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REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COMMUNICATIONS INSTRUMENTS, INC.
KILOVAC CORPORATION
KILOVAC INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NORTH CAROLINA 3625 56-182-82-70
CALIFORNIA 3670 95-228-58-08
CALIFORNIA 3625 95-322-33-47
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
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1396 CHARLOTTE HIGHWAY
FAIRVIEW, NC 28730
TELEPHONE: (704) 628-1711
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
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RAMZI A. DABBAGH
CHIEF EXECUTIVE OFFICER
COMMUNICATIONS INSTRUMENTS, INC.
1396 CHARLOTTE HIGHWAY
FAIRVIEW, NC 28730
TELEPHONE: (704) 628-1711
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
SANFORD E. PERL
KIRKLAND & ELLIS
200 EAST RANDOLPH DRIVE
CHICAGO, ILLINOIS 60601
TELEPHONE: (312) 861-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
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. [_]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
10% Senior Subordinated Notes due
2004, Series B.............. $95,000,000 $1,000 $95,000,000 $28,788
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Guarantees of 10% Senior
Subordinated Notes due 2004,
Series B........................ $95,000,000 (2) (2) None
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f).
(2) No further fee is payable pursuant to Rule 457(n).
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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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS
OCTOBER 17, 1997
COMMUNICATIONS INSTRUMENTS, INC.
OFFER TO EXCHANGE ITS 10% SENIOR SUBORDINATED NOTES DUE 2004, SERIES B
FOR ANY AND ALL OF ITS OUTSTANDING 10% SENIOR SUBORDINATED NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER
, 1997, UNLESS EXTENDED.
Communications Instruments, Inc. a North Carolina corporation (the "Company")
hereby offers (the "Exchange Offer"), upon the terms and conditions set forth
in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 10% Senior Subordinated Notes due 2004, Series B (the "Exchange Notes"),
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which this prospectus is a part, for
each $1,000 principal amount of its outstanding 10% Senior Subordinated Notes
due 2004 (the "Old Notes"), of which $95,000,000 principal amount is
outstanding. The form and terms of the Exchange Notes are the same as the form
and terms of the Old Notes except that (i) the Exchange Notes will bear a
Series B designation, (ii) the Exchange Notes will have been registered under
the Securities Act and, therefore, will not bear legends restricting the
transfer thereof and (iii) holders of the Exchange Notes will not be entitled
to certain rights of holders of Old Notes under the Registration Rights
Agreement (as defined). The Old Notes and the Exchange Notes are referred to
herein collectively as the "Notes." The Exchange Notes will evidence the same
debt as the Old Notes (which they replace) and will be issued under and be
entitled to the benefits of the Indenture dated as of September 18, 1997 (the
"Indenture") by and among the Company, the Guarantors (as defined) and Norwest
Bank Minnesota, National Association, as trustee, governing the Notes. See "The
Exchange Offer" and "Description of the Exchange Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on December , 1997,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
See "The Exchange Offer."
The Old Notes were sold by the Company on September 18, 1997 to BancAmerica
Securities, Inc. and Salomon Brothers Inc (the "Initial Purchasers") in a
transaction not registered under the Securities Act in reliance upon an
exemption under the Securities Act (the "Initial Offering"). The Initial
Purchasers subsequently placed the Old Notes with qualified institutional
buyers in reliance upon Rule 144A under the Securities Act. Accordingly, the
Old Notes may not be reoffered, resold or otherwise transferred in the United
States unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of the Company and the Guarantors under the Registration Rights
Agreement entered into by the Company, the Guarantors and the Initial
Purchasers in connection with the Initial Offering (the "Registration Rights
Agreement"). See "The Exchange Offer."
Interest on the Notes is payable semi-annually in arrears on March 15 and
September 15 of each year, commencing on March 15, 1998. The Notes will mature
on September 15, 2004, unless previously redeemed, and the Company will not be
required to make any mandatory redemption or sinking fund payment prior to
maturity. The Notes may be redeemed, in whole or in part, at any time on or
after September 15, 2001 at the option of the Company, at the redemption prices
set forth herein, plus, in each case, accrued and unpaid interest and premium,
if any, to the date of redemption. In addition, at any time prior to September
15, 2000, the Company may, at its option, redeem up to 33.3% in aggregate
principal amount of the Notes at a redemption price of 110.0% of the principal
amount thereof, plus accrued and unpaid interest to the date of redemption,
with the net cash proceeds of an Equity Offering (as defined), provided that
not less than $63.4 million aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption. See
"Description of the Exchange Notes--Optional Redemption."
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The Notes will be general unsecured obligations of the Company, subordinated
in right of payment to all present and future Senior Debt (as defined) of the
Company, including the Company's obligations under the Senior Credit Facility
(as defined). The Notes will be unconditionally guaranteed on a senior
subordinated basis (the "Guarantees") by the Company's existing Restricted
Domestic Subsidiaries (as defined) and each of the Company's future Restricted
Domestic Subsidiaries (collectively, the "Guarantors"). As of the Issue Date,
the Guarantors under the Indenture were Kilovac Corporation ("Kilovac") and
Kilovac International, Inc. ("Kilovac International"). The Guarantees will be
general unsecured obligations of the Guarantors, subordinated in right of
payment to all present and future Guarantor Senior Debt (as defined) of each
Guarantor. Claims in respect of the Notes will be effectively subordinated to
all liabilities (including trade payables) of any Subsidiary of the Company
that is not a Guarantor. As of June 30, 1997, after giving effect to the
Transactions, the Company would have had approximately $3.1 million of Senior
Debt (excluding unused commitments of approximately $21.9 million under the
Senior Credit Facility) and the Guarantors would have had approximately
$700,000 of Guarantor Senior Debt (excluding guarantees of Senior Debt). In
addition, Subsidiaries of the Company that are not Guarantors would have had
$126,000 of liabilities (including trade payables).
In the event of a Change of Control (as defined), each holder of the Notes
will have the right to require the Company to make an offer to purchase their
Notes, in whole or in part, at a price of 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, to the date of purchase. See
"Description of the Exchange Notes--Change of Control."
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DESCRIPTION OF CERTAIN RISKS
TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Based upon an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business and such holder
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. See "The Exchange Offer--Resale of the
Exchange Notes." Holders of Old Notes wishing to accept the Exchange Offer
must represent to the Company, as required by the Registration Rights
Agreement, that such conditions have been met. Each broker-dealer (a
"Participating Broker-Dealer") that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this Prospectus available to any
Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter
is being used in connection with the Exchange Offer. Holders of Old Notes not
tendered and accepted in the Exchange Offer will continue to hold such Old
Notes and will be
ii
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entitled to all the rights and benefits and will be subject to the limitations
applicable thereto under the Indenture and with respect to transfer under the
Securities Act. See "The Exchange Offer."
There has not previously been any public market for the Old Notes or the
Exchange Notes. The Company does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors--Absence of Established Public
Market." Moreover, to the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE GUARANTORS. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE
HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
UNTIL FEBRUARY , 1997 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM.
EXCEPT AS DESCRIBED UNDER "BOOK-ENTRY; DELIVERY AND FORM", THE COMPANY EXPECTS
THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE
REPRESENTED BY A GLOBAL NOTE (AS DEFINED), WHICH WILL BE DEPOSITED WITH, OR ON
BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC") AND REGISTERED IN ITS NAME OR
IN THE NAME OF CEDE & CO., ITS NOMINEE. BENEFICIAL INTERESTS IN THE GLOBAL
NOTE REPRESENTING THE EXCHANGE NOTES WILL BE SHOWN ON, AND TRANSFERS THEREOF
WILL BE EFFECTED THROUGH, RECORDS MAINTAINED BY DTC AND ITS PARTICIPANTS.
AFTER THE INITIAL ISSUANCE OF THE GLOBAL NOTE, NOTES IN CERTIFICATED FORM WILL
BE ISSUED IN EXCHANGE FOR THE GLOBAL NOTE ONLY UNDER LIMITED CIRCUMSTANCES AS
SET FORTH IN THE INDENTURE. SEE "BOOK-ENTRY; DELIVERY AND FORM."
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE CONTENTS
OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD
CONSULT ITS OWN COUNSEL, ACCOUNTANTS AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. NEITHER THE
COMPANY NOR ANY OF THE GUARANTORS IS MAKING ANY REPRESENTATION TO ANY
PROSPECTIVE INVESTOR IN THE EXCHANGE NOTES REGARDING THE LEGALITY OF AN
INVESTMENT THEREIN BY SUCH PERSON UNDER APPROPRIATE LEGAL INVESTMENT OR
SIMILAR LAWS.
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MARKET DATA USED THROUGHOUT THIS PROSPECTUS WAS OBTAINED THROUGH COMPANY
RESEARCH, SURVEYS OR STUDIES PURCHASED BY THE COMPANY AND CONDUCTED BY THIRD
PARTIES AND FROM INDUSTRY OR GENERAL PUBLICATIONS. THE COMPANY HAS NOT
INDEPENDENTLY VERIFIED MARKET DATA PROVIDED BY THIRD PARTIES OR INDUSTRY OR
GENERAL PUBLICATIONS. SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY
THE COMPANY TO BE RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "SUMMARY," "SELECTED CONSOLIDATED
FINANCIAL INFORMATION," "UNAUDITED PRO FORMA FINANCIAL INFORMATION,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS." ALL OF THESE FORWARD LOOKING STATEMENTS ARE BASED
ON ESTIMATES AND ASSUMPTIONS MADE BY MANAGEMENT OF THE COMPANY WHICH, ALTHOUGH
BELIEVED TO BE REASONABLE, ARE INHERENTLY UNCERTAIN. THEREFORE, UNDUE RELIANCE
SHOULD NOT BE PLACED UPON SUCH ESTIMATES AND STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF SUCH ESTIMATES OR STATEMENTS WILL BE REALIZED AND IT IS
LIKELY THAT ACTUAL RESULTS WILL DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY
SUCH FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES
INCLUDE: (1) INCREASED COMPETITION; (2) INCREASED COSTS; (3) LOSS OR
RETIREMENT OF KEY MEMBERS OF MANAGEMENT; (4) INCREASES IN THE COMPANY'S COST
OF BORROWINGS OR INABILITY OR UNAVAILABILITY OF ADDITIONAL DEBT OR EQUITY
CAPITAL; (5) ADVERSE STATE OR FEDERAL LEGISLATION OR REGULATION OR ADVERSE
DETERMINATIONS BY REGULATORS; AND (6) CHANGES IN GENERAL ECONOMIC CONDITIONS
IN THE MARKETS IN WHICH THE COMPANY MAY, FROM TIME TO TIME, COMPETE. MANY OF
SUCH FACTORS WILL BE BEYOND THE CONTROL OF THE COMPANY AND ITS MANAGEMENT. FOR
FURTHER INFORMATION OR OTHER FACTORS WHICH COULD AFFECT THE FINANCIAL RESULTS
OF THE COMPANY AND SUCH FORWARD LOOKING STATEMENTS, SEE "RISK FACTORS."
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass
all amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder, covering the Exchange Notes being offered
hereby. This Prospectus does not contain all the information set forth in the
Exchange Offer Registration Statement. For further information with respect to
the Company and the Exchange Offer, reference is made to the Exchange Offer
Registration Statement. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Exchange Offer Registration Statement, reference is
made to the exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Exchange Offer Registration Statement, including the
exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
iv
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In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission all
quarterly and annual financial information that would be required to be filed
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act or
any successor provision thereto. In addition, for so long as any of the Notes
remain outstanding and prior to the occurrence of certain events, the Company
has agreed to make available to any record holder, in connection with any sale
thereof, the information required by Rule 144A(d)(4) under the Securities Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT CHARGE
UPON REQUEST FROM DAVID HENNING, CHIEF FINANCIAL OFFICER OF COMMUNICATIONS
INSTRUMENTS, INC., 1396 CHARLOTTE HIGHWAY, FAIRVIEW, NC 28730. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
, 1997 (FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the Expiration Date shall be deemed to be incorporated
by reference herein and to be a part hereof from the date of the filing of
such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in any other subsequently filed document which also is incorporated
or deemed to be incorporated by reference herein) modifies or supersedes such
previous statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus and the Exchange Offer Registration Statement.
v
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SUMMARY
The following summary information is qualified in its entirety by the more
detailed information and Selected Consolidated Financial Data and consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. As used herein, "Company" or "CII" refers to Communications
Instruments, Inc. and its wholly owned subsidiaries, together with the
historical business and operations undertaken by CII. Except as otherwise set
forth herein, references to "pro forma" financial data of the Company are to
financial data of the Company which gives effect to the Transactions (as
defined). See "Summary--The Transactions," "Description of the Exchange Notes"
and "Description of the Senior Credit Facility."
THE COMPANY
CII is a leading designer, manufacturer, and marketer of a broad line of high
performance relays and solenoids. Relays, which are switches used to control
electric current in a circuit, and solenoids, which convert electric signals
into mechanical motion, are critical components for a wide range of commercial,
industrial and electronic products. The Company focuses on producing highly
engineered relays and solenoids for customized niche applications that demand
reliable performance, small size, light weight, low energy consumption, and
durability. The Company's products are used in a large number of diverse end-
use applications including commercial aircraft, defense electronics,
telecommunication equipment, satellites, medical products, and HVAC systems.
The worldwide market for relays and solenoids is estimated to be
approximately $5.0 billion. The Company estimates that the high performance and
other specialty niche markets that it serves represent approximately 20% of the
entire worldwide market. CII sells more than 750 types of relays and solenoids
to more than 2,100 customers in a broad range of industries with no single
customer accounting for more than 8% of the Company's 1996 net sales. The
Company's engineering and manufacturing capabilities, as well as its focused
sales and customer service, have enabled it to develop long term customer
relationships, in many instances as a sole source supplier, and establish
strong competitive positions in its served markets. The Company believes that
in 1996 at least 55% of its net sales was attributable to products for which
the Company was the sole source supplier.
CII's products are used by customers in a variety of end-use markets for a
wide range of applications. In the commercial aircraft market, CII's high
performance relays and solenoids are utilized in functions including the flight
control, navigation, radio communication, landing gear, and power distribution
systems of aircraft produced by companies such as Boeing, Airbus, Gulfstream,
Lear, Cessna, and British Aerospace. In the aerospace and defense market, CII's
products are utilized in applications such as satellites, radio communications
equipment, military electronic systems, missile guidance systems, global
positioning equipment, and defense aircraft produced by companies such as TRW,
Rockwell International, Lockheed Martin, Raytheon, and Allied Signal. In the
commercial and industrial market, CII's products are utilized in a wide range
of applications such as medical equipment, HVAC control systems, electric
vehicles, elevators, and appliances for customers such as Zoll Medical, Johnson
Controls, General Motors, Westinghouse, General Electric, and Amana. In the
telecommunication market, the Company's products are utilized in applications
such as central office switches, station switches, facsimile machines, and
modems by customers such as Lucent Technologies, Motorola, Alcatel, and Daewoo.
CII has expanded its product line, manufacturing capabilities, and customer
base through strategic acquisitions and internal growth. As a result, the
Company's net sales increased from $31.5 million in 1994 to $85.0 million for
the twelve months ended June 30, 1997. Over the same period, the Company's
EBITDA (as defined) increased from $4.4 million to $17.4 million and EBITDA
margins improved from 13.8% to 20.5%.
The Company believes it is well positioned to capitalize on current trends in
its principal markets. As a leading supplier of high performance relays and
solenoids to the commercial aircraft industry, the Company
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believes it will benefit from the anticipated increase in commercial aircraft
production. Additionally, the increased deployment of communication satellites,
the continued retrofitting of military equipment with advanced electronic
systems, and the ongoing expansion of the worldwide telecommunication
infrastructure are all anticipated to have a favorable impact on the Company.
In many of the Company's markets, major customers are consolidating their
supply base in order to develop long term strategic business relationships with
a limited number of full-service suppliers such as CII. Lastly, the increasing
technological complexity, electrical content, and miniaturization of products
manufactured by the Company's customers are expected to continue to result in
increased demand for the Company's high performance relays and solenoids which
provide advantages of small size, light weight, long life, low energy
consumption, and durability.
COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
Strong Market Position. The Company's reputation for quality and reliability
has allowed it to establish a strong market position in each of its principal
product lines. The Company believes it is a worldwide market leader in high
voltage, signal level and power relay products, which products accounted for
78.1% of the Company's 1996 net sales. The Company also believes it holds a
leading market position for products it manufactures that are designated on the
U.S. Department of Defense Qualified Parts List ("QPL").
Long Term Customer Relationships. The Company has long term relationships
with its principal customers in the commercial aircraft, defense, aerospace,
medical equipment, and telecommunication industries. The Company has been a
supplier to Boeing, Lucent Technologies, Motorola, Honeywell, Tellabs, and
others for more than 15 years. The Company's long term relationships with its
customers have resulted in collaborative research and development efforts that
have been integral to its new product development strategy and strong market
position.
Sole Source Relationships. Due to CII's superior customer service and ability
to provide full service design and manufacturing capabilities, the Company's
relays and solenoids are often specified into the design of its customers'
products. Once the Company's products have been specified into a customer's
design, CII is often designated the sole source supplier for the life of the
customer's product. In addition, CII benefits from replacement part sales
resulting from ongoing product maintenance and retrofitting. The Company
believes that in 1996 at least 55% of its net sales was attributable to
products for which the Company was the sole source supplier and that
approximately 20% of its 1996 net sales was from the sale of replacement parts.
Focus on Niche High Performance Markets. The Company produces relays and
solenoids targeted for high performance and specialty niche segments. The
Company believes that these products generally provide higher margins than
general purpose products, are less sensitive to pricing and less susceptible to
technical obsolescence. The increasing technological complexity, electrical
content and miniaturization of products manufactured by the Company's customers
have resulted in, and are expected to continue to generate, increased demand
for the Company's high performance relays and solenoids which provide the
advantages of small size, light weight, long life, low energy consumption, and
durability.
Long Product Lives; Low Technological Obsolescence. Many of the Company's
high performance relays and solenoids are utilized in products that have long
production cycles and extended product lives, including commercial and military
aircraft, locomotives and power generation equipment. Once incorporated into
the design of such products, the Company's relays and solenoids generally are
employed throughout the applicable product's life due, in part, to the time and
cost associated with the redesign and recertification of alternative products.
Additionally, the basic technology supporting a substantial portion of the
Company's products has been applied in products for over 50 years. Although the
size, weight, and functionality of relays and solenoids have evolved and will
continue to evolve, the underlying technology of relays and solenoids is
established and proven.
2
<PAGE>
Commitment to Quality, Flexible Manufacturing. The Company's manufacturing
processes have been designed to meet the stringent product quality and
inventory management requirements of its customers, including ISO 9000 for
various industrial markets, QS 9000 for the automotive market, D19000 for the
aircraft market, and military standards for markets served by QPL products. The
Company has established manufacturing facilities in Mexico, a joint venture in
India and supply relationships in China in order to enhance its global supply
capabilities and lower its production costs.
Broad Product Line, Diverse Customer Base. The Company currently markets and
assembles more than 750 types of high performance, general, and electronic
relays and solenoids and believes that it has one of the largest and most
diverse product portfolios of any manufacturer in its markets. The Company
sells to more than 2,100 customers worldwide in a number of growing industries
including commercial aircraft, defense electronics, telecommunication
equipment, satellite, medical equipment, environmental controls, and electric
vehicles.
STRATEGY
The Company's business objective is to strengthen its position as a leading
supplier of high performance relays and solenoids by: (i) employing its strong
relationships with existing customers to develop new products and applications;
(ii) developing new high performance relays and solenoids to capitalize on the
trend towards increasing technological complexity, electrical content, and
miniaturization in the products manufactured by the Company's customers; (iii)
pursuing strategic acquisitions that complement and expand the Company's
product lines, manufacturing capabilities, geographic markets, and customer
base; and (iv) increasing its international sales.
Enhance Customer Relationships. The Company has developed strong
relationships with the engineering and purchasing personnel of many of its
customers, allowing it to identify business opportunities and respond to
customer needs in the early stages of product design. The Company believes that
these relationships will continue to provide a competitive advantage in
marketing its broad range of products and in developing new product concepts
which complement its existing product lines.
Expand Product Offerings, Pursue New Market Opportunities. The Company seeks
to build on its strong market position in high performance relays and solenoids
and capitalize on the trend toward increasing electrical content in defense and
commercial aircraft, increasing technological complexity of satellites and
medical equipment, and the miniaturization of many types of equipment by
continuing to develop new high performance relays and solenoids which provide
the advantages of small size, light weight, low energy consumption, and
durability. The Company is developing new product applications in the
telecommunication, satellite, medical equipment, and automotive industries.
Pursue Strategic Acquisitions. The worldwide relay and solenoid market is
highly fragmented with more than 500 participants. CII believes that the
ongoing consolidation of the industry will provide attractive opportunities to
acquire high quality businesses and product lines. The Company has successfully
completed 13 acquisitions since its inception at purchase prices ranging from
approximately $300,000 to $14.4 million and averaging approximately $2.9
million. The Company has a demonstrated track record of increasing revenues and
improving profitability of its acquired operations. The Company seeks to make
acquisitions that: (i) provide additional product, manufacturing and technical
capabilities; (ii) broaden the Company's geographic coverage both domestically
and internationally; and (iii) add new customers and enable CII to further
penetrate its existing customer base.
