<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
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)
----------------
COPY TO:
WILSON S. NEELY, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
----------------
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 and upon consummation of the transactions described in the enclosed
Proxy Statement and Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SCURITIES TO BE REGISTERED(1)E AMOUNT TO BE REGISTERED(2) OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE(3)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value
$0.01 per share..... 500,000 shares Not Applicable Not Applicable $1,551.72
</TABLE>
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(1) This Registration Statement relates to securities of the Registrant
issuable to holders of Class A Common Shares, without par value ("Kilovac
Common Stock"), of Kilovac Corporation, a California corporation
("Kilovac"), in the proposed merger of Kilovac with and into
Communications Instruments Inc., a Delaware corporation and subsidiary of
the Registrant ("CII") (the "Merger").
(2) The amount of Common Stock, par value $.01 per share, of the Registrant
(the "CIIT Stock") to be registered has been determined by dividing $4.5
million by the initial public offering price per share (the "IPO Price")
of the CIIT Stock to be offered in an underwritten initial public offering
(the "Offering"). CIIT currently anticipates that the IPO Price will be in
the range of $9.00--$11.00 per share and that, consequently, a maximum of
500,000 shares of CIIT Stock and a minimum of 409,090 shares of CIIT Stock
will be issued to the holders of Kilovac Common Stock.
(3) The registration fee was calculated pursuant to Rule 457(f), as one
twenty-ninth of one percent of $180.31 (the exchange basis of each share
of Kilovac Common Stock as contemplated by the First Amendment (as defined
herein) multiplied by 24,957 (the maximum aggregate number of shares of
Kilovac Common Stock to be converted and cancelled in the Merger).
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>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
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S-4 ITEM NUMBER AND CAPTION PROSPECTUS
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A. INFORMATION ABOUT THE
TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of Facing Page; Cross Reference
Prospectus........................... Sheet; Outside Front Cover Page
of Proxy Statement/Prospectus.
2. Inside Front and Outside Back Cover Additional Information; Table of
Pages of Prospectus.................. Contents.
3. Risk Factors, Ratio of Earnings to Proxy Statement/Prospectus
Fixed Charges and Other Information.. Summary; Risk Factors Related to
the Merger.
4. Terms of the Transaction.............. Proxy Statement/Prospectus
Summary; Risk Factors Related to
the Merger; Business of the
Company; Business of Kilovac; The
Special Meeting; The Merger;
Description of Capital Stock of
the Company; Comparison of Rights
of Shareholders.
5. Pro Forma Financial Information....... Pro Forma Condensed Consolidated
Financial Information of the
Company.
6. Material Contacts with the Company Proxy Statement/Prospectus
Being Acquired....................... Summary; The Merger.
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters............ *
8. Interests of Named Experts and
Counsel.............................. Legal Matters.
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants.......................... *
11. Incorporation of Certain Information
by Reference......................... *
12. Information with Respect to S-2 or S-3
Registrants.......................... *
13. Incorporation of Certain Information
by Reference......................... *
14. Information with Respect to
Registrants Other Than S-3 or S-2 Proxy Statement/Prospectus
Registrants.......................... Summary; Business of the Company;
Dividend Policy of the Company;
Risk Factors of the Company;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations of the
Company.
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3
Companies............................ *
</TABLE>
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<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION PROSPECTUS
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<C> <C> <S>
16. Information with Respect to S-2 or S-3
Companies............................ *
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies...... Proxy Statement/Prospectus
Summary; The Companies; Business
of Kilovac; Dividend Policy of
Kilovac; Management's Discussion
and Analysis of Financial
Condition and Results of
Operations of Kilovac.
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited.... Proxy Statement/Prospectus
Summary; The Special Meeting; The
Merger; Management of the
Company; Management of Kilovac;
Certain Relationships and Related
Transactions.
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer............... *
</TABLE>
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* Item is omitted because answer is negative or item is inapplicable.
<PAGE>
KILOVAC CORPORATION
550 LINDEN AVENUE
CARPINTERIA, CALIFORNIA
AUGUST , 1996
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders of
Kilovac Corporation to be held on , 1996 at Kilovac's headquarters at 550
Linden Avenue, Carpinteria, California 93013 commencing at :00 o'clock a.m.
local time.
At the Special Meeting you will be asked to consider and vote upon an
Agreement and Plan of Merger (the "Merger Agreement") providing for the merger
of Kilovac with and into Communications Instruments, Inc., a North Carolina
corporation ("CII") and a wholly-owned subsidiary of CII Technologies Inc., a
Delaware corporation ("CIIT"). If the merger is consummated, Kilovac's
separate corporate existence will cease and each outstanding Kilovac common
share (except shares held by shareholders who perfect their dissenters' rights
under California law) will be converted into a number of shares of CIIT common
stock determined by dividing $180.31 by the price at which the CIIT common
stock is issued to the public on closing of the registered initial public
offering of CIIT common stock which is currently pending.
Pursuant to the Stock Subscription and Purchase Agreement between Kilovac,
its shareholders and CII, on October 11, 1995 CII acquired 99,828 shares
(constituting 80%) of Kilovac's outstanding common shares. In connection with
the Merger Agreement, you will also be asked to vote upon the First Amendment
to Stock Purchase and Subscription Agreement, which amendment is necessary to
consummate the Merger pursuant to the Merger Agreement.
The attached Proxy Statement and Prospectus will provide you with a detailed
description of the proposals to be presented at the Special Meeting and
information concerning CIIT, CII and Kilovac. Please give this information
your careful attention.
After consideration, your Board of Directors has unanimously approved the
Merger, the Merger Agreement and the First Amendment. Kilovac shareholders of
record on July 31, 1996 are entitled to vote at the Special Meeting and at all
adjournments thereof. The unanimous approval of the Kilovac shareholders of
record is necessary for approval of the First Amendment. The merger and the
Merger Agreement require a majority vote of the Kilovac shareholders,
including a majority of the beneficial owners of the shares held by the
Kilovac Corporation Employee Stock Bonus Plan. Consequently all shareholders
are strongly urged either to attend the Special Meeting or be represented by
proxy.
Shareholders are urged to mark, sign, date and return the accompanying proxy
in the enclosed business reply envelope promptly. The giving of the proxy by a
shareholder will not prevent voting in person.
Douglas L. Campbell,
President and Chief Executive
Officer
<PAGE>
KILOVAC CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Notice is hereby given that a Special Meeting of Shareholders of Kilovac
Corporation, a California corporation ("Kilovac"), will be held at Kilovac's
headquarters, 550 Linden Avenue, Carpinteria, California on , 1996 at
:00 o'clock a.m. local time for the following purposes:
1. To consider and vote on approval of the First Amendment to Stock
Subscription and Purchase Agreement (the "First Amendment") described in
the attached Proxy Statement and Prospectus. Record shareholders of Kilovac
will each be asked to execute and deliver the First Amendment.
Beneficiaries of the Kilovac Corporation Employee Stock Bonus Plan (the
"ESBP") will be voting to instruct the Trustee of the ESBP as to their
wishes regarding the First Amendment.
2. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger among CII Technologies Inc., a Delaware corporation ("CIIT"),
Communications Instruments, Inc., a North Carolina corporation ("CII"), and
Kilovac, pursuant to which Kilovac will be merged with and into CII, as
described in the attached Proxy Statement and Prospectus. Beneficiaries of
the ESBP will be voting to direct the Trustee of the ESBP as to the manner
in which the shares allocated by the EBSP to such beneficiaries will be
voted by the Trustee.
In accordance with the Bylaws of Kilovac, the Board of Directors has fixed
the close of business on July 31, 1996 as the record date for the
determination of shareholders entitled to notice of and to vote at the Special
Meeting of shareholders and all adjournments thereof.
By order of the Board of Directors
Douglas L. Campbell,
President and Chief Executive
Officer
Carpinteria, California
, 1996
THE SHARES OF CAPITAL STOCK OF CII TECHNOLOGIES INC. TO WHICH THIS
PROSPECTUS RELATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 13, 1996
KILOVAC CORPORATION
PROXY STATEMENT
CII TECHNOLOGIES INC.
PROSPECTUS
This Proxy Statement and Prospectus ("Proxy Statement/Prospectus") is being
furnished to shareholders of record of Kilovac Corporation, a California
corporation ("Kilovac"), in connection with a Special Meeting of Shareholders
of Kilovac (the "Special Meeting") to be held on September , 1996 at 10:00
a.m., local time at the offices of Kilovac, and at any adjournment thereof. At
the Special Meeting, the Kilovac shareholders will be asked to consider and
vote on the adoption and approval of the First Amendment dated as of August
, 1996 (the "First Amendment") to the Stock Subscription and Purchase
Agreement dated as of September 20, 1995 (the "Stock Purchase Agreement"), and
the Agreement and Plan of Merger dated as of , 1996 (the
"Merger Agreement") among Kilovac, CII Technologies Inc., a Delaware
corporation ("CIIT" or the "Company"), and Communications Instruments Inc., a
North Carolina corporation and wholly-owned subsidiary of CIIT ("CII"). The
First Amendment establishes the ratio of shares of common stock, par value
$.01 per share, of CIIT (the "CIIT Stock" or the "Common Stock") to be
received for Class A Common Shares, without par value, of Kilovac ("Kilovac
Common Stock") to be cancelled in the Merger. The Merger Agreement provides
for the merger (the "Merger") of Kilovac with and into CII, with CII as the
surviving corporation. ALL SHAREHOLDERS ARE REQUESTED TO CONSIDER THE MATTER
DESCRIBED BELOW AND TO DELIVER A PROXY TO KILOVAC.
Upon consummation of the Merger following approval of the shareholders and
the closing of the Offering (as defined below), each of the outstanding shares
of Kilovac Common Stock, other than shares of Kilovac Common Stock owned by a
wholly owned subsidiary of CIIT (which represent 80% of the outstanding shares
of Kilovac) (the "Kilovac Shares"), and shares of Kilovac Common Stock that
are Dissenting Shares (as defined later in this Proxy Statement/Prospectus),
will be converted into the right to receive the number of shares of CIIT Stock
equal to the quotient of $4.5 million divided by the initial public offering
price (the "IPO Price") of CIIT Stock in the underwritten initial public
offering of 3.5 million shares of CIIT Stock to occur contemporaneous with the
Merger (the "Offering") divided by 24,957 (the number of Kilovac Shares). No
fractional shares will be issued. See "The Merger--Terms of the Merger
Reorganization."
CIIT has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 pursuant to the provisions
of the Securities Act of 1933, as amended (the "Securities Act"), covering the
shares of CIIT Stock to be issued in the Merger. This Proxy
Statement/Prospectus also constitutes a Prospectus filed as part of such
Registration Statement.
This Proxy Statement/Prospectus and the enclosed proxy, are first being sent
to Kilovac's shareholders on or about , 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is , 1996
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS
IN CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CIIT OR KILOVAC. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION
OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CIIT OR
KILOVAC SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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PROXY STATEMENT/PROSPECTUS SUMMARY........................................ 1
The Company............................................................. 1
Kilovac................................................................. 2
The Special Meeting..................................................... 3
The Merger.............................................................. 3
Risk Factors Related to the Merger...................................... 6
Selected Consolidated Financial Information of the Company.............. 7
Selected Consolidated Financial Information of Kilovac.................. 9
Dilution................................................................ 10
Comparative Per Share Data of CIIT and Kilovac.......................... 11
THE SPECIAL MEETING....................................................... 12
General................................................................. 12
Record Date; Voting Rights; Revocability of Proxies..................... 12
Proxy Solicitation...................................................... 12
THE COMPANIES............................................................. 13
The Company............................................................. 13
Kilovac................................................................. 14
THE MERGER................................................................ 15
Background of the Merger................................................ 15
Terms of the Merger Reorganization...................................... 15
Determination of the Exchange Ratio..................................... 16
Fairness From a Financial Point of View................................. 17
Effect on Existing Security Holders; Resale of CIIT Stock............... 18
Shareholder Approval.................................................... 19
Recommendation of the Board of Directors................................ 19
Description of the Merger Agreement..................................... 19
Certain Federal Income Tax Consequences to Shareholders................. 20
Dissenters' Rights...................................................... 23
Interests of Certain Persons in the Merger.............................. 24
RISK FACTORS RELATED TO THE COMPANY....................................... 25
Expansion through Acquisitions.......................................... 25
Integration of Acquired Businesses...................................... 25
Risks Related to the Hartman Acquisition................................ 25
International Operations and Foreign Instability........................ 26
Dependence on Independent Sales Representatives and Distributors........ 27
Dependence on Senior Management......................................... 27
Competition............................................................. 27
Compliance with Military Qualifications................................. 28
Dependence on Raw Materials and Limited or Sole Source Suppliers........ 28
Uncertainty of Intellectual Property Protection and Position............ 28
Technical Obsolescence.................................................. 28
Environmental Matters................................................... 29
Control by Principal Stockholders....................................... 29
Use of Proceeds to Repay Debt Owing to Existing Stockholders............ 29
Anti-Takeover Provisions................................................ 30
Shares Eligible for Future Sale; Possible Adverse Effect on Future
Market Prices.......................................................... 30
No Prior Public Market.................................................. 30
USE OF PROCEEDS OF THE OFFERING........................................... 31
</TABLE>
i
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DIVIDEND POLICY OF THE COMPANY........................................... 31
DIVIDEND POLICY OF KILOVAC............................................... 31
CAPITALIZATION OF THE COMPANY............................................ 32
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY.... 33
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF KILOVAC................ 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY............................................ 40
General................................................................ 40
Results of Operations.................................................. 41
Liquidity and Capital Resources........................................ 45
Inflation.............................................................. 47
Impact of New Accounting Pronouncements................................ 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF KILOVAC................................................ 48
BUSINESS OF THE COMPANY.................................................. 51
General................................................................ 51
Industry Overview...................................................... 51
Operating Strategy..................................................... 52
Acquisition Strategy................................................... 53
Products............................................................... 54
Product Development.................................................... 56
Customers.............................................................. 57
Sales and Distribution................................................. 58
Competition............................................................ 58
Manufacturing.......................................................... 59
Facilities............................................................. 60
Employees.............................................................. 61
Proprietary Rights..................................................... 61
Legal Proceedings...................................................... 61
Environmental Matters.................................................. 61
BUSINESS OF KILOVAC...................................................... 63
General................................................................ 63
Product Groups......................................................... 63
New Technologies....................................................... 65
Quality Control........................................................ 66
MANAGEMENT OF THE COMPANY................................................ 67
Executive Officers and Directors....................................... 67
Compensation of Directors.............................................. 68
Board Committees....................................................... 68
Executive Compensation................................................. 69
Employment Agreements.................................................. 69
Employee Benefit Plan.................................................. 70
Compensation Committee Interlocks and Insider Participation............ 72
MANAGEMENT OF KILOVAC.................................................... 73
Executive Officers and Directors....................................... 73
Employment Agreements.................................................. 74
</TABLE>
ii
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<TABLE>
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OWNERSHIP OF COMMON STOCK OF THE COMPANY.................................. 75
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 75
Registration Rights..................................................... 75
Issuance of Securities by the Company................................... 76
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY............................... 77
Common Stock............................................................ 77
Preferred Stock......................................................... 77
Certain Certificate of Incorporation, Bylaw and Statutory Provisions Af-
fecting Stockholders................................................... 77
Transfer Agent and Registrar............................................ 79
COMPARISON OF RIGHTS OF SHAREHOLDERS...................................... 79
SHARES OF COMPANY COMMON STOCK ELIGIBLE FOR FUTURE SALE................... 83
LEGAL MATTERS............................................................. 84
EXPERTS................................................................... 84
ADDITIONAL INFORMATION.................................................... 84
FINANCIAL STATEMENTS OF CII TECHNOLOGIES INC. AND SUBSIDIARIES ........... F-1
ANNEX 1--Merger Agreement
ANNEX 2--First Amendment
ANNEX 3--Stock Subscription and Purchase Agreement
ANNEX 4--Opinion of Internationale Nederlanden (U.S.) Capital Corporation
ANNEX 5--Chapter 13 of the California GCL
</TABLE>
iii
<PAGE>
PROXY STATEMENT/ 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 Proxy Statement/Prospectus. Unless otherwise
indicated, all information in this Proxy Statement/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 Merger has
been completed; and (iii) assumes the Underwriters' over-allotment option of
525,000 shares of CIIT Stock is not exercised. Unless otherwise indicated, all
amounts and statistical information regarding the Company 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 of the Company," is presented on a pro forma basis after
giving effect to the acquisitions of Kilovac Corporation 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 solid state relays 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 80% of 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 solid state relays (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.
1
<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 Company's executive offices are located at 1396 Charlotte Highway,
Fairview, North Carolina, 28730, and its telephone number is (704) 628-1711.
KILOVAC
Founded in 1964, Kilovac is a leading developer, manufacturer and marketer of
high voltage ("HV") relays and high voltage direct current ("HVDC") contactors.
Kilovac's specialty is HV vacuum and gas-filled electromechanical relays, with
its products including a broad array of HV relays, contactors and power
controllers. Kilovac produces 75 different products used to control and
regulate electric power in a wide variety of end products such as heart
defibrillators, magnetic resonance imaging ("MRI") equipment, electric
vehicles, test equipment, aircraft, satellites and high frequency radios (for
both commercial and military applications). Having a well-recognized reputation
for high-level product quality, excellent customer support and innovative
products, Kilovac sells its products to both domestic and foreign customers in
the medical, communications, aerospace, test equipment, industrial and
automotive industries.
Kilovac's core strategy is to develop, manufacture and sell components based
on proprietary technology to niche markets where Kilovac can achieve
significant market share and premium pricing. Kilovac management believes that
this strategy has been strengthened by Kilovac's diverse line of standard and
custom products, suited to a wide variety of specific applications, and by its
high level of customer service. In 1992, Kilovac supplemented this core
strategy by focusing on the development of emerging market products and
technologies with mass market applications. Kilovac continues to pursue several
opportunities to sell its products in large industrial markets including the
electric vehicle market and the rail transportation industry.
In October 1995 CII, a wholly owned subsidiary of the Company, acquired 80%
of the outstanding Kilovac Common Stock. The Company has since maintained
Kilovac as a stand-alone operation which conducts its business as the Kilovac
Division of the Company.
Kilovac's executive offices are located at 550 Linden Avenue, Carpinteria,
California 93013, and its telephone number is (805) 684-4560.
2
<PAGE>
THE SPECIAL MEETING
Date, Time and Place........ The Special Meeting of Shareholders of Kilovac
will be held on September , 1996 at 10:00 a.m.,
local time, at the offices of Kilovac in
Carpinteria, California. See "The Special
Meeting--General."
Matters to be Considered at
the Special Meeting........ The Kilovac Shareholders will be asked to
consider and vote on the adoption and approval of
(i) the First Amendment to the Stock Purchase
Agreement, and (ii) the Merger Agreement. See
"The Special Meeting--General."
Record Date................. The Board of Directors of Kilovac has fixed the
close of business on July 31, 1996 as the record
date (the "Record Date") for determining the
shareholders entitled to notice of and to vote at
the Special Meeting. See "The Special Meeting--
Record Dates; Voting Rights; Revocability of
Proxies."
Votes Required.............. Adoption and approval of the Merger requires the
affirmative vote of the holders of a majority of
the Kilovac Common Stock. Approval of the First
Amendment requires the affirmative vote of all of
the holders of the 24,957 shares of Kilovac
Common Stock that are not held by CII (the
"Kilovac Shares"). See "The Special Meeting--
Record Dates; Voting Rights; Revocability of
Proxies."
Security Ownership of
Management and Others...... At the Record Date, directors and executive
officers of Kilovac and their affiliates owned
approximately 16,461 shares of Kilovac Common
Stock (approximately 13.2% of the outstanding
Kilovac Common Stock). All of such persons have
indicated their intention to vote their shares of
Kilovac Common Stock in favor of the Merger. The
wholly owned subsidiary of the Company which owns
80% of the outstanding shares of Kilovac Common
Stock also intends to vote its shares in favor of
the Merger.
THE MERGER
Principal Terms of the
Merger..................... CII, a wholly-owned subsidiary of CIIT, will
acquire the outstanding shares of Kilovac Common
Stock which it does not already own (20%) through
the Merger of Kilovac with and into it. CII will
survive the Merger and Kilovac will carry on its
business as a division of the Company. Upon the
filing of the Merger Agreement, together with the
required officers' certificates with the North
Carolina and California Secretaries of State (the
"Effective Time"), each of the Kilovac Shares
other than "dissenting shares" within the meaning
of Chapter 13 of the California General
Corporation Law (the "California GCL")
("Dissenting Shares"), will be automatically
converted into the right to receive the number of
shares of CIIT Stock equal to the quotient of
$4.5 million divided by the IPO Price divided by
24,957, and each outstanding Kilovac Share held
by the Company will be cancelled. See "The
Merger--Terms of the Merger Reorganization and
"--Description of the Merger Agreement."
3
<PAGE>
Approval of the Merger
Agreement and
recommendation by the
Board of Directors......... The Board of Directors of Kilovac has approved
the Merger as being fair to and in the best
interests of the Kilovac shareholders. With the
exception of Douglas Campbell, the current
directors of Kilovac have been affiliated with
CIIT since prior to consummation of the Kilovac
Acquisition. Since the Kilovac Acquisition, Mr.
Campbell has served on the Board of Directors of
CIIT. Consequently, the Board of Directors of
Kilovac has determined that it will not make a
recommendation to the Kilovac shareholders as to
the approval of the Merger. See "The Merger--
Recommendation of the Board of Directors."
Opinion of Financial
Advisor.................... Internationale Nederlanden (U.S.) Capital
Corporation ("ING Capital") rendered its written
opinion, dated June 14, 1996, that the aggregate
net consideration for the Kilovac Shares payable
in CIIT Stock valued at $4,500,000 at the time of
the closing of the Offering is fair from a
financial point of view to the holders of Kilovac
Shares. The full text of the ING Capital opinion
is attached as Annex 4 to this Proxy
Statement/Prospectus. See "The Merger--Fairness
from a Financial Point of View."
Conditions to the Merger.... The Merger Agreement and consummation of the
Merger are subject to the satisfaction of
customary conditions prior to the Effective Time,
including receipt of necessary approvals and
freedom from legal restraints, as well as the
conditions of the closing of the Offering and the
aggregate number of Dissenting Shares not
exceeding ten percent of the total number of
outstanding shares of Kilovac Common Stock and
the agreement to the First Amendment by all
record Kilovac shareholders. See "The Merger--
Description of the Merger Agreement."
Termination, Amendment,
Waiver and Assignment...... Each of the First Amendment and the Merger
Agreement provides that it shall be void if the
Merger does not occur on or before October 31,
1996, unless extended by the consent of the
parties thereto. Pursuant to the First Amendment,
Douglas Campbell, as representative of the
holders of Kilovac Shares, is authorized in his
discretion to consent to any extension on behalf
of the holders of the Kilovac Shares. Each of the
First Amendment and the Merger Agreement may be
terminated (a) by mutual consent in writing of
CIIT and Douglas Campbell, as shareholder
representative; or (b) unilaterally by either
CIIT or Mr. Campbell, as shareholder
representative, if any event occurs which would
render impossible the satisfaction of any
conditions to their respective obligations to
consummate the transactions contemplated thereby.
See "The Merger--Description of the Merger
Agreement."
Regulatory Approvals........ No federal or state regulatory approvals are
required and no federal or state regulatory
requirements must be complied with in order to
effect the Merger, other than the filing of the
Merger Agreement
4
<PAGE>
together with officers' certificates with the
Secretaries of State of California and North
Carolina. See "The Merger--Description of the
Merger Agreement."
Certain Federal Income Tax
Consequences............... The Merger is intended to qualify as a
reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as
amended (the "Code") and result in no gain or
loss being recognized by holders of Kilovac
Shares upon the exchange of such shares for
shares of CIIT stock by reason of the Merger
(except with respect to cash received pursuant to
the exercise of Dissenters' Rights or in lieu of
a fractional interest). See "The Merger--Certain
Federal Income Tax Consequences."
Dissenters' Rights.......... If the Merger is consummated, a holder of Kilovac
Shares who follows the procedures set forth in
Chapter 13 of the California GCL may be entitled
to have such shareholder's Dissenting Shares
purchased for cash as described in Chapter 13.
See "The Merger--Dissenters' Rights."
Comparison of Shareholder
Rights..................... The rights of shareholders of Kilovac currently
are determined by reference to the California
GCL, and Kilovac's Amended Articles of
Incorporation and Bylaws. At the Effective Time,
shareholders of Kilovac will become shareholders
of CIIT. Their rights as shareholders will then
be determined by reference to the Delaware
General Corporations Law (the "Delaware GCL"),
and the CIIT Restated Certificate of
Incorporation and Bylaws. See "Comparison of
Rights of Shareholders."
Resale of CIIT Stock
Received in the Merger..... The shares of CIIT Stock to be issued to Kilovac
Shareholders pursuant to the Merger will be
freely tradeable without restriction or
registration under the Securities Act by persons
other than affiliates of Kilovac or the Company
at the time of the Merger; provided that all of
such shares, other than those received by the
Kilovac Corporation Employee Stock Bonus Plan,
will also be subject to one-year lock up
agreements with the representatives of the
underwriters of the Offering.
5
<PAGE>
RISK FACTORS RELATED TO THE MERGER
Holders of Kilovac Common Stock should carefully consider all of the
information contained in this Proxy Statement/Prospectus, including Risk
Factors Related to the Company included elsewhere in this Proxy
Statement/Prospectus, as well as the following considerations:
CONDITIONS TO THE MERGER AND THE FIRST AMENDMENT
The consummation of the Offering of CIIT Stock by CIIT is a condition to the
consummation of the Merger. The Merger Agreement also provides that it is a
condition to the obligations of CIIT to consummate the Merger that the
aggregate number of shares of Kilovac Common Stock exercising dissenters rights
not exceed 10% of the total number of outstanding shares of Kilovac Common
Stock. At the Record Date, directors and executive officers of Kilovac and
their affiliates owned approximately 16,461 shares of Kilovac Common Stock
(approximately 13.2% of the outstanding Kilovac Common Stock), and have
indicated their intention to vote in favor of the Merger and therefore not
exercise dissenter's rights. The wholly-owned subsidiary of the Company which
owns 80% of the outstanding shares of Kilovac Common Stock also intends to vote
its Shares in favor of the Merger. In addition, approval of the First Amendment
requires the approval of all of the Kilovac Shares, and is a condition to the
consummation of the Merger.
MERGER CONSIDERATION
At the Effective Time, each of the Kilovac Shares, other than Dissenting
Shares, will be automatically converted into the right to receive the number of
shares of CIIT Stock equal to the quotient of $4.5 million divided by the IPO
Price divided by 24,957. The final exchange ratio will be determined on the
effective date of the Offering, and therefore the exact number of shares to be
issued in exchange for the Kilovac Shares is not yet determinable. CIIT
currently anticipates that the IPO Price will be in the range of $9.00--$11.00
per share and that, consequently, a maximum of 500,000 shares of CIIT Stock and
a minimum of 409,090 shares of CIIT Stock will be issued to the Kilovac
Shareholders.
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
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 three months ended,
April 2, 1995 and March 31, 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 three months ended March 31, 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 of the Company" and the consolidated financial
statements of the Company and the related notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus. The Company has not paid any dividends on its
Common Stock in the past ten years.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------- -------------------------------------------------------------------------------
FISCAL YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
-------------------------------------- -------------------------------
FISCAL NINE PRO
YEAR MONTHS JANUARY 1, PRO FORMA
ENDED ENDED 1993 TO MAY 11, PRO FORMA AS ADJUSTED
MARCH 31, DECEMBER 31, MAY 10, 1993 TO FORMA AS ADJUSTED APRIL 2, MARCH 31, MARCH 31,
1992 1992(1) 1993 1993 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> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales....... $20,318 $15,346 $ 8,378 $17,095 $25,473 $31,523 $39,918 $68,408 $ 9,216 $13,119 $18,214
Cost of sales... 14,214 10,270 6,684 14,448 21,776 24,330 28,687 46,598 6,839 9,193 12,919
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... 6,104 5,076 1,694 2,647 3,697 7,193 11,231 21,810 2,377 3,926 5,295
Selling
expenses....... 1,381 1,065 713 1,344 2,057 2,382 3,229 4,961 656 1,148 1,221
General and
administrative
expenses....... 1,253 842 586 1,150 1,736 2,248 3,334 5,749 656 1,187 1,478
Research and
development.... 77 44 21 41 62 103 301 1,463 39 265 265
Amortization of
goodwill and
other
intangible
assets......... 70 53 45 117 173 177 251 808 52 122 194
Special
compensation
charge(5)...... -- -- -- -- -- -- 1,300 -- -- -- --
Environmental
expenses(6).... -- -- -- -- -- -- 951 -- -- -- --
Special
acquisition
expenses(7).... -- -- 153 266 419 -- 2,064 -- 568 -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)......... 3,323 3,072 176 (271) (750) 2,283 (199) 8,829 406 1,204 2,137
Interest
expense........ 289 93 77 1,086 1,760 1,833 2,997 1,501 555 874 375
Other income
(expense)...... 14 100 42 -- 42 -- 2 (81) 2 -- 1
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before taxes... 3,048 3,079 141 (1,357) (2,468) 450 (3,194) 7,247 (147) 330 1,763
Income tax
expense
(benefit)...... -- -- -- (499) (908) 178 (1,076) 2,948 (59) 142 712
Income
applicable to
minority
interest in net
income of
subsidiary..... -- -- -- -- -- -- 35 -- -- 16 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)......... 3,048 3,079 141 (858) (1,560) 272 (2,153) 4,299 (88) 172 1,051
Preferred stock
dividend....... -- -- -- 102 185 185 210 -- 46 93 --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)
available for
common stock... $ 3,048 $ 3,079 $ 141 $ (960) $(1,745) $ 87 $(2,363) $ 4,299 $ (134) $ 79 $ 1,051
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income
(loss) per
common share... $ (.93) $ .66 $ (.05) $ .03 $ .16
======= ======= ======= ======= =======
Average shares
outstanding.... 2,536 6,486 2,520 2,550 6,500
BALANCE SHEET
DATA:
(AT PERIOD END)
Working
capital........ $ 6,284 $ 6,853 $ 8,235 $ 7,313 $ 7,659 $ 9,904 $ 9,494 $ 9,825 $19,851
Total assets.... 11,561 10,825 14,593 25,425 26,836 48,986 28,677 48,359 69,924
Total long-term
debt........... 2,451 1,065 4,292 17,393 17,947 30,902 19,355 30,004 18,319
Cumulative
redeemable
preferred
stock.......... -- -- -- 2,102 2,287 4,497 2,333 4,590 --
Total
stockholders'
equity
(deficit)...... 6,958 8,538 7,782 (969) (837) (2,505) (996) (2,426) 32,185
</TABLE>
7
<PAGE>
- --------
(1) Reflects the change of the Predecessor's fiscal year end from March 31 to
December 31.
(2) Pro forma statement of operations data for the year ended December 31,
1993 represent the results of the Predecessor for the portion of the year
ended May 11, 1993 and the results of the Company for the portion of the
year beginning after May 11, 1993, together with pro forma adjustments
(which adjustments include additional depreciation ($644,000),
amortization of goodwill ($11,000), interest expense ($597,000) and
cumulative redeemable preferred stock ($83,000)), as if the CII
Acquisition (which was completed on May 11, 1993) had occurred on January
1, 1993. 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 in this period due to the revaluation of inventory to
fair market value. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company--General."
(3) Gives effect to (i) the Hartman Acquisition and the Kilovac Acquisition,
(ii) the Merger, (iii) the sale by the Company of 3,500,000 shares of
Common Stock in the Offering at an assumed initial public offering price
of $10.00 per share and the application of the proceeds therefrom, as
described in "Use of Proceeds of the Offering" including, without
limitation, the repayment of a portion of outstanding debt and the
redemption of outstanding cumulative redeemable preferred stock and the
elimination of accrued and unpaid dividends in connection therewith, and
(iv) the elimination of a $1.3 million special compensation charge (as
described in footnote 5), the elimination of $951,000 of environmental
expenses (as described in footnote 6) and the elimination of special
acquisition expenses (as described in footnote 7), in each case as
adjusted to reflect the corresponding tax benefits associated with such
adjustments and as if such transactions (in the case of the events
described in clauses (i), (ii) and (iii)) had occurred on January 1, 1995.
See "Use of Proceeds of the Offering," "Capitalization of the Company,"
"Pro Forma Condensed Consolidated Financial Information of the Company,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company," and the Company's Consolidated Financial
Statements and the Notes thereto.
(4) Gives effect to (i) the Hartman Acquisition, (ii) the Merger and (iii) the
sale by the Company of 3,500,000 shares of Common Stock in the Offering at
an assumed initial public offering price of $10.00 per share and the
application of the proceeds therefrom as described in "Use of Proceeds of
the Offering," 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 adjustments and as if such
transactions had occurred on January 1, 1995 in the case of the statement
of operations data, and at March 31, 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 issued to
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 issuances.
(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 of the Company--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
of the Company--Results of Operations."
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF KILOVAC
The following selected consolidated financial information as of the dates and
for the periods indicated were derived from the audited consolidated financial
statements of Kilovac, except data as of, and for the three months ended March
26, 1995 and March 31, 1996 and the fiscal year ended December 31, 1995 which
were derived from the unaudited consolidated financial statements of Kilovac
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 three months ended March 31, 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 of Kilovac" and the
consolidated financial statements of Kilovac and the related notes thereto,
appearing elsewhere in this Proxy Statement/Prospectus. Kilovac has not paid
any dividends on its Common Stock in the past ten years.
<TABLE>
<CAPTION>
PRO FORMA
FISCAL THREE MONTHS ENDED
FISCAL YEARS ENDED DECEMBER JANUARY 1, YEAR ------------------------
31, 1995 TO ENDED MARCH PRO FORMA MARCH
-------------------------------- OCTOBER 11, DECEMBER 31, 26, MARCH 26, 31,
1991 1992 1993 1994 1995 1995(1) 1995 1995(2) 1996
------ ------ ------- ------- ----------- ------------ ------ --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales.......... $7,910 $7,887 $10,376 $11,257 $ 9,685 $12,728 $2,901 $2,901 $ 3,511
Engineering sales...... 1,558 1,386 492 962 1,344 1,981 129 129 164
------ ------ ------- ------- ------- ------- ------ ------ -------
Total revenues....... 9,468 9,273 10,868 12,219 11,029 14,709 3,030 3,030 3,675
Costs and Expenses:
Cost of product
sales................. 4,921 4,955 5,902 6,941 5,636 6,921 1,707 1,827 1,711
Engineering, research
and
development costs..... 1,064 1,016 944 1,432 1,364 1,944 364 364 625
Selling, general and
administrative
expenses.............. 2,845 2,534 2,441 2,987 2,527 3,530 675 675 852
Amortization of
goodwill and other
intangible assets: -- -- -- -- -- 346 -- 86 86
------ ------ ------- ------- ------- ------- ------ ------ -------
Total costs and
expenses............ 8,830 8,505 9,287 11,360 9,527 12,741 2,746 2,952 3,274
Operating Income........ 638 768 1,581 859 1,502 1,968 284 78 401
Other Expense (Income):
Other (income)......... (61) (39) 226 (113) (9) (9) (15) (15) --
Interest expense....... 226 199 151 130 35 1,287 13 280 267
------ ------ ------- ------- ------- ------- ------ ------ -------
Total other expense
(income).............. 165 160 377 17 26 1,278 (2) 265 267
Income Before Income
Taxes.................. 473 607 1,204 842 1,476 690 286 (187) 134
Income Tax Provision
(Benefit).............. 95 189 403 228 561 297 107 (68) 60
------ ------ ------- ------- ------- ------- ------ ------ -------
Net Income.............. $ 378 $ 418 $ 801 $ 614 $ 915 $ 393 $ 179 (119) $ 74
====== ====== ======= ======= ======= ======= ====== ====== =======
BALANCE SHEET DATA (AT
PERIOD END):
Working Capital........ $1,281 $1,792 $ 2,449 $ 1,707 $ 2,274 $ 2,778 $1,895 $ 2,513
Total Assets........... 4,964 4,550 5,558 5,555 6,363 19,160 6,008 17,689
Total Debt............. 2,035 1,429 1,291 630 81 9,731 756 9,372
Total Stockholder's
Equity................ 1,819 2,223 2,932 3,516 4,121 4,174 3,745 4,247
Net income (loss) per
common share........... $ 3.62 $ 4.02 $ 7.00 $ 5.43 $ 7.75(3) $ 3.15 $ 1.57(3) $ (.95) $ .59
====== ====== ======= ======= ======= ======= ====== ====== =======
Average shares
outstanding............ 118 114 119 119 119(4) 125 119(4) 125(4) 125(4)
</TABLE>
- --------
(1) Pro forma statement of operations data for the year ended December 31, 1995
represent the results of Kilovac for the portion of the year ended October
11, 1995 (the date of the Kilovac Acquisition) and the results of the
Successor Company for the portion of the year beginning after October 11,
1995, together with pro forma adjustments (which adjustments include an
adjustment to depreciation (-$174,000), amortization of intangible assets
including goodwill ($270,000) and interest expense ($1,002,000), as if the
Kilovac Acquisition had occurred on January 1, 1995.
(2) Pro forma statement of operations data for the three months ended March 31,
1995 represent the results for that period together with pro forma
adjustments (which adjustments include an adjustment cost of goods sold
($120,000), amortization of intangible assets including goodwill ($86,000)
and interest expense ($267,000), as if the Kilovac Acquisition (which was
completed on October 11, 1995) had occurred on January 1, 1995.
(3) In calculating earnings per share, adjustments were made to net income for
the periods ending October 11, 1995 and March 26, 1995 of $4,000 and
$8,000, respectively.
(4) Assumes all outstanding options were exercised on January 1, 1995.
9
<PAGE>
DILUTION
As of March 31, 1996, the net tangible book value (deficit) applicable to the
Company's Common Stock, giving effect to the Hartman Acquisition and the
Merger, was $(22.1) million, or $(7.36) 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
and the Merger as if such transactions occurred on March 31, 1996. After giving
effect to the sale of 3,500,000 shares of Common Stock offered by the Company
in the Offering (at an assumed initial public offering price of $10.00 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 March 31,
1996 would have been $13.7 million or $2.10 per share. This represents an
immediate increase in pro forma net tangible book value of $9.46 per share to
existing stockholders and an immediate dilution of $7.90 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................. $10.00
Net tangible book value (deficit) per share before the Offer-
ing.......................................................... $(7.36)
Increase per share attributable to new investors.............. 9.46
------
Pro forma net tangible book value per share after the Offering.. 2.10
------
Dilution per share to new investors............................. $ 7.90
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1996, the
difference between the effective cash consideration paid by the Company's
existing stockholders for shares of Common Stock and 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 non-cash consideration paid by the participants in
the Merger:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 2,550,000 39.2% $ 1,025,600 2.5% $ .40
New investors............. 3,500,000 53.9 35,000,000 86.4 10.00
Participants in the Merg-
er....................... 450,000 6.9 4,500,000(1) 11.1 10.00
--------- ----- ----------- -----
Total................... 6,500,000 100.0% $40,525,600 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Reflects non-cash consideration recorded in respect of the issuance of
450,000 shares of Common Stock in exchange for the 20% interest in Kilovac
not currently owned by CII.
10
<PAGE>
COMPARATIVE PER SHARE DATA OF CIIT AND KILOVAC
The following table sets forth income and book value per common share of CIIT
and Kilovac on a historical basis, for CIIT on a pro forma basis and for
Kilovac on a pro forma equivalent basis. Pro forma information gives effect to
the Merger under the purchase method of accounting and reflects certain
assumptions on the basis described in the notes to the unaudited Pro Forma
Combined Financial Statements. The data set forth below should be read in
conjunction with the audited and unaudited consolidated historical financial
statements of CIIT and the audited and unaudited consolidated historical
financial statements of Kilovac, including the respective notes thereto, and
the unaudited Pro Forma Combined Financial Statements, including the notes
thereto, appearing elsewhere in this Proxy Statement/Prospectus. Neither CIIT
nor Kilovac has paid any cash dividends on its common stock in the past ten
years.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
INCOME (LOSS) PER COMMON SHARE:
CIIT historical.................................. $ .03 $ (.93)
Kilovac historical............................... .59 3.15(2)
CIIT pro forma................................... .02 (.74)
Kilovac equivalent pro forma(1).................. .36 (13.34)
BOOK VALUE PER COMMON SHARE:
CIIT historical.................................. $(2.46) $(2.38)
Kilovac historical (Successor Company)........... 34.03 33.45
CIIT pro forma................................... .71 .68
Kilovac equivalent pro forma(1).................. 12.80 12.26
</TABLE>
(1) Equivalent pro forma per share amounts are calculated by multiplying the
pro forma per share information of CIIT by the exchange ratio so that the per
share amounts are equated to the respective values for one share of Kilovac.
