acquisition of Midtex Relays,
several of the Company's existing products were shifted to the newly acquired
lower-cost operations in Mexico. Although the Hartman Division functions as a
stand-alone operation, the Company expects to offer Hartman's product line
through the Company's field sales force beginning in late 1996. The Company
has made strategic acquisitions of assets employing sophisticated technology,
and, as a result, the Company has and will continue to expend considerable
time and expense on rationalizing acquired products with similar products in
existing lines and creating synergies between related product technologies and
existing products. For example, the Company's product engineers are currently
integrating newly acquired technology into certain existing high performance
relay products to enhance the performance of those products.
The Company intends to continue to make acquisitions to expand its market
geographically, complement its product line and supplement its technical
knowledge. The Company presently has available capacity in certain of its
facilities, and therefore the Company believes that it is well-positioned to
make additional acquisitions and integrate the acquired businesses into its
existing facilities. While the Company regularly evaluates potential
acquisition opportunities in the ordinary course of its business, as of the
date hereof there are no existing commitments or agreements with respect to
any acquisitions.
39
<PAGE>
PRODUCTS
The Company manufactures products in the following four general categories:
high performance relays, general purpose relays, electronic products and
solenoids, which represented 67.7%, 22.0%, 5.9% and 4.4%, respectively, of the
Company's net sales in 1995.
Relays
A relay is an electrically operated switch which can be located at a remote
location to control electrical current or signal transmissions.
Electromechanical relays utilize discrete switching elements which are opened
or closed by electromagnetic energy and thus control circuits with physical
certainty. Since these devices are controlled electrically, they can be placed
at remote locations where it may not be safe or convenient for a human
operator to be located. Relays are designed to meet exacting circuit and
ambient conditions and can control numerous circuits simultaneously. Certain
relay types measured in microwatts are used to switch signals in test
equipment, computers and telecommunications systems. Higher power relays,
which switch or control high voltage or high currents, are used in electric
vehicles, aircraft electrical systems, heart defibrillators and spacecraft
power grids. Due to various application requirements, relays come in thousands
of shapes, sizes and with differing levels of performance reliability. Because
of the many switching functions performed by relays, they are found in
thousands of electrical and electronic applications.
High performance relays. High performance relays are characterized by their
advanced design or construction, demanding performance and reliability
requirements and used in adverse operating environments. High performance
relays provide customers with the advantages of smaller size, lighter weight,
longer life, energy efficiency and greater reliability than general purpose
relays. Many of the Company's high performance relays are hermetically sealed
in metal or ceramic enclosures to protect the internal operating mechanisms
from harsh environments and to improve performance and reliability. The
Company manufactures more than 400 types of high performance relays in its
North Carolina, Ohio and California facilities. The inherent switching
advantages of the Company's high performance relays generally command higher
selling prices than general purpose relays. The sale prices of high
performance relay products range from approximately $10 to $3,500 per unit.
The Company's high performance relays are sold to commercial airframe
manufacturers, manufacturers of communication systems, medical systems,
avionics systems, automatic test equipment, aerospace, and defense equipment
manufacturers. High performance relays can have a variety of applications in a
single end product. For example, the Company believes that more than 250 of
its high performance relays are used on each Boeing 777 aircraft to perform
switching, power distribution and control functions in the avionics system,
radio communications, power regulation equipment and electrical load
management system. High performance relays are also an integral component in
heart defibrillator machines and electric vehicles.
General purpose relays. Like its high performance relay products, the
Company's general purpose relays are generally targeted towards niche
applications where they are typically sole-sourced or have limited
competition. The Company's general purpose relays are used in commercial and
industrial applications where performance and reliability requirements are
somewhat less demanding than those for high performance relays. These relays
are generally manufactured for the Company in Mexico and in China where longer
production runs are necessary for operating efficiency. Many of these
production lines are either semi-automated or utilize lower-cost assembly
labor. The Company's general purpose relay offering includes some of the more
sophisticated product types in the general purpose category. The prices of
general purpose relays range from $1 to $25 per unit. Specific applications
for the Company's general purpose relays include an environmental management
system for buildings manufactured by Johnson Controls which uses up to 700
general purpose relays per system. Taylor Freezer also uses many of the
Company's general purpose relays in its ice cream machines.
40
<PAGE>
Electronic products. An electronic product contains no moving parts and
performs switching functions utilizing semiconductor devices. Since there are
no moving parts, these types of relays feature very long service lives and
high reliability, but such products are not appropriate for applications
requiring complete electrical isolation. High performance electronic products
are becoming increasingly sophisticated and provide the user with control and
functional options not previously available. Switching speed of electronic
products is normally much faster than that of electromechanical relays. The
Company significantly increased its electronic products product offerings
through the HiG Acquisition in January 1995. Management believes that,
although sales of electronic products represent approximately 5.9% of total
1995 net sales, electronic products represent a logical and attractive growth
opportunity for the Company. Electronic products are sold to commercial
industrial equipment manufacturers and defense equipment manufacturers for
prices ranging from approximately $15 to $500 per unit.
Solenoids
Solenoids are similar to relays in design, but differ in that
electromechanical action is used to perform mechanical functions. Rather than
control currents or transmissions, solenoids are applied when a defined
mechanical motion is required in the user's equipment or system. Among their
many applications, solenoid products operate product release mechanisms in
vending machines, activate remote door locks, open and close valves, and are
utilized in custom automation equipment. Like relays, solenoids can be made in
many sizes and shapes to meet specific customer application requirements.
The Company supplies products to the high performance and the general
purpose solenoid markets. High performance solenoids tend to be custom
designed and are used in aerospace, security, power station and automotive
applications such as aerospace de-icing equipment and commercial airframe fuel
shut-off valves. General purpose solenoid types are used in vending machines,
automation equipment, office machines and cameras. The Company manufactures
its high performance solenoids in its Fairview, North Carolina facility, while
its general purpose solenoid types are manufactured by subcontractors in
China. The prices of the Company's solenoids range from $2 to $350 per unit.
PRODUCT DEVELOPMENT
The Company intends to continue to develop new products to meet the
application requirements of its customers and to expand the Company's
technical capabilities.
High performance relays. The Company is developing several new types of high
performance relays, including a high voltage relay to be used in a new model
of automatic heart defibrillator, a high voltage relay for the rail
transportation industry, a new energy efficient, long-life environmentally
sealed relay for applications where energy consumption is critical, and a new
relay designed to reduce printed circuit board space. The Company is also
developing a new line of ultra-high reliability relays which are similar to
the high performance relays in composition, but are subject to more rigorous
testing because such relays are used in aerospace and satellite equipment and
are therefore continuously utilized in adverse conditions.
General purpose relays. The Company is currently developing several new
product types to be used in automotive and commercial/industrial applications.
These products are currently in the prototype stage and the Company expects to
begin manufacturing and selling certain of these products in 1996.
Solenoids. The Company is currently developing several new solenoid types
for use in business equipment, vending machines, security systems, home
appliances, automotive door locks, electronic games, and personal computers.
Prototypes of many of these products are in the test phase while others are in
mechanical design. The development cycle of new solenoids from design to
prototype can generally be completed within one month. The Company expects to
commence marketing certain of these new solenoids in 1996.
41
<PAGE>
CUSTOMERS
The Company has established a diversified base of over 2,100 customers
representing a wide range of industries and applications. Sales by industry
segment are diversified across the commercial airframe, defense/aerospace,
commercial/industrial equipment, communications, automatic test equipment, and
automotive markets representing approximately 29.0%, 27.3%, 22.9%, 14.8%, 3.8%
and 2.2% respectively, of net sales during 1995. Sales to customers outside of
the United States comprised approximately 14% of net sales during 1995. No
single customer accounted for 10% or more of the Company's total net sales for
1995. The chart set forth below lists the Company's primary market segments,
representative customers, and certain end product applications.
<TABLE>
<CAPTION>
MARKET SEGMENT REPRESENTATIVE CUSTOMERS PRODUCT APPLICATIONS
- -------------- ------------------------ --------------------
<S> <C> <C>
Commercial Airframe Airbus, Aerospatiale, Beech, Flight Control Systems,
Boeing, British Aerospace, Navigation Control Systems,
Cessna, Lear, McDonnell- Communication Systems, Radar
Douglas, Smiths Industries Systems, Landing Gear
Control Systems, Electrical
Load Management Systems
Defense/Aerospace Allied Signal, Bell Satellites, Missiles, Tanks,
Helicopter, General Defense Systems, Navigation
Dynamics, Grimes Aerospace, Equipment, Aircraft, Global
HR Textron, Hughes Missile Positioning Equipment
Systems, ITT Aerospace,
Litton Industries, Lockheed
Martin, Loral, Lucas
Aerospace, McDonnell-
Douglas, NASA, Raytheon,
Rocketdyne, Rockwell,
Sundstrand Aviation, TRW,
Westinghouse
Commercial/Industrial Amana, ABB, Burdick, Dover, Vending Machines, Overhead
ECC, General Electric, Doors, Medical
Hercules Corp., Hewlett- Instrumentation, Heart
Packard, Honeywell, Johnson Defibrillators, Motor
Controls, Laerdal, Landis & Controls, Welders, White
Gyr, Lorain, Miller Goods, Appliances, Heating,
Electric, Montgomery Ventilation, Air
Elevator, Onan, Otis Conditioning Controls, Spas,
Elevator, Physio Control, Metering, High Voltage
Rockwell, Safetran, Testers
Scotsman, Siemens, Taylor
Freezer, Trane,
Westinghouse, Whitaker
Controls, Woodward Governor,
Zoll Medical
Communications AG Communications, Alcatel, Central Office Switches,
Allied Signal, AT&T, Station Switches, RF Radios,
Collins, Daewoo, IBM, Facsimile Communications,
Motorola, Pulsecom, Line Test Equipment,
Rockwell, Tellabs, Teltrend, Wireless Phones
Wiltron
Automatic Test Equipment Hewlett-Packard, IBM, Metric Electronic Systems, Test and
Systems, Picon, Schlumberger Component Systems
Automotive Chrysler, GM, Mercedes, Electric Vehicles,
Rostra Automotive Security Systems
</TABLE>
42
<PAGE>
SALES AND DISTRIBUTION
The Company sells its products worldwide through a network of 72 independent
sales representatives and 27 distributors in North America, Europe and Asia.
This sales network is supported by the Company's internal staff of 10 direct
product marketing managers, 10 customer service associates, 10 application
engineers and two marketing communication specialists.
The Company believes it differentiates itself from many of its competitors
by offering a high level of customer service and engineering support to its
customers. A key element in the service provided by the Company to its
customers is assistance in the proper application of the Company's products,
thereby reducing field failures and overall product cost in use. The Company
believes that its service oriented approach has contributed to significant
customer loyalty. The Company seeks to provide customized solutions to its
customers' switching problems and to sell complementary products across its
broad product offering to both existing and new customers. The Company has
formed strategic partnerships with certain customers to develop new products,
improve on existing products, and reduce product cost in use.
The Company provides its salespeople, representatives, and distributors with
product training on the application and use of all Company products. The
Company employs 10 technical application engineers who provide ongoing
technical support to new and existing customers. The application engineers,
along with the product marketing managers, develop application-related
literature, provide answers to customer questions on the use and application
of the Company's products, and provide field support at the customer's site
during installation or use, if required. The Company believes that the
services provided by its application engineers and product marketing managers
are an integral factor in its sales and new customer development efforts.
The Company produces internally nearly all of its own marketing
communication materials, enabling the Company's marketing department to
incorporate product improvements and respond to market changes rapidly. The
Company maintains an up-to-date database of over 9,000 prospects with an
active customer base of approximately 2,100.
The Company conducts virtually all of its sales through sales
representatives who sell both to end users and distributors. The Company has
maintained relationships with many of its sales representatives and
distributors for over ten years. The Company believes that its longstanding
relationships with its sales network contributes to the effectiveness of its
marketing program.
Sales representatives, who market the Company's products exclusively, and
distributors enter into agreements with the Company that allow for termination
by either party upon 30 days notice. Distributors are permitted to market and
sell competitive products and can return to the Company a small portion of
products purchased by them during the term of such agreements.
COMPETITION
The markets in which the Company operates are highly competitive. The
Company competes primarily on the basis of quality, reliability, price,
service and delivery. Its primary competitors are Teledyne Relays, Genicom,
Jennings, Leach, Ibex and Eaton in the high performance relay market, the
Electromechanical Products division of Siemens in the general purpose relay
market, and G.W. Lisk in the solenoid market. Several of the Company's
competitors have greater financial, marketing, manufacturing and distribution
resources than the Company and some have more automated manufacturing
facilities. There can be no assurance that the Company will be able to compete
successfully in the future against its competitors or that the Company will
not experience increased price competition, which could adversely affect the
Company's results of operations. The Company also faces competition for
acquisition opportunities from its large competitors.
The Company believes that significant barriers to entry exist in the high
performance relay markets in the form of stringent commercial and military
qualifications required to sell products to certain customers in
43
<PAGE>
these markets. The Company holds military qualifications (QPL) for 29 of its
product types. During 1995, approximately $9.7 million (14.2%) of the
Company's total revenue was derived from the sale of qualified products.
Obtaining and maintaining these qualifications is contingent upon successful
completion of rigorous facility review and product testing on a regular basis
and at a significant cost. Each of the Company's North Carolina manufacturing
facilities are certified to Military Standard 790, a standard promulgated by
the DOD. The elimination by the military or certain commercial customers of
qualification requirements would lower these barriers to entry and enable
other relay manufacturers to sell products to such customers.
The Company holds patents on many of its products, including high voltage DC
relays and other high performance relays. In addition, the Company has
developed proprietary manufacturing capabilities which afford the Company an
advantage over its competitors in many of its product lines. See "--
Proprietary Rights."
MANUFACTURING
The Company has established efficient, flexible and diverse manufacturing
capabilities, which the Company believes enable it to provide its customers
with a wide array of high quality custom and standard relays and solenoids at
competitive prices and lead times. The Company manufactures its products at
five facilities which utilize advanced and often proprietary assembly and
processing techniques.
The facilities of the CII Division in North Carolina manufacture high
performance signal relays and solenoids and have each obtained the Military
Standard 790 certification promulgated by the DOD which involves rigorous
documentation of operating systems processes, assembly, and testing technique.
The Kilovac Division's facility in Southern California manufactures high
performance, high voltage relays utilizing advanced propriety assembly and
processing techniques and maintains rigorous certifications and qualifications
required by its sophisticated customer base. Products manufactured at the
Kilovac facility represented approximately 21.5% of the Company's net sales in
1995.
The Company's facility in Juarez, Mexico manufactures general purpose relays
which represented approximately 13.1% of the Company's net sales in 1995. In
addition to manufacturing a broad array of general purpose relays for its
diverse customer base, this facility provides the Company with sophisticated
low cost assembly, process, and testing capabilities for labor-intensive
manufacture of certain components and products.
The Hartman Division's facility in Mansfield, Ohio manufactures high
performance, high current relays using a modular construction technique that
is designed to satisfy diverse customer requirements. Products manufactured by
the Hartman Division represented approximately 25.5% of the Company's net
sales in 1995.
Products representing approximately 0.9% of the Company's net sales in 1995
were manufactured at a subcontract facility in Connecticut. The Company owns
substantially all of the assets at this subcontract facility. Under the
agreement between the Company and the subcontractor, the subcontractor will
provide consultation, manufacturing, design, and engineering services upon the
Company's request on fixed pricing terms.
The Company also subcontracts for certain relays and solenoids to six
subcontractors located in China and Japan which represented approximately 3.9%
of the Company's net sales in 1995. In addition, these subcontractors supply
the Company with low cost labor-intensive assembly of certain components which
assists the Company in its cost reduction efforts.
The Company participated in the construction and design of the product lines
of each of its subcontractors and routinely confirms that the manufacturing
facilities of each subcontractor meet the Company's stringent product quality
qualifications. The Company believes that production by its international
subcontractors who maintain low labor costs and strong manufacturing
competence enable the Company to compete effectively in the relay and solenoid
marketplace.
44
<PAGE>
FACILITIES
The Company, headquartered in Fairview, North Carolina, operates the
following manufacturing and distribution facilities worldwide:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE PRODUCTS MANUFACTURED
-------- ------- ---------------------
<C> <C> <S>
CII DIVISION:
Fairview, North Carolina 70,000 High performance relays and solenoid
products
Asheville, North Carolina 26,000 High performance relays and electronic
products
KILOVAC DIVISION:
Carpinteria, California 38,000 High voltage and power switching relay
products
MIDTEX DIVISION:
Juarez, Mexico 45,000 General purpose relay products
El Paso, Texas 6,000 Distribution center
HARTMAN DIVISION:
Mansfield, Ohio 53,000 High performance power relays
INDIAN JOINT VENTURE:
Cochin, India(1) 20,000 High performance and general purpose relay
products
</TABLE>
- --------
(1) The Company has a 28% ownership interest in the Indian Joint Venture named
CII Guardian International Limited. Production commenced at this facility
in the third quarter of 1996.
The Company's manufacturing and assembly facilities (including the Indian
Joint Venture property) contain approximately an aggregate of 250,000 square
feet of floor space. Each of the facilities is under lease, other than the two
North Carolina properties which the Company owns. The Company currently has
available manufacturing space in certain of its facilities. The Company
believes this excess manufacturing capacity will allow for the integration of
future product line acquisitions and/or the development of new product lines.
The facilities of the CII Division and the Hartman Division, each of which
manufacture products to be sold to the military, maintain Military Standard
790 and Military Standard I 45208 certifications, respectively.
The Company's headquarters in Fairview, North Carolina house the sales and
engineering staff of the CII Division. The corporate, sales and engineering
staff of the Kilovac Division and the Midtex Division are located in the
Carpinteria, California and Juarez, Mexico facilities, respectively, and the
leases for these facilities expire in April 2006 and June 1998, respectively.
The Company has entered into a lease for Hartman's Mansfield, Ohio facility
providing for a ten year term and an option to purchase.
Indian Joint Venture
In November 1995 the Company formed a joint venture in India with Guardian
Controls Ltd. ("Guardian"), an Indian company with which the Company has had a
business relationship for more than ten years. The joint venture is expected
to produce relays for the domestic Indian market and global markets and to
manufacture labor-intensive relay components and sub-assemblies for export to
the Company's divisions in North America. The Company trained the employees of
the Indian Joint Venture in its North Carolina facilities and is currently
transferring to the Indian Joint Venture's facility the assembly equipment
which was purchased by the Indian Joint Venture. All sales for the Indian
Joint Venture outside of India will be channeled through the Company's
existing sales representatives. The Company and Guardian each have a 28%
interest in the Indian Joint Venture, the Bank of India has a 16% interest,
and the remaining 28% interest is held by certain financial investors in
India. The governing board of the Indian Joint Venture is presently composed
of two designees of the Company, one designee of Guardian and two outside
directors.
45
<PAGE>
EMPLOYEES
As of June 30, 1996, the Company had approximately 1,054 employees. Of these
employees, approximately 293, including the sales and engineering staff, were
employed in its Fairview headquarters, approximately 185 were employed in the
Asheville facility, approximately 267 were employed in the Mexico facility,
approximately 3 were employed in the Texas facility, approximately 180 were
employed in the Ohio facility and approximately 126 were employed in the
California facility. Approximately 150 of Hartman's employees in the Ohio
facility are represented by the International Union of Electronics,
Electrical, Salaried, Machine and Furniture Workers AFL, CIO. The Company
believes that its relations with its employees are excellent.
PROPRIETARY RIGHTS
The Company currently holds seven patents, one registered trademark and has
four patent applications and four trademark registrations pending. None of the
Company's material patents expire prior to 2000. The Company intends to
continue to seek patents on its products, as appropriate. The Company does not
believe that the success of its business is materially dependent on the
existence, validity or duration of any patent, license or trademark.
The Company attempts to protect its trade secrets and other proprietary
rights through formal agreements with employees, customers, suppliers and
consultants. Although the Company intends to protect its intellectual property
rights vigorously, there can be no assurance that these and other security
arrangements will be successful. The Company has from time to time received,
and may in the future receive, communications from third parties asserting
patents on certain of the Company's products and technologies. Although the
Company has not been a party to any material intellectual property litigation,
if a third party were to make a valid claim and the Company could not obtain a
license on commercially reasonable terms, the Company's operating results
could be materially and adversely affected. Litigation, which could result in
substantial cost to and diversion of resources of the Company, may be
necessary to enforce patents or other intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. The failure to obtain necessary licenses or the occurrence of
litigation relating to patent infringement or other intellectual property
matters could have a material adverse affect on the Company's business and
operating results.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. As of the date of this Prospectus there are
no material legal proceedings pending against the Company.
ENVIRONMENTAL MATTERS
The Company is subject to various foreign, federal, state and local
environmental laws and regulations. The Company believes its operations are in
material compliance with such laws and regulations. However, there can be no
assurance that violations will not occur or be identified, or that
environmental laws and regulations will not change in the future, in a manner
that could materially and adversely affect the Company.
Under certain circumstances, such environmental laws and regulations may
also impose joint and several liability for investigation and remediation of
contamination at locations owned or operated by an entity or its predecessors,
or at locations at which wastes or other contamination attributable to an
entity or its predecessors have come to be located. The Company can give no
assurance that such liability at facilities the Company currently owns or
operates, or at other locations, will not arise or be asserted against the
Company or entities for which it may be responsible. Such other locations
could include, for example, facilities formerly owned or operated by the
Company (or an entity or business that the Company has acquired), or locations
to which wastes generated by the Company (or an entity or business that the
Company has acquired) have been sent. Under certain circumstances such
liability at several locations (discussed below), or at locations yet to be
identified, could materially and adversely affect the Company.
46
<PAGE>
The Company has been identified as a potentially responsible party ("PRP")
for investigation and cleanup costs at two sites under the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"). CERCLA provides for joint and several liability for the
costs of remediating a site, except under certain circumstances. However, the
Company believes it will be allocated responsibility for a relatively small
percentage of the cleanup costs at each of these sites, and in both instances
other PRPs will also be required to contribute to such costs. Although the
Company's total liability for cleanup costs at these sites cannot be predicted
with certainty, the Company does not currently believe that its share of those
costs will have a material adverse effect.
Soil and groundwater contamination has been identified at and about the
Company's Fairview, North Carolina facility resulting in that site's inclusion
in the North Carolina Department of Environmental, Health & Natural Resource's
Inactive Hazardous Waste Sites Priority List. The Company believes that the
Fairview contamination relates to the past activities of a prior owner of the
Fairview property (the "Prior Owner"). On May 11, 1995, the Company entered
into a Settlement Agreement with the Prior Owner, pursuant to which the Prior
Owner agreed to provide certain funds for the investigation and remediation of
the Fairview contamination in exchange for a release of certain claims by the
Company. In accordance with the Settlement Agreement, the Prior Owner has
placed $1.75 million in escrow to fund further investigation, the remediation
of contaminated soils and the installation and start-up of a groundwater
remediation system at the Fairview facility. The Company is responsible for
investigation, soil remediation and start-up costs in excess of the escrowed
amount, if any. The Settlement Agreement further provides that after the
groundwater remediation system has been operating for three years, the Company
will provide to the Prior Owner an estimate of the then present value of the
cost to continue operating and maintaining the system for an additional 27
years. After receiving the estimate, the Prior Owner is to deposit with the
escrow agent an additional sum equal to 90% of the estimate, up to a maximum
of $1.25 million. Although the Company believes that the Prior Owner has the
current ability to satisfy its obligations pursuant to the Settlement
Agreement, the Company believes that the total investigation and remediation
costs will exceed the amounts that the Prior Owner is required to provide
pursuant to the Settlement Agreement. The Company has recorded a liability for
the total remediation costs of approximately $3.5 million, representing the
discounted amount of future remediation costs over the 30 year period of
remediation. Applicable environmental laws provide for joint and several
liability, except under certain circumstances. Accordingly, the Company, as
the current owner of a contaminated property, could be held responsible for
the entire cost of investigating and remediating the site. If the site
remedial system fails to perform as anticipated, or if the funds to be
provided by the Prior Owner pursuant to the Settlement Agreement together with
the Company's reserve are insufficient to remediate the property, or if the
Prior Owner fails to make the scheduled future contribution to the
environmental escrow, the Company could be required to incur costs that could
materially and adversely affect the Company. See "Risk Factors--Environmental
Matters."
In connection with the Hartman Acquisition, the Company entered into an
agreement pursuant to which it leases from a wholly owned subsidiary of Figgie
a manufacturing facility in Mansfield, Ohio, at which Hartman has conducted
operations (the "Lease"). The Mansfield property may contain contamination at
levels that will require further investigation and may require soil and/or
groundwater remediation. As a lessee of the Mansfield property, the Company
may become subject to liability for remediation of such contamination at
and/or from such property, which liability may be joint and several except
under certain circumstances. The Lease includes an indemnity from the Company
to the lessor for contamination that may arise following commencement of the
Lease, where caused by the Company or related parties, except under certain
circumstances. The Lease also includes an indemnity from Lessor to the
Company, guaranteed by Figgie, for certain environmental liabilities in
connection with the Mansfield Property, subject to a dollar limitation of
$12.0 million (the "Indemnification Cap"). In addition, in connection with the
Hartman Acquisition, Figgie has placed $515,000 in escrow for environmental
remediation costs at the Mansfield property to be credited towards the
Indemnification Cap as provided in the Lease. The Company believes that, while
actual remediation costs may exceed the cash amount escrowed, such costs will
not exceed the Indemnification Cap. If costs exceed the escrow and the Company
is unable to obtain, or is delayed in obtaining, indemnification under the
Lease for any reason, the Company could be materially and adversely affected.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company anticipated to be in
place upon consummation of the Offering and their ages and positions with the
Company are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION OR AFFILIATION
---- --- -----------------------
<S> <C> <C>
Ramzi A. Dabbagh........ 62 Chairman of the Board, Chief Executive Officer, President and Director
Michael A. Steinback.... 42 President of CII Division and Director
Douglas Campbell........ 49 President of Kilovac Division and Director
G. Daniel Taylor........ 60 Executive Vice President of Business Development and Director
David Henning........... 49 Chief Financial Officer
Theodore Anderson....... 40 Vice President and General Manager of Midtex Division
Daniel McAllister....... 42 Vice President of Manufacturing and Engineering of Kilovac Division
James R. Mikesell....... 54 Vice President and General Manager of Hartman Division
Michael S. Bruno, Jr.... 41 Director
Daniel A. Dye........... 43 Director
John P. Flanagan........ 54 Director
Donald E. Dangott....... 63 Director
</TABLE>
Upon the consummation of the Offering, the Board of Directors of the Company
will be expanded to 10 directors, and the Board currently intends to appoint
two additional independent directors following consummation of the Offering.
The present principal occupations and recent employment history of each of
the executive officers and directors of the Company listed above are set forth
below:
Ramzi A. Dabbagh was recently named the Chairman of the Board, Chief
Executive Officer and President of the Company. He served as President of
Communications Instruments from 1982 to 1995. Mr. Dabbagh served as President
and Chairman of the National Association of Relay Manufacturers ("NARM") from
1991 to 1993 and has been a director of NARM since 1990.
Michael A. Steinback became President of the CII Division and a director of
the Company in 1995. He served as the Vice President of Operations of the CII
Division from 1994 to 1995. From 1990 to 1993, Mr. Steinback was Vice
President of Sales and Marketing for CP Clare Corporation. Mr. Steinback has
served on the Board of Directors of NARM for 2 years.
Douglas Campbell became President of the Kilovac Division and a director of
the Company in 1995 as a result of the Kilovac Acquisition. He had been
employed by the Kilovac Corporation since 1978, and its President since 1986.
Mr. Campbell is expected to leave his position upon the expiration of his
employment agreement in December 1996. The Company may elect to employ Mr.
Campbell on a part-time consulting basis in 1997. See "--Employment
Agreements." The Company has an understanding with Mr. Campbell that he will
be nominated to serve as a director of the Company through October 1997.
G. Daniel Taylor has been the Executive Vice President of Business
Development of the Company since October 1995 and a director of the Company
since 1993. He joined the Company in 1981 as Vice President of Engineering and
Marketing and became Executive Vice President in 1984. He has served as the
Company's representative to NARM and has acted as an advisor to the National
Aeronautics and Space Administration (NASA) for relay applications and testing
procedures since 1967.
David Henning became Chief Financial Officer of the Company in December
1994. He held various positions at CP Clare Corporation from 1971 to 1994 and
served as Chief Financial Officer of that corporation from 1992 to 1994.