Increase International Sales. Over the last few years, the Company has
expanded the size and geographic scope of its international sales and marketing
network and now has sales representatives and distributors in approximately 31
countries. As a result of the Company's larger distribution network and broad
product line, its international sales increased to 19% of net sales in 1996
from 15% in 1995. The Company expects its
3
<PAGE>
international sales to continue to increase as a percentage of net sales as its
existing relationships mature and as new relationships are established.
----------------
The principal executive offices of the Company are located at 1396 Charlotte
Highway, Fairview, North Carolina 28730, and the Company's telephone number is
(704) 628-1711. The principal executive offices of each Guarantor are c/o
Communications Instruments, Inc. at the same address and telephone number.
4
<PAGE>
THE TRANSACTIONS
Concurrent with the consummation of the Initial Offering (as defined) of the
Old Notes: (i) Code, Hennessy & Simmons III, L.P. ("Code, Hennessy & Simmons"),
certain members of management and certain other investors (collectively, the
"New Investors") acquired approximately 87% of the capital stock of CII
Technologies Inc., a Delaware corporation and the holder of all of the
outstanding capital stock of the Company ("Parent"), and certain of Parent's
existing stockholders (the "Existing Stockholders"), including certain members
of management, retained approximately 13% of Parent's capital stock
(collectively, the "Recapitalization"); (ii) the Company borrowed approximately
$2.7 million pursuant to a new senior secured credit facility providing for
revolving loans of up to $25.0 million as of the date of this Prospectus (the
"Senior Credit Facility"); (iii) the Company repaid approximately $29.3 million
of outstanding obligations under the Old Credit Facility (as defined) including
a success fee of approximately $1.5 million in connection therewith and certain
other liabilities (the "Refinancing"); (iv) the Company purchased for $4.5
million the remaining 20% of the outstanding capital stock of Kilovac
Corporation ("Kilovac") that the Company did not then own (the "Kilovac
Purchase"); and (v) the Company made a dividend of approximately $55.0 million
to Parent (the "Dividend"), which was used to consummate the Recapitalization
and repay certain indebtedness of Parent. Pursuant to the Recapitalization, the
New Investors, including Code, Hennessy & Simmons, and certain Existing
Stockholders, including members of senior management, invested approximately
$25.0 million (the "New Investment") through a cash investment of approximately
$21.7 million and the retention of capital stock of Parent which, for purposes
of the Recapitalization, is valued at approximately $3.3 million.
The Initial Offering, the Recapitalization, the Refinancing, the Kilovac
Purchase, the Dividend, and the initial borrowings under the Senior Credit
Facility are collectively referred to herein as the "Transactions." See "Use of
Proceeds" and "Description of the Senior Credit Facility."
5
<PAGE>
THE INITIAL OFFERING
Notes....................... The Old Notes were sold by the Company on
September 18, 1997 (the "Initial Offering") to
BancAmerica Securities, Inc. and Salomon Brothers
Inc (the "Initial Purchasers") pursuant to a
Purchase Agreement dated September 12, 1997 (the
"Purchase Agreement"). The Initial Purchasers
subsequently resold the Old Notes to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act.
Registration Rights Pursuant to the Purchase Agreement, the Company,
Agreement................... the Guarantors and the Initial Purchasers entered
into a Registration Rights Agreement dated as of
September 18, 1997 (the "Registration Rights
Agreement"), which grants the holder of the Old
Notes certain exchange and registration rights.
The Exchange Offer is intended to satisfy such
exchange and registration rights which terminate
upon the consummation of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered.......... $95,000,000 aggregate principal amount of 10%
Senior Subordinated Notes due 2004, Series B, of
the Company (the "Exchange Notes").
The Exchange Offer.......... $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of Old
Notes. As of the date hereof, $95,000,000
aggregate principal amount of Old Notes are
outstanding. The Company will issue the Exchange
Notes to holders on or promptly after the
Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by
any holder thereof (other than any such holder
which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act)
without compliance with the registration and
prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's
business and that such holder does not intend to
participate and has no arrangement or
understanding with any person to participate in
the distribution of such Exchange Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of market-
making activities or other trading activities may
be a statutory underwriter. Each Participating
Broker-Dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by
6
<PAGE>
delivering a prospectus, a Participating Broker-
Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resales of Exchange Notes
received in exchange for Old Notes where such Old
Notes were acquired by such Participating Broker-
Dealer as a result of market-making activities or
other trading activities. The Company has agreed
that, for a period of 180 days after the
Expiration Date, they will make this Prospectus
available to any Participating Broker-Dealer for
use in connection with any such resale. See "Plan
of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the
Exchange Notes could not rely on the position of
the staff of the Commission enunciated in no-
action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
resale transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not indemnified by
the Company.
Expiration Date............. 5:00 p.m., New York City time, on December ,
1997 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended.
Accrued Interest on the
Exchange Notes and the Old
Notes....................... Each Exchange Note will bear interest from its
issuance date. Holders of Old Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including,
the issuance date of the Exchange Notes. Such
interest will be paid with the first interest
payment on the Exchange Notes. Interest on the
Old Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions."
Procedures for Tendering Each holder of Old Notes wishing to accept the
Old Notes................... Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof (or, in the case of a book-
entry transfer, transmit an Agent's Message (as
defined) in lieu thereof), in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile (or Agent's
message), together with the Old Notes and any
other required documentation to the Exchange
Agent (as defined) at the address set forth
herein. By executing the Letter of Transmittal
7
<PAGE>
(or transmitting an Agent's Message), each holder
will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such Exchange Notes, whether or not
such person is the holder, that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes and that neither the holder nor any such
other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company.
See "The Exchange Offer--Purpose and Effect of
the Exchange Offer" and "--Procedures for
Tendering."
Untendered Old Notes........ Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have
any further exchange or registration rights and
such Old Notes will continue to be subject to
certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes
could be adversely affected.
Consequences of Failure to The Old Notes that are not exchanged pursuant to
Exchange.................... the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States
to a foreign person pursuant to the requirements
of Rule 904 under the Securities Act, or (iv)
pursuant to an effective registration statement
under the Securities Act. See "The Exchange
Offer--Consequences of Failure to Exchange."
Shelf Registration If any holder of the Old Notes (other than any
Statement................... such holder which is an "affiliate" of the
Company or a Guarantor within the meaning of Rule
405 under the Securities Act) is not eligible
under applicable securities laws to participate
in the Exchange Offer, and such holder has
satisfied certain conditions relating to the
provision of information to the Company for use
therein, the Company and the Guarantors have
agreed to register the Old Notes on a shelf
registration statement (the "Shelf Registration
Statement") and to use their best efforts to
cause it to be declared effective by the
Commission as promptly as practical on or after
the consummation of the Exchange Offer. The
Company and Guarantors have agreed to maintain
the effectiveness of the Shelf Registration
Statement for, under certain circumstances, a
maximum of two years, to cover resales of the Old
Notes held by any such holders.
Special Procedures for
Beneficial Owners........... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to
8
<PAGE>
tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time.
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures.................. Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes
(or comply with the procedures for book-entry
transfer), the Letter of Transmittal or any other
documents required by the Letter of Transmittal
to the Exchange Agent (or transmit an Agent's
message in lieu thereof) prior to the Expiration
Date must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
Acceptance of Old Notes and
Delivery of Exchange Notes.. The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer."
Use of Proceeds............. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange Offer.
Exchange Agent.............. Norwest Bank Minnesota, National Association.
THE EXCHANGE NOTES
General..................... The form and terms of the Exchange Notes are the
same as the form and terms of the Old Notes
(which they replace) except that (i) the Exchange
Notes bear a Series B designation, (ii) the
Exchange Notes have been registered under the
Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and
(iii) the holders of Exchange Notes will not be
entitled to certain rights under the Registration
Rights Agreement, including the provisions
providing for an increase in the interest rate on
the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights
will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer." The Exchange Notes
will evidence the same debt as the Old Notes and
will be entitled to the benefits of the
Indenture. See "Description of the Exchange
Notes." The Old Notes and the Exchange Notes are
referred to herein collectively as the "Notes."
9
<PAGE>
Issuer...................... Communications Instruments, Inc.
Securities Offered.......... $95 million aggregate principal amount of 10%
Senior Subordinated Notes due 2004, Series B.
Maturity.................... September 15, 2004.
Interest Payment Dates...... March 15 and September 15 of each year,
commencing on March 15, 1998.
Sinking Fund................ None.
Optional Redemption......... The Exchange Notes may be redeemed, in whole or
in part, at any time on or after September 15,
2001, at the option of the Company, at the
redemption prices set forth herein, plus, in each
case, accrued and unpaid interest to the date of
redemption. In addition, at any time prior to
September 15, 2000, the Company may, at its
option, redeem up to 33.3% in aggregate principal
amount of the Exchange Notes at a redemption
price of 110.0% of the principal amount thereof,
plus accrued and unpaid interest thereon to the
date of redemption, with the net cash proceeds of
an Equity Offering, provided that not less than
$63.4 million aggregate principal amount of the
Exchange Notes remains outstanding immediately
after the occurrence of such redemption.
Change of Control........... In the event of a Change of Control, each holder
of the Exchange Notes will have the right to
require the Company to make an offer to purchase
their Exchange Notes, in whole or in part, at a
price of 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest to the
date of purchase.
Guarantees.................. The Exchange Notes will be unconditionally
guaranteed on a senior subordinated basis (the
"Guarantees") by the Company's existing
Restricted Domestic Subsidiaries and each of the
Company's future Restricted Domestic Subsidiaries
(collectively, the "Guarantors"). The Guarantees
will be general unsecured obligations of the
Guarantors, subordinated in right of payment to
all present and future Guarantor Senior Debt of
each Guarantor.
Subordination............... The Exchange Notes will be general unsecured
obligations of the Company, subordinated in right
of payment to all current and future Senior Debt
of the Company, including the Company's
obligations under the Senior Credit Facility, and
are effectively subordinated to all indebtedness
and other obligations of the Subsidiaries. Claims
in respect of the Exchange Notes will be
effectively subordinated to all liabilities
(including trade payables) of any Subsidiary of
the Company that is not a Guarantor. As of June
30, 1997, after giving effect to the
Transactions, the Company would have had
approximately $3.1 million of Senior Debt
(excluding unused commitments of approximately
$21.9 million under the Senior Credit Facility)
and the Guarantors would have had approximately
10
<PAGE>
$700,000 of Guarantor Senior Debt (excluding
guarantees of Senior Debt). In addition,
Subsidiaries of the Company that are not
Guarantors would have had $126,000 of liabilities
(including trade payables).
Certain Covenants........... The Indenture pursuant to which the Exchange
Notes will be issued (the "Indenture") among
other things, limits the ability of the Company
and its Subsidiaries other than Unrestricted
Subsidiaries (as defined) to: incur additional
indebtedness; issue Disqualified Stock (as
defined); make certain restricted payments; grant
liens on assets; merge, consolidate or transfer
substantially all of their assets; enter into
transactions with Related Persons (as defined);
make certain payments affecting Restricted
Subsidiaries; enter into certain guarantees; sell
assets; and issue capital stock of Subsidiaries.
Use of Proceeds............. The Company used the net proceeds from the
Initial Offering to effect the Transactions and
to pay the related fees and expenses. See "Use of
Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered before tendering Old Notes in exchange for Exchange Notes. These
risk factors are generally applicable to the Old Notes as well as the Exchange
Notes.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following information is qualified in its entirety by the consolidated
financial statements of the Company. The following summary consolidated
financial data as of the dates and for the periods indicated were derived from
the audited and unaudited consolidated financial statements of the Company
contained elsewhere in this Prospectus. The unaudited consolidated financial
data at June 30, 1997 and for the six months ended June 30, 1996 and June 30,
1997 include all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation of results for
these unaudited periods. The results of operations for the six months ended
June 30, 1997 are not necessarily indicative of the results of operations that
may be expected for the full fiscal year 1997. None of the pro forma
consolidated financial data set forth below (including the summary unaudited
pro forma consolidated balance sheet data) purport to be indicative of the
results that actually would have been obtained had all of the events been
completed as of the assumed date and for the periods presented and are not
intended to be a projection of the Company's future results or financial
position. The following summary consolidated financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and the related notes thereto, and the unaudited pro forma
condensed consolidated statement of operations and the related notes thereto.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
FISCAL YEAR ENDED AS ADJUSTED SIX MONTHS ENDED SIX MONTHS
DECEMBER 31, YEAR ENDED JUNE 30, ENDED
------------------------- DECEMBER 31, ------------------ JUNE 30,
1994 1995 1996 1996 (1) 1996 1997 1997 (1)
------- ------- ------- ------------ -------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $31,523 $39,918 $66,336 $77,161 $ 27,399 $ 46,079 $46,079
Cost of sales........... 24,330 28,687 46,779 54,882 19,018 30,589 30,599
------- ------- ------- ------- -------- -------- -------
Gross profit........... 7,193 11,231 19,557 22,279 8,381 15,490 15,480
Selling expenses........ 2,382 3,229 4,903 5,059 2,319 3,052 3,052
General and
administrative
expenses............... 2,248 3,326 5,464 6,040 2,369 4,095 4,060
Research and
development............ 103 301 1,011 1,011 461 498 498
Amortization of goodwill
and other intangible
assets................. 177 251 543 748 246 311 386
Non-recurring charges
(2).................... -- 4,315 -- -- -- -- --
------- ------- ------- ------- -------- -------- -------
Income (loss) from
operations............. 2,283 (191) 7,636 9,421 2,986 7,534 7,484
Interest expense, net
(3).................... (1,279) (2,309) (5,055) (12,805) (1,407) (1,826) 5,241
Other income, net....... -- 2 201 186 201 1 1
------- ------- ------- ------- -------- -------- -------
Income (loss) before
income taxes and
minority interest in
subsidiary............ 1,004 (2,498) 2,782 (3,198) 1,780 5,709 2,244
Provision for (benefit
from) income taxes..... 386 (812) 1,120 (1,225) 712 2,275 914
------- ------- ------- ------- -------- -------- -------
Income (loss) after
income taxes before
minority interest in
subsidiary............. 618 (1,686) 1,662 (1,973) 1,068 3,434 1,330
Income applicable to
minority interest in
subsidiary............. -- 35 33 -- 51 55 --
------- ------- ------- ------- -------- -------- -------
Net income (loss)....... $ 618 $(1,721) $ 1,629 $(1,973) $ 1,017 $ 3,379 $ 1,330
======= ======= ======= ======= ======== ======== =======
OTHER FINANCIAL DATA:
Gross margin %.......... 22.8% 28.1% 29.5% 28.9% 30.6% 33.6% 33.6%
EBITDA (4).............. $ 4,351 $ 6,618 $11,873 $14,059 $ 4,431 $ 9,997 $10,034
EBITDA margin %......... 13.8% 16.6% 17.9% 18.2% 16.2% 21.7% 21.8%
Depreciation and
amortization........... $ 2,158 $ 2,442 $ 3,551 $ 3,987 $ 1,553 $ 2,062 $ 2,149
Capital expenditures.... $ 444 $ 1,139 $ 2,449 $ 2,512 $ 925 $ 938 $ 938
NET CASH PROVIDED BY
(USED IN)
Operating Activities... $ 1,333 $ 1,960 $ 8,498 $ 1,383 $ 4,086
Financing Activities... 256 13,645 5,973 (808) (3,140)
Investing Activities... (1,544) (15,484) (14,548) (618) (938)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
PRO FORMA (1)
ACTUAL AS ADJUSTED
------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $ 124 $ 124
Working capital........................................... 13,357 19,280
Property, plant and equipment, net........................ 15,121 15,290
Total assets.............................................. 60,126 68,375
Total debt................................................ 28,784 98,104
Stockholders' equity (deficit)............................ 13,822 (45,035)
</TABLE>
- - - ---------
(1) Gives effect to Hartman Acquisition (as defined) and the Transactions, as
if such events had occurred on January 1, 1996.
(2) Reflects (a) a special compensation charge of $1.3 million which represents
(i) the difference between the purchase price of common stock of Parent
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, (b) 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 Company's Fairview, North Carolina facility and (c) special
acquisition expenses in 1995 include costs primarily related to (i) the
relocation of certain assets acquired in the HiG Acquisition (as defined)
and the Deutsch Acquisition (as defined) and (ii) the write-off of an
agreement with a business development consultant. See "Business--
Environmental Matters" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Interest expense in 1996 includes a charge of $1.6 million related to costs
associated with the preparation of a withdrawn initial public offering of
Parent's capital stock.
(4) EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization, gain on disposal of assets,
extraordinary, unusual and nonrecurring items, non-recurring charges
referred to in footnote 2 above, the provision for loss in April, 1997 for
receivables relating primarily to a single customer, and the non-cash
write-ups and non-cash charges resulting from the write-up of inventory and
fixed assets arising in connection with the Kilovac Acquisition (as
defined) and the Hartman Acquisition pursuant to Accounting Principles
Board Opinion Nos. 16 and 17. EBITDA is not intended to represent cash flow
from operations or net income as defined by generally accepted accounting
principles and should not be considered as a measure of liquidity or an
alternative to, or more meaningful than, operating income or operating cash
flow as an indication of the Company's operating performance. EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring the Company's ability to service its debt.
13
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus before tendering the Old Notes
in exchange for the Exchange Notes. In connection with the forward-looking
statements which appear in this Prospectus, prospective purchasers of the
Exchange Notes should carefully review the factors discussed below and the
Cautionary Statements referred to in "Disclosure Regarding Forward-Looking
Statements." The risk factors set forth below are generally applicable to the
Old Notes as well as the Exchange Notes.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
After consummation of the Transactions, the Company is highly leveraged and
has negative stockholders' equity. As a result of the Transactions, including
the Initial Offering and the Company's payment of a substantial portion of the
net proceeds therefrom as a dividend to Parent, the Company's aggregate
indebtedness for borrowed money and interest expense increased and its
stockholders' equity decreased. On a pro forma basis, after giving effect to
the Transactions, the Company would have had total Debt (as defined) of $98.1
million and stockholders' deficit of approximately $45.0 million as of June
30, 1997. In addition, subject to the restrictions in the Senior Credit
Facility and the Indenture, the Company may incur additional Debt from time to
time to finance working capital, capital expenditures, acquisitions, or for
other purposes.
The Indenture governing the Notes as well as the Senior Credit Facility (or
any replacement facilities) of the Company or any subsidiary of the Company
contain certain restrictive financial and other covenants. Such leverage and
restrictions have important consequences to the holders of the Notes,
including the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions or other purposes may be limited or impaired; (ii) the Company's
operating flexibility with respect to certain matters is limited by covenants
contained in the Indenture and the Senior Credit Facility which will limit the
ability of the Company and certain of its Subsidiaries to incur additional
indebtedness, grant or create liens upon assets, pay dividends, redeem capital
stock or prepay certain subordinated indebtedness and enter into sale and
leaseback transactions or other loans, investments or guarantees; and (iii)
the Company's degree of leverage may make it more vulnerable to economic
downturns, may reduce its flexibility in responding to changing business and
economic conditions and may limit its ability to pursue other business
opportunities, to finance its future operations or capital needs, and to
implement its business strategy. See "Business--Strategy."
Required payments of principal and interest on the Company's long-term debt
are expected to be financed from cash flow from operations and debt
financings. The Company's ability to generate cash for the repayment of debt
will be dependent upon the future performance of the Company's businesses,
which will in turn be subject to financial, business, economic, and other
factors affecting the business and operations of the Company, including
factors beyond its control, such as prevailing economic conditions. There can
be no assurance that cash flow from operations will be sufficient to enable
the Company to service its debt and meet its other obligations.
SUBORDINATION OF THE NOTES AND THE GUARANTEES
The Notes and the Guarantees are subordinated in right of payment to all
Senior Debt of the Company and Guarantor Senior Debt of the Guarantors,
respectively, including the Company's obligations under the Senior Credit
Facility. In the event of bankruptcy, liquidation or reorganization of the
Company or the Guarantors, the assets of the Company or the Guarantors will be
available to pay obligations on the Notes only after all Senior Debt or
Guarantor Senior Debt, as the case may be, has been paid in full, and there
may not be sufficient assets remaining to pay amounts due on any or all of the
Notes then outstanding. In addition, indebtedness outstanding under the Senior
Credit Facility will be secured by substantially all of the assets of the
Company and its Subsidiaries. Claims in respect of the Notes will be
effectively subordinated to all liabilities (including trade payables) of any
Subsidiary of the Company that is not a Guarantor. As of June 30, 1997, on a
pro forma basis after giving effect to the Transactions, the Company would
have had approximately $3.1 million of Senior Debt (excluding unused
commitments of approximately $21.9 million under the Senior Credit Facility)
and the
14
<PAGE>
Guarantors would have had approximately $700,000 of Guarantor Senior Debt
(excluding guarantees of Senior Debt). In addition, Subsidiaries of the
Company that are not Guarantors would have had $126,000 of liabilities
(including trade payables). Additional Senior Debt and Guarantor Senior Debt
may be incurred by the Company and the Guarantors from time to time subject to
certain restrictions contained in the Senior Credit Facility and the
Indenture. See "Description of the Senior Credit Facility" and "Description of
the Exchange Notes."