The final exchange ratio will be determined on the effective date of the
Offering. See "Risk Factors Related to the Merger--Merger Consideration."
(2) Reflects income per Common Share on a pro forma basis for the fiscal year
ended December 31, 1995.
11
<PAGE>
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to shareholders of record
of Kilovac in connection with the Special Meeting of Shareholders of Kilovac
to be held on September , 1996 at 10:00 a.m., local time, at the offices of
Kilovac, and at any adjournment thereof. At the Special Meeting, the Kilovac
shareholders will be asked to consider and vote on the adoption and approval
of (i) the First Amendment and (ii) the Merger Agreement. The First Amendment
establishes the number of shares of CIIT Stock to be received for each Kilovac
Share cancelled in the Merger. The Merger Agreement provides for the Merger of
Kilovac with and into CII, a wholly-owned subsidiary of CIIT. CII which will
be the surviving corporation in the Merger.
All proxies which are properly completed, signed, dated and returned to
Kilovac prior to the Special Meeting will be voted in accordance with the
instructions indicated therein. In the absence of instructions, shares
represented by valid proxies will be voted FOR the matter described in this
Proxy Statement/Prospectus and in the discretion of the proxy holders as to
any other matter which may properly come before the Special Meeting or any
adjournment thereof. Any shareholder giving a proxy has the right to revoke it
at any time before it is exercised.
On consummation of the Merger following approval of the shareholders, each
of the Kilovac Shares, other than Kilovac Shares that are Dissenting Shares
(as defined later in this Proxy Statement/Prospectus) will be converted into
the right to receive the number of shares of CIIT Stock equal to the quotient
of $4.5 million divided by the IPO Price of CIIT Stock in the Offering divided
by 24,957. No fractional shares will be issued. See "The Merger--Terms of the
Merger Reorganization".
RECORD DATE; VOTING RIGHTS; REVOCABILITY OF PROXIES
The Board of Directors of Kilovac has fixed the close of business on July
31, 1996 as the Record Date for determining the shareholders entitled to
notice of and to vote at the Special Meeting. As of the Record Date, there are
eighteen record holders of the 124,785 outstanding shares of Kilovac Common
Stock. One of those record date shareholders is the Kilovac Corporation
Employee Stock Bonus Plan (the "ESBP"). In addition to the Record Date
shareholders, the beneficiaries of the ESBP will be entitled to direct the
trustee as to the manner in which the trustee votes on the Merger Agreement
for the shares of Kilovac Common Stock that are allocated by the ESBP to such
beneficiaries. As of the Record Date, there were 134 beneficiaries of the
ESBP.
Shares of Kilovac Common Stock represented by properly executed proxies will
be voted in accordance with the instructions indicated on such proxies or, if
no instructions are indicated, will be voted FOR the proposal to adopt and
approve the Merger Agreement and in the discretion of the proxy holders as to
any other matter which may properly come before the Special Meeting or any
adjournment thereof. A Kilovac shareholder who has given a proxy may revoke it
at any time before it is voted by filing with the Secretary of Kilovac an
instrument revoking the proxy or by duly executing a proxy bearing a later
date, or by appearing at the Special Meeting and voting in person.
Adoption and approval of the Merger requires the affirmative vote of the
holders of a majority of the outstanding shares of Kilovac Common Stock. The
obligations of all parties to the Merger Agreement are subject to the
condition that the affirmative vote of the Kilovac shareholders shall have
been obtained. As of the Record Date, a wholly-owned subsidiary of CIIT is the
record owner of 80% of the outstanding shares of Kilovac Common Stock and
intends to vote all such shares in favor of the approval of the Merger
Agreement.
Approval of the First Amendment requires the affirmative vote of all of the
holders of the Kilovac Shares.
PROXY SOLICITATION
Pursuant to the First Amendment, all expenses of this solicitation,
including the cost of preparing and mailing this Proxy Statement/Prospectus,
will be borne by CIIT. In addition to solicitation by use of the mails,
proxies may be solicited by directors, officers and employees of Kilovac in
person or by telephone, telegram or other means of communication. Such
directors, officers and employees will not be additionally compensated for,
but may be reimbursed for out-of-pocket expenses in connection with, such
solicitations. Arrangements will also be made with custodians, nominees and
fiduciaries for the forwarding of proxy solicitation materials to beneficial
owners of the shares of Kilovac Common Stock held of record by such
custodians, nominees and fiduciaries, and Kilovac may reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
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THE COMPANIES
THE COMPANY
The Company is a leading designer, manufacturer and marketer of a broad line
of high performance electromechanical and solid state relays 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. (the "Predecessor") 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, 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. 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 75% of its 1995 revenues from sales as a sole source supplier.
The Company also recently acquired a 25% 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
is expected to commence production of relays for the Company's global markets
in the third quarter of 1996 and thereafter expand into manufacturing of sub-
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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.
KILOVAC
Founded in 1964, Kilovac is a leading developer, manufacturer and marketer
of high voltage ("HV") relays and high voltage direct current ("HVDC")
contactors. Kilovac's specialty is HV vacuum and gas-filled electromechanical
relays, with its product including a broad array of HV relays, contactors and
power controllers. Kilovac produces 75 different products used to control and
regulate electric power in a wide variety of end products such as heart
defibrillators, magnetic resonance imaging ("MRI") equipment, electric
vehicles, test equipment, aircraft, satellites and high frequency radios (for
both commercial and military applications). Having a well-recognized
reputation for high-level product quality, excellent customer support and
innovative products, Kilovac sells its products to both domestic and foreign
customers in the medical, communications, aerospace, test equipment,
industrial and automotive industries.
Kilovac's core strategy is to develop, manufacture and sell components based
on proprietary technology to niche markets where Kilovac can achieve
significant market share and premium pricing. Kilovac management believes that
this strategy has been strengthened by Kilovac's diverse line of standard and
custom products, suited to a wide variety of specific applications, and by its
high level of customer service. In 1992, Kilovac supplemented this core
strategy by focusing on the development of emerging market products and
technologies with mass market applications. Kilovac continues to pursue
several opportunities to sell its products in large industrial markets
including the electric vehicle market and the rail transportation industry.
In October 1995, CII, a wholly owned subsidiary of the Company, acquired 80%
of the outstanding Kilovac Common Stock. The Company has since maintained
Kilovac as a stand-alone operation which conducts its business as the Kilovac
Division of the Company.
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THE MERGER
BACKGROUND OF THE MERGER
CIIT, through its wholly-owned subsidiary CII, owns 80% of the outstanding
Kilovac Common Stock, which was acquired on October 11, 1995 pursuant to the
Stock Purchase Agreement.
Pursuant to the Stock Purchase Agreement, Kilovac offered to purchase from
the shareholders and optionholders of Kilovac 80% of the outstanding shares of
Kilovac (after giving effect to the exercise of all options). At the time of
the closing under the Stock Purchase Agreement, there were seventeen
shareholders of Kilovac and each shareholder, as a party to the Stock Purchase
Agreement, tendered 80% of their shares for purchase by Kilovac. After the
Closing, these shareholders continued to own, in the aggregate, 24,957 shares
of Kilovac Common Stock (the "Kilovac Shares") and are referred to herein as
the "Kilovac Shareholders."
Contemporaneous with such purchase, Kilovac sold to CII, pursuant to its
subscription in the Stock Purchase Agreement, the number of shares of Kilovac
Common Stock equal to the number of such shares purchased by Kilovac from the
Kilovac Shareholders. The transactions consummated on October 11, 1995
pursuant to the Stock Purchase Agreement are referred to in this Proxy
Statement/Prospectus as the "Kilovac Acquisition".
The Stock Purchase Agreement also provided for the purchase by CII of the
Kilovac Shares in certain circumstances, and established the right of the
Kilovac Shareholders to participate in an underwritten public offering of the
shares of Kilovac, CII or certain affiliates of CII, including CIIT. In the
case of an offering of CIIT Stock, the Kilovac Shareholders are entitled to
have their Kilovac Shares converted into shares of CIIT Stock in accordance
with a formula set forth in the Stock Purchase Agreement.
CIIT has considered the current conditions in the public offering markets
and now desires to complete an IPO of CIIT Stock. The IPO of CIIT Stock will
be made pursuant to a registration statement filed with the Commission on Form
S-1 (the "S-1 Registration Statement"). CIIT, CII and Kilovac have agreed to
enter into the First Amendment to the Stock Purchase Agreement, subject to the
approval of the holders of all of the Kilovac Shares, and to complete the
Merger of Kilovac with and into CII whereby the Kilovac Shares will be
converted into the right to receive CIIT Stock. See "--Terms of the Merger
Reorganization." Copies of the Merger Agreement, the First Amendment, and the
Stock Purchase Agreement are attached hereto as ANNEX 1, ANNEX 2 and ANNEX 3,
respectively.
The consummation of the Merger is conditioned on the approval of a majority
of the shares of the outstanding Kilovac Common Stock, including the Kilovac
Shares and the shares held by CII. CII will be the surviving corporation in
the Merger.
The Board of Directors of Kilovac on , 1996 approved the Merger as
being fair to and in the best interests of the holders of Kilovac Common
Stock.
TERMS OF THE MERGER REORGANIZATION
CIIT proposes to issue to the Kilovac Shareholders, in exchange for the
24,957 Kilovac Shares, shares of fully paid and nonassessable CIIT Stock
having an aggregate initial public offering price of $4.5 million. The per
share exchange ratio of CIIT Stock for Kilovac Shares will be equal to the
quotient of $4.5 million divided by the IPO Price divided by the number of
Kilovac Shares (24,957). Consequently, the Kilovac Shareholders are assured of
receiving CIIT Stock having an aggregate initial public offering price of $4.5
million as of the closing of the IPO, and each of the Kilovac Shares will be
exchanged for CIIT Stock with an aggregate initial public offering price of
$180.31 per share. No fractional shares will be issued. In lieu of fractional
shares, holders of Kilovac Shares will receive cash in an amount equal to the
product of the fraction of a share of CIIT Stock to which they would have been
entitled times the IPO Price.
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The final exchange ratio will be determined on the effective date of the
IPO, and the merger of Kilovac with and into CII will be completed promptly
thereafter. CIIT currently anticipates that the IPO Price will be in the range
of $9.00-$11.00 per share and that, consequently, a maximum of 500,000 shares
of CIIT Stock and a minimum of 409,090 shares of CIIT Stock will be issued to
the Kilovac Shareholders.
DETERMINATION OF THE EXCHANGE RATIO
The exchange ratio for shares of CIIT Stock issuable on cancellation of
Kilovac Shares provided for in the First Amendment was reached by negotiation
between CIIT and Douglas Campbell, acting in his capacity as shareholder
representative of the holders of Kilovac Shares. Mr. Campbell serves as
shareholder representative and paying agent for the holders of Kilovac Shares
pursuant to the Shareholder Representative and Paying Agent Agreement entered
into in connection with the Stock Purchase Agreement. Mr. Campbell was
President and a director of Kilovac at the time of the Kilovac Acquisition
and, since that time, he has also served as a director of CIIT. The First
Amendment negotiated by CIIT and Mr. Campbell amends the Stock Purchase
Agreement to revise the exchange ratio and provide for the Merger under the
terms and in the manner described herein. The First Amendment and the Merger
are being submitted to the Kilovac Shareholders for their approval pursuant to
this Proxy Statement.
EXCHANGE RATIO UNDER THE STOCK PURCHASE AGREEMENT. The Stock Purchase
Agreement originally provided that, in the event of an IPO by CIIT, the
Kilovac Shares would be exchangeable into a number of shares of CIIT Stock
equal to the product of (a) (i) the proportion of common equity of Kilovac
represented by the Kilovac Shares times (ii) the quotient of the Kilovac IPO
Value divided by the CIIT IPO Value, multiplied by (b) the aggregate number of
shares of CIIT Stock which are to be outstanding immediately prior to the IPO.
Under this formula, the Kilovac Shares (which represent 20% of the outstanding
shares of Kilovac Common Stock) would be exchangeable into a portion of CIIT's
capital stock equal to that portion of the CIIT's earnings during the
preceding twelve months that are represented by 20% of Kilovac's earnings.
For purposes of the above exchange calculation, the following terms have the
meanings indicated, as more particularly described in the Stock Purchase
Agreement:
"Kilovac IPO EBIT" shall mean Kilovac's earnings before interest and taxes
for the four fiscal quarters preceding the closing date of the IPO
determined in accordance with GAAP (generally accepted accounting
principles) applied in a manner consistent throughout all periods and
consistent between Kilovac and CIIT. Further, in calculating EBIT, (i)
there shall be excluded all CII or corporate income and expense items
allocated, assigned or charged to Kilovac, including debt and related
interest, overhead (other than sales and marketing expenses and overhead
directly related to the conduct of Kilovac's business), and (ii) no
consolidated or consolidating entries relating to any entity other than
Kilovac or subsidiaries of Kilovac at the time of the IPO shall be given
effect.
"Kilovac IPO Value" shall equal (a) Kilovac IPO EBIT times IPO Multiple
minus (b) the Debt of Kilovac; provided however that during the period
continuing until the last day of the 30th full calendar month following
October 11, 1995, the Debt of Kilovac as used in the foregoing calculation
shall not include the Acquisition Debt.
"IPO Multiple" shall equal the result of multiplying (a) the number of
shares of CIIT Stock to be outstanding immediately prior to the IPO times
(b) the per share offering price as determined by the lead underwriter for
the IPO at the final pricing meeting prior to closing the IPO, and adding
to the product (c) the debt and preferred stock of CIIT, and subtracting
from the product (d) the estimated transaction fees to be incurred in
connection with the IPO, and dividing the amount thus determined by (e)
CIIT IPO EBIT.
"CIIT IPO EBIT" shall equal CIIT's earnings before interest and taxes for
the four fiscal quarters preceding the closing date of the IPO determined
in accordance with GAAP applied in a manner consistent throughout all
periods and consistent between Kilovac and CIIT. Further, in calculating
EBIT, (i) there shall be excluded all CIIT or corporate income and expense
items allocated, assigned or charged to CIIT, including
debt and related interest, overhead (other than sales and marketing
expenses and overhead directly related
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to the conduct of CIIT's business), and (ii) no consolidated or
consolidating entries relating to any entity other than CIIT or
subsidiaries of CIIT at the time of the IPO shall be given effect.
"CIIT IPO Value" shall equal (a) CIIT IPO EBIT times IPO Multiple, minus
(b) the debt and preferred stock of CIIT.
"Debt of Kilovac" shall mean the gross amount of all indebtedness for money
borrowed by Kilovac reflected on its balance sheet prepared on a
consolidated basis with its subsidiaries as at the date of the event
causing such measurement.
"Acquisition Debt" refers to the senior bank debt of CII and its affiliates
incurred to finance the Kilovac Acquisition, as more particularly defined
in the Stock Purchase Agreement.
In applying the foregoing formula to the earnings of Kilovac and CIIT
through March 1996, and assuming the issuance by CIIT in the IPO of 53.9 % of
its CIIT Stock at an IPO Price of $10.00, the holders of Kilovac Shares would
be entitled to receive CIIT Stock equal to approximately 17.3% of CIIT's Stock
outstanding after the IPO. Based on the IPO Price for the CIIT Stock assumed
above, the Kilovac Shares would be exchanged for CIIT Stock with an aggregate
initial public offering price of $11,243,000, or $450.49 per share.
CIIT anticipates that the earnings figures for CIIT and Kilovac as of June
30, 1996 will be substantially consistent with the numbers used in the
foregoing example.
NEGOTIATION OF REVISED EXCHANGE RATIO. The principal purpose of the First
Amendment is to amend the provisions providing for the exchange of the Kilovac
Shares for shares of CIIT in an IPO of CIIT Stock. In negotiating the Stock
Purchase Agreement, CIIT did not anticipate that an IPO would be conducted in
1996. Further, the earnings of CIIT for 1995 were reduced as a result of costs
and expenses associated with the Kilovac Acquisition and certain other
transactions undertaken by CIIT in that year. Consequently, CIIT is of the
opinion that, for purposes of calculating the exchange ratio, its earnings are
artificially lower than the level of earnings anticipated at the time the
Stock Purchase Agreement was executed.
According to the exchange ratio determined under the formula set forth in
the Stock Purchase Agreement (without giving effect to the First Amendment),
following an IPO in accordance with the example above, the current holders of
CIIT Stock (other than the holders of Kilovac Shares) would own approximately
28.8% of the CIIT Stock, rather than 39.2% of such CIIT Stock following an IPO
as described above after giving effect to the First Amendment. Such shares
would have an aggregate initial public offering price of approximately
$18,720,000, or $6,760,000 less than the aggregate IPO Price of the CIIT Stock
owned by such shareholders after giving effect to such IPO according to the
revised exchange ratio provided for in the First Amendment. The current
shareholders of CIIT have concluded that an IPO of CIIT on the foregoing terms
is not advisable and in their best interests.
In light of the foregoing and in anticipation of the IPO, CIIT approached
Mr. Campbell (in his capacity as shareholder representative) concerning the
proportion of CIIT Stock that the holders of the Kilovac Shares should
equitably receive as a result of the IPO. In negotiations concerning the
exchange ratio, CIIT proposed an enterprise value analysis which emphasizes
the longer term relative values of the entities rather than the short-term
earnings analysis used in the Stock Purchase Agreement. This analysis reduces
the distortion caused by the level of CIIT's earnings in 1995. The revised
exchange ratio is the result of arms-length negotiations.
FAIRNESS FROM A FINANCIAL POINT OF VIEW
ING CAPITAL FAIRNESS OPINION. Kilovac engaged ING Capital to analyze, from a
financial point of view, the fairness of the exchange pursuant to the Merger
as contemplated by the First Amendment. ING Capital was not engaged to
negotiate or set the price per share for the exchange in the Merger. ING
Capital had assisted Kilovac in negotiating the Kilovac Acquisition and
rendered an opinion as to the fairness to the Kilovac Shareholders from a
financial point of view of the Kilovac Acquisition, including the
consideration received by the Kilovac Shareholders at closing thereunder.
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ING Capital rendered its written opinion dated June 14, 1996 to Kilovac and
CIIT that the aggregate net consideration for the Kilovac Shares payable in
CIIT Stock with an aggregate initial public offering price of $4.5 million at
the time of the closing of the IPO is fair from a financial point of view to
the Kilovac Shareholders. ING Capital did not perform any independent appraisal
of any of Kilovac's or CIIT's assets and relied upon the accuracy and
completeness of the information concerning each company supplied to it, without
seeking to independently verify such information. In rendering its opinion, ING
Capital reviewed business and financial information concerning Kilovac and CIIT
supplied by Kilovac and CIIT, respectively, reviewed certain internal financial
reports and projections prepared by Kilovac and CIIT, and met with members of
Kilovac's and CIIT's management to discuss past and present operations and
financial performance, and the terms of the Merger. ING Capital also reviewed
publicly available financial and market data for companies that it considered
comparable to Kilovac and CIIT, the Merger Agreement and the First Amendment,
and the financial terms of certain other mergers and acquisitions that it
judged relevant, including the Kilovac Acquisition. ING Capital further
reviewed and analyzed other information relating to the assets, liabilities,
earning power, operations, financial condition, historical performance and
future prospects of Kilovac and CIIT, and conducted such other studies,
analyses and investigations as it deemed appropriate. No limitations were
imposed by Kilovac, CII or CIIT with respect to the investigations made, the
procedures followed or the factors considered by ING Capital in rendering its
opinion. The full text of ING Capital's opinion, which sets forth the matters
considered and limitations upon the review undertaken is set forth as ANNEX 4
to this Proxy Statement. The summary of this ING Capital opinion as set forth
in this Proxy Statement/Prospectus is qualified in its entirety by reference to
the full text of the opinion. ING Capital has approved the use of its opinion
in connection with this Proxy Statement/Prospectus and the proposed Merger.
ING Capital received substantial fees for its engagement in connection with
the Kilovac Acquisition and the fairness opinion rendered by it in connection
therewith. ING Capital is being paid a separate fee by CIIT of $100,000, plus
expenses, in connection with determining the fairness from a financial point of
view of the consideration to be paid to or for the account of the holders of
the Kilovac Shares on account of the Merger and rendering its formal opinion as
to such fairness. No fee payable to ING Capital has been or will be contingent
upon the determination as to fairness reached by ING Capital or upon the
delivery of its opinion thereon. Kilovac and CIIT have also agreed to indemnify
ING Capital against certain liabilities.
EFFECT ON EXISTING SECURITY HOLDERS; RESALE OF CIIT STOCK
As a result of the Merger, the holders of Kilovac Shares will become
stockholders of CIIT and shall thereafter have the rights and privileges
afforded stockholders by Delaware law and CIIT's Certificate of Incorporation
and Bylaws. See "Description of Capital Stock of the Company."
Pursuant to Section 1.7 of the Stock Purchase Agreement, the holders of
Kilovac Shares are subject to contractual provisions providing for (i) the
forfeiture of one-half of the Kilovac Shares if Kilovac fails to attain certain
earnings targets, (ii) the purchase by CII of such shareholder's Kilovac Shares
at the election of each Kilovac Shareholder effective December 31, 2000 or in
any event effective December 31, 2005, in each case at a price determined based
on Kilovac's earnings and outstanding debt, (iii) participation by the holders
of Kilovac Shares in any sale of Kilovac or certain affiliates and (iv)
participation by the holders of Kilovac Shares in any public offering of the
shares of Kilovac, CII or certain affiliates thereof. Upon completion of the
IPO and the Merger, all such provisions of the Stock Purchase Agreement would
terminate.
The shares of CIIT Stock to be distributed to Kilovac Shareholders in
connection with the Merger will be registered under the Securities Act and, in
accordance with the provisions of Rule 145 thereunder ("Rule 145"), may be
freely traded by Kilovac Shareholders who, at the time of the Merger, are not
affiliates of CIIT. Kilovac Shareholders who are affiliates of CIIT at the time
of the Merger will be able to resell shares of CIIT Stock in accordance with
the volume and manner of sale restrictions of Rule 144 under the Securities
Act. In addition, each holder of Kilovac Shares other than the ESBP, by
agreeing to the First Amendment, will be agreeing for the benefit of the
underwriters of the IPO not to sell any shares of CIIT Stock for a period of
one year following the effectiveness of the IPO. The only other restrictions on
the sale of the CIIT Stock acquired by the Kilovac
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Shareholders will be those provided by federal and state securities laws. See
"Restricted Shares Eligible For Future Sale".
SHAREHOLDER APPROVAL
As of the Record Date, the number of holders of Kilovac Common Stock of
record, including CII, is eighteen. The ESBP, one of the Kilovac Shareholders,
is a qualified stock bonus plan for the exclusive benefit of Kilovac's
employees and their beneficiaries and is qualified under Section 401(a) of the
Internal Revenue Code of 1986. Pursuant to the regulation of plans holding
employer securities such as the ESBP, each of the beneficial owners of the
Kilovac Shares held by the ESBP is entitled to direct the Trustee as to the
manner of voting the Kilovac Shares beneficially owned by such participant on
the Merger. Consequently, in addition to the eighteen record holders of shares
of Kilovac Common Stock, approximately 134 participants in the ESBP are
entitled to notice of and an opportunity to direct the Trustee with respect to
the vote on the Merger. Each of the holders of Kilovac Common Stock entitled to
vote, and each of the ESBP participants entitled to direct the Trustee as to
voting, are being provided with a copy of this Proxy Statement/Prospectus.
Under California law applicable to the Merger, the affirmative vote of a
majority of the issued and outstanding shares of Kilovac will be required to
approve the Merger. Directors and executive officers of Kilovac (who own 13.2%
of the outstanding Kilovac Common Stock) and a wholly owned subsidiary of the
Company (which owns 80% of the outstanding Kilovac Common Stock) have indicated
their intention to vote their shares in favor of the Merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors approved the Merger as being fair to and in the best
interests of the holders of Kilovac Common Stock. With the exception of Douglas
Campbell, the current directors of Kilovac have been affiliated with CIIT since
prior to the consummation of the Kilovac Acquisition. Since the Kilovac
Acquisition, Mr. Campbell has served on the Board of Directors of CIIT.
Consequently, the Board of Directors has determined that it will not make a
recommendation to the shareholders of Kilovac as to the approval of the Merger.
DESCRIPTION OF THE MERGER AGREEMENT
A summary of the principal terms of the Merger Agreement is set forth below.
The summary is subject in all respects to the express provisions of the Merger
Agreement, a copy of which is attached as ANNEX 1 to this Proxy
Statement/Prospectus.
PRINCIPAL TERMS. CII will acquire the Kilovac Shares through the merger of
Kilovac with and into CII. CII will survive the Merger (and as the corporation
surviving the Merger is sometimes referred to in this Proxy
Statement/Prospectus and the Merger Agreement as the "Surviving Corporation")
and Kilovac will carry on its business as a division of the Company. The Merger
will be effected by the filing of the Merger Agreement, together with the
required officers' certificates with the North Carolina and California
Secretaries of State. The time of such filing with the North Carolina Secretary
of State is referred to as the "Effective Time."
At the Effective Time, each of the Kilovac Shares, other than "dissenting
shares" within the meaning of Chapter 13 of the California GCL ("Dissenting
Shares"), will be automatically converted into the right to receive the number
of shares of CIIT Stock equal to the quotient of $4.5 million divided by the
IPO Price divided by 24,957, and each share of Kilovac Common Stock held by CII
will be cancelled. No fractional shares will be issued. In lieu of fractional
shares, holders of Kilovac Shares will receive cash in an amount equal to the
product of the fraction of a share of CIIT Stock to which they would have been
entitled times the IPO Price. Following the Merger, the Surviving Corporation
will continue as a wholly-owned subsidiary of CIIT.
For the rights of holders of Dissenting Shares, see "The Merger--Dissenters'
Rights."
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EXPENSES. In accordance with certain provisions negotiated as part of the
First Amendment, CIIT or CII will pay all legal and investment banking fees
and expenses incurred by Kilovac in connection with the Merger and the fees
and expenses incurred by Mr. Campbell in his capacity as shareholder
representative and paying agent for the holders of Kilovac Shares. Such fees
and expenses include the fee payable to ING Capital in connection with its
fairness opinion and the legal fees and expenses incurred in connection with
the First Amendment, this Proxy Statement/Prospectus, the Special Meeting and
the Merger.
EXCHANGE WITH SHAREHOLDERS. CIIT's transfer agent, First Union National Bank
of North Carolina, will act as exchange agent in connection with the Merger to
effect the exchange of certificates representing Kilovac Shares for
certificates representing CIIT Stock. All certificates for the Kilovac Shares
are currently held by Mr. Campbell, in his capacity as shareholder
representative and paying agent, or by the law firm of Adams, Duque &
Hazeltine ("AD&H"), counsel to Kilovac, as escrow agent for CII and the
shareholder representative pursuant to the Stock Purchase Agreement. At the
Effective Time, pursuant to the First Amendment, the escrow held by AD&H will
be released and AD&H will deliver the Kilovac Shares held by it to the
shareholder representative for the benefit of the holders of the Kilovac
Shares. As soon as practicable after the Effective Time, the shareholder
representative shall surrender all certificates representing Kilovac Shares to
the Exchange Agent for cancellation and issuance of CIIT Stock. After the
Effective Time there shall be no further transfer of the Kilovac Shares on the
books of Kilovac.
CONDITIONS TO THE MERGER. The Merger Agreement and consummation of the
Merger are subject to the satisfaction of customary conditions prior to the
Effective Time, including, receipt of necessary approvals and freedom from
legal restraints. In addition to the foregoing conditions, the Merger
Agreement and the consummation of the Merger are conditioned upon the closing
of the IPO and the agreement to the First Amendment by all record holders of
Kilovac Shares.
Consummation of the Merger is further conditioned upon the aggregate number
of Dissenting Shares not exceeding ten percent of the total number of
outstanding Kilovac Shares. Thus, if Dissenting Shareholders (as defined later
in this Proxy Statement/Prospectus) holding more than 12,479 Kilovac Shares
shall have taken steps to perfect their Dissenters' Rights, the Merger will
not be consummated unless CIIT and CII waive this condition. See "--
Dissenters' Rights."
TERMINATION, AMENDMENT, WAIVER AND ASSIGNMENT. Each of the First Amendment
and the Merger Agreement provides that it shall be void if the Merger does not
occur on or before October 31, 1996, unless extended by the consent of the
parties thereto. Pursuant to the First Amendment, Mr. Campbell, as shareholder
representative, is authorized in his discretion to consent to any extension of
behalf of the holders of Kilovac Shares. Each of the First Amendment and the
Merger Agreement may be terminated (a) by mutual consent in writing of CIIT
and CII, and Mr. Campbell, as shareholder representative; or (b) unilaterally
by either CIIT and CII or Mr. Campbell, as shareholder representative, if any
event occurs which would render impossible the satisfaction of any conditions
to their respective obligations to consummate the transactions contemplated
thereby.
ACCOUNTING TREATMENT. The Merger will be accounted for as a purchase, as
such term is used under generally accepted accounting principles, for
accounting and financial reporting purposes.
REGULATORY APPROVALS. No federal or state regulatory approvals are required
and no federal or state regulatory requirements must be complied with in order
to effect the Merger, other than the filing of an agreement of merger together
with officers' certificates with the Secretaries of State of North Carolina
and California.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE SHAREHOLDERS
This section includes a brief summary of the federal income tax consequences
of the proposed exchange of Kilovac Shares for CIIT Stock pursuant to the
Merger. It is for general information only and does not consider all aspects
of federal and state taxation that may be relevant to the holders of the
Kilovac Shares. The consequences to any holder of Kilovac Shares may differ
depending upon the shareholder's own circumstances and tax position. This tax
summary does not consider the effect of applicable foreign, state or local tax
laws.
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EACH HOLDER OF KILOVAC SHARES IS URGED TO CONSULT HIS OR HER OWN TAX ADVISER
WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THIS
TRANSACTION.
This tax summary will separately consider federal income tax consequences to
holders of Kilovac Shares held as capital assets, Kilovac Shares received upon
the exercise of options at the closing of the Kilovac Acquisition and Kilovac
Shares held as part of ESBP. This tax summary assumes that no holder of
Kilovac Shares has any family relationship with any of CIIT's shareholders.
This tax summary also assumes that no holder of Kilovac Shares owns any stock
in CIIT, either directly or indirectly, or any options to acquire CII or CIIT
stock.
EXCHANGE OF KILOVAC SHARES FOR CIIT STOCK: TREATMENT IF A TAX FREE
REORGANIZATION. It is intended that the Merger be treated as a forward
triangular merger which is a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986. To qualify as a forward
triangular merger under current rules of the Internal Revenue Service, at
least fifty percent of the Kilovac equity value must continue as an equity
interest in the resulting combined enterprise. Management believes that this
"continuity-of-interest" requirement is met because more than fifty percent of
Kilovac is already owned by an affiliate of CIIT. However, the Internal
Revenue Service may make a contrary argument. The Internal Revenue Service
might argue that the cash purchase of eighty percent of Kilovac on October 11,
1995 in the Kilovac Acquisition and the exchange of shares in the Merger are
part of one integrated plan to acquire all of Kilovac. If the Internal Revenue
Service can successfully make this argument, then the continuity of interest
requirement will not be satisfied because only twenty percent of the pre-
October 11, 1995 equity in Kilovac would be exchanged in the Merger for CIIT
stock. The balance of the pre-October 11, 1995 equity in Kilovac would have
been sold for cash.
There are no safe harbor rules as to when a cash purchase and later merger
to acquire the balance of the equity are not considered part of the same
transaction. Based on current case law, there generally must be some delay
between the two transactions. There should also be some intervening
circumstances which cause the second transaction to occur which were not a
certainty at the time of the first transaction. The consummation of the
second transaction cannot be required by or considered inevitable at the time
of the first transaction. It is management's view that the Kilovac Acquisition
and the Merger are not part of the same transaction. In the Kilovac
Acquisition, the Kilovac Shares were not acquired so that the holders of the
Kilovac Shares could participate in the future growth of Kilovac. In October
1995, there was no set time when the Kilovac Shares would be eliminated. While
the elimination of the Kilovac Shares was contemplated by the Stock Purchase
Agreement, no exit plan was assured. The Stock Purchase Agreement contemplated
that the Kilovac Shares either (i) could be included in a sale of the entire
Kilovac enterprise, (ii) half of such Shares could be forfeited if certain
projections were not met, (iii) the Kilovac Shares could participate in a
public offering of Kilovac, CII or an affiliate thereof or (iv) the Kilovac
Shares could be sold by the Kilovac Shareholders to CII at the shareholder's
election on December 31, 2000, or in any event CII would purchase such Kilovac
Shares on December 31, 2005. In addition, management did not foresee in
October 1995 that an IPO would occur so soon after the consummation of the
Kilovac Acquisition. It is therefore management's view that the Kilovac
Acquisition and the Merger are not part of one integrated plan to acquire all
of Kilovac.
If the Merger is considered a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, then the following will be the
treatment for federal income tax purposes for those persons who hold their
Kilovac Shares as capital assets: (1) no gain or loss would be recognized by
holders of the Kilovac Shares upon the receipt of CIIT Stock in the Merger
(except as discussed below with respect to cash received in lieu of a
fractional interest and with respect to cash received upon exercise of
Dissenters' Rights), (2) the aggregate adjusted tax basis of the CIIT Stock to
be received by holders of Kilovac Shares will be the same as the aggregate
adjusted tax basis of the Kilovac Shares surrendered in the Merger (reduced by
any amount allocable to a fractional share interest for which cash is
received), and (3) the holding period of CIIT Stock received in the Merger by
holders of Kilovac Shares will include the holding period for the Kilovac
Shares surrendered in the Merger.
The receipt of cash for fractional shares pursuant to the Merger or on the
exercise of "Dissenters' Rights" will be a taxable transaction for federal
income tax purposes to the holders of Kilovac Shares receiving such cash (and
may be a taxable transaction for state, local and foreign tax purposes as
well). Accordingly, each holder of Kilovac Shares will generally recognize
gain or loss for federal income tax purposes equal to the difference
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between the amount of cash received (other than the portion of any amount
received pursuant to the exercise of Dissenters' Rights which is denominated
as interest, which amount will be taxable as ordinary income) and such
shareholder's adjusted tax basis for the shares surrendered for cash in the
Merger. A holder of Kilovac Shares who does not perfect Dissenters' Rights
will recognize such gain or loss as of the Effective Time. A holder of Kilovac
Shares who perfects Dissenters' Rights under the California GCL will recognize
such gain or loss on the date on which such shareholder is entitled to receive
payment for his or her Dissenting Shares pursuant to the procedure described
under "Dissenters' Rights." In general such gain or loss will be a capital
gain or loss, provided the Kilovac Shares are a capital asset in the hands of
the holder at the time they are converted and will be long term capital gain
or loss if the shares have been held for more than one year. For tax years of
individuals beginning in 1994, long term capital gains are taxable for federal
income tax purposes at a maximum rate of 28%, whereas other income may be
taxed at a maximum rate of 39.6%.
Management does not intend to obtain a legal opinion or a ruling from the
Internal Revenue Service regarding the tax consequences of the Merger.
Therefore, no one has made or will make any representation or warranty that
the Merger will in fact be treated by the Internal Revenue Service as a tax
free reorganization.
EXCHANGE OF KILOVAC SHARES FOR CIIT STOCK: TREATMENT IF NOT A TAX FREE
REORGANIZATION. If the Merger is not considered a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, then the
following will be the treatment for federal income tax purposes for those
persons who hold their Kilovac Shares as capital assets. Gain or loss will be
recognized by holders of the Kilovac Shares upon the receipt of CIIT Stock in
the Merger in an amount equal to the difference between the cash and the fair
market value of the CIIT Stock received in the Merger at the Effective Time
and the aggregate adjusted tax basis of the Kilovac Shares surrendered in the
Merger.
EXCHANGE OF KILOVAC SHARES RECEIVED UPON EXERCISE OF NONQUALIFIED
OPTIONS. For Kilovac Shares received on the exercise of nonqualified options
at the closing of the Kilovac Acquisition which have been held as capital
assets since that time, they will be subject to the same tax treatment as
previously described for Kilovac Shares which were not acquired on the
exercise of stock options. However, if any gain or loss is recognized on such
shares as part of the Merger and if the Effective Time of the Merger occurs
before October 11, 1996, that gain or loss will be considered short-term.
EXCHANGE OF KILOVAC SHARES RECEIVED UPON EXERCISE OF QUALIFIED OPTIONS. For
those Kilovac Shares received on the exercise of qualified stock options at
the closing of the Kilovac Acquisition, no income or gain will be recognized
on the exchange of those shares for CIIT Stock as part of the Merger if the
Merger is considered a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986. However, the holder will recognize ordinary
income equal to the difference between the amount of cash received and the
option exercise price for the shares surrendered for cash in the Merger.
If the Merger is not considered a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986 and if the Effective Time
of the Merger occurs before October 11, 1996, then the holder will recognize
ordinary income equal to the difference between the fair market value of the
CIIT Stock received at the Effective Time and the option exercise price for
the Kilovac Shares surrendered. If the Merger is not considered a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986 and if the Effective Time of the Merger occurs on or after
October 11, 1996, then the holder will recognize capital gain equal to the
difference between the fair market value of the CIIT Stock received at the
Effective Time and the option exercise price for the Kilovac Shares
surrendered.
ESBP SHARES. The ESBP is a qualified stock bonus plan for the exclusive
benefit of Kilovac's employees and their beneficiaries. Therefore, the ESBP
will not recognize any income on the exchange of Kilovac Shares pursuant to
the Merger. In addition, the participants in the ESBP will not recognize any
income on the ESBP's exchange of Kilovac Shares pursuant to the Merger.
WITHHOLDING REQUIREMENTS. The Paying Agent will be required to withhold 31%
of the gross proceeds payable to a holder of Kilovac Shares or other payee in
the Merger unless the shareholder or payee provides his or her taxpayer
identification number and certifies under penalty of perjury that such number
is correct, or an
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exception applies under applicable law and regulations. Therefore, unless such
an exception exists and is proven in a manner satisfactory to Kilovac and the
Paying Agent, each holder delivering Kilovac Shares in the Merger should
complete and sign the Substitute Form W-9 included as part of the Letter of
Transmittal included in this Proxy Statement/Prospectus package so as to
provide the information and certification necessary to avoid backup
withholding.
ADDITIONAL EXCEPTIONS. The foregoing discussion may not be applicable to a
holder of Kilovac Shares which is a tax-exempt entity or to a shareholder that
is a foreign corporation or an individual who is not a citizen or resident of
the United States, if the ownership of Kilovac Shares by such shareholder is
not effectively connected with a United States trade or business of such
shareholder.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. IT MAY NOT BE APPLICABLE TO ALL SHAREHOLDERS. HOLDERS OF
KILOVAC SHARES ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER AND RULES APPLICABLE TO THEM,
INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM TAX, THE
CORPORATE MINIMUM TAX AND STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS.
DISSENTERS' RIGHTS
If the Merger is consummated, a holder of Kilovac Shares who follows the
procedures set forth in Chapter 13 of the California GCL ("Chapter 13") may be
entitled to have such shareholder's Dissenting Shares purchased for cash as
described in Chapter 13 (such rights, "Dissenters' Rights"). The summary
description of Dissenters' Rights set forth herein is qualified in its
entirety by reference to Chapter 13, the text of which is attached to this
Proxy Statement as ANNEX 5. FAILURE TO TAKE ANY NECESSARY STEP MAY RESULT IN A
TERMINATION OR WAIVER OF A SHAREHOLDER'S DISSENTERS' RIGHTS.
A shareholder electing to exercise Dissenters' Rights (a "Dissenting
Shareholder") must satisfy each of the following requirements of Chapter 13:
(i) the Dissenting Shareholder must not have voted or delivered a proxy in
favor of the Merger; (ii) the shareholder must make a written demand in
accordance with Section 1301 of the California GCL that Kilovac purchase his
or her shares at fair market value, which written demand must be received by
Kilovac within 30 days after the date Kilovac mails notice of approval of the
Merger to the shareholders (voting against the Merger does not satisfy the
requirement of a written demand); and (iii) the shareholder must submit such
shareholder's share certificates to Kilovac for endorsement. Because the
Kilovac Shares are held in escrow, Kilovac will accept the certificates as
being tendered for endorsement on receipt of the Dissenting Shareholder's
written demand. BECAUSE A PROXY SIGNED AND LEFT BLANK WILL, UNLESS REVOKED, BE
VOTED FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT, A SHAREHOLDER WISHING
TO EXERCISE DISSENTERS' RIGHTS WHO VOTES BY PROXY MUST NOT LEAVE THE PROXY
BLANK, BUT MUST VOTE AGAINST ADOPTION AND APPROVAL OF THE MERGER AGREEMENT OR
ABSTAIN FROM VOTING.
If a Dissenting Shareholder complies with the requirements of Chapter 13,
Kilovac will be required to purchase the Dissenting Shares for cash at the
fair market value of those shares on the day before the terms of the Merger
were first announced, excluding any appreciation or depreciation because of
the Merger.