Theodore Anderson has served as Vice President and General Manager of the
CII Division/Midtex Division since 1993. Mr. Anderson served as Product
Marketing Manager of CP Clare Corporation from 1990 to 1993.
48
<PAGE>
Daniel R. McAllister has served as the Vice President of Manufacturing and
Engineering of the Kilovac Division since the Kilovac Acquisition in 1995 and
had served as Vice President of Product Development for the Kilovac
Corporation since 1990.
James R. Mikesell joined the Company as Vice President and General Manager
of the Hartman Division in July 1996 upon the completion of the Hartman
Acquisition. Mr. Mikesell joined Hartman Electrical Manufacturing in February
1994, from IMO Industries, where he had been the General Manager of their
Controlex Division for the previous 5 years. Prior to IMO, Mr. Mikesell was
Director of Manufacturing for the U.S. operations of the Automatic Switch
Division of Emerson Electric; Vice President of Engine Accessory Operations
and Director of Materials Management for the Quincy Controls Division of Colt
Industries; and in various operations management positions with Cummins Engine
and Dana Corporation.
Michael S. Bruno, Jr. has served as a director of the Company since 1993. He
was a founding Partner of Stonebridge Partners in 1986.
Daniel A. Dye has served as a director of the Company since 1993. He has
been a Partner of Stonebridge Partners since March 1993. From 1977 to 1993 he
was employed by Security Pacific Corporation and its successor company,
BankAmerica Capital Corporation and served as Senior Vice President of that
Company from 1988 to 1993.
John P. Flanagan has served as a director of the Company since 1993. He has
been an Operating Partner of Stonebridge Partners since 1992. He was the Chief
Operating Officer of Cabot Safety Corporation from 1990 to 1991 and President
of American Opticals Safety Business from 1985 to 1990.
Donald E. Dangott has served as a director of the Company since 1994. He
held various positions at Eaton Corporation until 1993, including serving as
the Director of Business Development Commercial and Military Controls
Operations from 1990 to 1993, and he presently serves as a business
development consultant. He is the Executive Director and a member of the Board
of Directors of NARM.
COMPENSATION OF DIRECTORS
As independent directors of the Company, Mr. Dangott and the directors to be
appointed after the consummation of the Offering will receive $10,000 per
year. All directors are entitled to reimbursement of reasonable out-of-pocket
expenses incurred in connection with Board meetings. Directors who are
officers of the Company or partners of Stonebridge Partners receive no
additional compensation for serving as directors. See "--Compensation
Committee Interlocks and Insider Participation."
BOARD COMMITTEES
The Board of Directors has an Audit Committee which makes recommendations to
the Board of Directors regarding the independent auditors to be nominated for
election by the shareholders, reviews the independence of such auditors,
approves the scope of the annual audit activities and reviews audit results.
The Audit Committee consists of Mr. Dye, Mr. Dangott and an additional
independent director to be named after the consummation of the Offering.
The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for officers and employees of
the Company. Mr. Flanagan, Mr. Dangott and an additional independent director
to be named after the consummation of the Offering will comprise the
Compensation Committee.
The Board of Directors may from time to time establish other committees to
assist it in the discharge of its responsibilities.
49
<PAGE>
EXECUTIVE COMPENSATION
The following sets forth a summary of all compensation paid to the chief
executive officer and the three other executive officers of the Company (the
"Named Executive Officers") for services rendered in all capacities to the
Company for the year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- --------------------------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Ramzi A. Dabbagh ........ $172,501 $139,098 $361,305 $14,240
Chairman, President and
Chief Executive Officer
Michael A. Steinback..... 129,683 75,026 346,458 8,494
President of CII
Division and Director
G. Daniel Taylor......... 112,761 63,187 5,098 7,866
Executive Vice President
of Business Development
and Director
David Henning............ 102,500 60,350 343,833 7,396
Chief Financial Officer
</TABLE>
- --------
(1) These amounts represent the sum of (i) the difference between the
appraised value of 25,000 shares of Common Stock at the date of purchase
($7.66 per share) and the purchase price paid for such shares ($0.46 per
share) ($180,000 for each of Messrs. Dabbagh, Steinback and Henning); (ii)
reimbursement for taxes related to stock compensation ($166,358 for
Messrs. Dabbagh and Steinback and $156,233 for Mr. Henning; (iii) fringe
benefits received by Messrs. Dabbagh and Taylor valued at $14,847 and
$5,098, respectively and (iv) with respect to Mr. Henning, reimbursement
received for $7,500 of expenses relating to the commencement of his
employment with the Company.
(2)These amounts represent insurance premiums paid by the Company with respect
to term life insurance.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Messrs. Dabbagh and
Taylor which terminate on May 11, 1998 and provide for annual base salaries of
$150,000 and $100,000. In addition, the employment agreements provide that
each of these executive officers is entitled to participate in a bonus pool
based upon the performance of the Company as established by the Board of
Directors, and such other employee benefit plans and other benefits and
incentives as the Board of Directors of the Company shall determine from time
to time. Under the employment agreements, each of Messrs. Dabbagh and Taylor
agrees that during the period of such agreement and for one year thereafter
such executive officer will not (i) become employed by or in any other way
associated with a business similar to that of the Company, (ii) solicit any
business similar to that of the Company from any of its customers or clients
or (iii) encourage any employees of the Company which have been employed by
the Company for a year or less to enter into any employment agreement or
perform any services for any other organization or enter into any other
business. The agreements also provide that while employed by the Company
neither of the executive officers may have a financial or other interest in a
supplier, customer, client or competitor of the Company (provided that
maintaining a financial interest equal to the lesser of $100,000 or 1%
ownership of a public company is not precluded). The employment agreements may
be terminated immediately by the Company "for cause" or within three months
after the death or disability of the employee. The Company maintains key-man
life insurance on Messrs. Dabbagh and Taylor and has agreed to pay out of the
proceeds of such policy three years salary to the estate of either officer in
the event of the death of such officer.
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The Company entered into an employment agreement with Douglas Campbell in
connection with the Kilovac Acquisition pursuant to which Mr. Campbell is
employed on a full-time basis until December 31, 1996 and, at the Company's
request, on a part-time consultancy basis for up to 12 months thereafter.
Under such agreement, while he is a full-time employee Mr. Campbell is
entitled to receive an annual salary of $150,000 and such stock options and
bonuses as are afforded other key employees of the Kilovac Division. The
Company is entitled to terminate this employment agreement for any reason upon
90 days notice, provided that Mr. Campbell is entitled to receive his full
salary if he is terminated without "cause". Under the employment agreement Mr.
Campbell agrees that for the term of such agreement and for five years
thereafter he will not directly or indirectly participate, have a financial
interest in or advise any business competitive with the business of the
Company and will not at any time interfere with the business of the Company by
soliciting its customers, suppliers or employees.
The Company entered into employment agreements with Michael Steinback and
David Henning in January 1994 and December 1994, respectively, which expire in
April 1997 and December 1996, respectively, and are automatically renewed each
year. Messrs. Steinback and Henning are entitled to receive annual salaries
(subject to annual review) of $134,375 and $105,000, respectively, an annual
auto allowance, and other standard employee benefits applicable to the
Company's other executive officers, and are entitled to participate in the
Company's executive bonus plan. Each of Messrs. Steinback and Henning is
entitled to receive full salary and benefits for a year if he is terminated at
any time during such year.
EMPLOYEE BENEFIT PLAN
The CII Technologies Inc. 1996 Management Stock Plan (the "1996 Plan") has
been adopted by the Company's Board of Directors and approved by its
stockholders.
Administration. The 1996 Plan is administered by the Compensation Committee
of the Board of Directors. The Compensation Committee has discretion to select
the individuals to whom awards will be granted and to determine the type, size
and terms of each award and the authority to administer, construe and
interpret the 1996 Plan. Members of the Compensation Committee must be
"disinterested" within the meaning of Rule 16b-3 under the Securities Exchange
Act of 1934.
Participants. All employees of the Company who are selected by the
Compensation Committee are eligible to participate in the 1996 Plan. Each of
the Named Executive Officers and other officers of the Company is an eligible
participant under the 1996 Plan.
Awards. The 1996 Plan provides for the granting of incentive and non-
qualified incentive stock options, stock appreciation rights, and other stock
based awards (collectively or individually, "Awards"). An individual to whom
an Award is made has no rights as a stockholder with respect to any Common
Stock issuable pursuant to that Award until the date of issuance of the stock
certificate for such shares upon payment of the Award.
Shares Available for Awards. A total of 325,000 shares of Common Stock may
be subject to Awards under the 1996 Plan, subject to adjustment at the
discretion of the Compensation Committee in the event of a Common Stock
dividend, split, recapitalization or certain other transactions. The shares of
Common Stock issuable under the 1996 Plan may be either authorized unissued
shares, or treasury shares or any combination thereof. If any shares of Common
Stock subject to repurchase or forfeiture rights are reacquired by the Company
or if any Award is canceled, terminates or expires unexercised, the shares of
Common Stock which were issued or would have been issuable pursuant thereto
will become available for new Awards. No individual may receive options, SARs
or other stock-based Awards during a calendar year attributable to more than
75,000 shares of Common Stock, subject to adjustment in accordance with the
terms of the 1996 Plan.
Stock Options. A stock option which may be a non-qualified or an incentive
stock option (each, an "Option"), is the right to purchase a specified number
of shares of Common Stock at a price (the "Option Price") fixed by the
Compensation Committee. The Option Price of an incentive Option may be no less
than the
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<PAGE>
fair market value of the underlying Common Stock on the date of grant. Unless
otherwise provided in a participant's award agreement, options are not
transferable during the participant's lifetime and will generally expire not
later than ten years after the date on which they are granted. Options become
exercisable at such times and in such installments as the Compensation
Committee shall determine. The Compensation Committee may also accelerate the
period for exercise of any or all Options held by a participant.
The Compensation Committee may, at the time of the grant of an Option or
thereafter, grant the participant a right (a "Limited Right") to surrender to
the Company all or a portion of the related Option in connection with a Change
in Control (as defined below). In exchange for such surrender, the Option
holder would receive cash in an amount equal to the number of shares subject
to the Option multiplied by the excess of the higher of (i) the highest price
per share of Common Stock paid in certain Change of Control transactions or
(ii) the highest fair market value per share of Common Stock at any time
during the 90-day period preceding such Change in Control over the Option
Price of the Option to which the Limited Right relates. A Limited Right can be
exercised within the 30-day period following a Change of Control. A Limited
Right will only be exercisable during the term of the related Option. A
"Change in Control" is deemed to occur when: (i) 20% or more of the combined
voting power of Company's voting securities is acquired in certain instances;
(ii) individuals who are members of Company's Board of Directors prior to the
Change of Control cease, subject to certain exceptions, to constitute at least
a majority of such Board of Directors; or (iii) stockholders approve certain
mergers, consolidations, reorganizations, or a liquidation of the Company or
an agreement is approved for the sale or other disposition of all or
substantially all of the assets of the Company.
Stock Appreciation Rights. A stock appreciation right may be granted alone
or in tandem with Options. Upon exercise, a stock appreciation right will
entitle the participant to receive from the Company an amount equal to excess
of the fair market value of a share of Common Stock on the settlement date
over the per share grant or option price, as applicable (or some lesser amount
as the Compensation Committee may determine at the time of grant), multiplied
by the number of shares of Common Stock with respect to which the stock
appreciation right is exercised. Upon the exercise of a stock appreciation
right granted in connection with a stock option, the stock option shall be
canceled to the extent of the number of shares as to which the stock
appreciation right is exercised, and upon the exercise of a stock option
granted in connection with a stock appreciation right or the surrender of such
stock option, the stock appreciation right shall be canceled to the extent of
the number of shares as to which the stock option is exercised or surrendered.
The Compensation Committee will determine whether the stock appreciation right
will be settled in cash, Common Stock or a combination of cash and Common
Stock. The Compensation Committee may, at the time of the grant of a SAR
unrelated to an Option or thereafter, grant a Limited Right in tandem with the
SAR which will operate in a manner comparable to the Limited Rights described
above under the caption "Stock Options."
Other Stock Based Awards. Other Awards of Common Stock that are valued in
whole or in part by reference to, or otherwise based on, the fair market value
of Common Stock ("Other Stock-based Awards"), may be granted under the 1996
Plan in the discretion of the Compensation Committee. The Compensation
Committee may make Other Stock-based Awards in the form of (i) the right to
purchase shares of Common Stock, (ii) shares of Common Stock subject to
restrictions on transfer until the completion of a specified period of
service, the occurrence of an event or the attainment of performance
objectives, each as specified by the Compensation Committee, and (iii) shares
of Common Stock issuable upon the completion of a specified period of service,
the occurrence of an event or the attainment of performance objectives, each
as specified by the Compensation Committee. Other Stock-based Awards may be
granted alone or in addition to any other Awards made under the Plan. Subject
to the provisions of the 1996 Plan, the Compensation Committee has sole and
absolute discretion to determine to whom and when such Other Stock-based
Awards will be made, the number of shares of Common Stock to be awarded under
(or otherwise related to) such Other Stock-based Awards and all other terms
and conditions of such Awards. The Compensation Committee determines whether
Other Stock-based Awards will be settled in cash, Common Stock or a
combination of cash and Common Stock.
Additional Information. The Compensation Committee may accelerate or waive
vesting or exercise or the lapse of restrictions on all or any portion of any
Award or extend the exercisability of Options or SARs.
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Unless otherwise provided in an individual's award agreement, an
individual's rights under the 1996 Plan may not be assigned or transferred
(except in the event of death). The Company will have the right to deduct from
all amounts paid to any participant in cash (whether under the 1996 Plan or
otherwise) any taxes required by law to be withheld therefrom. In the case of
payments of Awards in the form of Common Stock, at the Compensation
Committee's discretion, the participant may be required to pay to the Company
the amount of any taxes required to be withheld with respect to such Common
Stock, or, in lieu thereof, the Company shall have the right to retain the
number of shares of Common Stock the fair market value of which equals the
amount required to be withheld. Without limiting the foregoing, the
Compensation Committee may, in its discretion and subject to such conditions
as it shall impose, permit share withholding to be done at the Participant's
election.
It is anticipated that, at or about the time of the Offering, options to
acquire 100,000 shares of Common Stock at an exercise price equal to the
initial public offering price will be granted to certain officers of the
Company pursuant to the 1996 Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1995 the Company's Compensation Committee consisted of Messrs.
Dabbagh, Bruno and Flanagan. Neither Mr. Bruno nor Mr. Flanagan served as an
officer or employee of the Company during that year. Mr. Bruno is a general
partner and Mr. Flanagan is a special limited partner of the Partnership which
will own approximately 35% of the Common Stock of the Company upon
consummation of the Offering. As a general partner of the Partnership, Mr.
Bruno may be deemed to share beneficial ownership of the Common Stock
beneficially owned by the Partnership; however, Mr. Bruno disclaims such
beneficial ownership. See "Ownership of Common Stock."
Stonebridge Partners, which is an affiliate of the Partnership, renders
management, consulting, acquisition and financial services to the Company for
an annual fee of approximately $150,000. The Company believes that this fee is
no less favorable than that which could be obtained for comparable services
from unaffiliated third parties. From time to time, Stonebridge Partners may
also receive customary investment banking fees for services rendered to the
Company in connection with acquisitions and certain other transactions. The
Company paid Stonebridge Partners fees of $140,000 and $130,000 upon
consummation of the Kilovac Acquisition and Hartman Acquisition, respectively.
The Company also reimburses Stonebridge Partners for out-of-pocket expenses
incurred in connection with services rendered to the Company. Partners of
Stonebridge Partners who also serve as directors of the Company do not receive
additional compensation for service in such capacity.
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OWNERSHIP OF COMMON STOCK
The following table sets forth certain information concerning the beneficial
ownership of the Common Stock of the Company as of June 30, 1996 assuming the
consummation of the Kilovac Share Exchange and the Preferred Exchange and as
adjusted to reflect the sale of the shares offered hereby of (i) each
beneficial owner of more than 5% of the Common Stock of the Company, (ii) each
director and each Named Executive Officer and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING THE OFFERING
-------------- ------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
---------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
CII Associates, L.P.(1)(2)................ 2,150,000 63.9% 2,400,000 35.0%
Ramzi A. Dabbagh(3)....................... 75,000 2.2 75,000 1.1
Michael A. Steinback(3)................... 75,000 2.2 75,000 1.1
G. Daniel Taylor(3)....................... 100,000 2.9 100,000 1.5
David Henning(3).......................... 25,000 * 25,000 *
Michael S. Bruno(1)(2).................... 2,150,000 63.9 2,400,000 35.0
Daniel A. Dye(1)(2)....................... 2,150,000 63.9 2,400,000 35.0
John P. Flanagan(3)....................... 75,000 2.2 75,000 1.2
Donald E. Dangott(3)...................... -- -- -- --
Douglas Campbell(4)....................... 349,643 10.4 349,643 5.1
Directors and executive officers as a
group (12 persons)(2)(4)................. 2,849,643 84.7 2,849,643 41.5
</TABLE>
- --------
* Represents less than 1% of the outstanding Common Stock of the Company.
(1) c/o Stonebridge Partners, Westchester Financial Center, 50 Main Street,
White Plains, NY 10606.
(2) The general partners of CII Associates, L.P. have sole voting and
investment power with respect to the shares of Common Stock owned by CII
Associates, L.P. Messrs. Bruno and Dye (directors of the Company) and
Messrs. David A. Zackrison and Harrison M. Wilson, as the general partners
of CII Associates, L.P., may be deemed to share beneficial ownership of
the shares shown as beneficially owned by CII Associates, L.P. Messrs.
Bruno and Dye disclaim beneficial ownership of such shares.
(3) c/o CII Technologies Inc., 1396 Charlotte Highway, Fairview, North
Carolina 28730
(4) Includes 31,554 shares held by Douglas Campbell, as Trustee of the
Campbell Charitable Remainder Unitrust (the "Unitrust") and 137,775 shares
held by Douglas Campbell, as Trustee of the Kilovac Corporation Employee
Stock Bonus Plan (the "ESBP"). Mr. Campbell disclaims beneficial ownership
of all shares held as Trustee of the Unitrust and of 129,261 shares held
by the ESBP, as to which the individual employees have the power to direct
the Trustee as to the disposition of the shares. Mr. Campbell's address is
c/o Kilovac Division, Communications Instruments, Inc., P.O. Box 4422,
Santa Barbara, California 93140.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
KILOVAC ACQUISITION
On October 11, 1995, the Company purchased 80% of the outstanding capital
stock of Kilovac pursuant to a Stock Subscription and Purchase Agreement, as
amended (the "Kilovac Purchase Agreement"), dated as of September 20, 1995
among the Company, Kilovac and the stockholders of Kilovac named therein (the
"Kilovac Stockholders"). Under the terms of the Kilovac Purchase Agreement,
concurrent with the consummation of the Offering, the 24,957 outstanding
shares of Kilovac held by the Kilovac Stockholders will be exchanged for the
number of shares of Common Stock of the Company equal to $4,500,000 divided by
the initial per share offering price to the public of the Common Stock being
offered hereby (562,500 shares of Common Stock based upon the assumed initial
public offering price of $8.00 per share) (the "Kilovac Share Exchange"). The
Shares of Common Stock to be issued in the Kilovac Share Exchange will be
issued pursuant to an exemption from the registration requirements of the
Securities Act and will be "restricted securities" within the meaning of Rule
144. Most of the Kilovac Stockholders have agreed not to sell or otherwise
dispose of any of the Common Stock of the Company acquired in the Kilovac
Share Exchange until 365 days after the Offering (the "Lock-up Period")
without the prior written consent of the Representatives of the Underwriters.
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REGISTRATION RIGHTS
In connection with the CII Acquisition, the Partnership entered into a
Registration Rights Agreement with the Company (the "Registration Rights
Agreement") pursuant to which the Company granted demand registration rights
to the Partnership in respect of the shares of Common Stock and Preferred
Stock owned by the Partnership or a partner thereof (the "Registrable
Securities"). Under the Registration Rights Agreement, holders of a majority
of the outstanding Registrable Securities may make a demand registration at
any time. Expenses in connection with the exercise of such demand registration
rights are to be borne by the Company subject to certain limitations. Under
the terms of the stock subscription agreements pursuant to which certain
members of management and others purchased Common Stock in the Company, the
Company granted such purchasers certain rights to have their shares of Common
Stock included in registrations of capital stock of the Company ("piggyback
registration rights"). The Company is obligated to assume all of the costs
associated with the exercise of the piggyback registration rights other than
each such purchaser's pro rata share of any underwriter's discounts or
commissions. In connection with the Offering, all holders of Registrable
Securities and piggyback registration rights have agreed to waive their
registration rights for 365 days following the date of this Prospectus.
Upon the expiration of the Lock-up Period, holders of shares of Common Stock
received in the Kilovac Share Exchange and the Preferred Exchange may require
the Company to register such shares (at the Company's expense) pursuant to the
Securities Act. In addition, such stockholders have certain rights to register
their shares pari passu with any registration of shares effected on behalf of
another stockholder.
ISSUANCE OF SECURITIES BY THE COMPANY
In connection with the CII Acquisition on May 11, 1993, the Company issued
to the Partnership (i) 2,150,000 shares of Common Stock for $860,000, (ii)
40,000 shares of Cumulative Redeemable Preferred Stock for $2.0 million, and
(iii) a $4.0 million subordinated promissory note that bears interest at an
annual rate of 9.25% and one-half of the unpaid principal of such note is due
on each of May 31, 2002 and May 31, 2003 (the "CII Note"). $1.3 million of the
amounts due under the CII Note represent accrued and unpaid interest which
bears interest at an 11.75% interest rate. The general partners of the
Partnership include Michael S. Bruno, Jr. and Daniel A. Dye (both directors of
the Company), David A. Zackrison and Harrison M. Wilson and the limited
partners include the other partners of Stonebridge Partners, certain private
investors and the original shareholders of the Predecessor and Aleowyn C. Ward
(the "Original Shareholders"). The general partners of the Partnership have
sole voting and investment power with respect to the shares of Common Stock
owned by the Partnership.
As part of the financing of the CII Acquisition, the Original Shareholders
issued notes for an aggregate principal amount of $2.0 million which bear
interest at the annual rate of 9.25% and become due May 11, 2003 (the "Seller
Notes"). The aggregate principal amount of the Seller Notes was reduced by
$250,000 on May 17, 1994 in satisfaction of certain indemnity claims arising
under the acquisition agreement pursuant to which the CII Acquisition was
accomplished (the "Acquisition Agreement"). The Original Shareholders were
subsequently released from all indemnity obligations arising under the
Acquisition Agreement on October 11, 1995. On October 11, 1995, three of the
four Original Shareholders, in their capacity as limited partners of the
Partnership, each contributed $100,000 of their respective Seller Notes to
their respective capital accounts in the Partnership (the "Capital Notes").
Proceeds from the Offering will be used to repay the $1.45 million outstanding
principal and interest on the Seller Notes and the $300,000 outstanding
principal and interest on the Capital Notes.
On October 11, 1995, in connection with the Kilovac Acquisition, the Company
issued to the Partnership (i) 40,000 shares of Cumulative Redeemable Preferred
Stock Series A for a purchase price of $2.0 million and (ii) a subordinated
promissory note in the principal amount of $1.7 million which bears interest
at the annual rate of 9.25% and one-half of the unpaid principal amount on
such note is due on each of October 11, 2004 and October 11, 2005 (the
"Kilovac Note"). $79,000 of the amounts due under the Kilovac Note represent
accrued and unpaid interest which bears interest at an 11.75% interest rate.
Proceeds from the Offering will be used to repay the $1.8 million outstanding
principal and accrued interest on the Kilovac Note and to redeem a portion of
the Preferred Stock.
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On October 11, 1995, the Company made a $70,000 loan to Ramzi Dabbagh (the
Chairman, President and Chief Executive Officer of the Company) which was to
bear interest at 9.25% per annum and secured by Mr. Dabbagh's limited
partnership interest in the Partnership. Mr. Dabbagh repaid the principal and
accrued interest on this loan in December 1995.
On December 1, 1995 Ramzi Dabbagh, Michael Steinback and David Henning each
purchased 25,000 shares of Common Stock for $11,400. On such date other
employees also purchased stock of the Company as follows: Theodore Anderson
purchased 12,500 shares of Common Stock for $5,700 and Gary C. McGill, Jeffrey
W. Boyce and Raymond McClinton purchased 4,165, 4,165 and 4,170 shares of
Common Stock, respectively, for purchase prices of $1,899, $1,899 and $1,902,
respectively. The Company recorded a special compensation charge in 1995 to
reflect the difference between the purchase price of such Common Stock sales
and the estimated fair market value of such shares. The Company also granted a
cash bonus to each of these employees to compensate such employees for the tax
impact of the stock sales. See "--Summary Compensation Table."
PREFERRED EXCHANGE
On October 31, 1996, the Company entered into an agreement with the
Partnership which is conditioned upon and concurrent with the closing of the
Offering, and pursuant to which the Partnership will surrender to the Company
shares of the Company's cumulative redeemable preferred stock having an
aggregate liquidation preference of $2.0 million in exchange for the issuance
by the Company to the Partnership of shares of Common Stock having an
aggregate value of $2.0 million, based upon the initial offering price of the
Offering.
The shares of Common Stock issued to the Partnership in the Exchange
Agreement will have the same registration rights that apply to the other
shares of Common Stock held by the Partnership.
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, consummation of the Kilovac Share Exchange
and the Preferred Exchange and application of the proceeds as described
herein, the authorized capital stock of the Company will consist of 25,000,000
shares of Common Stock, $.01 par value per share, of which 6,862,500 shares
will be outstanding, and five million shares of Preferred Stock, $.01 par
value per share, none of which will be outstanding. The following description
of the capital stock of the Company, and certain provisions of the Company's
Second Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws") is a summary of
such provisions as amended in connection with the Offering and is qualified in
its entirety by the provisions of the Certificate of Incorporation and Bylaws,
as anticipated to be amended, copies of which are filed as exhibits to the
Company's Registration Statement of which this Prospectus is a part. As of the
date of this Prospectus the Company's Common Stock is held of record by 11
stockholders.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders, including the election of
directors. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election if they choose to do so. The Certificate of
Incorporation does not provide for cumulative voting for the election of
directors. Subject to the prior rights of the holders of any Preferred Stock,
holders of Common Stock will be entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor, and will be entitled to receive, pro rata,
all assets of the Company available for distribution to such holders upon
liquidation. Holders of Common Stock do not have preemptive, subscription or
redemption rights.
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The Common Stock has been approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol CIIT.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Company to issue "blank
check" Preferred Stock, which may be issued from time to time in one or more
series upon authorization by the Company's Board of Directors. The Board of
Directors, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges and restrictions applicable to each series of the Preferred Stock.
The issuance of Preferred Stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes could, among other
things, adversely affect the voting power of the holders of Common Stock and,
under certain circumstances, make it more difficult for a third party to gain
control of the Company, discourage bids for the Company's Common Stock at a
premium or otherwise adversely affect the market price of the Common Stock.
As of the date of this Prospectus, 80,000 shares of Cumulative Redeemable
Preferred Stock are issued and outstanding and are held by the Partnership.
The Company anticipates that a portion of the proceeds of the Offering will be
used to redeem a portion of the outstanding Cumulative Redeemable Preferred
Stock at a price per share of $50 plus an amount equal to all accrued and
unpaid dividends to the date fixed by the Board of Directors as the redemption
date (the remainder of such shares of Cumulative Redeemable Preferred Stock
will be exchanged for Common Stock pursuant to the Preferred Exchange).
CERTAIN CERTIFICATE OF INCORPORATION, BYLAW AND STATUTORY PROVISIONS AFFECTING
STOCKHOLDERS
Classified Board; Board Vacancies. Effective upon the first annual meeting
of stockholders following the Offering, the Certificate of Incorporation
provides that the Company's Board of Directors will be divided into three
classes, with each class, after a transitional period, serving for three
years, and one class being elected each year. Members of the Board of
Directors may be removed only with cause. A majority of the remaining
directors then in office, though less than a quorum, or the sole remaining
director, will be empowered to fill any vacancy on the Board of Directors. A
majority vote of the stockholders will be required to alter, amend or repeal
the foregoing provisions. The classification of the Board of Directors may
discourage a third party from making a tender offer or otherwise attempting to
gain control of the Company and may maintain the incumbency of the Board of
Directors. See "Management."