CHANGE OF CONTROL
A Change of Control (as defined) could require the Company to refinance
substantial amounts of indebtedness, including indebtedness under the Notes
and the Senior Credit Facility. Upon the occurrence of a Change of Control,
the holders of the Notes would be entitled to require the Company to
repurchase the Notes at a purchase price equal to 101% of the principal amount
of such Notes, plus accrued and unpaid interest, if any, to the date of
purchase. Such right is subordinated to the rights of the holders of Senior
Debt. These requirements and the subordination of the Notes will limit the
ability of the Company to repurchase the Notes. The source of funds for any
such repurchase would be the Company's available cash or cash generated from
operating or other sources, including borrowings, sales of equity or funds
provided by a new controlling person. However, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to
make any required purchases of the Notes tendered. In addition, the Senior
Credit Facility prohibits the repayment of indebtedness on the Notes by the
Company in such an event, unless and until such time as the indebtedness under
the Senior Credit Facility is repaid in full. The Company's failure to make
such repayments in such instances would result in a default under both the
Notes and the Senior Credit Facility. Future indebtedness of the Company may
also contain restrictions or repayment requirements with respect to certain
events or transactions that would constitute a Change of Control. In the event
of a Change of Control, there can be no assurance that the Company would have
sufficient assets to satisfy all of its obligations under the Notes or the
Senior Credit Facility. The effect of such requirements may make it more
difficult or delay attempts by others to obtain control of the Company. See
"Description of the Exchange Notes--Change in Control" and "Description of the
Senior Credit Facility."
EXPANSION THROUGH ACQUISITIONS
The Company intends to 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 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. In
carrying out its acquisition strategy, the Company attempts to minimize the
risk of unexpected liabilities and contingencies associated with acquired
businesses through planning, investigation, and negotiation, but such
liabilities and contingencies may nevertheless arise in a manner that could
materially and adversely affect the Company. While the Company regularly
evaluates potential acquisition candidates in the ordinary course of its
business, as of the date of this Offering Memorandum there are no binding
commitments or agreements with respect to any acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--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
15
<PAGE>
businesses and, if the acquired company has significant losses when purchased,
may materially and adversely impact 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 materially and adversely affect the Company's results of operations. The
failure to effectively integrate acquired businesses with the Company's
operations could materially and adversely affect the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Strategy," and "--Sales and Distribution."
RISKS RELATING TO DEFENSE RELATED BUSINESS
In 1996, approximately 22.0% of the Company's net sales was derived from
products used in equipment supplied, directly or indirectly, to the U.S.
military. Although the Company does not believe that its defense related
business is materially dependent upon any single program or supply contract,
this business is nevertheless subject to the risks generally applicable to the
U.S. defense industry. Those risks include political uncertainties impacting
U.S. military budget processes, changes in government policies and
requirements that may reflect rapidly changing military and political
developments, and significant program delays and cancellations. A significant
decline in U.S. military expenditures could have a material adverse effect on
the Company's operations.
During 1996, approximately $14.4 million (21.7%) of the Company's net sales
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. Upon the occurrence of
such failures, the Company interrupts the production and shipment of the
products involved. The Company does not resume production and shipment until a
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 failure occurs in the future which cannot be resolved
quickly or if a proposed corrective action is not acceptable to the applicable
governmental authority, production and shipping delays could be extended and
the operations of the Company could be materially and adversely affected.
INTERNATIONAL OPERATIONS AND FOREIGN INSTABILITY
In 1996, approximately 14.7% of the Company's net sales was attributable to
products manufactured outside of the United States, consisting primarily of
the operations of the Company's Juarez, Mexico facility and the operations of
several Asian-based subcontractors (including the Indian Joint Venture (as
defined)). Foreign manufacturing is subject to various risks, including
exposure to currency fluctuations, political, religious and economic
instability, the imposition of foreign tariffs and other trade barriers, and
changes in governmental policies. While the Company historically has not
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. Further, in certain of the locations of the
Company's foreign operations, 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.
A portion of the Company's net sales and cost of 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 1996, the devaluation of the Mexican
peso relative to the U.S. dollar had a favorable impact on the Company's
results of operations. In the future, an increase in the value of the peso
relative to the U.S. dollar may have a material 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.
16
<PAGE>
DEPENDENCE ON INDEPENDENT SALES REPRESENTATIVES AND DISTRIBUTORS
In 1996, approximately 77% of the Company's net sales was through
commissioned sales representatives who sell to both end users and
distributors. The Company's distributors are not subject to minimum purchase
requirements and certain of these distributors sell competing products. The
sales representatives and distributors can discontinue marketing the Company's
products with minimal notice. The loss of, or a significant reduction in sales
volume through, one or more of the Company's independent sales representatives
or distributors could have a material adverse effect on the Company's
operating results. See "Business--Sales and Distribution."
DEPENDENCE ON SENIOR MANAGEMENT
The Company's future performance will depend, in part, upon the efforts and
abilities of the Company's senior management employees. The loss of service of
one or more of these persons could have a material adverse effect on the
Company's business and development. The success of certain recent and future
acquisitions by the Company also may depend, in part, on the Company's ability
to retain key management of the acquired businesses. See "Management-
Employment Agreements."
COMPETITION
The markets in which the Company operates are highly competitive. Several of
the Company's competitors have greater financial, marketing, manufacturing,
and distribution resources than those of the Company. There can be no
assurance that the Company will be able to compete successfully in the future
against its existing competitors or that the Company will not experience
increased price competition, which could materially and adversely affect the
Company's results of operations. The Company also faces competition for
acquisition opportunities from its 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. Approximately 42.2% of the Company's net sales in 1996
was attributable to the Company's products which are qualified and listed on
the U.S. Department of Defense QPL and Federal Aviation Administration product
qualifications list. Obtaining and maintaining these qualifications is
contingent upon successful completion of rigorous facility review and product
testing on a regular basis and at significant cost. The elimination of such
qualification requirements by the military, the Federal Aviation Agency or
certain commercial customers would lower the barriers to entry and enable
additional relay manufacturers to sell products to such customers. See
"Business--Competition."
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 these 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
17
<PAGE>
products or technologies infringe the proprietary rights of such third
parties. There can be no assurance that the Company is not infringing the
proprietary rights of any third party. In addition, there can be no assurance
that, if the Company is so infringing the property rights of any third party,
a license to such rights would be available on commercially reasonable terms,
if at all. In the event of any such infringement, the Company's results of
operations could be materially and adversely affected. See "Business--
Proprietary Rights."
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 also
may 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
leases certain manufacturing facilities, may contain contamination at levels
that will require further investigation and may require soil and/or
groundwater remediation. At each of these locations the Company could become
subject to liability that, except under certain circumstances, is joint and
several for the total cost of investigating and remediating the site. Such
liability, or liability at locations yet to be identified, could under certain
circumstances materially and adversely affect the Company. See "Business--
Environmental Matters."
CONTROL BY PRINCIPAL STOCKHOLDER
After completion of the Recapitalization, Code, Hennessy & Simmons owns in
the aggregate approximately 74% of the outstanding voting stock of Parent,
which in turn owns all of the issued and outstanding capital stock of the
Company. Consequently, Code, Hennessy & Simmons, through its voting stock
holdings in Parent and its ability to designate all of the members of the
boards of directors of Parent and of the Company, may exercise significant
influence over the policies and direction of the Company. Code, Hennessy &
Simmons' interests may differ from the interests of the holders of the Notes.
See "Management--Executive Officers and Directors" and "Certain Relationships
and Related Transactions."
CERTAIN INSOLVENCY CONSIDERATIONS
The incurrence by the Company and the Guarantors of indebtedness such as the
Notes and the Guarantees to finance the Transactions may be subject to review
under relevant state and federal fraudulent conveyance laws if a bankruptcy
case or lawsuit is commenced by or on behalf of unpaid creditors of the
Company or the Guarantors. Under these laws, if a court were to find that,
after giving effect to the sale of the Old Notes, or the exchange of Old Notes
for Exchange Notes, and the application of the net proceeds therefrom, either
(a) the Company or the Guarantors incurred such indebtedness with the intent
of hindering, delaying or defrauding creditors or (b) the Company or the
Guarantors received less than reasonably equivalent value or consideration for
incurring such indebtedness and (i) was insolvent or was rendered insolvent by
reason of such transactions,
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<PAGE>
(ii) was engaged in a business or transaction for which the assets remaining
with the Company or the Guarantors constituted unreasonably small capital or
(iii) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court may subordinate such
indebtedness to presently existing and future indebtedness or obligations of
the Company or the Guarantors, as the case may be, avoid the issuance of such
indebtedness and direct the repayment of any amounts paid thereunder to the
Company's or the Guarantors', as the case may be, creditors or take other
action detrimental to the holders of such indebtedness.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and mature.
There can be no assurance as to what standard a court would apply in order
to determine solvency. A court may find that the Company or the Guarantors, as
the case may be, did not receive fair consideration or reasonably equivalent
value for the incurrence of the indebtedness represented by the Old Notes. In
addition, if a court were to find that any of the components of the
Transactions constituted a fraudulent transfer, a court may find that the
Company or the Guarantors, as the case may be, did not receive fair
consideration or reasonably equivalent value for the incurrence of the
indebtedness represented by the Old Notes and the Exchange Notes or the
Guarantees, as the case may be. Pursuant to the terms of the Guarantees, the
liability of each Guarantor is limited to the maximum amount of indebtedness
permitted, at the time of the grant of such Guarantee, to be incurred in
compliance with fraudulent conveyance or similar laws.
Each of the Company and the Guarantors believes that it received equivalent
value at the time the indebtedness under the Old Notes and the Guarantees was
incurred. In addition, neither the Company nor any of the Guarantors believes
that it, after giving effect to the Transactions, (i) was or will be insolvent
or rendered insolvent, (ii) was or will be engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital or (iii) intends or intended to incur, or believes or believed that it
will or would incur, debts beyond its ability to pay such debts as they
mature. These beliefs are based on the Company's operating history and
analysis of internal cash flow projections and estimated values of assets and
liabilities of the Company and the Guarantors at the time of the Initial
Offering. There can be no assurance, however, that a court passing on these
issues would make the same determination.
ABSENCE OF ESTABLISHED PUBLIC MARKET
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Prior to the Exchange
Offer, there has not been any public market for the Old Notes. The Old Notes
have not been registered under the Securities Act and will be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange Notes by holders who are entitled to participate in this Exchange
Offer. The market for Old Notes not tendered for exchange in the Exchange
Offer is likely to be more limited than the existing market for such notes.
The holders of Old Notes (other than any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) who are
not eligible to participate in the Exchange Offer are entitled to certain
registration rights, and the Company is required to file a Shelf Registration
Statement with respect to such Old Notes. The Exchange Notes will constitute a
new issue of securities with no established trading market. The Company does
not intend to list the Exchange Notes on any national securities exchange or
seek the admission thereof to trading in the National Association of
Securities Dealers Automated Quotation System. The Initial Purchasers have
advised the Company that they currently intend to make a market in the
Exchange Notes, but are not obligated to do so and may discontinue such market
making at any time. In addition, such market making activity will be subject
to the limits imposed by the Securities Act and the Exchange Act and may be
limited during the Exchange Offer and the pendency of the Shelf Registration
Statement. Accordingly, no assurance can be given that an active public or
other market will
19
<PAGE>
develop for the Exchange Notes or as to the liquidity of the trading market
for the Exchange Notes. If a trading market does not develop or is not
maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may be discontinued at any
time.
If a public trading market develops for the Exchange Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from
their principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal (or
Agent's Message) and all other required documents. Therefore, holders of the
Old Notes desiring to tender such Old Notes in exchange for Exchange Notes
should allow sufficient time to ensure timely delivery. The Company is under
no duty to give notification of defects or irregularities with respect to the
tenders of Old Notes for exchange. Old Notes that are not tendered or are
tendered but not accepted will, following the consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof and, upon consummation of the Exchange Offer, certain registration
rights under the Registration Rights Agreement will terminate. In addition,
any holder of Old Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities, and if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. See "Plan
of Distribution." To the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected. See "The Exchange Offer."
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this
Prospectus, including those regarding the Company's financial position,
business strategy, projected costs, and plans and objectives of management for
future operations, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, there can be no assurance that such expectations will prove to
have been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed herein under "Risk Factors" and elsewhere in this Prospectus
including, without limitation, in conjunction with the forward-looking
statements included in this Prospectus. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
behalf of the Company are expressly qualified in their entirety by the
Cautionary Statements.
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<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights
Agreement. The Company will not receive any cash proceeds from the issuance of
the Exchange Notes offered hereby. In consideration for issuing the Exchange
Notes contemplated in this Prospectus, the Company will receive Old Notes in
like principal amount, the form and terms of which are the same as the forms
and terms of the Exchange Notes (which replace the Old Notes), except as
otherwise described herein. The Old Notes surrendered in exchange for Exchange
Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase or decrease in
the indebtedness of the Company. As such, no effect has been given to the
Exchange Offer in the pro forma statements or capitalization tables.
The net proceeds to the Company from the sale of the Old Notes in the
Initial Offering (after deducting discounts and estimated fees and expenses)
were utilized by the Company to consummate the Transactions. See "Summary--The
Transactions" and "Description of the Senior Credit Facility."
CAPITALIZATION
The following table sets forth the unaudited historical consolidated
capitalization of the Company as of June 30, 1997 and as adjusted on a pro
forma basis to give effect to the Transactions as if they had occurred on June
30, 1997. See "Use of Proceeds." This table should be read in conjunction with
the "Selected Consolidated Financial Data" and the related notes thereto, and
the Company's consolidated financial statements, including the related notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Old Credit Facility......................................... $28,761 $ --
Senior Credit Facility (1).................................. -- 3,081
Notes offered in Initial Offering........................... -- 95,000
------- -------
Total long-term debt...................................... 28,761 98,081
------- -------
Stockholders' equity (deficit) (2)............................ 13,822 (45,035)
------- -------
Total capitalization...................................... $42,583 $53,046
======= =======
</TABLE>
- - - ---------
(1) The Senior Credit Facility provides for revolving loans up to $25.0
million, subject to certain borrowing conditions. See "Description of the
Senior Credit Facility."
(2) Reflects the (i) payment of the Dividend, (ii) payment of the unaccrued
portion of the success fee payable in connection with the Refinancing, net
of taxes, (iii) non-cash write-off of approximately $725,000 for
unamortized financing fees and debt issuance costs associated with the Old
Credit Facility as a result of the Refinancing, and (iv) the payment of
the unaccrued portion of financing costs associated with the Transactions.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following information is qualified in its entirety by the consolidated
financial statements of the Company. The following selected consolidated
financial data as of the dates and for the periods indicated were derived from
the audited and unaudited consolidated financial statements of the Company
contained elsewhere in this Prospectus, except data as of, and for, (i) the
nine months ended December 31, 1992, (ii) the period from January 1, 1993 to
May 10, 1993, (iii) the period from May 11, 1993 to December 31, 1993, and
(iv) data as of December 31, 1994, which was derived from audited and
unaudited consolidated financial statements of the Company (including its
predecessors) not included in this Prospectus. The unaudited consolidated
financial statements for the six months ended June 30, 1996 and June 30, 1997
include all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation of results for
these unaudited periods. The results of operations for the six months ended
June 30, 1997 are not necessarily indicative of the results of operations that
may be expected for the full fiscal year 1997. The selected unaudited pro
forma consolidated financial data for the year ended December 31, 1996 include
the historical results of the Company and gives effect to the Hartman
Acquisition as if it had occurred on January 1, 1996. The unaudited pro forma
consolidated financial data and the selected unaudited pro forma consolidated
balance sheet data as of June 30, 1997 give effect to the Transactions as if
they had occurred on such date. None of the pro forma consolidated financial
data set forth below (including the selected unaudited pro forma consolidated
balance sheet) purport to be indicative of the results that actually would
have been obtained had all of the events been completed as of the assumed date
and for the periods presented and are not intended to be a projection of the
Company's future results or financial position. The following selected
consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and the
related notes thereto, and the unaudited pro forma condensed consolidated
statement of operations and the related notes thereto, appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------- ------------------------------------------------------------------------------------
PRO FORMA
PRO FORMA AS AS ADJUSTED
NINE MONTHS JANUARY 1, MAY 11, FISCAL YEAR ENDED ADJUSTED SIX MONTHS ENDED SIX MONTHS
ENDED 1993 TO 1993 TO DECEMBER 31, YEAR ENDED JUNE 30, ENDED JUNE
DECEMBER 31, MAY 10, DECEMBER 31, ------------------------- DECEMBER 31, ------------------ 30, 1997
1992 1993 1993 1994 1995 1996 1996 (1) 1996 1997 (1)
------------ ---------- ------------ ------- ------- ------- ------------ -------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........ $15,346 $8,378 $17,095 $31,523 $39,918 $66,336 $77,161 $ 27,399 $ 46,079 $46,079
Cost of sales.... 10,270 6,684 14,448 24,330 28,687 46,779 54,882 19,018 30,589 30,599
------- ------ ------- ------- ------- ------- ------- -------- -------- -------
Gross profit.... 5,076 1,694 2,647 7,193 11,231 19,557 22,279 8,381 15,490 15,480
Selling expenses. 1,065 713 1,344 2,382 3,229 4,903 5,059 2,319 3,052 3,052
General and
administrative
expenses........ 842 586 1,150 2,248 3,326 5,464 6,040 2,369 4,095 4,060
Research and
development..... 44 21 41 103 301 1,011 1,011 461 498 498
Amortization of
goodwill and
other intangible
assets.......... 53 45 117 177 251 543 748 246 311 386
Special
compensation
charge (2)...... -- -- -- -- 1,300 -- -- -- -- --
Environmental
expense (3)..... -- -- -- -- 951 -- -- -- -- --
Special
acquisition
expenses (4).... -- 153 266 -- 2,064 -- -- -- -- --
------- ------ ------- ------- ------- ------- ------- -------- -------- -------
Income (loss)
from
operations..... 3,072 176 (271) 2,283 (191) 7,636 9,421 2,986 7,534 7,484
Interest expense,
net (5)......... (93) (77) (728) (1,279) (2,309) (5,055) (12,805) (1,407) (1,826) 5,241
Other income,
net............. 100 42 -- -- 2 201 186 201 1 1
------- ------ ------- ------- ------- ------- ------- -------- -------- -------
Income (loss)
before income
taxes and
minority
interest in
subsidiary..... 3,079 141 (999) 1,004 (2,498) 2,782 (3,198) 1,780 5,709 2,244
Provision for
(benefit from)
income taxes.... -- -- (357) 386 (812) 1,120 (1,225) 712 2,275 914
------- ------ ------- ------- ------- ------- ------- -------- -------- -------
Income (loss)
after income
taxes before
minority
interest in
subsidiary...... 3,079 141 (642) 618 (1,686) 1,662 (1,973) 1,068 3,434 1,330
Income applicable
to minority
interest in
subsidiary...... -- -- -- -- 35 33 -- 51 55 --
------- ------ ------- ------- ------- ------- ------- -------- -------- -------
Net income
(loss)......... $ 3,079 $ 141 $ (642) $ 618 $(1,721) $ 1,629 $(1,973) $ 1,017 $ 3,379 $ 1,330
======= ====== ======= ======= ======= ======= ======= ======== ======== =======
OTHER FINANCIAL
DATA:
Gross margin %... 33.1% 20.2% 15.5% 22.8% 28.1% 29.5% 28.9% 30.6% 33.6% 33.6%
EBITDA (6)....... $ 3,497 $ 530 $ 2,211 $ 4,351 $ 6,618 $11,873 $14,059 $ 4,431 $ 9,997 $10,034
EBITDA margin %.. 22.8% 6.3% 12.9% 13.8% 16.6% 17.9% 18.2% 16.2% 21.7% 21.8%
Depreciation and
amortization.... $ 425 $ 201 $ 1,309 $ 2,158 $ 2,442 $ 3,551 $ 3,987 $ 1,553 $ 2,062 $ 2,149
Capital
expenditures.... $ 353 $ 131 $ 323 $ 444 $ 1,139 $ 2,449 $ 2,512 $ 925 $ 938 $ 938
Ratio of earnings
to fixed charges
(7)............. 26.0x 2.5x NA 1.8x NA 1.7x NA 2.1x 3.8x 1.4x
NET CASH PROVIDED
BY (USED IN)
Operating
Activities..... $ 3,187 $1,336 $ 1,332 $ 1,333 $ 1,960 $ 8,498 $ 1,383 $ 4,086
Financing
Activities..... (2,885) 1,611 380 256 13,645 5,973 (808) (3,140)
Investing
Activities..... (314) (2,876) (1,667) (1,544) (15,484) (14,548) (618) (938)
</TABLE>
- - - - -------
Footnotes on following page.
22
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------- -----------------------------------------------------------
PRO FORMA
DECEMBER 31, JUNE 30, AS ADJUSTED
DECEMBER 31, MAY 10, ------------------------------- --------------- JUNE 30,
1992 1993 1993 1994 1995 1996 1996 1997 1997(1)
------------ ------- ------- ------- ------- ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 10 $ 81 $ 27 $ 72 $ 193 $ 116 $ 150 $ 124 $ 124
Working capital......... 6,853 8,234 7,482 8,274 10,590 12,143 12,482 13,357 19,280
Property, plant
and equipment, net..... 1,929 2,358 12,554 11,735 13,225 15,796 12,672 15,121 15,290
Total assets............ 10,825 14,593 25,450 26,836 48,531 60,725 50,231 60,126 68,375
Total debt.............. 1,065 4,292 11,769 12,197 23,452 30,622 23,328 28,784 98,104
Stockholders' equity
(deficit).............. 8,538 7,782 7,153 7,667 10,293 11,750 11,254 13,822 (45,035)
</TABLE>
- - - ---------
(1) Gives effect to the Hartman Acquisition and the Transactions, as if such
events had occurred on January 1, 1996.
(2) Reflects a special compensation charge of $1.3 million which represents
(i) the difference between the purchase price of common stock of Parent
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 Company's Fairview, North Carolina facility. See "Business--
Environmental Matters."