The Board of Directors of Kilovac has determined that the fair market value
of each of the dissenting shares on July 17, 1996, the day before the filing
of the S-1 Registration Statement for the Offering pursuant to the Securities
Act, was $131.25. This amount is equal to that portion of the price paid by
Kilovac in cash on the purchase of shares from the Kilovac shareholders on
October 11, 1995 pursuant to the Stock Purchase Agreement. In addition to the
above cash consideration, in connection with the purchase of Kilovac Common
Stock pursuant to Stock Purchase Agreement, an escrow fund in the amount of
$500,000 was established against which CII is entitled to make certain claims
through October 10, 1997 if representations and warranties made by Kilovac in
the Stock Purchase Agreement were incorrect. The remaining consideration paid
or payable
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to the Kilovac shareholders pursuant to the Stock Purchase Agreement (the
amount of certain tax benefits to be received by Kilovac and the interest in
Kilovac Development, Inc.) have been paid or are payable to the Kilovac
shareholders independent of any continuing interest in Kilovac, and the entire
amount of such items has been or will be received by the Kilovac shareholders
pursuant to the Stock Purchase Agreement regardless of whether they exercise
dissenters' rights. Consequently, the continuing operations of Kilovac after
October 11, 1995 do not include such items and are, therefore, not included in
the fair market value of dissenting shares.
In connection with the Kilovac Acquisition, on October 11, 1995, Kilovac
obtained an independent valuation of the Kilovac Shares for purposes related
to the ESBP. This valuation was undertaken in light of the price paid pursuant
to the Stock Purchased Agreement. The valuation reflected certain discounts
from amounts derived from recognized valuation techniques, including discounts
for (i) the fact that the Kilovac Shares represent a minority interest, (ii)
risk associated with the size of Kilovac, (iii) the lack of marketability of
the Kilovac Shares and (iv) the risk of forfeiture of one half of the Kilovac
Shares pursuant to the Stock Purchase Agreement. The value of the Kilovac
Shares determined in such valuation was $68.73 per share.
If Kilovac and a Dissenting Shareholder fail to agree on either the fair
market value of the Dissenting Shares or on the eligibility of shares to be
purchased, then either the Dissenting Shareholder or Kilovac may file a
complaint for judicial resolution of the dispute in the California Superior
Court of the proper county. If a complaint is not filed within six months, the
Dissenting Shares will lose their status as Dissenting Shares. Dissenting
Shareholders should not assume that Kilovac will file such a complaint or that
Kilovac will initiate any negotiations with respect to the fair market value
of Dissenting Shares. Accordingly, Dissenting Shareholders should initiate all
necessary actions to perfect their Dissenters' Rights.
A shareholder may not withdraw a demand for payment without the consent of
Kilovac. It is a condition to the obligations of CIIT and CII to consummate
the Merger that the aggregate number of Dissenting Shares not exceed ten
percent of the outstanding shares of Kilovac Common Stock. Therefore, if
Shareholders holding an aggregate of at least 12,479 Kilovac Shares perfect
Dissenters' Rights, the Merger will not be consummated unless CIIT and CII
waive this condition.
Under the California GCL, no shareholder exercising Dissenters' Rights has
any right at law or in equity to attack the validity of the Merger or to have
the Merger set aside or rescinded, except in an action to test whether the
number of shares required to authorize or approve the Merger had been legally
voted in favor of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Holders of Kilovac Common Stock should be aware that the members of the
Kilovac Board of Directors and certain members of management of Kilovac have
certain interests which may present them with potential conflicts of interest
in connection with the Merger and the First Amendment. The Board of Directors
of Kilovac was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and the First Amendment.
Common Directorships. Ramzi A. Dabbagh and G. Daniel Taylor have been
executive officers and directors of CIIT since prior to the consummation of
the Kilovac Acquisition. Douglas Campbell was named a director of CIIT at the
time of the Kilovac Acquisition.
Employment Arrangements. Each of the executive officers of Kilovac other
than Mr. Campbell have entered into employment agreements with CIIT which
terminate in October 1998. Mr. Campbell is employed by CIIT on a full-time
basis until December 31, 1996 and, at CIIT's request, on a part-time
consultancy basis for up to 12 months thereafter. See "Management of Kilovac--
Employment Agreements." CIIT also has an understanding with Mr. Campbell that
he will be nominated to serve as a director of CIIT through October 1997.
Indemnification. Pursuant to the First Amendment, Mr. Campbell, as
representative of the holders of the Kilovac Shares, is indemnified by CIIT
and CII for any and all Claims (as such term is defined in the First Amendment
which is attached hereto as Annex 2) incurred or suffered by him arising out
of the First Amendment and for any and all expenses incurred by him in
connection with the First Amendment.
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RISK FACTORS RELATED TO THE COMPANY
This Proxy Statement/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 Proxy Statement/Prospectus. Readers should consider carefully the
following specific information, together with the other information set forth
in this Proxy Statement/Prospectus.
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 of the Company" and "Business of the Company--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 of the Company,"
"Business of the Company--Acquisition Strategy," and "--Sales and
Distribution."
RISKS RELATED TO THE HARTMAN ACQUISITION
The Company has assumed certain risks in connection with its recently
completed Hartman Acquisition.
Approximately 75% of Hartman's employees are represented by the
International Union of Electronics, Electrical, Salaried, Machine and
Furniture Workers AFL, CIO. As a result of the Hartman Acquisition, these
employees are working under temporary terms of employment while the Company
and the union negotiate a new collective bargaining agreement. If the Company
and the union cannot agree as to the terms of a new collective bargaining
agreement, or if the terms of that agreement are not favorable to the Company,
the Company's results of operations could be materially and adversely
affected.
The Company has also assumed a contractual obligation to produce and sell
relay components of electrical load management systems. This contract
accounted for $1.4 million, or 8.0%, of Hartman's revenues for fiscal
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1995 and, for the first three months of 1996, $1.3 million, or 22.2%, of
Hartman's revenues (7.2% of the Company's pro forma net sales for the first
three 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 $2.6 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. If purchases under this contract are reduced or the
contract is not renewed, future revenues would decline, and, in the absence of
offsetting new sales, the Company's gross profit would be adversely affected.
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 21.6% 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 13.1%
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
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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.
India. The Company expects the Indian Joint Venture to commence 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 is currently
transferring 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 of the Company--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 of the
Company--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 of the
Company--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
27
<PAGE>
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 of the Company--Competition."
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 of the Company--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
28
<PAGE>
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.
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 of the Company--Environmental
Matters."
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, CII Associates, L.P. (the "Partnership")
will own in the aggregate approximately 33.1% of the outstanding Common Stock
of the Company (and 30.6% 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
"Ownership of Common Stock of the Company."
USE OF PROCEEDS TO REPAY DEBT OWING TO EXISTING STOCKHOLDERS
After the application of approximately $17.3 million of the net proceeds 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, $7.3
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 $4.6 million of the net proceeds will be
used to redeem all of the Company's outstanding Preferred Stock, including
accrued and unpaid dividends, held by the Partnership. See "Use of Proceeds of
the Offering" and "Ownership of Common Stock of the Company."
29
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of the Company, as expected to be
amended prior to consummation of the Offering, will 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 of the
Company--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 Company will have 6,500,000 shares of
Common Stock outstanding (7,025,000 if the Underwriters' over-allotment option
is exercised in full). The 3,500,000 shares of Common Stock in the Offering
(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. Of the remaining 3,000,000
shares of Common Stock, approximately 2,550,000 shares 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. 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 of the Offering. The 450,000 shares to be
issued to Kilovac Shareholders in the Merger will be freely tradeable without
restriction or registration under the Securities Act by persons other than
affiliates of Kilovac or the Company at the time of the Merger; provided that
all of such shares, other than those received by the ESBP, will also be subject
to one-year lock-up agreements with the representatives of the underwriters of
the Offering. In addition, the 2,550,000 shares of Common Stock held by the
Company's current stockholders have certain rights with respect to the
registration of their restricted securities under the Securities Act. See
"Certain Relationships and Related Transactions--Registration Rights."
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."
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 of the IPO and may not be indicative of the market price for
the Common Stock after the Offering.
30
<PAGE>
USE OF PROCEEDS OF THE OFFERING
The net proceeds to the Company from the Offering are estimated to be $31.2
million (assuming an initial public offering price of $10.00 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 $17.3 million will be used to repay a portion of the $35.5
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 $12.9 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 $5.3 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 $4.6 million will be used to redeem an equivalent amount of
the Company's outstanding Cumulative Redeemable Preferred Stock held by the
Partnership, including accrued and unpaid dividends. 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 $500,000 (based on the assumed
initial public offering price).
The amounts outstanding under the Credit Facility are due on October 11,
2000, 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, $1.2 million
and $74,000, 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 OF THE COMPANY
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.
DIVIDEND POLICY OF KILOVAC
Kilovac has not paid dividends on the Kilovac Common Stock for more than ten
years. Kilovac's earnings have historically been retained for reinvestment in
the growth of Kilovac.
31
<PAGE>
CAPITALIZATION OF THE COMPANY
The following table sets forth the short-term debt and consolidated
capitalization of the Company (i) as of March 31, 1996 and (ii) as adjusted to
give effect to (a) the Merger, (b) the Hartman Acquisition and (c) the sale of
3,500,000 shares of the Common Stock at an assumed initial public offering
price of $10.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds of the Offering." This table should be read in
conjunction with the Company's consolidated financial statements, including
the notes thereto, included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 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)............................... $ 6,744 $ 6,259
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........................... 26,967 18,282
Accrued interest on subordinated note............ 1,302 --
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)..................................... 4,590 --
Common stock, $.01 par value, subject to put
options, 400,000 shares issued and
outstanding(4).................................. 165 --
----------- -----------
Total long-term obligations.................... 33,024 18,282
Stockholders' equity (deficit):
Common stock, $.01 par value, 2,150,000 shares
authorized and 2,150,000 shares issued and
outstanding, actual; and 25,000,000 shares
authorized and 6,500,000 shares issued and
outstanding, as adjusted........................ 22 65
Additional paid-in capital....................... 745 36,343
Retained earnings (deficit)...................... (3,157) (4,187)
Currency translation adjustment.................. (36) (36)
----------- -----------
Total stockholders' equity (deficit)........... (2,426) 32,185
----------- -----------
Total capitalization......................... $ 30,598 $ 50,467
=========== ===========
</TABLE>
- --------
(1) For a further description of the Company's debt, see Note 5 of Notes to
Consolidated Financial Statements.
(2) Approximately $12.9 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 of the Company--
Liquidity and Capital Resources."
(3) Includes accrued and unpaid dividends on the Cumulative Redeemable
Preferred Stock in the amount of $590,000.
(4) See Note 11 of Notes to Consolidated Financial Statements.
32
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
(UNAUDITED)
The pro forma condensed consolidated statement of operations data for the
fiscal year ended December 31, 1995 gives effect to the Kilovac Acquisition,
the Hartman Acquisition and the Merger, as if each such transaction had
occurred on January 1, 1995. See "Use of Proceeds of the Offering," and "The
Companies."
The pro forma condensed consolidated statement of operations data for the
three months ended March 31, 1996 and the pro forma condensed consolidated
balance sheet at March 31, 1996 give effect to the Hartman Acquisition and the
Merger, as if such events had occurred on January 1, 1995 and March 31, 1996,
respectively. See "The Companies--The Company" and "Use of Proceeds of the
Offering."
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 of the Company." 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.
33
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
KILOVAC FROM KILOVAC
JANUARY 1, ADJUSTMENTS ADJUSTMENTS ACQUISITION
1995 TO FOR THE FOR THE AND THE ADJUSTMENTS PRO FORMA
OCTOBER 11, KILOVAC HARTMAN HARTMAN FOR THE FOR THE
COMPANY(1) 1995 ACQUISITION HARTMAN ACQUISITION(10) ACQUISITION MERGER MERGER
---------- ------------ ----------- ------- --------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Net sales....... $39,918 $11,029 $ -- $17,461 $ -- $68,408 $ -- $68,408
Cost of sales... 28,687 6,453 (174)(6) 11,417 195 (11) 46,578 20 (16) 46,598
------- ------- ------- ------- ------ ------- ----- -------
Gross profit.... 11,231 4,576 174 6,044 (195) 21,830 (20) 21,810
Selling
expenses....... 3,229 1,287 -- 445 -- 4,961 -- 4,961
General and
administrative
expenses....... 3,334 1,240 -- 2,753 (1,582)(12) 5,745 4 (16) 5,749
Research and
development.... 301 547 -- 615 -- 1,463 -- 1,463
Amortization of
goodwill and
other
intangible
assets......... 251 -- 270 (7) -- 134 (13) 655 162 (17) 817
Special
compensation
charge(2)...... 1,300 -- -- -- -- 1,300 -- 1,300
Environmental
expenses....... 951(3) -- -- 850 (850)(14) 951 -- 951
Special
acquisition
expenses(4).... 2,064 -- -- -- -- 2,064 -- 2,064
------- ------- ------- ------- ------ ------- ----- -------
Operating income
(loss)......... (199) 1,502 (96) 1,381 2,103 4,691 (186) 4,505
Interest
expense........ 2,997 35 1,002 (8) 50 1,303 (15) 5,387 -- 5,387
Other income
(expense)...... 2 9 -- (92) -- (81) -- (81)
------- ------- ------- ------- ------ ------- ----- -------
Income (loss)
before taxes... (3,194) 1,476 (1,098) 1,239 800 (777) (186) (963)
Income tax
expense
(benefit)(5)... (1,076) 561 (402) 496 318 (103) (75) (178)
Income
applicable to
minority
interest in net
income of
subsidiaries... 35 -- 43(9) -- -- 78 (78) --
------- ------- ------- ------- ------ ------- ----- -------
Net income
(loss)......... (2,153) 915 (739) 743 482 (752) (33) (785)
Preferred stock
dividend....... 210 -- -- -- -- 210 -- 210
------- ------- ------- ------- ------ ------- ----- -------
Net income
(loss)
available for
common stock... $(2,363) $ 915 $ (739) $ 743 $ 482 $ (962) $ (33) $ (995)
======= ======= ======= ======= ====== ======= ===== =======
Net income
(loss) per
common share... $ (.93) $ (.33)
======= =======
Average shares
outstanding.... 2,536 2,986
<CAPTION>
PRO FORMA
AS
ADJUSTED(18)
------------
<S> <C>
STATEMENT OF
OPERATIONS
DATA:
Net sales....... $68,408
Cost of sales... 46,598
------------
Gross profit.... 21,810
Selling
expenses....... 4,961
General and
administrative
expenses....... 5,749
Research and
development.... 1,463
Amortization of
goodwill and
other
intangible
assets......... 808
Special
compensation
charge(2)...... --
Environmental
expenses....... --
Special
acquisition
expenses(4).... --
------------
Operating income
(loss)......... 8,829
Interest
expense........ 1,501
Other income
(expense)...... (81)
------------
Income (loss)
before taxes... 7,247
Income tax
expense
(benefit)(5)... 2,948
Income
applicable to
minority
interest in net
income of
subsidiaries... --
------------
Net income
(loss)......... 4,299
Preferred stock
dividend....... --
------------
Net income
(loss)
available for
common stock... $ 4,299
============
Net income
(loss) per
common share... $ .66
============
Average shares
outstanding.... 6,486
</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 issued to
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 issuances.
(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 of the Company--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 of the Company--Results of
Operations."
(5) Assumes an effective tax rate of 42.0% for Kilovac, 40.0% for Hartman and
40.7% for the pro forma as adjusted data.
34
<PAGE>
(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.
(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.
(11) Reflects (i) increased depreciation expenses corresponding to a higher
appraised value of certain equipment acquired in the Hartman Acquisition,
(ii) reclassification of building depreciation to rent expense since the
Company is leasing Hartman's facility and (iii) the amortization of
certain tooling expenditures previously expensed as incurred by Hartman.
(12) Reflects elimination of estimated Figgie corporate charges of $1.8 million
recorded by Hartman, which are partially offset by the Company's estimate
of accounting, legal and human resource expenses ($230,000).
(13) Reflects the amortization of goodwill ($134,000) recorded in connection
with the Hartman Acquisition.
(14) Reflects certain environmental expense associated with liabilities not
assumed by the Company.
(15) Reflects additional interest expense associated with approximately $12.9
million of bank debt incurred to finance the Hartman Acquisition.
(16) Reflects the depreciation of fixed assets recorded in connection with the
Merger.
(17) Reflects the amortization of goodwill ($137,000) and other intangible
assets ($25,000) recorded in connection with the Merger.
(18) Reflects pro forma statement of operations data, as further adjusted 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
$10.00 per share and the application of the proceeds therefrom, as
described in "Use of Proceeds of the Offering", including, without
limitation, the repayment of a portion of outstanding debt and the
redemption of outstanding cumulative redeemable preferred stock and the
elimination of accrued and unpaid dividends in connection therewith and
(ii) the elimination of a $1.3 million special compensation charge (as
described in footnote 2), the elimination of $951,000 of environmental
expenses (as described in footnote 3) and the elimination of special
acquisition expenses (as described in footnote 4) in each case as adjusted
to reflect the corresponding tax expenses/benefits associated with such
adjustments and as if such transactions (in the case of the event
described in clause (i)) had occurred on January 1, 1995. See "Use of
Proceeds of the Offering," "Pro Forma Condensed Consolidated Financial
Information of the Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company," and the
Company's Consolidated Financial Statements and the Notes thereto.
35
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
FOR THE FOR THE ADJUSTMENTS PRO FORMA PRO FORMA
HARTMAN HARTMAN FOR THE FOR THE AS
COMPANY HARTMAN ACQUISITION(1) ACQUISITION MERGER MERGER ADJUSTED(9)
------- ------- -------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $13,119 $5,095 $ -- $18,214 $ -- $18,214 $18,214
Cost of sales........... 9,193 3,656 65 (2) 12,914 5(7) 12,919 12,919
------- ------ ----- ------- ------ ------- -------
Gross profit............ 3,926 1,439 (65) 5,300 (5) 5,295 5,295
Selling expenses........ 1,148 73 -- 1,221 -- 1,221 1,221
General and
administrative
expenses............... 1,187 685 (395) (3) 1,477 1(7) 1,478 1,478
Research and
development............ 265 -- -- 265 -- 265 265
Amortization of goodwill
and other intangible
assets................. 122 -- 34 (4) 156 38(8) 194 194
------- ------ ----- ------- ------ ------- -------
Operating income
(loss)................. 1,204 681 296 2,181 (44) 2,137 2,137
Interest expense........ 874 -- 338 (5) 1,212 -- 1,212 375
------- ------ ----- ------- ------ ------- -------
Income (loss) before
taxes.................. 330 682 (42) 970 (44) 926 1,763
Income tax expense
(benefit)(6)........... 142 272 (17) 397 (19) 378 712
------- ------ ----- ------- ------ ------- -------
Net income (loss)....... 172 410 (25) 557 (9) 548 1,051
Preferred stock
dividend............... 93 -- -- 93 -- 93 --
------- ------ ----- ------- ------ ------- -------
Net income (loss)
available for
common stock........... $ 79 $ 410 $ (25) $ 464 $ (9) $ 455 $ 1,051
======= ====== ===== ======= ====== ======= =======
Net income per common
share.................. $ .03 $ .15 $ .16
======= ======= =======
Average shares
outstanding............ 2,550 3,000 6,500
</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 upon
valuations and other studies that may be completed after closing.
(2) Reflects (i) increased depreciation expenses relating to a higher appraised
value of certain equipment acquired in the Hartman Acquisition, (ii)
reclassification of building depreciation to rent expense since the Company
is leasing Hartman's facility and (iii) the amortization of certain tooling
expenditures previously expensed as incurred by Hartman.
(3) Reflects elimination of estimated Figgie corporate charges ($453,000)
recorded by Hartman, which are partially offset by the Company's estimate
of accounting, legal and human resource expenses ($58,000).
(4) Reflects the amortization of goodwill recorded in connection with the
Hartman Acquisition.
(5) Reflects additional interest expense associated with approximately $12.9
million of bank debt incurred to finance the Hartman Acquisition.
(6) Assumes an effective tax rate of 40.0% for Hartman and 40.4% for the pro
forma as adjusted data.
(7) Reflects the depreciation of fixed assets recorded in connection with the
Merger.
(8) Reflects the amortization of goodwill ($32,000) and other intangible assets
($6,000) recorded in connection with the Merger.
(9) Reflects pro forma statement of operations data, as further adjusted to
give effect to the Offering and the application of the estimated net
proceeds therefrom, 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 adjustments and as if such events occurred on January
1, 1995.
36
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET OF THE COMPANY
MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS PRO FORMA
FOR THE FOR THE ADJUSTMENTS PRO FORMA PRO FORMA
HARTMAN HARTMAN FOR THE FOR THE AS
COMPANY HARTMAN ACQUISITION(1) ACQUISITION MERGER MERGER ADJUSTED(13)
-------- -------- -------------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable,
net.................. $ 7,885 $ 2,596 $ -- $ 10,481 $ -- $10,481 $ 10,481
Inventories........... 10,963 6,973 989 18,925 47(9) 18,972 18,972
Other current assets.. 3,195 34 (22) 3,207 -- 3,207 3,207
-------- -------- ------- -------- ------- ------- --------
Total current
assets............. 22,043 9,603 967 (2) 32,613 47 32,660 32,660
Property, plant and
equipment, net......... 13,004 1,407 1,689 (3) 16,100 169(9) 16,269 16,269
Goodwill................ 7,662 -- 4,020 (4) 11,682 4,097(10) 15,779 15,779
Other assets............ 5,650 1,427 (1,177)(5) 5,900 458(11) 6,358 5,216
-------- -------- ------- -------- ------- ------- --------
$ 48,359 $ 12,437 $ 5,499 $ 66,295 $ 4,771 $71,066 $ 69,924
======== ======== ======= ======== ======= ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses..... $ 6,978 $ 6,634 $(1,548)(6) $ 12,064 $ -- $12,064 $ 12,064
Accrued interest...... 1,495 -- -- 1,495 -- 1,495 --
Current portion of
long-term debt....... 3,037 504 (504)(6) 3,037 -- 3,037 37
Current payable due to
minority stockholders
of subsidiary........ 708 -- -- 708 -- 708 708
-------- -------- ------- -------- ------- ------- --------
Total current
liabilities........ 12,218 7,138 (2,052) 17,304 -- 17,304 12,809
Long-term debt.......... 19,517 -- 12,850 (7) 32,367 -- 32,367 18,282
Notes payable to
stockholders........... 7,450 -- -- 7,450 -- 7,450 --
Other long-term debt,
minority interest and
other.................. 6,845 494 (494)(8) 6,845 220(12) 7,065 6,648
Capital stock subject to
mandatory redemption/
put option(14)......... 4,755 -- -- 4,755 -- 4,755 --
-------- -------- ------- -------- ------- ------- --------
Total long-term
obligations........ 38,567 494 12,356 51,417 -- 51,637 24,930
Stockholders' equity
(deficit).............. (2,426) 4,805 (4,805) (2,426) 4,551 2,125 32,185
-------- -------- ------- -------- ------- ------- --------
$ 48,359 $ 12,437 $ 5,499 $ 66,295 $ 4,771 $71,066 $ 69,924
======== ======== ======= ======== ======= ======= ========
</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 upon
valuations and other studies that may be completed after closing.
(2) Reflects the purchase accounting adjustment to increase inventories to
estimated fair market value in connection with the Hartman Acquisition
($989,000) offset by the elimination of Hartman's current assets not
purchased by the Company ($22,000).
37
<PAGE>
(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 ($872,000), offset by (iii) the
elimination of the Hartman building not purchased by the Company
($629,000).
(4) Reflects the goodwill adjustment in connection with the Hartman
Acquisition.
(5) Reflects deferred financing costs relating to the Hartman Acquisition
($250,000), 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
($504,000) and (iii) other accrued expenses ($698,000).
(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 Merger.
(10) Reflects the goodwill adjustment in connection with the Merger.
(11) Reflects other intangible assets resulting from the Merger.
(12) Reflects the purchase accounting adjustment to increase deferred tax
liabilities in connection with the Merger ($271,000) offset by the
elimination of the minority interest in subsidiary in connection with the
Merger ($51,000).
(13) Reflects balance sheet data as further adjusted to give effect to the
sale by the Company of 3,500,000 shares of Common Stock in the Offering
at an assumed initial public offering price of $10.00 per share, and as
if such transactions had occurred on March 31, 1996. See "Use of Proceeds
of the Offering," "Capitalization of the Company," "Pro Forma Condensed
Consolidated Financial Information of the Company," "Management's
Discussion and Analysis of Financial Condition and Results of Operations
of the Company," and the Company's Consolidated Financial Statements and
Notes thereto.
(14) See Note 11 of Notes to Consolidated Financial Statements.
38
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS OF KILOVAC
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
PRO FORMA KILOVAC
KILOVAC KILOVAC FOR THE KILOVAC ACQUISITION
FROM FROM KILOVAC FOR THE FOR THE THREE
JANUARY OCTOBER ACQUISITION THREE THREE MONTHS
1, 1995 ADJUSTMENTS 12, 1995 FOR THE MONTHS ADJUSTMENTS MONTHS ENDED
TO FOR THE TO YEAR ENDED ENDED FOR THE ENDED MARCH
OCTOBER 11, KILOVAC DECEMBER DECEMBER MARCH 26, KILOVAC MARCH 26, 31,
1995 ACQUISITION 31, 1995 31, 1995 1995 ACQUISITION 1995 1996
----------- ----------- -------- ----------- --------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Product sales.......... $ 9,685 $ -- $3,043 $12,728 $2,901 $ -- $2,901 $3,511
Engineering sales...... 1,344 -- 637 1,981 129 -- 129 164
------- ------ ------ ------- ------ ----- ------ ------
Total revenues......... 11,029 -- 3,680 14,709 3,030 -- 3,030 3,675
COSTS AND EXPENSES
Cost of product sales.. 5,636 (174)(1) 1,459 6,921 1,707 120(1) 1,827 1,711
Engineering, research
and development
costs ................ 1,364 -- 580 1,944 364 -- 364 625
Selling, general and
administrative
expenses.............. 2,527 -- 1,001 3,530 675 -- 675 852
Amortization of
goodwill.............. -- 270 (2) 76 346 -- 86(2) 86 86
------- ------ ------ ------- ------ ----- ------ ------
Total costs and
expenses.............. 9,527 96 3,118 12,741 2,746 206 2,952 3,274
OPERATING INCOME........ 1,502 (96) 562 1,968 284 (206) 78 401
OTHER EXPENSE (INCOME):
Other (income)......... (9) -- -- (9) (15) -- (15) --
Interest expense....... 35 1,002 (3) 250 1,287 13 267(3) 280 267
------- ------ ------ ------- ------ ----- ------ ------
Total other expense
(income).............. 26 1,002 250 1,278 (2) 267 265 267
------- ------ ------ ------- ------ ----- ------ ------
INCOME BEFORE INCOME
TAXES.................. 1,476 (1,098) 312 690 286 (473) (187) 134
INCOME TAX PROVISION
(BENEFIT).............. 561 (402) 138 297 107 (175) (68) 60
------- ------ ------ ------- ------ ----- ------ ------
NET INCOME.............. $ 915 $ (696) $ 174 $ 393 $ 179 $(298) $ (119) $ 74
======= ====== ====== ======= ====== ===== ====== ======
WEIGHTED AVERAGE NUMBER
SHARES OUTSTANDING..... 119(4) 125 125(4) 119 125(4) 125(4)
EARNINGS PER SHARE...... $7.75(5) 1.39 $ 3.15 $ 1.57(5) $(0.95) $ 0.59
</TABLE>
- -------
(1) Reflects (i) an increase in cost of goods sold due to the write-up of
inventory to its fair market value, (ii) decreased depreciation expenses
relating to longer estimated lives of certain equipment acquired in the
Kilovac Acquisition and (iii) the amortization of certain tooling
expenditures previously expensed as incurred by Kilovac.
(2) Reflects the amortization of goodwill and other intangible assets recorded
in connection with the Kilovac Acquisition.
(3) 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.
(4) Assumes all outstanding options were exercised on January 1, 1995.
(5) In calculating earnings per share, adjustments were made to net income for
the periods ending October 11, 1995 and March 26, 1995 of $4,000 and
$8,000, respectively.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
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, 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
450,000 shares of its Common Stock (based upon an assumed initial public
offering price of $10.00 per share) for the remaining 20% interest in Kilovac
pursuant to the Merger.
In July 1996 the Company purchased the assets of the Hartman Division from
Figgie for $12.0 million. 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 Companies--The Company"
and "Use of Proceeds of the Offering." In connection with the Hartman
Acquisition, the Company has assumed a reserve previously established by
Hartman of approximately $2.6 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 of the Offering." In connection therewith, upon
the closing of the Offering (expected to occur during the quarter ending
September 30, 1996), the Company is required to pay a one-time success fee of
$500,000 to its senior lender, of which $83,000 has not been accrued and which
will be expensed at the time of the Offering, and will incur an expense of
$968,000 relating to the write-off of deferred financing charges.
40
<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 INCREASE
PERCENTAGE OF NET SALES --------------------------------
----------------------------------------------------- THREE MONTHS
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED ENDED APRIL 2,
------------------------------- ------------------- PRO FORMA 1995 TO THREE
PRO FORMA APRIL 2, MARCH 31, 1993 TO 1994 TO MONTHS ENDED
1993(1) 1994 1995 1995 1996 1994(1) 1995 MARCH 31, 1996
----------- -------- -------- -------- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 23.8% 26.6% 42.4%
Cost of sales........... 85.5 77.2 71.9 74.2 70.1 11.7 17.9 34.4
-------- -------- -------- ----- -----
Gross profit............ 14.5 22.8 28.1 25.8 29.9 94.6 56.1 65.2
Selling expenses........ 8.1 7.6 8.1 7.1 8.8 15.8 35.6 75.0
General and
administrative
expenses............... 6.8 7.1 8.4 7.1 9.0 29.5 48.3 80.9
Research and
development............ 0.2 0.3 0.8 0.4 2.0 66.1 192.2 579.5
Amortization of goodwill
and other intangible
assets................. 0.7 0.6 0.6 0.6 0.9 2.3 41.8 134.6
Special compensation
charge................. -- -- 3.3 -- -- -- -- --
Environmental expenses.. -- -- 2.4 -- -- -- -- --
Special acquisition
expenses............... 1.6 -- 5.2 6.2 -- * -- *
-------- -------- -------- ----- -----
Operating income
(loss)................. (2.9) 7.2 (0.5) 4.4 9.2 * * 196.6
Interest expenses....... 6.9 5.8 7.5 6.0 6.7 4.1 63.5 57.5
Other income (expense).. 0.2 -- -- -- -- * -- *
-------- -------- -------- ----- -----
Income (loss) before
taxes.................. (9.7) 1.4 (8.0) (1.6) 2.5 * * *
Income tax expense
(benefit).............. (3.6) 0.6 (2.7) (0.6) 1.1 * * *
-------- -------- -------- ----- -----
Income applicable to
minority interest in
net income of
subsidiaries........... -- -- 0.1 -- 0.1 -- -- --
-------- -------- -------- ----- -----
Net income (loss)....... (6.1) 0.9 (5.4) (1.0) 1.3 * * *
Preferred stock
dividend............... 0.7 0.6 0.5 0.5 0.7 -- 13.5 102.2
-------- -------- -------- ----- -----
Net income (loss)
available for common
stock.................. (6.9)% 0.3% (5.9)% (1.5)% 0.6% * * *
======== ======== ======== ===== =====
</TABLE>
- --------
(1) Pro forma data give effect to the CII Acquisition as if such acquisition
had occurred on January 1, 1993. See footnote 2 to "Selected Consolidated
Financial Information of the Company."
* Not meaningful.
Three Months Ended March 31, 1996 compared to Three Months Ended April 2,
1995
Net sales for the three months ended March 31, 1996 increased $3.9 million,
or 42.4%, to $13.1 million from $9.2 million for the corresponding period in
1995. The increase was primarily the result of the acquisition of Kilovac
which represented $3.7 million in sales. Excluding the Kilovac Acquisition,
net sales of the Company for the three months ended March 31, 1996 increased
by $228,000, or 2.5%, from net sales for the corresponding period in 1995.
This increase was due to growth in sales of high performance relays ($1.2
million) which was partially offset by the expiration of a significant general
purpose relay contract ($426,000), the peak demand for a particular solenoid
product during the first quarter of 1995 (representing $208,000 of net sales)
and a decrease in sales of certain mature general purpose relay products
($268,000).
The Company's gross profit for the three months ended March 31, 1996
increased by $1.5 million to $3.9 million from $2.4 million for the same
period in 1995. Gross profit as a percentage of net sales increased to 29.9%
for the three months ended March 31, 1996 from 25.8% 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
41
<PAGE>
the three months ended March 31, 1996 increased by $10,000, or 0.4%, from the
same period in 1995, and gross profit as a percentage of net sales decreased
from 25.8% for the three months ended April 2, 1995 to 25.3% for the same
period in 1996. This increase in dollar amount was primarily 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 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 $1.1 million for the three months ended March
31, 1996 from $656,000 for the corresponding period in 1995. The increase in
dollar amount of selling expense was primarily due to the acquisition of
Kilovac. Excluding Kilovac, selling expenses for the Company for the three
months ended March 31, 1996 were $673,000 (7.1% of net sales) which
represented an increase of $17,000 from such expenses in the corresponding
period in 1995. 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 to $1.2 million for the three
months ended March 31, 1996 from $656,000 for the corresponding period in
1995. This increase was due primarily to the acquisition of Kilovac. Excluding
Kilovac, general and administrative expenses of the Company were $810,000, or
8.6% of net sales, for the three months ended March 31, 1996, which represents
an increase of $154,000, or 23.5%, 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 $265,000 or 2.0% of net
sales, for the three months ended March 31, 1996, compared to $39,000 or 0.4%
of net sales for the corresponding period in 1995. The increase was primarily
due to the $200,000 of research and development expenses of Kilovac.
Amortization of goodwill and other intangible assets was $122,000, or 0.9%
of net sales, for the three months ended March 31, 1996 compared to $52,000,
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.
Special acquisition expenses were $568,000 for the first quarter of 1995. No
special acquisition expenses were incurred in the first quarter of 1996. The
costs in the first quarter of 1995 primarily related to the relocation of
certain assets acquired in the HiG Acquisition and the Deutsch Acquisition to
the new manufacturing facility in Asheville, N.C. and the commencement of
production at such facility.
Interest expense increased to $874,000 in the three months ended March 31,
1996 from $555,000 for the same period of 1995. The increase reflects
additional borrowings to fund the Kilovac Acquisition ($11.5 million) and to
accrue for additional amounts due to the Company's bank lenders, and was
partially offset by a decrease in market interest rates.
Income taxes were an expense of $142,000 in the three month period ended
March 31, 1996, compared to a benefit of $59,000 in the same period of 1995.
Income taxes (benefit) as a percentage of income (loss) before taxes were
43.0% in the three months ended March 31, 1996 and 40.1% for the same period
in 1995, with the increase due to the additional amortization of goodwill from
the Kilovac Acquisition.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales for 1995 increased by $8.4 million, or by 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.
42
<PAGE>
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.
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."
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 of the
Company--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.
43
<PAGE>
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 primarily to additional Mexican income taxes
of approximately $16,000 that arose in 1995 due to changes in Mexican tax law.
Year Ended December 31, 1994 Compared to Pro Forma Year Ended December 31,
1993
For comparison purposes, the following discussion assumes that the CII
Acquisition occurred as of January 1, 1993. See footnote 2 to "Selected
Consolidated Financial Information of the Company."
The Company's net sales increased by $6.0 million, or 23.8%, to $31.5
million in 1994 from $25.5 million in 1993 (pro forma). 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 by $3.5 million to $7.2 million from $3.7
million in 1993 (pro forma). Gross profit as a percentage of net sales
increased to 22.8% in 1994 from 14.5% in 1993 (pro forma). The increase in
gross margin dollars primarily reflected 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 in 1994 increased $1.2
million from 1993, or 32.5%, 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 $2.1 million in 1993.
Selling expenses as a percentage of net sales were 7.6% in 1994 compared to
8.1% in 1993 (pro forma). The increase in the dollar amount of selling
expenses resulted from 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.
General and administrative expenses increased in 1994 to $2.2 million, or
7.1% of net sales, from $1.7 million, or 6.8% of net sales, in 1993 (pro
forma). The increase in dollar amount of general and administrative expenses
was primarily due to 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 $62,000, or 0.2% of net sales, in 1993 (pro forma). The
increase was due to additional personnel.
Amortization of goodwill and other intangible assets increased to $177,000,
or 0.6% of net sales, in 1994 from $173,000, or 0.7% of net sales, in 1993
(pro forma).
Special acquisition expenses were $419,000, or 1.6% of net sales, in 1993
(pro forma). 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 $1.76 million in
1993 (pro forma), reflecting higher interest rates in 1994.
Income tax expense was $178,000 in 1994 compared to a benefit of $908,000 in
1993 (pro forma). The rate of income tax expense (benefit) as a percentage of
income before income taxes (benefit) was 39.6% in 1994 and
44
<PAGE>
36.8% in 1993 (pro forma). 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.
Quarterly Comparison
The following table sets forth the results of operations by quarter for
1994, 1995 and the first quarter 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,
1994 1994 1994 1994 1995 1995 1995 1995(1) 1996
-------- ------- ------- -------- -------- ------- ------- -------- ---------
(IN THOUSANDS)
<S> <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
Cost of sales........... 5,856 6,264 6,402 5,808 6,839 6,729 6,763 8,356 9,193
------ ------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 1,366 1,937 1,932 1,958 2,377 2,623 2,411 3,820 3,926
Selling expenses........ 562 690 620 510 656 753 708 1,112 1,148
General and
administrative
expenses............... 541 533 544 630 656 640 733 1,305 1,187
Research and
development............ 25 30 27 21 39 39 22 201 265
Amortization of goodwill
and other intangible
assets................. 34 34 33 76 52 58 51 90 122
Environmental expenses.. -- -- -- -- -- -- -- 951 --
Acquisition related
expenses............... -- -- -- -- 568 347 222 927 --
Special compensation
expenses............... -- -- -- -- -- -- -- 1,300 --
------ ------ ------ ------ ------ ------ ------ ------- -------
Operating income........ 204 650 708 721 406 786 675 (2,066) 1,204
Interest expenses....... 414 467 451 501 555 583 579 1,280 874
Other income (expense).. 1 (1) -- -- 2 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
taxes.................. (209) 182 257 220 (147) 203 96 (3,346) 330
Minority interest in net
income of
subsidiaries........... -- -- -- -- -- -- -- 35 16
Income tax expense
(benefit).............. (84) 72 103 87 (59) 81 38 (1,136) 142
------ ------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... (125) 110 154 133 (88) 122 58 (2,245) 172
Preferred stock
dividend............... 46 46 46 47 46 46 46 72 93
------ ------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)
available for common
stock.................. $ (171) $ 64 $ 108 $ 86 $ (134) $ 76 $ 12 $(2,317) $ 79
====== ====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
- --------
(1) During this fiscal quarter the Kilovac Acquisition was completed.
Backlog
As of March 31, 1996, the Company's backlog was approximately $32.9 million
($22.6 million excluding Kilovac) compared to $19.2 million as of March 31,
1995. Approximately $27.7 million of this backlog ($22.0 million excluding
Kilovac) consists 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 and slower growth of accounts receivable. For the three
months ended March 31, 1996, cash provided by operating activities was $2.0
million, compared to $302,000 for the same period in 1995. This increase was
primarily attributable to improved collections and slower growth of
receivables and an increase in accounts payable, which was partially offset by
an increase in inventory.
45
<PAGE>
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 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. 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 is
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 $9.0 million at March 31, 1995 to $11.0 million at March 31,
1996. The increase was primarily due to the Kilovac Acquisition ($2.3 million)
and was offset by a decrease of $359,000 primarily due 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 $2.3 million at March 31, 1995 to $3.7 million at March
31, 1996. This increase was primarily due to the Kilovac Acquisition
($817,000), increased purchases to support the Company's growth and costs
incurred in connection with the Offering.
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 $380,000 for the three months ended
March 31, 1996. Capital expenditures were primarily for replacement and
enhancement of production equipment. In 1995, capital expenditures also
included $1.0 million for the purchase of and 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 $14.3 million in 1995, and the Company expended approximately $12.9
million in July 1996 for the Hartman Acquisition.
The Company will apply the estimated net proceeds of the Offering ($31.2
million) to repay $17.3 million of the $35.5 million outstanding under its
senior credit facility, $8.75 million of its subordinated debt, including
$1.3 million of interest in arrears and $4.6 million of its preferred stock,
including $620,000 of accrued and unpaid dividends. In connection with the
initial public offering, the Company will also pay to its senior lenders a
success fee in the amount of $500,000 (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
46
<PAGE>
term loan facility (bearing 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 facilities will be
available for five years and that amounts outstanding under the Term Loan will
be repaid in $600,000 installments each fiscal quarter commencing October 31,
1996. 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.