Special Meetings of Stockholders. The Certificate of Incorporation requires
that special meetings of the stockholders of the Company be called only by a
majority of the Board of Directors and certain officers.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws provide that stockholders seeking to bring business
before or to nominate directors at any meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of
the Company not less than 60 days nor more than 90 days prior to such meeting
or, if less than 60 days' notice was given for the meeting, within 10 days
following the date on which such notice was given. The Bylaws also specify
certain requirements for a stockholder's notice to be in proper written form.
These provisions may preclude some stockholders from bringing matters before
the stockholders or from making nominations for directors.
Section 203 of Delaware Corporation Law. Following the consummation of the
Offering, the Company will be subject to the "business combination" statute of
the Delaware General Corporation Law. In general, such statute prohibits a
publicly held Delaware corporation from engaging in various "business
combination" transactions with any "interested stockholder" for a period of
three years after the time that such person became an "interested
stockholder," unless (i) the transaction is approved by the board of directors
prior to the time the interested stockholder obtained such status, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the "interested stockholder" owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer,
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or (iii) on or subsequent to such time the "business combination" is approved
by the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the "interested stockholder." A "business
combination" includes mergers, consolidations, asset sales and other
transactions resulting in financial benefit to a stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns
(or within three years, did own) 15% or more of a corporation's voting stock.
The statute could prohibit or delay mergers or other takeover or change in
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company.
Limitations on Directors' Liability. Delaware law authorizes corporations to
limit or eliminate the personal liability of directors to corporations and
their stockholders for monetary damages for breach of directors' fiduciary
duty of care. The Certificate of Incorporation limits the liability of the
Company's directors to the Company or its stockholders (in their capacity as
directors but not in their capacity as officers) to the fullest extent
permitted by Delaware law. As a result, directors will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited the
Company and its stockholders.
TRANSFER AGENT AND REGISTRAR
First Union National Bank of North Carolina will be the Transfer Agent and
Registrar for the Common Stock.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, 6,862,500 shares of Common Stock will
be outstanding (7,387,500) shares if the Underwriter's over-allotment option
is exercised in full). Of these shares, the 3,500,000 shares (4,025,000 if the
over-allotment option granted to the Underwriters is exercised in full) sold
in the Offering may be freely traded without restriction under the Securities
Act, except by purchasers in the Offering who may be deemed to be "affiliates"
of the Company, as that term is defined in Rule 144 under the Securities Act
(an "Affiliate").
All of the shares of Common Stock currently outstanding were, and the shares
to be issued in the Kilovac Share Exchange and the Preferred Exchange will be,
acquired in transactions exempt from registration under the Securities Act.
These shares, as well as any shares purchased in the Offering by an Affiliate,
may not be resold unless they are registered under the Securities Act or are
sold pursuant to an applicable exemption from registration, including
exemptions under Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if at least two years have elapsed since the
later of the date "restricted securities" (as that term is defined in Rule
144) were acquired from the Company or from an Affiliate, the beneficial
holder of such restricted shares (including an Affiliate) is entitled to sell
a number of shares within any three-month period that does not exceed the
greater of 1% of the then outstanding shares of Common Stock immediately after
the Offering or the average weekly volume of trading in the Common Stock as
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding such sale and may sell
such shares only through unsolicited brokers' transactions. Sales under Rule
144 are also subject to certain requirements pertaining to the manner of such
sales, notices of such sales and the availability of current public
information concerning the Company. Existing Stockholders holding 2,425,000
shares have already satisfied the two-year holding period. In addition,
Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing volume limitations and other requirements but
without regard to the two-year holding period.
Most of the restricted securities will be subject to "lock-up" agreements
under which the holders of such shares will agree not to sell or otherwise
dispose of any shares of Common Stock for a period of 365 days without the
prior written consent of the Representatives of the Underwriters.
Under Rule 144(k), if at least three years have elapsed since the later of
the date restricted shares were acquired from the Company or an Affiliate, a
holder of such restricted shares who is not an Affiliate at the time of the
sale and has not been an Affiliate for at least three months prior to the sale
would be entitled to sell the shares immediately without regard to the volume
limitations and other conditions described above. A non-affiliate existing
stockholder holds 25,000 shares which may be resold under Rule 144(k) without
restriction, assuming such existing stockholder does not become an Affiliate
of the Company.
The existing stockholders (including the recipients of shares in the Kilovac
Share Exchange and the Preferred Exchange) will have registration rights with
respect to the 3,362,500 shares of Common Stock held by such shareholders
following the closing of the Offering. See "Certain Relationships and Related
Transactions--Registration Rights", "--Kilovac Acquisition" and "--Preferred
Exchange."
59
<PAGE>
UNDERWRITING
The Company has entered into an underwriting agreement (the "Underwriting
Agreement") with certain underwriters listed in the table below (the
"Underwriters"), for whom William Blair & Company, L.L.C. and Furman Selz LLC
are acting as Representatives (the "Representatives"). Subject to the terms
and conditions set forth in the Underwriting Agreement, the Company has agreed
to sell to each of the Underwriters, and each of the Underwriters has
severally agreed to purchase from the Company, the number of shares of Common
Stock set forth opposite each Underwriter's name in the table below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
William Blair & Company, L.L.C. ................................
Furman Selz LLC.................................................
---------
Total......................................................... 3,500,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Common Stock
being sold pursuant to the Underwriting Agreement if any of the Common Stock
being sold pursuant to the Underwriting Agreement (excluding shares covered by
the over-allotment option granted therein) is purchased. In the event of and
default by an Underwriter, the Underwriting Agreement provides that, in
certain circumstances, purchase commitments of the non-defaulting Underwriters
will be increased or the Underwriting Agreement may be terminated.
The Underwriters have advised the Company that they propose to offer the
Common Stock to the public initially at the public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession of not more than $ per share. The Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share to
certain other dealers. After the initial public offering, the public offering
price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
525,000 shares of Common Stock at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to this option, each of the Underwriters
will be committed to purchase such additional shares in approximately the same
proportion as set forth in the table above. The Underwriters may exercise the
option only for the purpose of covering over-allotments, if any, made in
connection with the distribution of the Common Stock offered hereby.
The Company and certain of its officers, directors and stockholders have
agreed that they will not sell, contract to sell or otherwise dispose of any
Common Stock or any interest therein for a period of 365 days after the date
of this Prospectus without the prior written consent of the Representatives of
the Underwriters.
60
<PAGE>
There has been no public market for the shares of Common Stock prior to the
Offering. The initial public offering price for the Common Stock will be
determined by negotiation between the Company and the Representatives of the
Underwriters. Among the factors to be considered in determining the initial
public offering price are prevailing market conditions, revenue and earnings
of the Company, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations, an assessment
of the Company's management and the consideration of the above factors in
relation to the market valuation of certain publicly traded companies.
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required
to make in respect thereof.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby are
being passed upon for the Company by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York, and for the
Underwriters by Gardner, Carton & Douglas, Chicago, Illinois.
EXPERTS
The consolidated balance sheets of the Company at December 31, 1994 and
December 31, 1995, the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended and the period
from May 11, 1993 to December 31, 1993 and the statements of operations,
stockholders' equity and cash flows for the Predecessor for the period from
January 1, 1993 to May 10, 1993 included in this Prospectus and Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein. Such consolidated financial
statements and financial statements of the Predecessor Company for the periods
referred to above are included herein in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated balance sheet of Kilovac at December 31, 1994, the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended and the consolidated statements of income, stockholders'
equity and cash flows for the year ended December 31, 1993 and the period from
January 1, 1995 to October 11, 1995 included in this Prospectus and
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein. Such consolidated
financial statements of Kilovac referred to above are included herein in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated balance sheet of the Hartman Division at December 31, 1994
and December 31, 1995 and the related statements of operations, stockholders'
equity and cash flows for the years then ended included in this Prospectus and
the Registration Statement referred to below have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein.
Such consolidated financial statements of the Hartman Division referred to
above are included herein in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
61
<PAGE>
ADDITIONAL INFORMATION
The Company will furnish its stockholders with annual reports containing
audited financial statements for each fiscal year and with quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the Common Stock being
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to
the Registration Statements as permitted by the rules and regulations of the
Commission. Items of information omitted from this Prospectus but contained in
the Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street N.W., Washington,
D.C. 20549, and at the regional offices of the Commission at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Such material may also
be accessed electronically by means of the Commission's Home Page on the
Internet at http://www.sec.gov. Copies of such material may also be obtained
by mail from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
62
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 (Company)
and Unaudited June 30, 1996 (Company)................................ F-3
Consolidated Statements of Operations for the Period From January 1,
1993 to May 10, 1993 (Predecessor Company), the Period From May 11,
1993 to December 31, 1993 (Company), the Years Ended December 31,
1994 and 1995 (Company) and the Unaudited Six Months Ended July 2,
1995 and June 30, 1996 (Company)..................................... F-4
Consolidated Statements of Stockholders' Equity for the Period From
January 1, 1993 to May 10, 1993 (Predecessor Company), the Period
From May 11, 1993 to December 31, 1993 (Company), the Years Ended
December 31, 1994 and 1995 (Company) and the Unaudited Six Months
Ended June 30, 1996 (Company)........................................ F-5
Consolidated Statements of Cash Flows for the Period From January 1,
1993 to May 10, 1993 (Predecessor Company), the Period From May 11,
1993 to December 31, 1993 (Company), the Years Ended December 31,
1994 and 1995 (Company) and the Unaudited Six Months Ended July 2,
1995 and June 30, 1996 (Company)..................................... F-6
Notes to Consolidated Financial Statements............................ F-7
KILOVAC CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report.......................................... F-19
Consolidated Balance Sheet at December 31, 1994....................... F-20
Consolidated Statements of Income for the Years Ended December 31,
1993 and 1994 and the Period From January 1, 1995 to October 11,
1995................................................................. F-21
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1993 and 1994 and the Period From January 1, 1995 to
October 11, 1995..................................................... F-22
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993 and 1994 and the Period From January 1, 1995 to October 11,
1995................................................................. F-23
Notes to Consolidated Financial Statements............................ F-24
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF
FIGGIE INTERNATIONAL INC.:
Independent Auditors' Report.......................................... F-28
Balance Sheets at December 31, 1994 and 1995 and Unaudited June 30,
1996................................................................. F-29
Statements of Operations for the Years Ended December 31, 1994 and
1995 and the Unaudited Six Months Ended June 30, 1995 and 1996....... F-30
Statements of Cash Flows for the Years Ended December 31, 1994 and
1995 and the Unaudited Six Months Ended June 30, 1995 and 1996....... F-31
Notes to Consolidated Financial Statements............................ F-32
INDEX TO FINANCIAL STATEMENT SCHEDULES................................. II-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
CII Technologies Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of CII
Technologies Inc., formerly Communications Instruments Holdings, Inc. (the
"Company"), as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from May 11, 1993 to December 31, 1993 and the years ended December 31, 1994
and 1995. Our audits also included the financial statement schedule listed in
the index at II-4. We have also audited the consolidated statements of
operations, stockholders' equity and cash flows of Communications Instruments,
Inc. (the "Predecessor Company") for the period from January 1, 1993 to May
10, 1993. These financial statements and financial statement schedule are the
responsibility of the Company's and Predecessor Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at December 31, 1994 and 1995, and the results of its operations and
its cash flows for the period from May 11, 1993 to December 31, 1993 and the
years ended December 31, 1994 and 1995 and the Predecessor Company's results
of operations and cash flows for the period from January 1, 1993 to May 10,
1993, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Deloitte & Touche LLP
Charlotte, North Carolina
March 21, 1996
F-2
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
ASSETS (NOTE 5)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.............................................. $ 72 $ 193 $ 150
Accounts receivable (less allowance for doubtful
accounts: 1994--$301; 1995--$420;
1996--$377) (Note 1)............................. 5,094 8,092 8,616
Inventories (Notes 1 and 2)....................... 7,934 10,642 10,671
Deferred income taxes (Note 7).................... 410 1,909 2,050
Other current assets (Note 13).................... 76 1,321 1,613
------- ------- -------
Total current assets.............................. 13,586 22,157 23,100
------- ------- -------
Property, Plant and Equipment, net (Notes 1, 3 and
6)................................................ 11,735 13,225 12,672
------- ------- -------
OTHER ASSETS:
Cash restricted for environmental remediation
(Note 9)......................................... -- 1,755 1,231
Environmental settlement receivable (Note 9)...... -- 1,050 1,076
Goodwill (net of accumulated amortization: 1994--
$54; 1995--$130; 1996--$260)..................... 717 7,726 7,596
Other intangible assets, net (Note 4)............. 798 3,061 3,267
Other noncurrent assets........................... -- 12 139
------- ------- -------
Total other assets................................ 1,515 13,604 13,309
------- ------- -------
Total............................................. $26,836 $48,986 $49,081
======= ======= =======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................... $ 2,282 $ 2,579 $ 3,173
Accrued interest (Note 5).......................... 626 1,269 1,667
Other accrued expenses............................. 1,013 3,231 3,546
Current portion of long-term debt (Note 5)......... 2,006 3,721 3,037
Current payable due to minority stockholders of
subsidiary (Note 1)............................... -- 1,453 79
------- ------- -------
Total current liabilities.......................... 5,927 12,253 11,502
------- ------- -------
Long-Term Debt (Note 5)............................. 10,191 19,731 20,321
------- ------- -------
Notes Payable to Stockholders (Notes 5 and 13)...... 5,750 7,450 7,450
------- ------- -------
Accrued Environmental Remediation Costs (Note 9).... -- 3,491 3,013
------- ------- -------
Deferred Income Taxes and Other Liabilities (Notes 7
and 8)............................................. 3,418 3,004 2,973
------- ------- -------
Noncurrent Payable Due to Minority Stockholders of
Subsidiary (Note 1)................................ -- 865 817
------- ------- -------
Minority Interest in Subsidiary..................... -- 35 86
------- ------- -------
Cumulative Redeemable Preferred Stock--$.01 par
value, stated at liquidation value--170,000 shares
authorized; 40,000 shares issued and outstanding--
1994; 80,000 shares issued and outstanding--1995
and 1996 (Note 11)................................. 2,287 4,497 4,683
------- ------- -------
Common Stock Subject to Put Options--$.01 par value,
215,000 shares issued and
outstanding--1994; 400,000 shares issued and
outstanding--1995 and 1996 (after giving effect
retroactively to the stock split, see Note 11 and
Note 14)........................................... 100 165 165
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY (Notes 5, 11 and 14):
Common stock, $.01 par value--2,550,000 shares
authorized; 2,150,000 shares issued and
outstanding (after giving effect retroactively to
the stock split, see Note 11 and Note 14)......... 22 22 22
Additional paid-in capital......................... 25 745 745
Accumulated deficit................................ (873) (3,236) (2,660)
Currency translation loss.......................... (11) (36) (36)
------- ------- -------
Total stockholders' equity (deficit)............... (837) (2,505) (1,929)
------- ------- -------
Total.............................................. $26,836 $48,986 $49,081
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------------------------
PREDECESSOR
COMPANY YEAR ENDED SIX MONTHS ENDED
JANUARY 1, MAY 11, 1993 DECEMBER 31, ----------------------
1993 TO TO DECEMBER 31, ---------------------- JULY 2, JUNE 30,
MAY 10, 1993 1993 1994 1995 1995 1996
------------ --------------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Sales (Note 12)..... $8,378 $ 17,095 $ 31,523 $ 39,918 $ 18,568 $ 27,455
Cost of Sales........... 6,684 14,448 24,330 28,687 13,568 19,011
------ ---------- ---------- ---------- ---------- ----------
Gross Profit............ 1,694 2,647 7,193 11,231 5,000 8,444
------ ---------- ---------- ---------- ---------- ----------
Operating Expenses:
Selling expenses....... 713 1,344 2,382 3,229 1,409 2,382
General and
administrative
expenses (Note 13).... 586 1,150 2,248 3,334 1,296 2,369
Research and
development expenses.. 21 41 103 301 78 461
Amortization of
goodwill and other
intangible assets..... 45 117 177 251 110 246
Special compensation
charge (Note 10)...... -- -- -- 1,300 -- --
Environmental expenses
(Note 9).............. -- -- -- 951 -- --
Special acquisition
expenses (Note 1)..... 153 266 -- 2,064 915 --
------ ---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 1,518 2,918 4,910 11,430 3,808 5,458
------ ---------- ---------- ---------- ---------- ----------
Operating Income
(Loss)................. 176 (271) 2,283 (199) 1,192 2,986
Other Income............ 42 -- -- 2 2 201
Interest Expense (Note
5)..................... (77) (1,086) (1,833) (2,997) (1,138) (1,820)
------ ---------- ---------- ---------- ---------- ----------
Income (Loss) Before
Income Taxes and
Minority Interest in
Subsidiary............. 141 (1,357) 450 (3,194) 56 1,367
Income Tax Expense
(Benefit) (Note 7)..... -- (499) 178 (1,076) 22 554
------ ---------- ---------- ---------- ---------- ----------
Income (Loss) After
Income Taxes Before
Minority Interest in
Subsidiary............. 141 (858) 272 (2,118) 34 813
Income Applicable to
Minority Interest in
Subsidiary............. -- -- -- 35 -- 51
------ ---------- ---------- ---------- ---------- ----------
Net Income (Loss)....... 141 (858) 272 (2,153) 34 762
Preferred Stock
Dividend............... -- 102 185 210 92 186
------ ---------- ---------- ---------- ---------- ----------
Net Income (Loss)
Available for Common
Stock.................. $ 141 $ (960) $ 87 $ (2,363) $ (58) $ 576
====== ========== ========== ========== ========== ==========
Pro Forma Earnings per
Common Share
(Unaudited) (Note 1):
Net Income (Loss)
Available for Common
Stock................. $ (.38) $ .03 $ (.93) $ (.02) $ .23
========== ========== ========== ========== ==========
Weighted average of
common shares
outstanding........... 2,494,300 2,509,985 2,534,574 2,524,901 2,550,000
========== ========== ========== ========== ==========
Supplemental Pro Forma
Earnings Per Common
Share (Unaudited) (Note
1):
Net Income (Loss)
Available for Common
Stock................. $ (.21) $ .17
========== ==========
Weighted average of
common shares
outstanding........... 6,284,574 6,300,000
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------- ---------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS
PREDECESSOR COMPANY ------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1993............. 6,875 $ 840 2,428 $ 545 $ 8,243
Distributions to stockholders......... -- -- -- -- (1,217)
Net income............................ -- -- -- -- 141
----- ----- ------- ------- -------
Balances at May 10, 1993................ 6,875 $ 840 2,428 $ 545 $ 7,167
===== ===== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CURRENCY SUBSCRIPTION
----------------- PAID-IN ACCUMULATED TRANSLATION NOTE
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT RECEIVABLE
COMPANY --------- ------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of stock May
11, 1993............... 2,400,000 $24 $936 -- -- $ (35)
Reclass to common
stock subject to put
options.............. 250,000 (2) (98) -- -- --
Dividend deemed to be
paid to continuing
shareholders in
conjunction with
leveraged buyout
transaction (Note
1)................... -- -- (843) -- -- --
Preferred stock
dividend accrued..... -- -- -- $ (102) -- --
Collection on
subscription note
receivable........... -- -- -- -- -- 10
Net loss.............. -- -- -- (858) --
--------- --- ---- -------- ----- -----
Balances at December 31,
1993................... 2,150,000 22 (5) (960) -- (25)
Preferred stock
dividend accrued..... -- -- -- (185) -- --
Contribution.......... -- -- 30 -- -- --
Currency translation
loss................. -- -- -- -- $ (11) --
Common stock issued... 25,000 -- 10 -- -- (10)
Reclass to common
stock subject to put
options.............. (25,000) -- (10) -- -- 10
Collection on
subscription note
receivable........... -- -- -- -- -- 25
Net income............ -- -- -- 272 -- --
--------- --- ---- -------- ----- -----
Balances at December 31,
1994................... 2,150,000 22 25 (873) (11) --
Preferred stock
dividend accrued..... -- -- -- (210) -- --
Currency translation
loss................. -- -- -- -- (25) --
Common stock issued... 125,000 1 774 -- -- --
Reclass to common
stock subject to put
options.............. (125,000) (1) (54) -- -- (10)
Collection on
subscription note
receivable........... -- -- -- -- -- 10
Net loss.............. -- -- -- (2,153) -- --
--------- --- ---- -------- ----- -----
Balances at December 31,
1995................... 2,150,000 22 745 (3,236) (36) --
Unaudited:
Preferred stock
dividend accrued..... -- -- -- (186) -- --
Net income............ -- -- -- 762 -- --
--------- --- ---- -------- ----- -----
Balances at June 30,
1996 .................. 2,150,000 $22 $745 $ (2,660) $ (36) $ --
========= === ==== ======== ===== =====
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR ----------------------------------------------------
COMPANY YEAR ENDED
JANUARY 1, DECEMBER 31, SIX MONTHS ENDED
1993 TO MAY 11, 1993 ----------------- -----------------
MAY 10, TO DECEMBER 31, JULY 2, JUNE 30,
1993 1993 1994 1995 1995 1996
----------- --------------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 141 $ (858) $ 272 $ (2,153) $ 34 $ 762
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 201 1,309 2,158 2,442 1,168 1,553
Deferred taxes........ -- (749) (751) (1,583) (403) (436)
Stock compensation
charge............... -- -- -- 720 -- --
Non-cash environmental
charge............... -- -- -- 686 -- --
Minority interest..... -- -- -- 35 -- 51
Gain on sale of
assets............... -- -- -- -- -- (201)
Changes in operating
assets and
liabilities net of
effects of
acquisitions:
Decrease (increase)
in accounts
receivable.......... (306) 453 (1,600) (1,033) (953) (524)
Decrease (increase)
in inventories...... 841 41 (274) 748 (27) (29)
Decrease (increase)
in other current
assets.............. 360 244 (3) (121) (163) (1,048)
Increase (decrease)
in accounts
payable............. (205) 383 603 (486) 223 594
Increase (decrease)
in accrued
expenses............ 304 (181) 734 2,678 617 645
Increase in other
assets and
liabilities......... -- -- 46 81 (22) (39)
------- -------- ------- -------- ------- -------
Net cash provided by
operating
activities......... 1,336 642 1,185 1,846 474 1,328
------- -------- ------- -------- ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisition of
businesses and
product lines, net of
cash acquired........ (2,745) (13,320) (1,100) (14,345) (1,485) --
Investment in joint
venture.............. -- -- -- -- -- (139)
Purchases of property,
plant and equipment.. (131) (323) (444) (1,139) (880) (925)
Sale of equipment..... -- -- -- -- -- 446
------- -------- ------- -------- ------- -------
Net cash used in
investing
activities........... (2,876) (13,643) (1,544) (15,484) (2,365) (618)
------- -------- ------- -------- ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowings
(repayment) under
line of credit
arrangement.......... 1,400 160 (552) 114 673 2,097
Borrowings under long-
term debt
agreements........... 1,967 15,612 2,281 16,945 2,241 --
Principal payments
under long-term debt
agreements........... (540) (4,446) (1,300) (4,789) (1,025) (2,184)
Loan fees paid........ -- (452) (50) (577) -- --
Proceeds from issuance
of common stock...... -- 144 -- 56 -- --
Proceeds from issuance
of cumulative
redeemable
preferred stock...... -- 2,000 -- 2,000 -- --
Receipt on stock
subscription note.... -- 10 25 10 -- --
Payments of amounts
owed to minority
stockholders......... -- -- -- -- -- (666)
Distributions to
stockholders......... (1,216) -- -- -- -- --
------- -------- ------- -------- ------- -------
Net cash provided by
(used in) financing
activities........... 1,611 13,028 404 13,759 1,889 (753)
------- -------- ------- -------- ------- -------
NET INCREASE IN CASH... 71 27 45 121 (2) (43)
CASH, BEGINNING OF
PERIOD................ 10 -- 27 72 72 193
------- -------- ------- -------- ------- -------
CASH, END OF PERIOD.... $ 81 $ 27 $ 72 $ 193 $ 70 $ 150
======= ======== ======= ======== ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
During the period from
May 11, 1993 to
December 31, 1993, the
Company entered into a
capital lease
arrangement for
computer equipment
totaling $139.
During the year ended
December 31, 1995, the
Company entered into a
capital lease
arrangement for a
building totaling
$640.
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JULY 2, 1995 AND JUNE 30, 1996
IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description--Communications Instruments Holdings, Inc. ("Holdings")
was formed in May 1993 for the purpose of acquiring Communications
Instruments, Inc. and its subsidiary (the "Predecessor Company"). On March 13,
1996, Holdings changed its name to CII Technologies Inc. CII Technologies Inc.
and its subsidiaries are hereinafter referred to as the Company. The Company
is engaged in the design, manufacture and distribution of electromechanical
and electronic products and solenoids for the commercial/industrial equipment,
commercial airframe, defense/aerospace, communications, automotive and
automatic test equipment. Manufacturing is primarily performed in North
Carolina, California and Juarez, Mexico.
Acquisitions--On January 1, 1993, the Predecessor Company acquired certain
relay and switch product lines from CP Clare Corporation for $750 in cash. On
March 1, 1993, the Predecessor Company acquired certain assets and liabilities
of the West Coast Electrical Manufacturing Company for $400 in cash and notes
to the seller for $400. On March 22, 1993, the Predecessor Company acquired
Midtex Relays, Inc. for $1,600 in cash. These acquisitions were accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets acquired based on their fair values at the date of
acquisition.
On May 11, 1993, the Company acquired the Predecessor Company in a leveraged
buyout transaction (the "Acquisition") and merged the Predecessor Company with
its wholly-owned acquisition shell company, Communications Instruments, Inc.
("CII"). In conjunction therewith the Company issued 2,400,000 Common Shares
(post-split). See Note 14. The Company is 89% owned by investors that did not
hold an interest in the Predecessor Company, with the remaining 11% held by
stockholders who owned shares of the Predecessor Company prior to the
Acquisition. The Acquisition has been accounted for as a purchase to the
extent of the change in ownership (89%), with the remaining 11% valued at its
historical cost. The total purchase price was approximately $20,205, including
acquisition costs of approximately $1,300. To the extent of the 89% change in
ownership, the purchase price has been allocated to the assets and liabilities
of the Predecessor Company based on their fair values. Fair value was
determined generally by appraisals with the excess allocated to goodwill. The
excess of purchase price paid to continuing stockholders over the historical
cost of shares owned by such continuing shareholders has been deemed to be a
stockholder distribution and thus has been recorded as a reduction of
additional paid-in capital. As the Predecessor Company financial statements
have been prepared on the historical cost basis, they are not directly
comparable to those of the Company.
The following summarizes the purchase price allocation as of the acquisition
date:
<TABLE>
<S> <C>
Current assets.................................................. $11,704
Property and equipment.......................................... 13,200
Intangibles and other assets.................................... 2,577
Liabilities assumed............................................. (7,276)
-------
Total purchase price.......................................... $20,205
=======
</TABLE>
In conjunction with the Acquisition, the Company issued a term note payable
to a bank of $6,500 and borrowed $5,112 under a revolving credit facility. In
addition, Holdings issued subordinated notes payable of $4,000 as well as
cumulative redeemable preferred stock of $2,000 and subordinated notes payable
to the sellers of $2,000 (reduced to $1,750 on May 17, 1994 pursuant to an
indemnity settlement agreement).
On December 5, 1994, the Company purchased certain assets of Deutsch Relays,
Inc. for a purchase price of approximately $1,100. The purchase price was
allocated to the fair value of inventory, equipment and related business
assets with the remainder of $200 allocated to a covenant not to compete.
F-7
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On January 27, 1995, the Company acquired certain assets from HiG Company,
Inc. for $1,485 in cash. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to the
assets acquired based on their fair values at the date of acquisition. As the
purchase price was equal to the fair value of the inventory at the date of
acquisition the entire purchase price was allocated to the inventory and no
value was assigned to the machinery and equipment acquired.
On October 11, 1995, the Company purchased an 80% ownership interest in
Kilovac Corporation ("Kilovac") for an aggregate purchase price of
approximately $15,800 including acquisition costs of approximately $1,300.
Kilovac designs and manufactures high voltage and high frequency
electromechanical relays. The transaction has been accounted for as a
purchase. To the extent of the 80% change in ownership, the purchase price has
been allocated to the assets and liabilities of Kilovac based on their fair
values, with the remaining 20% minority interest valued at its historical
cost. Fair values were determined generally by appraisals with the excess
allocated to goodwill.