(4) Special acquisition expenses in 1993 consist primarily of costs related to
the relocation of a facility following the acquisition of Midtex Relays,
Inc. and costs associated with relocating certain operations acquired from
West Coast Electrical Manufacturing Co. and CP Clare Corporation. Such
expenses in 1995 include costs primarily related to (i) the relocation of
certain assets acquired in the HiG Acquisition and the Deutsch Acquisition
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 Operation--Results of Operation."
(5) Interest expense in 1996 includes a charge of $1.6 million related to
costs associated with the preparation of a withdrawn initial public
offering of Parent's capital stock.
(6) EBITDA represents income (loss) before interest expense (net), income
taxes, depreciation and amortization, gain on disposal of assets,
extraordinary, unusual and nonrecurring items, the special compensation
charge, environmental expense and special acquisition charges referred to
in footnotes (2), (3) and (4) above, the provision for loss in April, 1997
for receivables relating primarily to a single customer and the non-cash
write-ups and non-cash charges resulting from the write-up of inventory
and fixed assets arising in connection with the Kilovac Acquisition and
the Hartman Acquisition pursuant to Accounting Principles Board Opinion
Nos. 16 and 17. EBITDA is not intended to represent cash flow from
operations or net income as defined by generally accepted accounting
principles and should not be considered as a measure of liquidity or an
alternative to, or more meaningful than, operating income or operating
cash flow as an indication of the Company's operating performance. EBITDA
is included herein because management believes that certain investors find
it a useful tool for measuring the Company's ability to service its debt.
(7) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before taxes and minority interest in
subsidiary plus fixed charges, and fixed charges consist of interest
expense, which includes amortization of deferred debt issuance costs and
deferred financing costs and the portion of rental expense on capital and
operating leases deemed representative of the interest factor. The
Company's earnings were insufficient to cover fixed charges for the period
from May 11, 1993 to December 31, 1993, the year ended December 31, 1995
and the pro forma year ended December 31, 1996 by $1.7 million, $4.7
million and $14.8 million, respectively.
23
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements (the "Pro Forma
Financial Statements") are based on the historical financial statements of the
Company included elsewhere in this Prospectus.
The unaudited pro forma balance sheet gives effect to the Transactions (as
defined) as though such events were consummated on January 1, 1996. The
unaudited pro forma statement of operations for the year ended December 31,
1996 gives effect to the Hartman Acquisition and the Transactions as if such
events were consummated on January 1, 1996. The unaudited pro forma statement
of operations for the six months ended June 30, 1997 gives effect to the
Transactions as if such events were consummated on January 1, 1996. The pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable.
The Pro Forma Financial Statements do not purport to be indicative of the
results that would have been obtained had such transactions described above
occurred as of the assumed dates. In addition, the Pro Forma Financial
Statement do not purport to project the Company's results of operations for any
future date or period.
The Pro Forma Financial Statements should be read in conjunction with the
financial statements of the Company, Kilovac and Hartman, and the notes
thereto, included elsewhere herein.
24
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
ADJUSTMENTS FOR THE
FOR THE RECAPITALIZATION
KILOVAC AND THE PRO FORMA
HISTORICAL PURCHASE(1) PRO FORMA INITIAL OFFERING AS ADJUSTED
---------- ----------- --------- ---------------- -----------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash.................. $ 124 $ -- $ 124 $ -- $ 124
Accounts receivable... 11,238 -- 11,238 -- 11,238
Inventories........... 15,790 47 15,837 -- 15,837
Deferred income taxes. 1,760 -- 1,760 -- 1,760
Other current assets.. 681 -- 681 -- 681
------- ------ ------- -------- --------
Total current
assets............. 29,593 47 29,640 -- 29,640
Property, plant, and
equipment.............. 15,121 169 15,290 -- 15,290
Investments............. 133 -- 133 -- 133
Goodwill................ 10,876 3,703 14,579 -- 14,579
Deferred financing
costs.................. 725 -- 725 3,947 (2) 4,672
Intangible and other
assets................. 3,678 458 4,136 (75)(3) 4,061
------- ------ ------- -------- --------
Total assets........ $60,126 $4,377 $64,503 $ 3,872 $ 68,375
======= ====== ======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
- - - - -----------------------------
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...... $ 5,166 $ -- $ 5,166 $ -- $ 5,166
Accrued expenses...... 6,062 -- 6,062 (352)(4) 5,710
Accrued taxes payable
(receivable)......... 239 -- 239 (778)(5) (539)
Accrued interest...... 246 -- 246 (246)(6) 0
Current portion of
long-term debt
obligations.......... 4,523 -- 4,523 (4,500)(7) 23
------- ------ ------- -------- --------
Total current
liabilities........ 16,236 -- 16,236 (5,876) 10,360
Long-term debt
obligations, less
current portion........ 24,261 4,500 28,761 (25,680)(8) 3,081
Notes payable........... -- 95,000 (9) 95,000
Deferred taxes.......... 1,641 -- 1,641 (58)(10) 1,583
Other long-term
liabilities............ 3,349 -- 3,349 (657)(11) 2,692
Notes payable to
shareholders........... 694 -- 694 -- 694
Minority interest in
subsidiary............. 123 (123) -- -- --
Stockholders' equity:
Common stock and
additional paid-in
capital.............. 12,317 -- 12,317 -- 12,317
Retained earnings
(accumulated
deficit)............. 3,264 -- 3,264 (60,577) (57,313)
Currency translation
loss................. (39) -- (39) -- (39)
Accounts receivable
due from parent...... (1,720) -- (1,720) 1,720 --
------- ------ ------- -------- --------
Total stockholders'
equity............. 13,822 13,822 (58,857)(12) (45,035)
------- ------ ------- -------- --------
Total liabilities &
stockholders'
equity............. $60,126 $4,377 $64,503 $ 3,872 $ 68,375
======= ====== ======= ======== ========
</TABLE>
25
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(1) Adjustment reflects pro forma financial data to give effect to the Kilovac
Purchase as if such Transaction had occurred on June 30, 1997.
(2) Adjustment reflects (i) approximately $4.0 million of deferred financing
costs related to the Initial Offering, (ii) approximately $670,000 of
deferred financing costs related to the New Credit Facility offset by
(iii) the write-off of $725,000 of unamortized financing costs relating to
the Old Credit Facility.
(3) Adjustment reflects the transfer to Parent of a prepaid fee in connection
with the Recapitalization.
(4) Adjustment reflects the payment from proceeds of the Initial Offering of
an accrued bonus to certain members of the Company's management in
connection with the Recapitalization.
(5) Adjustment reflects the tax benefit of approximately $324,000 relating to
the payment from proceeds of the Initial Offering of the unaccrued success
fee of approximately $809,000, and the transfer of tax benefits of
$454,000 related to the Recapitalization from Parent to CII.
(6) Adjustment reflects the payment from proceeds of the Initial Offering of
accrued interest due in connection with the Old Credit Facility.
(7) Adjustment reflects the payment from proceeds of the Initial Offering of
the current portion of long-term debt associated with the Old Credit
Facility.
(8) Adjustment reflects the payment from proceeds of the Initial Offering of
the noncurrent portion of long-term debt associated with the Old Credit
Facility.
(9) Adjustment reflects the issuance of the Notes in the Initial Offering.
(10) Adjustment reflects a deferred tax benefit associated with the payment
from proceeds of the Initial Offering of the remaining portion of the
unaccrued success fee.
(11) Adjustment reflects the payment from proceeds of the Initial Offering of
the accrued portion of the success fee.
(12) Adjustment reflects (i) the Dividend of $57.1 million net of amounts owed
CII from Parent, (ii) the payment from proceeds of the Initial Offering of
the unaccrued portion of the success fee in the amount of $954,000 net of
the tax benefit of $382,000, (iii) $800,000 of expenses related to the
abandoned financing, (iv) the write-off of $725,000 of unamortized
financing costs associated with the Old Credit Facility, (v) the transfer
of $75,000 of transaction expenses from CII to Parent offset by (vi) the
transfer of tax benefits of $454,000 from Parent to CII.
26
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
ADJUSTMENTS THE
ADJUSTMENTS FOR FOR THE RECAPITALIZATION
THE HARTMAN PRO KILOVAC AND THE PRO FORMA AS
COMPANY HARTMAN ACQUISITION (2) FORMA PURCHASE (8) INITIAL OFFERING ADJUSTED (10)
------- ------- --------------- ------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $66,336 $10,825 $ -- $77,161 $ -- $ -- $77,161
Cost of sales........... 46,779 (1) 7,942 141 (3) 54,862 20 -- 54,882
------- ------- ----- ------- ----- ------- -------
Gross profit............ 19,557 2,883 (141) 22,299 (20) -- 22,279
Selling expenses........ 4,903 156 -- 5,059 -- -- 5,059
General and
administrative
expenses............... 5,464 578 (6)(4) 6,036 4 -- 6,040
Research and development
expenses............... 1,011 -- -- 1,011 -- -- 1,011
Amortization of goodwill
and other intangible
assets................. 543 -- 57 (5) 600 148 -- 748
------- ------- ----- ------- ----- ------- -------
Income (loss) from
operations............. 7,636 2,149 (192) 9,593 (172) -- 9,421
Interest expense, net... 5,055 791 (98)(6) 5,748 -- $ 7,057 (9) 12,805
Other (income) expense,
net.................... (201) 15 -- (186) -- -- (186)
------- ------- ----- ------- ----- ------- -------
Income (loss) before
income taxes and
minority interest...... 2,782 1,343 (94) 4,031 (172) (7,057) (3,198)
Provision for (benefit
from) income taxes (7). 1,120 536 (38) 1,618 (20) (2,823) (1,225)
Income applicable to
minority interest...... 33 -- -- 33 (33) -- --
------- ------- ----- ------- ----- ------- -------
Net income (loss)....... $ 1,629 $ 807 $ (56) $ 2,380 $(119) $(4,234) $(1,973)
======= ======= ===== ======= ===== ======= =======
</TABLE>
27
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) Adjustment reflects the write-off of $903,000 due to the purchase
accounting adjustment for the increase of inventories to estimated fair
market value in connection with the Hartman Acquisition.
(2) 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 of the Hartman Acquisition.
(3) Adjustment reflects (i) increased depreciation expenses corresponding to
a higher appraised value of certain equipment acquired in the Hartman
Acquisition, of which $103,000 is attributable to the capitalization of
tooling, and (ii) reclassification of building depreciation to rent
expense since the Company is leasing Hartman's facility. The lease of the
Hartman facility is a 10 year lease, terminable at the Company's option.
The first 5 years have an average annual rent of approximately $85,000
and years 6-10 will have an annual rent of approximately $159,000. For
pro forma purposes, it was assumed the lease would end in five years
because management expects to relocate locally within the next five
years.
(4) Adjustment reflects reclassification of $6,000 of depreciation expense to
cost of sales.
(5) Adjustment reflects the amortization of $57,000 of goodwill recorded in
connection with the Hartman Acquisition. Goodwill is amortized over 30
years.
(6) Adjustment reflects elimination of $791,000 of allocated debt service
offset by additional interest expense associated with approximately $13.0
million of bank debt incurred to finance the Hartman Acquisition.
(7) Adjustment assumes an effective tax rate of 39.9% for Hartman and 40% for
Kilovac and 38.3% for the pro forma as adjusted data.
(8) Adjustments give effect to the Kilovac Purchase as adjusted to reflect
the corresponding tax benefit and as if such transaction had occurred on
January 1, 1996.
(9) Adjustment reflects elimination of $3.4 million of the interest expense
associated with the Old Credit Facility offset by additional interest
expense associated with the additional borrowings of approximately $98.1
million.
(10) Adjustments give effect to the Kilovac Purchase and the remaining
Transactions as if such events occurred on January 1, 1996.
28
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS FOR
ADJUSTMENTS THE
FOR THE RECAPITALIZATION
KILOVAC PRO AND THE INITIAL PRO FORMA
COMPANY PURCHASE(1) FORMA OFFERING AS ADJUSTED(5)
------- ----------- ------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales............... $46,079 $ -- $46,079 $ -- $46,079
Costs of sales.......... 30,589 10 30,599 -- 30,599
------- ------- ------- ------- -------
Gross profit............ 15,490 (10) 15,480 -- 15,480
Selling expenses........ 3,052 -- 3,052 -- 3,052
General and
administrative
expenses............... 4,095 2 4,097 (37)(2) 4,060
Research and development
expenses............... 498 -- 498 -- 498
Amortization of goodwill
and other intangible
assets................. 311 75 386 -- 386
------- ------- ------- ------- -------
Income (loss) from
operations............. 7,534 (87) 7,447 37 7,484
Interest expense, net... 1,826 -- 1,826 3,415(3) 5,241
Other (income) expense,
net.................... (1) -- (1) -- (1)
------- ------- ------- ------- -------
Income (loss) before
income taxes and
minority interest...... 5,709 (87) 5,622 (3,378) 2,244
Provision for (benefit
from) income taxes (4). 2,275 (10) 2,265 (1,351) 914
Income applicable to
minority interest...... 55 (55) -- -- --
------- ------- ------- ------- -------
Net income (loss)....... $ 3,379 ($22) 3,357 ($2,027) $ 1,330
======= ======= ======= ======= =======
</TABLE>
29
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(1) Adjustments give effect to the Kilovac Purchase as if such event occurred
on January 1, 1996.
(2) Reflects the elimination of $37 in expenses paid by the Company associated
with the Recapitalization that was charged to Parent at the time of the
Recapitalization.
(3) Reflects elimination of $1.8 million of interest expense associated with
the Old Credit Facility offset by additional interest expense associated
with the additional borrowings of approximately $98.0 million.
(4) Assumes an effective tax rate of 40.0% for Kilovac and 40.7% for the pro
forma as adjusted data.
(5) Adjustments give effect to the Kilovac Purchase and the remaining
Transactions as if such events occurred on January 1, 1996.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The matters discussed below and elsewhere herein contain forward-looking
statements regarding the future performance of the Company and future events.
These matters involve risks and uncertainties that could cause actual results
to differ materially from the statements contained herein. In addition to the
matters discussed below, see "Risk Factors" for information relating to such
risks and uncertainties. The following discussion and analysis of the results
of operations, financial condition and liquidity of the Company should be read
in conjunction with the consolidated financial statements of the Company and
the unaudited pro forma condensed consolidated statement of operations and the
related notes thereto included elsewhere in this Prospectus.
OVERVIEW
CII is a leading designer, manufacturer, and marketer of a broad line of
high performance relays and solenoids. Relays, which are switches used to
control electric current in a circuit, and solenoids, which convert electric
signals into mechanical motion, are critical components for a wide range of
commercial, industrial and electronic products. The Company focuses on
producing highly engineered relays and solenoids for customized niche
applications that demand reliable performance, small size, light weight, low
energy consumption, and durability. The Company's products are used in a large
number of diverse end-use applications including commercial aircraft, defense
electronics, telecommunication equipment, satellites, medical products, and
HVAC systems. CII sells more than 750 types of relays and solenoids to more
than 2,100 customers in a broad range of industries with no single customer
accounting for more than 8% of the Company's 1996 net sales.
In October 1995, the Company acquired (the "Kilovac Acquisition") an 80%
interest in Kilovac for an aggregate purchase price of $14.4 million,
excluding expenses, which was financed with secured bank debt, subordinated
debt of Parent and the issuance by Parent of preferred stock. The Company
acquired the remaining 20% interest in Kilovac, refinanced such indebtedness
and redeemed such preferred stock in conjunction with the consummation of the
Initial Offering and the other Transactions.
In November 1995, the Company formed a joint venture, CII Guardian
International, Ltd., in India with Guardian Controls, Ltd., an Indian company
("Guardian Controls"), Kerala State Industrial Development Corporation
("KSIDC"), and certain other investors (the "Indian Joint Venture"). The
Company initially had a 28% interest in the Indian Joint Venture. As of June
30, 1997, the Company has a 30% interest in the Indian Joint Venture, Guardian
has a 30% interest in the Indian Joint Venture, KSIDC has a 15% interest, and
the remaining 25% interest is held by certain financial investors in India.
The Indian Joint Venture started production in the third quarter of 1996.
In July 1996, the Company acquired the assets and certain liabilities of
Hartman Electrical Manufacturing, a division of Figgie International, Inc.
("Figgie"), for $12.0 million, excluding expenses (the "Hartman Acquisition").
The Company financed the Hartman Acquisition with secured bank debt, which was
refinanced in conjunction with the consummation of the Initial Offering and
the other Transactions.
The Company has improved gross margins in recent years primarily due to
increased production volumes at existing facilities as a result of the
acquisition of product lines which have been incorporated into the Company's
existing manufacturing facilities, internal growth, improved pricing, greater
use of low labor cost production facilities in Mexico and China, and improved
production efficiencies due to improved manufacturing processes at certain of
the Company's plants.
Due to the Company's historical growth through acquisitions, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication
31
<PAGE>
of future performance. In addition, the Company expects to record an estimated
$2.5 million pre-tax charge in the third quarter of 1997 for transaction
related fees and expenses.
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. There can be no assurance that the trends in sales growth or
operating results will continue in the future.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- ------------------
1994 1995 1996 1996 1997
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 77.2 71.9 70.5 69.4 66.4
Gross profit........................... 22.8 28.1 29.5 30.6 33.6
Selling expenses....................... 7.6 8.1 7.4 8.5 6.6
General and administrative expenses.... 7.1 8.3 8.2 8.6 8.9
Research and development............... 0.3 0.8 1.5 1.7 1.1
Other expenses......................... 0.6 11.4 0.8 0.9 0.7
Operating income (loss)................ 7.2 (0.5) 11.6 10.9 16.3
</TABLE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net sales of the Company for the six months ended June 30, 1997 increased
$18.7 million, or 68.2%, to $46.1 million from $27.4 million for the
corresponding period in 1996. Excluding the Hartman Acquisition, net sales of
the Company for the six months ended June 30, 1997 increased by $6.3 million,
or 23.0%, to $33.7 million from $27.4 million for the corresponding period in
1996, as a result of a $4.9 million increase in sales of high performance
relays and a $1.4 million increase in sales of general purpose relays. The
Company attributes this increase in sales to market share gains, improved
pricing, growth in end use markets, and new products.
Gross profit of the Company for the six months ended June 30, 1997 increased
$7.1 million, or 84.8%, to $15.5 million from $8.4 million for the
corresponding period in 1996. The Company's gross profit as a percentage of
net sales increased to 33.6% for the six months ended June 30, 1997 from 30.6%
for the corresponding period in 1996. Excluding the Hartman Acquisition, the
gross profit of the Company for the six months ended June 30, 1997 increased
$3.2 million, or 38.7% to $11.6 million from $8.4 million for the
corresponding period in 1996. The increase in gross profit was due primarily
to improved yields and productivity at the Company's new manufacturing
facility in Asheville, North Carolina, cost reductions and improved pricing.
Excluding the Hartman Acquisition, the Company's gross profit as a percentage
of net sales increased to 34.5% for the six months ended June 30, 1997 from
30.6% for the corresponding period in 1996.
Selling expenses for the Company for the six months ended June 30, 1997
increased $733,000, or 31.6%, to $3.1 million from $2.3 million for the
corresponding period in 1996. Selling expenses for the Company as a percentage
of net sales decreased to 6.6% for the first six months ended June 30, 1997
from 8.5% for the corresponding period in 1996. Excluding the Hartman
Acquisition, selling expenses for the Company for the six months ended June
30, 1997 increased $404,000, or 17.4%, to $2.7 million from $2.3 million for
the corresponding period in 1996. Such increase was due to additional
commissions on higher net sales, additional personnel, and increased
advertising costs. Excluding the Hartman Acquisition, selling expenses for the
Company as a percentage of net sales decreased to 8.1% for the six months
ended June 30, 1997 from 8.5% for the corresponding period in 1996.
General and administrative expenses for the Company for the six months ended
June 30, 1997 increased $1.7 million, or 72.9%, to $4.1 million from $2.4
million for the corresponding period in 1996. General and administrative
expenses for the Company as a percentage of net sales increased to 8.9% for
the first six months
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ended June 30, 1997 from 8.6% for the corresponding period in 1996. Excluding
the Hartman Acquisition, general and administrative expenses for the Company
for the six months ended June 30, 1997 increased $1.1 million, or 47.7%, to
$3.5 million from $2.4 million for the corresponding period in 1996. Such
increase was primarily due to the addition of new management, additional
compensation, and a bad debt expense relating primarily to a single customer.
Excluding the Hartman Acquisition, general and administrative expenses for the
Company as a percentage of net sales increased to 10.4% for the six months
ended June 30, 1997 from 8.6% for the corresponding period in 1996.
Research and development expenses for the Company for the six months ended
June 30, 1997 increased $37,000, or 8.0%, to $498,000 from $461,000 for the
corresponding period in 1996. Research and development expenses for the
Company as a percentage of net sales decreased to 1.1% for the first six
months ended June 30, 1997 from 1.7% for the corresponding period in 1996.
Excluding the Hartman Acquisition, research and development expenses for the
Company for the six months ended June 30, 1997 decreased $80,000, or 17.4%, to
$381,000 from $461,000 for the corresponding period in 1996. Such decrease was
primarily due to higher reimbursements of research and development costs by
customers. Excluding the Hartman Acquisition, research and development costs
for the Company as a percentage of net sales decreased to 1.1% for the six
months ended June 30, 1997 from 1.7% for the corresponding period in 1996.
Amortization of goodwill and other intangible assets of the Company for the
six months ended June 30, 1997 increased $65,000, or 26.4%, to $311,000 from
$246,000 for the corresponding period in 1996. Such increase primarily
reflects amortization of goodwill and other intangible assets related to the
Hartman Acquisition.