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 the effect of this standard on the
Company's earnings.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF KILOVAC
Founded in 1964, Kilovac is a leading developer, manufacturer and marketer
of high voltage relays and high voltage direct current contactors. On October
11, 1995, the Company, through its subsidiary CII, purchased 80% of the
outstanding Kilovac Common Stock. Since the Kilovac Acquisition, the Company
has operated Kilovac as its Kilovac Division and the consolidated financial
statements of the Company and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company" included
elsewhere in this Proxy Statement/Prospectus incorporate Kilovac for periods
after the Kilovac Acquisition.
Three Months Ended March 31, 1996 compared to Three Months Ended March 26,
1995
The period ending March 31, 1996 includes five more days of activity than
the corresponding period in 1995, as Kilovac changed from a 13 period to a 12
period fiscal year in 1996.
Product sales for the three months ended March 31, 1996 increased to $3.5
million, or 21%, from $2.9 million for the corresponding period in 1995. The
increase was primarily due to growth in sales of aerospace, electric vehicle
and reed relay products which was partially offset by a decline in sales of
heart defibrillator relays which had enjoyed a temporary surge in shipments
during the first three months of 1995. Engineering sales for the three months
ended March 31, 1996 increased to $163,000, or 26%, from $129,000 for the
corresponding period in 1995 due to increased activity on Kilovac's
development contracts in 1996.
Cost of product sales decreased as a percentage of product sales from 59% to
49%. This decrease was primarily due to the continued benefit of controlling
fixed overhead costs and to improved efficiencies in the manufacture of
electric vehicle relays as a result of increased production volumes.
Engineering, research and development expenses increased by $261,000, or
72%, to $625,000 for the three months ended March 31, 1996 from $364,000 for
the corresponding period in 1995. This increase reflects increased new
proprietary product development and an increase over previous estimates of
development costs on a customer contract that was near completion.
Selling, general and administrative expenses increased by $177,000 to
$852,000 (or 23% of net sales) for the three months ended March 31, 1996 from
$675,000 (or 22% of net sales) for the corresponding period in 1995. The
increase was primarily due to an increase in commissions associated with
Kilovac's additional sales and to costs associated with the Kilovac
international sales meeting which occurs every three years and was held in
February 1996. This increase was partially offset by a decline in general and
administrative expenses relating to non-recurring legal and consulting costs
incurred in 1995 in connection with Kilovac's consideration of shareholder
liquidity options and the sale of Kilovac.
Interest expense increased to $267,000 for the three months ended March 31,
1996 from $13,000 for the same period of 1995 as a result of indebtedness
incurred in connection with the Kilovac Acquisition.
Period from January 1, 1995 to October 11, 1995 compared to Year Ended
December 31, 1994
The audited financial statements of Kilovac included in this Proxy
Statement/Prospectus for 1995 are for the period from January 1, 1995 to
October 11, 1995, the date that CII acquired 80% of the Kilovac Common Stock.
This discussion of Kilovac's financial condition and results of operations for
1995 compared to 1994 includes references to the unaudited pro forma results
of Kilovac for fiscal 1995 which include pro forma adjustments to reflect the
Kilovac Acquisition, as if such event had occurred on January 1, 1995.
Product sales for the period ended October 11, 1995 were $9.7 million ($12.3
million for fiscal 1995 (pro forma)) compared to $11.3 million for fiscal year
ended December 31, 1994. The increased volume was attributable to increased
sales of communications relays, custom relay products, electric vehicle relay
products and a new high voltage relay product line. Engineering sales
increased by $382,000 to $1.3 million for the period ended October 11, 1995,
or 12% of net sales ($2.0 million, or 13% of net sales for fiscal 1995 (pro
forma)) compared to $962,000 for fiscal 1994 due to work performed in
connection with two long-term development contracts.
48
<PAGE>
Kilovac's cost of product sales was $6.9 million, or 62% of product sales,
for fiscal 1994 compared to $5.6 million, or 58% of product sales, for the
period ended October 11, 1995 ($6.9 million, or 56% of product sales for fiscal
1995 (pro forma)). The decrease in cost of product sales was primarily due to
improved control of fixed overhead costs and shifts in the product mix to
products in the high reliability market.
Kilovac's engineering, research and development costs totaled $1.43 million,
or 11.7% of net sales, for fiscal 1994 compared to $1.37 million, 12.4% of net
sales, for the period ended October 11, 1995 ($1.94 million, or 13% of net
sales for fiscal 1995). The increased level of activity in 1995 was largely the
result of work performed on two aerospace development contracts and the
continued development of the electric vehicle relays.
Kilovac's selling, general and administrative expenses totaled $3.0 million,
or 24% of net sales, for fiscal 1994 compared to $2.5 million, or 23% of net
sales, for the period ended October 11, 1995 ($3.6 million, or 24% of net sales
for fiscal 1995 (pro forma)). The increased rate of spending primarily
represents an increase in sales commissions due to higher sales and to employee
incentive bonuses based on Kilovac's operating results.
Other income of Kilovac decreased to $9,000 for the period ended October 11,
1995 compared to $113,000 for fiscal 1994. The 1994 amount included insurance
reimbursement proceeds related to litigation costs incurred in 1993.
Interest expense was $35,000 for the period ended October 11, 1995 ($1.3
million for fiscal 1995 (pro forma)) compared to $130,000 for fiscal 1994. The
increase in interest expense for fiscal 1995 (pro forma) reflected debt
incurred to finance the Kilovac Acquisition.
Tax expenses of Kilovac were $561,000, or 5.1% of net sales, for the period
ended October 11, 1995 ($297,000, or 6.8% of net sales, for fiscal 1995 (pro
forma)) compared to $228,000, or 1.9% of net sales, for fiscal 1994. The
increase in tax expense reflected an increase in Kilovac's effective tax rate
from 27% in 1994 to 38% in 1995 because of the expiration in 1995 of a federal
tax credit related to research and development expenditures.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
Product sales increased by 8.5% to $11.3 million in 1994 from $10.4 million
in 1993. The increase in product sales reflected greater sales of power
switching relays due to an increase in contracts for satellite applications and
the start-up of the electric vehicle relay product line. These increases were
partially offset by a reduction in sales of medical relay products which were
at peak demand in 1993. Engineering sales also increased by 95.4% to $962,000
in 1994 from $492,000 in 1993. This increase was primarily due to progress made
by Kilovac on its development contracts.
Kilovac's cost of product sales was $5.9 million, or 57% of net sales, in
1993 compared to $6.9 million, or 62% of net sales, in 1994. The increase in
cost of product sales was primarily due to the start-up of Kilovac's electric
vehicle group and a decrease in sales of medical relay products which have
higher margins than other Kilovac relay products whose sales increased in 1994.
Kilovac's engineering, research and development costs increased to $1.4
million in 1994 from $944,000 in 1993. The increase was primarily due to higher
costs related to the development of an electric vehicle contactor and costs
incurred in connection with an aerospace development contract.
Kilovac's selling, general and administrative expenses increased from $2.4
million, or 22% of net sales, for 1993 to $3.0 million, or 24% of net sales,
for 1994. This increase was due to the write-off of an uncollectible receivable
($187,000), non-recurring consulting fees in connection with business
development activities in Japan and the United States ($150,000), increased
personnel costs ($140,000) and increased commissions associated with additional
sales ($85,000).
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<PAGE>
Other income of Kilovac increased by $339,000 to $113,000 in 1994 from an
expense of $226,000 in 1993. The 1993 expense amount included non-recurring
legal fees of $213,000 for litigation which has been settled.
Interest expense decreased to $130,000 in 1994 from $151,000 in 1993. The
decrease reflected reduced borrowings in 1994.
Income tax expenses of Kilovac decreased to $228,000, or 2% of net sales, in
1994 from $403,000, or 4% of net sales, in 1993. Kilovac's effective tax rate
decreased to 27% in 1994 from 33% in 1993 mainly as a result of an increase in
a federal tax credit related to increased research and development expenditures
in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) operating activities was $598,000 in 1993, $1.1
million in 1994, $947,000 in the period ended October 11, 1995 and ($204,000)
in the period from October 12, 1995 to December 31, 1995. The increase in cash
provided from operations from 1993 to 1994 was primarily due to a slow down in
the increase in receivables, reduced inventory levels, and the accrual of
certain expenses for which disbursements were not required until future
periods, which was offset by an increase in income tax payments. The decrease
in cash provided by operations from 1994 to 1995 (including cash flows from
October 12, 1995 to December 31, 1995) reflects an increase in receivables
primarily as a result of increased sales toward year end and the timing of
certain milestone billings on long-term development contracts. For the three
months ended March 31, 1996, cash provided by operating activities was $1.2
million compared to ($127,000) for the same period in 1995. This increase was
primarily related to collections on receivables and changes in the timing of
cash disbursements of certain accrued liabilities, which was partially offset
by the continued investment in inventories.
Kilovac has historically financed its operations from cash flows provided by
its operating activities supplemented by short and long term borrowings
provided under bank revolving borrowing arrangements. Subsequent to the
acquisition of Kilovac by the Company such bank borrowing arrangements were
discontinued and short or long term financing requirements of Kilovac are to be
provided by the Company.
Capital expenditures totaled $284,000 in 1993, $487,000 in 1994, $299,000 for
the period from January 1, 1995 to October 11, 1995, $113,000 for the period
October 12, 1995 to December 31, 1995 and $240,000 for the three months ended
March 31, 1996. Capital expenditures primarily relate to upgrading production
and development equipment and office automation, and for the three months ended
March 31, 1996 also included enhancement to its research and development
facilities.
Kilovac anticipates generating sufficient cash flow from its operating
activities in 1996 to meet its capital expenditure requirements and any
payments required on indebtedness.
INFLATION
Kilovac does not believe that inflation had any material effect on its
business over the past three years.
50
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company is a leading designer, manufacturer and marketer of a broad line
of high performance electromechanical and solid state relays 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.
51
<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 solid state relays 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
52
<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 Related to the Company."
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.
53
<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, including T0-5
relay
January 1995 HiG Relays Inc. Assets High performance
electromechanical and
solid state relay
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.
PRODUCTS
The Company manufactures products in the following four general categories:
high performance relays, general purpose relays, solid state relays and
solenoids, which represented 71.2%, 22.5%, 3.0% and 3.3%, respectively, of the
Company's net sales in 1995.
54
<PAGE>
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.
Solid state relays. A solid state relay 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 solid state relays
are becoming increasingly sophisticated and provide the user with control and
functional options not previously available. Switching speed of solid state
relays is normally much faster
55
<PAGE>
than that of electromechanical relays. The Company significantly increased its
solid state relay product offerings through the HiG Acquisition in January
1995. Management believes that, although sales of solid state relays represent
approximately 3% of total 1995 net sales, solid state relays represent a
logical and attractive growth opportunity for the Company. Solid state relays
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 these new solenoids in 1996.
56
<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 greater than 10% 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>
57
<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
58
<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 3.1%
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.
59
<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 25% ownership interest in the Indian Joint Venture named
CII Guardian International Limited. Production is expected to commence 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 25%
interest in the Indian Joint Venture, the Bank of India has a 15% interest,
and the remaining 35% 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.
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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. As a result of
the Hartman Acquisition, these employees are working under temporary terms of
employment while the Company and the union negotiate a new collective
bargaining agreement. No assurance can be given that the Company and the union
will agree to a labor contract or that the terms of an agreement will be
favorable to the Company. 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 Proxy
Statement/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
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<PAGE>
certain circumstances such liability at several locations (discussed below),
or at locations yet to be identified, could materially and adversely affect
the Company.
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 may exceed the amounts that the Prior Owner is required to provide
pursuant to the Settlement Agreement. Based on the possibility that the
groundwater remediation will need to be operated for 30 years, the Company has
estimated that the present value of the excess remediation and operating costs
not covered by the Settlement Agreement may be approximately $690,000 and has
accrued a reserve for such an amount on its books. 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 Related to the Company--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.
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BUSINESS OF KILOVAC
GENERAL
Founded in 1964, Kilovac is a leading developer, manufacturer and marketer
of high voltage ("HV") relays and high voltage direct current ("HVDC")
contactors. Kilovac's specialty is HV vacuum and gas-filled electro-mechanical
relays, with its product line including a broad array of HV relays, contactors
and power controllers. Kilovac produces 75 different products used to control
and regulate electric power in a wide variety of end products, such as heart
defibrillators, magnetic resonance imaging ("MRI") equipment, electric
vehicles, test equipment, aircraft, satellites and high frequency radios (for
both commercial and military applications). Having a well-recognized
reputation for high-level product quality, excellent customer support and
innovative products, Kilovac sells its products to both domestic and foreign
customers in the medical, communications, aerospace, test equipment,
industrial and automotive industries.
Kilovac's core strategy is to develop, manufacture and patented components
based on proprietary technology to niche markets where Kilovac can achieve
significant market share and premium pricing. Kilovac management believes that
this strategy has been strengthened by Kilovac's diverse line of standard and
custom products, suited to a wide variety of specific applications, and by its
high level of customer service. In 1992, Kilovac supplemented this core
strategy by focusing on the development of emerging market products and
technologies with mass market applications. Kilovac continues to pursue
several opportunities to sell its products in large industrial markets,
including the electric vehicle market and the rail transportation industry.
In October 1995 a wholly owned subsidiary of the Company acquired 80% of the
outstanding Kilovac Common Stock. The Company has since maintained Kilovac as
a stand-alone operation which conducts its business as the Kilovac Division of
the Company. This section of the Proxy Statement/Prospectus contains
information regarding the business of Kilovac in addition to that provided
above in "Business of the Company." For a discussion of the property and legal
procedures of Kilovac see "Business of the Company--Manufacturing," "--
Facilities" and "--Legal Proceedings."
PRODUCT GROUPS
Kilovac competes at the highest end of the relay market based on relay power
rating and average selling price. Kilovac's products are typically used when
the combination of high power (either high voltage or high current) and small
size or light weight are required. Critical attributes of relays generally are
size, price, reliability, performance and compatibility with other components
and systems. Kilovac is organized along market/product lines into the
following six groups: (i) Medical Relay Group, (ii) Communications Relay
Group, (iii) Custom Products Group, (iv) Power Switching Group, (v) Electric
Vehicle Group, and (vi) Reed Relay Group.
Kilovac's historical sales from these groups are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-------------------------------------
HISTORICAL REVENUE 1991 1992 1993 1994 1995
- ------------------ ------ ------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Medical Relay Group...................... $3,231 $2,734 $ 4,650 $ 4,082 $ 4,270
Communications Relay Group............... 1,409 1,674 1,820 2,171 2,373
Custom Products Group.................... 3,248 3,266 3,425 3,564 4,515
Power Switching Group.................... 1,580 1,599 748 1,423 2,329
Electric Vehicle Group................... 0 0 225 882 817
Reed Relay Group......................... 0 0 0 97 405
------ ------ ------- ------- -------
TOTALS............................... $9,468 $9,273 $10,868 $12,219 $14,709
====== ====== ======= ======= =======
</TABLE>
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MEDICAL RELAY GROUP. The most common medical application for Kilovac's
relays is their use as a component part in heart defibrillators where HV
relays are necessary to control the charge and discharge of defibrillators and
to disarm them after use. Kilovac's relays are also used in other medical
applications, including MRI equipment, kidney stone lithotrypter equipment,
electro-surgical equipment and medical lasers.
Customers of the medical relay group include domestic and foreign based
companies including Hewlett-Packard, Physio Control and Zoll Medical. The
potential market for Kilovac's medical relays could be significantly expanded,
however, by the wider use of the "automatic external defibrillator". The
automatic external defibrillator is geared towards developing a market for
selling defibrillators for placement in public areas such as airports, hotels
and shopping malls for quick and easy access.
Two types of relays are used in defibrillators, the patient switch and the
safety dump relays. With respect to patient switch relays, three major
defibrillator manufacturers use in-house made relays, while others use Kilovac
products. One of the major manufacturers using in-house relays has designed
Kilovac's relays into a new product line. At least one substantial relay
manufacturer, Jennings, has the technological ability to be an aggressive
competitor in this segment.
In the area of safety dump relays, Kilovac has only one significant
competitor, Coto Corporation, a reed relay manufacturer. Management believes
that Kilovac's 1993 addition of a reed relay line will help secure its
customer relationships and enable Kilovac to expand its market share in this
area.
COMMUNICATIONS RELAY GROUP. Communications relays are used in high-frequency
radios for commercial and military aircraft to tune radios to the desired
frequency. Projected growth in this segment is 2.4% compound annual growth
over the next five years. Kilovac's customers in this segment include Racal,
Harris, Collins Radio, and King Radio.
The primary competition in the communications relay group comes from a
domestic supplier, Jennings, which manufactures similar products. In addition,
other products can be used for this application, including pin diode switches
and reed relays.
CUSTOM PRODUCTS GROUP. Kilovac's custom products consist of relays with high
voltage ratings ranging up to 70,000 volts. These relays are typically used to
isolate high voltage rather than to switch power. Primary applications for
these relays can be found in the context of various types of test equipment.
Relay sales for use in test equipment are typically low volume, high margin
sales made to repeat customers. In addition to test equipment, these products
are used in industrial radio frequency-based applications and military
systems, such as electronic countermeasures, fire control and radar systems.
Kilovac's customers in this segment include AT&T, Schaffner, Noise Labs and
Pirelli.
Primary competitors for these products are Jennings, which makes many of the
same products as Kilovac, and Ross Engineering, which makes open-frame high
voltage relays. In addition, solid state relays are making increasing inroads
into these markets.
POWER SWITCHING GROUP. Kilovac's relays in this segment are primarily used
to switch power in advanced aircraft and spacecraft. This is a developing
market consisting primarily of advanced development projects including the
space station, the F-22 fighter and the Comanche helicopter. Management
believes that Kilovac currently maintains a 95% market share in the 270 volt
direct current HVDC military relay segment. Over time, management anticipates
that HVDC systems, such as those supplied by Kilovac, will be adapted for
commercial aircraft. Kilovac's customers in this segment include Sundstrand,
Rockwell and Boeing.
Kilovac competes primarily with one domestic manufacturer, Eaton/Cutler
Hammer. Management does not currently believe that any other company has made
the new product investment necessary to participate in this market in the near
future. Kilovac's current competitor, however, has the financial and market
strength and the technological ability to be an aggressive competitor in this
segment.
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ELECTRIC VEHICLE GROUP. A major application for Kilovac's DC contactor
products exists in the emerging electric vehicle market. The rate at which the
electric vehicle market will grow is uncertain at this point, however, current
legislation requires that 10% of all vehicles sold in California, New York and
Massachusetts in 2003 be zero emission vehicles ("ZEV"). To date, electric
vehicles are the only vehicles which will satisfy the zero emission
requirement. The electric vehicle market represents an opportunity for
substantial growth in Kilovac's sales if existing legislation remains in
place. Other potential applications for Kilovac's relays in the electric
vehicle market include electric buses and electrically-powered industrial
equipment such as forklifts, provided that the cost of the present product can
be substantially reduced.
Kilovac's relays have been designed into electric vehicles manufactured by
General Motors, Ford and Chrysler, and Kilovac continues to market its
technology to other car manufacturers worldwide. Success in the electric
vehicle market is predicated on being a low-cost provider. Kilovac's efforts
to date in reducing its costs on these products have been very successful and
Kilovac continues research into alternative processes and materials in order
to attain additional cost reductions. However, while the electric vehicle
market represents a substantial growth opportunity, recent scaling back of
government mandates regarding ZEVs has delayed the development of this market
and has had a substantial adverse impact on Kilovac's ability to recoup its
investment in products designed for this market.
Kilovac's principal competitors in this segment are Schaltbau in Germany and
Matsushita Electric Works in Japan. In addition, other large manufacturers,
including General Electric and Jennings, manufacture similar products and
could compete in the electric vehicle market if they choose to do so.
Management believes that Kilovac's principal advantage in this market rests
with its products which are smaller, lighter and cheaper than those introduced
by its competitors to date. Each of Kilovac's competitors in this segment has
substantial financial and market strength and, in addition, has the
technological ability to be an aggressive competitor in this segment.
REED RELAY GROUP. Reed relays use magnetic reeds as contact members. These
products can only be used in relatively low power applications. The advantage
of these applications is that they are a lower cost alternative. Reed relays
sold by Kilovac are sometimes complimentary to, and occasionally competitive
with, other products manufactured by Kilovac. Reed relays are used in
defibrillators and test equipment, and in the communications and electric
vehicle markets. Kilovac's reed relays are produced in the United Kingdom, and
Kilovac has exclusive worldwide distribution rights for these products in the
electric vehicle and heart defibrillator markets. Kilovac is also the primary
distributor of these products for the United States, Canada, Japan, Germany,
Italy and France.
Kilovac's principal competitors are Coto Corporation in the United States,
Gunther in Germany and Aleph in Japan. Each of these companies operates in a
manner similar to Kilovac in that they purchase reed relays from other
manufacturers. Management believes that Kilovac is distinguished from its
competitors, however, because its supplier controls the most critical part of
the product, and because of its applications engineering support and its wide
range of high voltage relay products.
NEW TECHNOLOGIES
For the past eight years, and at a development cost in excess of $5 million,
Kilovac has developed unique methods of managing arcs and switching power.
These efforts were initially targeted at developing DC relays and contactors
for the aerospace market, however, Kilovac's target applications for these
products have eventually been broadened to include electric vehicles and
industrial applications. Kilovac's various power switching applications have
been recognized in six patents that have either been issued or are currently
pending. Management feels these patents give Kilovac a significant advantage
over competing products and technologies associated with these applications.
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QUALITY CONTROL
All of Kilovac's products are tested and inspected before being shipped to
customers. Kilovac's quality assurance and testing program, as well as
Kilovac's extensive applications engineering support, result in a very low
level of returns. Over the past seven years, customer returns for all reasons
have averaged 2.7% of gross sales. Returns resulting from defective products
have averaged approximately .5%.
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MANAGEMENT OF THE COMPANY
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........ 61 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 has 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.
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<PAGE>
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.
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.
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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>
Ramzi A. Dabbagh ........ $163,752 $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......... 107,309 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) ($180,100 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) and with respect to Mr. Henning,
reimbursement received by Mr. Henning 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.
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
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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 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.
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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.
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
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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.
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 33.1% 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 of the Company."
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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MANAGEMENT OF KILOVAC
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of Kilovac and their ages and
positions are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION OR AFFILIATION
---- --- -----------------------------------------------
<S> <C> <C>
Douglas Campbell...... 49 President, Chief Executive Officer and Director
Dan McAllister........ 42 Vice President of Manufacturing and Engineering
Pat McPherson......... 53 Vice President Sales and Marketing
Robert T. Helman...... 54 Vice President Quality Assurance
Richard Danchuk....... 30 Vice President Finance
Ramzi A. Dabbagh...... 61 Director
G. Daniel Taylor...... 60 Director
</TABLE>
After the Merger each of the executive officers of Kilovac will maintain
their position in management of the Kilovac Division of the Company.
Douglas Campbell has been with Kilovac since 1978 and has served as
President and CEO since 1986. Mr. Campbell received his B.A. in Environmental
Studies from the University of California at Santa Barbara in 1972. Mr.
Campbell became President of the Kilovac Division and a director of CIIT as a
result of the Kilovac Acquisition. 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.
Dan 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.
Pat McPherson joined Kilovac in 1987 as Vice President Sales and Marketing.
Robert Helman has been with Kilovac since 1985 and has served as Vice
President Quality Assurance since October 1995. Prior to his current position,
Mr. Helman served as Vice President of Operations.
Richard Danchuk joined Kilovac in 1992 as Controller and Secretary and
became Vice President Finance in December 1993. Prior to joining Kilovac, Mr.
Danchuk was a Senior Accountant with Deloitte & Touche from 1989 to 1992.
Ramzi A. Dabbagh has served as a director of Kilovac since October 11, 1995,
the date of the Kilovac Acquisition. He was recently named the Chairman of the
Board, Chief Executive Officer and President of CIIT. He served as President
of CII from 1982 to 1995. Mr. Dabbagh has 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.
G. Daniel Taylor has served as a director of Kilovac since October 11, 1995,
the date of the Kilovac Acquisition. He has been the Executive Vice President
of Business Development of CIIT since October 1995 and a director of CIIT
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.
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EMPLOYMENT AGREEMENTS
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.
Kilovac entered into employment agreements with Dan McAllister, Pat
McPherson, Robert Helman and Richard Danchuk in October 1995 which expire on
October 31, 1998. Messrs. McAllister, McPherson, Helman and Danchuk are
entitled to receive an annual salary (subject to annual review) of $115,877,
$108,160, $112,218 and $70,000, respectively, and such other benefits in
accordance with Kilovac's policies as are afforded to key employees. Kilovac
is entitled to terminate these employment agreements for any reason upon 90
days notice, provided that Messrs. McAllister, McPherson, Helman and Danchuk
are entitled to receive the greater of (i) their salary (at the rate then in
effect) from the date of termination through October 1, 1998 and (ii) one
year's salary (at the rate then in effect) if terminated "without cause."
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OWNERSHIP OF COMMON STOCK OF THE COMPANY
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 Merger 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 71.7% 2,150,000 33.1%
Ramzi A. Dabbagh(3)....................... 75,000 2.5 75,000 1.2
Michael A. Steinback(3)................... 75,000 2.5 75,000 1.2
G. Daniel Taylor(3)....................... 100,000 3.3 100,000 1.5
David Henning(3).......................... 25,000 * 25,000 *
Michael S. Bruno(1)(2).................... 2,150,000 71.7 2,150,000 33.1
Daniel A. Dye(1)(2)....................... 2,150,000 71.7 2,150,000 33.1
John P. Flanagan(3)....................... 75,000 2.5 75,000 1.2
Donald E. Dangott(3)...................... -- -- -- --
Douglas Campbell(4)....................... 279,713 9.3 279,713 4.3
Directors and executive officers as a
group (12 persons)(2)(4)................. 2,779,713 92.7 2,779,713 42.8
</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 25,243 shares held by Douglas Campbell, as Trustee of the
Campbell Charitable Remainder Unitrust (the "Unitrust") and 110,219 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 103,409 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
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 the Prospectus relating
to the Offering (the "Lock-up Period").
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In connection with the approval of the First Amendment, the Kilovac
Shareholders (other than the ESBP) will agree not to sell any shares of CIIT
Stock received in the Merger until the expiration of the Lock-up Period.
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"). $1.2 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"). $74,000 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 the Preferred
Stock.
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
issuances 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 issuances. See "--Summary Compensation Table."
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
Upon completion of the Offering, consummation of the Merger 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 6,500,000 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 Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Restated Bylaws (the "Bylaws") is a
summary of such provisions as proposed to be amended prior to consummation of
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 Proxy Statement/Prospectus is a part. As of the date of this Proxy
Statement/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.
Application has been made to list the Common Stock on the Nasdaq National
Market under the symbol CIIT.
PREFERRED STOCK
The Certificate of Incorporation is expected to be amended to authorize 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, will be 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.
The existing Certificate of Incorporation authorizes 85,000 shares for each
of two series of Preferred Stock, designated as the Cumulative Redeemable
Preferred Stock and the Cumulative Redeemable Preferred Stock Series A
(collectively, the "Existing Preferred Stock"). As of the date of this Proxy
Statement/Prospectus, 40,000 shares of each series 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 all of the outstanding
Existing 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.
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 is
expected to be amended to provide that the Company's Board of
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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 of the Company."
Special Meetings of Stockholders. The Certificate of Incorporation is
expected to be amended to require 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 are expected to be amended to 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 will 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, 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 Restated 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.
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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.
COMPARISON OF RIGHTS OF SHAREHOLDERS
Upon the consummation of the Merger, the holders of Kilovac shares will
receive, in exchange for such shares, shares of CIIT stock. Differences
between the laws of California and the laws of Delaware, and between Kilovac's
Amended Articles of Incorporation (the "Kilovac Articles") and Bylaws (the
"Kilovac Bylaws") and the Certificate of Incorporation and Bylaws of CIIT will
result in several changes in the rights of holders of Kilovac Shares when the
Merger is effected. A summary of the more significant difference is set forth
below.
CLASSIFICATION OF THE BOARD OF DIRECTORS; CUMULATIVE VOTING
California law requires that each director be elected annually. Delaware law
permits, but does not require, the adoption of a classified board of directors
pursuant to which the directors can be divided into as many as three classes
with staggered terms of office with only one class of directors coming up for
election each year. Effective upon the first annual meeting of stockholders
following the Offering, the Company's Certificate of Incorporation is expected
to be amended to provide 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. Adoption of a classified
board is generally considered to have an anti-takeover effect. The Kilovac
Bylaws and the California GCL require that, upon notice properly given by a
shareholder at a shareholders' meeting, cumulative voting will be available in
the election of directors. Under cumulative voting, each share of stock
entitled to vote in the election of directors has a number of votes equal to
the number of directors to be elected. A shareholder may cast all votes for a
single candidate, or may allocate them among candidates as such shareholder
may choose. As a result, shareholders holding a significant minority
percentage of the outstanding shares entitled to vote in the election of
directors of Kilovac may be able to assure the election of one or more
directors.
Under Delaware law, shares may not be cumulatively voted for the election
of directors unless the certificate of incorporation specifically provides for
cumulative voting. The Company's Certificate of Incorporation does not provide
for cumulative voting. As a result, the holder or holders of a majority of the
shares entitled to vote in an election of directors will be able to elect all
directors then being elected. At present, in the election of directors
(assuming all shares are voted in the election), using cumulative voting, the
holders of 25% or more of the outstanding Kilovac Common Stock entitled to
vote in the election of directors can elect one director out of the currently
authorized total of three directors. As a result of the elimination of
cumulative voting, after the Merger the holders of a substantial minority of
the outstanding CIIT Stock entitled to vote in the election of directors,
perhaps the holders of as much as 49% of the CIIT Stock, may not have enough
voting power to elect any directors.
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 Company's
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.
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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 GCL, or (iv) for any transaction from which the
director derived an improper personal benefit.
The Kilovac Articles do not contain a comparable provision. The California
GCL, however, does permit a California corporation to provide in its articles
for the indemnification of directors subject to specified exceptions.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Generally, California and Delaware law contain similar provisions and
limitations regarding the indemnification by a corporation of its officers and
directors.
Under the Delaware GCL, a director or officer of a corporation (i) shall be
indemnified by the corporation for all expenses of litigation or other legal
proceedings when he is successful on the merits, (ii) may be indemnified by
the corporation for the expenses, judgments, fines and amounts paid in
settlement of such litigation (other than a derivative suit) even if he is not
successful on the merits if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation (and, in the case of a criminal proceeding, had no reason to
believe his conduct was unlawful), and (iii) may be indemnified by the
corporation for expenses of a derivative suit (a suit by a stockholder
alleging a breach by a director or officer of a duty owed to the corporation),
even if he is not successful on the merits, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, provided that no such indemnification may be made in
accordance with this clause (iii) if the director or officer is adjudged
liable to the corporation, unless a court determines that, despite such
adjudication but in view of all of the circumstances, he is entitled to
indemnification of such expenses. The indemnification described in clauses
(ii) and (iii) above shall be made only upon a determination by (i) a majority
of disinterested directors, (ii) independent legal counsel or (iii) the
stockholders, that indemnification is proper because the applicable standard
of conduct is met. Expenses incurred by a director or officer in defending an
action may be advanced by the corporation prior to the final disposition of
such action upon receipt of an undertaking by such director or officer to
repay such expenses if it is ultimately determined that he is not entitled to
be indemnified in connection with the proceeding to which the expenses relate.
The Company's Bylaws provide for indemnification of directors and officers
to the full extent permitted by Delaware Law. The Kilovac Bylaws provide for a
more limited indemnification.
SIZE OF BOARD OF DIRECTORS
The Kilovac Bylaws provide that the number of directors will be three. Under
California law, the number of directors or a specified range of authorized
directors can only be changed with shareholder approval. Under Delaware law, a
board of directors may fix or change the authorized number of directors
pursuant to an amendment of the Bylaws. The Company's Certificate of
Incorporation will authorize the Board of Directors to fix or change the
number of directors from time to time by amendment of the Bylaws. The Bylaws
of the Company will initially provide that the authorized number of directors
will be ten.
LIMITATIONS ON ACTION BY SHAREHOLDERS; CALL OF SPECIAL MEETINGS
The California GCL and the Kilovac Bylaws provide that shareholders may, in
certain instances, take action without a meeting by the written consent of the
holders of at least that number of shares necessary to authorize or take such
action at such meeting. Such written consent would be permitted under the
Delaware GCL unless specifically prohibited by the certificate of
incorporation. The Company's Certificate of Incorporation includes such a
prohibition on actions by written consent of stockholders.
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This provision may make it more difficult for the stockholders of the
Company to take action opposed by the Board of Directors, and thus may deter
persons from undertaking a unilateral takeover attempt.
Under California law, a special meeting of shareholders may be called by the
board of directors, the chairman of the board, the president, the holders of
shares entitled to cast not less than 10% of the votes at the special meeting
or such additional persons as may be provided in the articles of incorporation
or bylaws. Under Delaware law, special meetings of stockholders may be called
by the Board of Directors or by such other persons as may be authorized by the
certificate of incorporation or bylaws. The Company's Certificate of
Incorporation is expected to provide that such meetings may be called only by
a majority of the Board of Directors and certain officers. Limitation of
stockholders rights to call special meetings would generally be considered to
have an anti-takeover effect.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The Company's Bylaws are expected to be amended to 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 officers 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 will 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.
REMOVAL OF DIRECTORS
Under California law, a director may be removed without cause by shareholder
vote, provided that the shares voted against such removal would not be
sufficient to elect the director under cumulative voting rules. Under Delaware
law, however, a director of a corporation with a classified board of directors
can be removed only for cause unless the certificate of incorporation
otherwise provides. Since there is no controlling definition of "cause" under
Delaware law, the resolution of any dispute as to what constitutes "cause" may
become a matter for determination by the courts. The Company's Certificate of
Incorporation is expected to provide for a classified board of directors.
DISSENTERS' RIGHTS
Under both California and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to receive cash equal to the fair market value of
the shares held by such shareholder (as determined by a court of competent
jurisdiction or by agreement of the shareholder and the corporation), in lieu
of the consideration such shareholder would otherwise receive in the
transaction. The laws of California and Delaware differ with respect to the
circumstances under which dissenters' rights of appraisal are available.
Delaware law does not require dissenters' rights with respect to (a) a sale-
of-assets reorganization, (b) a merger by a corporation, the shares of which
are either listed on a national securities exchange or similar trading system,
or are widely-held (by more than 2,000 shareholders of record) if shareholders
receive shares of the surviving corporation or of a listed or widely held
corporation, or (c) a merger in which the corporation is the surviving
corporation, provided that no vote of its shareholders is required to approve
the merger. California law does, in general, afford dissenters' rights in a
sale-of-assets reorganization, and the exclusions from dissenters' rights in
mergers are somewhat different from those in Delaware. For example, in the
case of a corporation whose shares are listed on a national securities
exchange, dissenters' rights would nevertheless be available in certain
transactions for any shares with respect to which there are certain
restrictions on transfer and for any class with respect to which 5% or more of
such class claims dissenters' rights. Also, under California law, shareholders
of a corporation involved in a reorganization are not entitled to dissenters'
rights if the corporation, or its shareholders immediately before the
reorganization, or both, will own more than five-sixths of the voting power of
the surviving or acquiring corporation or its parent entity.
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LOANS TO OFFICERS
Under Delaware law, a corporation may make loans to, guarantee the
obligations of, or otherwise assist, its officers or other employees and those
of its subsidiaries when such action, in the judgment of the corporation's
board of directors, may reasonably be expected to benefit the corporation.
Under California law, a corporation may only make such a loan to, or guarantee
for the benefit of, officers if such loan or guarantee is approved by a
majority of the corporation's shareholders or, for corporations with 100 or
more shareholders of record, by its board of directors pursuant to a bylaw
approved by shareholders. Kilovac currently does not have such a bylaw.
INSPECTION OF SHAREHOLDER LIST
California law provides for an absolute right of inspection of a shareholder
list for persons holding 5% or more of the corporation's voting shares or
persons holding 1% or more of such shares who have filed a Schedule 14A with
the Securities and Exchange Commission relating to the election of directors.
(Generally, a Schedule 14A must be filed by any shareholder engaged in the
solicitation of proxies in connection with a contested election of directors.)
Delaware law permits any stockholder to inspect the stockholder list for a
purpose reasonably related to such person's interest as a stockholder and,
during the ten days preceding a stockholders' meeting, for any purpose germane
to that meeting. Delaware law contains no provision comparable to the absolute
right of inspection provided by California law to certain shareholders.
PAYMENT OF DIVIDENDS
Delaware law permits the payment of dividends out of surplus or, if there is
no surplus, out of net profits for the current and preceding fiscal years
(provided that the amount of capital of the corporation is not less than the
aggregate amount of the capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets). In
addition, Delaware law generally provides that a corporation may redeem or
repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation. The ability of a Delaware corporation to pay
dividends on, or to make repurchases or redemptions of, its shares is
dependent on the financial status of the corporation standing alone and not on
a consolidated basis. In determining the amount of surplus of a Delaware
corporation, the assets of the corporation, including stock of subsidiaries
owned by the corporation, must be valued at their fair market value as
determined by the board of directors, without regard to their historical book
value.
Under California law, any distributions (including dividends and repurchases
of shares) are limited either to retained earnings or to an amount that would
leave the corporation with tangible assets in an amount equal to at least 125%
of its tangible liabilities and with current assets in an amount at least
equal to its current liabilities (or 125% of its current liabilities if the
average pre-tax and pre-interest earnings for the preceding two fiscal years
were less than the average interest expenses for such years). Such limitations
are applied on a consolidated basis.
BUSINESS COMBINATION TRANSACTIONS
Following the consummation of the Offering, the Company will be subject to
the "business combination" statute of the Delaware General Corporations 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, 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
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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.
The California GCL includes a provision requiring the delivery of a fairness
opinion in connection with certain acquisitions by corporations controlling
the acquired party or in which the acquirer is otherwise an interested party.
There are no limitations as to the timing of any acquisition.
SHARES OF COMPANY COMMON STOCK ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, 6,500,000 shares of Common Stock will
be outstanding (7,025,000 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 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 shares of CIIT Stock to be distributed to Kilovac Shareholders in
connection with the Merger will be registered under the Securities Act and, in
accordance with the provisions of Rule 145, may be freely traded by Kilovac
Shareholders who, at the time of the Merger, are not affiliates of CIIT.
Kilovac Shareholders who are
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affiliates of CIIT at the time of the Merger will be able to resell shares of
CIIT Stock in accordance with the volume and manner of sale restrictions of
Rule 144 under the Securities Act. In addition, each holder of Kilovac Shares
other than the ESBP, by agreeing to the First Amendment, will be agreeing for
the benefit of the underwriters of the IPO not to sell any shares of CIIT
Stock for a period of one year following the effectiveness of the IPO.
The existing stockholders will have registration rights with respect to the
3,000,000 shares of Common Stock held by such shareholders following the
closing of the Offering. See "Certain Relationships and Related Transactions--
Registration Rights."
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.
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 sheets of Kilovac at December 31, 1994 and October
11, 1995, the related consolidated statements of income, stockholders' equity
and cash flows for the two years in the period ended December 31, 1994 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 sheets 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.
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.
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The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act, with respect to the Common Stock being
offered hereby. This Proxy Statement/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.