The following summarizes the purchase price allocation as of the acquisition
date:
<TABLE>
<S> <C>
Current assets.................................................. $ 5,663
Property and equipment.......................................... 1,802
Intangibles and other assets.................................... 10,165
Liabilities assumed............................................. (1,849)
-------
Total purchase price............................................ $15,781
=======
</TABLE>
The transaction was financed through additional borrowings of approximately
$9,800 on the term and revolver loans, issuance of $2,000 in preferred stock,
and issuance of subordinated notes of $1,700. Additionally, an estimated
$2,300 is payable to the sellers upon the future realization of potential tax
benefits associated with a net operating loss carryforward.
The Company is obligated to purchase, for additional shares of the Company,
the remaining 20% interest in Kilovac on, at the option of the selling
shareholders, either December 31, 2000 or December 31, 2005, or upon the
occurrence of certain events, if earlier, at an amount based on the value of
Kilovac as defined in the agreement. The anticipated initial public offering
described in Note 14 is an event that would result in the acquisition of such
shares. During 1996, the Company and holders of the remaining 20% interest in
Kilovac agreed that the value of the remaining interest that would be acquired
upon such offering is $4,500.
The following unaudited pro forma financial information shows the results of
operations of the Company as though the Kilovac acquisition occurred as of
January 1, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Net sales....................................... $ 43,742 $ 50,947
========== ==========
Net loss available for Common Stock............. $ (98) $ (2,187)
========== ==========
Loss per share.................................. $ (.04) $ (.86)
========== ==========
Average shares outstanding...................... 2,511,125 2,535,714
========== ==========
</TABLE>
Principles of Consolidation--The accompanying consolidated financial
statements include Holdings, its wholly-owned subsidiary, CII and CII's
wholly-owned subsidiary, Electro-Mech S.A. and 80% owned subsidiary, Kilovac
and Kilovac's wholly-owned subsidiaries, Kilovac International Inc., and
Kilovac International FSC Ltd. Inc. Significant intercompany transactions have
been eliminated.
F-8
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition--Sales and the related cost of sales are recognized upon
shipment of products. Certain sales for Kilovac, which constitute an
immaterial proportion of the total consolidated sales, represent revenues
under long-term fixed price development contracts. Revenues under these
contracts are recognized based on the percentage of completion method,
measured by the percentage of costs incurred to date to estimated total costs
for each contract. Costs in excess of contract revenues on cost sharing
development contracts are expensed in the period incurred as research and
development costs. Provision for estimated losses on fixed price contracts is
made in the period such losses are determined by management.
Special Acquisition Expenses--In conjunction with the acquisition of several
product lines and businesses, the Company has incurred direct costs of
integration of the acquisitions into the existing business, such as moving,
training and product qualification costs. Such costs are expensed in the
period incurred.
Accounts Receivable--The changes in the allowance for doubtful accounts
receivable consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, MAY 11, YEAR ENDED
1993 TO 1993 TO DECEMBER 31,
MAY 10, DECEMBER 31, --------------
1993 1993 1994 1995
---------- ------------ ------ ------
<S> <C> <C> <C> <C>
Allowance beginning of year........ $108 $265 $ 317 $ 301
Provision for uncollectible
accounts.......................... -- 40 64 127
Write-off of uncollectible accounts
(net)............................. (43) 12 (80) (48)
Effect of acquisitions and other... 200 -- -- 40
---- ---- ------ ------
Allowance end of year............ $265 $317 $ 301 $ 420
==== ==== ====== ======
</TABLE>
Inventories--Inventories are stated at the lower of cost (first-in, first-
out method) or market.
Property, Plant and Equipment--Property, plant and equipment held at the
Acquisition date are recorded at their respective fair market values at the
date of the Acquisition. Purchases of property, plant and equipment subsequent
to the Acquisition are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which are
five to twenty years.
Goodwill--Goodwill represents the excess of cost over net tangible and
identifiable intangible assets acquired in the Acquisition and the Kilovac
Acquisition, and is being amortized by the straight-line method over the
estimated period benefited, 30 years. The Company regularly evaluates the
recoverability of goodwill using estimates of undiscounted future cash flows
and operating earnings of the businesses acquired.
Intangible Assets--Intangible assets, primarily patents, covenants not to
compete and debt issuance costs, are amortized on a straight-line basis over
the patent life, term of the related agreement or on the effective interest
method over the life of the loan.
Reclassifications--Certain 1993 and 1994 amounts have been reclassified to
conform with the 1995 presentation.
Pro forma Earnings Per Common Share--Pro forma earnings per common share is
computed based on the weighted average number of common shares outstanding
during each period after giving retroactive effect to the planned 2.5 for 1
stock split to be effective prior to the closing of the anticipated initial
public offering described more fully in Note 14. The Company sold 40,000
shares of common stock to certain employees of the Company in December 1995
(Note 11). Pursuant to Staff Accounting Bulletin, Topic 4D, "Earnings Per
Share Computations in an Initial Public Offering", stock issued within a one
year period prior to the initial filing of the registration statement are
treated as outstanding for periods reported.
Supplemental Pro forma Earnings Per Common Share--Supplemental earnings per
common share is computed based on the weighted average number of common shares
outstanding during 1995 and the first quarter of 1996 after giving retroactive
effect to the planned 2.5 for 1 stock split, and the planned issuance of
3,500,000
F-9
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
shares in the anticipated initial public offering and the anticipated issuance
of 250,000 shares of Common Stock in exchange for a portion of the Cumulative
Redeemable Preferred Stock, described more fully in Note 14. The proceeds from
such offering are anticipated to be used to retire approximately $11,600 amounts
due under the borrowing arrangement with the bank, the subordinated notes
payable and a portion of the Cumulative Redeemable Preferred Stock.
Supplemental pro forma net earnings gives effect for the interest and dividend
savings on such retired Company debt and Cumulative Redeemable Preferred Stock
of $1,333, net of income taxes of $331.
Use of Estimates in the Preparation of Financial Statements--The preparation
of 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 financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Instruments--The carrying amount of accounts
receivable, long-term debt, notes payable and other current and long-term
liabilities approximates their respective fair values.
Impact of New Accounting Pronouncements--In March 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of", which will be effective during
the Company's year ending December 31, 1996. The Company adopted the new
standard in the first quarter of 1996, which adoption had no impact on the
accompanying financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes an alternative method of accounting for
employee stock compensation plans based on a fair value methodology. However,
the statement allows an entity to continue to use the accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The new
standard also requires additional disclosures if the Company elects to remain
with the accounting in Opinion 25. The Company has not determined whether it
will adopt the alternative method of accounting and has also not yet
determined its effect.
Indian Joint Venture--In November 1995, the Company formed a joint venture
in India with Guardian Controls Ltd., an Indian company, a bank and certain
financial investors. The Company has a 28% interest in the joint venture which
was formed for the purpose of manufacturing relays, relay components and sub-
assemblies in India for the domestic Indian market, and global markets. The
Company accounts for the joint venture using the equity method. The venture
started production in the third quarter of 1996.
Unaudited Interim Financial Data--The interim financial data relating to the
six months ended July 2, 1995 and June 30, 1996 are unaudited; however, in the
opinion of the Company's management, the interim data includes all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair statement of the results for the interim periods. The results for the six
months ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year or any other interim period.
Fiscal Quarters--As of January 1, 1996 the Company changed its policy for
the fiscal quarter-end to be consistent with the calendar quarter-end.
Previously, the fiscal quarter-end was the Sunday which came closest to
including a full 13 weeks in each quarter. The impact of the change is not
significant.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
--------------- 30,
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Finished goods.................................... $1,500 $ 2,495 $ 2,782
Work-in-process................................... 2,821 4,201 4,010
Raw materials..................................... 4,116 4,730 4,709
Reserve for obsolete and slow-moving inventory.... (503) (784) (830)
------ ------- -------
Total........................................... $7,934 $10,642 $10,671
====== ======= =======
</TABLE>
F-10
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Land......................................................... $ 250 $ 289
Buildings.................................................... 1,299 2,652
Machinery and equipment...................................... 13,042 15,145
Construction in progress..................................... 135 198
------- -------
Total...................................................... 14,726 18,284
Less accumulated depreciation................................ 2,991 5,059
------- -------
Total, net................................................. $11,735 $13,225
======= =======
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets at December 31 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Debt issuance costs........................................... $ 502 $1,079
License of product name....................................... 44 --
Covenants not to compete...................................... 668 557
Patents....................................................... -- 1,634
Trademarks.................................................... -- 360
Other......................................................... -- 3
------ ------
1,214 3,633
Less accumulated amortization................................. 416 572
------ ------
Total....................................................... $ 798 $3,061
====== ======
</TABLE>
5. LONG-TERM DEBT
CII has a borrowing arrangement with a bank which provides for a maximum
credit facility of $27,500 (including $2,000 for stand-by letters of credit),
limited by outstanding indebtedness under the $16,500 term loan agreement or
availability under the borrowing base, as defined. Amounts advanced under the
revolving loan bear interest at the prime rate plus 1.5% (10.0% at both
December 31, 1994 and December 31, 1995) and are due on October 11, 2000. No
amounts are outstanding against the letter of credit portion of the credit
arrangement at December 31, 1995.
All of the Company's assets are pledged to secure the revolving credit and
term loan bank indebtedness.
F-11
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Term note payable to a bank due in quarterly installments
of $750 from March 1, 1996 through December 1, 1997 and
$875 from March 1, 1998 through September 1, 2000 with a
final payment October 1, 2000. Interest is prime plus 2%
(10.5% at December 31, 1994 and 1995).................... $ 7,183 $16,500
Revolving loan payable to a bank.......................... 4,720 6,208
Unsecured note payable, due in 1995, plus interest payable
monthly at prime plus 2% (10.5% at December 31, 1994).... 200 --
Subordinated notes payable by Holdings to CII Associates,
L.P. ("Associates"), a stockholder, due in installments
of $2,000 in May 2002, $2,000 in May 2003, $850 in
October 2004 and $850 in October 2005, plus interest
payable semiannually at 9.25%............................ 4,000 5,700
Subordinated notes payable by Holdings to prior owners of
Predecessor Company and stockholders of the Company and
Associates, due in May 2003, plus interest payable
monthly at 9.25%......................................... 1,750 1,750
Subordinated notes payable to a former stockholder;
interest at a rate of 8.25% payable monthly, principal
due January 1996......................................... -- 81
Obligations under capital leases.......................... 94 663
------- -------
Total................................................... 17,947 30,902
Less--current portion................................... 2,006 3,721
------- -------
$15,941 $27,181
======= =======
</TABLE>
Debt maturities at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 3,721
1997............................................................. 3,023
1998............................................................. 3,500
1999............................................................. 3,500
Thereafter....................................................... 17,158
-------
Total.......................................................... $30,902
=======
</TABLE>
The term and revolving loans payable to a bank contain certain covenants,
including maintenance of minimum net worth, interest coverage ratio and
leverage ratio and limits on expenditures for property and equipment.
Additionally, CII is restricted from issuing stock, retiring or otherwise
acquiring any of its capital stock, further encumbering any of its assets and
declaring or paying dividends such that approximately $8,800 of the $10,293 of
net assets of CII may not be transferred to Holdings at December 31, 1995. At
December 31, 1995, the Company was in compliance with the covenants except the
capital investment limitation covenant for the year ended December 31, 1995.
The Company received a waiver from the bank for exceeding the capital
investment limitation covenant. At June 30, 1996, the Company was not in
compliance with several of the covenants. The Company received a waiver from
the bank for these violations (see Note 14).
Both subordinated notes held by Associates include a provision for penalty
interest at a rate of 11.75% for interest or principal payments not paid on
the scheduled due date. At December 31, 1994 and 1995, accrued interest
represents interest and penalty interest due on the $4,000 and $5,700
subordinated notes. No scheduled interest payments have been paid as allowed
under the agreement. At December 31, 1994 and 1995, $617 and $1,140 in
interest was due on the subordinated notes, respectively.
F-12
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest paid amounted to $77, $551, $1,142 and $1,874 for the period from
January 1, 1993 to May 10, 1993, the period from May 11, 1993 to December 31,
1993, and the years ended December 31, 1994 and 1995, respectively.
6. LEASES
The Company leases certain office equipment and a building under capital
lease arrangements. The leased assets have a net book value of $92 and $683 at
December 31, 1994 and 1995, respectively.
The future minimum lease obligation under capital leases as of December 31
is included in long-term debt (see Note 5). On February 7, 1996, the Company
purchased the building in accordance with the capital lease arrangement. The
$625 purchase price was financed through additional borrowings under the
revolving loan agreement.
The Company leases certain premises and equipment under noncancelable
operating leases which have remaining terms from one to four years and which
provide for various renewal options. Total rent expense charged to operations
was approximately $51, $23, $63 and $120 for the period from January 1, 1993
to May 10, 1993, the period from May 11, 1993 to December 31, 1993 and the
years ended December 31, 1994 and 1995, respectively.
Future minimum rental payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996................................................................ $296
1997................................................................ 315
1998................................................................ 276
1999................................................................ 86
----
Total............................................................. $973
====
</TABLE>
7. INCOME TAXES
The Predecessor Company was a "Subchapter S" Corporation and therefore all
taxable income was passed through to its shareholders. Accordingly, no tax
provision has been recorded in the period from January 1, 1993 to May 10,
1993.
The significant components of income tax expense are:
<TABLE>
<CAPTION>
MAY 11, YEAR ENDED
1993 TO DECEMBER 31,
DECEMBER 31, --------------
1993 1994 1995
------------ ----- -------
<S> <C> <C> <C>
Current tax expense:
Federal...................................... $ 196 $ 795 $ 378
State........................................ 48 131 83
Foreign...................................... 6 3 46
----- ----- -------
Total current tax expense...................... 250 929 507
Deferred tax (benefit)......................... (749) (751) (1,583)
----- ----- -------
Total tax provision............................ $(499) $ 178 $(1,076)
===== ===== =======
</TABLE>
Income tax payments amounted to approximately $254, $717 and $859 for the
period from May 11, 1993 to December 31, 1993 and the years ended December 31,
1994 and 1995, respectively.
F-13
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's effective tax rate differs from the statutory rate for the
following reasons:
<TABLE>
<CAPTION>
MAY 11, YEAR ENDED
1993 TO DECEMBER 31,
DECEMBER 31, -------------
1993 1994 1995
------------ ------ ------
<S> <C> <C> <C>
Provision at statutory U.S. tax rate.......... (34.0)% 34.0% (34.0)%
Effective state income tax rate............... (4.5) 3.7 (3.6)
Nondeductible meals, entertainment and
officers' life insurance expenses............ -- 3.5 1.0
Mexican income taxes.......................... -- -- 1.4
Other, net.................................... 1.7 (1.7) 1.5
----- ----- ------
(36.8)% 39.5% (33.7)%
===== ===== ======
</TABLE>
Deferred income taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Current deferred tax assets:
U.S. net operating loss carryforward........................ -- $ 161
State net operating loss carryforward....................... -- 9
Accrued expenses............................................ 104 1,299
Inventory reserve .......................................... 189 287
Accounts receivable reserve................................. 117 153
------ ------
Total current deferred assets................................. $ 410 $1,909
------ ------
Long-term deferred tax asset:
Accrued expenses............................................ $ 248 $ 407
U.S. net operating loss carryforward........................ -- 1,422
State net operating loss carryforward....................... -- 182
------ ------
248 2,011
Less--Valuation allowance................................... -- (75)
------ ------
Total long-term deferred tax asset............................ $ 248 $1,936
====== ======
Long-term deferred tax liabilities:
Property and equipment...................................... $3,401 $3,217
Intangibles................................................. -- 726
Other....................................................... 218 186
------ ------
Total long-term deferred tax liability........................ $3,619 $4,129
====== ======
Total long-term deferred tax liability, net................... $3,371 $2,193
====== ======
Deferred tax liability, net................................... $2,961 $ 284
====== ======
</TABLE>
At December 31, 1995, the Kilovac subsidiary has a U.S. net operating loss
carryforward of $4,655 which expires in 2010. Internal Revenue Code Section
382 imposes certain limitations on the ability of a taxpayer to utilize its
U.S. net operating losses in any one year if there is a change in ownership of
more than 50% of the Company. Management has considered the Section 382
limitation and believes that it is more likely than not that the entire U.S.
net operating loss carryforward will be utilized. California tax law limits
loss carryforwards to a five-year period. A valuation allowance has been
recorded for the portion of the California net operating loss carryforward
which could not be realized due to the previously mentioned limitations.
F-14
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Realization of the benefit is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. The amount of the
deferred tax asset considered realizable could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
8. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain executives which expire
in May 1998. Such agreements provide for minimum salary levels as well as
incentive bonuses. The incentive bonuses are based upon the attainment of
specified performance levels as determined by the board of directors.
Additionally, one former executive will be paid a "finder's fee" for any
acquisition originated by the executive that closes within eighteen months of
origination. In the current year, this former executive was paid a finder's
fee of $28 due to the acquisition of Hi-G assets. The agreements also restrict
the executive's ability to compete directly with the Company or to solicit
customers or employees of the Company. The aggregate commitment for salaries,
excluding bonuses, was $1,688 and $1,338 at December 31, 1994 and 1995,
respectively.
The Company is obligated to pay the bank that financed the Acquisition and
the Kilovac acquisition a "success fee" upon the occurrence of certain
specified events, such as sale of the Company or an initial public offering,
or on the fifth anniversary of the Kilovac acquisition (collectively referred
to as the valuation date). The fee will be based upon the market value or
appraised value of the Company on the valuation date. At December 31, 1995,
$387 has been accrued related to this fee, representing the fee based on
management's estimate of the value of the Company accrued over the period to
the maturity of the arrangement. The anticipated public offering discussed in
Note 14 represents a valuation date that would require the fee to be paid. The
success fee based on the anticipated value of the Company at the effective
date of such offering is estimated to be $700 (assuming an initial public
offering price of $10.00 per share).
From time to time the Company is a party to certain lawsuits and
administrative proceedings that arise in the conduct of its business. While
the outcome of these lawsuits and proceedings cannot be predicted with
certainty, management believes that, if adversely determined, the lawsuits and
proceedings, either singularly or in the aggregate, would not have a material
adverse effect on the financial condition or results of operations of the
Company.
9. ENVIRONMENTAL REMEDIATION
The Company has been notified by the State of North Carolina Department of
Environment, Health & Natural Resources ("NCDHNR") that its manufacturing
facility in Fairview, North Carolina has sites containing hazardous wastes
resulting from activities by the predecessor to the Predecessor Company
("Prior Owner"). Additionally, the Company has been identified as a
potentially responsible party for remediation at two superfund sites which
were formerly used by hazardous waste disposal companies utilized by the
Company.
Several soil and groundwater contaminations have been noted at the Fairview
facility the most serious of which is TCE contamination in the groundwater.
Remedial investigations have been on-going at the facility and the NCDHNR has
placed the facility on the Inactive Hazardous Sites Inventory. The Company is
proceeding with development of a Corrective Action Plan and performing
preliminary remediation under the Responsible Party Voluntary Site Remedial
Action course of action.
In the acquisition agreement of the Predecessor Company, the Company
obtained indemnity from the selling shareholders for any environmental clean
up costs as a result of existing conditions which would not be paid by the
Prior Owner. The indemnity was limited to the extent of amounts owed to the
selling shareholders through the subordinated note.
On May 11, 1995, the Company reached a settlement with the Prior Owner which
resulted in a cash deposit of $1,750 to an escrow account and an obligation
for the Prior Owner to pay to the escrow account after the
F-15
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
groundwater remediation system has been operating at least at 90% capacity for
three years, an amount equal to the lesser of 90% of the present value of the
long term operating and maintenance costs of the groundwater remediation
system or $1,250. The Company has reflected the present value of the
receivable, discounted at 5%, and the cash as restricted assets as the funds
are held in escrow to be used specifically for the Fairview facility
environmental remediation and monitoring and will become unrestricted only
when the NCDHNR determines that no further action is required.
In October 1995, the Company released the selling shareholders from their
indemnity obligation. This action and the settlement with the Prior Owners
resulted in the recording of a separate environmental remediation liability
and the recognition in 1995 operations of an expense of $951 of environmental
related costs which are not covered under the settlement with the Prior Owner.
The environmental related costs include an environmental remediation liability
which is recorded at the present value, discounted at 5%, of the reliably
determinable costs to remediate and monitor the remediation over the 30 year
remediation period, which management believes is the maximum time period that
will be required to successfully remediate this site. The amount and timing of
the payments were developed based on information provided by a third party
environmental consultant considering the site specific plan for the
remediation and based on experience with similar remediation projects and
methods and taking inflation into consideration. Total amounts estimated to be
paid related to environmental liabilities are $5,264 calculated as follows:
<TABLE>
<S> <C>
1996............................................................. $1,395
1997............................................................. 135
1998............................................................. 135
1999............................................................. 135
2000............................................................. 135
Thereafter....................................................... 3,277
------
5,212
Discount to present value........................................ 1,773
------
Fairview site liability at present value......................... 3,439
Other environmental liabilities.................................. 52
------
Total Accrued Environmental Remediation Costs.................... $3,491
======
</TABLE>
10. EMPLOYEE BENEFITS
The Company has a self-funded welfare benefit plan (the "Plan") composed of
separate programs for the hourly and salaried employees. The Plan was formed
in 1981 to provide hospitalization and medical benefits for substantially all
full-time employees of the Company and their dependents. The Plan is funded
principally by employer contributions in amounts equal to the benefits
provided. Employee contributions vary depending upon the amount of coverage
elected by the employee. Employer contributions amounted to $50, $175, $307
and $508 for the period from January 1, 1993 to May 10, 1993, the period from
May 11, 1993, to December 31, 1993 and the years ended December 31, 1995 and
1994, respectively.
Effective January 1, 1988, the Company implemented an investment retirement
plan (the "Retirement Plan") pursuant to Section 401(k) of the Internal
Revenue Code for all employees who qualify based on tenure with the Company.
The Retirement Plan provides for employee and the Company contributions
subject to certain limitations. The cost of the Retirement Plan charged to
operations was approximately $36, $66, $110 and $91 for the period from
January 1, 1993 to May 10, 1993, the period from May 11, 1993, to December 31,
1993 and the years ended December 31, 1995 and 1994, respectively.
During 1995, the Company sold 125,000 shares of stock to certain employees.
The issuance price was $1 per share for 25,000 shares and $1.14 per share for
100,000 shares. The Company has recorded compensation expense of $720
representing the difference between the issuance price and the fair value of
the stock as determined by an independent appraiser. Additionally, the Company
has accrued bonuses of $580 to the employees for reimbursement of the tax
impact to the employees of these transactions.
F-16
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. CUMULATIVE REDEEMABLE PREFERRED STOCK AND COMMON STOCK SUBJECT TO PUT
OPTIONS
On May 11, 1993, the Company issued 40,000 shares of cumulative redeemable
preferred stock for $50 per share. This issuance was in conjunction with the
acquisition described in Note 1.
On October 11, 1995, the Company issued 40,000 shares of cumulative
redeemable preferred stock Series A at $50 per share to finance the Kilovac
acquisition described in Note 1. At December 31, 1995, the Company has 40,000
shares of cumulative redeemable preferred stock Series A and 40,000 shares of
cumulative redeemable preferred stock outstanding. The preferred stock has
been stated at the liquidation preference value of $50 per share plus unpaid
dividends.
Holders of the preferred stock are entitled to a cumulative dividend payable
semiannually on May 31 and November 30 at an annual rate of 9.25%. No
dividends have been paid as Management has elected not to pay dividends until
completion of the offering as described in Note 14. The dividends have been
accrued and reflected as an increase in preferred stock.
The preferred stock carries a mandatory redemption feature requiring
redemption of 50% of the then outstanding shares of preferred stock on May 31,
2002 and the remaining shares on May 31, 2003 at a rate of $50 per share plus
accrued and unpaid dividends. The Series A preferred stock also carries a
mandatory redemption feature requiring redemption of 50% of the then
outstanding shares of Series A preferred stock on May 31, 2004 and the
remaining shares on May 31, 2005 at a rate of $50 per share plus accrued and
unpaid dividends. The preferred stock may, however, be redeemed at the option
of the Company at any time prior to the mandatory redemption date, in whole or
in part, at a price of $50 per share plus accrued and unpaid dividends.
On May 11, 1993, the Company issued 250,000 shares of common stock via
subscription agreements for $1.00 per share to members of management who owned
shares of the Predecessor Company. On both May 17, 1994 and May 23, 1995, the
Company issued 25,000 shares of common stock via subscription agreements for
$1.00 per share. On December 1, 1995, the Company issued 100,000 shares of
common stock via subscription agreements for $1.14 per share (see Note 10).
These agreements stipulate that the purchaser cannot sell the stock without
first offering it for sale back to the Company. Prior to the fifth year
anniversary of purchase or an initial public offering such as the anticipated
offering described in Note 14, the Company is obligated to buy back the stock
at the higher of the original purchase price or book value per share in the
event of death, disability, or voluntary termination of employment ("Put
Options"). At December 31, 1995, the Company had 400,000 shares outstanding
subject to Put Options of the total 2,550,000 shares outstanding.
12. SIGNIFICANT CUSTOMERS
Sales to foreign customers accounted for 15%, 15%, 20% and 15% of total
sales for the period from January 1, 1993 to May 10, 1993, the period from May
10, 1993 to December 31, 1993 and the years ended December 31, 1994 and 1995,
respectively.
Approximately 20% percent of the Company's sales are made directly, or
indirectly, to the U.S. Department of Defense.
13. RELATED PARTY TRANSACTIONS
Certain nonemployee shareholders provide management services to the Company.
The Company was charged $0, $127, $150 and $156 for such services for the
period from January 1, 1993 to May 10, 1993, the period from May 11, 1993 to
December 31, 1993 and the years ended December 31, 1994 and 1995,
respectively. Additionally, this group was paid $150 in 1995 for fees related
to the Kilovac acquisition (see Notes 1 and 5).
F-17
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the six months ended June 30, 1996, the Company sold certain of its
fixed assets to the Indian Joint Venture (Note 1) for approximately $990. This
amount is included in the other assets balance in the accompanying
consolidated balance sheet at June 30, 1996.
14. SUBSEQUENT EVENTS (UNAUDITED)
On July 2, 1996, the Company acquired certain assets and assumed certain
liabilities of the Hartman Electrical Division of Figgie International, Inc.
for approximately $12,000. The transaction was financed with secured bank
debt, which was made available through amendment to the existing credit
facility. The amended credit facility contains financial covenants including,
without limitation, certain limitations on cash interest coverage, leverage,
liquidity and minimum net worth and certain other customary restrictive
covenants.
The Company has entered into a Letter of Understanding with the bank, which,
upon the execution of definitive documentation at the time of the offering,
would provide for an amended $40 million credit facility, which will bear
interest at LIBOR plus the applicable margin. The facility will be available
for working capital purposes and to finance additional acquisitions and will
be secured by the Company's assets. The Company anticipates that the loan
agreement for the new facility will contain financial covenants including,
without limitation, certain limitations on cash interest coverage, leverage,
liquidity and minimum net worth and certain other customary restrictive
covenants. The Company expects that the facility will be available for five
years.
In connection with the expected offering of 3,500,000 shares of Common Stock
by the Company, a Registration Statement on Form S-1 has been filed with the
Securities and Exchange Commission.
The Company intends to use the anticipated net proceeds of the offering to
repay amounts under the borrowing arrangement with a bank, the subordinated
notes payable and a portion of the preferred stock. The Company also intends
to issue 250,000 shares of Common Stock (based upon an initial offering price
of $8.00 per share) in exchange for the remaining portion of the Cumulative
Redeemable Preferred Stock.
Subsequent to December 31, 1995, the Board of Directors adopted the 1996
Management Stock Plan (the "1996 Plan"). The 1996 Plan is administered by the
Compensation Committee of the Board of Directors. All employees of the Company
who are selected by the Compensation Committee are eligible to participate in
the 1996 Plan. The 1996 Plan provides for the granting of incentive and non-
qualified incentive stock options, stock appreciation rights, and other stock
based awards. The shares of common stock issuable under the 1996 Plan may be
either authorized unissued shares, or treasury shares, or any combination
thereof. A total of 325,000 shares of Common Stock may be subject to awards
under the 1996 Plan, subject to adjustment at the discretion of the
Compensation Committee. It is anticipated that, at or about the time of the
Company's initial public offering, options to acquire 100,000 shares of Common
Stock at an exercise price equal to the initial public offering price will be
granted to certain officers of the Company pursuant to the 1996 Plan.