Other income of the Company for the six months ended June 30, 1997 was
$1,000 as compared to $201,000 for the corresponding period in 1996. Other
income in the six months ended June 30, 1996, was due primarily to 72% of the
net gain on the sale of certain high performance relay product line assets to
the Indian Joint Venture. Due to the Company's 28% ownership interest in the
Indian Joint Venture at that time, 28% of the net gain has been deferred.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales of the Company for 1996 increased by $26.4 million, or 66.2%, to
$66.3 million from $39.9 million in 1995. The increase was primarily due to
(i) the full year effect of the Kilovac Acquisition which represented $14.9
million in sales in 1996, an increase of $11.2 million from $3.7 million in
sales for the period from October 12, 1995 (the date following the date of the
Kilovac Acquisition) to December 31, 1995 and (ii) the Hartman Acquisition
which represented $10.2 million in sales for the period from July 3, 1996 (the
date following the date of the Hartman Acquisition) to December 31, 1996.
Excluding the Hartman Acquisition and the Kilovac Acquisition, net sales of
the Company for 1996 increased $5.0 million, or 13.9%, to $41.3 million from
$36.2 million in 1995, primarily as a result of a $3.4 million increase in net
sales of high performance relays and a $894,000 increase in sales of
electronic products. The Company attributes this increase to market share
gain, improved pricing, growth in end use markets, and new products.
Gross profit of the Company for 1996 increased $8.3 million, or 74.1%, to
$19.6 million from $11.2 million in 1995. The Company's gross profit as a
percentage of net sales increased to 29.5% in 1996 from 28.1% in 1995. Such
increase was due primarily to (i) the full year effect of the Kilovac
Acquisition and (ii) the Hartman Acquisition. Excluding the Hartman
Acquisition and the Kilovac Acquisition, the gross profit of the Company for
1996 increased $1.9 million, or 20.1%, to $11.3 million from $9.4 million in
1995. Excluding the Hartman Acquisition and the Kilovac Acquisition, the gross
profit of the Company as a percentage of net sales increased to 27.4% in 1996
from 26.0% in 1995. The increase in gross profit as a percentage of net sales
was primarily due to improved pricing, cost reductions, and the decrease in
overhead cost per unit produced.
Selling expenses for the Company in 1996 increased $1.7 million, or 51.8%,
to $4.9 million from $3.2 million in 1995. Such increase was due primarily to
(i) the full year effect of the Kilovac Acquisition and (ii) the
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Hartman Acquisition. Selling expenses for the Company as a percentage of net
sales decreased to 7.4% in 1996 from 8.1% in 1995. Excluding the Hartman
Acquisition and the Kilovac Acquisition, selling expenses for the Company in
1996 remained substantially unchanged. Excluding the Hartman Acquisition and
the Kilovac Acquisition, selling expenses for the Company as a percentage of
net sales decreased to 6.7% in 1996 from 7.6% in 1995. The decrease in selling
expenses as a percentage of net sales is attributable to the restructuring of
commissions at one of the Company's divisions and stable fixed costs.
General and administrative expenses for the Company in 1996 increased $2.1
million, or 64.3%, to $5.5 million from $3.3 million in 1995. Such increase
was primarily due to (i) the full year effect of the Kilovac Acquisition and
(ii) the Hartman Acquisition. General and administrative expenses for the
Company as a percentage of net sales decreased to 8.2% in 1996 from 8.3% in
1995. Excluding the Hartman Acquisition and the Kilovac Acquisition, general
and administrative expenses for the Company in 1996 increased $392,000, or
14.0%, to $3.2 million from $2.8 million in 1995. Such increase in general and
administrative expenses was primarily due to increased management compensation
and the reclassification of certain management personnel mainly from
manufacturing overhead. Excluding the Hartman Acquisition and the Kilovac
Acquisition, general and administrative expenses for the Company as a
percentage of net sales was 7.7% in 1995 and 1996.
Research and development expenses for the Company in 1996 increased
$710,000, or 235.9%, to $1.0 million from $301,000 in 1995. Such increase was
primarily due to the full year effect of the Kilovac Acquisition. Research and
development expenses for the Company as a percentage of net sales increased to
1.5% in 1996 from 0.8% in 1995. Excluding the Hartman Acquisition and the
Kilovac Acquisition, research and development expenses for the Company in 1996
increased $89,000, or 74.2%, to $209,000 from $120,000 in 1995. Such increase
was primarily due to the addition of engineering personnel. Excluding the
Hartman Acquisition and the Kilovac Acquisition, research and development
costs for the Company as a percentage of net sales increased to 0.5% in 1996
from 0.3% in 1995.
Amortization of goodwill and other intangible assets of the Company in 1996
increased $292,000, or 116.3%, to $543,000 from $251,000 in 1995. Such
increase primarily reflects (i) the full year effect of the Kilovac
Acquisition and (ii) the Hartman Acquisition.
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 of the Parent 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 issuances.
No such costs were incurred in 1996.
During 1995, the Company recorded a non-recurring charge of $951,000, which
represents primarily the costs incurred to date and the present value of the
estimated future costs payable by the Company over the next 30 years for
groundwater remediation at the Fairview facility. During 1995 the Company
entered into a settlement with the prior owner of the Fairview facility which
determined the liability, as between the two parties, for current and future
expenses related to the remediation of the facility. See "Business--
Environmental Matters." No such costs were incurred in 1996.
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. No such costs were incurred in 1996.
Other income of the Company increased to $201,000 in 1996 from $2,000 in
1995. The increase in other income resulted from recognition of 72% of the net
gain on the sale of certain high performance relay product line assets to the
Indian Joint Venture. Due to the Company's 28% ownership interest at that time
of the Indian Joint Venture, 28% of the net gain has been deferred.
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Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales of the Company for 1995 increased by $8.4 million, or 26.6%, to
$39.9 million from $31.5 million in 1994. The increase was primarily due to
(i) the effect of the Kilovac Acquisition which represented $3.7 million in
net sales for the period from October 12, 1995 (the date following the date of
the Kilovac Acquisition) to December 31, 1995, (ii) the acquisition of certain
assets from HiG Company, Inc. for approximately $1.5 million (the "HiG
Acquisition") which represented $1.7 million in net sales for the period from
January 28, 1995 (the date following the date of the HiG Acquisition) to
December 31, 1995, and (iii) the acquisition on December 5, 1994 of certain
assets from Deutsch Relays, Inc. for approximately $1.1 million (the "Deutsch
Acquisition") which represented $1.6 million in net sales for 1995. Excluding
the HiG Acquisition, the Deutsch Acquisition and the Kilovac Acquisition, net
sales of the Company for 1995 increased $1.4 million, or 4.5%, to $32.9
million from $31.5 million in 1994, primarily as a result of an increase in
sales of high performance relays. The Company attributes this increase to
market share gains and growth in end use markets.
Gross profit of the Company for 1995 increased $4.0 million, or 56.1%, to
$11.2 million in 1995 from $7.2 million in 1994. The Company's gross profit as
a percentage of net sales increased to 28.1% in 1995 from 22.8% in 1994. The
increase in gross profit was due in part to the Kilovac Acquisition. Excluding
the Kilovac Acquisition, the Company's gross profit for 1995 increased $2.2
million, or 30.8%, to $9.4 million from $7.2 million in 1994. 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 28.1% overall
gross profit margin of the Company. Excluding the Kilovac Acquisition, the
Company's gross profit as a percentage of net sales increased to 26.0% in 1995
from 22.8% in 1994. This increase was due to improved pricing and cost
reductions in both materials and manufacturing expenses. Gross profit in 1995
was also favorably impacted by the devaluation of the Mexican peso in that
year. The increase in gross profit was partially offset by integration costs
incurred in connection with the Company's 1995 acquisitions and additional
provisions for obsolete inventory due to an increased level of inventory.
Selling expenses for the Company in 1995 increased $847,000, or 35.6%, to
$3.2 million from $2.4 million in 1994. Such increase was due primarily to the
Kilovac Acquisition. Selling expenses for the Company as a percentage of net
sales increased to 8.1% in 1995 from 7.6% in 1994. Excluding the Kilovac
Acquisition, selling expenses for the Company in 1995 increased $371,000, or
15.6%, to $2.8 million from $2.4 million in 1994. This increase in selling
expenses was primarily due to an increase in commissions associated with the
Company's additional sales. Excluding the Kilovac Acquisition, selling
expenses for the Company as a percentage of net sales was 7.6% in 1995 and
1994.
General and administrative expenses for the Company in 1995 increased $1.1
million, or 48.0%, to $3.3 million from $2.2 million in 1994. Such increase
was primarily due to the Kilovac Acquisition. General and administrative
expenses for the Company as a percentage of net sales increased to 8.3% in
1995 from 7.1% in 1994. Excluding the Kilovac Acquisition, general and
administrative expenses for the Company in 1995 increased $619,000, or 27.5%,
to $2.8 million from $2.2 million in 1994. Such 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 in reviewing potential acquisitions. Excluding the Kilovac
Acquisition, general and administrative expenses for the Company as a
percentage of net sales was 7.1% in 1994 and 7.7% in 1995.
Research and development expenses for the Company in 1995 increased
$198,000, or 192.2%, to $301,000 from $103,000 in 1994. Such increase was
primarily due to the Kilovac Acquisition. Research and development expenses
for the Company as a percentage of net sales increased to 0.8% in 1995 from
0.3% in 1994. Excluding the Kilovac Acquisition, research and development
expenses for the Company in 1995 increased $17,000, or 16.5%, to $120,000 from
$103,000 in 1994. Such increase was primarily due to the addition of
engineering personnel. Excluding the Kilovac Acquisition, research and
development costs for the Company as a percentage of net sales was 0.3% in
1995 and 1994.
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Amortization of goodwill and other intangible assets of the Company in 1995
increased $74,000 or 41.8%, to $251,000 from $177,000 in 1994. Such increase
primarily reflects the Kilovac Acquisition.
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 of the Parent 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 issuances.
No such costs were incurred in 1994.
During 1995, the Company recorded a non-recurring charge of $951,000, which
represents primarily the costs incurred to date and the present value of the
estimated future costs payable by the Company over the next 30 years for
groundwater remediation at the Fairview facility. During 1995 the Company
entered into a settlement with the prior owner of the Fairview facility which
determined the liability, as between the two parties, for current and future
expenses related to the remediation of the facility. See "Business--
Environmental Matters." No such costs were incurred in 1994.
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. No such costs were incurred in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $1.3 million in 1994, $2.0 million
in 1995 and $8.5 million in 1996. The increase in cash provided by operating
activities from 1994 to 1995 was mainly due to the reduction in inventory
(excluding the effect of acquisitions) and slower growth of accounts
receivable. The increase in cash provided by operating activities from 1995 to
1996 was mainly due to improved profitability, improved collections of
accounts receivable, reductions in inventory, increases in accounts payable,
and the increase in accrued interest on subordinated debt. For the six months
ended June 30, 1997, cash provided by operating activities was $4.1 million,
compared to $1.4 million for the same period in 1996. This increase was
primarily attributable to improved profitability, improved collections of
accounts receivable, and a reduction in inventory. The average days' sales
outstanding for accounts receivable was approximately 55, 58, and 53 trade
days at year end 1994, 1995, and 1996, respectively. Average days' sales
outstanding at June 30, 1997 was 45. The decrease in average days' sales
outstanding can be attributed to increased collection efforts.
The Company's inventories increased from $7.9 million at year end 1994 to
$10.6 million at year end 1995. This increase is attributable to inventory
acquired in connection with the HiG Acquisition, the Kilovac Acquisition, and
increased production 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 inventory
increased from $10.6 million at year end 1995 to $17.1 million at year end
1996. $7.1 million of this increase was attributable to the Hartman
Acquisition. This increase was also offset by a $300,000 reduction of
inventory associated with the sale of certain high performance relay product
line assets to the Indian Joint Venture and by improved inventory planning
techniques. The Company's inventories increased from $10.7 million at June 30,
1996 to $15.8 million at June 30, 1997. $5.9 million of this increase was due
to the Hartman Acquisition, but this increase was offset by a reduction in
inventory due to continued efforts to improve inventory planning techniques
and reduce cycle times.
The Company's accounts payable increased from $2.3 million at year end 1994
to $2.6 million at year end 1995. This increase was primarily due to the
effect of the Kilovac Acquisition and increases in purchases to support the
Company's growth, and was partially offset by the Company's strategy to
shorten the payment period of its accounts payable. The Company's accounts
payable increased from $2.6 million at year end 1995 to $5.1 million at year
end 1996. This increase was due primarily to the Hartman Acquisition and also
to increases in
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purchases to support the Company's continued growth. The Company's accounts
payable increased from $3.2 million at June 30, 1996 to $5.4 million at June
30, 1997. $1.4 million of this increase was due to the Hartman Acquisition.
Increased purchases to support the Company's growth also contributed to this
increase.
The Company has historically financed its operations and acquisitions
through a combination of internally generated funds and secured borrowings
under its existing credit agreement. The Company financed its largest
acquisition, the Kilovac Acquisition, through $9.8 million of borrowings under
the Old Credit Facility and funds received from Parent as a result of the
issuance by Parent of $1.7 million of subordinated debt and $2.0 million of
cumulative redeemable preferred stock. The Company financed the Hartman
Acquisition (approximately $13 million in borrowings) with borrowings under
the Old Credit Facility.
Capital expenditures, excluding the Hartman Acquisition, the Kilovac
Acquisition and other acquisitions, were $444,000 in 1994, $1.1 million in
1995, $2.4 million in 1996, and $938,000 for the six months ended June 30,
1997. In 1995, capital expenditures also included $414,000 for improvements to
the Asheville facility, $133,000 for the acquisition of equipment for a high
performance relay product line and $112,000 of capital expenditures for
Kilovac. In 1996, capital expenditures included $1.1 million for increased
capacity, $318,000 for increased efficiency and $555,000 for maintenance.
Acquisition spending totaled $1.1 million in 1994, $14.3 million in 1995, and
$12.7 million in 1996.
The Company applied the net proceeds of the Old Notes, together with
borrowings under the Senior Credit Facility, to repay all outstanding
obligations under the Old Credit Facility and to pay a dividend to Parent. In
connection with the Initial Offering, the Company also paid to its existing
senior lenders under the Old Credit Facility a success fee in the amount of
approximately $1.6 million. In connection with the Initial Offering, the
Company also entered into the Senior Credit Facility, which enables the
Company to borrow up to $25.0 million, subject to certain borrowing
conditions. See "Description of the Senior Credit Facility." The Senior Credit
Facility is available for general corporate and working capital purposes and
to finance additional acquisitions and is secured by the Company's assets.
After consummation of the Initial Offering and the other Transactions, the
Company's total debt significantly increased. Interest payments on the Notes
and under the Senior Credit Facility represent significant liquidity
requirements for the Company. The Notes will require semi-annual payments and
interest on the loans under the Senior Credit Facility will be due at least
quarterly.
Although there can be no assurances, the Company anticipates that its cash
flow generated from operations and borrowings under the Senior Credit Facility
will be sufficient to fund the Company's working capital needs, planned
capital expenditures, scheduled interest payments (including interest payments
on the Notes and amounts outstanding under the Senior Credit Facility) and its
business strategy for the next twelve months. However, the Company may require
additional funds if it enters into strategic alliances, acquires significant
assets or businesses or makes significant investments in furtherance of its
growth strategy. The ability of the Company to satisfy its capital
requirements will be dependent upon the future financial performance of the
Company, which in turn will be subject to general economic conditions and to
financial, business, and other factors, including factors beyond the Company's
control.
Instruments governing the Company's indebtedness, including the Senior
Credit Facility and the Indenture, contain financial and other covenants that
restrict, among other things, the Company's ability to incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of substantially all of the
assets of the Company. Such limitations, together with the highly leveraged
nature of the Company, could limit corporate and operating activities,
including the Company's ability to respond to market conditions to provide for
unanticipated capital investments or to take advantage of business
opportunities. See "Risk Factors--Substantial Leverage and Debt Service."
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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 Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which became effective during the Company's year ending December 31,
1996. The impact of this new standard on 1996 earnings was not significant.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock--Based
Compensation," which establishes an alternative method of accounting for
employee stock compensation plans based on a fair value methodology. However,
the statement allows an entity to continue to use the accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
has not yet determined whether it will adopt the alternative method of
accounting and has also not yet determined its effect.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segment Reporting of an
Enterprise and Related Information," both of which will be effective during
the Company's year ending December 31, 1998. The Company has not determined
the effect of the adoption of SFAS No. 130 or SFAS No. 131 on its financial
statements.
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BUSINESS
GENERAL
CII is a leading designer, manufacturer, and marketer of a broad line of
high performance relays and solenoids. Relays, which are switches used to
control electric current in a circuit, and solenoids, which convert electric
signals into mechanical motion, are critical components for a wide range of
commercial, industrial and electronic products. The Company focuses on
producing highly engineered relays and solenoids for customized niche
applications that demand reliable performance, small size, light weight, low
energy consumption, and durability. The Company's products are used in a large
number of diverse end-use applications including commercial aircraft, defense
electronics, telecommunication equipment, satellites, medical products, and
HVAC systems.
The worldwide market for relays and solenoids is estimated to be
approximately $5.0 billion. The Company estimates that the high performance
and other specialty niche markets that it serves represent approximately 20%
of the entire worldwide market. CII sells more than 750 types of relays and
solenoids to more than 2,100 customers in a broad range of industries with no
single customer accounting for more than 8% of the Company's 1996 net sales.
The Company's engineering and manufacturing capabilities, as well as its
focused sales and customer service, have enabled it to develop long term
customer relationships, in many instances as a sole source supplier, and
establish strong competitive positions in its served markets. The Company
believes that in 1996 at least 55% of its net sales was attributable to
products for which the Company was the sole source supplier.
CII's products are used by customers in a variety of end-use markets for a
wide range of applications. In the commercial aircraft market, CII's high
performance relays and solenoids are utilized in functions including the
flight control, navigation, radio communication, landing gear, and power
distribution systems of aircraft produced by companies such as Boeing, Airbus,
Gulfstream, Lear, Cessna, and British Aerospace. In the aerospace and defense
market, CII's products are utilized in applications such as satellites, radio
communications equipment, military electronic systems, missile guidance
systems, global positioning equipment, and defense aircraft produced by
companies such as TRW, Rockwell International, Lockheed Martin, Raytheon, and
Allied Signal. In the commercial and industrial market, CII's products are
utilized in a wide range of applications such as medical equipment, HVAC
control systems, electric vehicles, elevators, and appliances for customers
such as Zoll Medical, Johnson Controls, General Motors, Westinghouse, General
Electric, and Amana. In the telecommunications market, the Company's products
are utilized in applications such as central office switches, station
switches, facsimile machines, and modems by customers such as Lucent
Technologies, Motorola, Alcatel, and Daewoo.
CII has expanded its product line, manufacturing capabilities, and customer
base through strategic acquisitions and internal growth. As a result, the
Company's net sales increased from $31.5 million in 1994 to $85.0 million for
the twelve months ended June 30, 1997. Over the same period, the Company's
EBITDA (as defined) increased from $4.4 million to $17.4 million and EBITDA
margins improved from 13.8% to 20.5%.
The Company believes it is well positioned to capitalize on current trends
in its principal markets. As a leading supplier of high performance relays and
solenoids to the commercial aircraft industry, the Company believes it will
benefit from the anticipated increase in commercial aircraft production.
Additionally, the increased deployment of communication satellites, the
continued retrofitting of military equipment with advanced electronic systems,
and the ongoing expansion of the worldwide telecommunication infrastructure
are all anticipated to have a favorable impact on the Company. In many of the
Company's markets, major customers are consolidating their supply base in
order to develop long term strategic business relationships with a limited
number of full-service suppliers such as CII. Lastly, the increasing
technological complexity, electrical content, and miniaturization of products
manufactured by the Company's customers are expected to continue to result in
increased demand for the Company's high performance relays and solenoids which
provide advantages of small size, light weight, long life, low energy
consumption, and durability.
The Company was incorporated in North Carolina in 1980. The Company's
executive offices are located at 1396 Charlotte Highway, Fairview, North
Carolina, 28730 and its telephone number is (704) 628-1711.
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COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
Strong Market Position. The Company's reputation for quality and reliability
has allowed it to establish a strong market position in each of its principal
product lines. The Company believes it is a worldwide market leader in high
voltage, signal level and power relay products, which products accounted for
78.1% of the Company's 1996 net sales. The Company also believes it holds a
leading market position for products it manufactures that are designated on
the U.S. Department of Defense Qualified Parts List ("QPL").
Long Term Customer Relationships. The Company has long term relationships
with its principal customers in the commercial aircraft, defense, aerospace,
medical equipment and telecommunication industries. The Company has been a
supplier to Boeing, Lucent Technologies, Motorola, Honeywell, Tellabs, and
others for more than 15 years. The Company's long term relationships with its
customers have resulted in collaborative research and development efforts that
have been integral to its new product development strategy and strong market
position.
Sole Source Relationships. Due to CII's superior customer service and
ability to provide full service design and manufacturing capabilities, the
Company's relays and solenoids are often specified into the design of its
customers' products. Once the Company's products have been specified into a
customer's design, CII is often designated the sole source supplier for the
life of the customer's product. In addition, CII benefits from replacement
part sales resulting from ongoing product maintenance and retrofitting. The
Company believes that in 1996 at least 55% of its net sales was attributable
to products for which the Company was the sole source supplier and that
approximately 20% of its 1996 net sales was from the sale of replacement
parts.