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CII TECHNOLOGIES INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 (Company)
and Unaudited March 31, 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 Three Months Ended April 2,
1995 and March 31, 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 Three Months
Ended March 31, 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 Three Months Ended April 2,
1995 and March 31, 1996 (Company).................................... F-6
Notes to Consolidated Financial Statements............................ F-7
KILOVAC CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS:
Independent Auditors' Report.......................................... F-19
Consolidated Balance Sheets at December 31, 1994, October 11, 1995 and
Unaudited March 31, 1996 (Successor Company)......................... F-20
Consolidated Statements of Income for the Years Ended December 31,
1993 and 1994, the Period From January 1, 1995 to October 11, 1995,
the Unaudited Period From October 12, 1995 to December 31, 1995
(Successor Company) and the Unaudited Three Months Ended March 26,
1995 and March 31, 1996 (Successor Company).......................... F-21
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1993 and 1994, the Period From January 1, 1995 to
October 11, 1995, the Unaudited Period From October 12, 1995 to
December 31, 1995 (Successor Company) and the Unaudited Three Months
Ended March 31, 1996 (Successor Company)............................. F-22
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993 and 1994, the Period From January 1, 1995 to October 11, 1995,
the Unaudited Period From October 12, 1995 to December 31, 1995
(Successor Company) and the Unaudited Three Months Ended March 26,
1995 and March 31, 1996 (Successor Company).......................... F-23
Notes to Consolidated Financial Statements............................ F-24
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL INC.:
Independent Auditors' Report.......................................... F-29
Balance Sheets at December 31, 1994 and 1995 and Unaudited March 31,
1996................................................................. F-30
Statements of Operations for the Years Ended December 31, 1994 and
1995 and the Unaudited Three Months Ended March 31, 1995 and 1996.... F-31
Statements of Cash Flows for the Years Ended December 31, 1994 and
1995 and the Unaudited Three Months Ended March 31, 1995 and 1996.... F-32
Notes to Financial Statements......................................... F-33
INDEX TO FINANCIAL STATEMENT SCHEDULES................................. II-4
</TABLE>
F-1
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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,
---------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
ASSETS (NOTE 5)
---------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................ $ 72 $ 193 $ 73
Accounts receivable (less allowance for doubtful
accounts: 1994--$301; 1995--$420;
1996--$446) (Note 1)........................... 5,094 8,092 7,885
Inventories (Notes 1 and 2)..................... 7,934 10,642 10,963
Deferred income taxes (Note 7).................. 410 1,909 1,972
Other current assets............................ 76 1,321 1,150
------- ------- -------
Total current assets............................ 13,586 22,157 22,043
------- ------- -------
Property, Plant and Equipment, net (Notes 1, 3
and 6).......................................... 11,735 13,225 13,004
------- ------- -------
OTHER ASSETS:
Cash restricted for environmental remediation
(Note 9)....................................... -- 1,755 1,304
Environmental settlement receivable (Note 9).... -- 1,050 1,062
Goodwill (net of accumulated amortization:
1994--$54; 1995--$130; 1996--$194)............. 717 7,726 7,662
Other intangible assets, net (Note 4)........... 798 3,061 3,145
Other noncurrent assets......................... -- 12 139
------- ------- -------
Total other assets.............................. 1,515 13,604 13,312
------- ------- -------
Total........................................... $26,836 $48,986 $48,359
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable................................ $ 2,282 $ 2,579 $ 3,671
Accrued interest (Note 5)....................... 626 1,269 1,495
Other accrued expenses.......................... 1,013 3,231 3,307
Current portion of long-term debt (Note 5)...... 2,006 3,721 3,037
Current payable due to minority stockholders of
subsidiary (Note 1)............................ -- 1,453 708
------- ------- -------
Total current liabilities....................... 5,927 12,253 12,218
------- ------- -------
Long-Term Debt (Note 5).......................... 10,191 19,731 19,517
------- ------- -------
Notes Payable to Stockholders (Notes 5 and 13)... 5,750 7,450 7,450
------- ------- -------
Accrued Environmental Remediation Costs (Note
9).............................................. -- 3,491 3,052
------- ------- -------
Deferred Income Taxes and Other Liabilities
(Notes 7 and 8)................................. 3,418 3,004 2,877
------- ------- -------
Noncurrent Payable Due to Minority Stockholders
of Subsidiary (Note 1).......................... -- 865 865
------- ------- -------
Minority Interest in Subsidiary.................. -- 35 51
------- ------- -------
Cumulative Redeemable Preferred Stock--$.01 par
value, stated at liquidation value--170,000
shares authorized; 40,000 shares issued and
outstanding--1994; 80,000 shares issued and
outstanding--1995 and 1996 (Note 11)............ 2,287 4,497 4,590
------- ------- -------
Common Stock Subject to Put Options--$.01 par
value, 110,000 shares issued and
outstanding--1994; 160,000 shares issued and
outstanding--1995 and 1996 (Note 11)............ 100 165 165
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY (Notes 5 and 11):
Common stock, $.01 par value--1,020,000 shares
authorized; 860,000 shares issued and
outstanding.................................... 9 9 9
Additional paid-in capital...................... 38 758 758
Accumulated deficit............................. (873) (3,236) (3,157)
Currency translation loss....................... (11) (36) (36)
------- ------- -------
Total stockholders' equity (deficit)............ (837) (2,505) (2,426)
------- ------- -------
Total........................................... $26,836 $48,986 $48,359
======= ======= =======
</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 THREE MONTHS ENDED
JANUARY 1, MAY 11, 1993 DECEMBER 31, ----------------------
1993 TO TO DECEMBER 31, ---------------------- APRIL 2, MARCH 31,
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 $ 9,216 $ 13,119
Cost of Sales........... 6,684 14,448 24,330 28,687 6,839 9,193
------ ---------- ---------- ---------- ---------- ----------
Gross Profit............ 1,694 2,647 7,193 11,231 2,377 3,926
------ ---------- ---------- ---------- ---------- ----------
Operating Expenses:
Selling expenses....... 713 1,344 2,382 3,229 656 1,148
General and
administrative
expenses (Note 13).... 586 1,150 2,248 3,334 656 1,187
Research and
development expenses.. 21 41 103 301 39 265
Amortization of
goodwill and other
intangible assets..... 45 117 177 251 52 122
Special compensation
charge (Note 10)...... -- -- -- 1,300 -- --
Environmental expenses
(Note 9).............. -- -- -- 951 -- --
Special acquisition
expenses (Note 1)..... 153 266 -- 2,064 568 --
------ ---------- ---------- ---------- ---------- ----------
Total operating
expenses............. 1,518 2,918 4,910 11,430 1,971 2,722
------ ---------- ---------- ---------- ---------- ----------
Operating Income
(Loss)................. 176 (271) 2,283 (199) 406 1,204
Other Income............ 42 -- -- 2 2 --
Interest Expense (Note
5)..................... (77) (1,086) (1,833) (2,997) (555) (874)
------ ---------- ---------- ---------- ---------- ----------
Income (Loss) Before
Income Taxes and
Minority Interest in
Subsidiary............. 141 (1,357) 450 (3,194) (147) 330
Income Tax Expense
(Benefit) (Note 7)..... -- (499) 178 (1,076) (59) 142
------ ---------- ---------- ---------- ---------- ----------
Income (Loss) After
Income Taxes Before
Minority Interest in
Subsidiary............. 141 (858) 272 (2,118) (88) 188
Income Applicable to
Minority Interest in
Subsidiary............. -- -- -- 35 -- 16
------ ---------- ---------- ---------- ---------- ----------
Net Income (Loss)....... 141 (858) 272 (2,153) (88) 172
Preferred Stock
Dividend............... -- 102 185 210 46 93
------ ---------- ---------- ---------- ---------- ----------
Net Income (Loss)
Available for Common
Stock.................. $ 141 $ (960) $ 87 $ (2,363) $ (134) $ 79
====== ========== ========== ========== ========== ==========
Pro Forma Earnings per
Common Share
(Unaudited) (Note 1):
Net Income (Loss)
Available for Common
Stock................. $ (.38) $ .03 $ (.93) $ (.05) $ .03
========== ========== ========== ========== ==========
Weighted average of
common shares
outstanding........... 2,495,440 2,511,125 2,535,714 2,520,440 2,550,000
========== ========== ========== ========== ==========
Supplemental Pro Forma
Earnings Per Common
Share (Unaudited) (Note
1):
Net Income (Loss)
Available for Common
Stock................. $ (.21) $ .06
========== ==========
Weighted average of
common shares
outstanding........... 6,035,714 6,050,000
========== ==========
</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............... 960,000 $ 10 $ 950 -- -- $ (35)
Reclass to common
stock subject to put
options.............. (100,000) (1) (99) -- -- --
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................... 860,000 9 8 (960) -- (25)
Preferred stock
dividend accrued..... -- -- -- (185) -- --
Contribution.......... -- -- 30 -- -- --
Currency translation
loss................. -- -- -- -- $ (11) --
Common stock issued... 10,000 -- 10 -- -- (10)
Reclass to common
stock subject to put
options.............. (10,000) -- (10) -- -- 10
Collection on
subscription note
receivable........... -- -- -- -- -- 25
Net income............ -- -- -- 272 -- --
-------- ---- ----- -------- ----- -----
Balances at December 31,
1994................... 860,000 9 38 (873) (11) --
Preferred stock
dividend accrued..... -- -- -- (210) -- --
Currency translation
loss................. -- -- -- -- (25) --
Common stock issued... 50,000 -- 775 -- -- --
Reclass to common
stock subject to put
options.............. (50,000) -- (55) -- -- (10)
Collection on
subscription note
receivable........... -- -- -- -- -- 10
Net loss.............. -- -- -- (2,153) -- --
-------- ---- ----- -------- ----- -----
Balances at December 31,
1995................... 860,000 9 758 (3,236) (36) --
Preferred stock
dividend accrued..... -- -- -- (93) -- --
Net income............ -- -- -- 172 -- --
-------- ---- ----- -------- ----- -----
Balances at March 31,
1996 (Unaudited)....... 860,000 $ 9 $ 758 $ (3,157) $ (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, THREE MONTHS ENDED
1993 TO MAY 11, 1993 ----------------- -------------------
MAY 10, TO DECEMBER 31, APRIL 2, MARCH 31,
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) $ (88) $ 172
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 201 1,309 2,158 2,442 581 775
Deferred taxes........ -- (749) (751) (1,583) (205) (220)
Stock compensation
charge............... -- -- -- 720 -- --
Minority interest..... -- -- -- 35 -- 16
Changes in operating
assets and
liabilities net of
effects of
acquisitions:
Decrease (increase)
in accounts
receivable.......... (306) 453 (1,600) (1,033) (1,026) 207
Decrease (increase)
in inventories...... 841 41 (274) 748 382 (321)
Decrease (increase)
in other current
assets.............. 360 244 (3) (121) (76) 171
Increase (decrease)
in accounts
payable............. (205) 383 603 (486) 62 1,092
Increase (decrease)
in accrued
expenses............ 304 (181) 734 1,866 696 302
Increase in other
assets and
liabilities......... -- -- 46 1,411 (24) (152)
------- -------- ------- -------- ------- -------
Net cash provided by
operating
activities......... 1,336 642 1,185 1,846 302 2,042
------- -------- ------- -------- ------- -------
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) (201) (380)
------- -------- ------- -------- ------- -------
Net cash used in
investing
activities........... (2,876) (13,643) (1,544) (15,484) (1,686) (519)
------- -------- ------- -------- ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowings
(repayment) under
line of credit
arrangement.......... 1,400 160 (552) 114 (210) 536
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) (624) (1,434)
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......... -- -- -- -- -- (745)
Distributions to
stockholders......... (1,216) -- -- -- -- --
------- -------- ------- -------- ------- -------
Net cash provided by
(used in) financing
activities........... 1,611 13,028 404 13,759 1,407 (1,643)
------- -------- ------- -------- ------- -------
NET INCREASE IN CASH... 71 27 45 121 23 (120)
CASH, BEGINNING OF
PERIOD................ 10 -- 27 72 72 193
------- -------- ------- -------- ------- -------
CASH, END OF PERIOD.... $ 81 $ 27 $ 72 $ 193 $ 95 $ 73
======= ======== ======= ======== ======= =======
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 FOR THE THREE MONTHS ENDED APRIL 2, 1995 AND 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 solid state relays 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"). 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 and $2,000
(reduced to $1,750 on May 17, 1994 pursuant to an indemnity settlement
agreement) as well as cumulative redeemable preferred stock of $2,000.
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 $15,700 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.................................................. $ 5,563
Property and equipment.......................................... 1,802
Intangibles and other assets.................................... 10,165
Liabilities assumed............................................. (1,849)
-------
Total purchase price............................................ $15,681
=======
</TABLE>
The transaction was financed through additional borrowings of approximately
$9,700 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 one
stock split to be effective prior to the closing of the anticipated initial
public offering described more fully in Note 14. The Company issued 40,000
shares of common stock via subscription agreements 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 described more fully in Note
14. The proceeds from such offering are anticipated to be used to retire
approximately $18,300 of Company debt and 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 $1,097, net of income taxes of $731.
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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------ ------- ---------
<S> <C> <C> <C>
Finished goods................................... $1,500 $ 2,495 $ 2,689
Work-in-process.................................. 2,821 4,201 4,144
Raw materials.................................... 4,116 4,730 4,943
Reserve for obsolete and slow-moving inventory... (503) (784) (813)
------ ------- -------
Total.......................................... $7,934 $10,642 $10,963
====== ======= =======
</TABLE>
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>
F-10
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 Communications
Instruments 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>
F-11
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 March 31, 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.
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>
F-12
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-13
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Other....................................................... $ 410 1,739
------ ------
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.
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.
F-14
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $500.
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 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
F-15
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
remediation liability which is recorded at the present value, discounted at
5%, of the best estimate of the costs to remediate and monitor the remediation
over the estimated 30 year remediation period, which were developed by a third
party environmental consultant 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............................................................. $1,447
1997............................................................. 135
1998............................................................. 135
1999............................................................. 135
2000............................................................. 135
Thereafter....................................................... 3,277
------
5,264
Discount to present value........................................ 1,773
------
Liability at present value....................................... $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 $307 and $508 for
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 $110 and $91 during the years ended December 31,
1995 and 1994, respectively.
During 1995, the Company sold 50,000 shares of stock to certain employees.
The issuance price was $1 per share for 10,000 shares and $1.14 per share for
40,000 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.
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.
F-16
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 100,000 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 10,000 shares of common stock via subscription agreements for
$1.00 per share. On December 1, 1995, the Company issued 40,000 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 160,000 shares outstanding
subject to Put Options of the total 1,020,000 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 $150 and $156 for such services for 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).
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.
F-17
<PAGE>
CII TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 annually, at the election of the Company at a reference rate or at
LIBOR (for the interest period selected by the Company) plus the applicable
margin. The facility will be available for working capital purposes and to
finance additional acquisitions. 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 revolving loan facility will be
available for three years, subject to one-year renewals, and that all
outstanding amounts at the end of the three-year period will convert to a
five-year term loan.
In connection with the expected offering of 3,500,000 shares of Common Stock
by the Company, a Registration Statement on Form S-1 will be 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 the preferred stock.
Subsequent to December 31, 1995, the Board of Directors approved a 2.5 for 1
stock split of the Common Stock effective immediately prior to the offering of
Common Stock by the Company.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Kilovac Corporation:
We have audited the consolidated balance sheets of Kilovac Corporation and
subsidiaries as of December 31, 1994 and October 11, 1995 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 October 11, 1995 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 SHEETS
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY
DECEMBER 31, OCTOBER 11, MARCH 31,
1994 1995 1996
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 533,532 $ 309,333 $ 12,665
Receivables:
Trade, net of allowance for doubtful
accounts: 1994--$6,134; 1995--
$37,816; 1996--$40,470............... 1,315,546 1,365,489 1,617,565
Other................................. 191,531 28,798 75,391
Unbilled receivables.................. 30,518 570,999 364,916
Income taxes receivable............... 66,554 -- 754,694
Inventories:
Raw materials and processed parts..... 558,907 779,636 1,157,465
Work-in-progress...................... 429,787 583,784 626,568
Finished products..................... 208,536 416,849 500,665
Prepaid expenses........................ 68,140 81,862 72,049
Deferred income taxes................... 325,827 373,460 536,350
----------- ---------- -----------
Total current assets.................. 3,728,878 4,510,210 5,718,328
----------- ---------- -----------
PROPERTY, At cost:
Land.................................... 435,408 435,408 --
Building................................ 145,136 145,136 --
Machinery............................... 1,999,514 2,113,184 1,471,847
Furniture and office equipment.......... 754,106 868,152 337,152
Vehicles................................ 19,220 57,130 33,735
Leasehold improvements.................. 935,725 959,081 311,644
Construction-in-progress................ 36,450 46,842 --
----------- ---------- -----------
Total................................. 4,325,559 4,624,933 2,154,378
Accumulated depreciation................ (2,671,554) (2,945,584) (137,561)
----------- ---------- -----------
Property, net......................... 1,654,005 1,679,349 2,016,817
----------- ---------- -----------
OTHER ASSETS:
Deposits................................ 27,226 12,959 13,554
Deferred Income Taxes................... 556,177
Intangibles............................. 145,295 159,958 2,409,342
Goodwill................................ 6,975,239
----------- ---------- -----------
Total other assets.................... 172,521 172,917 9,954,312
----------- ---------- -----------
TOTAL.................................... $ 5,555,404 $6,362,476 $17,689,457
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Revolving line of credit................ $ 200,000 -- --
Notes payable........................... 429,778 $ 80,842 --
Accounts payable........................ 486,855 788,295 $ 816,693
Accrued liabilities..................... 905,243 980,260 1,596,265
Income taxes payable.................... -- 386,887 84,436
Payable to stockholders................. -- -- 707,695
----------- ---------- -----------
Total current liabilities............. 2,021,876 2,236,284 3,205,089
----------- ---------- -----------
NOTE PAYABLE TO CII...................... -- -- 9,372,346
----------- ---------- -----------
PAYABLE TO STOCKHOLDERS.................. -- -- 864,770
----------- ---------- -----------
DEFERRED INCOME TAXES.................... 18,916 4,798 --
----------- ---------- -----------
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,
52,295 and 124,785 shares issued and
outstanding in 1994, 1995 and 1996,
respectively........................... 559,929 374,215 4,000,000
Common stock--Class B, no par value;
200 shares authorized; none issued or
outstanding
Retained earnings....................... 2,954,683 3,747,179 247,252
----------- ---------- -----------
Total stockholders' equity............ 3,514,612 4,121,394 4,247,252
----------- ---------- -----------
TOTAL.................................... $ 5,555,404 $6,362,476 $17,689,457
=========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
------------------------
SUCCESSOR
YEAR ENDED COMPANY SUCCESSOR
DECEMBER 31, JANUARY 1, 1995 OCTOBER 12, 1995 COMPANY
------------------------ TO OCTOBER 11, TO DECEMBER 31, MARCH 26, MARCH 31,
1993 1994 1995 1995 1995 1996
----------- ----------- --------------- ---------------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Product sales......... $10,375,887 $11,257,160 $9,685,620 $3,042,216 $2,901,286 $3,511,177
Engineering sales..... 492,343 961,810 1,343,880 637,325 128,326 162,997
----------- ----------- ---------- ---------- ---------- ----------
Total revenues...... 10,868,230 12,218,970 11,029,500 3,679,541 3,029,612 3,674,174
----------- ----------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of product
sales................ 5,902,130 6,940,568 5,635,997 1,459,519 1,707,119 1,710,306
Engineering, research
and development
costs................ 943,532 1,431,703 1,364,845 579,577 364,127 624,565
Selling, general and
administrative
expenses............. 2,441,318 2,987,309 2,527,046 1,079,414 674,635 938,001
----------- ----------- ---------- ---------- ---------- ----------
Total costs and
expenses........... 9,286,980 11,359,580 9,527,888 3,118,510 2,745,881 3,272,872
----------- ----------- ---------- ---------- ---------- ----------
OPERATING
INCOME................. 1,581,250 859,390 1,501,612 561,031 283,731 401,302
----------- ----------- ---------- ---------- ---------- ----------
OTHER EXPENSE (INCOME):
Other (income)
expense.............. 226,133 (112,901) (8,788) (837) (15,000) --
Interest expense...... 150,813 130,247 34,527 250,261 12,772 267,588
----------- ----------- ---------- ---------- ---------- ----------
Total other
expense............ 376,946 17,346 25,739 249,424 (2,228) 267,588
----------- ----------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES.................. 1,204,304 842,044 1,475,873 311,607 285,959 133,714
----------- ----------- ---------- ---------- ---------- ----------
INCOME TAX PROVISION
(BENEFIT):
Current............... 490,799 333,168 622,864 148,598 118,247 64,840
Deferred.............. (87,913) (104,852) (61,751) (10,700) (11,723) (4,669)
----------- ----------- ---------- ---------- ---------- ----------
Total income taxes.. 402,886 228,316 561,113 137,898 106,524 60,171
----------- ----------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 801,418 $ 613,728 $ 914,760 $ 173,709 $ 179,435 $ 73,543
=========== =========== ========== ========== ========== ==========
Income per share........ $ 7.00 $ 5.43 $ 7.75 $ 1.39 $ 1.57 $ .59
=========== =========== ========== ========== ========== ==========
Weighted average shares
outstanding............ 119,147 118,600 118,557 124,785 119,472 124,785
=========== =========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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
CII purchase adjustment
(including effect of issuance
of shares upon exercise of
stock options)............... 72,490 3,625,785 (3,747,179) (121,394)
Net Income.................... -- -- 173,709 173,709
------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995
(Unaudited) (Successor
Company)....................... 124,785 4,000,000 173,709 4,173,709
Net Income.................... -- -- 73,543 73,543
------- ---------- ---------- ----------
BALANCE, MARCH 31, 1996
(Unaudited) (Successor Company)
............................... 124,785 $4,000,000 $247,252 $4,247,252
======= ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
--------------------------------
SUCCESSOR
COMPANY
YEAR ENDED JANUARY 1, OCTOBER 12, SUCCESSOR
DECEMBER 31, 1995 TO 1995 TO COMPANY
--------------------- OCTOBER DECEMBER 31, MARCH 26, MARCH 31,
1993 1994 11, 1995 1995 1995 1996
--------- ---------- ---------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 801,418 $ 613,728 $ 914,760 $ 173,709 $ 179,435 $ 73,543
Adjustments to
reconcile net income
to net cash provided
by activities:
Depreciation and
amortization......... 308,699 365,718 274,030 158,793 78,540 180,719
Loss on disposal of
property............. -- 14,543 -- -- -- --
Deferred income
taxes................ (87,913) (104,852) (61,751) (10,700) (11,723) (4,669)
Provision for
doubtful accounts
and notes
receivable........... 78,151 (30,000) 31,682 3,677 21,678
Changes in operating
assets and
liabilities:
Trade and other
receivables........ (792,448) (6,632) (459,373) (1,017,444) (78,066) 924,866
Inventories......... (49,503) 167,438 (583,039) 168,009 (155,666) (483,099)
Prepaid expenses and
deposits........... (108,146) 59,784 545 25,544 (45,364) (5,476)
Accounts payable.... 91,170 96,384 308,378 (105,374) 144,986 138,772
Income taxes........ 159,464 (345,015) 453,441 301,481 (3,777) 60,860
Accrued
liabilities........ 197,254 268,251 68,079 98,126 (256,629) 337,024
--------- ---------- --------- ----------- --------- -----------
Net cash provided
by operating
activities....... 598,146 1,099,347 946,752 (204,179) (126,586) 1,222,540
--------- ---------- --------- ----------- --------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to
property............. (284,029) (486,583) (299,374) (112,509) (54,809) (239,784)
Additions to
patents.............. (579) (68,779) (14,663) (2,610) -- --
Proceeds from
disposal of fixed
assets............... -- 1,205 -- -- -- --
--------- ---------- --------- ----------- --------- -----------
Net cash used in
investing
activities......... (284,608) (554,157) (314,037) (115,119) (54,809) (239,784)
--------- ---------- --------- ----------- --------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net revolving line of
credit borrowings.... -- 200,000 (200,000) -- 169,927
Repayment of notes
payable.............. (137,968) (860,865) (348,936) -- (288,483) (80,842)
Notes payable to
CII.................. -- -- -- 144,177 (278,277)
Repayment of payable
to stockholders...... (745,184)
Issuance of common
stock................ 95 69,992 -- -- -- --
Repurchase of common
stock................ (92,993) (101,063) (307,978) -- (46,264) --
--------- ---------- --------- ----------- --------- -----------
Net cash used in
financing
activities....... (230,866) (691,936) (856,914) 144,177 (164,820) (1,104,303)
--------- ---------- --------- ----------- --------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS.. 82,672 (146,746) (224,199) (175,121) (346,215) (121,547)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 597,606 680,278 533,532 309,333 533,532 134,212
--------- ---------- --------- ----------- --------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 680,278 $ 533,532 $ 309,333 $ 134,212 $ 187,317 $ 12,665
========= ========== ========= =========== ========= ===========
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW
INFORMATION--
Cash paid during the
period for:
Interest.............. $ 117,132 $ 97,810 $ 19,963 $ 106,084 $ 10,307 --
Income taxes.......... $ 321,798 $ 717,500 $ 142,200 $ 120,353 $ 120,000 $ 4,000
</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.
Interim Financial Statements--In the opinion of management, the unaudited
interim financial statements contain all adjustments, consisting solely of
adjustments of a normal recurring nature, necessary to present fairly the
financial position, results of operations, and cash flows for the periods
presented. The results of operations for the three months ended March 31, 1996
are not necessarily indicative of the results for the full year. It is the
Company's practice at the end of each interim reporting period to make an
estimate of the effective tax rate expected to be applicable for the full
fiscal year on a stand alone basis. The rate so determined is used in
providing for income taxes on a year-to-date basis.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
Property--Depreciation and amortization are computed using the straight-line
method. Useful lives of the assets range from 3 to 30 years for building and
leasehold improvements, 3 to 10 years for machinery, and 3 to 5 years for
furniture and 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. Cost 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.
Income per Share--Per share data is based on the weighted average number of
shares outstanding and common stock equivalents. Income per share computations
limit the assumption of the repurchase of treasury shares to a maximum of 20
percent of the outstanding shares of the Company, with the remaining pro forma
proceeds, where applicable, being applied to reduce interest-bearing
liabilities. Accordingly, interest expense based on the Company's average cost
of funds is reduced, and net income is increased. Net income for purposes of
the computation of income per share was increased by $32,938, $30,574, $4,062
and $7,663 for the years ended December 31, 1993 and 1994, the period from
January 1, 1995 to October 11, 1995 and the three months ended March 26, 1995,
respectively.
F-24
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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, OCTOBER 11,
1994 1995
------------ -----------
<S> <C> <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 $80,842
Other............................................. 20,300 --
-------- -------
$429,778 $80,842
======== =======
</TABLE>
F-25
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 11,
1994 1995
------------ -----------
<S> <C> <C>
Wages and certain benefits.......................... $319,033 $355,000
Legal costs......................................... 360,000 --
Provision for contract losses....................... 155,813 307,983
Deferred revenues................................... -- 240,404
Other............................................... 70,397 76,873
-------- --------
$905,243 $980,260
======== ========
</TABLE>
5. INCOME TAXES
Significant components of the Company's net deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 11,
1994 1995
------------ -----------
<S> <C> <C>
Current:
Accrued expenses.................................. $147,358 $ 67,606
Provision for contract losses..................... 52,976 104,714
Deferred revenues................................. -- 81,600
Inventories....................................... 31,449 16,697
Loan receivable................................... 23,800 --
Other............................................. (4,005) 10,444
State taxes, net of federal benefit............... 74,249 92,399
-------- --------
$325,827 $373,460
======== ========
Noncurrent:
Depreciation...................................... $(16,185) $ (4,064)
State taxes, net of federal benefit............... (2,731) (734)
-------- --------
$(18,916) $ (4,798)
======== ========
</TABLE>
The net deferred tax asset is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 11,
1994 1995
------------ -----------
<S> <C> <C>
Deferred tax assets............................... $336,608 $416,278
Deferred tax liabilities.......................... (29,697) (47,616)
-------- --------
$306,911 $368,662
======== ========
</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>
F-26
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-27
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
11. SUCCESSOR COMPANY
On October 12, 1995, the reporting entity was effectively changed to
reflect the purchase of 80% of the Company by CII. Accordingly, the
accompanying financial statements subsequent to the purchase on October 11,
1995, entitled "Successor Company", reflect the push down of the purchase
accounting adjustments based on the aggregate purchase price of $15,681,000
paid by CII including substantially all bank borrowings. To the extent of the
80% change in ownership, the purchase price has been allocated to the assets
and liabilities of the Company 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............................................... $ 5,563,000
Property and equipment....................................... 1,802,000
Intangibles and other assets................................. 10,165,000
Liabilities assumed.......................................... (1,849,000)
-----------
Total purchase price....................................... $15,681,000
===========
</TABLE>
The transaction was financed through bank borrowings of approximately
$9,700,000 on term and revolver loans, issuance of $2,000,000 in preferred
stock, and issuance of subordinated notes of $1,700,000 to CII stockholders.
Additionally, an estimated $2,300,000 is payable to the Company's selling
stockholders upon the future realization of potential tax benefits associated
with a net operating loss carry-forward.
CII is obligated to purchase, for shares of CII, the remaining 20% interest
in the Company on, at the option of the selling stockholders, either December
31, 2000 or December 31, 2005, or upon the occurrence of certain events
(including an initial public offering), if earlier, at an amount based on the
value of the Company as defined in the agreement. During 1996, CII and holders
of the remaining 20% interest in the Company agreed that the value of the
remaining interest that would be acquired upon an initial public offering is
$4,500.
The accompanying Successor Company financial statements include
substantially all bank borrowings incurred by CII in connection with the
purchase, approximating $9,500,000 as a note payable to CII, and the
$2,300,000 payable to the Company's stockholders. The note payable to CII
includes interest at the bank's prime rate plus 2% (10% at December 31, 1995
and 10.25% at March 31,1996). The remaining purchase price has been reflected
as an adjustment to certain liabilities and stockholders' equity.
As a result of the purchase price allocation, intangible and other assets,
which includes goodwill, were increased to approximately $10,165,000. The
intangible assets, excluding goodwill, primarily represent patents and debt
issuance costs, and are amortized on a straight-line basis over the patent
life, or on the effective interest method over the life of the loan. Goodwill
is being amortized by the straight-line method over 30 years. The Company and
CII regularly evaluate the recoverability of goodwill using estimates of
undiscounted future cash flows and operating earnings of the Company.
F-28
<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-29
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Cash............................................ $ 7 $ 22 $ 19
Receivables--net of allowance for doubtful
accounts of $100 in 1994, 1995 and 1996........ 3,633 1,877 2,596
Inventories (Note 2)............................ 5,632 6,992 6,973
Prepaid expenses................................ 13 23 15
------- ------- -------
Total current assets.......................... 9,285 8,914 9,603
Property and equipment--at cost (Note 3)........ 5,720 5,720 5,400
Less accumulated depreciation and amortization.. (3,626) (3,958) (3,993)
------- ------- -------
Property and equipment--net................... 2,094 1,762 1,407
Prepaid pension (Note 6)........................ 1,342 1,427 1,427
Other assets.................................... 174 33 --
------- ------- -------
Total......................................... $12,895 $12,136 $12,437
======= ======= =======
LIABILITIES AND DIVISIONAL EQUITY
---------------------------------
LIABILITIES:
Accounts payable................................ $ 963 $ 1,356 $ 1,602
Accrued liabilities (Note 4).................... 6,819 5,333 5,032
Current portion of capital lease obligations
(Note 7)....................................... 1,073 518 504
------- ------- -------
Total current liabilities..................... 8,855 7,207 7,138
Non-current capital lease obligations (Note 7).. 1,138 617 494
------- ------- -------
Total liabilities............................. 9,993 7,824 7,632
COMMITMENTS AND CONTINGENCIES (Note 7)
DIVISIONAL EQUITY (Note 9)...................... 2,902 4,312 4,805
------- ------- -------
Total......................................... $12,895 $12,136 $12,437
======= ======= =======
</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 OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------- --------------------
1994 1995 1995 1996
------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES............................... $19,974 $17,461 $ 4,742 $ 5,095
------- ------- --------- ---------
COSTS AND EXPENSES:
Cost of sales (Note 8)................ 17,120 11,417 3,024 3,656
Selling............................... 889 445 130 73
General and administrative (Note 1 and
8)................................... 3,331 2,753 697 685
Research and development.............. 969 615 216 --
Non-recurring charge (Note 10)........ 1,877 -- -- --
Provision for estimated environmental
costs (Note 11)...................... -- 850 -- --
------- ------- --------- ---------
Total costs and expenses............ 24,186 16,080 4,067 4,414
------- ------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........... (4,212) 1,381 675 681
------- ------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (Note 8)............. (332) (50) (17) --
Other................................. 118 (92) (33) 1
------- ------- --------- ---------
Total other income (expense)........ (214) (142) (50) 1
------- ------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....... (4,426) 1,239 625 682
PROVISION (BENEFIT) FOR INCOME TAXES
(Note 5)............................... (1,765) 496 249 272
------- ------- --------- ---------
NET INCOME (LOSS)....................... $(2,661) $ 743 $ 376 $ 410
======= ======= ========= =========
</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.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------- -------------
1994 1995 1995 1996
------- ------- ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $(2,661) $ 743 $ 376 $ 410
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation............................... 389 332 88 67
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 (603) (719)
Inventories.............................. 1,315 (1,360) 181 19
Prepaid expenses......................... (4) (10) 6 8
Prepaid pension and other assets......... 629 56 26 33
Accounts payable......................... (1,314) 393 113 246
Accrued expenses......................... (2,613) (1,486) (951) (301)
------- ------- ------ -----
Net cash provided by (used in) operating
activities................................ (3,797) 424 (764) (237)
------- ------- ------ -----
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) (281) (137)
Net cash provided by Figgie.................. 4,149 667 1,055 434
------- ------- ------ -----
Net cash provided by (used in) financing
activities................................ 3,658 (409) 774 297
------- ------- ------ -----
NET INCREASE (DECREASE) IN CASH.............. 2 15 10 (3)
CASH, BEGINNING OF PERIOD.................... 5 7 7 22
------- ------- ------ -----
CASH, END OF PERIOD.......................... $ 7 $ 22 $ 17 $ 19
======= ======= ====== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-32
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THREE MONTHS ENDED MARCH 31, 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.
Sales to these customers ranged from 11% to 21% of net sales in 1994 and 11%
to 27% of net sales in 1995. 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 receives an allocation of various management services provided
by Figgie such as insurance, legal, treasury, property management, human
resources, accounting, tax, and other miscellaneous. Expenses for such common
services, included in general and administrative expenses, were $1,812 in 1994
and 1995. Effective January 1, 1996, Figgie discontinued allocating expenses
for common services discussed above due to the proposed transaction discussed
in Note 12. An estimate of $453 relating to corporate charges that would have
been allocated by Figgie to the Company during the quarter ended March 31,
1996 has been included in general and administrative expenses for the quarter
ended March 31, 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.
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
F-33
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Products in process.......................... $ 2,089 $ 3,475 $ 3,518
Raw materials, supplies and finished
components.................................. 6,456 6,709 6,793
------- ------- -------
Inventories--gross........................... 8,545 10,184 10,311
Reserve for excess and obsolete inventory.... (2,913) (3,192) (3,338)
------- ------- -------
Total...................................... $ 5,632 $ 6,992 $ 6,973
======= ======= =======
</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>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Compensation and related benefits................. $ 617 $ 642 $ 565
Taxes other than income........................... 334 335 429
Estimated losses on uncompleted contracts......... 5,332 3,091 2,644
Estimated environmental remediation liability..... -- 850 850
Warranty.......................................... 200 200 224
Other............................................. 336 215 320
------ ------ ------
Total........................................... $6,819 $5,333 $5,032
====== ====== ======
</TABLE>
F-34
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-35
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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%.
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 three months ended March 31, 1995 and 1996 were $823 and $439,
respectively.
F-36
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's working capital and other cash requirements are financed by
Figgie with an interest charge or benefit computed based on working capital
variance to plan budgets. Net interest expense charged by Figgie in 1994 and
1995 amounted to $315 and $44, respectively.
During the three month period ending March 31, 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 three months ended March 31, 1996.............. 410
Net cash transferred from Figgie.................................. 434
Equipment transferred to Figgie................................... (351)
-------
Balance, March 31, 1996............................................. $ 4,805
=======
</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 or results of operations of
the Company.
12.SUBSEQUENT EVENT
On May 10, 1996, Communications Instruments, Inc. ("CII") entered into a
non-binding letter of intent with Figgie to acquire certain assets and assume
certain liabilities of the Company. This proposed transaction is subject to
negotiation of definitive agreements, due diligence, Board and regulatory
approvals and CII obtaining financing for the acquisition. If this transaction
is consummated as proposed, 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-37
<PAGE>
ANNEX 1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is entered into among COMMUNICATIONS
INSTRUMENTS, INC., a North Carolina corporation ("CII"), KILOVAC CORPORATION,
a California corporation ("KILOVAC"), and CII TECHNOLOGIES INC., a Delaware
corporation ("CIIT").
1. CONSTITUENT CORPORATIONS.
1.1 Kilovac. Kilovac is incorporated under the laws of the State of
California. The authorized capital stock of Kilovac consists of 400,000
shares, 200,000 Class A Common Shares and 200,000 Class B Common Shares, of
which 124,785 Class A Common Shares are outstanding (the "KILOVAC COMMON
STOCK").
1.2 CII. CII is incorporated under the laws of the State of North Carolina.
One hundred percent of the issued and outstanding capital stock of CII is
owned by CIIT.
1.3 CIIT. CIIT is incorporated under the laws of the State of Delaware. The
authorized capital stock of CIIT consists of 25,000,000 shares of Common
Stock, $.01 par value per share (the "CIIT STOCK"), and 5,000,000 shares of
Preferred Stock, $.01 par value per share.
2. THE MERGER.
2.1 At the Effective Time (as defined below) and subject to the terms of
this agreement, Kilovac shall be merged with and into CII (the "MERGER"). The
time and date on which the Merger becomes effective are herein called the
"EFFECTIVE TIME".
2.2 As soon as practicable following the satisfaction or waiver of all
conditions set forth herein, CII and Kilovac will cause the filings necessary
to effect the Merger to be duly filed in the States of North Carolina and
California.
3. CONVERSION OF SHARES.
3.1 At the Effective Time of the Merger, each outstanding share of Kilovac,
other than (i) shares held by CII, and (ii) shares qualifying as "dissenting
shares" within the meaning of Chapter 13 of the California General Corporation
Law (the "CALIFORNIA GCL"), shall, without any action on the part of the
holder thereof, be converted into that number of shares of CIIT Stock equal to
the result of $4,500,000 divided by the price at which shares of CIIT Stock
are offered in an underwritten initial public offering (the "OFFERING") of the
CIIT Stock (the "IPO PRICE"), and dividing that result by 24,957; provided,
however, that no fractional shares shall be issued. In lieu of any fractional
share of CIIT Stock, a Kilovac shareholder shall be entitled to receive, in
cash, an amount equal to the product of the fraction of a share of CIIT Stock
to which such shareholder would have been entitled multiplied by the IPO
Price.
3.2 At the Effective Time, each outstanding common share of Kilovac held by
CII shall be canceled without consideration.
3.3 At the Effective Time, each outstanding share of Kilovac Common Stock
that qualifies as a "dissenting share" within the meaning of Chapter 13 of the
California GCL shall, on the effectiveness of the Merger and without any
further action on the part of the holder thereof, cease to be outstanding and
thereafter shall represent the right to receive the fair market value thereof
in accordance with Chapter 13 of the California GCL.
3.4 The outstanding shares of CII shall remain outstanding and are not
affected by the Merger.
<PAGE>
4. EFFECT OF MERGER. The effect of the Merger and the effective date of the
Merger are as prescribed by North Carolina law.
4.1 At the Effective Time, CII shall succeed to all of the rights,
privileges, powers, immunities, franchises, properties, assets and claims of,
and shall be subject to and responsible for all debts, liabilities and
obligations of Kilovac as provided under North Carolina law.
4.2 Kilovac from time to time, as and when requested by CII and through the
persons who were its officers immediately prior to the Merger, shall execute
and deliver all such documents and instruments and take all such action
necessary or desirable to evidence or carry out this Merger.
4.3 Upon the effectiveness of the Merger, the Certificate of Incorporation
and Bylaws of CII in effect immediately prior to the effectiveness of the
Merger shall remain in effect unless and until amended as provided under North
Carolina law.
5. CONDITIONS TO MERGER.
5.1 The obligations of CII and CIIT to proceed with the Merger shall be
conditioned on satisfaction of the following:
(a) CIIT's Registration Statement on Form S-4 (the "S-4") filed with the
Securities and Exchange Commission ("SEC") with respect to the CIIT Stock
to be issued as a result of the Merger shall have been declared effective
by the SEC.
(b) Each record holder of Kilovac Common Stock shall have executed and
delivered the First Amendment to Stock Purchase and Subscription Agreement
dated as of the date hereof between CIIT, CII, Kilovac and the record
shareholders of the Kilovac Common Stock (the "FIRST AMENDMENT").
(c) The holders of a majority of the outstanding Kilovac Common Stock
shall have approved the Merger and the holders of not more than ten percent
of the outstanding shares of Kilovac Common Stock shall have exercised
dissenters' rights under California GCL Chapter 13.
(d) The Merger shall be consummated on or prior to October 31, 1996.
(e) The Merger shall not violate any preliminary or permanent injunction,
decree or order of any court or governmental body having competent
jurisdiction.
(f) All consents and approvals of any governmental body required in
connection with the Merger shall have been obtained.
5.2 The obligations of Kilovac to proceed with the Merger shall be
conditioned on satisfaction of the following:
(a) CIIT's S-4 shall have been declared effective by the SEC.
(b) Each record holder of Kilovac Common Stock shall have executed and
delivered the First Amendment.
(c) The Offering of CIIT Stock shall have been declared effective and the
sale of shares pursuant thereto shall have been consummated. This condition
shall benefit each of the holders of Kilovac Common Stock and may not be
waived except on the consent of each of such shareholders.