Subsequent to December 31, 1995, the Board of Directors approved a 2.5 for 1
stock split and increased the number of authorized shares to 25,000,000, both
to be effective immediately prior to the offering of Common Stock by the
Company. The 2.5 for 1 stock split has been retroactively reflected in the
consolidated financial statements.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Kilovac Corporation:
We have audited the consolidated balance sheet of Kilovac Corporation and
subsidiaries as of December 31, 1994, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1994 and the period from January 1, 1995 through
October 11, 1995. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Kilovac Corporation and
subsidiaries as of December 31, 1994, and the results of their operations and
their cash flows for the two years in the period ended December 31, 1994 and
the period from January 1, 1995 through October 11, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, in
September 1995 Kilovac Corporation entered into a merger agreement with
Communications Instruments, Inc. Effective October 11, 1995, the merger was
completed.
Deloitte & Touche LLP
Los Angeles, California
December 6, 1995
F-19
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 533,532
Receivables:
Trade, net of allowance for doubtful accounts of $6,134....... 1,315,546
Other......................................................... 191,531
Unbilled receivables.......................................... 30,518
Income taxes receivable....................................... 66,554
Inventories:
Raw materials and processed parts............................. 558,907
Work-in-progress.............................................. 429,787
Finished products............................................. 208,536
Prepaid expenses................................................ 68,140
Deferred income taxes........................................... 325,827
-----------
Total current assets.......................................... 3,728,878
-----------
PROPERTY, At cost:
Land............................................................ 435,408
Building........................................................ 145,136
Machinery....................................................... 1,999,514
Furniture and office equipment.................................. 754,106
Vehicles........................................................ 19,220
Leasehold improvements.......................................... 935,725
Construction-in-progress........................................ 36,450
-----------
Total......................................................... 4,325,559
Accumulated depreciation........................................ (2,671,554)
-----------
Property, net................................................. 1,654,005
-----------
OTHER ASSETS:
Deposits........................................................ 27,226
Patents......................................................... 145,295
-----------
Total other assets............................................ 172,521
-----------
TOTAL............................................................. $ 5,555,404
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit........................................ $ 200,000
Notes payable................................................... 429,778
Accounts payable................................................ 486,855
Accrued liabilities............................................. 905,243
-----------
Total current liabilities..................................... 2,021,876
-----------
DEFERRED INCOME TAXES............................................. 18,916
-----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $100 par value; 5,000 shares authorized; none
issued or outstanding..........................................
Preference stock, $100 par value; 5,000 shares authorized; none
issued or outstanding..........................................
Common stock--Class A, no par value; 200,000 shares authorized;
58,574 shares issued and outstanding........................... 559,929
Common stock--Class B, no par value; 200 shares authorized; none
issued or outstanding
Retained earnings............................................... 2,954,683
-----------
Total stockholders' equity.................................... 3,514,612
-----------
TOTAL............................................................. $ 5,555,404
===========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD JANUARY 1, 1995 TO OCTOBER 11, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, JANUARY 1, 1995
------------------------ TO OCTOBER 11,
1993 1994 1995
----------- ----------- ---------------
<S> <C> <C> <C>
REVENUES:
Product sales...................... $10,375,887 $11,257,160 $9,685,620
Engineering sales.................. 492,343 961,810 1,343,880
----------- ----------- ----------
Total revenues................... 10,868,230 12,218,970 11,029,500
----------- ----------- ----------
COSTS AND EXPENSES:
Cost of product sales.............. 5,902,130 6,940,568 5,635,997
Engineering, research and
development costs................. 943,532 1,431,703 1,364,845
Selling, general and administrative
expenses.......................... 2,441,318 2,987,309 2,527,046
----------- ----------- ----------
Total costs and expenses......... 9,286,980 11,359,580 9,527,888
----------- ----------- ----------
OTHER EXPENSE (INCOME):
Other (income) expense............. 226,133 (112,901) (8,788)
Interest expense................... 150,813 130,247 34,527
----------- ----------- ----------
Total other expense.............. 376,946 17,346 25,739
----------- ----------- ----------
INCOME BEFORE INCOME TAXES........... 1,204,304 842,044 1,475,873
----------- ----------- ----------
INCOME TAX PROVISION (BENEFIT):
Current............................ 490,799 333,168 622,864
Deferred........................... (87,913) (104,852) (61,751)
----------- ----------- ----------
Total income taxes............... 402,886 228,316 561,113
----------- ----------- ----------
NET INCOME........................... $ 801,418 $ 613,728 $ 914,760
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD JANUARY 1, 1995 TO OCTOBER 11, 1995
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ -------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993............ 62,114 $538,795 $1,684,640 $2,223,435
Exercise common stock options..... 10 95 -- 95
Repurchase of common stock........ (2,448) (24,467) (68,526) (92,993)
Net income........................ -- -- 801,418 801,418
------ -------- ---------- ----------
BALANCE, DECEMBER 31, 1993.......... 59,676 514,423 2,417,532 2,931,955
Issuance of common stock.......... 1,346 69,992 -- 69,992
Repurchase of common stock........ (2,448) (24,486) (76,577) (101,063)
Net income........................ -- -- 613,728 613,728
------ -------- ---------- ----------
BALANCE, DECEMBER 31, 1994.......... 58,574 559,929 2,954,683 3,514,612
Repurchase of common stock........ (6,279) (185,714) (122,264) (307,978)
Net income........................ -- -- 914,760 914,760
------ -------- ---------- ----------
BALANCE, OCTOBER 11, 1995........... 52,295 $374,215 $3,747,179 $4,121,394
====== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
AND THE PERIOD JANUARY 1, 1995 TO OCTOBER 11, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, JANUARY 1, 1995
--------------------- TO OCTOBER 11,
1993 1994 1995
--------- ---------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 801,418 $ 613,728 $ 914,760
Adjustments to reconcile net income to
net cash provided by activities:
Depreciation and amortization......... 308,699 365,718 274,030
Loss on disposal of property.......... -- 14,543 --
Deferred income taxes................. (87,913) (104,852) (61,751)
Provision for doubtful accounts and
notes receivable..................... 78,151 (30,000) 31,682
Changes in operating assets and
liabilities:
Trade and other receivables......... (792,448) (6,632) (459,373)
Inventories......................... (49,503) 167,438 (583,039)
Prepaid expenses and deposits....... (108,146) 59,784 545
Accounts payable.................... 91,170 96,384 308,378
Income taxes........................ 159,464 (345,015) 453,441
Accrued liabilities................. 197,254 268,251 68,079
--------- ---------- ---------
Net cash provided by operating
activities....................... 598,146 1,099,347 946,752
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property................. (284,029) (486,583) (299,374)
Additions to patents.................. (579) (68,779) (14,663)
Proceeds from disposal of fixed
assets............................... -- 1,205 --
--------- ---------- ---------
Net cash used in investing
activities......................... (284,608) (554,157) (314,037)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving line of credit
borrowings........................... -- 200,000 (200,000)
Repayment of notes payable............ (137,968) (860,865) (348,936)
Issuance of common stock.............. 95 69,992 --
Repurchase of common stock............ (92,993) (101,063) (307,978)
--------- ---------- ---------
Net cash used in financing
activities......................... (230,866) (691,936) (856,914)
--------- ---------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS............................ 82,672 (146,746) (224,199)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................. 597,606 680,278 533,532
--------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................. $ 680,278 $ 533,532 $ 309,333
========= ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--
Cash paid during the year for:
Interest.............................. $ 117,132 $ 97,810 $ 19,963
Income taxes.......................... $ 321,798 $ 717,500 $ 142,200
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIODFROM JANUARY 1, 1995
THROUGH OCTOBER 11, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General--Kilovac Corporation designs and manufactures high voltage and high
frequency electromechanical relays with applications in the following
industries: aerospace and defense, medical, test equipment, and other
commercial industries. Kilovac Corporation sells its products and grants
credit to customers in all of these industries located throughout the world.
Principles of Consolidation--The consolidated financial statements include
the accounts of Kilovac Corporation and its wholly owned subsidiaries (the
"Company"). All intercompany accounts and transactions have been eliminated.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market. Reserves for excess and obsolete inventories are determined
based on historical and projected usage.
Property--Depreciation and amortization are computed using the straight-line
method. Useful lives of the assets range from 3 to 30 years for buildings and
leasehold improvements, 3 to 10 years for machinery, and 3 to 5 years for
furnishings, office equipment and vehicles.
Income Taxes--The Company files a federal income tax return and a California
franchise tax return. Income taxes are recognized for (a) the amount of taxes
payable or refundable for the current period, and (b) deferred income tax
assets and liabilities for the future tax consequences of events that have
been recognized in the Company's financial statements or income tax returns.
The effects of income taxes are measured based on enacted laws and rates.
Revenues--Engineering sales represent revenues under fixed price development
and cost sharing development contracts. Revenues under the contracts are
recognized based on the percentage of completion method, measured by the
percentage of costs incurred to date to estimated total costs for each
contract. Costs in excess of contract revenues on cost sharing development
contracts are expensed in the period incurred as research and development
costs. These estimates are reviewed and revised periodically throughout the
lives of the contracts, and adjustments to profits resulting from such
revisions are recorded in the accounting period in which the revisions are
made. Provision for estimated losses on fixed price development contracts is
made in the period such losses are determined by management. Product sales are
recognized upon product shipment.
Use of Estimates in the Preparation of Financial Statements--The preparation
of 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 financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Export Sales--The Company operates in one industry segment. Export sales
primarily to the Far East and Europe for the years ended December 31, 1993 and
1994 and the period from January 1, 1995 through October 11, 1995 totaled
$2,254,995, $2,743,502 and $3,118,545, respectively.
New Accounting Standards--In March 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to Be Disposed Of," which established a
new accounting principle for the impairment of long-lived assets and certain
identifiable intangible assets and is effective for fiscal years beginning
after December 15, 1995 with earlier adoption encouraged. The Company adopted
the new standard in 1995, which adoption had no impact on the accompanying
consolidated financial statements.
F-24
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes an alternative method of accounting for
employee stock compensation plans based on a fair value methodology. However,
the statement allows an entity to continue to use the accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The new
standard also requires additional disclosures if the Company elects to remain
with the accounting in Opinion 25. The Company has not determined whether it
will adopt the new accounting standard and has also not yet determined its
effect.
2. BORROWING ARRANGEMENTS
The Company had borrowing arrangements with a bank that provided for
borrowings of up to $750,000 under a revolving line of credit and $600,000
under a term line of credit for equipment purchases. Interest on outstanding
balances under these arrangements was payable at the bank's reference rate
(8.5% at December 31, 1994) plus .75% under the revolving line of credit and
1% under the term line of credit. The credit arrangements required the Company
to maintain certain financial ratios and a compensating balance equal to 7% of
the revolving line of credit limit. In connection with the sale of the Company
(see Note 9), the borrowing arrangements were canceled effective October 11,
1995.
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Term loan to bank; interest at the prime rate (8.5% at December
31, 1994) plus 1% with minimum and maximum rates set at 11%
and 14.75%, respectively; principal due in monthly
installments of $806 through March 1995 when the unpaid
balance is due and payable. The loan is collateralized by a
first trust deed on land and building with a net book value of
$556,354 at December 31, 1994................................. $244,078
Term line of credit; interest at variable rates, 9.5% at
December 31, 1994, principal and interest due in monthly
installments through May 1995................................. 84,558
Subordinated notes payable to a former officer/stockholder;
interest at a rate of 8.25% payable monthly, principal due
December 1995................................................. 80,842
Other.......................................................... 20,300
--------
$429,778
========
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Wages and certain benefits...................................... $319,033
Legal costs..................................................... 360,000
Provision for contract losses................................... 155,813
Other........................................................... 70,397
--------
$905,243
========
</TABLE>
F-25
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
Significant components of the Company's net deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current:
Accrued expenses.............................................. $147,358
Provision for contract losses................................. 52,976
Inventories................................................... 31,449
Loan receivable............................................... 23,800
Other......................................................... (4,005)
State taxes, net of federal benefit........................... 74,249
--------
$325,827
========
Noncurrent:
Depreciation.................................................. $(16,185)
State taxes, net of federal benefit........................... (2,731)
--------
$(18,916)
========
</TABLE>
The net deferred tax asset is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Deferred tax assets........................................... $336,608
Deferred tax liabilities...................................... (29,697)
--------
$306,911
========
</TABLE>
The following is a reconciliation of the effective tax rate to the federal
statutory rate:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED JANUARY 1, 1995
DECEMBER 31, DECEMBER 31, TO OCTOBER 11,
1993 1994 1995
------------ ------------ ---------------
<S> <C> <C> <C>
Tax provision at statutory rate.. $421,506 $294,715 $516,556
Benefit of foreign service
corporation..................... (11,937) (9,821) (21,237)
Research and development credit.. (55,776) (71,006) (27,610)
State taxes, net of federal
benefit......................... 63,628 14,915 80,969
Other............................ (14,535) (487) 12,435
-------- -------- --------
$402,886 $228,316 $561,113
======== ======== ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company leases its premises under an operating lease that expires in
April 1996. Future minimum lease payments under the lease total $77,805 at
October 11, 1995.
Rent expense for the years ended December 31, 1993 and 1994 and the period
from January 1, 1995 through October 11, 1995 was $207,480, $207,480 and
$163,590, respectively.
In 1992, two former officers of the Company filed a lawsuit against the
Company and an officer of the Company, stating various causes of action. The
lawsuit has been settled and the settlement amount and related legal costs
were reported in the 1994 consolidated financial statements as other
(expenses) income, net of insurance reimbursements.
F-26
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CAPITAL STOCK
The dividend rights, dividend rate, conversion rights, voting rights, rights
and terms of redemption and other preferences of the Class B common stock,
preferred stock and preference stock are subject to determination by the Board
of Directors.
8. STOCK OPTIONS
The Company has stock option plans that provide for the issuance of shares
of the Company's common stock in incentive stock options and nonqualified
stock options to key employees. Incentive stock options may be granted at a
price not less than the fair market value of the stock at the grant date.
Options granted vest over varying periods and expire no later than ten years
from the grant date. The option agreements include a vesting acceleration
provision in the event of certain occurrences, which include the merger or
sale of the Company. In connection with the merger agreement discussed in Note
10, all of the employee stock options became fully vested on October 11, 1995
and were exercised.
Information concerning outstanding options is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Outstanding, January 1, 1993......................... 70,500 $9.52-$38.70
Exercised.......................................... (10) 9.52
------ ------------
Outstanding, December 31, 1993....................... 70,490 $9.52-$38.70
Granted............................................ 2,000 41.50
------ ------------
Outstanding, December 31, 1994....................... 72,490 $9.52-$41.50
------ ------------
Outstanding, October 11, 1995........................ 72,490 $9.52-$41.50
====== ============
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Company has established the Kilovac Corporation Employee Stock Bonus
Plan (the "Plan") for the benefit of substantially all of its employees.
Annual contributions are limited to a maximum of 15% of eligible employees'
compensation and are made at the discretion of the Board of Directors.
Contributions may be made in the form of cash or stock. Valuation of stock
contributed under the Plan is based on fair market value as determined by
independent appraisal. Contributions to the Plan for the years ended December
31, 1993 and 1994 and the period from January 1, 1995 through October 11, 1995
totaled $147,607, $76,280 and $70,000, respectively. Effective with the
consummation of the merger (see Note 10), the Company has discontinued further
contributions to the plan.
The Company has established a salary deferral savings plan under provisions
of Section 401(k) of the Internal Revenue Code. Employees may elect to defer
up to 15% of their annual compensation under the plan. Company contributions
to the Plan for the years ended December 31, 1993 and 1994 and the period from
January 1, 1995 through October 11, 1995 totaled $0, $25,400 and $89,200,
respectively.
10. MERGER AGREEMENT
On September 20, 1995, the Company entered into a merger agreement with
Communications Instruments, Inc. ("CII") that was effective October 11, 1995.
Under the terms of the agreement, CII acquired 80% of the outstanding common
stock of the Company (99,828 shares) for a total cash consideration of
$12,900,000 (less certain transaction fees), distribution of the Company's
ownership in Kilovac Development Corporation, and certain future
consideration. In conjunction with the acquisition, the outstanding stock
options were exercised, representing 72,490 shares of the Company's common
stock. The option holders received their pro rata share of the purchase price
less the aggregate option exercise price totaling $1,202,692.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hartman Electrical Manufacturing
Division of Figgie International,
Inc.
We have audited the accompanying balance sheets of the Hartman Electrical
Manufacturing Division (the "Company") of Figgie International, Inc. as of
December 31, 1994 and 1995 and the related statements of operations, and cash
flows for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1994 and 1995,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Cleveland, Ohio
June 28, 1996
F-28
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Cash............................................ $ 7 $ 22 $ 14
Receivables--net of allowance for doubtful
accounts of $100 in 1994, 1995 and 1996........ 3,633 1,877 2,809
Inventories (Note 2)............................ 5,632 6,992 6,503
Prepaid expenses................................ 13 23 14
------- ------- -------
Total current assets.......................... 9,285 8,914 9,340
Property and equipment--at cost (Note 3)........ 5,720 5,720 5,400
Less accumulated depreciation and amortization.. (3,626) (3,958) (4,061)
------- ------- -------
Property and equipment--net................... 2,094 1,762 1,339
Prepaid pension (Note 6)........................ 1,342 1,427 1,427
Other assets.................................... 174 33 --
------- ------- -------
Total......................................... $12,895 $12,136 $12,106
======= ======= =======
LIABILITIES AND DIVISIONAL EQUITY
LIABILITIES:
Accounts payable................................ $ 963 $ 1,356 $ 1,189
Accrued liabilities (Note 4).................... 6,819 5,333 4,937
Current portion of capital lease obligations
(Note 7)....................................... 1,073 518 489
------- ------- -------
Total current liabilities..................... 8,855 7,207 6,615
Non-current capital lease obligations (Note 7).. 1,138 617 372
------- ------- -------
Total liabilities............................. 9,993 7,824 6,987
COMMITMENTS AND CONTINGENCIES (Note 7)
DIVISIONAL EQUITY (Note 9)...................... 2,902 4,312 5,119
------- ------- -------
Total......................................... $12,895 $12,136 $12,106
======= ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-29
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- -----------------
1994 1995 1995 1996
------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................. $19,974 $17,461 $ 9,404 $ 10,825
------- ------- ------- --------
COSTS AND EXPENSES:
Cost of sales (Note 8).................. 17,120 11,417 6,007 7,942
Selling................................. 889 445 248 156
General and administrative ............. 1,749 1,171 596 578
Research and development................ 969 615 381 --
Non-recurring charge (Note 10).......... 1,877 -- -- --
Provision for estimated environmental
costs (Note 11)........................ -- 850 -- --
------- ------- ------- --------
Total costs and expenses.............. 22,604 14,498 7,232 8,676
------- ------- ------- --------
INCOME (LOSS) FROM OPERATIONS............. (2,630) 2,963 2,172 2,149
------- ------- ------- --------
OTHER INCOME (EXPENSE):
Allocated debt service charges (Note
1)..................................... (1,582) (1,582) (791) (791)
Interest expense ....................... (332) (50) (27) --
Other................................... 118 (92) (79) (15)
------- ------- ------- --------
Total other income (expense).......... (1,796) (1,724) (897) (806)
------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES......... (4,426) 1,239 1,275 1,343
PROVISION (BENEFIT) FOR INCOME TAXES (Note
5)....................................... (1,765) 496 509 536
------- ------- ------- --------
NET INCOME (LOSS)......................... $(2,661) $ 743 $ 766 $ 807
======= ======= ======= ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-30
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
---------------- ------------
1994 1995 1995 1996
------- ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $(2,661) $ 743 $ 766 $ 807
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation................................ 389 332 175 135
Gain on sale of fixed assets................ (167) -- -- --
Loss on write-off of equipment and other
assets..................................... 1,951 -- -- --
Changes in operating assets and liabilities:
Receivables............................... (1,322) 1,756 897 (933)
Inventories............................... 1,315 (1,360) 243 489
Prepaid expenses.......................... (4) (10) (33) 9
Prepaid pension and other assets.......... 629 56 14 33
Accounts payable.......................... (1,314) 393 344 (167)
Accrued expenses.......................... (2,613) (1,486) 1,662 (397)
------- ------- ----- -----
Net cash provided by (used in) operating
activities................................. (3,797) 424 744 (24)
------- ------- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (76) -- -- (63)
Sale of property and equipment................ 217 -- -- --
------- ------- ----- -----
Net cash provided by (used in) investing
activities................................. 141 -- -- (63)
------- ------- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations......... (491) (1,076) (562) (273)
Net cash provided by Figgie................... 4,149 667 (169) 352
------- ------- ----- -----
Net cash provided by (used in) financing
activities................................. 3,658 (409) (731) 79
------- ------- ----- -----
NET INCREASE (DECREASE) IN CASH............... 2 15 13 (8)
CASH, BEGINNING OF PERIOD..................... 5 7 7 22
------- ------- ----- -----
CASH, END OF PERIOD........................... $ 7 $ 22 $ 20 $ 14
======= ======= ===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-31
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
(IN THOUSANDS)
1.BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity--Hartman Electrical Manufacturing (the "Company") is a
division of Figgie International, Inc. ("Figgie"). The Company, located in
Mansfield, Ohio, is a manufacturer and marketer of high current
electromechanical relays for critical applications in the military and
commercial aerospace markets. The Company specializes in lower volume, highly
engineered relays targeted to aerospace original equipment manufacturers and
aftermarket users. Due to the nature of the industry they serve, the Company's
customer base is highly concentrated. Approximately 86% and 91% of net sales
in 1994 and 1995, respectively, were to the Company's ten largest customers.
Three customers in 1994 and four customers in 1995 exceeded 10% of net sales.
In 1994, customers A, B and C purchased 21.0%, 17.1% and 11.1%, respectively,
while in 1995 customers A, B, C and D purchased 27.4%, 13.2%, 11.3% and 10.5%,
respectively. Net sales to the U.S. Department of Defense (including prime
contractors under U.S. government programs) amounted to 35% and 26% of total
net sales in 1994 and 1995, respectively.
Approximately 13% and 17% of net sales in 1994 and 1995, respectively, were
to entities which principally operate outside of the United States.
The financial statements have been prepared generally as if the Company had
operated as a stand-alone entity for all periods presented. The financial
information included herein is not necessarily indicative of the financial
position and results of operations of the Company in the future. In addition,
these financial statements do not reflect any effects of the proposed change
in ownership transaction described in Note 12.
The Company is charged a corporate "debt service" charge from Figgie
designed to allocate a portion of Figgie's debt service and general and
administrative costs to the Company. Such charges totalled $1,812 for 1994 and
1995.
The Company has estimated the portion of such charges that relates to debt
service and included such amounts ($1,582 in 1994 and 1995) in allocated debt
service charges in the accompanying statements of operations. The Company's
management believes the allocation method is reasonable; however, this
allocated expense is not necessarily indicative of expenses that would have
been incurred by the Company on a stand-alone basis. Effective January 1,
1996, Figgie discontinued allocating expenses for debt service costs discussed
above due to the proposed transaction in Note 12. An estimate of $906, of
which $791 relates to allocated debt service charges, that would have been
charged by Figgie to the Company during the six months ended June 30, 1996 has
been included in the accompanying statement of operations for the six months
ended June 30, 1996.
Concentration of Credit Risk--Credit is extended based on an evaluation of
the customer's financial condition and, generally, collateral is not required.
Receivables from the Company's ten largest customers represent 82% and 78% of
total receivables at December 31, 1994 and 1995, respectively.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions pending completion of related events. These estimates and
assumptions affect the amounts reported at the date of the financial
statements for assets, liabilities, revenues and expenses and the disclosure
of contingencies. Actual results could differ from those estimates.
Fair Value of Financial Instruments--The Company has various financial
instruments, including cash, accounts receivable, accounts payable, and
capital leases. The Company believes that the carrying values of these
financial instruments approximate their fair values.
F-32
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Inventories-- Inventories are stated at the lower of first-in, first-out
(FIFO) cost or market. Reserves for excess and obsolete inventories are
determined based on historical and projected usage.
Revenue Recognition--Revenues are generally recognized as finished products
are shipped to customers. The Company follows the guidelines of AICPA
Statement of Position 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts" (the contract method of accounting) for
certain long-term commercial and governmental contracts. Under the contract
method of accounting, the Company's sales are primarily under fixed-price
contracts, certain of which require delivery of products over several years.
Sales and profit on each contract are recognized primarily in accordance with
the percentage-of-completion method of accounting, using the units of delivery
method. Revisions of estimated profits on contracts are included in earnings
by the reallocation method, which spreads the change in estimate over future
deliveries. Any anticipated losses on contracts are charged to earnings when
identified. Estimated warranty costs are provided for based on known claims
and historical experience.
Depreciation--Depreciation is computed on the straight-line method over the
assets' estimated useful lives, ranging from 15 to 40 years for buildings and
improvements and 5 to 10 years for machinery and equipment.
Research and Development--Research and development costs are expensed as
incurred.
Unaudited Interim Financial Data--The interim financial data relating to the
six months ended June 30, 1995 and 1996 are unaudited; however, in the opinion
of the Company's management, the interim data includes all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
statement of the results for the interim periods. The results for the six
months ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year or any other interim period.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Products in process.......................... $ 2,089 $ 3,475 $ 3,940
Raw materials, supplies and finished
components.................................. 6,456 6,709 6,110
------- ------- -------
Inventories--gross........................... 8,545 10,184 10,050
Reserve for excess and obsolete inventory.... (2,913) (3,192) (3,547)
------- ------- -------
Total...................................... $ 5,632 $ 6,992 $ 6,503
======= ======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Land.......................................................... $ 205 $ 205
Buildings and improvements.................................... 1,134 1,134
Machinery and equipment....................................... 4,131 4,381
Construction in progress...................................... 250 --
------ ------
Total....................................................... $5,720 $5,720
====== ======
</TABLE>
F-33
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Compensation and related benefits................. $ 617 $ 642 $ 751
Taxes other than income........................... 334 335 413
Estimated losses on uncompleted contracts......... 5,332 3,091 2,465
Estimated environmental remediation liability..... -- 850 860
Warranty.......................................... 200 200 320
Other............................................. 336 215 137
------ ------ ------
Total........................................... $6,819 $5,333 $4,936
====== ====== ======
</TABLE>
5. INCOME TAXES
The operations of the Company are included in the consolidated tax return of
Figgie. The income tax provision included in the statements of operations has
been determined as if the Company was a separate taxpayer. Current and
deferred tax assets and liabilities are transferred to divisional equity.
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1994 1995
------- ----
<S> <C> <C>
Current........................................................ $(1,654) $ 1
Deferred....................................................... (111) 495
------- ----
Total........................................................ $(1,765) $496
======= ====
</TABLE>
The effective income tax rates for the years ended December 31, 1994 and
1995 were 40%. The principle difference between income taxes computed at the
federal statutory rate (35%) and the Company's effective income tax rate is
state and local income taxes.
Components of the deferred tax liabilities (assets) included in divisional
equity at December 31 were as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Depreciation.............................................. $ 214 $ 186
Pension................................................... 537 571
Inventory basis difference................................ (1,065) (1,178)
Estimated losses on uncompleted contracts................. (2,133) (1,236)
Accrued liabilities....................................... (213) (508)
Bad debt reserve.......................................... (40) (40)
------- -------
Total................................................... $(2,700) $(2,205)
======= =======
</TABLE>
6. RETIREMENT PLANS
Hourly employees covered under the Company's collective bargaining agreement
participate in a defined benefit pension plan. The plan provides for various
levels of benefits based on length of service. The plan is fully funded and no
contributions to the plan were required in 1994 and 1995. The plan's assets
consist primarily of listed common stocks, corporate and government bonds,
real estate investments, and cash and cash equivalents.
F-34
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net periodic pension income of the defined benefit pension plan consists of
the following for the years ended December 31:
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Service cost--benefits earned during the year................. $ 59 $ 53
Interest cost on accumulated benefit obligation............... 190 221
Actual (return) loss on plan assets........................... 171 (748)
Net amortization and deferral................................. (607) 389
----- -----
Net periodic pension income................................. $(187) $ (85)
===== =====
</TABLE>
The funded status of the defined benefit pension plan and the amounts
recognized in the balance sheets at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Fair value of plan assets................................ $ 3,548 $ 4,091
Actuarial present value of benefit obligation--projected
and accumulated......................................... (2,443) (3,014)
------- -------
Plan assets greater than projected benefit obligation.... 1,105 1,077
Unrecognized net transition asset........................ (521) (456)
Unrecognized net loss.................................... 670 728
Unrecognized prior service cost.......................... 88 78
------- -------
Prepaid pension asset.................................... $ 1,342 $ 1,427
------- -------
Vested benefits.......................................... $ 2,411 $ 2,970
------- -------
</TABLE>
Assumptions used were as follows: discount rate--8.25% in 1994 and 7.50% in
1995; and return on plan assets--10%.