Focus on Niche High Performance Markets. The Company produces relays and
solenoids targeted for high performance and specialty niche segments. The
Company believes that these products generally provide higher margins than
general purpose products, are less sensitive to pricing and less susceptible
to technical obsolescence. The increasing technological complexity, electrical
content and miniaturization of products manufactured by the Company's
customers have resulted in, and are expected to continue to generate,
increased demand for the Company's high performance relays and solenoids which
provide the advantages of small size, light weight, long life, low energy
consumption, and durability.
Long Product Lives; Low Technological Obsolescence. Many of the Company's
high performance relays and solenoids are utilized in products that have long
production cycles and extended product lives, including commercial and
military aircraft, locomotives and power generation equipment. Once
incorporated into the design of such products, the Company's relays and
solenoids generally are employed throughout the applicable product's life due,
in part, to the time and cost associated with the redesign and recertification
of alternative products. Additionally, the basic technology supporting a
substantial portion of the Company's products has been applied in products for
over 50 years. Although the size, weight, and functionality of relays and
solenoids have and will continue to evolve, the underlying technology of
relays and solenoids is established and proven.
Commitment to Quality, Flexible Manufacturing. The Company's manufacturing
processes have been designed to meet the stringent product quality and
inventory management requirements of its customers, including ISO 9000 for
various industrial markets, QS 9000 for the automotive market, D19000 for the
aircraft market, and military standards for markets served by QPL products.
The Company has established manufacturing facilities in Mexico, a joint
venture in India and supply relationships in China in order to enhance its
global supply capabilities and lower its production costs.
Broad Product Line, Diverse Customer Base. The Company currently markets and
assembles more than 750 types of high performance, general, and electronic
relays and solenoids and believes that it has one of the largest and most
diverse product portfolios of any manufacturer in its markets. The Company
sells to more than 2,100 customers worldwide in a number of growing industries
including commercial aircraft, defense electronics, telecommunications
equipment, satellite, medical equipment, environmental controls, and electric
vehicles.
40
<PAGE>
STRATEGY
The Company's business objective is to strengthen its position as a leading
supplier of high performance relays and solenoids by: (i) employing its strong
relationships with existing customers to develop new products and
applications; (ii) developing new high performance relays and solenoids to
capitalize on the trend towards increasing technological complexity,
electrical content, and miniaturization in the products manufactured by the
Company's customers; (iii) pursuing strategic acquisitions that complement and
expand the Company's product lines, manufacturing capabilities, geographic
markets, and customer base; and (iv) increasing its international sales.
Enhance Customer Relationships. The Company has developed strong
relationships with the engineering and purchasing personnel of many of its
customers, allowing it to identify business opportunities and respond to
customer needs in the early stages of product design. The Company believes
that these relationships will continue to provide a competitive advantage in
marketing its broad range of products and in developing new product concepts
which complement its existing product lines.
Expand Product Offerings, Pursue New Market Opportunities. The Company seeks
to build on its strong market position in high performance relays and
solenoids and capitalize on the trend toward increasing electrical content in
defense and commercial aircraft, increasing technological complexity of
satellites and medical equipment, and the miniaturization of many types of
equipment by continuing to develop new high performance relays and solenoids
which provide the advantages of small size, light weight, low energy
consumption, and durability. The Company is developing new product
applications in the telecommunication, satellite, medical equipment, and
automotive industries.
Pursue Strategic Acquisitions. The worldwide relay and solenoid market is
highly fragmented with more than 500 participants. CII believes that the
ongoing consolidation of the industry will provide attractive opportunities to
acquire high quality businesses and product lines. The Company has
successfully completed 13 acquisitions since its inception at purchase prices
ranging from approximately $300,000 to $14.4 million and averaging
approximately $2.9 million. The Company has a demonstrated track record of
increasing revenues and improving profitability of its acquired operations.
The Company seeks to make acquisitions that: (i) provide additional product,
manufacturing and technical capabilities; (ii) broaden the Company's
geographic coverage both domestically and internationally; and (iii) add new
customers and enable CII to further penetrate its existing customer base. The
following table sets forth the Company's strategic acquisitions to date:
<TABLE>
<CAPTION>
YEAR NAME OF SELLER OR ACQUIRED COMPANY ACQUISITION TYPE PRODUCT TYPES
---- ------------------------------------------------ ---------------- --------------------------
<C> <S> <C> <C>
1983 Sun Electric Company Product lines Aircraft instrumentation
1984 Midland--Ross Corporation Product lines High performance relays
1985 Automotive Electric Division of GTE Product lines Telecommunication relays
1986 Branson Corporation Company High performance relays
1990 Sigma Relay Division of Pacific Scientific Co. Product lines Custom application relays
1990 Airpax Relay Division of North American Phillips Product lines High performance relays
and solenoids
1993 CP Clare Corporation Product lines Telecommunication relays
1993 West Coast Electrical Manufacturing Co. Company Solenoids
1993 Midtex Relays, Inc. Company General purpose relays
1994 Deutsch Relays, Inc. Product lines High performance relays
1995 HiG Relays Inc. Product lines High performance relays
1995 Kilovac Corporation Company High voltage relays,
vacuum and gas filled
relays, and DC power
relays
1996 Hartman Electrical Manufacturing Product lines High performance power
relays and electrical
subsystems
</TABLE>
41
<PAGE>
Increase International Sales. Over the last few years, the Company has
expanded the size and geographic scope of its international sales and
marketing network and currently has sales representatives and distributors in
approximately 31 countries. As a result of the Company's larger distribution
network and broad product line, its international sales increased to 19% of
net sales in 1996 from 15% in 1995. The Company expects its international
sales to continue to increase as a percentage of net sales as its existing
international relationships mature and as new relationships are established.
INDUSTRY OVERVIEW
According to industry sources, the worldwide market for relays and solenoids
is estimated to be approximately $5 billion and growing at a compound annual
rate of approximately 5%. Management estimates that the high performance and
other specialty niche relay segments targeted by the Company are growing more
rapidly than the overall market. Additionally, market share gains by broad
line suppliers such as the Company have allowed them to grow at a
substantially faster rate than the industry as a whole. The worldwide relay
and solenoid market is highly fragmented with more than 500 participants.
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 Company's primary markets are consolidating
their supplier base in an effort to develop long term strategic business
relationships with a more limited number of suppliers that provide a broad
range of high quality products, together with full service capabilities,
including design, engineering and product management support. The Company
intends to continue to pursue opportunities for growth through strategic
acquisitions that enhance its product, manufacturing and service capabilities.
A second trend is an increase in the technological complexity, electrical
content, and miniaturization of the equipment manufactured by the Company's
customers. As its customers develop increasingly complex products 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.
PRODUCTS
Relays
A relay is an electrically operated switch which controls electric current
or signal transmissions. Electromechanical relays are a form of relay which
utilize discrete switching elements which are opened or closed by
electromagnetic energy and thus control circuits with physical certainty.
These relays are designed to meet exacting circuit and ambient conditions and
can control numerous circuits simultaneously. Certain low wattage relays 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 the electrical distribution systems for aircraft, heart
defibrillators, electric vehicles 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 fundamental
switching functions performed by such products, they are critical components
in a wide range of commercial and industrial electrical and electronic
applications.
High performance relays--79.0% of 1996 net sales. High performance relays
are characterized by their reliable performance and durability in adverse
operating environments. High performance relays provide customers with the
advantages of smaller size, lighter weight, longer life, lower energy
consumption, 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. High performance relays generally
command higher
42
<PAGE>
selling prices than general purpose relays. The Company's high performance
relays are sold to manufacturers of commercial aircraft, communication
systems, medical equipment, avionics systems, automatic test equipment,
aerospace and defense products.
General purpose relays--15.4% of 1996 net sales. The Company's general
purpose relays are generally targeted towards specialty niche applications
with which the Company has sole source relationships. 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 create
operating efficiency with production lines that 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. Specific applications for the Company's general purpose
relays include environmental management systems and telecommunication
switches.
Electronic relays--2.3% of 1996 net sales. Electronic relays feature very
long service lives and high reliability, but such products are not appropriate
for applications requiring complete electrical isolation. Switching speed of
electronic relays is normally much faster than that of electromechanical
relays. The Company significantly increased its electronic relay product line
through the HiG Acquisition in January 1995. Electronic relays are sold to
commercial, industrial, and defense equipment manufacturers.
Solenoids--3.3% of 1996 net sales. Solenoids are similar to relays in
design, but rather than control currents or transmissions, they are applied
when a defined mechanical motion is required in the user's equipment or
system. 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 are custom designed and are used in aerospace, security,
power station, and automotive applications such as aerospace de-icing
equipment, commercial aircraft fuel shut-off valves, locking mechanisms for
landing gear, and thrust reversers for aircraft engines. General purpose
solenoid types are used in vending machines, automation equipment, office
equipment, and cameras.
PRODUCT DEVELOPMENT
The Company intends to continue to develop new products with its customers
to meet the application requirements of its customers and to expand the
Company's technical capabilities. As of June 30, 1997, the Company employed
over 50 engineers in research and development activities including the design
and development of new customer applications. The Company has formed strategic
partnerships with certain customers to develop new products, improve existing
products, and reduce total product costs. In 1996, the Company's customers
funded $1.6 million of the Company's product development expenses.
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 for aerospace and satellite equipment that are
continuously utilized in adverse conditions.
The Company is currently developing several new general purpose relays to be
used in automotive, commercial, and industrial applications. These products
are currently in the prototype stage and the Company expects to begin
manufacturing and selling certain of these products in 1998. Additionally, the
Company is currently developing several new solenoid types for use in office
equipment, vending machines, security systems, home appliances, automotive
door locks, electronic games, and personal computers.
43
<PAGE>
CUSTOMERS
The Company has established a diversified base of over 2,100 customers
representing a wide range of industries and applications. Sales to customers
outside of the United States comprised approximately 19% of net sales during
1996. No single customer accounted for 8% or more of the Company's total net
sales for 1996. The chart set forth below lists the Company's primary end use
markets, representative customers within such markets and certain end product
applications.
<TABLE>
<CAPTION>
MARKET SEGMENT REPRESENTATIVE CUSTOMERS PRODUCT APPLICATIONS
-------------- ------------------------ --------------------
<S> <C> <C>
Commercial Aircraft Airbus Industries, Flight Control Systems,
Aerospatiale, Navigation Control
Beech Aerospace, Boeing/ Systems, Communication
McDonnell-Douglas, British Systems, Radar Systems,
Aerospace, Cessna, Lear, Landing Gear Control
Smiths Industries Systems, Primary and
Secondary Power
Distribution
Aerospace & Defense Allied Signal, Bell Satellites, Missiles,
Helicopter, General Dynamics, Tanks, Defense Systems,
Grimes Aerospace, HR Textron, Navigation Equipment,
ITT Aerospace, Litton Aircraft, Global
Industries, Lockheed Martin, Positioning Equipment
Lucas Aerospace, McDonnell-
Douglas, NASA, Raytheon,
Rocketdyne, Rockwell,
Sundstrand Aviation, TRW,
Westinghouse Electric
Commercial & Amana, ABB, Burdick, Dover, Medical Instrumentation,
Industrial General Electric, Hercules, Heart Defibrillators,
Hewlett-Packard, Honeywell, Motor Controls, Railroad
Johnson Controls, Laerdal, Equipment, Generators,
Landis & Gyr, Lorain, Miller Welders, White Goods,
Electric, Montgomery Appliances, Heating,
Elevator, Onan, Otis Ventilation, Air
Elevator, Physio Control, Conditioning Controls,
Rockwell, Safetran Systems, Spas, Metering, High
Scotsman, Siemens, Taylor Voltage Testers, Vending
Freezer & Equipment, Trane, Machines, Overhead Doors
Westinghouse Electric,
Whitaker Controls, Woodward
Governor, Zoll Medical
Communications AG Communications Systems, Central Office Switches,
Alcatel, Allied Signal, Station Switches, RF
Collins, Daewoo, IBM, Lucent Radios, Facsimile
Technologies, Motorola, Communications, Line Test
Pulsecom, Rockwell, Tellabs, Equipment, Wireless Phones
Teltrend, Wiltron
Automatic Test Hewlett-Packard, IBM, Picon, Electronic Systems, Test
Equipment Schlumberger and Component Systems
Automotive Chrysler, General Motors, Electric Vehicles,
Mercedes-Benz Automotive Security
Systems
</TABLE>
44
<PAGE>
SALES AND DISTRIBUTION
The Company sells its products worldwide through a network of 72 independent
sales representatives and 27 distributors in approximately 31 countries
throughout 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. This service and support is designed to assist customers in the
proper application of the Company's products and thereby increase operating
efficiencies for the customer. 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 line to both existing and new
customers.
The Company provides its salespeople, representatives, and distributors with
product training on the application and use of all Company products. The
Company's application engineers, along with its product marketing managers,
develop application-related literature, answer questions on the application of
the Company's products, and provide field support during installation and use.
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 nearly all of its own marketing 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.
In 1996, approximately 77% of the Company's net sales were through
commissioned sales representatives who sell both to end users and
distributors. Commission rates to the Company's sales representatives vary
between approximately 2% and 10% of net sales depending upon the products. 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 and distributors enter into agreements with the
Company that allow for termination by either party upon 30 days notice. Sales
representatives do not sell or market competitive products. Distributors are
permitted to market and sell competitive products.
COMPETITION
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 competitors.
The Company believes that significant barriers to entry exist in certain
high performance relay markets in the form of stringent commercial and
military qualifications. Approximately 42.2% of the Company's net sales in
1996 were attributable to the Company's products which are qualified and
listed on the U.S. Department of Defense QPL and Federal Aviation
Administration product qualifications list. 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 United States Department
of Defense. The
45
<PAGE>
elimination by the military, the Federal Aviation Agency or certain commercial
customers of qualification requirements would lower these barriers to entry
and enable other relay manufacturers to sell products to such customers.
MANUFACTURING
In response to customers' increasingly stringent demands, the Company has
implemented manufacturing practices designed to maximize product quality and
timeliness of delivery and to eliminate waste and inefficiency. The Company
manufactures its products at five facilities which utilize advanced and other
proprietary assembly and processing techniques. The Company has established
manufacturing facilities in Mexico, entered into the Indian Joint Venture and
established supply relationships in China in order to enhance its global
supply capabilities and lower production costs. In order to reduce production
costs, the Company maintains continued emphasis on shortening production cycle
time, reducing the number of suppliers, and increasing use of outsourced
standard components and sub-assemblies. The Company has continued to upgrade
its manufacturing capabilities by investing in new equipment, reengineering
its manufacturing processes, and acquiring companies with sophisticated
manufacturing technologies.
In November 1995, the Company formed the Indian Joint Venture with Guardian
Controls, an Indian company with which the Company has had a business
relationship for more than ten years. The Indian Joint Venture produces relays
for the domestic Indian market and global markets and manufactures 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 has transferred 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 also subcontracts for certain relays and solenoids to six
subcontractors located in China and Japan which represented approximately 4.2%
of the Company's net sales in 1996. 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.
FACILITIES
The Company, headquartered in Fairview, North Carolina, operates the
following manufacturing and distribution facilities. The Company believes that
such facilities are maintained in good condition and are adequate for their
present and intended needs:
<TABLE>
<CAPTION>
SQUARE OWNED/
LOCATION FOOTAGE LEASED PRODUCTS MANUFACTURED
-------- ------- ------ ---------------------
<S> <C> <C> <C>
Fairview, North
Carolina............... 70,000 Owned High performance relays and solenoids
Mansfield, Ohio......... 53,000 Leased High performance power relays
Juarez, Mexico.......... 45,000 Leased General purpose relays
Carpinteria, California. 44,000 Leased High voltage and power switching relays
Asheville, North
Carolina............... 26,000 Owned High performance relays and electronic relays
El Paso, Texas.......... 6,000 Leased Distribution center
</TABLE>
The Company's manufacturing and assembly facilities contain approximately an
aggregate of 244,000 square feet of floor space. The Company currently has
available manufacturing space in certain of its facilities.
46
<PAGE>
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 Company's two facilities in North Carolina and its facility
in Ohio, each of which manufactures products for the military, maintain
Military Standard 790 and Military Standard I 45208 certifications,
respectively.
The leases for the Company's facilities in Juarez, Mexico and Carpinteria,
California expire in June 1998 and April 1999, respectively. The lease for the
Company's Mansfield, Ohio facility expires in 2006, subject to an option to
purchase.
PROPRIETARY RIGHTS
The Company currently holds seven patents and one registered trademark and
has four patent applications and four trademark registrations pending. None of
the Company's material patents expire prior to 2007. 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.
EMPLOYEES
As of June 30, 1997, the Company had approximately 1,070 employees. Of these
employees, approximately 264 are salaried employees and approximately 807 are
hourly workers. Of the approximately 264 salaried employees, approximately 69
perform manufacturing functions, over 50 are engineers engaged in research and
development activities, including the design and development of new customer
applications, 25 perform quality assurance tasks and 15 perform customer
service. Approximately 137 of the Company's employees in the Mansfield Ohio
facility are represented by the International Union of Electronics,
Electrical, Salaried, Machine and Furniture Workers AFL, CIO and are covered
by a collective bargaining agreement, which is scheduled to expire in
September, 1999. The Company believes that its relations with its employees
are satisfactory.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time in the
ordinary course of its business. As of the date of this Prospectus the Company
is not a party to any lawsuit or proceeding which, individually or in the
aggregate, in the opinion of management, is reasonably likely to have a
material adverse effect on the financial condition of 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
47
<PAGE>
can be no assurance that violations will not occur or be identified, or that
environmental laws and regulations will not change in the future, in a manner
that could materially and adversely affect the Company.
Under certain circumstances, such environmental laws and regulations may
also impose joint and several liability for investigation and remediation of
contamination at locations owned or operated by an entity or its predecessors,
or at locations at which wastes or other contamination attributable to an
entity or its predecessors have come to be located. The Company can give no
assurance that such liability at facilities the Company currently owns or
operates, or at other locations, will not arise or be asserted against the
Company or entities for which it may be responsible. Such other locations
could include, for example, facilities formerly owned or operated by the
Company (or an entity or business that the Company has acquired), or locations
to which wastes generated by the Company (or an entity or business that the
Company has acquired) have been sent. Under certain circumstances such
liability at several locations (discussed below), or at locations yet to be
identified, could materially and adversely affect the Company.
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 on the Company's financial position
or results of operations.
Soil and groundwater contamination has been identified at and about the
Company's Fairview, North Carolina facility resulting in that site's inclusion
in the North Carolina Department of Environmental, Health & Natural Resource's
Inactive Hazardous Waste Sites Priority List. The Company believes that the
Fairview contamination relates to the past activities of a prior owner of the
Fairview property (the "Prior Owner"). On May 11, 1995, the Company entered
into a settlement agreement (the "Settlement Agreement") with the Prior Owner,
pursuant to which the Prior Owner agreed to provide certain funds for the
investigation and remediation of the Fairview contamination in exchange for a
release of certain claims by the Company. In accordance with the Settlement
Agreement, the Prior Owner has placed $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 does not believe that the
total investigation and remediation costs will exceed the amounts that the
Prior Owner is required to provide pursuant to the Settlement Agreement. The
Company has recorded a liability for the total remediation costs of
approximately $3.5 million, representing the discounted amount of future
remediation costs over the 30 year period of remediation. Applicable
environmental laws provide for joint and several liability, except under
certain circumstances. Accordingly, the Company, as the current owner of a
contaminated property, could be held responsible for the entire cost of
investigating and remediating the site. If the site remedial system fails to
perform as anticipated, or if the funds to be provided by the Prior Owner
pursuant to the Settlement Agreement together with the Company's reserve are
insufficient to remediate the property, or if the Prior Owner fails to make
the scheduled future contribution to the environmental escrow, the Company
could be required to incur costs that could materially and adversely affect
the Company. See "Risk Factors--Environmental Matters."
In connection with the Hartman Acquisition, the Company entered into an
agreement pursuant to which it leases from a wholly owned subsidiary of Figgie
a manufacturing facility in Mansfield, Ohio, at which Hartman
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<PAGE>
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.
49
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages and
positions with the Company as of September 18, 1997, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION OR AFFILIATION
---- --- -----------------------
<S> <C> <C>
Ramzi A. Dabbagh........ 62 Chairman of the Board, Chief Executive Officer, President and Director
Michael A. Steinback.... 43 Chief Operating Officer and Director
G. Daniel Taylor........ 61 Executive Vice President of Business Development and Director
David Henning........... 50 Chief Financial Officer
Theodore H. Anderson.... 40 Vice President
Daniel R. McAllister.... 42 Vice President
James R. Mikesell....... 55 Vice President
Carl R. Freas........... 59 General Manager
Brian P. Simmons........ 37 Director
Andrew W. Code.......... 38 Director
Steven R. Brown......... 28 Director
Jon S. Vesely........... 31 Director
</TABLE>
The following table sets forth certain information concerning the Guarantors'
directors and officers as of September 18, 1997. Officers of the Guarantors
serve at the discretion of the respective board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION OR AFFILIATION
---- --- -----------------------
<S> <C> <C>
Ramzi A. Dabbagh........ 62 Chairman of the Board and President of Kilovac and Kilovac International
David Henning........... 50 Chief Financial Officer of Kilovac and Kilovac International
Daniel R. McAllister.... 44 Vice President and General Manager of Kilovac
Pat McPherson........... 52 Vice President Sales and Marketing of Kilovac
Robert T. Helman........ 56 Vice President Quality Assurance of Kilovac
Richard Danchuk......... 31 Vice President Finance of Kilovac
Brian P. Simmons........ 37 Director of Kilovac and Kilovac International
</TABLE>
The present principal occupations and recent employment history of each of
the executive officers and directors of the Company and the Guarantors listed
above are set forth below:
Ramzi A. Dabbagh is the Chairman of the Board, Chief Executive Officer and
President of the Company and Chairman of the Board of Kilovac and Kilovac
International and a director of Kilovac International. He served as President
of Communications Instruments from 1982 to 1995. Mr. Dabbagh served as
President and Chairman of the National Association of Relay Manufacturers
("NARM") from 1991 to 1993 and has been a director of NARM since 1990.