(d) The Merger shall have been consummated on or prior to October 31,
1996.
(e) The Merger shall not violate any preliminary or permanent injunction,
decree or order of any court or governmental body having competent
jurisdiction.
(f) All consents and approvals of any governmental body required in
connection with the Merger shall have been obtained.
<PAGE>
6. AMENDMENT AND TERMINATION. This agreement may be modified, amended or
terminated with the approval of the Board of Directors of each of the parties
hereto, either before or after the approval of the Kilovac shareholders and at
any time prior to the Effective Time; provided that no modification or
amendment may be made hereto which shall decrease the consideration payable to
the holders of Kilovac Common Stock, other than CII, or which effects a waiver
of the conditions to Kilovac's obligation to proceed with the Merger that
specifically benefit such shareholders. Any party hereto may terminate this
agreement at any time after October 31, 1996 if the Merger has not occurred.
7. COUNTERPARTS. This agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement and Plan of
Merger.
KILOVAC CORPORATION
Dated: _________________, 1996 By: _________________________________
Douglas L. Campbell, President
COMMUNICATIONS INSTRUMENTS, INC.
Dated: _________________, 1996 By: _________________________________
Ramzi A. Dabbagh, President
CII TECHNOLOGIES INC.
Dated: _________________, 1996 By: _________________________________
Ramzi A. Dabbagh, President
<PAGE>
ANNEX 2
KILOVAC CORPORATION
FIRST AMENDMENT
TO
STOCK SUBSCRIPTION AND PURCHASE AGREEMENT
This FIRST AMENDMENT TO STOCK SUBSCRIPTION AND PURCHASE AGREEMENT (this
"AMENDMENT") dated as of August , 1996 is made and entered into by and among
CII TECHNOLOGIES INC., a Delaware corporation ("CIIT"), COMMUNICATIONS
INSTRUMENTS, INC., a North Carolina corporation ("BUYER"), KILOVAC
CORPORATION, a California corporation (the "COMPANY"), and the shareholders
executing this Amendment (individually, a "SELLING SHAREHOLDER" and
collectively, the "SELLING SHAREHOLDERS").
W I T N E S S E T H :
WHEREAS, the parties hereto other than CIIT are parties to the Stock
Subscription and Purchase Agreement dated as of September 20, 1995 (the
"AGREEMENT"), which provides for redemption by the Company of 80% of its
outstanding Class A Common Shares, no par value (the "COMMON STOCK"), and the
purchase by Buyer of an equal number of shares of Common Stock; and
WHEREAS, the Agreement contains certain provisions relating to the shares of
Common Stock retained by the Selling Shareholders following the redemption
(such shares as defined in the Agreement, the "CONTINUING SHARES"); and
WHEREAS, CIIT, an affiliate of Buyer, desires to proceed with the sale of a
portion of its common stock ("CIIT STOCK") in an initial public offering (the
"IPO") registered with the Securities and Exchange Commission under the
provisions of the Securities Act of 1933, as amended; and
WHEREAS, after reviewing the provisions of the Agreement regarding the
proportion of CIIT Stock that the holders of the Continuing Shares will be
entitled to receive on completion of an IPO of CIIT Stock, CIIT has determined
that the terms of the exchange ratio may need to be adjusted to allow for an
IPO at this time; and
WHEREAS, CIIT, Buyer and the Selling Shareholders have agreed that the
Selling Shareholders will agree to certain amendments to the Agreement in
consideration of the Selling Shareholders receiving, shares of CIIT Stock with
an aggregate initial public offering price of $4,500,000 based on the price at
which the CIIT Stock is offered in the IPO; and
WHEREAS, the Selling Shareholders, as holders of the Continuing Shares, have
determined that it is in the best interests of the Selling Shareholders to
proceed with an IPO of the CIIT Stock at this time, and in furtherance thereof
it is in the best interests of the Selling Shareholders to agree to certain
amendments of the Agreement set forth herein; and
WHEREAS, Buyer and CIIT have determined that it is in their best interests
to proceed with an IPO of the CIIT Stock at this time, and in furtherance
thereof it is in each of their best interests to agree to certain amendments
of the Agreement set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants, agreements, terms and conditions
contained herein, the parties hereto do hereby agree as follows:
1. Effectiveness of Amendment. The modifications to the Agreement set forth
herein shall be effective upon the execution and delivery of this Amendment by
all of the parties hereto. If CIIT has not completed an IPO of the CIIT Stock
on or before October 31, 1996 or if the Continuing Shares are not exchanged
for shares
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of CIIT Stock in connection therewith pursuant to the Agreement, as modified
by this Amendment, the modifications to the Agreement contained herein (other
than the provisions of Section 7 hereof) shall lapse and be void and of no
further force or effect. Thereafter, the provisions of the Agreement shall be
effective in accordance with their terms and without reference to this
Amendment (other than the provisions of Section 7 hereof), as if this
amendment to the Agreement had not been made. If CIIT completes an IPO of the
CIIT Stock on or before October 31, 1996 and the Continuing Shares are
converted into CIIT Stock in accordance with the provisions of the Agreement,
as modified by this Amendment, the condition subsequent set forth in the
foregoing sentences shall terminate effective on the closing of the IPO (the
"IPO CLOSING").
2. IPO Exchange. Notwithstanding the provisions of Section 1.7.5 of the
Agreement, at the time of and concurrent with the IPO Closing, the Continuing
Shares shall be exchanged for CIIT Stock having an aggregate value of
$4,500,000 (such shares of CIIT Stock, the "EXCHANGE STOCK") in accordance
with the formula set forth below. Each Continuing Share shall be exchanged for
the number of shares of CIIT Stock equal to the result of: $4,500,000 divided
by the initial per share offering price to the public of CIIT Stock in the IPO
(the "IPO PRICE") and dividing such result by 24,957 (the number of Continuing
Shares).
For example, if the IPO Price is $10, then 450,000 shares of CIIT Stock
will be exchanged for the Continuing Shares at a ratio of 18.031 shares of
CIIT Stock for each Continuing Share.
No fractional shares of Exchange Stock shall be issued. Selling Shareholders
who would otherwise be entitled to receive a fractional share of the Exchange
Stock shall receive in lieu thereof an amount in cash determined by
multiplying such fraction by the IPO Price.
3. Participation of the Selling Shareholders in the IPO. Notwithstanding the
provisions of Sections 1.7.5.1 and 1.7.5.2 of the Agreement, so long as CIIT
is the only seller of CIIT Stock in the IPO, the Selling Shareholders shall
have no right to sell any shares of the Exchange Stock in the IPO.
4. Termination of Redemption Provisions. Notwithstanding the provisions of
Sections 1.7.3 and 1.7.4 of the Agreement, neither Buyer nor CIIT shall have
any obligation to purchase and redeem the Continuing Shares (or the Exchange
Stock) pursuant to Section 1.7.3 or Section 1.7.4 of the Agreement.
5. Manner of Exchange. CIIT and Buyer acknowledge that the conversion of
shares provided for in the Agreement and Plan of Merger among CIIT, CII and
Kilovac shall supersede Section 1.7.5.4 of the Agreement.
6. Restrictions on Sale of Exchange Stock. Each of the Selling Shareholders
other than the Kilovac Corporation Employee Stock Bonus Plan (the "ESBP")
agrees to enter into an agreement (the "LOCKUP AGREEMENT") in the form of
EXHIBIT A hereto with William Blair & Company, L.L.C. and Furman Selz LLC, as
representatives of the underwriters of the IPO, which Lockup Agreement shall
restrict the sale of Exchange Stock by each Selling Shareholder other than the
ESBP for a period of 365 days after the IPO Closing. Delivery of such Lockup
Agreement shall be conditioned upon the delivery of a substantially identical
Lockup Agreement by each and every beneficial owner of CIIT Stock or
securities convertible into CIIT Stock (other than the Selling Shareholders
and the ESBP), including optionees under currently outstanding options for the
purchase of CIIT Stock, which will not be registered in the IPO. Each of the
Selling Shareholders (other than the ESBP) specifically acknowledges and
agrees that Douglas L. Campbell (referred to herein as "CAMPBELL" or "PAYING
AGENT"), as attorney-in-fact for such Selling Stockholder pursuant to the
Paying Agent Agreement (as defined in the Agreement), has the power and
authority to execute and deliver the Lockup Agreement in the name of and on
behalf of such Selling Shareholder other than the ESBP.
7. Indemnity. CIIT and Buyer, jointly and severally, agree to indemnify
Campbell, to the fullest extent possible under law, for any and all claims,
demands, losses, costs, charges, expenses, obligations, liabilities, actions,
suits, damages, judgments and deficiencies, including interest and penalties,
reasonable counsels' fees and costs and all reasonable amounts paid in
furtherance of the transactions contemplated herein or in settlement of any
claim, action or suit (collectively referred to as "CLAIMS") which may be
sustained, suffered or incurred
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by Campbell, arising out of or by reason of this Amendment and the
modifications to the Agreement contained herein or the preparation or
distribution of documents, instruments and materials necessary for the
consummation of this Amendment or the solicitation of the agreement of the
Selling Shareholders to this Amendment or the transactions contemplated
hereby. CIIT and Buyer, jointly and severally, agree to indemnify Campbell, to
the fullest extent possible under law, for any and all expenses incurred by
Campbell in implementing the modifications to the Agreement contemplated
herein and representing the interests of the Selling Shareholders in
connection therewith, such as legal fees and expenses incurred in connection
with the matters contemplated pursuant to Section 1.7.5.4 of the Agreement,
the costs of a fairness opinion and any other expenses incurred by Campbell
which he deems reasonable and necessary to complete the modifications to the
Agreement contained herein and the exchange of Continuing Shares into Exchange
Stock. The provisions of this Section 7 shall survive the IPO Closing or the
termination of this Amendment pursuant to Section 1.
8. Share Sale Adjustment. The parties acknowledge for the benefit of the
Share Escrow Holder pursuant to Section 1.7.2 of the Agreement that the IPO
Closing and the consummation of the exchange contemplated herein shall
constitute a Liquidity Event (as defined in the Agreement) and, on the
occurrence of such events, the Share Escrow Holder is to deliver to or at the
direction of the Paying Agent the Escrowed Continuing Shares. This
acknowledgement shall constitute a joint certification to the Share Escrow
Holder, as contemplated in Section 1.7.2.1 of the Agreement.
9. Miscellaneous.
9.1 Notices. Any notice or other communication required or permitted
hereunder shall be given in the manner provided in the Agreement. The address
of CIIT for notices shall be as follows:
If to CIIT: CII Technologies Inc. c/o
Stonebridge Partners Westchester
Financial Center 50 Main Street
White Plains, New York 10606
Attention: Michael S. Bruno, Jr.
Telecopy No.: (914) 682-0834
Telephone No.: (914) 682-2285
with a copy to:
Simpson Thacher & Bartlett 425
Lexington Avenue New York, New York
10017 Attention: Richard C.
Weisberg, Esq. Telecopy No.: (212)
455-2502 Telephone No.: (212) 455-
3240
9.2 Counterparts. This Amendment shall be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.3 Continuation of Agreement. Except as specifically modified hereby, all
provisions of the Agreement shall remain unaltered and in full force and
effect. From and after the date hereof, any reference in the Agreement (and in
any agreement referred to or contemplated in the Agreement) to the Agreement
and concerning a time from and after the date hereof shall be deemed to be a
reference to the Agreement as amended hereby.
9.4 Entire Agreement. This Amendment embodies the entire agreement and
understanding between the parties hereto with respect to the modification of
the Agreement and supersedes all prior negotiations, understandings and
agreements between the parties with respect thereto.
9.5 Defined Terms. All defined terms in this Amendment shall have the same
meaning which they have in the Agreement, unless otherwise defined in this
Amendment.
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IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
Stock Subscription and Purchase Agreement to be duly executed as of the date
first above written.
CII Technologies Inc.
Attest ______________________________ By___________________________________
Ramzi A. Dabbagh,
Its Chief Executive Officer
Communications Instruments, Inc.
Attest ______________________________ By___________________________________
Ramzi A. Dabbagh,
Its President
Kilovac Corporation
Attest ______________________________
By___________________________________
Douglas Campbell,
Its President
SELLING SHAREHOLDERS
Witness _____________________________________
Douglas L. Campbell,
Trustee of the Kilovac Corporation
Employee Stock Bonus Plan
Witness _____________________________________
Douglas L. Campbell,
as Trustee of the Campbell
Charitable Remainder Unitrust
Witness _____________________________________
Milo Filip,
as Trustee of the Erin Campbell
Trust
Witness _____________________________________
Douglas L. Campbell
Witness _____________________________________
Ronald D. Klingensmith,
as Trustee of the Donald C.
Campbell Charitable Unitrust
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Witness
_____________________________________
Pat McPherson
Witness
_____________________________________
Robert Helman
Witness
_____________________________________
Dan McAllister
Witness
_____________________________________
Rick Danchuk
Witness
_____________________________________
Harry Jabagchourian
Witness
_____________________________________
John Stewart
Witness
_____________________________________
Rick Steen
Witness
_____________________________________
Susan Reid
Witness
_____________________________________
Robin Hamilton
Witness
_____________________________________
Gary Clancy
Witness
_____________________________________
Hugh Vos
Witness
_____________________________________
Norm Blankenship
State of California
County of ss.:
On , 1996, before me, the undersigned notary public, personally
appeared , personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the
same in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity(ies) upon behalf
of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
_____________________________________
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EXHIBIT A
LOCK-UP 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 60606-5312
CII Technologies, Inc.
1396 Charlotte Highway
Fairview, North Carolina 28730-0520
Ladies and Gentlemen:
Reference is made to that certain Underwriting Agreement by and among
CII Technologies, Inc. (the "Company"), and William Blair & Company, L.L.C. and
Furman Selz LLC as representatives (the "Representatives") of the several
Underwriters (the "Underwriters") named in Schedule A thereto. The Underwriting
Agreement provides for an initial public offering (the "Offering") of certain
shares of the Company's Common Stock, $.01 par value per share (the "Common
Stock") by the Underwriters, including the Representatives. The shares of
Common Stock to be sold in the Offering are being registered under the
Securities Act of 1933, as amended, pursuant to a registration statement on Form
S-1.
Please be advised that the undersigned (or an account over which the
undersigned has investment authority) is (or may become) the beneficial owner of
shares of Common Stock. In consideration of the Underwriters' management of the
Offering and for other good and valuable consideration, the receipt and
sufficiency of which is acknowledged, the undersigned agrees that without the
prior written consent of the Representatives, it will not (nor will it agree to)
assign, transfer, hypothecate, sell or otherwise dispose of any shares of 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 this letter.
The undersigned understands that the Company may decline to register any
transfer of shares of Common Stock inconsistent with this letter ageement and
that stop transfer instructions will be given to the Company's transfer agent
with respect to shares of Common Stock subject to this letter agreement.
The undersigned also represents and warrants that it has full power and
authority to enter into this letter agreement, and that, upon request, the
undersigned will execute any additional documents necessary or desirable in
connection with the enforcement hereof. All authority herein conferred or
agreed to be conferred shall survive the death or incapacity of the undersigned
and any obligations of the undersigned shall be binding upon its heirs, personal
representatives, successors, and assigns.
Very truly yours,
----------------------------
Name:
-----------------------
Owner: shares
----------------
of Common Stock
<PAGE>
ANNEX 3
KILOVAC CORPORATION
STOCK SUBSCRIPTION AND PURCHASE AGREEMENT
This STOCK SUBSCRIPTION AND PURCHASE AGREEMENT (this "Agreement") dated as
of September 20, 1995 is made and entered into by and among COMMUNICATIONS
INSTRUMENTS, INC., a North Carolina corporation ("Buyer"), KILOVAC
CORPORATION, a California corporation (the "Company"), and the shareholders
and optionholders set forth in Schedule 1 (individually, a "Selling
Shareholder" and collectively, the "Selling Shareholders").
W I T N E S S E T H :
WHEREAS, the Selling Shareholders collectively own, beneficially and of
record, an aggregate of 124,785 Class A Common Shares, no par value, of the
Company (the "Common Stock") after giving effect to the exercise of the
outstanding options (the "Stock Options") exercisable into shares of Common
Stock; and
WHEREAS, the Selling Shareholders intend to exercise all of the Stock
Options, and thereby purchase 72,490 shares of Common Stock for an aggregate
exercise price of $1,202,691.80; and
WHEREAS, Buyer desires that the Company purchase and Selling Shareholders
desire to sell to the Company an aggregate of 99,828 shares of Common Stock
upon the terms and conditions set forth herein;
WHEREAS, Buyer desires to purchase 99,828 newly issued shares of the Common
Stock of the Company for consideration of $4,000,000.
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants, agreements, terms and conditions
contained herein, the parties hereto do hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF STOCK;
EXERCISE OF STOCK OPTIONS
1.1 Purchase and Sale; And Exercise of Stock Options.
(a) On the Closing Date (as defined below) and subject to the terms and
conditions set forth in this Agreement, the Selling Shareholders shall, in
exchange for the consideration described in Section 1.3, (i) sell, assign,
transfer and deliver to Company 99,828 Shares, (the "Sale Shares") free and
clear of all options, pledges, security interests, liens or other encumbrances
or restrictions on voting or transfer (other than those restrictions
contemplated by this Agreement), (ii) deliver to Company certificates for the
Sale Shares, with appropriate share transfer forms attached, duly endorsed in
blank, together with evidence of payment of any applicable transfer taxes and
(iii) take such steps as may be necessary to cause the Company to cancel and
redeem the Sale Shares.
(b) As of the Closing Date and immediately prior to Closing, and without any
action on the part of the holders thereof after signing this Agreement, each
Stock Option shall be exercised and the shares of Common Stock issuable on
exercise shall be issued to such holder. There shall be deducted from the
aggregate proceeds payable to the holder of each Stock Option pursuant to the
purchase of the Sale Shares, the aggregate exercise price of all Stock Options
held by such Selling Shareholder, which deduction shall be in satisfaction of
the payment by such holder of the option exercise price with respect to the
Stock Options.
(c) The Company shall sell, assign, transfer and deliver to Buyer and Buyer
shall purchase 99,828 newly issued shares of Common Stock (the "New Shares"),
free and clear of all options, pledges, security interests, liens or other
restrictions on voting or transfer (other than those restrictions contemplated
by this Agreement),
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together with evidence of payment of any applicable transfer tax in
consideration of payment in the amount of $4,000,000 and Buyer shall make
advances to Company in an aggregate amount not less than $10,000,000.
1.2 Closing. The closing (the "CLOSING") of the transactions provided for in
this Agreement shall be held at the offices of Bank of America Illinois, in
Chicago, Illinois (unless the parties hereto otherwise agree in writing) on
the Closing Date. The "CLOSING DATE" shall mean October 11, 1995; provided,
however, that if any of the conditions provided for in Article IV shall not
have been waived or met by October 11, 1995, then either Buyer or Douglas
Campbell on behalf of the Selling Shareholders shall be entitled to postpone
the Closing Date by written notice to the other party until three (3) business
days after such condition or conditions have been met or waived. The Closing
Date shall not be later than October 31, 1995, unless mutually agreed upon by
Buyer and Douglas Campbell.
1.3 Purchase Consideration. The purchase consideration for the Sale Shares
shall be the aggregate of the per share amounts set forth below, which
aggregate amount shall be subject to deduction for payment of certain expenses
in accordance with Section 1.5 of this Agreement:
(i) cash in the aggregate amount of $11,900,000, which equals $131.2527
on a per share basis; provided that with respect to Sale Shares issued on
the exercise of Stock Options, the aggregate amount payable to such
Shareholder shall be reduced by the aggregate exercise price of all Stock
Options exercised by such Selling Shareholder as of the Closing Date (the
aggregate of all such cash consideration, the "CASH CONSIDERATION");
(ii) a pro rata interest in the Escrow Fund (as defined in Section 1.4),
calculated based on a total number of interests therein, which shall be
99,828 (the aggregate of all such consideration, the "ESCROW
CONSIDERATION");
(iii) a pro rata interest in the tax benefits payable to Selling
Shareholders in accordance with Section 1.6, calculated on the same basis
as set forth in Section 1.3(ii) (the aggregate of all such consideration,
the "TAX BENEFITS CONSIDERATION"); and
(iv) one common share of Kilovac Development, Inc., a California
corporation ("KILOVAC DEVELOPMENT") and the owner of the Palm Avenue
Property (as defined below) (such aggregate shares, the "PROPERTY
CONSIDERATION").
The Cash Consideration, the Escrow Consideration, the Tax Benefits
Consideration and the Property Consideration are referred to herein,
collectively, as the "Purchase Consideration".
1.4 Escrow Fund. On the Closing Date and subject to the terms and conditions
set forth in this Agreement, in reliance on the representations, warranties,
covenants and agreements of the parties contained herein and in consideration
of the sale, assignment, transfer and delivery of the Sale Shares, the Company
shall deliver $500,000 to Bank of America, N.A. ("ESCROW AGENT") to be held
pursuant to, and in all cases subject to, the Escrow Agreement substantially
in the form of Exhibit A hereto (the "ESCROW AGREEMENT") and the Paying Agent
Agreement in the form of Exhibit B hereto (the "PAYING AGENT AGREEMENT")
delivered in connection with this Agreement; amounts so held from time to time
are to be referred to therein as the "Escrow Fund".
1.5 Payment. (a) At or prior to the Closing, Buyer, the Company and the
Selling Shareholders shall enter into the Paying Agent Agreement which, among
other things, designates the persons or entities selected by the Selling
Shareholders and approved by Buyer to act as paying agent, shareholder
representative and attorney-in-fact (the "PAYING AGENT") in connection with
the transactions contemplated in this Agreement. At the Closing, upon the
terms and subject to the conditions of this Agreement and the Paying Agent
Agreement, Buyer shall deliver the Cash Consideration to the Paying Agent for
the benefit of the Selling Shareholders.
(b) From the Cash Consideration, the Paying Agent shall first pay all fees
and expenses incurred by the Company or the Selling Shareholders in connection
with the transactions contemplated by this Agreement, all as approved by the
Paying Agent in accordance with the Paying Agent Agreement (the "TRANSACTION
FEES").
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Thereafter, the Paying Agent shall disburse to each Selling Shareholder the
amount due to such Selling Shareholder pursuant to Section 1.3 net of such
Selling Shareholder's pro rata share of the Transaction Fees.
1.6 Certain Tax Benefits. Buyer agrees that the Selling Shareholders will
receive cash payment from the Company, as described in this Section 1.6, for
certain tax benefits resulting from any deduction relating to the exercise or
sale of the Stock Options net of any income recognized by the Company
resulting from transactions contemplated herein other than any income
recognized as a result of any tax election made by Buyer or the Company after
the Closing Date (the "Deduction"). Such payment shall be made ratably to the
Selling Shareholders as follows: (A) to the extent that the Deduction results
in a net operating loss for income tax purposes in the taxable year that
includes the Closing Date (the "Short Period") that may be carried back to
prior taxable years, 100 percent of the benefit realized shall be paid to
Paying Agent for the benefit of Selling Shareholders when tax refunds are
received by the Company as a result of the carryback claims (net of any taxes
caused by the refund of state taxes); (B) to the extent that the Deduction
results in a reduction of the tax liability due for or a refund of taxes that
would otherwise have been payable with respect to the day to day sales and
operations of the Company and its Subsidiaries in the Short Period and not
from other transactions or events (including, without limitation, transactions
not in the ordinary course of business, any income resulting from transactions
contemplated by this Agreement and any income relating to prior periods), 100
percent of the benefit realized shall be paid to Paying Agent for the benefit
of Selling Shareholders (i) when refunds of such taxes are received by the
Company or (ii) when such taxes that would otherwise be payable by the Company
or the consolidated group which includes Buyer and the Company are reduced;
and (C) to the extent that the Deduction results in a net operating loss
generated in the taxable years ending through the Closing Date that is carried
forward to taxable years thereafter, 100 percent of the benefit realized by
virtue of the net operating loss carryforward for the fiscal year ending
December 31, 1995 and 50 percent of such benefit realized for fiscal years
thereafter shall be paid to the Paying Agent for the benefit of Selling
Shareholders when such benefit is actually realized. The Selling Shareholders
agree to reimburse the Buyer and/or the Company for any unearned payments made
pursuant to this Section 1.6, subject to the limitations of Section 6.2
hereof.
1.7 Continuing Common Stock.
1.7.1 Definitions. For purposes of this Section 1.7 the following terms
shall have the meanings set forth below:
"ACQUISITION DEBT" shall mean the principal and accrued interest on any
senior bank financing actually obtained by Buyer specifically to finance
the purchase of the Sale Shares hereunder, whether such Acquisition Debt is
a principal obligation of Buyer or any of its parent or affiliate
organizations, including the Company. Acquisition Debt shall also include
the principal and accrued interest on any refinancing of the foregoing
acquisition financing actually obtained, to the extent utilized to payoff
the principal amount initially borrowed as Acquisition Debt, including
accrued interest. Acquisition Debt shall not include any amount borrowed by
the Company, whether from any lending institution or from Buyer or any
affiliate of Buyer, to the extent the funds obtained are utilized in the
Company's ordinary business operations, and are not used to reduce
Acquisition Debt or to pay fees or other return to Buyer or its affiliates.
"DEBT" with respect to any entity shall mean the gross amount of all
indebtedness for borrowed money of the subject entity reflected on its
balance sheet prepared on a consolidated basis with its subsidiaries as at
the date of the event causing such measurement.
"CONTINUING SHARES" shall mean the shares of Common Stock not transferred
and redeemed by the Company at the Closing Date.
"PREFERRED STOCK" with respect to any entity shall mean the sum of the
accrued but unpaid dividends and liquidation preference on any of the
entity's stock which has any preference with respect to dividends or
liquidation proceeds.
1.7.2 Share Sale Adjustment. One half of the Continuing Shares (the
"ESCROWED CONTINUING SHARES"), together with stock assignments separate from
certificate with respect thereto duly executed by the respective
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Shareholders in blank (the "ESCROWED STOCK POWERS") shall be placed in escrow
with Adams, Duque & Hazeltine (the "SHARE ESCROW HOLDER") to be held subject
to the following. If no SALE, IPO (each as defined below) or conversion
pursuant to Subsection 1.7.5.2 (any of such events, a "LIQUIDITY EVENT")
occurs prior to January 1, 1998 and CUMULATIVE 1997 EBITDA (as defined below)
is not equal to or greater than $6,342,700 (the "EBITDA TARGET"), the Purchase
Consideration shall be deemed to have been paid with respect to both the
Escrowed Continuing Shares and the Sale Shares, and Escrow Holder shall
release the Escrowed Continuing Shares, together with the Escrowed Stock
Powers, to Buyer on account of the payment on the Closing Date of the Purchase
Consideration. If either (a) a Liquidity Event occurs prior to January 1,
1998, or (b) Cumulative 1997 EBITDA is equal to or exceeds the EBITDA Target,
then there shall be no share adjustment and the Escrowed Continuing Shares,
together with the Escrowed Stock Powers, shall be released by Escrow Agent for
the benefit of the Shareholders and delivered by Escrow Holder to the Paying
Agent.
1.7.2.1 Escrow Holder's Duties. Escrow Holder shall act solely on (i) the
joint certification of Buyer and Shareholder Representative, or (ii) the final
determination of either the Company's accountant or an arbitrator, each as
certified by both Buyer and Shareholder Representative as being final, or (a)
the arbitrator's award or the order of a court with respect to the arbitrators
award.
1.7.2.2 Cumulative 1997 EBITDA. "CUMULATIVE 1997 EBITDA" shall mean the
Company's cumulative earnings before interest, taxes, depreciation and
amortization for the fiscal years ended December 31, 1996 and December 31,
1997 determined in accordance with generally accepted accounting principles
("GAAP") applied in a manner consistent throughout all periods and in
accordance with the Company's financial statements for the three fiscal years
prior to the Closing Date, except that tooling costs will be treated as if
capitalized (whether or not actually capitalized). Further, in calculating
EBITDA, (i) there shall be excluded all Buyer or corporate income and expense
items allocated, assigned or charged to the Company, including debt and
related interest, overhead (other than sales and marketing expenses and
overhead directly related to the conduct of the Company's business), and
amortization of goodwill and other capitalized assets resulting from the
purchase of the Sale Shares pursuant to this Agreement and (ii) no
consolidated or consolidating entries relating to any entity other than the
existing subsidiaries of the Company shall be given effect. Cumulative 1997
EBITDA shall be conclusively presumed to be the amount agreed by both the
Company and Shareholder Representative in writing.
1.7.3 Purchase of Continuing Shares. Buyer shall purchase and redeem the
Continuing Shares in accordance with the following:
1.7.3.1 Final Redemption. If the Continuing Shares are not earlier purchased
and the purchase obligations are not earlier terminated on an IPO as provided
below, Buyer shall effective December 31, 2005 ("Final Redemption") purchase
the Continuing Shares. The per share purchase price for the Continuing Shares
outstanding on such date shall equal the result of the Company Redemption
Value divided by the number of shares of Common Stock then outstanding.
1.7.3.2 Early Redemption. If the Continuing Shares are not purchased prior
to December 31, 2000 ("EARLY REDEMPTION") and the purchase obligations are not
earlier terminated on an IPO as provided below, Buyer shall at the election of
any Shareholder purchase the Continuing Shares owned by such Shareholder. The
per share purchase price payable with respect to the Continuing Shares
outstanding on such date shall equal the result of the COMPANY REDEMPTION
VALUE divided by the number of shares of Common Stock then outstanding. The
foregoing Shareholder election may be exercised by each Shareholder only
during the period commencing January 1, 2001 and continuing until and
including April 30, 2001, by giving written notice to Buyer or the Company.
The effective date of any such election by a Shareholder shall be December 31,
2000.
1.7.3.3 Definitions. For purposes of this Subsection the following terms
shall have the meanings set forth below:
"COMPANY REDEMPTION EBIT" shall mean the Company's earnings before interest
and taxes for the fiscal year ending December 31, 2000 or December 31, 2005
(whichever is concurrent with Early Redemption or
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Final Redemption) determined in accordance with GAAP applied in a manner
consistent throughout all periods and in accordance with the Company's
financial statements for the three fiscal years prior to the Closing Date,
except that tooling costs will be treated as if capitalized (whether or not
actually capitalized). Further, in calculating EBIT, (i) there shall be
excluded all Buyer or corporate income and expense items allocated,
assigned or charged to the Company, including debt and related interest,
overhead (other than sales and marketing expenses and overhead directly
related to the conduct of the Company's business), and amortization of
goodwill and other capitalized assets resulting from the purchase of the
Sale Shares and (ii) no consolidated or consolidating entries relating to
any entity other than the subsidiaries of the Company at the end of such
measurement period shall be given effect.
"COMPANY REDEMPTION VALUE" shall equal 5.75 times COMPANY REDEMPTION EBIT,
minus the Debt of the Company.
1.7.3.4 Buyer's Determination of Payment. Buyer's determination of the
purchase price payable pursuant to this Subsection shall be determined based
on the audited financial statements of the Company and within 30 days
following the Company's auditor's completion of its audit of the Company's
financial statements for such fiscal year and not later than March 31 of the
following year.
1.7.3.5 Payment. The purchase price payable under Subsection 1.7.3.1 shall
be payable in cash within 10 days after final determination of the amount
payable and not later than May 31, 2006. The purchase price payable under
Subsection 1.7.3.2 shall be payable within 10 days after final determination
of the amount payable and not later than May 31, 2001. If such payment would
be prohibited under the Buyer's senior credit agreement or California law,
such payment shall be made as soon as practicable and shall bear interest
during the deferral at the rate of 8% per annum.
1.7.4 Purchase on a Sale. The closing of a sale (a "STOCK SALE") of greater
than 50% of the outstanding common equity interests in the Company or Buyer
(or any affiliate of Buyer which includes as part of its consolidated
operations the business of the Company (a "SALE AFFILIATE")) and the sale (an
"ASSET SALE") of all or substantially all of the assets of the Company, Buyer
or Sale Affiliate, are referred to herein together as a "SALE". If a Sale
occurs prior to Buyer's purchase of the Continuing Shares in accordance with
any of the other provisions herein, effective as of the closing date with
respect to such Sale, holders of the Continuing Shares shall participate
therein as set forth below.
1.7.4.1 Sale of the Company. If the Sale is with respect to the Company, the
holders of Continuing Shares shall be entitled to participate in the Sale
proceeds pari passu with other holders of equity interests in the Company, and
the Shareholders shall participate in such Sale pro rata with all holders of
Continuing Shares.
1.7.4.2 Sale of Buyer or Affiliate. If the Sale is with respect to Buyer or
any Selling Affiliate (either, as appropriate, a "SELLER"), the Continuing
Shares shall be purchased for a per share purchase price payable with respect
to the Continuing Shares outstanding on such date equal to the result of the
COMPANY SALE VALUE divided by the number of shares of Common Stock then
outstanding. Payment for the Continuing Shares shall be in cash at the closing
of the Sale. At Buyer's election, payment for the Continuing Shares may
instead be made at the closing of the Sale with a proportionate payment of the
NET SALE CONSIDERATION, pari passu with all other recipients of such Net Sale
Consideration.
1.7.4.3 Definitions. For purposes of this Subsection the following terms
shall have the meanings set forth below:
"COMPANY SALE VALUE" shall equal (a) COMPANY SALE EBIT times SALE MULTIPLE,
minus (b) Debt of the Company.
"COMPANY SALE EBIT" shall mean the Company's earnings before interest and
taxes for the four fiscal quarters preceding the closing date of the Sale
determined in accordance with GAAP applied in a manner consistent
throughout all periods and consistent between the Company and Seller.
Further, in calculating EBIT, (i) there shall be excluded all Buyer or
corporate income and expense items allocated, assigned or
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charged to the Company, including debt and related interest, overhead
(other than sales and marketing expenses and overhead directly related to
the conduct of the Company's business), and (ii) no consolidated or
consolidating entries relating to any entity other than the Company and
subsidiaries of the Company at the time of the Sale shall be given effect.
"NET SALE CONSIDERATION" shall mean the fair market value in cash of (a)
all consideration received in the Sale plus the value of all Debt of the
Seller assumed or taken subject to by the buyer plus the fair market value
of (i) all shares of the Seller not sold in a Stock Sale or (ii) all assets
of the Seller retained in any Asset Sale, minus (b) the reasonable costs
and expenses of consummating such Sale, without deduction for any fees or
expenses paid to any affiliate of Buyer.
"SALE MULTIPLE" shall equal the NET SALE CONSIDERATION divided by SELLER
EBIT.
"SELLER EBIT" shall equal Seller's earnings before interest and taxes for
the four fiscal quarters preceding the closing date of the Sale determined
in accordance with GAAP applied in a manner consistent throughout all
periods and consistent between the Company and Seller. Further, in
calculating EBIT, (i) there shall be excluded all Buyer or corporate income
and expense items allocated, assigned or charged to Seller, including debt
and related interest, overhead (other than sales and marketing expenses and
overhead directly related to the conduct of Seller's business), and (ii) no
consolidated or consolidating entries relating to any entity other than the
Company and subsidiaries of Seller at the time of the Sale shall be given
effect.
"SELLER VALUE" shall equal (a) SELLER EBIT times SALE MULTIPLE, minus (b)
the Debt and Preferred Stock of Seller or Selling Affiliate (as
appropriate).
1.7.4.4 Contingent Payment. If a Sale occurs prior to the end of the 30th
full calendar month following the Closing Date, the Shareholders shall be
entitled to an additional payment as set forth below (the "CONTINGENT SALE
PAYMENT"). If no Sale occurs within such period, no Contingent Sale Payment
shall become due under this Subsection. On the occurrence of a Sale within
such period, Buyer shall pay to the Shareholders a Contingent Sale Payment in
the per share amount equal to the result of (1) the lesser of (i) the amount
of ACQUISITION DEBT then outstanding and (a) $5,000,000, divided by (b) the
number of shares of Common Stock outstanding.
1.7.4.5 Buyer's Determination of Payment. Buyer's determination of the
purchase price payable pursuant to this Subsection shall be determined based
on the audited financial statements of the Company for the four fiscal
quarters immediately prior to the closing date of such sale and within 30 days
following the Company's auditor's completion of its review of the final
quarterly financial statements of the Company for such fiscal quarters.
1.7.5 Registered Public Offering. The closing of a registered initial public
offering of common equity of the Company or Buyer (or any affiliate of Buyer
which includes as part of its consolidated operations the business of the
Company (an "OFFERING AFFILIATE")) is referred to herein as an "IPO". If an
IPO occurs prior to Buyer's purchase of the Continuing Shares in accordance
with any of the foregoing, the Continuing Shares shall be eligible to
participate in such IPO as provided below.
1.7.5.1 IPO of the Company. If the IPO is with respect to common equity of
the Company, the Continuing Shares shall be registered as a part of the
offering pari passu with other holders of equity interests in the Company, and
the Selling Shareholders shall participate in such offering pro rata with all
holders of Common Stock. The Selling Shareholders shall also participate in
any secondary offering pari passu with all other holders of unregistered
Common Stock.
1.7.5.2 IPO by Buyer or Affiliate. As a condition to an IPO with respect to
the common equity of Buyer or any Offering Affiliate (either, as appropriate,
"OFFEROR"), the Continuing Shares shall be exchanged for common equity
("OFFEROR SHARES") of Offeror having the same rights, preferences and
privileges as the direct or indirect interests of the other common equity
owners of Buyer. The number of Offeror Shares for which the aggregate
Continuing Shares shall be exchanged shall be equal to the product of (a) (i)
the proportion of common equity of the Company represented by the Continuing
Shares times (ii) the result of Company IPO Value divided
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by Offeror IPO Value, multiplied by (b) the aggregate number of Offeror Shares
which are to be outstanding immediately prior to the IPO.
In an IPO of Offeror Shares, the Offeror Shares into which the Continuing
Shares are converted shall be registered as a part of the offering pari passu
with other holders of Offeror Shares, and the Shareholders shall participate
in such offering pro rata with all holders of Offeror Shares. The Selling
Shareholders shall also participate in any secondary offering pari passu with
all other holders of unregistered Offeror Shares.
1.7.5.3 Definitions. For purposes of this Subsection the following terms
shall have the meanings set forth below:
"COMPANY IPO EBIT" shall mean the Company's earnings before interest and
taxes for the four fiscal quarters and consistent between the Company and
Seller preceding the closing date of the IPO determined in accordance with
GAAP applied in a manner consistent throughout all periods and consistent
between the Company and Seller. Further, in calculating EBIT, (i) there
shall be excluded all Buyer or corporate income and expense items
allocated, assigned or charged to the Company, including debt and related
interest, overhead (other than sales and marketing expenses and overhead
directly related to the conduct of the Company's business), and (ii) no
consolidated or consolidating entries relating to any entity other than the
Company or subsidiaries of the Company at the time of the IPO shall be
given effect.
"COMPANY IPO VALUE" shall equal (a) COMPANY IPO EBIT times IPO MULTIPLE
minus (b) the Debt of the Company; provided however that during the period
continuing until the last day of the 30th full calendar month following the
Closing Date, the Debt of the Company as used in the foregoing calculation
shall not include the Acquisition Debt.
"IPO MULTIPLE" shall equal the result of multiplying (a) the number of
shares of Offeror common stock to be outstanding immediately prior to the
IPO times (b) the per share offering price as determined by the lead
underwriter for the IPO at the final pricing meeting prior to closing the
IPO, and adding to the product (c) the Debt and Preferred Stock of Offeror,
and subtracting from the product (d) the estimated transaction fees to be
incurred in connection with the IPO, and dividing the amount thus
determined by (e) Offeror IPO EBIT.
"OFFEROR IPO EBIT" shall equal Offeror's earnings before interest and taxes
for the four fiscal quarters preceding the closing date of the IPO
determined in accordance with GAAP applied in a manner consistent
throughout all periods and consistent between the Company and Seller.
Further, in calculating EBIT, (i) there shall be excluded all Buyer or
corporate income and expense items allocated, assigned or charged to
Offeror, including debt and related interest, overhead (other than sales
and marketing expenses and overhead directly related to the conduct of
Offeror's business), and (ii) no consolidated or consolidating entries
relating to any entity other than Offeror or subsidiaries of Offeror at the
time of the IPO shall be given effect.
"OFFEROR IPO VALUE" shall equal (a) Offeror IPO EBIT times IPO Multiple,
minus (b) the Debt and Preferred Stock of Offeror.
1.7.5.4 Manner of Exchange. If there is an exchange of Continuing Shares for
Offeror Shares, such exchange shall be completed in compliance with federal
and state securities laws and Buyer shall use its best efforts to cause such
exchange to be completed in a manner that is tax free to the Shareholders and
Buyer. Further, following such exchange Buyer shall use its best efforts to
cause the Shareholders to be entitled to tack their holding period for the
Continuing Shares to their holding period for the Offeror Shares for purposes
of Rule 144 promulgated under the Securities Act of 1933 (the "33 Act") or
shall be entitled to sell such shares under the provisions of Rule 144 or Rule
145 without regard to holding period. Such efforts may include holding a
fairness hearing under Section 3(a)(10) of the 33 Act and seeking a "no-
action" letter in connection therewith.