Eligible salaried employees of the Company participate in a defined benefit
pension plan sponsored by Figgie. Plan benefits under this plan are based on
employees' earnings during their years of participation in the plan. Amounts
allocated by Figgie and charged to expense were $170 and $49 in 1994 and 1995,
respectively. In addition, eligible employees may participate in a 401(k)
defined contribution plan, also sponsored by Figgie. The Plan does not provide
for employer contributions.
7. COMMITMENTS
The Company has commitments under operating leases primarily for computer
and office equipment. Rental expense was $488 in 1994 and $424 in 1995. Future
minimum rental commitments under operating leases having initial or remaining
non-cancelable lease terms exceeding one year are $356 in 1996; $263 in 1997;
$176 in 1998; and $23 in 1999.
The Company has commitments under capital leases primarily for machinery and
equipment. Future principal payments under these capital leases are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1996............................................................ $ 518
1997............................................................ 490
1998............................................................ 127
------
$1,135
======
</TABLE>
The net book value of machinery and equipment under capital leases is not
significant. Implicit interest rates in the capital leases range from 8.9% to
9.8%.
F-35
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Company purchases certain component parts from Interstate Electronics, a
subsidiary of Figgie. Amounts purchased during the years ended December 31,
1994 and 1995 were $4,670 and $2,005, respectively. Amounts purchased during
the six months ended June 30, 1995 and 1996 were $1,367 and $601,
respectively.
During the six month period ending June 30, 1996, the Company transferred
equipment with a net book value of $351 to Figgie.
9.DIVISIONAL EQUITY
Changes in divisional equity, which includes cash advances and allocated
costs, were as follows:
<TABLE>
<S> <C>
Balance, January 1, 1994............................................ $ 1,414
Net loss for 1994................................................. (2,661)
Net cash transferred from Figgie.................................. 4,149
-------
Balance, December 31, 1994.......................................... 2,902
Net income for 1995............................................... 743
Net cash transferred from Figgie.................................. 667
-------
Balance, December 31, 1995.......................................... 4,312
Net income for the six months ended June 30, 1996................. 807
Net cash transferred from Figgie.................................. 351
Equipment transferred to Figgie................................... (351)
-------
Balance, June 30, 1996.............................................. $ 5,119
=======
</TABLE>
10.NON-RECURRING CHARGE
The non-recurring charge in 1994 represents the write-off of test equipment.
This equipment was developed for the purpose of testing relays in a more
efficient manner. Management determined in 1994 that the equipment was not
effective.
11.CONTINGENCIES
In 1995, the Company recorded an estimated liability of $850 for
environmental remediation and compliance costs related to its facility in
Mansfield, Ohio. Management believes that the actual outcome of any
remediation and compliance costs in excess of the recorded liability would not
have a material effect on the financial condition, results of operations or
cash flows of the Company.
12.SUBSEQUENT EVENT
On July 2, 1996, Communications Instruments, Inc. ("CII") acquired certain
assets and assumed certain liabilities of the Company for approximately
$12,000. The pension plan assets and obligations described in Note 6 will
remain with Figgie, the plan sponsor, as well as certain other assets and
liabilities including, but not limited to, land, buildings and environmental
related liabilities.
F-36
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING COVERED HEREBY. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY
JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Consolidated Financial Data...................................... 5
Risk Factors............................................................. 7
The Company.............................................................. 13
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Information.............................. 18
Pro Forma Condensed Consolidated Financial Information................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 36
Management............................................................... 48
Ownership of Common Stock................................................ 54
Certain Relationships and Related Transactions........................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 60
Legal Matters............................................................ 61
Experts.................................................................. 61
Additional Information................................................... 62
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIP-
TION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
[LOGO] CII TECHNOLOGIES (TM)
COMMON STOCK
---------------
PROSPECTUS
, 1996
---------------
WILLIAM BLAIR & COMPANY
FURMAN SELZ
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an itemization of the estimated costs expected to be
incurred in connection with the offer and sale of the securities registered
hereby.
<TABLE>
<S> <C>
Securities Act Registration Fee.................................. $ 15,267
NASD Filing Fee.................................................. 4,928
Nasdaq National Market Listing Fee............................... 33,750
Transfer Agent Fee............................................... 1,500
Printing and Engraving Expenses.................................. 158,000
Legal Fees and Expenses.......................................... 380,000
Accounting Fees and Expenses..................................... 402,000
Blue Sky Fees and Expenses....................................... 15,000
Miscellaneous.................................................... 389,555
----------
Total.......................................................... $1,400,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty,
except (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant
to Section 174 of the DGCL (providing for liability of directors for unlawful
payment of dividends or unlawful stock purchases or redemptions) or (iv) for
any transaction from which a director derived an improper personal benefit.
The Registrant's Restated Certificate of Incorporation limits the liability of
directors to the extent permitted by Section 102(b)(7) of the DGCL.
Under the Second Amended and Restated Certificate of Incorporation of the
Registrant and under its Amended and Restated Bylaws, the Registrant shall
have the power to indemnify its officers, directors, employees and agents to
the full extent permitted by the laws of the State of Delaware.
The Registrant maintains insurance, at its expense, to protect any director
or officer of the Registrant against certain expenses, liabilities or losses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Securities sold:
(i) On May 11, 1993, as part of the CII Acquisition, the Registrant issued
to CII Associates, L.P. (the "Partnership") 2,150,000 shares of Common Stock
and 40,000 shares of Cumulative Redeemable Preferred Stock for a total
consideration of $860,000 and $2,000,000, respectively.
(ii) Also in connection with the CII Acquisition on May 11, 1993, Ramzi A.
Dabbagh, Alan Gordon, G. Daniel Taylor and John Flanagan subscribed for and
purchased 50,000, 25,000, 100,000 and 75,000 shares, respectively of Common
Stock of the Company for purchases price of $20,000, $10,000, $40,000 and
$30,000, respectively.
(iii) On May 11, 1993 the Company issued a subordinated promissory note due
May 31, 2003 in the principal amount of $4,000,000 and one-half of the unpaid
principal of such note is due on each of May 31, 2002 and May 31, 2003.
II-1
<PAGE>
(iv) On May 17, 1994 and May 23, 1995 Michael A. Steinback purchased 25,000
shares of Common Stock and the consideration for each such purchase was
$10,000.
(v) On October 11, 1995 the Company issued to the Partnership 40,000 shares
of Cumulative Redeemable Preferred Stock Series A for a total consideration of
$2,000,000.
(vi) On October 11, 1995 the Company issued a subordinated promissory note
due October 11, 2005 in the principal amount of $1,700,000 and one-half of the
unpaid principal of such note is due on each of October 11, 2004 and October
11, 2005.
(vii) On December 1, 1995, Ramzi Dabbagh, Michael Steinback and David
Henning each purchased 25,000 shares of Common Stock for $11,400. On such
date, Theodore Anderson also purchased 12,500 shares of Common Stock for
$5,700 and Gary L. McGill, Jeffrey W. Boyce and Raymond McClinton purchased
4,165, 4,165 and 4,170 shares, respectively, for purchase prices of $1,899,
$1,899 and $1,902, respectively.
(b) Underwriters and other purchasers
None.
(c) Consideration
See (a) above.
(d) Exemption from registration claimed
The foregoing securities were not offered or sold in transactions involving
any public offering in the United States and, accordingly, were exempt from
registration under Section 4(2) of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1 --Form of Underwriting Agreement.
+3.1 --Form of Second Amended and Restated Certificate of Incorporation.
+3.2 --Form of Amended and Restated Bylaws.
+4 --Form of Common Stock Certificate.
+5 --Opinion of Simpson Thacher & Bartlett (a partnership which
includes professional corporations) regarding the legality of the
Common Stock being registered.
+10.1 --Management Subscription Agreements between the Company and Messrs.
Dabbagh, Gordon, Taylor and Flanagan.
+10.2 --Subscription Agreements between the Company and Messrs. Dabbagh,
Steinback, Henning, Anderson, Jr., McGill, Boyce and McClinton.
+10.3 --Registration Rights Agreement between the Company and CII
Associates, L.P.
+10.5 --Employment Agreement with Ramzi Dabbagh.
+10.6 --Employment Agreement with G. Daniel Taylor.
+10.7 --Employment Agreement with Douglas Campbell.
+10.8 --Employment Agreement with Michael Steinback.
+10.9 --Employment Agreement with David Henning.
+10.10 --Stock Subscription and Purchase Agreement dated as of September
20, 1995, by and among CII, Kilovac Corporation and the
stockholders and optionholders of Kilovac Corporation named
therein.
+10.11 --Second Amended and Restated Loan and Security Agreement dated as
of July 2, 1996 among CII, the financial institutions named therein
(the "Lenders") and Bank of America Illinois as agent for the
Lenders.
+10.12 --Asset Purchase Agreement dated as of June 27, 1996 between
Communications Instruments Inc. and Figgie International Inc.
+10.13 --Environmental Remediation and Escrow Agreement, dated as of July
2, 1996.
+10.14 --Lease Agreement dated as of July 2, 1996 by and between Figgie
Properties, Inc. and Communications Instruments, Inc. dba Hartman
Division of CII Technologies Inc.
+10.15 --Form of CII Technologies Inc. 1996 Management Stock Plan.
+10.16 --First Amendment to Stock Subscription and Purchase Agreement dated
as of August 26, 1996, by and among the Company, CII, Kilovac and
the selling shareholders named therein.
10.17 --Exchange Agreement dated as of October 31, 1996 between the
Company and CII Associates, L.P.
+11 --Statement re computation of pro forma per share earnings.
+21 --Subsidiaries of Registrant.
23.1 --Consent of Deloitte & Touche LLP.
+23.2 --Consent of Simpson Thacher & Bartlett (included in Exhibit 5).
+24 --Powers of Attorney (included in the signature pages of this
registration statement)
+27.1 --Financial Data Schedule
</TABLE>
- --------
+ Previously filed.
(b) Financial Statement Schedules:
I. Condensed Financial Information of Registrant.
II-3
<PAGE>
SCHEDULE I
CII TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
I. CONDENSED FINANCIAL INFORMATION OF REGISTRANT..................... II-5
Notes to Condensed Financial Information of Registrant............. II-8
</TABLE>
Schedules not filed herewith are omitted because of the absence of conditions
under which they are required or because the information called for is shown in
the Consolidated Financial Statements or Notes thereto.
II-4
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ -------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Income tax receivable........................................ $ 60 $ 59
Current deferred tax asset................................... 249 455
------ -------
Total current assets....................................... 309 514
INVESTMENT IN SUBSIDIARY....................................... 7,862 10,538
------ -------
Total...................................................... $8,171 $11,052
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable due to subsidiary.................................... $ 256 $ 304
Accrued interest............................................. 615 1,141
------ -------
Total current liabilities.................................. 871 1,445
LONG-TERM DEBT................................................. 5,750 7,450
CUMULATIVE REDEEMABLE PREFERRED STOCK.......................... 2,287 4,497
COMMON STOCK SUBJECT TO PUT OPTIONS............................ 100 165
STOCKHOLDERS' EQUITY:
Common stock................................................. 9 9
Additional paid-in capital................................... 38 758
Accumulated deficit.......................................... (873) (3,236)
Currency translation loss.................................... (11) (36)
------ -------
Total...................................................... $8,171 $11,052
====== =======
</TABLE>
See notes to condensed financial statements.
II-5
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
MAY 11, 1993 -------------------------
TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------------- ------------ ------------
<S> <C> <C> <C>
INTEREST EXPENSE.................... $ 358 $ 554 $ 689
OTHER EXPENSE....................... -- -- 8
----- ----- -------
LOSS BEFORE EQUITY IN INCOME (LOSS)
OF SUBSIDIARY AND INCOME TAXES..... (358) (554) (697)
INCOME TAX EXPENSE (BENEFIT)........ 142 208 264
----- ----- -------
LOSS BEFORE EQUITY IN INCOME (LOSS)
OF SUBSIDIARY...................... (216) (346) (433)
EQUITY IN INCOME (LOSS) OF
SUBSIDIARY......................... (642) 618 (1,720)
----- ----- -------
NET INCOME (LOSS)................... $(858) $ 272 $(2,153)
===== ===== =======
</TABLE>
See notes to condensed financial statements.
II-6
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
MAY 11, 1993 -------------------------
TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------------- ------------ ------------
<S> <C> <C> <C>
NET CASH USED IN OPERATING
ACTIVITIES.......................... $ (121) $ (160) $ (114)
NET CASH USED IN INVESTING
ACTIVITIES--
Acquisition of Common Stock of
Communications Instruments, Inc... (7,904) -- (3,700)
NET CASH PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from issuance of debt..... 5,750 -- 1,700
Proceeds from issuance of preferred
stock............................. 2,000 -- 2,000
Proceeds from issuance of common
stock............................. 144 -- 56
Borrowings from subsidiary......... 121 135 48
Receipt on stock subscription
note.............................. 10 25 10
------- ------ -------
NET INCREASE (DECREASE) IN CASH...... -- -- --
CASH, BEGINNING OF PERIOD............ -- -- --
------- ------ -------
CASH, END OF PERIOD.................. $ -- $ -- $ --
======= ====== =======
</TABLE>
See notes to condensed financial statements.
II-7
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. BASIS OF PRESENTATION
The Condensed Financial Information of Registrant reflects the financial
statements of CII Technologies Inc. with its subsidiaries, Communications
Instruments, Inc. Kilovac Corporation, Kilovac International FSC Limited and
Electro-Mech, S.A. DE C.V., presented on the equity method of accounting in
order to comply with the requirements of Schedule I of the Form S-1 to be
filed with the Securities and Exchange Commission.
2. LONG-TERM DEBT
See Note 5 of the Notes to Consolidated Financial Statements.
3. CUMULATIVE REDEEMABLE PREFERRED STOCK AND COMMON STOCK SUBJECT TO PUT
OPTIONS
See Note 11 of the Notes to Consolidated Financial Statements.
4. COMMITMENTS AND CONTINGENCIES
See Note 8 of the Notes to Consolidated Financial Statements.
5. CASH DIVIDENDS PAID TO REGISTRANT
For the fiscal years ending December 31, 1993, 1994 and 1995, CII
Technologies Inc. did not receive any dividends.
II-8
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Representatives of the Underwriters at the closing specified in the
Underwriting Agreement certificates for Common Stock in such denominations and
registered in such names as required by the Representatives of the
Underwriters to permit prompt delivery to each purchaser of Common Stock.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act of 1933 shall be deemed to be a
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
FAIRVIEW, STATE OF NORTH CAROLINA, ON NOVEMBER 1, 1996.
CII Technologies Inc.
/s/ Ramzi A. Dabbagh
By __________________________________
RAMZI A. DABBAGH
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON NOVEMBER 1, 1996.
SIGNATURE TITLE
/s/ Ramzi A. Dabbagh Chairman of the Board of Directors,
- ------------------------------------- and Chief Executive Officer and
RAMZI A. DABBAGH Director (principal executive
officer)
/s/ G. Daniel Taylor* Executive Vice President of Business
- ------------------------------------- Development and Director
G. DANIEL TAYLOR
/s/ David Henning* Chief Financial Officer (principal
- ------------------------------------- financial and accounting officer)
DAVID HENNING
/s/ Michael A. Steinback* President of Communications
- ------------------------------------- Instruments Inc. and Director
MICHAEL A. STEINBACK
/s/ Douglas Campbell* President of Kilovac Division and
- ------------------------------------- Director
DOUGLAS CAMPBELL
II-10
<PAGE>
SIGNATURE TITLE
/s/ Michael S. Bruno, Jr.* Director
- -------------------------------------
MICHAEL S. BRUNO, JR.
/s/ Daniel A. Dye* Director
- -------------------------------------
DANIEL A. DYE
/s/ John P. Flanagan* Director
- -------------------------------------
JOHN P. FLANAGAN
/s/ Donald E. Dangott* Director
- -------------------------------------
DONALD E. DANGOTT
- --------
*By signing his name hereto, Ramzi A. Dabbagh signs this document on behalf of
each of the persons indicated above pursuant to powers of attorney duly
executed by such persons.
/s/ Ramzi A. Dabbagh
By: _________________________________
ATTORNEY IN FACT
II-11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------- ---------------------- ------------
<C> <S> <C>
1 --Form of Underwriting Agreement.
+3.1 --Form of Second Amended and Restated Certificate of
Incorporation.
+3.2 --Form of Amended and Restated Bylaws.
+4 --Form of Common Stock Certificate.
+5 --Opinion of Simpson Thacher & Bartlett (a partnership
which includes professional corporations) regarding
the legality of the Common Stock being registered.
+10.1 --Management Subscription Agreements between the
Company and Messrs. Dabbagh, Gordon, Taylor and
Flanagan.
+10.2 --Subscription Agreements between the Company and
Messrs. Dabbagh, Steinback, Henning, Anderson, Jr.,
McGill, Boyce and McClinton.
+10.3 --Registration Rights Agreement between the Company and
CII Associates, L.P.
+10.5 --Employment Agreement with Ramzi Dabbagh.
+10.6 --Employment Agreement with G. Daniel Taylor.
+10.7 --Employment Agreement with Douglas Campbell.
+10.8 --Employment Agreement with Michael Steinback.
+10.9 --Employment Agreement with David Henning.
+10.10 --Stock Subscription and Purchase Agreement dated as of
September 20, 1995, by and among CII, Kilovac
Corporation and the stockholders and optionholders of
Kilovac Corporation named therein.
+10.11 --Second Amended and Restated Loan and Security
Agreement dated as of July 2, 1996 among CII, the
financial institutions named therein (the "Lenders")
and Bank of America Illinois as agent for the Lenders.
+10.12 --Asset Purchase Agreement dated as of June 27, 1996
between Communications Instruments Inc. and Figgie
International Inc.
+10.13 --Environmental Remediation and Escrow Agreement, dated
as of July 2, 1996.
+10.14 --Lease Agreement dated as of July 2, 1996 by and
between Figgie Properties, Inc. and Communications
Instruments, Inc. dba Hartman Division of CII
Technologies Inc.
+10.15 --Form of CII Technologies Inc. 1996 Management Stock
Plan.
+10.16 --First Amendment to Stock Subscription and Purchase
Agreement dated as of August 26, 1996, by and among
the Company, CII, Kilovac and the Selling
Shareholders.
10.17 --Exchange Agreement dated as of October 31, 1996
between the Company and CII Associates, L.P.
+11 --Statement re computation of pro forma per share
earnings.
+21 --Subsidiaries of Registrant.
23.1 --Consent of Deloitte & Touche LLP.
+23.2 --Consent of Simpson Thacher & Bartlett (included in
Exhibit 5).
+24 --Powers of Attorney (included in the signature pages
of this registration statement)
+27.1 --Financial Data Schedule
</TABLE>
- -------
+ Previously filed.
<PAGE>
EXHIBIT 1
CII TECHNOLOGIES INC.
3,500,000 Shares/*/
Common Stock
UNDERWRITING AGREEMENT
November ___, 1996
WILLIAM BLAIR & COMPANY, L.L.C.
FURMAN SELZ LLC
As Representatives of the Several
Underwriters Named in Schedule A
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Section 1. Introductory. CII Technologies Inc. (the "Company"), a
Delaware corporation, proposes to issue and sell 3,500,000 shares of its
authorized but unissued Common Stock $0.01 par value per share ("Common Stock")
to the several underwriters named in Schedule A as it may be amended by the
Pricing Agreement hereinafter defined ("Underwriters"), who are acting severally
and not jointly. Such total of 3,500,000 shares of Common Stock proposed to be
sold by the Company is hereinafter referred to as the "Firm Shares." In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to 525,000 additional shares of Common Stock ("Option Shares") as
provided in Section 4 hereof. The Firm Shares and, to the extent such option is
exercised, the Option Shares, are hereinafter collectively referred to as the
"Shares."
You have advised the Company that the Underwriters propose to make a public
offering of their respective portions of the Shares as soon as you deem
advisable after the registration statement hereinafter referred to becomes
effective, if it has not yet become effective, and the Pricing Agreement
hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company and William Blair & Company, L.L.C. and Furman Selz
LLC (the "Representatives"), acting on behalf of the several Underwriters, shall
enter into an agreement substantially in the form of Exhibit A hereto (the
"Pricing Agreement"). The Pricing Agreement may take the form of an exchange of
any standard form of written telecommunication between the Company and the
Representatives and shall specify such applicable information as is indicated in
Exhibit A hereto. The offering of the Shares will be governed by this
Agreement, as supplemented by the Pricing Agreement. From and after the date of
the execution and delivery of the Pricing Agreement, this Agreement shall be
deemed to incorporate the Pricing Agreement.
The Company hereby confirms its agreements with the Underwriters as
follows:
- --------------
/*/Plus an option to acquire from the Company up to 525,000 additional shares to
cover overallotments.
<PAGE>
Section 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-08397) and a
related preliminary prospectus with respect to the Shares have been
prepared and filed with the Securities and Exchange Commission
("Commission") by the Company in conformity with the requirements of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "1933 Act;" all references herein
to specific rules are rules promulgated under the 1933 Act); the Company
has so prepared and has filed such amendments thereto, if any, and such
amended preliminary prospectuses as may have been required to the date
hereof and will file such additional amendments thereto and such amended
prospectuses as may hereafter be required. There have been or will
promptly be delivered to you three signed copies of such registration
statement and amendments, three copies of each exhibit filed therewith, and
conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus or prospectuses and
final forms of prospectus for each of the Underwriters.
Such registration statement (as amended, if applicable) at the time it
becomes effective and the prospectus constituting a part thereof (including
the information, if any, deemed to be part of the registration statement at
the time of effectiveness pursuant to Rule 430A(b) and/or Rule 434(d)), as
from time to time amended or supplemented, are hereinafter referred to as
the "Registration Statement" and the "Prospectus," respectively, except
that if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares which differs
from the Prospectus on file at the Commission at the time the Registration
Statement became or becomes effective (whether or not such revised
prospectus is required to be filed by the Company pursuant to Rule 424(b)),
the term "Prospectus" shall refer to such revised prospectus from and after
the time it was provided to the Underwriters for such use. If the Company
elects to rely on Rule 434 of the 1933 Act, all references to "Prospectus"
shall be deemed to include, without limitation, the form of prospectus and
the term sheet, taken together, provided to the Underwriters by the Company
in accordance with Rule 434 of the 1933 Act (the "Rule 434 Prospectus").
Any registration statement (including any amendment or supplement thereto
or information which is deemed to be a part thereof) filed by the Company
under Rule 462(b) (the "Rule 462(b) Registration Statement") shall be
deemed to be part of the "Registration Statement" as defined herein, and
any prospectus (including any amendment or supplement thereto or
information which is deemed a part thereof) included in such registration
statement shall be deemed to be a part of the "Prospectus" as defined
herein, as appropriate. The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder are hereinafter
collectively referred to as the "Exchange Act."
(b) The Commission has not issued any order preventing or suspending
the use of the preliminary prospectus dated October 9, 1996, and such
preliminary prospectus conformed in all material respects with the
requirements of the 1933 Act and, as of its date, did not include any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading; and when the
Registration Statement became or becomes effective, and at all times
subsequent thereto, up to the First Closing Date or the Second Closing Date
hereinafter defined, as the case may be, the Registration Statement,
including the information deemed to be part of the Registration Statement
at the time of effectiveness pursuant to Rule 430A(b) or Rule 434(d), if
applicable, and the Prospectus and any amendments or supplements thereto,
contained or will contain all statements that are required to be stated
therein in accordance with the 1933 Act and in all material
-2-
<PAGE>
respects conformed or will in all material respects conform to the
requirements of the 1933 Act, and neither the Registration Statement nor
the Prospectus contained in the Registration Statement as of its effective
date, nor any amendment or supplement thereto, included or will include any
untrue statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company
makes no representation or warranty as to information contained in or
omitted from any preliminary prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives specifically for use
in the preparation thereof.
(c) Communications Instruments, Inc., a North Carolina corporation
("CII"), and Kilovac Corporation, a California corporation ("Kilovac,"
together with CII, the "Subsidiaries"), constitute the Company's only
"significant subsidiaries" (as such term is defined in Rule 405 of
Regulation C under the 1933 Act).
(d) The Company and the Subsidiaries have been duly incorporated and
are validly existing as corporations in good standing under the laws of
their respective places of incorporation, with corporate power and
authority to own their properties and conduct their business as described
in the Prospectus; the Company and the Subsidiaries are duly qualified to
do business as foreign corporations under the corporation law of, and are
in good standing as such in, each jurisdiction in which such qualification
is required except in any such case where the failure to so qualify or be
in good standing would not have a material adverse effect upon the Company
and the Subsidiaries taken as a whole; and no proceeding of which the
Company has knowledge has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail,
such power and authority or qualification.
(e) Upon consummation of the Kilovac Share Exchange (as described in
the Registration Statement), the Company will own directly or indirectly
100 percent of the issued and outstanding capital stock of the Subsidiaries
and all of such capital stock has been duly authorized and validly issued
and is fully paid and nonassessable. Except for the pledge of such shares
to secure the Company's senior credit facility as disclosed in the
Registration Statement, upon consummation of the Kilovac Share Exchange the
Company will own all of the issued and outstanding capital stock of the
Subsidiaries free and clear of any claims, liens, encumbrances or security
interests.
(f) As of the date hereof, the Company's authorized capital stock
consists of 25,000,000 shares of Common Stock and 5,000,000 shares of
Preferred Stock, of which 1,020,000 shares of Common Stock, and 80,000
shares of Preferred Stock are issued and outstanding. As of the First
Closing Date (as defined in Section 4), the issued and outstanding shares
of capital stock of the Company as set forth in the Prospectus will have
been duly authorized and validly issued, will be fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus.
(g) The Shares to be sold by the Company have been duly authorized and
when issued, delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable, and will conform to the
description thereof contained in the Prospectus.
(h) The making and performance by the Company of this Agreement and
the Pricing Agreement have been duly authorized by all necessary corporate
action and will not violate any
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provision of the Company's charter or bylaws and will not result in the
breach, or be in contravention, of any provision of any agreement,
franchise, license, indenture, mortgage, deed of trust, or other instrument
to which the Company or either of the Subsidiaries are a party or by which
the Company, either of the Subsidiaries or the property of any of them may
be bound or affected, or any order, rule or regulation applicable to the
Company or either of the Subsidiaries of any court or regulatory body,
administrative agency or other governmental body applicable to the Company
or either of the Subsidiaries or any of their respective properties, or any
order of any court or governmental agency or authority entered in any
proceeding to which the Company or either of the Subsidiaries were or are
now a party or by which any of them are bound, except, in any such case,
for such breaches or contraventions which would not have a material adverse
effect on the Company and the Subsidiaries taken as a whole. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the Pricing Agreement or the
consummation of the transactions contemplated herein or therein, except for
compliance with the 1933 Act and blue sky laws applicable to the public
offering of the Shares by the several Underwriters and clearance of such
offering with the National Association of Securities Dealers, Inc.
("NASD"). This Agreement has been duly executed and delivered by the
Company.
(i) The accountants who have expressed their opinions with respect to
certain of the financial statements and schedules included in the
Registration Statement are independent accountants with respect to the
Company and Kilovac as required by the 1933 Act.
(j) The consolidated financial statements and schedules of the
Company, Kilovac and their respective subsidiaries included in the
Registration Statement present fairly the consolidated financial position
of the Company, Kilovac and their respective subsidiaries as of the
respective dates of such financial statements, and the consolidated results
of operations and cash flows of the Company, Kilovac and their respective
subsidiaries for the respective periods covered thereby, all in conformity
with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed in the Prospectus, and
the supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. The financial
information set forth in the Prospectus under "Selected Consolidated
Financial Information" presents fairly, on the basis stated in the
Prospectus, the information set forth therein.
The financial statements of the Hartman Electrical Manufacturing
Division of Figgie International, Inc. ("Hartman") included in the
Registration Statement present fairly the consolidated financial position
of Hartman as of the respective dates of such financial statements, and the
results of operations and cash flows of Hartman for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed in the Prospectus.
The pro forma financial statements and other pro forma financial
information included in the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements and other pro
forma information, have been properly compiled on the pro forma bases
described therein, and in the opinion of the Company, the assumptions used
in the preparation thereof are reasonable and the adjustments used therein
are appropriate to give effect to the transactions or circumstances
referred to therein.