Michael A. Steinback became Chief Operating Officer of CII and a director of
the Company in 1995. He served as the Vice President of Operations of CII 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 two years.
50
<PAGE>
G. Daniel Taylor has been the Executive Vice President of Business
Development of the Company since 1995 and a director of the Company since
1993. He served as a director of Kilovac from 1995 to 1997. 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 1994. He held
various positions at CP Clare Corporation from 1971 to 1994 including Chief
Financial Officer from 1992 to 1994. He became Chief Financial Officer of
Kilovac and Kilovac International in 1997.
Theodore H. Anderson joined the Company in 1993 as Vice President and
General Manager of the Juarez, Mexico operations and was promoted to Vice
President and General Manager of North Carolina operations in January 1997.
Mr. Anderson previously served as Product Marketing Manager, Director of
Export Sales, with CP Clare Corporation and with Midtex Relays, Inc.
Daniel R. McAllister has served as the Vice President of the Company and
Vice President of Manufacturing and Engineering of Kilovac since the Kilovac
Acquisition in 1995 and had served as Vice President of Product Development
for Kilovac since 1990.
James R. Mikesell joined the Company as Vice President and General Manager
of Hartman in 1996 upon the completion of the Hartman Acquisition. Mr.
Mikesell joined Hartman Electrical Manufacturing in 1994, from IMO Industries,
where he had been the General Manager of their Controlex Division for the
previous five years.
Carl R. Freas has been General Manager of the Juarez, Mexico operations
since January 1997 and previously served as director of manufacturing since
1995. Previous positions were in manufacturing management, engineering, and
finance.
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.
Brian P. Simmons is a Principal of Code, Hennessy & Simmons, Inc. Since
founding Code, Hennessy & Simmons, Inc. in 1988, Mr. Simmons has been actively
involved in the investment origination and investment management activities of
such company. Prior to founding Code, Hennessy & Simmons, Inc., Mr. Simmons
was a Vice President with Citicorp's Leveraged Capital Group and before that
was employed by Mellon Bank.
Andrew W. Code is a Principal of Code, Hennessy & Simmons, Inc. Since
founding Code, Hennessy & Simmons, Inc. in 1988, Mr. Code has been actively
involved in the investment organization and investment management activities
of such company. Prior to founding Code, Hennessy & Simmons, Inc., Mr. Code
was a Vice President with Citicorp's Leveraged Capital Group and before that
was employed by American National Bank.
Steven R. Brown is a Vice President of Code, Hennessy & Simmons, Inc. Prior
to joining Code, Hennessy & Simmons, Inc. in 1994, Mr. Brown was employed by
Heller Financial. Mr. Brown held various positions within Heller's commercial
leveraged lending and real estate departments.
51
<PAGE>
Jon S. Vesely is a Principal of Code, Hennessy & Simmons, Inc. Prior to
joining Code, Hennessy & Simmons, Inc. in 1991, Mr. Vesely was employed by
First Chicago Corporation in its leveraged leasing group.
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, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION SALARY BONUS COMPENSATION COMPENSATION (1)
------------------ -------- -------- ------------ ----------------
<S> <C> <C> <C> <C>
Ramzi A. Dabbagh....... $183,390 $118,984 $43,079 $6,880
Chairman, President
and Chief Executive
Officer
Michael A. Steinback... 136,890 93,883 24,017 740
Chief Operating
Officer
G. Daniel Taylor....... 117,670 83,509 14,030 4,268
Executive Vice
President of Business
Development
David Henning.......... 106,968 77,733 6,000 943
Chief Financial
Officer
</TABLE>
- - - ---------
(1) These amounts represent insurance premiums paid by the Company with respect
to term life insurance.
EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with Messrs. Dabbagh and Taylor
which terminate in May 1998 and provide for annual base salaries of $193,767
and $124,323, respectively. 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 one 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 in or 1% ownership of a
public company is not precluded). The employment agreements may be terminated
immediately by the Company for cause (as defined therein) or within three
months after the death or disability of the employee as determined in good
faith by the Board of Directors of the Company. 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 is party to employment agreements with Messrs. Steinback and
Henning which expire in April 1998 and December 1997, respectively, and are
subject to automatic renewal each year unless either the Company or such
employee elects to terminate such agreement. Messrs. Steinback and Henning are
entitled to receive annual salaries (subject to annual review) of $155,625 and
$113,015, respectively, annual auto allowances, and other standard employee
benefits applicable to the Company's other executive officers, and are
52
<PAGE>
entitled to participate in the Company's executive bonus plan. Mr. Steinback is
entitled to receive full salary and benefits for a year if he is terminated at
any time during such year.
STOCK OPTION PLAN
Parent is in the process of implementing a stock option plan which will
provide for the granting of options and other stock-based awards to officers
and employees of Parent and the Company representing up to 5.0% of Parent's
outstanding capital stock on a fully-diluted basis.
PRINCIPAL STOCKHOLDERS
Parent owns all of the Company's issued and outstanding capital stock. The
following table sets forth certain information regarding beneficial ownership
of the common stock of Parent after the consummation of the Recapitalization by
(i) each stockholder who the Company expects will own beneficially more than 5%
of the outstanding capital stock of Parent and (ii) each director, each Named
Executive Officer and all directors and executive officers of the Company as a
group. Except as set forth in the footnotes to the table, each stockholder
listed below has informed the Company that such stockholder has sole voting and
investment power with respect to the shares of common stock of the Company
beneficially owned by such stockholder.
<TABLE>
<CAPTION>
SHARES OF
PARENT
COMMON STOCK
BENEFICIALLY
OWNED (1)
---------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------- -------
<S> <C> <C>
Code, Hennessy & Simmons
III, L.P. (2).......... 736,180 73.6%
TCW/Crescent Mezzanine,
L.L.C. (3)............. 90,101 8.9
Ramzi A. Dabbagh (4).... 48,000 4.8
Michael A. Steinback
(4).................... 30,480 3.0
G. Daniel Taylor (4).... 20,000 2.0
David Henning (4)....... 10,940 1.1
Brian P. Simmons (5)(6). 736,180 73.6
Andrew W. Code (5)(6)... 736,180 73.6
Jon S. Vesely (6)....... -- --
Steven R. Brown (6)..... -- --
Directors and executive
officers as a group (12
persons)............... 865,600 86.6
</TABLE>
- - - ---------
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person has beneficial ownership of any securities as to which
such person, directly or indirectly, through any contract, arrangement,
undertaking, relationship or otherwise has or shares voting power and/or
investment power and as to which such person has the right to acquire such
voting and/or investment power within 60 days. Percentage of beneficial
ownership as to any person as of a particular date is calculated by
dividing the number of shares beneficially owned by such person by the sum
of the number of shares outstanding as of such date and the number of
shares as to which such person has the right to acquire voting and/or
investment power within 60 days. The figures shown above do not take into
account any shares of common stock of Parent issuable upon exercise of
stock options to be granted at or subsequent to the date of the
Recapitalization.
(2) The address of Code, Hennessy & Simmons III, L.P. is 10 South Wacker Drive,
Suite 3175, Chicago, Illinois 60606.
(3) Includes shares of common stock held by certain affiliates of TCW/Crescent
Mezzanine, L.L.C. ("TCW/Crescent LLC") listed herein, and also includes
10,101 shares of common stock that TCW will have the right to acquire upon
exercise of certain warrants issued to TCW in connection with the
Recapitalization. TCW/Crescent LLC is the general partner of (i)
TCW/Crescent Mezzanine Partners, L.P. (the "L.P."), which holds 6.0% of the
Company's outstanding common stock and (ii) TCW/Crescent
53
<PAGE>
Mezzanine Investment Partners, L.P. (the "Investment L.P."). The managing
owner of TCW/Crescent Mezzanine Trust (the "Trust") is TCW/Crescent LLC. The
general partner of TCW Shared Opportunity Fund II, L.P. ("SHOP II") is TCW
Investment Management Corporation ("TIMCO"). The investment adviser of TCW
Leveraged Income Trust, L.P. ("LINC") is TIMCO. The investment adviser of
Crescent/Mach I Partners, L.P. ("MACH I") is TCW Asset Management Company
("TAMCO"). The entities referred to above are hereinafter collectively
referred to as "TCW". TCW holds 100% of the Company's outstanding warrants
to purchase 10,101 shares of common stock; the L.P. holds 67.6% of the
warrants, and the Trust holds 20.6% of the warrants. Messrs. Mark Attanasio,
Robert Beyer, Jean-Marc Chapus and Mark Gold are portfolio managers of one
or more of the L.P., Investment L.P., Trust, SHOP II, MACH I or LINC, and
with respect to such entities, exercise voting and dispositive powers on
their behalf. The address of TCW is 11100 Santa Monica Boulevard, Suite
2000, Los Angeles, California 94111.
(4) The address of each such person is c/o CII Technologies, Inc., 1396
Charlotte Highway, Fairview, North Carolina 28730.
(5) All of such shares are held of record by Code, Hennessy & Simmons III, L.P.
Messrs. Simmons and Code are officers, directors and stockholders of Code,
Hennessy & Simmons, Inc., the sole general partner of CHS Management III,
L.P., the sole general partner of Code, Hennessy & Simmons III, L.P.
Messrs. Simmons and Code disclaim beneficial ownership of such shares.
(6) The address of each such person is c/o Code, Hennessy & Simmons, Inc., 10
South Wacker Drive, Suite 3175, Chicago, Illinois 60606.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
In connection with the Recapitalization, the Company entered into a
Management Agreement with CHS Management III, L.P. ("CHS Management"), an
affiliate of Code, Hennessy & Simmons, pursuant to which CHS Management will
provide financial and management consulting services to the Company and receive
a monthly fee of $41,667. In addition, pursuant to the Management Agreement the
Company paid to CHS Management $500,000 at the closing of the Transactions as
compensation for services rendered by CHS Management to the Company in
connection with the Transactions. The Management Agreement also provides that
when and as the Company consummates the acquisition of other businesses, the
Company will pay to CHS Management a fee equal to one percent of the
acquisition price of each such business as compensation for services rendered
by CHS Management to the Company in connection with the consummation of such
acquisition. The term of the Management Agreement is five years, subject to
automatic renewal unless either CHS Management or the Company elects to
terminate; provided that the Management Agreement will terminate automatically
upon the occurrence of a change of control of the Company. The Company believes
that the fees to be paid to CHS Management for the professional services to be
rendered are at least as favorable to the Company as those which could be
negotiated with an unrelated third party. The Company also reimburses CHS
Management for expenses incurred in connection with the Transactions and with
its services rendered to the Company and Parent.
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization, Parent's stockholders entered into a
Stockholders Agreement. This agreement provides, among other things, for the
nomination of and voting for at least seven directors of Parent by Parent's
stockholders. The Stockholders Agreement also provides the number of directors
(subject to a minimum of seven) to be determined by Code, Hennessy & Simmons.
The following individuals have been initially designated by Code, Hennessy &
Simmons to serve as directors of Parent: Ramzi A. Dabbagh, Michael A.
Steinback, G. Daniel Taylor, Brian P. Simmons, Andrew W. Code, Jon S. Vesely,
and Steven R. Brown. See "Management."
54
<PAGE>
REGISTRATION AGREEMENT
In connection with the Recapitalization, Parent's stockholders entered into
a Registration Agreement. The Registration Agreement grants certain demand
registration rights to Code, Hennessy & Simmons. An unlimited number of such
demand registrations may be requested by Code, Hennessy & Simmons. In the
event that Code, Hennessy & Simmons makes such a demand registration request,
all other stockholders of Parent will be entitled to participate in such
registration on a pro rata basis (based on shares held). Code, Hennessy &
Simmons may request, pursuant to its demand registration rights, and each
other stockholder may request, pursuant to his or its participation rights,
that up to all of such stockholder's shares of common stock be registered by
Parent. Parent is entitled to postpone such a demand registration for up to
180 days under certain circumstances. In addition, the parties to the
Registration Agreement are granted certain rights to have shares included in
registrations initiated by Parent or its stockholders ("piggyback registration
rights"). Expenses incurred in connection with the exercise of such demand or
piggyback registration rights shall, subject to limited exceptions, be borne
by Parent.
TAX SHARING AGREEMENT
The operations of the Company are included in the Federal income tax returns
filed by Parent. Prior to the closing of the Initial Offering, Parent and the
Company entered into a Tax Sharing Agreement ("Tax Sharing Agreement")
pursuant to which the Company agreed to advance to Parent (i) so long as
Parent files consolidated income tax returns that include the Company,
payments for the Company's share of income taxes assuming the Company is a
stand-alone entity, which in no event may exceed the group's consolidated tax
liabilities for such year, and (ii) payments to or on behalf of Parent in
respect of franchise or similar taxes and governmental charges incurred by it
relating to the business, operations or finances of the Company.
RECAPITALIZATION
In connection with the Recapitalization, and subject to certain adjustments,
Messrs. Dabbagh, Steinback, Taylor, and Henning received approximately $3.47
million, $1.15 million, $1.74 million, and $414,000, respectively, in net cash
proceeds from their sale of shares of Parent and Parent's repayment of
indebtedness owing to them. Upon the satisfaction of certain conditions,
Messrs. Dabbagh, Steinback, Taylor and Henning could receive from funds
escrowed at the time of the consummation of the Transactions approximately
$187,000, $249,000, $187,000 and $62,000, respectively, in net cash proceeds.
OLD CREDIT FACILITY
Bank of America National Trust and Savings Association ("Bank of America")
was a lender and agent under the Old Credit Facility. A portion of the net
proceeds of the Offering were used to satisfy the obligations outstanding
under the Old Credit Facility. As a result of such repayment, Bank of America,
as agent under the Old Credit Facility for the benefit of all the existing
lenders thereunder, received a success fee of $1.6 million. See "Use of
Proceeds." Bank of America is a lender and the administrative agent in the
Senior Credit Facility. See "Description of the Senior Credit Facility." Bank
of America is an affiliate of BancAmerica Securities, Inc., one of the Initial
Purchasers. In addition, an affiliate of Bank of America and BancAmerica
Securities, Inc. owns a limited partnership interest in CII Associates, L.P.,
which, in turn, held a portion of the capital stock and certain indebtedness
of Parent acquired and repaid in connection with the Recapitalization. Subject
to certain adjustments, the net proceeds from the Recapitalization allocable
to such affiliate based on such partnership interest equaled approximately
$12.6 million.
55
<PAGE>
DESCRIPTION OF THE SENIOR CREDIT FACILITY
General. As part of the Transactions, the Company entered into the Senior
Credit Facility with Bank of America, as a lender and as administrative agent,
and BancAmerica Securities, Inc., as arranger, and certain other financial
institutions (the "Banks").
The Senior Credit Facility provides for revolving loans to the Company for
up to $25.0 million (including letters of credit). Subject to certain
restrictions, the Senior Credit Facility may be used to finance acquisitions,
investments and capital expenditures and for ongoing working capital and
general corporate purposes of the Company and its subsidiaries.
Repayment. Outstanding loans under the Senior Credit Facility must be repaid
on the sixth anniversary of the date of the closing of the Senior Credit
Facility. Loans made pursuant to the Senior Credit Facility may be borrowed,
repaid and reborrowed, without premium or penalty (other than LIBOR (as
defined in the Senior Credit Facility) breakage costs), from time to time
until the sixth anniversary of the date of the closing of the Senior Credit
Facility, subject to the satisfaction of certain conditions on the date of any
such borrowing. In addition, the Senior Credit Facility provides for mandatory
repayments (with corresponding permanent reductions on revolving loan
commitments) of any outstanding borrowings out of any proceeds received from a
sale of assets (other than sales of inventory in the ordinary course of
business, sales of certain obsolete assets, and certain other exceptions) and
net cash proceeds of permitted debt issuances (subject to certain exceptions).
Security; Guaranty. The obligations of the Company under the Senior Credit
Facility are guaranteed by Parent and each of the Company's other now-existing
and future domestic restricted subsidiaries. The obligation of the Company
under the Senior Credit Facility and each of the Guarantors under its
Guarantee is secured by substantially all of the assets (other than real
property) of such person.
Interest. At the Company's option, the interest rates per annum applicable
to the loans under the Senior Credit Facility will be a fluctuating rate of
interest measured by reference to one or a combination (at the Company's
election) of the following: (i) the Base Rate (as defined in the Senior Credit
Facility), plus the applicable borrowing margin, or (ii) the relevant LIBOR
Rate (as defined in the Senior Credit Facility), plus the applicable borrowing
margin. The applicable borrowing margin under the Senior Credit Facility is
1.25% for Base Rate-based borrowings and 2.25% for LIBOR Rate-based
borrowings, subject to adjustment in each case based on the Company's
Consolidated Leverage Ratio (defined in the Senior Credit Facility as the
ratio of Consolidated Indebtedness (as defined in the Senior Credit Facility)
to Consolidated EBITDA (as defined in the Senior Credit Facility)).
Fees. The Company has agreed to pay certain fees in connection with the
Senior Credit Facility, including: (i) letter of credit fees; (ii) agency
fees; and (iii) commitment fees. Commitment fees are payable at a rate per
annum of 0.5% on the undrawn amounts of the Senior Credit Facility, subject to
adjustment based on the Consolidated Leverage Ratio of the Company and its
subsidiaries.
Covenants. The Senior Credit Facility requires the Company to meet certain
financial tests, including a maximum leverage ratio, a minimum interest
coverage ratio and a minimum Consolidated EBITDA. The Senior Credit Facility
also contains covenants which, among other things, restrict the ability of the
Company and its subsidiaries (subject to certain exceptions) to incur liens,
transact with affiliates, incur indebtedness, declare dividends or redeem or
repurchase capital stock, make loans and investments, engage in mergers,
acquisitions and asset sales, acquire assets, stock, or debt securities of any
person, have additional subsidiaries, amend its certificate of incorporation
and bylaws, and make capital expenditures. The Senior Credit Facility also
requires the Company and its restricted subsidiaries to satisfy certain
customary affirmative covenants and to make certain customary indemnifications
to the Banks and the administrative agent under the Senior Credit Facility.
Events of Default. The Senior Credit Facility contains customary events of
default, including payment defaults, breach of representations or warranties,
covenant defaults, certain events of bankruptcy and insolvency, ERISA
violations, judgment defaults, cross-default to certain other indebtedness,
and a change in control of Parent or the Company.
56
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes offered hereby are to be issued as a separate series
under an Indenture dated as of September 18, 1997 (the "Indenture") among the
Company, the Guarantors and Norwest Bank, Minnesota, National Association, as
trustee (the "Trustee"). The form and terms of the Exchange Notes are the same
as the form and terms of the Old Notes (which they replace) except that (i)
the Exchange Notes bear a Series B designation, (ii) the Exchange Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, and (iii) the holders of Exchange Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Old Notes in certain circumstances relating to the timing of the Exchange
Offer, which rights will terminate when the Exchange Offer is consummated. The
Old Notes issued in the Initial Offering and the Exchange Notes offered hereby
are referred to collectively as the "Notes." The following summary of the
material provisions of the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all provisions
of the Indenture, a copy of which can be obtained from the Trustee upon
request. Upon the issuance of the Exchange Notes, or the effectiveness of the
Shelf Registration Statement, the Indenture will be subject to and governed by
the provisions of the Trust Indenture Act of 1939 (the "Trust Indenture Act"
). The definitions of certain terms used in the following summary are set
forth below under "--Certain Definitions." Wherever particular sections or
defined terms of the Indenture not otherwise defined herein are referred to,
such sections or defined terms shall be incorporated herein by reference, and
those terms made a part of the Indenture by the Trust Indenture Act also are
incorporated herein by reference.
GENERAL
The Notes, which mature on September 15, 2004, will be limited to $125.0
million in aggregate principal amount, $95.0 million of which will be issued
on the Issue Date. The Notes will not be entitled to any sinking fund. The
Notes will be redeemable at the option of the Company as described below under
"--Redemption."
The Notes will bear interest from September 18, 1997 at the rate per annum
set forth on the cover page hereof payable semi-annually in arrears on March
15 and September 15 of each year commencing on March 15, 1998 until the
principal thereof is paid or made available for payment to the Holders of
record at the close of business on the immediately preceding March 1 or
September 1, respectively. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. The circumstances under which the
interest rate may increase from the rate set forth on the cover page hereof
are described under "--Registration Rights Agreement."
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Trustee maintained for such purpose within the City
and State of New York or, at the option of the Company, payment of interest
may be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; provided that all
payments of principal, premium, if any, and interest with respect to Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in denominations
of $1,000 and integral multiples thereof. Any Old Notes that remain
outstanding after the completion of the Exchange Offer, together with the
Exchange Notes issued in connection with the Exchange Offer, will be treated
as a single class of securities under the Indenture.
All references herein to payments of principal, premium, if any, and
interest on the Notes shall be deemed to include any applicable Additional
Interest (as defined) that may become payable in respect of the Notes. See "--
Registration Rights Agreement."