1.7.5.5 Termination of Purchase Obligations. Upon an IPO in which the
Continuing Shares or Offeror Shares received in exchange therefor are
registered and participate, all obligations of Buyer to purchase the
Continuing Shares shall terminate and be of no further force or effect.
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1.7.6 Right of Review. Cumulative 1997 EBITDA, together with all the other
defined terms in this Section 1.7 involving calculation or determination by
Buyer are referred to herein as the "Determination Numbers". With respect to
the Determination Numbers, Buyer shall, promptly upon computation, provide to
Shareholder Representative the amount determined by Buyer for such
Determination Number and a complete and accurate description of the
calculations and determinations made in connection therewith, including the
amount and manner of calculation of any numbers used in computing the
Determination Numbers. In addition, Buyer shall provide Shareholder
Representative complete and accurate copies of the Company's, and, where
appropriate, Buyer's and any affiliate's financial statements relevant in
reviewing such calculations and determinations. Examples of such calculations
are appended to this Agreement as Schedule 2. Shareholder Representative shall
also have the right, in person or by its agent, to audit the relevant books
and records of the Company, and where appropriate, Buyer and its affiliates,
with regard to such calculations and determinations. Such right may be
exercised by written request made within 60 days following Shareholder
Representative's receipt of Buyer's report of such Determination Number and
the foregoing description and financial statements.
1.7.6.1 Disputes. If Shareholder Representative disputes any Determination
Number, and Shareholder Representative and Buyer are unable to resolve their
differences within 30 days following receipt by Buyer of a statement from
Shareholder Representative setting forth complete and accurate descriptions of
its differences with the calculations and determinations used in computing a
Determination Number, the amount of such Determination Number shall be
submitted to the Company's independent public accountants who shall confer
with Buyer and Shareholder Representative regarding all calculations and
determinations, and who shall thereafter render its determination made in
accordance with the provisions of this Section 1.7. Such determination shall
be final and binding on the parties, absent manifest error. Any claim of
manifest error shall be determined by arbitration in accordance with this
Agreement.
1.7.6.2 No Separate Shareholder Right. No person entitled to payments in
accordance with this Section 1.7 shall have any right to dispute the Company's
calculations or determinations, or review the Company's books and records.
Shareholder Representative is the sole representative of all such persons in
reviewing, challenging or confirming such determinations. Any agreement of
Shareholder Representative with Buyer resolving any Determination Number or
the amounts payable hereunder, and any determination of the Shareholder
Representative to acquiesce in, and any failure to appeal, any determination
by the Company, its independent public accountants or any arbitrator, shall be
final and binding on all persons entitled to receive payments hereunder. The
foregoing is a material and substantial consideration to Buyer in entering
into this agreement and providing for the purchase of the Sale Shares and the
Continuing Shares in accordance herewith. The separate review of the matters
subject hereof by the several Shareholders could result in different
Shareholders receiving different amounts and would result in a substantial
burden and inconvenience to Buyer and the Company in complying with multiple
review requests.
1.7.7 Anti-dilution. If there is any share dividend or stock split, or any
exchange or recapitalization or other occurrence affecting the Company's
Common Stock, the figures used in the calculations herein shall be adjusted to
eliminate the effect of such occurrence. The Company shall not issue any
equity interests so long as Buyer's obligations under this Section 1.7 are not
satisfied, unless such issuance enhances or does not dilute the value of the
Continuing Shares and Shareholder Representative approves such issuance in
writing prior to the effectiveness thereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties by Buyer. Buyer represents and warrants
to, and agrees with, the Selling Shareholders as follows:
a. Organization, etc. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, with full corporate power and authority to own all of
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its property and assets and to carry on its business as it is now being
conducted. Buyer is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or
the character of its property makes such qualification necessary. The
copies of the Certificate of Incorporation and By-laws of Buyer, which have
been delivered to the Company are complete and correct, and such
instruments, as so amended, are in full force and effect.
b. Authority Relative To Agreement. Buyer has the corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Buyer of
this Agreement and the consummation by Buyer of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action or proceedings. This Agreement has been duly executed and delivered
by Buyer and is a valid and binding agreement of Buyer, enforceable in
accordance with its terms.
c. Non-Contravention. The execution and delivery of this Agreement by
Buyer does not, and the consummation by Buyer of the transactions
contemplated hereby will not, (i) violate any provision of its Certificate
of Incorporation or By-Laws, or (ii) violate, or result with the giving of
notice or the lapse of time or both in a violation of, any provision of any
mortgage, lien, lease, agreement, license, instrument, law, ordinance,
regulation, order, arbitration award, judgment or decree to which Buyer or
any of its properties or assets (real, personal or mixed, tangible or
intangible) are bound, which, in the case of clause (ii) above, would have
a material adverse effect on the ability of Buyer to consummate the
transactions contemplated herein.
d. Consents, etc. As of the Closing Date, Buyer shall have obtained all
licenses, permits, consents, authorizations, orders or approvals of any
governmental commission, board or regulatory body necessary for its
execution and delivery of this Agreement and its consummation of the
transactions contemplated hereby.
2.2 Representations and Warranties by the Company. Except as set forth in
the Disclosure Schedule dated as of the date hereof prepared by the Company
and made a part of this Agreement (the "Disclosure Schedule"), the Paying
Agent on behalf of the Selling Shareholders represents and warrants to, and
agrees with, Buyer as follows:
a. Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of California,
with full corporate power and authority to own all of its properties and
assets and to carry on its business as it is now being conducted. The
Company is duly qualified or licensed to do business and is in good
standing in the states in which it has facilities and each other
jurisdiction in which the nature of its business or the character of its
properties requires such qualification. The copies of the Certificate of
Incorporation and By-laws, as amended, of the Company, which have been
delivered to Buyer, are complete and correct, and such instruments are in
full force and effect.
b. Capital Stock and Securities. The authorized capital stock of the
Company consists of 400,000 shares, consisting of (i) 200,000 shares of
Common Stock and (ii) 200,000 Series B Common Shares, no par value. As of
the Closing (after giving effect to the exercise of the Stock Options),
124,785 shares of the Common Stock will be issued and outstanding, all of
which will be owned, beneficially and of record, by the Selling
Shareholders in the amounts set forth on Schedule 1 attached hereto. Each
share of capital stock of the Company is owned by the Selling Shareholders
free and clear of any and all liens, charges, pledges, security interests
or other encumbrances of any kind. Each outstanding share of capital stock
of the Company is and shall be duly authorized, validly issued, fully paid
and nonassessable. Upon the consummation of the purchase of the Sale Shares
as contemplated by Sections 1.1 and 1.3, the Company will acquire from the
Selling Shareholders good and valid title to the Sale Shares free and clear
of any liens, claims, charges, pledges, options, contractual restrictions
of any kind or other legal or equitable encumbrances. Except for Stock
Options exercisable into 72,490 shares of Common Stock which are held by
the Selling Shareholders in the amounts set forth on Schedule 1 and which
will be exercised pursuant to
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Article I, the Company does not have any outstanding commitments to issue
or sell any shares of its capital stock, or any securities or obligations
convertible into or exchangeable for, or giving any person any right to
subscribe for or acquire from the Company any shares of its capital stock,
and no securities or obligations evidencing any such right are outstanding.
The Company does not have outstanding any other debt or equity securities
other than its Common Stock and existing indebtedness, which, including the
terms thereof, are fully described in the Disclosure Schedule.
c. Subsidiaries. The Company does not have any Subsidiaries other than
Kilovac Development and Kilovac International, Inc., a California
corporation. Set forth on the Disclosure Schedule is a correct and complete
list of the Subsidiaries, showing as to each, its name, its corporate,
partnership or joint venture form, the jurisdiction of its incorporation or
formation, the number of shares of stock of each class of each Subsidiary
which is outstanding and the number of such outstanding shares owned by
each of the Company and its Subsidiaries. Each Subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Each Subsidiary has the corporate or other
power and authority to carry on its business as now being conducted and to
own and lease its properties and is duly qualified to do business as a
foreign corporation in each jurisdiction in which the nature of its
business or properties makes such qualification necessary. All of the
outstanding shares of capital stock of each Subsidiary have been validly
issued, are fully paid and non-assessable with no personal liability
attaching to the ownership thereof and are free and clear of all liens. The
Company is the sole beneficial owner of all the outstanding shares of each
Subsidiary which is a corporation and there are no other securities of any
Subsidiary which is a corporation other than such outstanding shares. There
are no outstanding rights, warrants, options or agreements with respect to
any such outstanding shares of Subsidiaries including, without limitation,
agreements granting to any person rights to acquire any capital stock or
agreements with respect to the voting thereof. Neither the Company nor any
of its Subsidiaries has any investment (whether equity, debt or other) in
any other person. The copies of the Certificate of Incorporation and By-
laws, as amended, of each Subsidiary, which have been delivered to Buyer,
are complete and correct, and such instruments are in full force and
effect.
d. Authority Relative to Agreement. The Company and each Selling
Shareholder has the power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The
execution and delivery by the Company and each Selling Shareholder of this
Agreement and the consummation by such parties of the transactions
contemplated hereby have been duly authorized by each such party. No other
proceedings on the part of the Company or any Selling Shareholder are
necessary, and no vote or consent by the shareholders of the Company is
necessary, to authorize the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by the Company and each Selling
Shareholder and is a valid and binding agreement of each such party,
enforceable in accordance with its terms.
e. Non-Contravention. The consummation of the transactions contemplated
hereby will not violate any provision of the Certificate of Incorporation
or By-Laws of the Company or any of its Subsidiaries, or violate, or result
with the giving of notice or the lapse of time or both in a violation of,
any provision of any mortgage, lien, lease, agreement, license, instrument,
law, ordinance, regulation, order, arbitration award, judgment or decree to
which the Company, any of its Subsidiaries or any of their properties or
assets (real, personal or mixed, tangible or intangible) are bound.
f. Consents, etc. As of the Closing Date, the Company and the Selling
Shareholders shall have obtained all licenses, permits, consents,
authorizations, orders or approvals of any governmental commission, board
or regulatory body, if any, necessary for the execution and delivery of
this Agreement and the consummation of the transactions contemplated
hereby.
g. Financial Statements. The Company and the Selling Shareholders have
heretofore delivered to Buyer the audited consolidated financial statements
of the Company and its subsidiaries for the fiscal years
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ended December 31, 1990, 1991, 1992, 1993 and 1994 and the unaudited
unconsolidated financial statements of the Company and its subsidiaries for
the 6 periods ended June 16, 1995 including their balance sheets as of each
such date and the related statements of income, cash flow, and
shareholders' equity for each of the respective periods then ended (the
"Financial Statements"). Except as noted therein, such Financial Statements
have been prepared from the books and records of the Company and its
subsidiaries, and are in accordance with generally accepted accounting
principles consistently applied throughout the periods covered thereby, and
fairly present the financial condition, results of operations, and cash
flows of the Company and its subsidiaries as of the respective dates and
for the respective periods thereof except in the case of the June 16, 1995
Financial Statements footnotes have been omitted and it is subject to
normal year-end adjustments (which adjustments, individually or in the
aggregate, will not be material).
The December 31, 1994 balance sheet delivered as part of the Financial
Statements is referred to as the "Balance Sheet" and the June 16, 1995
balance sheet delivered as part of the Financial Statements is referred to
as the "Interim Balance Sheet".
h. Government Authorizations and Compliance with Laws. The business of
the Company and its Subsidiaries has been operated in material compliance
with all laws, ordinances, regulations and orders, of all governmental
entities, domestic or foreign. The Company and its Subsidiaries have all
material permits, certificates, licenses, approvals and other
authorizations required in connection with the operation of their business.
No notice has been received by the Company or any of its Subsidiaries and,
to the Company's knowledge after due inquiry, no investigation or review is
pending or threatened by any governmental entity with respect to (i) any
alleged violation by the Company or any of its Subsidiaries of any law,
ordinance, regulation, order, policy or guideline of any governmental
entity, or (ii) any alleged failure to have all permits, certificates,
licenses, approvals and other authorizations required in connection with
the operation of the business of the Company and its Subsidiaries. As used
in this Agreement, "Company's knowledge after due inquiry" shall mean the
knowledge of Douglas Campbell, Rick Danchuk, Pat McPherson, Robert Helman
and Dan McAllister, after inquiry by them of the Company's officer level
employees having responsibility for matters in the subject area of the
statement made and review of the Company's records with respect to such
subject matter.
i. Tax Matters. All federal, state, local and foreign tax returns and tax
reports required to be filed by or with respect to the Company or its
Subsidiaries have been duly filed. All taxes (including interest, penalties
and related costs) with respect to the Company and its Subsidiaries for all
taxable periods ending on or prior to the Closing Date have been paid,
except (a) to the extent of reserves for taxes (other than deferred taxes)
reflected on the Interim Balance Sheet less payments of such taxes on or
prior to the Closing Date and (b) for such taxes (other than deferred
taxes) properly accruable by the Company and its Subsidiaries for the
period beginning immediately following the date of the Interim Balance
Sheet and ending on the Closing Date but only to the extent that such taxes
arise in the ordinary course of the operations of the Company and its
Subsidiaries occurring during such period (and not taxes arising from other
transactions or events, including, without limitation, any taxes on income
resulting from transactions contemplated by this Agreement and any taxes
relating to prior periods); provided, however, that the reserve set forth
in clause (a) above and the accrual for taxes set forth in clause (b) above
shall be reduced for the tax effect of any deductions relating to the
exercise or cancellation of the Stock Options. No issues have been raised,
either orally or in writing, (and are currently pending) by any foreign,
federal, state or local taxing authority in connection with any of the
returns or reports referred to in this Section 2.2(i). No waivers of
statutes of limitations as to any tax matters are currently in effect with
respect to the Company or its Subsidiaries.
All tax returns filed by the Company and its Subsidiaries were true and
correct in all material respects as of the date on which they were filed.
Complete copies of all federal, state and local income tax returns for the
Company and its Subsidiaries that have been filed with respect to taxable
periods for which the statute of limitations period has not run have been
delivered to Buyer. The Company has provided to Buyer
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all revenue agent's reports and other written assertions by governmental
authorities of deficiencies or other liabilities for taxes of the Company
and its Subsidiaries with respect to past periods for which the statute of
limitations period has not run. All amounts required to be collected or
withheld by the Company and its Subsidiaries with respect to taxes have
been duly collected or withheld and any such amounts that are required to
be remitted to any taxing authority have been duly remitted.
No extension of time within which to file any tax return that related to
the Company and its Subsidiaries has been requested, which return has not
since been filed. There are no tax rulings, requests for rulings, or
closing agreements to which the Company or its Subsidiaries is a party or
is subject which could affect the liability for taxes for any period after
the Closing Date. All federal income tax returns of the Company and its
Subsidiaries with respect to taxable periods through the year ended
December 31, 1991, have been examined and closed or are returns with
respect to which the applicable statute of limitations period has expired
without extension or waiver. No power of attorney has been granted by the
Company or its Subsidiaries with respect to any matter relating to taxes of
the Company and its Subsidiaries which is currently in force.
The Company and its Subsidiaries have not filed a consent under Section
341(f) of the Code or any comparable provision of state revenue statutes.
The Company and its Subsidiaries have made all payments of estimated taxes
required to be made under Section 6655 of the Code and any comparable
provisions of state, local or foreign law. Any adjustment of taxes of the
Company and its Subsidiaries made by the Internal Revenue Service in any
examination which is required to be reported to the appropriate state,
local or foreign taxing authorities has been reported, and any additional
taxes due with respect thereto have been paid.
The Company and its Subsidiaries have not agreed or are not required to
include in income any adjustment pursuant to Section 481(a) of the Code (or
similar provisions of other law or regulations) by reason of a change in
accounting method. No excess loss accounts exist with respect to the
Company or any Subsidiary. There is no deferred gain or loss arising from
deferred intercompany transactions between the Company and its
Subsidiaries. The Company or its Subsidiaries are not a party to any
agreement that would result by its terms in the payment of a non-deductible
"excess parachute payment" within the meaning of Section 280G of the Code.
The amount of deferred tax assets reflected on the Balance Sheet and the
Interim Balance Sheet are determined in accordance with GAAP, subject to
year end adjustments.
For the purpose of this Agreement, any federal, state, local or foreign
income, sales, use, transfer, payroll, unemployment, Social Security,
personal property, occupancy or other tax, levy, impost, fee, imposition,
assessment or similar charge, together with any related addition to tax,
interest or penalty thereon, is referred to as a "tax."
j. Title to Properties; Absence of Liens and Encumbrances, etc. The
Company and its Subsidiaries have good and marketable title to all of the
properties and other assets (real, personal and mixed, tangible and
intangible) reflected in the Balance Sheet or acquired after the date
thereof (except for properties and assets sold or otherwise disposed of
since December 31, 1994 in the ordinary and usual course of business and
the real property located at 410 Palm Avenue (the "Palm Avenue Property")),
free and clear of any and all liens, charges, pledges, mortgages, security
interests or other encumbrances of any kind ("Liens"). Except for those
properties or assets acquired since December 31, 1994, all properties and
assets (real, personal and mixed, tangible and intangible) used in the
business of the Company and its Subsidiaries are reflected in the Balance
Sheet in the manner and to the extent required by generally accepted
accounting principles.
k. Material Agreements. The Disclosure Schedule lists every material
agreement to which the Company or any of its Subsidiaries is a party or by
which it or any of their properties or assets (real, personal or mixed,
tangible or intangible) is bound which is to be performed in whole or in
part after the Closing Date. Solely for the purpose of this Section 2.2(k),
the term "material agreement" shall mean any
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single agreement or lease, including agreements with respect to notes
receivable, pursuant to which any party thereto is obligated after the date
hereof to make payments aggregating more than $100,000. There is no
default, nor will any default occur hereafter, as a result of the
consummation of the transactions contemplated hereby or otherwise, in any
obligation to be performed by any party to any material agreement to which
the Company or any of its Subsidiaries is a party or by which it or any of
its properties or assets (real, personal or mixed, tangible or intangible)
is bound. Each agreement listed in the Disclosure Schedule is valid and
binding in accordance with its terms. Other than this Agreement, there are
no agreements or options to sell or lease any of the properties or assets
(real, personal or mixed, tangible or intangible) of the Company or any of
its Subsidiaries except in the ordinary and usual course of its business.
The Company has delivered to Buyer true and complete copies of all
agreements listed in the Disclosure Schedule, including supporting
documentation.
l. Litigation. (i) There is no claim, action, suit or proceeding pending
or, to the Company's knowledge after due inquiry, threatened against the
Company, any of its Subsidiaries or any of their properties or assets
(real, personal or mixed, tangible or intangible) or which seeks to
prohibit, restrict or delay consummation of the transactions contemplated
by this Agreement or any of the conditions to consummation of the
transactions contemplated by this Agreement, nor is there any judgement,
decree, injunction, ruling, award or order of any court, governmental
department, commission, agency or instrumentality or arbitrator outstanding
or, to the Company's knowledge after due inquiry, threatened against the
Company, any of its Subsidiaries or any of their properties or assets
(real, personal or mixed, tangible or intangible); and (ii) neither the
Company, any of its Subsidiaries nor any of their officers or, to the
Company's knowledge, employees is currently charged with, or to the
Company's knowledge is currently under investigation with respect to, any
violation of any provision of any federal, state, foreign or other
applicable law or administrative regulation in respect of the business of
the Company and its Subsidiaries.
m. Employee Benefit Plans. The Disclosure Schedule contains a complete
list of "Plans" consisting of each:
(1) "employee welfare benefit plan", as defined in Section 3(1) of
the Employee Retirement Income Security Act of 1974 ("ERISA"), to which
the Company or any of its Subsidiaries contributes or is required to
contribute, including each multi-employer welfare plan ("Welfare
Plan"), and sets forth the amount of any liability of the Company or
its Subsidiaries for payments more than thirty days past due with
respect to each Welfare Plan as of the Closing Date;
(2) "multi-employer pension plan," as defined in Section 3(37) of
ERISA, to which the Company (or any entity which is a member of a
"controlled group of corporations" with or is under "common control"
with the Company as defined in Section 414(b) or (c) of the Internal
Revenue Code of 1986 as amended ("Code") ("Common Control Entity")) has
contributed or been obligated to contribute at any time after September
25, 1980 ("Multi-employer Plan").
(3) "employee pension benefit plan," as defined in Section 3(2) of
ERISA, (other than a Multi-employer Plan) to which the Company or any
Common Control Equity contributes or is required to contribute
("Pension Plan"); and
(4) deferred compensation plan, bonus plan, stock option plan,
employee stock purchase plan and any other employee benefit plan,
agreement, arrangement or commitment, other than normal payroll
practices and policies concerning holidays, vacations and salary
continuation during short absences for illness or other reasons,
maintained by the Company or its Subsidiaries.
n. Pension Plans. The funding method used in connection with each Pension
Plan which is subject to the minimum funding requirements of ERISA is
acceptable and the actuarial assumptions used in connection with funding
each such plan, in the aggregate, are reasonable. The assets of each
Pension Plan are sufficient to discharge all liabilities under such plan,
on an ongoing basis and on a termination basis, and there is no
"accumulated funding deficiency," as defined in Section 302(a)(2) of ERISA,
with respect
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to any plan year of any such plan. Neither the Company nor any Common
Control Entity has any liability for unpaid contributions with respect to
any Pension Plan.
(1) Each Pension Plan and each related trust agreement, annuity
contract or other funding instrument is qualified and tax-exempt under
the provisions of Code Sections 401(a) (or 403(a) as appropriate) and
501(a).
(2) Each Pension Plan and each related trust agreement, annuity
contract or other funding instrument complies currently, and has
complied at all times in the past, both as to form and in operation,
with the provisions of applicable Federal law, including the Code and
ERISA.
(3) The Company have paid all premiums (and interest charges and
penalties for late payment, if applicable) due the Pension Benefit
Guaranty Corporation ("PBGC") with respect to each Pension Plan for
each plan year thereof for which such premiums are required. There has
been no "reportable event" (as defined in Section 4043(b) of ERISA and
the PBGC regulations under such Section) with respect to any Pension
Plan. No liability to the PBGC has been incurred by the Company or any
Common Control Entity on account of the termination of any Pension
Plan. No filing has been made by the Company or any Common Control
Entity with PBGC, and no proceeding has been commenced by the PBGC, to
terminate any Pension Plan. Neither the Company nor any Common Control
Entity has, at any time, (a) ceased operations at a facility so as to
become subject to the provisions of Section 4062(e) of ERISA, (b)
withdrawn as a substantial employer so as to become subject to the
provisions of Section 4063 of ERISA, or (c) ceased making contributions
on or before the Closing Date to any Pension Plan subject to Section
4064(a) of ERISA to which the Company or any Common Control Entity made
contributions during the five years prior to the Closing Date.
o. Multi-employer Plans. Neither the Company nor any Common Control
Entity has, at any time, withdrawn from a Multi-employer Plan in a
"complete withdrawal" or a "partial withdrawal" as defined in ERISA
Sections 4203 and 4205, respectively.
p. Prohibited Transactions. Neither the Company, any of its Subsidiaries
nor, to the Company's knowledge after due inquiry, any plan fiduciary of
any Welfare Plan or Pension Plan has engaged in any transaction in
violation of Section 406(a) or (b) of ERISA or any "prohibited
transaction," as defined in Section 4975(c)(1) of the Code, for which no
exemption exists under Section 4975(c)(2) or 4975(d) of the Code.
q. Copies of Relevant Plan Documents. True and complete copies of each of
the following documents have been delivered by the Company to Buyer: (i)
each Welfare Plan and each Pension Plan, related trust agreements, annuity
contracts or other funding instruments, (ii) each plan, agreement,
arrangement and commitment referred to in Sections 2.2(m) and (n), and
complete descriptions of any such plan which is not in writing, (iii) the
most recent determination letter issued by the Internal Revenue Service
with respect to each Pension Plan, (iv) Annual Reports on Form 5500 Series
required to be filed with any governmental agency for each Welfare Plan and
each Pension Plan for the two most recent plan years and (v) all actuarial
reports prepared for the last three years for each Pension Plan.
r. Validity and Enforceability of Plans. Each Welfare Plan, Pension Plan,
related trust agreement, annuity contract or other funding instrument and
each plan, agreement, arrangement and commitment referred to in Sections
2.2(m) and (n) is legally valid and binding and in full force and effect.
s. Payments to Retirees. Neither the Company, any of its Subsidiaries nor
any Welfare Plan has any obligation to make any payment to or with respect
to any former or current employee of the Company pursuant to any retiree
medical benefit or other Welfare Plan.
t. Litigation Under Plans. Neither the Company, any of Subsidiaries nor
any Plan is a party to any litigation relating to, or seeking benefits
under, any Plan.
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u. Employment Agreements. Neither the Company nor any of its Subsidiaries
is a party to any employment, severance or similar agreements.
v. Change in Control Provisions. Neither the Company nor any of its
Subsidiaries is a party to any agreement which contains any provision
pursuant to which the Company or any of its Subsidiaries will be obligated
to make any payment as a result of the transactions contemplated hereby.
w. Labor Matters. There are no controversies pending between the Company
and its Subsidiaries and any of their employees or officers. Neither the
Company nor any of its Subsidiaries is subject to any collective agreements
and, to the Company's knowledge after due inquiry, there is no current
prospect for any union election.
x. Employees. The Disclosure Schedule contains a true and complete list
of all the employees of the Company and its Subsidiaries, their ages, pay
levels and length of service.
y. Absence of Certain Changes or Events. Since December 31, 1994 there
has not been (i) any change, or any development involving a prospective
change, which, individually or in the aggregate, has had or could have a
material adverse effect ("Material Adverse Effect") on the financial
condition, business, operations, or prospects of the Company and its
Subsidiaries taken as a whole; (ii) any damage, destruction or other loss
with respect to property owned by the Company or any of its Subsidiaries,
whether or not covered by insurance, or any strike, work stoppage or
slowdown or other labor trouble involving the Company or any of its
Subsidiaries; (iii) any direct or indirect redemption, purchase or other
acquisition by the Company or any of its Subsidiaries of any shares of the
capital stock of the Company or any of its Subsidiaries; (iv) any
declaration, setting aside or payment of any dividend or distribution
(whether in cash, capital stock or property); or (v) the entry by the
Company or any of its Subsidiaries into any commitment or transaction which
is not in the ordinary course of business.
z. Absence of Undisclosed Liabilities and Agreements. Except as
specifically provided for in the Balance Sheet, the Company and its
Subsidiaries (i) did not have, as of December 31, 1994, any material debts,
liabilities or obligations, whether accrued, absolute, contingent or
otherwise and whether due or to become due (including, without limitation,
any liabilities resulting from the failure to comply with any law
applicable to the Company, any of its Subsidiaries or to the conduct of
their business) (ii) have not incurred, since December 31, 1994, any such
debts, liabilities or obligations other than in the ordinary and usual
course of their business, (iii) are not a party to any material agreement
which contains unusual or burdensome terms and conditions, or (iv) except
in connection with the transactions contemplated in this Agreement, has
not, since December 31, 1994, conducted their business otherwise than in
the ordinary and usual course.
aa. Insurance. The Company and its Subsidiaries have insurance policies
in full force and effect which provide for coverages which are normal in
both amount and scope for the business conducted by the Company and its
Subsidiaries. The current insurance coverage of the Company and its
Subsidiaries is as described in the Disclosure Schedule.
ab. Payments. The Company and its Subsidiaries have not, directly or
indirectly, paid or delivered any fees, commissions or other sums of money
or items of property however characterized to any finders, agents,
customers, government officials or other parties, in the United States or
in any other country, which in any manner are related to the business or
operations of the Company and its Subsidiaries, and which have been illegal
under any federal, state or local laws of the United States or any other
country or territory having jurisdiction over the Company or any of its
Subsidiaries. The Company and its Subsidiaries have not participated,
directly or indirectly, in any boycotts or similar practices.
ac. Renegotiation. The Company and its Subsidiaries are not subject to
renegotiation, redetermination or excess profit recovery with respect to
any fiscal year by reason of U.S. Government contracts performed by them.
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ad. Inventories. All inventories carried by the Company and its
Subsidiaries as of June 16, 1995 and reflected on the Interim Balance
Sheet, are valued at the lower of cost or market on a first-in-first-out
basis consistent with generally accepted accounting principles. For this
purpose, the lower of cost or market shall be determined on an item by item
rather than an aggregate basis. Except to the extent of inventory reserves
reflected in the Interim Balance Sheet, the items included in said
inventories are normal items of inventory carried by the Company and its
Subsidiaries, and are current, suitable and merchantable for the filling of
orders in the normal course of business, and are not obsolete, damaged,
defective or slow moving.
ae. Products Liability. There are no facts or the occurrence of any event
known or which reasonably should be known to the Company or the Selling
Shareholders forming the basis for any claim against the Company or any of
its Subsidiaries for products liability, whether in tort or strict
liability or on account of any express or implied warranty.
af. Notes and Accounts Receivable and Liabilities. Each of the material
liabilities of the Company and its Subsidiaries as of December 31, 1994 and
June 16, 1995 is reflected or reserved for on the Balance Sheet and the
Interim Balance Sheet, respectively, and the amounts so reflected or
reserved are true and correct according to GAAP. Notes and accounts
receivable will be fully collectible, except to the extent of reserves for
doubtful accounts reflected in the Interim Balance Sheet.
ag. Proprietary Rights. The proprietary rights listed in the Disclosure
Schedule are all those used in the business of the Company and its
Subsidiaries. To the knowledge of the Company after due inquiry, the
Company's and its Subsidiaries' use of such Proprietary Rights is not
infringing upon or otherwise violating the rights of any third party in or
to such proprietary rights, and no proceedings have been instituted against
or notices received by the Company or any of its Subsidiaries that are
presently outstanding alleging that the Company's or any Subsidiary's use
of such Proprietary Rights infringes upon or otherwise violates any rights
of a third party in or to such Proprietary Rights.
ah. Books of Account. The books of account of the Company and its
Subsidiaries have and will adequately reflect all of their respective items
of income and expense and all of their assets, liabilities and accruals, in
accordance with generally accepted accounting principles.
ai. Purchase Commitments and Outstanding Bids. As of the date of this
Agreement and as of the Closing Date, there are no claims against the
Company or any of its Subsidiaries to return in excess of an aggregate of
$50,000 by reason of alleged over-shipments, defective merchandise or
otherwise, or of merchandise in the hands of customers under an
understanding that such merchandise would be returnable. No outstanding
purchase or outstanding lease commitment of the Company or any of its
Subsidiaries presently is in excess of the normal, ordinary and usual
requirements of its business or contains terms and conditions more onerous
than those usual and customary in the business of the Company and its
Subsidiaries.
aj. Customers and Suppliers. The Disclosure Schedule contains a complete
and accurate list of (i) the 10 largest customers of the Company and its
Subsidiaries in terms of revenues during the Company's last fiscal year,
showing the approximate total sales to each such customer during such
fiscal year; (ii) the 10 largest suppliers of the Company and its
Subsidiaries in terms of purchases during the Company's last fiscal year,
showing the approximate total purchases from each such supplier during such
fiscal year. Since December 31, 1994, to the Company's knowledge after due
inquiry, there has been no adverse change in the business relationship of
the Company and its Subsidiaries with any customer or supplier named in the
Disclosure Schedule.
ak. Permits. The Disclosure Schedule contains a complete and accurate
list of all permits held by the Company or any of its Subsidiaries or for
which the Company or any Subsidiary has applied, which are the only
material permits necessary for or used by the Company and its Subsidiaries
to carry on their business as presently conducted.
al. Environmental Matters. (1) The Company and each of its
Subsidiaries is in compliance in all material respects with all
applicable Environmental Laws, and for the past five years has been in
such compliance; and the Company and each Selling Shareholder have no
reason to believe that
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circumstances exist which could prevent or interfere with continued
compliance in all material respects by the Company and each of its
Subsidiaries with all applicable Environmental Laws after the Closing
Date.
(2) The Company and its Subsidiaries hold all material Environmental
Permits necessary to conduct their operations as they are currently
conducted; the Disclosure Schedule includes a true and complete list of
all such Environmental Permits and their expiration dates, and the
Company and the Selling Shareholders have no reason to believe that
such permits (A) will not be renewed, or (B) will be renewed under
terms that could reasonably be expected to have an adverse effect on
the Company and its Subsidiaries.
(3) There are no Materials of Environmental Concern present at, and
no Materials of Environmental Concern are or have been in any way
released or threatened to be released from, any Kilovac Property,
former Kilovac Property, or as a result of present or former operations
of the Company or any of its Subsidiaries or any predecessor entity
(including without limitation the disposal of Materials of
Environmental Concern at any location other than a Kilovac Property or
former Kilovac Property), that could reasonably be expected to be in
material violation of or otherwise to give rise to material liability
of the Company or any of its Subsidiaries under any Environmental Law.
(4) No reports of any kind have been made to or required by any
Governmental Authority pursuant to any Environmental Law concerning
spills or any other releases of any kind at, or in any way from, any
Kilovac Property, former Kilovac Property, or as a result of present or
former operations of the Company or any of its Subsidiaries or any
predecessor entity, for which spills, releases, or reports thereof the
Company or any of its Subsidiaries may be liable under any
Environmental Law; true and complete copies of all written reports
concerning such spills and other releases have been provided or made
available to Buyer.
(5) None of the following are or have been on, under, in or at any
Kilovac Property, or to the Company's knowledge after due inquiry, any
former Kilovac Property: (A) underground or aboveground storage tanks
containing Materials of Environmental Concern; (B) polychlorinated
biphenyls; (C) asbestos or asbestos-containing materials; (D) septic
tanks, septic fields, dry-wells, or similar structures; (E) lagoons or
impoundments; or other bodies of water to which Materials of
Environmental Concern may have been discharged; (F) landfills or
dumping areas; or similar locations where Materials of Environmental
Concern may have been placed.
(6) Neither the Company nor any of its Subsidiaries has received any
Environmental Claim, and to Company's knowledge after due inquiry, no
Environmental Claim has been threatened against the Company or any of
its Subsidiaries by any person.
(7) Neither the Company nor any of its Subsidiaries has entered into,
agreed to, nor is the Company or any of its Subsidiaries otherwise
subject to any judgment, decree, order or similar requirement under any
Environmental Law, nor to the Company's knowledge after due inquiry is
any such judgment, decree, order or requirement being negotiated that
may obligate or affect the Company or any of its Subsidiaries.
(8) Neither the Company nor any of its Subsidiaries has assumed or
retained, contractually or by operation of law, any liabilities or
obligations of other persons, contingent or otherwise, in connection
with any Environmental Law.
(9) There are no past or present actions, activities, events,
conditions or circumstances, including without limitation the release,
threatened release, emission, discharge, generation, treatment, storage
or disposal of Materials of Environmental Concern, that could
reasonably be expected to give rise to any material liability or
obligation of the Company or any of its Subsidiaries under any
Environmental Laws. None of the matters set forth on the Disclosure
Schedule, or any aggregation thereof, could reasonably be expected to
have a Material Adverse Effect.
(10) True and complete copies of all reports, studies, assessments,
audits, and similar documents in the possession or control of the
Company, any of its Subsidiaries or any Selling Shareholder that
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address any issues of actual or potential noncompliance in any material
respect with, or actual or potential material liability under, any
Environmental Laws that may affect the Company or any of its
Subsidiaries have been provided to Buyer prior to the signing hereof.
(11) As used in this Section 2.2(al):
"Environmental Claim" means any written or oral notice, claim,
demand, action, suit, complaint, proceeding or other communication
by any person alleging liability or potential liability (including
without limitation liability or potential liability for
investigatory costs, cleanup costs, governmental response costs,
natural resource damages, property damage, personal injury, fines or
penalties) arising out of, relating to, based on or resulting from
(i) the presence, discharge, emission, release or threatened release
of any Materials of Environmental Concern at any location, (ii)
circumstances forming the basis of any violation or alleged
violation of any Environmental Law or Environmental Permit, or (iii)
otherwise relating to obligations or liabilities under any
Environmental Law.
"Environmental Laws" means all foreign (to the extent applicable),
federal, state and local statutes, rules, regulations, ordinances,
orders, judgments, decrees and common law relating in any manner to
contamination, pollution, or protection of human health or the
environment, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, the Solid
Waste Disposal Act, the Clean Air Act, the Clean Water Act, the
Toxic Substances Control Act, the Endangered Species Act, the
National Environmental Protection Act, the Occupational Safety and
Health Act, the Emergency Planning and Community-Right-to-Know Act,
the Safe Drinking Water Act, all as amended, and similar laws of any
other Governmental Authority.
"Environmental Permits" means all permits, licenses, registrations
and other governmental authorizations or exemptions required under
Environmental Laws.
"Materials of Environmental Concern" refers to any waste,
pollutant, contaminant or other substance of any kind (including
without limitation odors, radioactivity, and electromagnetic fields)
regulated by or under, or which may otherwise give rise to liability
under, any Environmental Law.
"Kilovac Property" means all real property in which the Company or
any of its Subsidiaries have any legal interest, including without
limitation a leasehold interest, and any equipment or other property
owned or leased by the Company or any of its Subsidiaries.
am. Transactions with Certain Persons. Neither any officer, director,
shareholder or employee of the Company and its Subsidiaries nor any member
of any such person's immediate family is presently a party to any material
transaction with the Company or any of its Subsidiaries relating to the
business of the Company and its Subsidiaries, including without limitation,
any contract, agreement or other arrangement (i) providing for the
furnishing of material services by (other than for services as officers,
directors or employees of the Company and its Subsidiaries), (ii) providing
for the rental of material real or personal property from, or (iii)
otherwise requiring material payments to (other than for services as
officers, directors or employees of the Company and its Subsidiaries) any
such person or corporation, partnership, trust or other entity in which any
such person has a substantial interest as a shareholder, officer, director,
trustee or partner.
an. Information. The Company and the Selling Shareholders have furnished
and will continue to furnish to Buyer detailed information with respect to
the assets, earnings, and business of the Company and its Subsidiaries, and
acknowledge that Buyer has relied and will rely thereon in entering into
this Agreement and consummating the transaction contemplated by this
Agreement. No such information, the preparation of which was under the
Company's and any Selling Shareholder's direct control, as it has been
corrected from time to time by the Company or Selling Shareholders,
contains an untrue statement of material fact or omits to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made not
misleading.
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ARTICLE III
ACTIONS PRIOR TO THE CLOSING
3.1 Conduct of the Company. During the period from the date hereof to the
Closing Date:
a. Operations in the Ordinary Course of Business. Except as contemplated
by this Agreement, the Company and its Subsidiaries shall, and the Selling
Shareholders shall cause the Company and its Subsidiaries to, conduct their
business operations according to the ordinary and usual course of business
and will use their best efforts (i) to preserve intact their business
organization; (ii) to maintain their books and records in accordance with
past practices; (iii) to keep available the services of their officers and
employees; and (iv) to maintain satisfactory relationships with licensors,
suppliers, distributors, customers and others having business relationships
with them. The Company and the Selling Shareholders shall confer with Buyer
or its representatives to keep it informed with respect to operational
matters of a material nature and to report the general status of the
ongoing operations of the business of the Company and its Subsidiaries.
b. Forbearances by the Company. Except as contemplated by this Agreement,
the Company and its Subsidiaries will not, and the Selling Shareholders
will not permit the Company and its Subsidiaries to, without the prior
written consent of Buyer:
(1) incur any indebtedness for borrowed money, except in the ordinary
course of business consistent with past practice in an amount not to
exceed $100,000;
(2) assume, guarantee, endorse or otherwise become responsible for
the obligations of, or make any loans or advances to, any other
individual, firm or corporation;
(3) make any direct or indirect redemption, purchase or other
acquisition of any shares of its capital stock or declare, set aside or
pay any dividend or distribution (whether in cash, capital stock or
property) other than the dividend or distribution to the Company's
shareholders of the shares of Kilovac Development, any dividends to the
Company from any of its Subsidiaries and the repurchase of Common Stock
held by Richard Edict or Harvey Clement for an amount not to exceed
$85,000 in the aggregate;
(4) mortgage, pledge or otherwise encumber any of its properties or
assets (other than the pledge of after acquired property as security
for indebtedness under the Bank of America Loan Agreement);
(5) sell, lease, transfer or dispose of any of its properties or
assets (other than the shares of Kilovac Development waive or release
any rights of material value, or cancel, compromise, release or assign
any indebtedness owed to it or any claims held by it except for sales
of inventory in the ordinary and usual course of business and
consistent with past practice;
(6) except for capital expenditures not to exceed $20,000 or items
included in the capital budget included in the Disclosure Schedule,
make any investment or expenditure of a capital nature either by
purchase of stock or securities, contributions to capital, property
transfers or otherwise, or by the purchase of any property or assets of
any other individual, firm or corporation;
(7) enter into any transaction other than in the ordinary and usual
course of its business and consistent with past practice;
(8) enter into or terminate any agreement, plan or lease, or make any
change in any of its agreements, plans or leases;
(9) permit any insurance policy naming it as a beneficiary or a loss
payable payee to be cancelled or terminated or any of the coverage
thereunder to lapse;
(10) enter into any collective bargaining agreements;
(11) increase in any manner the compensation, remuneration or fringe
benefits of any of its officers or employees (other than increases in
the hourly compensation of nonofficer employees in the ordinary course
of business consistent with past practice) or pay or agree to pay any
pension, retirement
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allowance, or other benefit not required by any existing employee
benefit plan to any such officers or employees, commit itself to any
employment agreement or employee benefit plan with or for the benefit
of any of its officers or employees or any other person, or alter,
amend, terminate in whole or in part, or curtail or permanently
discontinue distributions to, any pension plan or any other employee
benefit plan;
(12) issue any shares of capital stock or issue any warrants,
options, calls, subscriptions, or other agreements or commitments
obligating it to issue shares of capital stock;
(13) enter into an agreement to do any of the things described in
clauses (1) through (12) of this Section 3.1; or
(14) take any action which would render inaccurate any representation
and warranty made herein.