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(k) Neither the Company nor either of the Subsidiaries is in violation
of its charter or in default under any consent decree, or in default with
respect to any material provision of any lease, loan agreement, franchise,
license, permit or other contract obligation to which it is a party, in
each case, except for defaults which neither singly nor in the aggregate
are material to the Company and the Subsidiaries taken as a whole; and
there does not exist any state of facts which constitutes an event of
default as defined in such documents or which, with notice or lapse of time
or both, would constitute such an event of default, in each case, except
for defaults which neither singly nor in the aggregate are material to the
Company and the Subsidiaries taken as a whole.
(l) There are no material legal or governmental proceedings pending,
or to the Company's knowledge, threatened to which the Company or either of
the Subsidiaries is or may be a party or of which material property owned
or leased by the Company or either of the Subsidiaries is or may be the
subject, or related to environmental or discrimination matters which are
not disclosed in the Prospectus, or which question the validity of this
Agreement or the Pricing Agreement or any action taken or to be taken
pursuant hereto or thereto.
(m) There are no holders of securities of the Company having rights to
registration thereof or preemptive rights to purchase Common Stock except
as disclosed in the Prospectus. Holders of registration rights have waived
such rights with respect to the offering being made by the Prospectus.
(n) The Company and the Subsidiaries have good and marketable title to
all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except
those, if any, reflected in such financial statements or in the notes to
such financial statements (or elsewhere in the Prospectus) or which are not
material to the Company and the Subsidiaries taken as a whole, or liens for
taxes not yet due and payable. The Company and each of the Subsidiaries
hold their respective leased properties which are material to the Company
and the Subsidiaries taken as a whole under valid and binding leases.
(o) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares.
(p) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
contemplated by the Prospectus, the Company and the Subsidiaries, taken as
a whole, have not incurred any material liabilities or obligations, direct
or contingent, nor entered into any material transactions not in the
ordinary course of business and there has not been any material adverse
change in their condition (financial or otherwise) or results of operations
nor any material change in their capital stock, short-term debt or long-
term debt.
(q) The Company agrees not to sell, contract to sell or otherwise
dispose of any Common Stock or securities convertible into Common Stock
(except Common Stock issued pursuant to currently outstanding options), for
a period of 365 days after this Agreement becomes effective without the
prior written consent of the Representatives, except that (i) the Company
may grant stock options and issue Common Stock pursuant to the Company's
existing stock option plan, provided that the shares of Common Stock issued
upon exercise of such
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<PAGE>
options shall be subject to the restrictions of this subsection (q) until
the expiration of such 365 day period, and (ii) the Company may issue
Common Stock in connection with the acquisition of businesses, companies or
assets, so long as the recipients of such shares agree to adhere to the
restrictions of this subsection (q) until the expiration of such 365 day
period. The Company has obtained, or will obtain similar agreements from
each stockholder, director and executive officer of the Company as required
by Section 7(f)(v) of this Agreement.
(r) There is no material document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required.
(s) The Company together with the Subsidiaries owns and possesses all
right, title and interest in and to, or has duly licensed from third
parties, all patents, trademarks, copyrights and other proprietary rights
("Trade Rights") material to the business of the Company and the
Subsidiaries taken as a whole. Neither the Company nor either of the
Subsidiaries has received any notice of infringement, misappropriation or
conflict from any third party as to such material Trade Rights which has
not been resolved or disposed of and neither the Company nor either of the
Subsidiaries has any knowledge of having infringed, misappropriated or
otherwise conflicted with material Trade Rights of any third parties, which
infringement, misappropriation or conflict would have a material adverse
effect upon the condition (financial or otherwise) or results of operations
of the Company and the Subsidiaries taken as a whole.
(t) The conduct of the business of the Company and the Subsidiaries is
in compliance in all respects with applicable federal, state, local and
foreign laws and regulations, except where the failure to be in compliance
would not have a material adverse effect upon the condition (financial or
otherwise) or results of operations of the Company and the Subsidiaries
taken as a whole.
(u) All offers and sales of the Company's capital stock prior to the
date hereof were at all relevant times exempt from the registration
requirements of the 1933 Act and have been duly registered with or the
subject of an available exemption from the registration requirements of the
applicable state securities or blue sky laws.
(v) The Company has filed all necessary federal and state income and
material franchise tax returns (other than those filings being contested in
good faith) and has paid all taxes shown as due thereon, and, except as
disclosed in the Prospectus, there is no tax deficiency that has been, or
to the knowledge of the Company might be, asserted against the Company or
either of the Subsidiaries or any of their properties or assets that would
or could be expected to have a material adverse affect upon the condition
(financial or otherwise) or results of operations of the Company and the
Subsidiaries taken as a whole.
(w) The Company has filed a registration statement pursuant to Section
12(g) of the Exchange Act to register the Common Stock thereunder, has
filed an application to list the Shares on the Nasdaq National Market, and
has received notification that the listing has been approved, subject to
notice of issuance or sale of the Shares, as the case may be.
(x) The Company is not, and does not intend to conduct its business in
a manner in which it would become, an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940, as amended ("Investment
Company Act").
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<PAGE>
(y) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-
198, An Act Relating to Disclosure of Doing Business with Cuba, and the
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Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported in
the Prospectus, if any, concerning the Company's business with Cuba or with
any person or affiliate located in Cuba changes in any material way, the
Company will provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
Section 3. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (a) on the cover page of the
Prospectus with respect to price, underwriting discount and terms of the
offering and (b) under "Underwriting" in the Prospectus was furnished to the
Company by and on behalf of the Underwriters for use in connection with the
preparation of the Registration Statement and is correct and complete in all
material respects.
Section 4. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters named in Schedule A hereto, and the Underwriters agree, severally
and not jointly, to purchase from the Company 3,500,000 Firm Shares at the price
per share set forth in the Pricing Agreement. The obligation of each
Underwriter to the Company shall be to purchase from the Company that number of
full shares which (as nearly as practicable, as determined by you) bears to
3,500,000 the same proportion as the number of Shares set forth opposite the
name of such Underwriter in Schedule A hereto bears to the total number of Firm
Shares to be purchased by all Underwriters under this Agreement. The initial
public offering price and the purchase price shall be set forth in the Pricing
Agreement.
At 9:00 A.M., Chicago Time, on the fourth business day, if permitted under
Rule 15c6-1 under the Exchange Act (or the third business day if required under
Rule 15c6-1 under the Exchange Act or unless postponed in accordance with the
provisions of Section 11 hereof) following the date the Registration Statement
becomes effective (or, if the Company has elected to rely upon Rule 430A, the
fourth business day, if permitted under Rule 15c6-1 under the Exchange Act (or
the third business day if required under Rule 15c6-1 under the Exchange Act)
after execution of the Pricing Agreement), or such other time not later than ten
business days after such date as shall be agreed upon by the Representatives and
the Company, the Company will deliver to you at the offices of counsel for the
Underwriters or through the facilities of The Depository Trust Company for the
accounts of the several Underwriters, certificates representing the Firm Shares
to be sold by them, respectively, against payment of the purchase price therefor
by certified or bank cashier's checks, or wire transfer of immediately available
funds, payable to the order of the Company. Such time of delivery and payment
is herein referred to as the "First Closing Date." The certificates for the Firm
Shares so to be delivered will be in such denominations and registered in such
names as you request by notice to the Company prior to 10:00 A.M., Chicago Time,
on the third full business day preceding the First Closing Date, and will be
made available at the Company's expense for checking and packaging by William
Blair & Company, L.L.C. at 10:00 A.M., Chicago Time, on the first full business
day preceding the First Closing Date. Payment for the Firm Shares so to be
delivered shall be made at the time and in the manner described above at the
offices of counsel for the Underwriters.
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<PAGE>
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 525,000 Option Shares, at the
same purchase price per share to be paid for the Firm Shares, for use solely in
covering any overallotments made by the Underwriters in the sale and
distribution of the Firm Shares. The option granted hereunder may be exercised
at any time (but not more than once) within 30 days after the date of the
initial public offering upon notice by you to the Company setting forth the
aggregate number of Option Shares as to which the Underwriters are exercising
the option, the names and denominations in which the certificates for such
shares are to be registered and the time and place at which such certificates
will be delivered. Such time of delivery (which may not be earlier than the
First Closing Date), being herein referred to as the "Second Closing Date,"
shall be determined by you, but if at any time other than the First Closing
Date, shall not be earlier than three nor later than 10 full business days after
delivery of such notice of exercise. The number of Option Shares to be
purchased by each Underwriter shall be determined by multiplying the number of
Option Shares to be sold by the Company pursuant to such notice of exercise by a
fraction, the numerator of which is the number of Firm Shares to be purchased by
such Underwriter as set forth opposite its name in Schedule A and the
denominator of which is the total number of Firm Shares (subject to such
adjustments to eliminate any fractional share purchases as you in your absolute
discretion may make). Certificates for the Option Shares will be made available
at the Company's expense for checking and packaging at 10:00 A.M., Chicago Time,
on the first full business day preceding the Second Closing Date. The manner of
payment for and delivery of the Option Shares shall be the same as for the Firm
Shares as specified in the preceding paragraph.
You have advised the Company that each Underwriter has authorized you to
accept delivery of its Shares, to make payment and to receipt therefor. You,
individually and not as the Representatives of the Underwriters, may make
payment for any Shares to be purchased by any Underwriter whose funds shall not
have been received by you by the First Closing Date or the Second Closing Date,
as the case may be, for the account of such Underwriter, but any such payment
shall not relieve such Underwriter from any obligation hereunder.
Section 5. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will advise you promptly of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, or of any notification of the suspension of qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceedings for that purpose, and will also advise you promptly of any
request of the Commission for amendment or supplement of the Registration
Statement, of any preliminary prospectus or of the Prospectus, or for
additional information.
(b) The Company will give you notice of its intention to file or
prepare any amendment to the Registration Statement (including any post-
effective amendment) or any Rule 462(b) Registration Statement or any
amendment or supplement to the Prospectus (including any revised prospectus
which the Company proposes for use by the Underwriters in connection with
the offering of the Shares which differs from the prospectus on file at the
Commission at the time the Registration Statement became or becomes
effective, whether or not such revised prospectus is required to be filed
pursuant to Rule 424(b) and any term sheet as contemplated by Rule 434) and
will furnish you with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case
may be, and will not file any such amendment or supplement or use any such
prospectus to which you or counsel for the Underwriters shall reasonably
object.
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<PAGE>
(c) If the Company elects to rely on Rule 434 of the 1933 Act, the
Company will prepare a term sheet that complies with the requirements or
Rule 434. If the Company elects not to rely on Rule 434, the Company will
provide the Underwriters with copies of the form of prospectus, in such
numbers as the Underwriters may reasonably request, and file with the
Commission such prospectus in accordance with Rule 424(b) of the 1933 Act
by the close of business in New York City on the second business day
immediately succeeding the date of the Pricing Agreement. If the Company
elects to rely on Rule 434, the Company will provide the Underwriter with
copies of the form of Rule 434 Prospectus, in such numbers as the
Underwriters may reasonably request, by the close of business in New York
on the business day immediately succeeding the date of the Pricing
Agreement.
(d) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act any event occurs as a result of
which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements thereto and including
any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs
from the prospectus on file with the Commission at the time of
effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply with
the 1933 Act, the Company promptly will advise you thereof and will
promptly prepare and file with the Commission an amendment or supplement
which will correct such statement or omission or an amendment which will
effect such compliance; and, in case any Underwriter is required to deliver
a prospectus nine months or more after the effective date of the
Registration Statement, the Company upon request, but at the expense of
such Underwriter, will prepare promptly such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section
10(a)(3) of the 1933 Act.
(e) Neither the Company nor either of the Subsidiaries will acquire
any capital stock of the Company prior to the earlier of the Second Closing
Date or termination or expiration of the related option, nor will the
Company declare or pay any dividend or make any other distribution upon the
Common Stock payable to stockholders of record on a date prior to the
earlier of the Second Closing Date or termination or expiration of the
related option, except in either case as contemplated by the Prospectus.
(f) The Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of at
least 12 months beginning after the effective date of the Registration
Statement, which will satisfy the provisions of the last paragraph of
Section 11(a) of the 1933 Act and Rule 158 thereunder.
(g) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an
Underwriter or dealer, the Company will furnish to you at its expense,
subject to the provisions of subsection (b) hereof, copies of the
Registration Statement, the Prospectus, each preliminary prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may reasonably request, for the
purposes contemplated by the 1933 Act.
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(h) The Company will cooperate with the Underwriters to qualify or
register the Shares for sale under the blue sky laws of such jurisdictions
as you designate, and will continue such qualifications in effect so long
as reasonably required for the distribution of the Shares. The Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction where it is
not currently qualified or where it would be subject to taxation as a
foreign corporation.
(i) During the period of five years hereafter, provided that the
Common Stock remains registered pursuant to the Exchange Act, the Company
will furnish you and, if so requested by any other Underwriter, each such
requesting Underwriter with a copy (i) as soon as practicable after the
filing thereof, of each report filed by the Company with the Commission,
any securities exchange or the NASD; (ii) as soon as practicable after the
release thereof, of each material press release in respect of the Company;
and (iii) as soon as available, of each report of the Company mailed to
stockholders.
(j) The Company will use the net proceeds received by it from the sale
of the Shares being sold by it in the manner specified in the Prospectus.
(k) If, at the time of effectiveness of the Registration Statement,
any information shall have been omitted therefrom in reliance upon Rule
430A and/or Rule 434, then immediately following the execution and delivery
of the Pricing Agreement, the Company will prepare, and file or transmit
for filing with the Commission in accordance with such Rule 430A, Rule
424(b) and/or Rule 434, as the case may be, copies of an amended prospectus
or term sheet, as the case may be, or, if required by such Rule 430A or
Rule 434, as the case may be, a post-effective amendment to the
Registration Statement (including an amended prospectus), containing all
information so omitted. If required, the Company will prepare and file, or
transmit for filing, a Rule 462(b) Registration Statement not later than
the date of the execution of the Pricing Agreement. If a 462(b)
Registration Statement is filed, the Company shall make payment of, or
arrange for payment of, the additional registration fee owing to the
Commission required by Rule 111.
(l) The Company will comply with all registration, filing and
reporting requirements of the Exchange Act and the Nasdaq National Market
and will file with the Commission in a timely manner all reports on Form SR
required by Rule 463 and will furnish you copies of any such reports as
soon as practicable after the filing thereof.
Section 6. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as to
all of its provisions or is terminated, the Company agrees to pay (i) all costs,
fees and expenses (other than legal fees and disbursements of counsel for the
Underwriters, the costs and expenses of the Underwriters, any transfer taxes on
the Shares which they may sell and the expenses of advertising any offering of
the Shares made by the Underwriters) incurred in connection with the performance
of the Company's obligations hereunder, including without limiting the
generality of the foregoing, all fees and expenses of legal counsel for the
Company and of the Company's independent accountants, all costs and expenses
incurred in connection with the preparation, printing, filing and distribution
of the Registration Statement, each preliminary prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, this Agreement, the Pricing Agreement and the
Blue Sky Memorandum, (ii) all costs, fees and expenses (including legal fees not
to exceed $15,000 and disbursements of counsel for the Underwriters) incurred by
the Underwriters in connection with qualifying or registering all or any part of
the Shares for offer and sale under blue sky laws, including the
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preparation of a blue sky memorandum relating to the Shares, and clearance of
such offering with the NASD; and (iii) all fees and expenses of the Company's
transfer agent, printing of the certificates for the Shares and all transfer
taxes, if any, with respect to the sale and delivery of the Shares to the
several Underwriters.
Section 7. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Shares
on the First Closing Date and the Option Shares on the Second Closing Date shall
be subject to the accuracy of the representations and warranties on the part of
the Company herein set forth as of the date hereof and as of the First Closing
Date or the Second Closing Date, as the case may be, to the accuracy of the
statements of officers of the Company made pursuant to the provisions hereof, to
the performance by the Company of its obligations hereunder, and to the
following additional conditions:
(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 1:00 P.M.,
Chicago Time, on the first full business day after the date of this
Agreement, or such later time as shall have been consented to by you but in
no event later than 1:00 P.M., Chicago Time, on the third full business day
following the date hereof; and prior to the First Closing Date or the
Second Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued, and no
proceedings for that purpose shall have been instituted or shall be pending
or, to the knowledge of the Company or you, shall be contemplated by the
Commission. If the Company has elected to rely upon Rule 430A and/or Rule
434, the information concerning the initial public offering price of the
Shares and price-related information shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed period
and the Company will provide evidence satisfactory to the Representatives
of such timely filing (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with
the requirements of Rules 430A and 424(b)). If a Rule 462(b) Registration
Statement is required, such Registration Statement shall have been
transmitted to the Commission for filing and become effective within the
prescribed time period and, prior to the First Closing Date, the Company
shall provide evidence of such filing and effectiveness in accordance with
Rule 462(b).
(b) The Shares shall have been qualified for sale under the blue sky
laws of such states as shall have been specified by the Representatives.
(c) The legality and sufficiency of the authorization, issuance and
sale or transfer and sale of the Shares hereunder, the validity and form of
the certificates representing the Shares, the execution and delivery of
this Agreement and the Pricing Agreement, and all corporate proceedings and
other legal matters incident thereto, and the form of the Registration
Statement and the Prospectus (except financial statements) shall have been
approved by counsel for the Underwriters exercising reasonable judgment.
(d) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of fact, which, in the opinion of counsel for
the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or necessary to make the statements therein not misleading.
(e) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any change, or any development involving a
prospective change, in or affecting
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particularly the business or properties of the Company or either of the
Subsidiaries, otherwise than as described in the Prospectus, the effect of
which is, in the judgment of the Representatives, so material and adverse
as to make it impractical or inadvisable to proceed with the public
offering or purchase of the Shares as contemplated hereby.
(f) There shall have been furnished to you, as Representatives of the
Underwriters, on the First Closing Date or the Second Closing Date, as the
case may be, except as otherwise expressly provided below:
(i) An opinion of Simpson Thacher & Bartlett, counsel for the Company
(or McGuire, Wood and Bissette P.A. regarding the matters referenced
in paragraphs (2) and (3) below), addressed to the Underwriters and
dated the First Closing Date or the Second Closing Date, as the case
may be, to the effect that:
(1) the Company has been duly incorporated and is validly
existing and in good standing as a corporation under the laws of
the State of Delaware and has full corporate power and authority
to conduct its business as described in the Prospectus;
(2) CII has been duly incorporated and is validly existing and
in good standing under the laws of the State of North Carolina,
with corporate power and authority to own its properties and
conduct its business as described in the Prospectus; and CII has
been duly qualified to do business as a foreign corporation under
the corporation laws of, and is in good standing as such in, the
states of Ohio and Texas; all actions and documents necessary to
consummate the merger of Kilovac with and into CII in accordance
with all requirements of North Carolina law have been duly taken
and appropriately filed with the North Carolina Secretary of
State, and upon issuance of the proper certificate or other
document by such North Carolina Secretary of State, such merger
will have been consummated in accordance with North Carolina law;
(3) all of the issued and outstanding capital stock of CII has
been duly authorized, validly issued and is fully paid and
nonassessable, and, except for the pledge of such shares to secure
the Company's senior credit facility as disclosed in the
Registration Statement, to the knowledge of such counsel, the
Company owns directly or indirectly 100 percent of the outstanding
capital stock of CII and such stock is owned free and clear of any
claims, liens, encumbrances or security interests;
(4) the issued and outstanding capital stock of the Company
has been duly authorized and validly issued and is fully paid and
nonassessable;
(5) the form of the certificate for the Shares to be delivered
hereunder is in due and proper form, and when the certificates for
the Shares are duly countersigned by the Company's transfer agent
and delivered to you or upon your order against payment of the
agreed consideration therefor in accordance with the provisions of
this Agreement and the Pricing Agreement, the Shares represented
thereby will be duly authorized and validly issued, fully paid and
nonassessable;
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<PAGE>
(6) the Registration Statement has become effective under the
1933 Act, and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for that purpose have been
instituted or threatened by the Commission, and the Registration
Statement as of its effective date, and the Prospectus, as of
November ___, 1996 (except for the financial statements and other
statistical or financial data included therein as to which such
counsel need express no opinion), comply as to form in all
material respects with the requirements of the 1933 Act;
(7) such counsel does not know of any legal or governmental
proceedings pending or threatened which are required to be
described in the Prospectus which are not described as required,
nor of any contracts or documents of a character required to be
described in the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement which are not
described or filed, as required;
(8) the statements under the captions "Description of Capital
Stock" and "Shares Eligible for Future Sale" in the Prospectus,
insofar as such statements purport to constitute a summary of
documents referred to therein or matters of law, are accurate
summaries and fairly and correctly present, in all material
respects, the information called for with respect to such
documents and matters;
(9) this Agreement and the Pricing Agreement (and the
performance of the Company's obligations hereunder) have been duly
authorized by the Company, and this Agreement and the Pricing
Agreement have been duly executed and delivered by the Company,
and assuming due authorization, execution and delivery by the
Representatives on behalf of the Underwriters, constitute a valid
and legally binding obligation of the Company and no consent,
approval, authorization, order, registration or qualification of
or with any federal or New York governmental agency or body or any
Delaware governmental agency or body acting pursuant to the
Delaware General Corporation Law or, to such counsel's knowledge,
any federal or New York court or any Delaware court acting
pursuant to the Delaware General Corporation Law, is necessary in
connection with the issue and sale of the Shares by the Company
pursuant to this Agreement (except for the registration under the
1933 Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters) or
the performance by the Company of its obligations hereunder;
(10) the execution and performance by the Company of this
Agreement will not result in a breach or default under, any
agreement, franchise, license, indenture, mortgage, deed of trust,
or other instrument filed as an exhibit to the Registration
Statement, or violate any of the provisions of the charter or
bylaws of the Company, or violate the Delaware General Corporate
Law, or any federal or New York statute, rule or regulation, or,
so far as is known to such counsel, any order issued by a court or
governmental agency or body having jurisdiction over the Company
or either of the Subsidiaries pursuant to the Delaware General
Corporate law, or any federal or New York statute, rule or
regulation;
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<PAGE>
(11) the Company is not an "investment company" within the
meaning of, and subject to regulation under, the Investment
Company Act; and
(12) to such counsel's knowledge, all offers and sales of the
capital stock of the Company since April 29, 1993 were exempt from
the registration requirements of the 1933 Act.
In rendering such opinion, such counsel may state that they
are relying upon the certificate of First Union National Bank of North
Carolina, the transfer agent for the Common Stock, as to the number of
shares of Common Stock at any time or times outstanding, and that
insofar as the statements made pursuant to the next paragraph relate
to the accuracy and completeness of the Prospectus and Registration
Statement, it is based upon a general review with the Company's
representatives and independent accountants of the information
contained therein, without independent verification by such counsel of
the accuracy or completeness of such information. Such counsel may
also rely upon the opinions of other competent counsel and, as to
factual matters, on certificates and of officers of the Company and of
state officials, in which case their opinion is to state that they are
so doing and copies of said opinions or certificates are to be
attached to the opinion unless said opinions or certificates (or, in
the case of certificates, the information therein) have been furnished
to the Representatives in other form.
(i) Such counsel shall also have furnished to you, as
Representatives of the Underwriters, a written statement, addressed to
the Underwriters and dated the First Closing Date or Second Closing
Date, as the case may be, to the effect that such counsel has no
reason to believe that the Registration Statement at its effective
date contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary in
order to make the statements contained therein not misleading, or that
the Prospectus as of its issue date or the date of such opinion
includes or included any untrue statement of a material fact or omits
or omitted to state a material fact necessary to make the statements
therein not misleading in light of the circumstances under which they
were made (it being understood that such counsel need not express any
belief with respect to the financial statements, schedules and other
financial and statistical data included in the Registration Statement
or the Prospectus);
(ii) Such opinion or opinions of Gardner, Carton & Douglas,
counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the Shares to be sold by
the Company, the Registration Statement and the Prospectus and other
related matters as you may reasonably require, and the Company shall
have furnished to such counsel such documents and shall have exhibited
to them such papers and records as they request for the purpose of
enabling them to pass upon such matters.
(iii) A certificate of the chief executive officer and the
principal financial officer of the Company, dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect
that:
(1) the representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or the
Second Closing Date, as the case may be,
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<PAGE>
and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date; and
(2) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any preliminary prospectus
filed as a part of the Registration Statement or any amendment
thereto; no stop order suspending the effectiveness of the
Registration Statement has been issued, which order remains in
effect; and to the best knowledge of the respective signers, no
proceedings for that purpose have been instituted or are pending
or contemplated under the 1933 Act.
The delivery of the certificate provided for in this
subparagraph shall be and constitute a representation and warranty of
the Company as to the facts required in the immediately foregoing
clauses (1) and (2) of this subparagraph to be set forth in said
certificate.
(iv) At the time the Pricing Agreement is executed and also on the
First Closing Date or the Second Closing Date, as the case may be,
there shall be delivered to you a letter addressed to you, as
Representatives of the Underwriters, from Deloitte & Touche LLP,
independent accountants, the first one to be dated the date of the
Pricing Agreement, the second one to be dated the First Closing Date
and the third one (in the event of a second closing) to be dated the
Second Closing Date, to the effect set forth in Schedule B. There
shall not have been any change or decrease specified in the letters
referred to in this subparagraph which makes it impractical or
inadvisable in the judgment of the Representatives to proceed with the
public offering or purchase of the Shares as contemplated hereby.
(v) At the time the Pricing Agreement is executed, there shall be
delivered to you a letter from each individual, entity, stockholder,
director and executive officer of the Company identified in Schedule C
hereto, in which each such person agrees not to sell, contract to sell
or otherwise dispose of any Common Stock or securities convertible
into Common Stock (including Common Stock issued pursuant to currently
outstanding options) for a period of 365 days after the date of such
letter without the prior written consent of the Representatives.
(vi) Such further certificates and documents as you may reasonably
request.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to
you and to Gardner, Carton & Douglas, counsel for the Underwriters,
which approval shall not be unreasonably withheld. The Company shall
furnish you with such manually signed or conformed copies of such
opinions, certificates, letters and documents as you request.
(g) Prior to, or simultaneous with, the First Closing Date, the
"Kilovac Share Exchange" (as described in the Prospectus) shall have been
consummated by the Company and each shareholder of Kilovac.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification to the
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<PAGE>
Company without liability on the part of any Underwriter or the Company, except
for the expenses to be paid or reimbursed by the Company pursuant to Sections 6
and 8 hereof and except to the extent provided in Section 10 hereof.
Section 8. Reimbursement of Underwriters' Expenses. If the sale to the
Underwriters of the Shares on the First Closing Date is not consummated because
any condition of the Underwriters' obligations hereunder is not satisfied or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, unless such
failure to satisfy such condition or to comply with any provision hereof is due
to the default or omission of any Underwriter, the Company agrees to reimburse
you and the other Underwriters upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
reasonably incurred by you and them in connection with the proposed purchase and
the sale of the Shares. Any such termination shall be without liability of any
party to any other party except that the provisions of this Section, Section 6
and Section 10 shall at all times be effective and shall apply.
Section 9. Effectiveness of Registration Statement. You and the Company
will use your and its best efforts to cause the Registration Statement to become
effective, if it has not yet become effective, and to prevent the issuance of
any stop order suspending the effectiveness of the Registration Statement and,
if such stop order be issued, to obtain as soon as possible the lifting thereof.
Section 10. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the 1933 Act or the Exchange Act against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the 1933 Act, the Exchange Act
or other federal or state statutory law or regulation, at common law or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, including the information deemed
to be part of the Registration Statement at the time of effectiveness pursuant
to Rule 430A and/or Rule 434(d), if applicable, any preliminary prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and will reimburse each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that (i) any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use therein; or (ii) if such statement or
omission was contained or made in any preliminary prospectus and corrected in
the Prospectus and (1) any such loss, claim, damage or liability suffered or
incurred by any Underwriter (or any person who controls any Underwriter)
resulted from an action, claim or suit by any person who purchased Shares which
are the subject thereof from such Underwriter in the offering and (2) such
Underwriter failed to deliver or provide a copy of the Prospectus, as then
amended or supplemented, to such person at or prior to the confirmation of the
sale of such Shares in any case where such delivery is required by the 1933 Act.
In addition to its other obligations under this Section 10(a), the Company
agrees that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in this
Section 10(a), it will reimburse the Underwriters on a monthly
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basis for all reasonable legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, and each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the 1933 Act or the Exchange Act, against any losses, claims,
damages or liabilities to which the Company, or any such director, officer or
controlling person may become subject under the 1933 Act, the Exchange Act or
other federal or state statutory law or regulation, at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of such Underwriter), insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
the Registration Statement, any preliminary prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus, or any amendment or
supplement thereto in reliance upon and in conformity with Section 3 of this
Agreement or any other written information furnished to the Company by such
Underwriter through the Representatives specifically for use in the preparation
thereof; and will reimburse any legal or other expenses reasonably incurred by
the Company, or any such director, officer or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action. In addition to their other obligations under this Section 10(b), the
Underwriters agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 10(b), they will reimburse the Company on a monthly basis for all
reasonable legal and other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. This indemnity agreement will be
in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party except to the extent that
the indemnifying party was prejudiced by such failure to notify. In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying parties similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to those
available to the indemnifying party, or the indemnified and indemnifying parties
may have conflicting interests which would make it inappropriate for the same
counsel to represent both of them, the indemnified party
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<PAGE>
or parties shall have the right to select separate counsel to assume such legal
defense and otherwise to participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defense in accordance
with the proviso to the preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Representatives in the case of paragraph (a)
representing all indemnified parties not having different or additional defenses
or potential conflicting interest among themselves who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. No indemnifying party shall,
without the prior written consent of the indemnified party (which consent shall
not be unreasonably withheld), effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability arising out of such proceeding.
(d) If the indemnification provided for in this Section is unavailable to
an indemnified party under paragraphs (a) or (b) hereof in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company and
the Underwriters shall be deemed to be in the same proportion in the case of the
Company, as the total price paid to the Company for the Shares by the
Underwriters (net of underwriting discount but before deducting expenses), and
in the case of the Underwriters as the underwriting discount received by them
bears to the total of such amounts paid to the Company and received by the
Underwriters as underwriting discount in each case as contemplated by the
Prospectus. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section, no Underwriter shall be required
to contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or
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<PAGE>
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section are several in proportion to their respective underwriting commitments
and not joint.
(e) The provisions of this Section shall survive any termination of this
Agreement.
Section 11. Default of Underwriters. It shall be a condition to the
agreement and obligation of the Company to sell and deliver the Shares
hereunder, and of each Underwriter to purchase the Shares hereunder, that,
except as hereinafter in this paragraph provided, each of the Underwriters shall
purchase and pay for all Shares agreed to be purchased by such Underwriter
hereunder upon tender to the Representatives of all such Shares in accordance
with the terms hereof. If any Underwriter or Underwriters default in their
obligations to purchase Shares hereunder on the First Closing Date or the Second
Closing Date and the aggregate number of Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10
percent of the total number of Shares which the Underwriters are obligated to
purchase on the First Closing Date or the Second Closing Date, the
Representatives may make arrangements satisfactory to the Company for the
purchase of such Shares by other persons, including any of the Underwriters, but
if no such arrangements are made by such date the nondefaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Shares which such defaulting Underwriters agreed but
failed to purchase on such date. If any Underwriter or Underwriters so default
and the aggregate number of Shares with respect to which such default or
defaults occur is more than the above percentage and arrangements satisfactory
to the Representatives and the Company for the purchase of such Shares by other
persons or by the nondefaulting Underwriters are not made within 36 hours after
such default, this Agreement will terminate without liability on the part of any
nondefaulting Underwriter or the Company, except for the expenses to be paid by
the Company pursuant to Section 6 hereof and except to the extent provided in
Section 10 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, for not more than
seven business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
Section 12. Effective Date. This Agreement shall become effective at
10:00 A.M. Chicago Time, on the day upon which the Pricing Agreement is executed
and delivered, unless such a day is a Saturday, Sunday or holiday (and in that
event this Agreement shall become effective at such hour on the business day
next succeeding such Saturday, Sunday or holiday).
Section 13. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
or by you by notice to the Company at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to any
Underwriter (except for the expenses to be paid or reimbursed pursuant to
Sections 6 or 8 hereof and except to the extent provided in Section 10
hereof) or of any Underwriter to the Company.
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<PAGE>
(b) This Agreement may also be terminated by you prior to the First
Closing Date, and the option referred to in Section 4, if exercised, may be
canceled at any time prior to the Second Closing Date, if (i) trading in
securities on the New York Stock Exchange shall have been suspended or
minimum prices shall have been established on such exchange, or (ii) a
banking moratorium shall have been declared by Illinois, New York, or
United States authorities, or (iii) there shall have been any change in
financial markets or in political, economic or financial conditions which,
in the reasonable opinion of the Representatives, either renders it
impracticable or inadvisable to proceed with the offering and sale of the
Shares on the terms set forth in the Prospectus or materially and adversely
affects the market for the Shares, or (iv) there shall have been an
outbreak of major armed hostilities between the United States and any
foreign power which in the opinion of the Representatives makes it
impractical or inadvisable to offer or sell the Shares. Any termination
pursuant to this paragraph (b) shall be without liability on the part of
any Underwriter to the Company or on the part of the Company to any
Underwriter (except for expenses to be paid or reimbursed pursuant to
Sections 6 or 8 hereof and except to the extent provided in Section 10
hereof).
Section 14. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder.
Section 15. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters will be mailed, delivered or telegraphed and
confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams, Chicago,
Illinois 60606, with a copy to Glenn W. Reed, Gardner, Carton & Douglas, 321
North Clark Street, Chicago, Illinois 60610; if sent to the Company will be
mailed, delivered or telegraphed and confirmed to the Company at its corporate
headquarters with a copy to Wilson Neely, Simpson Thacher & Bartlett, 425
Lexington Avenue, New York, NY 10017-3909.
Section 16. Successors. This Agreement and the Pricing Agreement will
inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representatives and assigns, and to the benefit
of the officers and directors and controlling persons referred to in Section 10,
and no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Shares as such from any of
the Underwriters merely by reason of such purchase.
Section 17. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with this financing,
and any action under or in respect of this Agreement taken by you will be
binding upon all the Underwriters. Any action under or in respect of this
Agreement taken by William Blair & Company, L.L.C. will be binding upon the
other Representative.
Section 18. Partial Unenforceability. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
Section 19. Applicable Law. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State of
Illinois.
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If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters
including you, all in accordance with its terms.
Very truly yours,
CII TECHNOLOGIES INC.
By:
_________________________
Its:
_________________________
The foregoing Agreement is hereby
confirmed and accepted as of
the date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
FURMAN SELZ LLC
Acting as Representatives of the
several Underwriters named in
Schedule A.
By: William Blair & Company, L.L.C.
By:
___________________________
Partner
-21-
<PAGE>
SCHEDULE A
NUMBER OF FIRM
SHARES TO BE
PURCHASED
UNDERWRITER
William Blair & Company, L.L.C........................
Furman Selz LLC.......................................
---------
TOTAL 3,500,000
=========
-22-
<PAGE>
SCHEDULE B
COMFORT LETTER OF DELOITTE & TOUCHE LLP
(1) They are independent public accountants with respect to the
Company, the Subsidiaries and Hartman within the meaning of the 1933 Act.
(2) In their opinion the consolidated financial statements and
schedules of the Company and the Subsidiaries included in the Registration
Statement and the consolidated financial statements of the Company from which
the information presented under the caption "Selected Consolidated Financial
Information" has been derived which are stated therein to have been examined by
them comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act.
(3) In their opinion the financial statements of Hartman included in
the Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act.
(4) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company and the Subsidiaries responsible for financial
and accounting matters as to transactions and events subsequent to December 31,
1995, a reading of minutes of meetings of the stockholders and directors of the
Company and the Subsidiaries since December 31, 1995, a reading of the latest
available interim unaudited consolidated financial statements of the Company and
the Subsidiaries (with an indication of the date thereof) and other procedures
as specified in such letter, nothing came to their attention which caused them
to believe that (i) the historical amounts in "Selected Consolidated Financial
Information" and "Summary Consolidated Financial Data" as of, and for the fiscal
period ended March 31, 1992, the nine months ended December 31, 1992, the period
from January 1, 1993 to May 10, 1993, the period from May 11, 1993 to December
31, 1993, the fiscal period ended December 31, 1994 and the fiscal period ended
December 31, 1995 do not agree with or are not derivable from the corresponding
amounts in the audited consolidated financial statements from which such amounts
were derived, (ii) the historical amounts in "Selected Consolidated Financial
Information" and "Summary Consolidated Financial Data" as of, and for each of
the fiscal periods ended on July 2, 1995 and June 30, 1996 do not agree with or
are not derivable from the corresponding amounts in the unaudited consolidated
financial statements from which such amounts were derived; (iii) the unaudited
consolidated financial statements of the Company and the Subsidiaries and the
unaudited financial statements of Hartman included in the Registration Statement
do not comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act or that such unaudited financial statements are not
fairly presented in accordance with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement; (iv) the unaudited pro forma
data included under the captions "Summary Consolidated Financial Data,"
"Selected Consolidated Financial Information" and "Pro Forma Condensed
Consolidated Financial Information" in the Registration Statement (such pro
forma data are herein referred to collectively as the "Unaudited Pro Forma
Data") do not comply as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X and that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of such Unaudited Pro Forma Data; and (v) at a specified date not
more than five days prior to the date thereof in the case of the first letter
and not more than two business days prior to the date thereof in the case of the
second and third letters, there was any change in the capital stock or long-term
debt or short-term debt (other than normal payments) of the Company and the
Subsidiaries on a consolidated basis or any decrease in consolidated net current
assets or consolidated stockholders' equity as compared with amounts shown on
the latest unaudited balance sheet of the Company included
-23-
<PAGE>
in the Registration Statement or for the period from the date of such balance
sheet to a date not more than five days prior to the date thereof in the case of
the first letter and not more than two business days prior to the date thereof
in the case of the second and third letters, there were any decreases, as
compared with the corresponding period of the prior year, in consolidated net
sales, consolidated income before income taxes or in the total or per share
amounts of consolidated net income except, in all instances, for changes or
decreases which the Prospectus discloses have occurred or may occur or which are
set forth in such letter.
(4) They have carried out specified procedures, which have been agreed
to by the Representatives, with respect to certain information in the Prospectus
specified by the Representatives, and on the basis of such procedures, they have
found such information to be in agreement with the general accounting records of
the Company and the Subsidiaries.
-24-
<PAGE>
SCHEDULE C
LOCKUP AGREEMENTS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
SUBJECT TO
LOCK-UP
NAME OF STOCKHOLDER AGREEMENT
<S> <C>
CII Associates, L.P. 2,150,000
Ramzi A. Dabbagh 75,000
Michael A. Steinback 75,000
G. Daniel Taylor 100,000
David Henning 25,000
John P. Flanagan 75,000
Donald E. Dangott ______
Theodore Anderson 12,500
Gary C. McGill 4,165
Jeffrey W. Boyce 4,165
Raymond McClinton 4,170
Alan Gordon 25,000
Norm Blankenship [180]
Douglas Campbell [144,251]
Douglas Campbell (trustee of Campbell
Charitable Remainder Unitrust) [25,243]
Gary Clancy [1,435]
Rick Danchuk [7,212]
Milo Filip (trustee of the Erin [2,715]
Campbell Trust)
Robin Hamilton [1,442]
Robert Helman [32,455]
Harry Jabagchourian [7,753]
Ronald Klingensmith (trustee of the
Donald C.
Campbell Charitable Unitrust) [27,569]
Dan McAllister [28,849]
Pat McPherson [46,880]
Susan Clair Anderson Reid [2,621]
Rick Steen [4,543]
John Stewart [5,247]
Hugh Vos [1,377]
TOTALS
===========
__________ shares
</TABLE>
[Final share numbers for Kilovac stockholders to be recalculated to reflect
final offering price.]
-25-
<PAGE>
EXHIBIT A
CII TECHNOLOGIES INC.
3,500,000 Shares
Common Stock*
PRICING AGREEMENT
_____________, 1996
WILLIAM BLAIR & COMPANY, L.L.C.
FURMAN SELZ LLC
As Representatives of the Several
Underwriters
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated __________, 1996 (the
"Underwriting Agreement") relating to the sale by the Company and the purchase
by the several Underwriters for whom William Blair & Company, L.L.C. and Furman
Selz LLC are acting as representatives (the "Representatives"), of the above
Shares. All terms herein shall have the definitions contained in the
Underwriting Agreement except as otherwise defined herein.
Pursuant to Section 4 of the Underwriting Agreement, the Company agrees with
the Representatives as follows:
1. The initial public offering price per share for the Shares shall be
$__________.
2. The purchase price per share for the Shares to be paid by the several
Underwriters shall be $_____________, being an amount equal to the initial
public offering price set forth above less $____________ per share.
Schedule A is amended as follows:
______________________________
*Plus an option to acquire up to 525,000 additional shares to cover
overallotments.
-26-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
CII TECHNOLOGIES INC.
By:
_________________________
Its:
_________________________
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
WILLIAM BLAIR & COMPANY, L.L.C.
FURMAN SELZ LLC
Acting as Representatives of the
several Underwriters
By: William Blair & Company, L.L.C.
By:
______________________
Partner
-27-
<PAGE>
EXHIBIT 10.17
AGREEMENT
AGREEMENT dated as of October 31, 1996, between CII Technologies Inc., a
Delaware corporation ("CII") and CII Associates L.P., a Delaware limited
---
partnership ("LP").
--
WHEREAS, LP is the registered holder and beneficial owner of 40,000
shares of Cumulative Redeemable Preferred Stock (the "Preferred Stock") and
---------------
40,000 shares of Cumulative Redeemable Preferred Stock Series A (the "Series A
--------
Preferred") of CII;
- ---------
WHEREAS, it was originally contemplated that, in connection with CII's
initial public offering (the "IPO"), CII would redeem for cash all of the
---
Preferred Stock and Series A Preferred held by CII; and
WHEREAS, the parties now desire that, in lieu of effecting such cash
redemption, LP exchange shares of Preferred Stock or Series A Preferred Stock
having an aggregate liquidation preference, as of the date of exchange, of
$2,000,000 (the shares of Preferred Stock having such aggregate value, the
"Preferred Shares") for newly issued shares of Common Stock, par value $.01 (the
----------------
"Common Stock"), of CII having an aggregate value, based on the initial price to
------------
the public in the IPO, of $2,000,000 (the shares of Common Stock having such
aggregate value, the ("Common Shares"), with the closing of such exchange to be
-------------
conditioned on, and to occur concurrent with, the consummation of CII's IPO;
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:
ARTICLE 1
Surrender of Preferred Shares; Issuance of Common Stock
-------------------------------------------------------
1.1 Surrender of Preferred Shares. Upon the terms and subject to
-----------------------------
the conditions of this Agreement, LP agrees to surrender to CII at the Closing
(as defined below), and against delivery of certificates representing the Common
Shares, certificates representing the Preferred Shares together with duly
executed stock powers.
1.2 Issuance of Common Shares. Upon the terms and subject to the
-------------------------
conditions of this Agreement, CII agrees to issue and deliver to LP at the
Closing, and against surrender of certificates representing the Preferred
Shares, a certificate or certificates representing the Common Shares registered
in the name of LP. The certificate or certificates representing the Common
Shares shall bear the following legend.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE TRANSFERRED,
SOLD OR DISPOSED OF IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM
UNDER THE ACT.
<PAGE>
2
ARTICLE 2
The Closing
-----------
2.1 Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to the
provisions of Section 7.1, the closing (the "Closing") of the surrender of the
Preferred Shares and the issuance of the Common Shares shall take place at the
same location and at the same time as the Closing of the IPO; provided however,
-------- -------
that if the Closing shall not have occurred by November 30, 1996, this Agreement
shall be null and void and of no further force and effect.
ARTICLE 3
Representations, Warranties and Covenants of CII
------------------------------------------------
3.1 Authorization. The Common Shares have been duly and validly
-------------
authorized and, subject to approval of the transactions contemplated by this
Agreement by CII's Board of Directors ("CII Board Approval"), when issued and
------------------
delivered against payment therefor as provided herein, will be duly and validly
issued, fully paid and nonassessable.
3.2 Authority of CII. Subject to the receipt of CII Board Approval,
----------------
CII has full corporate right, power and authority to issue, transfer and deliver
to LP the full legal and beneficial ownership in the Common Shares to be sold by
it pursuant to this Agreement and to consummate the transactions contemplated
herein. Upon the receipt of CII Board Approval, this Agreement will be duly and
validly executed and delivered by CII and will be its legal, valid and binding
obligation enforceable against it in accordance with its terms. No action,
consent or approval by, or filing with, any Federal, state, municipal, foreign
or other court of governmental or administrative body or agency, or any other
regulatory or self-regulatory body, is required by CII in connection with its
execution and delivery of this Agreement or the consummation by it of the
transactions contemplated hereby.
3.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement by CII and the consummation of the transaction contemplated hereby
will not conflict with or result in a breach or violation of any of the terms of
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which CII or any of
its subsidiaries is a party or by which CII or any of its subsidiaries is bound
or to which any of the property or assets of CII or any of its subsidiaries is
subject, nor will such actions result in any violation of the provisions of the
charter or bylaws of CII or any of its subsidiaries or any statute or any order,
rule or regulation of any court or regulation of any court or governmental
agency or body having jurisdiction over CII or any of its subsidiaries or any of
its subsidiaries or any of their properties or assets.
3.4 Litigation. There is no claim, action, suit, proceeding,
arbitration, investigation or inquiry before any Federal, state, municipal,
foreign or other court or governmental or administrative body or agency, any
securities or commodities exchange,
<PAGE>
other regulatory body or any private arbitration tribunal now pending, or
threatened, against or relating to CII which could adversely affect its ability
to consummate the issuance of the Common Shares and the other transactions
contemplated by this Agreement.
3.5 Further Assurances. CII will execute and deliver, or cause to be
------------------
executed and delivered, such additional or further transfers, assignments,
endorsements and other instruments, and shall take such other actions as LP may
reasonably request for the purpose of effectively carrying out the issuance of
the Common Shares by it to LP and the other transactions contemplated by this
Agreement.
3.6 Brokers and Finders. Neither CII nor any of its officers,
-------------------
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated by this Agreement or employed any person to
solicit the exchange contemplated by this Agreement.
3.7 No Material Adverse Change. Since June 30, 1996, there has been
--------------------------
no material adverse change in the financial position of CII and its
subsidiaries, considered as a whole.
ARTICLE 4
Representations, Warranties and Covenants of LP
-----------------------------------------------
4.1 Title to Shares. LP is the beneficial and record owner of the
---------------
Preferred Shares to be surrendered by it to CII. The Preferred Shares are free
and clear of all mortgages, liens, security interests, encumbrances, claims,
charges and restrictions. As of the Closing, all of the Preferred Shares will be
transferred to CII free and clear of all mortgages, liens, security interests,
encumbrances, claims, charges and restrictions.
4.2 Authority of LP. LP has full partnership right, power and
---------------
authority to transfer and deliver to CII LP's full legal and beneficial
ownership in the Preferred Shares to be transferred and delivered by it pursuant
to this Agreement and to consummate the transactions contemplated herein. This
Agreement has been duly and validly executed and delivered by LP and constitutes
its legal, valid and binding obligation enforceable against it in accordance
with its terms. No action, consent or approval by, or filing with, any Federal,
state, municipal, foreign or other court or governmental or administrative body
or agency, or any other regulatory or self-regulatory body is required by it in
connection with its execution and delivery of this Agreement or the consummation
by it of the transactions contemplated hereby.
4.3 No Conflicts. Subject to obtaining any and all consents and
------------
approvals required pursuant to the Stockholders' Agreements referred to below,
the execution, delivery and performance of this Agreement by LP and the
consummation of the transaction contemplated hereby will not conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust,
<PAGE>
4
loan agreement or other agreement or instrument to which LP or any of its
subsidiaries is a party or by which LP or any of its subsidiaries is bound or to
which any of the property or assets of LP or any of its subsidiaries is subject,
nor will such actions result in any violation of the provisions of the charter
or bylaws of LP or any of its subsidiaries or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
LP or any of its subsidiaries or any of their properties or assets.
4.4 Litigation. There is no claim, action, suit, proceeding,
----------
arbitration, investigation or inquiry before any Federal, state, municipal,
foreign or other court or governmental or administrative body or agency, any
securities or commodities exchange, other regulatory body or any private
arbitration tribunal now pending, or threatened, against or relating to LP which
could adversely affect its ability to consummate the surrender and delivery of
the Preferred Shares and the other transactions contemplated by this Agreement.
4.5 Further Assurances. LP will execute and deliver, or cause to be
------------------
executed and delivered, such additional or further transfers, assignments,
endorsements and other instruments, and shall take such other actions as CII may
reasonably request for the purpose of effectively carrying out the surrender of
the Preferred Shares by it to LP and the other transactions contemplated by this
Agreement.
4.6 Brokers and Finders. Neither CII nor any of its officers,
-------------------
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated by this agreement or employed any person to
solicit the exchange contemplated by this Agreement.
ARTICLE 5
Conditions Precedent to Obligations of LP
-----------------------------------------
The obligations of LP under this Agreement are subject to the
satisfaction (or waiver by LP) at or prior to the Closing of each of the
following conditions:
(a) Accuracy of Representations and Warranties. All representations
------------------------------------------
and warranties of CII contained herein shall be true and correct in all material
respects on and as of the Closing Date, with the same force and effect as
though such representations and warranties had been made on and as of the
Closing Date.
(b) Performance of Agreements. CII shall have performed all
--------------------------
obligations and agreements, and complied with all convenants and conditions,
contained in this Agreement to be performed or complied with by it prior to or
at the Closing.
(c) Closing Certificate. LP shall have received a certificate, dated
-------------------
the Closing Date, of CII representing that the conditions specified in
paragraphs (a) and (b) above have been fulfilled.
<PAGE>
5
(d) Actions and Proceedings. The CII Board Approval necessary in order to
-----------------------
make the representations and warranties of CII contained herein true and correct
shall have been obtained, and all other corporate actions, proceedings,
instruments and documents required to carry out the transactions contemplated by
this Agreement or incidental thereto and all other related legal matters shall
be reasonably satisfactory to LP.
(e) Legal Proceedings. There shall not be any actual or threatened action
-----------------
or proceeding or notice or communication by or from any other person, CII or
Federal administrative agency or other governmental body before any court,
administrative agency or other governmental body which (i) in the reasonable
view of LP has a reasonable probability of success on the merits and (ii) seeks
to restrain, prohibit or invalidate LP's or CII's entry into, or the performance
by LP or CII of the transactions contemplated by this Agreement or to impose
material limitations on the ability of LP to exercise full rights of ownership
of the Common Shares.
(f) The IPO shall be consummated concurrently with CII issuing in the IPO
shares of Common Stock having an aggregate initial public offering price of not
less than $28,000,000 with an underwriters' spread or discount of not more than
7%.
ARTICLE 6
Conditions Precedent to the Obligations of CII
----------------------------------------------
The obligations of CII under this Agreement are subject to the satisfaction
(or waiver by CII) at or prior to the Closing Date of each of the following
conditions:
(a) Accuracy of Representations and Warranties. All representations and
------------------------------------------
warranties of LP contained herein shall be true and correct in all material
respects on and as of the Closing Date, with the same force and effect as though
such representations and warranties had been made on and as of the Closing Date.
(b) Performance of Agreements. LP shall in all material respects have
-------------------------
performed all obligations and agreements, and complied with all covenants and
conditions, contained in this Agreement to be performed or complied with by it
prior to or at the Closing.
(c) Closing Certificate. CII shall have received a certificate, dated the
-------------------
Closing Date, of LP representing that the conditions specified in paragraphs
(a) and (b) above have been fulfilled.
(d) Actions and Proceedings. The CII Board Approval necessary in order to
-----------------------
make the representations and warranties of CII contained herein true and correct
shall have been obtained, and all corporate actions, proceedings, instruments
and documents required to carry out the transactions contemplated by this
Agreement or incidental thereto and all other related legal matters shall be
reasonably satisfactory to CII.
<PAGE>
6
(e) Legal Proceedings. There shall not be any actual threatened action
-----------------
or proceeding or notice or communication by or from any other person, LP or any
Federal administrative agency or other governmental body before any court,
administrative agency or other governmental body which (i) in the reasonable
view of CII has a reasonable probability of success on the merits and (ii) seeks
to restrain, prohibit or invalidate CII's or LP's entry into, or the performance
by CII or LP of the transactions contemplated by this Agreement.
ARTICLE 7
Miscellaneous
------------
7.1 Termination. This Agreement may be terminated and the transactions
-----------
contemplated herein may be abandoned by the mutual consent of CII and LP.
7.2 Expenses. CII shall pay the costs and expenses incurred by itself
--------
and by LP in connection with the agreement and the transactions contemplated
hereby, including the fees and expenses of counsel, irrespective of when
incurred. Any stamp duty, transfer tax or other similar cost connected with the
transfer of the Common Shares or the Preferred Shares shall be paid by CII.
7.3 Notices. All notices and other communications which are required or
-------
may be given under this Agreement shall be in writing and shall be sent by
overnight courier, telecopier or hand delivery as follows:
(a) if to CII:
CII Technologies Inc.
1396 Charlotte Highway
Fairview, N.C. 28730
Attn: Ramzi Dabbagh
Telecopy No. (704) 628-1711
(b) if to LP:
CII Associates LP
c\o Stonebridge Partners
Westchester Financial Center
50 Main Street
White Plains, NY 10606
Attn: Michael S. Bruno, Jr.
Telecopy No. (212)
or to such other address as either party shall have specified by notice in
writing to the other party. All such notices and communications shall be deemed
to have been given or made (i)
<PAGE>
7
when delivered by hand, (ii) one business day after being sent by overnight
courier, or (iii) when telecopied, receipt acknowledged.
7.4 Entire Agreement. This Agreement constitutes the entire agreement
----------------
among the parties hereto and supersedes all prior agreements and understandings,
oral and written, between the parties hereto with respect to the subject matter
hereof.
7.5 Binding Effect; Benefit. This agreement shall inure to the benefit of
-----------------------
and be binding upon the parties hereto and their respective successors and
assigns. Nothing in this Agreement, expressed or implied, is intended to confer
on any person other than the parties hereto or their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason
of this Agreement.
7.6 Assignability. This Agreement shall not be assignable by either party
-------------
without the prior written consent of the other.
7.7 Amendment; Waiver. This Agreement may be amended, supplemented or
-----------------
otherwise modified only by a written instrument executed by the parties hereto.
No waiver by either party of any of the provisions hereof shall be effective
unless explicitly set forth in writing and executed by the party so waiving. The
waiver by any party hereto of a breach of any provisions of this Agreement shall
not operate or be construed as a waiver of any subsequent breach.
7.8 Severability. If any provisions of this Agreement shall be declared
------------
by any court of competent jurisdiction to be illegal, void or unenforceable, all
other provisions of this Agreement shall not be affected and shall remain in
full force and effect.
7.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
7.10 Governing Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of New York. The parties to this
Agreement hereby agree to submit to the non-exclusive jurisdiction of the courts
of the State of New York in any action or proceeding arising out of or relating
to this Agreement.
7.11 Public Announcements. Each of the parties hereto agrees not to issue
--------------------
any press release or make any other public announcement with respect to this
Agreement or the transaction contemplated hereby without obtaining the prior
approval of the other party (which approval will not be unreasonably withheld or
delayed). Nothing contained in this Agreement shall prevent any party hereto at
any time from furnishing any required information to any governmental agency or
authority, including, without limitation, the furnishing of any required
information in connection with the registration of CII's securities with the
Securities and Exchange Commission.
<PAGE>
8
7.12 Registration Rights. The Common Stock issued hereby shall be a
-------------------
"Registrable Security" under the Registration Rights Agreement between the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
CII TECHNOLOGIES INC.
By:
-----------------------------
Name:
Title:
CII ASSOCIATES L.P.
By:
-----------------------------
Name:
Title:
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CII Technologies Inc.
and subsidiaries on Form S-1 of our report on the financial statements of
Hartman Electrical Manufacturing Division of Figgie International dated June 28,
1996, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
October 31, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CII Technologies Inc.
and subsidiaries on Form S-1 of our report dated March 21, 1996, appearing in
the Prospectus, which is part of this Registration Statement, and of our report
dated March 21, 1996, relating to the financial statement schedule appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
October 31, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CII Technologies Inc.
and subsidiaries on Form S-1 of our report on the financial statements of
Kilovac Corporation and subsidiaries dated December 6, 1995, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Los Angeles, California
October 31, 1996