3.2 Regulatory Consents, Authorizations, etc. Each party hereto will use its
best efforts to obtain all consents, authorizations, orders and approvals of,
and make all filings and registrations with, any governmental commission,
board or other regulatory body or any other person required for or in
connection with the consummation of the transactions contemplated hereby and
will cooperate fully with the other parties in assisting them to obtain such
approvals and to make such filings and registrations. No party hereto will
take or omit to take any action for the purpose of delaying, impairing or
impeding the receipt of any required consent, authorization, order or approval
or the making of any required filing or registration.
3.3 Investigation by Buyer. Prior to the Closing Date, Buyer may make or
cause to be made such investigation of the business, properties, assets and
liabilities of the Company and its financial and legal conditions as Buyer
deems necessary or advisable to familiarize itself therewith, provided that
such investigation shall not unreasonably interfere with the normal operations
of the Company. Such investigation may include, without limitation, an
examination and valuation of inventory by Buyer's accountants and an appraisal
of all assets of the Company. Prior to the Closing Date, upon reasonable prior
notice, the Company and the Selling Shareholders agree to permit Buyer and its
authorized representatives, or cause them to be permitted, to have full access
to the premises, books and records, officers, employees, and independent
accountants (including the independent accountant's work-papers) of the
Company at reasonable hours, and prior to the Closing Date the officers of the
Company shall furnish Buyer with such financial and operating data and other
information with respect to the business, properties and assets of the Company
as Buyer shall from time to time reasonably request. No investigation by Buyer
heretofore or hereafter made shall affect the representations and warranties
of the Company contained herein. Prior to the Closing Date, or in the event
this Agreement is terminated, Buyer shall not use any information relating to
the Company obtained by it from the Company or the Selling Shareholders
pursuant to this Section 3.3, which is not otherwise publicly available, for
any purpose unrelated to the consummation of the transactions contemplated
hereby, and prior to such Closing Date, Buyer will not disclose any such
information to any person, unless and until such time as such information is
otherwise publicly available or as Buyer is advised by counsel that such
information is required by law to be disclosed. In the event this Agreement is
terminated, Buyer agrees to keep confidential all information it has obtained
concerning the Company under the terms of this Agreement for a five-year
period and to return promptly, if so requested by the Company, every document
furnished to Buyer by the Company and the Selling Shareholders, in connection
with the transactions contemplated hereby, and any copies thereof Buyer may
have made, and to use its best efforts to cause its representatives to whom
such documents were furnished promptly to return such documents, and any
copies thereof any of them may have made.
3.4 Expenses. Subject to Section 3.7, the Selling Shareholders joint and
severally agree to pay all of the fees, costs and expenses of the Selling
Shareholders, and Buyer agrees to pay all of the fees, costs and expenses of
Buyer, (including, without limitation, those of advisors, financial advisors,
lawyers or accountants) incurred in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement and the
transactions contemplated hereby.
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3.5 Negotiations with Others. During the period from the date of this
Agreement to the Closing Date, or until this Agreement is terminated in
accordance with the provisions of Article V, if it is so terminated, the
Company, the Selling Shareholders and their agents shall not, directly or
indirectly, without the prior written consent of Buyer, solicit or initiate
discussions or engage in negotiations with, or provide any information other
than publicly available information to, or authorize any financial advisor or
other person to solicit or initiate discussions or engage in negotiations
with, or provide any information to, any corporation, partnership, person or
other entity or group (other than Buyer) concerning any possible proposal
regarding a sale of shares of capital stock of, or a merger, consolidation,
sale of assets or other similar transaction involving the Company, and the
Company and the Selling Shareholders will promptly notify Buyer if any such
discussions or negotiations are sought to be initiated with, any such
information is requested from, or any such proposal or possible proposal is
received by the Company, the Selling Shareholders and/or their agents.
3.6 Publicity. Until the Closing Date, each party hereto agrees not to issue
any press release or to otherwise make any public statement with respect to
the transactions contemplated hereby except as may be required by law, in
which event such press release or public statement shall be made only after
consultation with the Company or Buyer, as the case may be; then and
thereafter no such public announcement shall be made without the consent,
which shall not be unreasonably withheld, of the Company (in the case of
releases or statements issued or made by Buyer) or Buyer (in the case of
releases or statements issued or made by the Company or the Selling
Shareholders).
3.7 Environmental Audit. If required by any prospective provider of
financing for the transactions contemplated by this Agreement, the parties
hereto agree that Buyer may have a Phase II environmental audit (the
"Environmental Audit") completed prior to Closing at the Company's facilities.
The environmental consultant shall be chosen by Buyer. The Company shall have
the right to approve each phase of the Environmental Audit, which approval
shall not be unreasonably withheld. The fees, costs and expenses relating to
the Environmental Audit shall be borne as follows: (x) the first $10,000 by
the Selling Shareholders, (y) the next $10,000 by Buyer and (z) any balance in
excess of $20,000 equally by the Selling Shareholders and Buyer.
3.8 Kilovac Development. Prior to the Closing, the Company shall (i) cause
Kilovac Development to assign and transfer to the Company all of its material
assets other than the Palm Avenue Property, if any, and (ii) cancel any
intercompany debt of Kilovac Develoment to the Company and (iii) contribute
funds to Kilovac Development sufficient to discharge any third party
indebtedness and the guarantee by the Company thereof in an amount not to
exceed $230,000.
3.9 Additional Agreements. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its best efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated hereby as soon as
reasonably practicable hereinafter.
ARTICLE IV
CONDITIONS TO THE CLOSING
4.1 Conditions to the Closing Relating to Buyer. Consummation of the
transaction contemplated hereby is subject to the fulfillment to the
reasonable satisfaction of Buyer, prior to or at the Closing Date, of each of
the following conditions:
a. Regulatory Consents, Authorizations, etc. All consents,
authorizations, orders and approvals of, and filings and registrations with
any governmental commission, board or other regulatory body or any other
person which are required, prior to the Closing Date, for or in connection
with the execution and delivery of this Agreement and the consummation by
each party hereto and the Company of the transactions contemplated hereby,
or which are required in order to avoid violation or termination of any
agreement listed in the Disclosure Schedule, shall have been obtained or
made.
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b. Representations and Warranties. The representations and warranties of
the Company and the Selling Shareholders contained in this Agreement are
true and correct in all material respects at and as of the Closing Date,
except for changes contemplated by this Agreement, with the same force and
effect as if made at and as of the Closing Date; and the Selling
Shareholders and the Company shall have performed or complied in all
material aspects with all agreements and covenants required by this
Agreement to be performed or complied with by them at or prior to the
Closing Date.
c. Certificate. Each of the Selling Shareholders who is a member of the
Board of Directors of the Company shall have delivered to Buyer
certificates to the effect that (i) he is familiar with the provisions of
this Agreement and (ii) the conditions specified in Sections 4.1(a) and (b)
have, to his knowledge after inquiry of the Company's officer level
employees having responsibility for matters in the subject area of the
condition to be satisfied and review of the Company's records with respect
to such subject matter, been satisfied.
d. Litigation; Other Events. No action, suit or proceeding shall have
been instituted by any person which seeks to prohibit, restrict or delay
consummation of the transaction contemplated herein or any of the
conditions to the transactions contemplated herein, or seeks damages as a
result of the consummation of the transactions contemplated herein, or
speaks to the conduct of the business of the Company after the Closing
Date.
e. Financing. Buyer shall have completed arrangements, on terms and
conditions reasonably satisfactory to it, for the financing of a portion of
the purchase price and the ongoing working capital requirements of the
Company.
f. Environmental Audit. If required pursuant to Section 3.7, Buyer shall
have completed the Environmental Audit and the results of such audit shall
be satisfactory to it.
g. Existing Indebtedness. Bank of America shall have released and
discharged its lien securing the outstanding indebtedness against payment
by Buyer of the outstanding balance of such indebtedness without premium or
penalty. On the Closing Date, the aggregate outstanding indebtedness of the
Company and its Subsidiaries shall not exceed $430,000.
h. Related Agreements. The Escrow Agreement, the Paying Agent Agreement
and the Employment Agreement shall have been executed and delivered by the
applicable parties thereto substantially in the forms of Exhibits A, B and
C hereto.
i. Legal Opinion. Buyer shall have received a legal opinion, dated as of
the Closing Date, from Adams, Duque & Hazeltine, special counsel to the
Company, in the form of Exhibit D hereto.
4.2 Conditions to the Closing Related to the Company and the Selling
Shareholders. Consummation of the transaction contemplated hereby is subject
to the fulfillment to the reasonable satisfaction of the Company and the
Selling Shareholders, prior to or at the Closing Date, of each of the
following conditions:
a. Regulatory Consents, Authorizations, etc. All consents,
authorizations, orders and approvals of, and filings and registrations with
any governmental commission, board or other regulatory body or any other
person which are required, prior to the Closing Date, for or in connection
with the execution and delivery of this Agreement and the consummation by
each party hereto and the Company of the transactions contemplated hereby,
or which are required in order to avoid violation or termination of any
agreement listed in the Disclosure Schedule, shall have been obtained or
made.
b. Representations and Warranties. The representations and warranties of
Buyer contained in this Agreement are true and correct in all material
respects on the date hereof and shall also be true and correct in all
material respects at and as of the Closing Date, except for changes
contemplated by this Agreement, with the same force and effect as if made
at and as of the Closing Date; and Buyer shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing
Date.
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<PAGE>
c. Certificate. Buyer shall have delivered to the Selling Shareholders a
certificate, dated as of the Closing Date, of the Chairman of the Board and
Chief Executive Officer of Buyer to the effect that (i) he is familiar with
the provisions of this Agreement and (ii) the conditions specified in
Sections 4.2(a) and (b) have, to his knowledge after due inquiry, been
satisfied.
d. Litigation; Other Events. No action, suit or proceeding shall have
been instituted by any person which seeks to prohibit, restrict or delay
consummation of the transaction contemplated herein or any of the
conditions to the transactions contemplated herein, or seeks damages as a
result of the consummation of the transactions contemplated herein, or
speaks to the conduct of the business of the Company after the Closing
Date.
e. Related Agreements. The Escrow Agreement, the Paying Agent Agreement
and the Employment Agreement shall have been executed and delivered by the
applicable parties thereto substantially in the forms of Exhibits A, B and
C hereto.
ARTICLE V
TERMINATION
5.1 Termination. This Agreement may be terminated by:
(1) By mutual action of the Company and Buyer;
(2) By the Company, if any of the conditions set forth in Section 4.2
shall not have been complied with or performed and such noncompliance or
nonperformance shall not have been cured or eliminated (or by its nature
cannot be cured or eliminated) by Buyer on or before the Closing Date; or
(3) By Buyer, if any of the conditions set forth in Section 4.1 shall not
have been complied with or performed and such noncompliance or
nonperformance shall not have been cured or eliminated (or by its nature
cannot be cured or eliminated) by the Company and the Selling Shareholders
on or before the Closing Date.
5.2. Effects of Termination. In the event of the termination of this
Agreement, this Agreement shall thereafter become void and have no effect, and
no party hereto shall have any liability to the other parties hereto or their
respective stockholders or directors or officers in respect thereof, except
for the obligations of the parties hereto in the last two sentences of Section
3.3 and the Confidentiality Agreement (as defined below), and except that
nothing herein will relieve any party from liability for any breach of this
Agreement prior to such termination.
ARTICLE VI
INDEMNITY
6.1 Survival of Representations and Warranties Indemnity. The
representations, warranties, agreements and covenants by the Company and
Selling Shareholders (other than the agreements and covenants set forth in
Article VII) shall survive until the 12 month anniversary of the Closing Date,
except that the representations, warranties, agreements and covenants of the
Company and the Selling Shareholders contained in (i) Section 2.2(al) shall
survive until the 24 month anniversary of the Closing Date and (ii) Section
2.2(i) shall survive indefinitely.
6.2 Indemnity. Subject to said applicable survival periods, the Shareholders
agree to indemnify Buyer, the Company and/or their Affiliates for any and all
claims, demands, losses, costs, charges, expenses, obligations, liabilities,
actions, suits, damages, judgments, and deficiencies, including interest and
penalties, reasonable counsels' fees and all reasonable amounts paid in
settlement of any claim, action, or suit (collectively referred to as
"CLAIMS") which may be sustained, suffered or incurred by Buyer, the Company
and/or their Affiliates and arising out of or by reason of any breaches of the
representations, warranties, agreements and covenants of the
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Company or the Selling Shareholders contained herein; provided, that, (i) the
obligations of the Selling Shareholders under this Section 6.2 relating to
taxes shall be limited to the Escrowed Funds and the setoff of any amounts
then due to the Selling Shareholders under this Agreement and (ii) all other
obligations of the Selling Shareholders under this Section 6.2 shall be
limited to the Escrowed Funds. Each of the Selling Shareholders agrees that
Buyer, the Company and/or their Affiliates will have the rights to setoff the
amounts referred to in the preceding proviso.
6.3 Cooperation. The term "Claims" as used in this Article is not limited to
matters asserted by third parties against Buyer and/or the Company. Claims
does not include any damages for which the Company receives insurance
reimbursement. In the event a Claim is asserted by any third party against
Buyer and/or the Company, it shall notify Selling Shareholders of such Claim
by giving to Selling Shareholders written notice, and shall give Selling
Shareholders and their counsel access to any and all such files, records and
other documents as may be necessary to enable Selling Shareholders to
investigate or participate in the defense against such Claim (but at the cost
and expense of such Selling Shareholders) and Buyer shall otherwise cooperate
in connection therewith and shall not assume a position contrary to that of
Selling Shareholders with respect to all such third party Claims.
ARTICLE VII
CERTAIN POST-CLOSING AGREEMENTS
7.1 Noncompete. Each of Pat McPherson, Robert Helman, Dan McAllister and
Rick Danchuk agree on behalf of himself and his Affiliates that he will not
anywhere in the State of California, including all the counties listed on
Schedule 2 hereto, or anywhere else at any time for three years after the date
hereof and Douglas Campbell agrees on behalf of himself and his Affiliates
that he will not anywhere in the State of California, including all the
counties listed on Schedule 2 hereto, or anywhere else at any time for five
years after the date hereof, except with the express prior written consent of
Buyer: (a) directly or indirectly, engage in any Competitive Business
(meaning, any business engaged in by the Company as of the Closing Date),
whether such engagement shall be as an owner, partner, agent, consultant or
shareholder (except as the holder of not more than five percent (5%) of the
outstanding shares of a corporation whose stock is listed on any national or
regional securities exchange or reported by the National Association of
Securities Dealers Automated Quotations System or any successor thereto); (b)
directly or indirectly solicit, divert or accept business from or otherwise
take away or interfere with any customer of Buyer, the Company or their
Affiliates engaged in any Competitive Business, including without limitation
any person who was a customer or whose business was being pursued by Buyer,
the Company or their Affiliates prior to the date hereof; or (c) directly or
indirectly, accept employment with, be employed by or be a principal of any
business or enterprise operating within the United States of America which
then employs or has as a principal or holder of any interest therein (except
as the holder of not more than one percent (1%) of the outstanding shares of a
corporation whose shares are publicly traded) any individual who was
previously employed in a managerial or consultant position with Buyer, the
Company or any of their Affiliates, provided however, that this prohibition
shall not be applicable if such business or enterprise is not a Competitive
Business. The Company and each of the individuals subject to this Section
acknowledge that the Company's products are sold and used in each county in
the State of California.
7.2 Nondisclosure. Each of the Selling Shareholders, agree that, for a
period of seven years following the Closing Date, except as required by law or
by the order of any court or government agency or in the performance of his
duties as an employee of the Company or its Subsidiaries, he shall keep secret
and retain in strictest confidence and shall not, except with the express
prior written consent of Buyer, directly or indirectly disclose, communicate
or divulge to any person, or use for the benefit of any person, any
Proprietary Information (meaning, all information or data with respect to the
conduct or details of the business of the Company including, without
limitation, methods of operation, customers and customer lists, details of
contracts with customers, consultants, suppliers or employees, products,
proposed products, former products, proposed, pending or completed
acquisitions of any company, division, product line or other business unit,
prices and pricing policies,
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fees, costs, plans, designs, technology, inventions, trade secrets, know-how,
software, marketing methods, policies, plans, personnel, suppliers,
competitors, markets or other specialized information or proprietary matters
of the business of the Company). The restriction contained in the preceding
sentence shall not apply to any Proprietary Information that (i) is a matter
of public knowledge on the date of this Agreement or (ii) becomes a matter of
public knowledge after the date of this Agreement from another source which is
under no known obligation of confidentiality to Buyer or its Affiliates.
7.3 Anti-dilution. In the event of the issuance, sale, grant or distribution
by the Company to Buyer or any of its Affiliates of any shares of Common
Stock, the Selling Shareholders shall be entitled to participate in such
issuance, sale, grant or distribution on a pro rata basis, and on the same
terms and conditions, so that following such issuance, sale, grant or
distribution each Selling Shareholder will, if such Selling Shareholder has
elected to purchase or otherwise receive the shares to be issued, sold,
granted or distributed, have the same percentage of the Common Stock ownership
of the Company as such Selling Shareholder had prior to such issuance, sale,
grant or distribution. This Section 7.3 shall not apply to registered public
offerings.
7.4 Contributions to ESBP. Each of the parties hereto agrees and
acknowledges that neither Buyer nor the Company shall have any obligation to
make any contributions to the Kilovac Corporation Employee Stock Bonus Plan
(the "ESBP") after the Closing Date.
7.5 Additional Restrictions. Except with the prior written approval of the
Paying Agent, after the Closing Date and until a Liquidity Event, the Company:
(a) shall not issue any additional shares of capital stock of the
Company;
(b) shall not amend the charter or by-laws of the Company or any of its
subsidiaries,
(c) shall not effect the voluntary liquidation, dissolution or winding up
of the Company or any of its subsidiaries, or the sale, lease or exchange
of all or substantially all of the assets, property or business of the
Company or any of its subsidiaries, or the merger or consolidation of the
Company with or into any other corporation (except a wholly-owned
subsidiary of the Company),
(d) shall not incur any indebtedness for borrowed money, except (i)
pursuant to financing arrangements entered into in connection with the
Closing between Buyer and Bank of America, N.A. (and any extensions
thereof), and (ii) other indebtedness incurred in the ordinary course of
business, consistent with past practice,
(e) shall not guaranty any indebtedness of any person or entity other
than financing arrangements entered into in connection with the Closing
between Buyer and Bank of America, N.A. (and any extensions thereof),
(f) shall not make any acquisition or disposition of securities other
than as a result of the reorganization of a debtor of the Company or a
business or line of business in a single transaction or a series of related
transactions,
(g) shall not repurchase or redeem any capital stock of the Company or
any of its subsidiaries,
(h) shall not declare or pay any dividends or distributions on Common
Stock (except as specifically provided herein),
(i) shall not make any initial public offering of shares of common stock
of the Company or of any of its subsidiaries or grant any registration
rights with respect to common stock of the Company or of any of its
subsidiaries,
(j) shall not create or dissolve any subsidiary of the Company, or
(k) shall not adopt or amend any personnel policies or personnel plans of
the Company or any of its subsidiaries, including those relating to
compensation or benefits.
(l) shall not enter into, or be a party to, any transaction with Buyer or
any affiliate of Buyer, except in the ordinary course of business and upon
fair and reasonable arms-length terms, which are no less favorable to the
Company than would be obtained in an arm's length transaction with an
unaffiliated third party.
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(m) shall in reduction of intercompany advances to the Company, deliver
all excess cash of the Company to Buyer, and borrow all working capital
needs from Buyer and the terms of intercompany advances in favor of the
Company shall be subject to only the charges and interest as applicable on
Buyer's senior credit accomodations.
(n) shall, until satisfaction of all obligations of Buyer and the Company
with respect to the Continuing Shares, be operated, and Buyer shall so
cause the Company to be operated as a separate subsidiary or division in a
manner to permit the computation and verification of the Determination
Numbers.
7.6 Restrictions on Transfer.
(a) Subject to paragraph (b) below, commencing on the Closing Date and
ending on December 31, 2005, no Selling Shareholder shall sell, transfer,
pledge or otherwise encumber any of his or her shares of Common Stock. Subject
to paragraph (b) below, any shares during such period shall be null and void.
(b) Any Selling Shareholder may at any time transfer to another Selling
Shareholder or by devise effective upon his or her death or by gift any or all
of his or her Continuing Shares to the heirs or beneficiaries of such Selling
Shareholder's estate (or of the estate of a family member of such Selling
Shareholder) (or their respective guardians, custodians or one or more trusts,
partnerships, corporations or similar entities principally for the benefit of
such spouse or children), provided however, that such transferee continues to
be bound by the terms of this Agreement in the event of any such transfer by a
Selling Shareholder to more than one person or entity, all of such persons or
entities shall collectively have right equal to the rights of such respective
Selling Shareholder under this Agreement.
ARTICLE VIII
MISCELLANEOUS
8.1 Notices. Any notice or other communication required or permitted
hereunder shall be sufficiently given if delivered personally or sent by
telecopy (receipt confirmed by telephone) or by registered or certified mail,
postage prepaid, addressed as follows:
If to Buyer:
Communications Instruments, Inc.
c/o Stonebridge Partners
Westchester Financial Center
50 Main Street
White Plains, New York 10606
Attention: Michael S. Bruno, Jr.
Telecopy No.: (914) 682-0834
Telephone No.: (914) 682-2285
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Richard C. Weisberg, Esq.
Telecopy No.: (212) 455-2502
Telephone No.: (212) 455-3240
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If to the Company or the Selling Shareholders:
Kilovac Corporation
P.O. Box 4422
Santa Barbara, California 93140
Attention: Douglas Campbell
Telecopy No.: (805) 684-1681
Telephone No.: (805) 684-4560,
(following closing, notices to the
Company shall also be sent to Buyer)
with a copy to:
Adams, Duque & Hazeltine
777 South Figueroa Street, 10th Floor
Los Angeles, California 90017
Attention: R. Stephen Doan, Esq.
Telecopy No.: (213) 896-5500
Telephone No.: (213) 620-1240
or such other person or address as shall be furnished in writing by any party
to the other parties prior to the giving of the applicable notice or
communication, and such notice or communication shall be deemed to have been
given ten (10) days after mailed, or in the case of personal delivery or
telecopy, upon receipt of transmission.
8.2 Financial Advisors and Brokers. Other than ING Capital, the Company and
the Selling Shareholders represent and warrant, jointly and severally, that no
investment banker, broker or finder is entitled to any financial advisory,
brokerage or finder's fee or other similar payment from the Company based on
agreements, arrangements or undertakings made by it or any of its respective
directors, officers or employees in connection with the transactions
contemplated hereby.
8.3 Counterparts. This Agreement shall be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.4 Disclosure Schedule. The Disclosure Schedule is an integral part of this
Agreement.
8.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement, and shall not be deemed to limit or
affect any of the provisions hereof.
8.6 Exhibits. The attached Exhibits are an integral part of this Agreement.
8.7 Miscellaneous. This Agreement (including the Schedules and Exhibits
hereto and the Disclosure Schedule) (a) constitutes (together with that
certain letter agreement, dated June 5, 1995, between Stonebridge Partners and
ING Capital (the "CONFIDENTIALITY AGREEMENT")) the entire Agreement and
understanding and supersedes all prior agreements and understandings, both
written and oral, among the parties hereto with respect to the subject matter
hereof, (b) is not intended to confer upon any other person any rights or
remedies hereunder, (c) shall not be assigned, by operation of law or
otherwise, and (d) shall be governed in all respects, including validity,
interpretation and effect, by the internal laws of the State of California. If
there is a conflict between the provisions of the Confidentiality Agreement
and this Agreement, the provisions of the Confidentiality Agreement shall
control.
8.8 Arbitration. Any party shall have the right to submit any dispute
arising out of this Agreement to neutral binding arbitration in the City of
Los Angeles with a partner of Price Waterhouse, L.L.P. In the event of
arbitration, the matter shall be heard before a single arbitrator and all
submissions shall be made in writing. Any party requesting arbitration shall
give notice to the other party stating the issue to be resolved. The decision
of the arbitrator shall be final and binding on both parties, with each party
or parties bearing its own costs and expenses with respect to the dispute.
Each party hereby consents to the entry of a judgment in any court of
competent jurisdiction enforcing any arbitration decision made in accordance
herewith.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written:
Communications Instruments, Inc.
/s/ Michael Bruno
Attest ______________________________ By___________________________________
Michael Bruno,
Its Director
Kilovac Corporation
/s/ Douglas Campbell
Attest ______________________________ By___________________________________
Douglas Campbell,
Its President
SELLING SHAREHOLDERS
/s/ Douglas L. Campbell
Witness _____________________________________
Douglas L. Campbell,
Trustee of the Kilovac Corporation
Employee Stock Bonus Plan
/s/ Douglas L. Campbell
Witness _____________________________________
Douglas L. Campbell,
as Trustee of the Campbell
Charitable Remainder Unitrust
Witness /s/ Milo Filip
_____________________________________
Milo Filip,
as Trustee of the Erin Campbell
Trust
Witness /s/ Douglas L. Campbell
_____________________________________
Douglas L. Campbell
Witness /s/ Ronald D. Klingensmith
_____________________________________
Ronald D. Klingensmith,
as Trustee of the Donald C.
Campbell Charitable Unitrust
Witness /s/ Pat McPherson
_____________________________________
Pat McPherson
/s/ Robert Helman
Witness _____________________________________
Robert Helman
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Witness /s/ Dan McAllister
_____________________________________
Dan McAllister
/s/ Rick Danchuk
Witness _____________________________________
Rick Danchuk
/s/ Harry Jabagchourian
Witness _____________________________________
Harry Jabagchourian
Witness /s/ John Stewart
_____________________________________
John Stewart
Witness /s/ Rick Steen
_____________________________________
Rick Steen
Witness /s/ Susan Reid
_____________________________________
Susan Reid
Witness /s/ Robin Hamilton
_____________________________________
Robin Hamilton
Witness /s/ Gary Clancy
_____________________________________
Gary Clancy
Witness /s/ Hugh Vos
_____________________________________
Hugh Vos
/s/ Norm Blankenship
Witness _____________________________________
Norm Blankenship
/s/ Carmen Rivera
Witness _____________________________________
Carmen Rivera
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<PAGE>
ATTACHMENTS TO STOCK SUBSCRIPTION AND PURCHASE AGREEMENT
<TABLE>
<S> <C> <C>
Disclosure Schedule Section 2.2
Schedule 1 Capitalization Section 2.2 (b)
Schedule 2 Continuing Share Examples Section 1.7.6
Schedule 3 All California Counties Section 7.1
Exhibit A Escrow Agreement Section 1.4
Exhibit B Paying Agent Agreement Section 1.4
Exhibit C Employment Agreement (Campbell) Section 4.1 (h)
Exhibit D Opinion of Counsel to Company Section 4.1 (i)
</TABLE>
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ANNEX 4
June 14, 1996
Kilovac Corporation
550 Linden Avenue
Carpinteria, CA 93013
Attn: Douglas Campbell
CII Technologies Inc.
c/o Stonebridge Partners
Westchester Financial Center
50 Main Street
White Plains, NY 10606
Attn: Michael S. Bruno, Jr.
Ladies and Gentlemen:
You have requested our opinion (the "Opinion"), as of the date hereof, as to
the fairness or otherwise, from a financial point of view, to the "Selling
Shareholders" of the consideration to be received by them for surrender of the
"Continuing Shares" in the "Exchange", as such terms are hereinafter defined.
Pursuant to a Stock Subscription and Purchase Agreement ("Agreement"), dated
September 20, 1995, by and among Communications Instruments, Inc., a North
Carolina corporation ("Buyer"), Kilovac Corporation, a California corporation
(the "Company"), and the shareholders and optionholders set forth in Schedule
1 thereto (the "Selling Shareholders"), the Buyer acquired an 80% interest in
the Company (the "Purchase Transaction"). The remaining 20% interest in the
Company (the "Continuing Shares") was retained by the Selling Shareholders.
The Agreement provides that in the event of an initial public offering of
the Buyer or one of its affiliates, the Selling Shareholders will receive
shares of the public entity in exchange for their Continuing Shares. CII
Technologies, Inc., a Delaware corporation ("CIIT"), and an affiliate of the
Buyer, is now contemplating an initial public offering of its common stock
(the "IPO"). Pursuant to the First Amendment to the Agreement (the
"Amendment", with the most recent draft dated as of March 1, 1996) the Selling
Shareholders will exchange their Continuing Shares for that amount of shares
of CIIT stock with a nominal value of $4,500,000 (the "Exchange Shares"), such
value based on the initial offering price of the shares of CIIT stock in the
IPO (the "Exchange"). Originally, the Agreement provided that in the event of
an initial public offering of the Buyer or one of its affiliates, the Selling
Shareholders would receive shares of the public entity in exchange for their
Continuing Shares and that the Continuing Shares would be valued through an
earnings calculation set forth in the Agreement.
Our Opinion is limited to a determination of the fairness or otherwise, of
the Exchange consideration and does not pass on the merits of the Exchange in
any other respect. The Opinion will not address, and with your consent has
assumed, the fairness of the substitution of the valuation method for the
Continuing Shares provided for in the Agreement for the valuation method
provided for in the Amendment. Additionally, the Opinion will not address the
appropriateness of the Selling Shareholders' rationale to accept the Exchange
or to execute and deliver the Amendment or the $4,500,000 IPO valuation.
We also have assumed with your consent that the factual circumstances and
terms, as they exist as of the date of our Opinion, will remain substantially
unchanged through the time the Exchange is consummated. We do not undertake to
update our Opinion for any changes occurring between the date of this Opinion
and the effective date of the Exchange.
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ING Capital Corporation is an investment banking firm and is engaged as part
of its business in the valuation of businesses and securities for corporate,
estate tax, and other purposes in connection with mergers and acquisitions,
private placements, and negotiated underwritings. We will receive a fee from
CIIT for our services in connection with this Opinion.
In arriving at our Opinion set forth below, we have among other things,
reviewed the following information and held the following meetings:
1. The Company's audited financial statements for fiscal years 1989,
1990, 1991, 1992, 1993, 1994, and the period ending October 11, 1995 as
prepared by Deloitte & Touche.
2. Audited financial statements for Communications Instruments, Inc. and
Subsidiaries, CII Technologies Inc. and Subsidiaries, and Communications
Instruments Holdings, Inc. for the years ended December 31, 1995 and 1994
and the period from May 11, 1993 to December 31, 1993.
3. Management's discussion and analysis of the Company's historical
results.
4. The Company's reporting period financial statements (the Company
historically operated on a 13-period fiscal year) for the 1994 and 1995
fiscal years and for the four periods ending April 28, 1996 (12-period
figures).
5. The Company's profit statements by product line for fiscal years 1991,
1992, 1993, 1994, and 1995.
6. Confidential Offering Memorandum prepared by Carleton, McCreary,
Holmes & Co. for the Hartman Electrical Manufacturing Division of Figgie
International Inc. ("Hartman", an affiliate-to-be of CIIT if the proposed
acquisition by CIIT of Hartman is consummated).
7. Hartman's unaudited financial statements for the fiscal years ended
December 31, 1991, 1992, 1993, 1994, and 1995.
8. The Company's financial projections for fiscal years 1996, 1997, 1998,
1999, and 2000.
9. The Company's assumptions for its 1996 and five year business plans.
10. The Stock Subscription and Purchase Agreement dated September 20,
1995, between Communications Instruments, Inc., Kilovac Corporation, and
the Shareholders.
11. March 1, 1996 draft of the First Amendment to Stock Subscription and
Purchase Agreement.
12. June 7, 1996 draft of Form S-1 for CII Technologies Inc.
13. Review of market research report, copyrighted 1994, prepared by Frost
& Sullivan, entitled "U.S. Relay Markets--Major Market Players Shift from
Conventional to Solid State Technology".
14. Met with certain members of the senior management of the Company,
CIIT, and Hartman, to discuss the operations, financial condition, future
prospects, and projected operations and performance of the respective
companies.
15. Statistical and financial comparisons were made with selected public
companies.
16. Review of publicly available data for transactions involving similar
companies.
Our engagement did not extend to independently verifying the accuracy and
completeness of any financial and other information publicly available or
furnished to or otherwise discussed with us, and we do not assume any
responsibility with respect to any of such information. We were provided with
financial forecasts and other information which, we are advised, reflects the
best currently available estimates and judgments of the
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management of the Company and CIIT as to the expected future financial and
operating performance of the Company and CIIT and we have not assumed any
obligation to assess whether such forecasts, estimates or judgments are
reasonable or independently verify the underlying assumptions. We have not
assumed any obligation to evaluate or appraise or to procure an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company and CIIT and we have not done so.
Our opinion is necessarily based upon financial, business, economic, stock
market, and other conditions and circumstances as they exist and can be
evaluated by us at the date of this letter, and we assume no obligation to
monitor future events relating to any of the matters addressed herein, or to
update this Opinion with respect thereto.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the Opinion that, as of the date hereof, the Exchange is fair, from a
financial point of view, to the Selling Shareholders.
This Opinion is for the exclusive individual use of the Company and CIIT.
Other than the Selling Shareholders, there are no third party beneficiaries to
the Opinion.
Sincerely,
ING Capital Corporation
3
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ANNEX 5
CHAPTER 13 OF THE CALIFORNIA GCL
(S) 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Section 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
(S) 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
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(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
(S) 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S) 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of this corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF ISSUES;
APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
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(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trail of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
2 --Agreement and Plan of Merger dated as of , 1996 among Kilovac,
CIIT, CII and Newco (included as Annex 1 to the Proxy
Statement/Prospectus)
3.1 --Restated Certificate of Incorporation (incorporated by reference to
the Registration Statement on Form S-1 (file No. 333-08397)).
3.2 --Bylaws (incorporated by reference to the Registration Statement on
Form S-1 (file No. 333-08397)).
4 --Form of Common Stock Certificate (incorporated by reference to the
Registration Statement on Form S-1 (file No. 333-08397)).
*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 (incorporated by reference to the
Registration Statement on Form S-1 (file No. 333-08397)).
10.2 --Subscription Agreements between the Company and Messrs. Dabbagh,
Steinback, Henning, Anderson, Jr., McGill, Boyce and McClinton
(incorporated by reference to the Registration Statement on Form S-1
(file No. 333-08397)).
10.3 --Registration Rights Agreement between the Company and CII Associates,
L.P. (incorporated by reference to the Registration Statement on Form
S-1 (file No. 333-08397))
10.5 --Employment Agreement with Ramzi Dabbagh (incorporated by reference to
the Registration Statement on Form S-1 (file No. 333-08397)).
10.6 --Employment Agreement with G. Daniel Taylor (incorporated by reference
to the Registration Statement on Form S-1 (file No. 333-08397)).
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.7 --Employment Agreement with Douglas Campbell (incorporated by
reference to the Registration Statement on Form S-1 (file No. 333-
08397)).
10.8 --Employment Agreement with Michael Steinback (incorporated by
reference to the Registration Statement on Form S-1 (file No. 333-
08397)).
10.9 --Employment Agreement with David Henning (incorporated by reference
to the Registration Statement on Form S-1 (file No. 333-08397)).
10.10 --Stock Subscription and Purchase Agreement dated as of September 20,
1995, as amended, by and among CII, Kilovac Corporation and the
stockholders and optionholders of Kilovac Corporation named therein
(included as Annex 3 to the Proxy/Statement Prospectus).
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
(incorporated by reference to the Registration Statement on Form S-1
(file No. 333-08397)).
10.12 --Asset Purchase Agreement dated as of June 27, 1996 between
Communications Instruments Inc. and Figgie International Inc.
(incorporated by reference to the Registration Statement on Form S-1
(file No. 333-08397)).
10.13 --Environmental Remediation and Escrow Agreement, dated as of July 2,
1996 (incorporated by reference to the Registration Statement on Form
S-1 (file No. 333-08397)).
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. (incorporated by reference to the
Registration Statement on Form S-1 (file No. 333-08397)).
10.15 --CII Technologies Inc. 1996 Management Stock Plan (incorporated by
reference to the Registration Statement on Form S-1 (file No. 333-
08397)).
10.16 --First Amendment to Stock Purchase and Subscription Agreement dated
as of , 1996 (included as Annex 2 to the Proxy
Statement/Prospectus).
11 --Statement re computation of pro forma per share earnings
(incorporated by reference to the Registration Statement on Form S-1
(file No. 333-08397)).
21 --Subsidiaries of Registrant (incorporated by reference to the
Registration Statement on Form S-1 (file No. 333-08397)).
23.1 --Consents of Deloitte & Touche LLP.
23.2 --Consent of Simpson Thacher & Bartlett (included in Exhibit 5).
23.3 --Consent of Internationale Nederlanden (U.S.) Capital Corporation.
24 --Powers of Attorney (included in the signature pages of this
registration statement).
27.1 --Financial Data Schedule (incorporated by reference to the
Registration Statement on Form S-1 (file No. 333-08397)).
99.1 --Opinion of Internationale Nederlanden (U.S.) Capital Corporation
(included as Annex 4 to the Proxy Statement/Prospectus).
99.2 --Form of Proxy of Kilovac Corporation.
</TABLE>
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* to be filed by amendment.
(b) Financial Statement Schedules:
I. Condensed Financial Information of Registrant.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
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<PAGE>
The registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 ((S) 230.415 of this chapter), will
be filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment 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.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CII Technologies Inc.
and subsidiaries on Form S-4 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
July 12, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CII Technologies Inc.
and subsidiaries on Form S-4 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
July 12, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CII Technologies Inc.
and subsidiaries on Form S-4 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
July 12, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF ING CAPITAL CORPORATION
August 7, 1996
We consent to the inclusion in the Form S-4 Registration Statement for CII
Technologies of our opinion letter dated June 14, 1996 on our consideration of
the fairness from a financial point of view of the exchange as described in
the Form S-4 Registration Statement.
ING Capital Corporation
/s/ Mark S. Vidergauz
By: _________________________________
Mark S. Vidergauz
Managing Director
<PAGE>
EXHIBIT 99.2
LOGO
KILOVAC CORPORATION PROXY
550 LINDEN AVENUE
CARPINTERIA, CALIFORNIA 93013
This proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Douglas C. Campbell, Ramzi Dabbagh and Richard
Danchuck, and each of them, as Proxies, each with full power of substitution,
and hereby authorizes each of them to represent and to vote as designated
below, all the common shares of Kilovac Corporation held of record by the
undersigned on July 31, 1996 at the Special Meeting of Shareholders to be held
on , 1996, or any adjournment thereof.
1. APPROVAL OF FIRST AMENDMENT TO STOCK PURCHASE AND SUBSCRIPTION AGREEMENT. A
VOTE IN FAVOR OF THE FIRST AMENDMENT BY THE BENEFICIARIES OF THE KILOVAC
CORPORATION EMPLOYEE STOCK BONUS PLAN IS A DIRECTION TO THE TRUSTEE OF SUCH
PLAN THAT SUCH BENEFICIARY IS IN FAVOR OF THE FIRST AMENDMENT. (check one)
FOR [_] AGAINST [_] ABSTAIN [_]
If you are a record holder of Kilovac shares voting in favor of the First
Amendment to Stock Purchase and Subscription Agreement, please also sign and
return the signature page of the First Amendment included with this Proxy.
2. MERGER OF KILOVAC WITH COMMUNICATIONS INSTRUMENTS INC. (check one)
FOR [_] AGAINST [_] ABSTAIN [_]
<PAGE>
This Proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this Proxy will be
voted in favor of the First Amendment and the Merger.
Please sign exactly as name appears
hereon. When shares are held by
joint tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If
a corporation, please sign in full
corporate name by president or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
DATED: , 1996
------------------------------------
Signature
------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