SUBORDINATION
The Notes will be general unsecured obligations of the Company and will be
subordinated in right of payment to all current and future Senior Debt of the
Company, including the Company's obligations under the
57
<PAGE>
Senior Credit Facility. The Notes will rank pari passu with any future senior
subordinated indebtedness of the Company and will rank senior to any future
subordinated indebtedness of the Company. As of June 30, 1997, on a pro forma
basis after giving effect to the Transactions, the Company had outstanding
Senior Debt of approximately $3.1 million.
The Notes will be unconditionally guaranteed, on a senior subordinated
basis, as to the payment of principal, premium, if any, and interest, jointly
and severally, by all direct and indirect Restricted Domestic Subsidiaries of
the Company (the "Guarantors").
In connection with the Transactions, the Company entered into the Senior
Credit Facility, under which the Company may borrow up to an aggregate of
$25.0 million, subject to compliance with certain covenants and financial
ratios. See "Description of the Senior Credit Facility."
Upon any payment or distribution of assets of the Company of any kind or
character to creditors of the Company in a total or partial liquidation,
winding up, reorganization or dissolution of the Company or in a voluntary or
involuntary bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property, an assignment for the
benefit of creditors or any marshaling of the Company's assets and
liabilities, the holders of all Senior Debt will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt whether or not such interest is an
allowed claim in any such proceeding) before the Holders of the Notes will be
entitled to receive any payment of any kind or character with respect to the
Notes, and until all Obligations with respect to all Senior Debt are paid in
full in cash, any payment or distribution to which the Holders of the Notes
would be entitled shall be made to the holders of Senior Debt or their
Representative (except that Holders of the Notes may receive Permitted Junior
Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
Neither the Company nor any Person on behalf of the Company may make any
payment of any kind or character upon or in respect of the Notes (except from
the trust described under "--Legal Defeasance and Covenant Defeasance") if (i)
a default in the payment of the principal of, premium, if any, interest on,
unpaid drawings for letters of credit issued in respect of, or regularly
accruing fees with respect to, any Designated Senior Debt occurs and is
continuing or (ii) any other default occurs and is continuing with respect to
Designated Senior Debt that permits holders of the Designated Senior Debt as
to which such default relates to accelerate its maturity and, in the case of
clause (ii), the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Representative of any Designated Senior Debt.
Payments on the Notes may and shall be resumed (x) in the case of a payment
default described in clause (i) above, upon the date on which such default is
cured or waived and (y) in case of a default described in clause (ii) above,
the earlier of (a) the date on which all such defaults have been cured or
waived, (b) 179 days after the date on which the applicable Payment Blockage
Notice is received, (c) the date such Designated Senior Debt shall have been
paid in full in cash or (d) the date such Payment Blockage Period shall have
been terminated by written notice to the Trustee from the Representative of
the Designated Senior Debt initiating such Payment Blockage Period, after
which, in the case of clauses (a), (b), (c) and (d), the Company shall resume
making any and all required payments in respect of the Notes, including any
payments not made to the Holders of the Notes during the Payment Blockage
Period due to the foregoing prohibitions, unless the provisions described in
clause (i) above or the provisions of the immediately preceding paragraph are
then applicable. No new Payment Blockage Period may be commenced unless and
until 360 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice. No default that existed or was continuing on the date
of delivery of any Payment Blockage Notice to the Trustee shall be, or be
made, the basis for a subsequent Payment Blockage Notice unless such default
shall have been cured or waived for a period of not less than 90 days.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of the Notes may recover less ratably
than creditors of the Company who are holders of Senior Debt. The Indenture
will limit, subject to certain financial tests, the amount of additional Debt,
including Senior Debt, that the Company and its Subsidiaries can incur. See
"--Certain Covenants--Incurrence of Debt and Issuance of Disqualified Stock."
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GUARANTEES
Each Guarantor unconditionally guarantees, on a senior subordinated basis,
jointly and severally to each Holder and the Trustee, the full and prompt
performance of the Company's obligations under the Indenture and the Notes,
including the payment of principal, premium, if any, and interest on the
Notes. The Guarantees will be subordinated to Guarantor Senior Debt on the
same basis as the Notes are subordinated to Senior Debt. The obligations of
each Guarantor are limited to the maximum amount which after giving effect to
all other contingent and fixed liabilities of such Guarantor and after giving
effect to any collections from or payments made by or on behalf of any other
Guarantor in respect of the obligations of such other Guarantor under its
Guarantee or pursuant to its contribution obligations under the Indenture,
will result in the obligations of such Guarantor under the Guarantee not
consulting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a
Guarantee shall be entitled to a contribution from each other Guarantor in an
amount pro rata, based on the net assets of each Guarantor, determined in
accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company, another Guarantor that is a Restricted Subsidiary of the Company or a
Restricted Subsidiary that is or in connection therewith becomes a Guarantor
without limitation, or with other Persons upon the terms and conditions set
forth in the Indenture. See "Certain Covenants--Merger, Consolidation or Sale
of Assets". In the event all of the Capital Stock or assets of a Guarantor or
the parent company of a Guarantor are sold and the sale complies with the
provisions set forth in "Certain Covenants--Asset Sales," the Guarantor's
Guarantee will be released.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after September 15, 2001 upon not less than 30 nor
more than 60 days notice, at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on September 15, of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001.......................... 105.00%
2002.......................... 102.50%
2003 and thereafter........... 100.00%
</TABLE>
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
At any time prior to September 15, 2000, the Company may on any one or more
occasions redeem from the net proceeds of one or more Equity Offerings up to
an aggregate of 33.3% in aggregate principal amount of the Notes at a
redemption price of 110.0% of the principal amount thereof, plus accrued and
unpaid interest thereon to the redemption date; provided that at least $63.4
million aggregate principal amount of Notes remain outstanding immediately
after the occurrence of such redemption.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
the Notes or portions of them called for redemption.
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CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof and accrued and
unpaid interest thereon, if any, to the date of purchase (the "Change of
Control Payment"). Within 30 days following any Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase Notes on the
date specified in such notice, which date shall be no earlier than 30 days and
no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable
in connection with the repurchase of the Notes as a result of a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Trustee an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Trustee will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided, that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant
(including the mailing of the notice referred to above), but in any event
within 90 days following a Change of Control, the Company will either repay in
full in cash all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
repurchase of Notes required by this covenant and the Company's failure to
comply with this covenant shall constitute an Event of Default under the
Indenture. The Company will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facility will restrict the ability of the Company to
purchase any Notes and other senior subordinated or subordinated indebtedness
of the Company, and also will provide that certain change of control events
with respect to the Company would constitute a default thereunder. Any future
credit agreements or other agreements relating to Senior Debt to which the
Company becomes a party may contain similar restrictions and provisions. In
the event any such restrictions would prohibit the Company from purchasing
Notes upon a Change of Control, the Company could seek the consent of its
lenders to the purchase of Notes or could attempt to refinance the borrowings
that contain such restrictions. If the Company does not obtain such a consent
or repay such borrowings, the Company will remain prohibited from purchasing
Notes. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the Senior Credit Facility. In such circumstances,
the subordination provisions in the Indenture would likely restrict payments
to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
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The Change of Control provision of the Notes may in certain circumstances
make it more difficult or discourage a takeover of the Company and, as a
result, may make removal of incumbent management more difficult. The Change of
Control provision is a result of negotiations between the Company and the
Initial Purchasers.
The provisions of the Indenture would not necessarily afford Holders of the
Notes protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect Holders of the Notes.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another person or group may be
uncertain.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
Incurrence of Debt and Issuance of Disqualified Stock.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any Debt
(including Acquired Debt) and that the Company will not permit any of its
Restricted Subsidiaries to issue any shares of Disqualified Stock; provided,
however, that if no Default shall have occurred and be continuing at the time
or as a consequence of said Debt incurred, the Company and any Restricted
Subsidiary may incur Debt (including Acquired Debt) if the Consolidated Fixed
Charge Coverage Ratio for the Company's and its Restricted Subsidiaries most
recently ended four full fiscal quarters for which financial statements are
available immediately preceding the date on which such additional Debt is
incurred would have been at least 2.0 to 1.0, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Debt had been incurred at the beginning of such four-quarter
period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"):
(i) the incurrence by the Company or any of its Restricted Subsidiaries
of Debt under Credit Facilities; provided that the aggregate principal
amount of all Debt outstanding under Credit Facilities and incurred
pursuant to this clause (i), after giving effect to such incurrence, does
not exceed (y) the greater of (a) $25.0 million and (b) the Borrowing Base
less (z) the principal amount of Debt outstanding pursuant to clause (x)
below;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Debt;
(iii) the incurrence by the Company or any of its Restricted Domestic
Subsidiaries of Debt represented by the Notes or any Guarantee;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to refund, refinance or replace, Debt that was permitted by the
Indenture to be incurred;
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(v) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Debt between or among the Company and (a) any of its Wholly
Owned Restricted Subsidiaries or (b) any of its other Restricted
Subsidiaries if and to the extent such Debt, when incurred, constitutes an
Investment permitted by the "Restricted Payments" covenant; provided,
however, that (i) if the Company or any Guarantor is the obligor on such
Debt, such Debt is expressly subordinated to the prior payment in full in
cash of all Obligations with respect to the Notes or the Guarantees, as
applicable, and (ii) (A) any subsequent issuance or transfer of Equity
Interests that results in any Debt described in the foregoing clause (a)
being held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary and (B) any sale or other transfer of any such Debt to a Person
that is not either the Company or a Restricted Subsidiary shall be deemed,
in each case, to constitute an incurrence of such Debt by the Company or
such Subsidiary, as the case may be;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Debt that is
permitted by the terms of this Indenture to be outstanding or for the
purpose of fixing or hedging currency exchange risk with respect to any
currency exchanges;
(vii) Capitalized Lease Obligations and Purchase Money Obligations of the
Company and its Subsidiaries not to exceed $2.0 million in aggregate
principal amount (or accrued value, as applicable) at any time outstanding;
(viii) Guarantees by the Company of Debt of any Restricted Subsidiaries
otherwise permitted by this covenant and Guarantees by any of the Company's
Restricted Subsidiaries of Debt of the Company or any Restricted Subsidiary
permitted to be incurred under the covenant described under "--Guarantees
by Restricted Subsidiaries";
(ix) Indebtedness of the Company or any Restricted Subsidiary in respect
of performance bonds, bankers' acceptances, trade letters of credit, surety
bonds and guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(x) Debt of Foreign Subsidiaries incurred for working capital purposes in
an aggregate principal amount outstanding at any one time not to exceed the
sum of 85% of the net book value of such Subsidiaries' accounts receivable
determined in accordance with GAAP and 60% of the net book value of their
inventory determined in accordance with GAAP and guarantees by Foreign
Subsidiaries of such Debt (which Debt shall reduce the aggregate Debt
permitted pursuant to clause (i) above in the manner contemplated thereby);
and
(xi) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Debt in an aggregate principal amount (or accrued value, as
applicable) at any time outstanding, including all Permitted Refinancing
Debt incurred to refund, refinance or replace any other Debt incurred
pursuant to this clause (xi), not to exceed $10 million (which amount may,
but need not, be incurred in whole or in part under the Senior Credit
Facility).
For purposes of determining compliance with this covenant, in the event that
an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (xi) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Debt in any manner that
complies with this covenant and such item of Debt will be treated as having
been incurred pursuant to only one of such clauses or pursuant to the first
paragraph hereof. Accrual of interest, the accretion of accrued value and the
payment of interest in the form of additional Debt will not be deemed to be an
incurrence of Debt for purposes of this covenant.
Restricted Payments.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, make any Restricted
Payment, unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
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(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Debt pursuant to the Consolidated
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Debt and
Issuance of Disqualified Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (including Restricted Payments
permitted by clauses (i) and (iv) of the next succeeding paragraph and
excluding the Restricted Payments permitted by the other clauses therein),
is less than or equal to the sum of (i) 50% of the Consolidated Net Income
(or if Consolidated Net Income shall be a loss, minus 100% of such loss)
earned on an accumulative basis during the period beginning October 1, 1997
and ending on the last date of the Company's fiscal quarter immediately
preceding such proposed restricted payment, plus (ii) 100% of the aggregate
net cash proceeds received by the Company as capital contributions after
October 1, 1997 or from the issue or sale after October 1, 1997 of Equity
Interests of the Company or of Disqualified Stock or debt securities of the
Company that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt securities)
sold to a Restricted Subsidiary of the Company and other than Disqualified
Stock or convertible debt securities that have been converted into
Disqualified Stock), plus (iii) $2.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
or consummation of irrevocable redemption within 60 days after the date of
declaration thereof or giving of irrevocable redemption notice, if at said
date of declaration or giving of notice such payment or redemption would have
complied with the provisions of the Indenture; (ii) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Company or any Restricted Subsidiary of the Company or any Subordinated Debt
of the Company or any Restricted Subsidiary, in each case in exchange for, or
out of the net proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of the Company) of other Equity Interests of the Company
(other than any Disqualified Stock); provided, however, that the amount of any
such net proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (ii) of the
preceding paragraph; (iii) the redemption, repurchase, refinancing or
defeasance of Subordinated Debt in exchange for, or with the net cash proceeds
from, an Incurrence of Permitted Refinancing Debt ; (iv) the payment to the
Parent of any amounts required under the Tax Sharing Agreement; (v) up to
$350,000 in any period of four consecutive quarters to fund repurchases by the
Parent (or its successor) of Equity Interests therein or Debt therein issued
in connection with such Equity Interests held by Persons who have ceased to be
bona fide officers or employees of the Company or one of its Restricted
Subsidiaries, provided that any unused amount thereof may be carried forward
to subsequent periods so long as the total amount of such Restricted Payments
shall not exceed $2.5 million; and (vi) the payment of amounts to fund
Parent's bona fide corporate overhead and similar fees and expenses relating
to the ownership or operation of the Company.
Liens.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly create, incur, assume
or suffer to exist any Lien that secures obligations under any Pari Passu Debt
or Subordinated Debt on any asset or property of the Company or such
Restricted Subsidiary, or any income or profits therefrom, or assign or convey
any right to receive income therefrom, unless the Notes are equally and
ratably secured with the obligations so secured or until such time as such
obligations are no longer secured by a Lien.
Merger, Consolidation or Sale of Assets.
The Indenture provides that the Company may not consolidate or merge with or
into, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
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transactions, to another corporation, Person or entity unless: (i) the Company
is the surviving corporation or the Person (if other than the Company) formed
by such consolidation or into which the Company is merged or the Person that
acquires by conveyance, transfer or lease substantially all of the properties
and assets of the Company shall be a corporation organized and validly
existing under the laws of the United States or any State thereof or the
District of Columbia; (ii) the entity or Person formed by or surviving any
such consolidation or merger (if other than the Company) or the entity or
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company
under the Notes and the Indenture pursuant to a supplemental indenture in a
form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary
of the Company, the Company or the entity or Person formed by or surviving any
such consolidation or merger (if other than the Company), or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made (x) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (y) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Debt pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in the first paragraph
of the covenant described above under the caption
"--Incurrence of Debt and Issuance of Disqualified Stock."
The Indenture provides that each Guarantor (other than any Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of "--Asset Sales") will not, and the Company will not cause or permit any
Guarantor to, consolidate with or merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
its properties or assets to any Person other than the Company or any other
Guarantor unless: (i) such Guarantor is the surviving corporation or the
Person (if other than a Guarantor) formed by such consolidation or into which
such Guarantor is merged or the Person that acquires by conveyance, transfer
or lease substantially all of the properties and assets of such Guarantor
shall be a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia; (ii) such entity or
Person formed by or surviving any such consolidation or merger (if other than
the Guarantor) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all of the obligations of the Guarantor under the Guarantee pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction, no Default or Event of Default exists; and
(iv) except in the case of a merger of the Guarantor with or into the Company,
immediately after giving effect to such transaction and the use of any net
proceeds therefrom on a pro forma basis the Company could satisfy the
provisions of clause (iv) of the first paragraph of this covenant.
Transactions with Related Persons.
The Company will not, nor will it permit any of its Restricted Subsidiaries
to (a) sell, lease, transfer or otherwise dispose of any of its property to,
(b) purchase any property from, (c) make any Investment in, or (d) enter into
or amend any contract, agreement or understanding with or for the benefit of,
a Related Person of the Company or any Restricted Subsidiary (other than the
Company or any such Restricted Subsidiary) in which no Related Person (other
than the Company or a Wholly Owned Restricted Subsidiary of the Company) owns,
directly or indirectly, an equity interest (each a "Related Person
Transaction"), other than Related Person Transactions that are on terms that
are no less favorable to the Company or such Restricted Subsidiary than those
that could be obtained in a comparable arm's length transaction by the Company
or such Restricted Subsidiary from an unrelated party; provided that the
Company delivers to the Trustee (i) with respect to any Related Person
Transaction involving aggregate payments in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Related Person Transaction complies with the preceding
sentence and such Related Person Transaction is approved by a majority of the
disinterested members of the Board of Directors and (ii) with respect to any
Related Person Transaction involving aggregate payments in excess of $5.0
million, an affirmative opinion as to the fairness to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of view
issued by a nationally recognized accounting, appraisal,
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investment banking or consulting firm that is, in the judgment of the Board of
Directors of the Company, qualified to render such opinion. The foregoing
restrictions shall not apply to (a) any transactions between Wholly Owned
Restricted Subsidiaries of the Company, or between the Company and any Wholly
Owned Restricted Subsidiary of the Company, if such transaction is not
otherwise prohibited by the terms of the Indenture, (b) any transactions
between or among the Company and any Restricted Subsidiaries involving the
provision of goods or services in the ordinary course of business, (c) any
payments or purchases permitted by the "Restricted Payments" covenant, (d)
customary directors' fees, indemnification and similar arrangements, employee
salaries, bonuses or employment agreements, compensation or employee benefit
arrangements and incentive arrangements with any officer, director or employee
of the Company or any Restricted Subsidiary entered into in the ordinary
course of business (including customary benefits thereunder) and payments
under any indemnification arrangements permitted by applicable law, (e)
transactions undertaken pursuant to the Management Agreement, the Tax Sharing
Agreement and the Registration Agreement, (f) the issue and sale by the
Company to its stockholders of Equity Interests other than Disqualified Stock,
(g) the incurrence of intercompany Debt permitted pursuant to "--Incurrence of
Debt and Issuance of Disqualified Stock" above, (h) the pledge of Equity
Interests of Unrestricted Subsidiaries to support the Debt thereof, (i)
customary indemnification and similar arrangements with any officer, director
or employee of Parent relating to the business, operations or ownership of the
Company, and (j) the payment of amounts pursuant to the Management Agreement.
Payment Restrictions Affecting Restricted Subsidiaries.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii)
transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) the Senior Credit Facility as in effect as of the
date of the Indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are not more
restrictive taken as a whole with respect to such dividend and other payment
restrictions than those contained in the Senior Credit Facility as in effect
on the date of the Indenture (as determined by the Board of Directors of the
Company in its reasonable and good faith judgment), (b) the Indenture and the
Notes, (c) applicable law, (d) any instrument governing Debt or Capital Stock
of a Person acquired by the Company or any of its Restricted Subsidiaries as
in effect at the time of such acquisition (except to the extent such Debt was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, provided that, in the case of Debt, such Debt was
permitted by the terms of the Indentures to be incurred, (e) customary non-
assignment provisions in leases and other agreements entered into in the
ordinary course of business and consistent with past practices, restricting
assignment or restricting transfers of non-cash assets, (f) Purchase Money
Obligations for property acquired in the ordinary course of business and other
Liens permitted by the Indenture, in each case that impose restrictions of the
nature described in clause (iii) above on the property so acquired (or subject
to such Liens), (g) Debt permitted by clause (x) of Permitted Debt, (h)
Permitted Refinancing Debt, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Debt are not more restrictive
taken as a whole than those contained in the agreements governing the Debt
being refinanced (as determined by the Board of Directors of the Company in
its reasonable and good faith judgment), (i) contracts for the sale of assets,
(j) customary provisions in agreements with respect to Permitted Joint
Ventures or, (k) any pledge by the Company or a Restricted Subsidiary of the
Equity Interests of an Unrestricted Subsidiary to support the Debt thereof.
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Incurrence of Senior Subordinated Indebtedness.
The Indenture provides that (i) the Company will not, directly or
indirectly, incur, create, issue, assume, guarantee or otherwise become liable
for any Debt that is expressly subordinated or junior in right of payment to
any Senior Debt of the Company and senior in any respect in right of payment
to the Notes, and (ii) the Company will not, directly or indirectly, permit
any Guarantor to incur, create, issue, assume, guarantee or otherwise become
liable for any Debt that is expressly subordinated or junior in right of
payment to its Guarantor Senior Debt and senior in any respect in right of
payment to its Guarantee.
Guarantees by Restricted Domestic Subsidiaries.
The Company will not permit any of its Restricted Domestic Subsidiaries,
directly or indirectly, by way of the pledge of any intercompany note or
otherwise to assume, guarantee or in any other manner become liable with
respect to any Debt of the Company or any other Restricted Domestic Subsidiary
unless, in any such case (a) such Restricted Domestic Subsidiary that is not a
Guarantor executes and delivers a supplemental indenture to the Indenture,
providing a Guarantee and (b) (x) if any such assumption, guarantee or other
liability of such Restricted Domestic Subsidiary is provided in respect of
Senior Debt or Guarantor Senior Debt, the guarantee or other instrument
provided by such Restricted Domestic Subsidiary in respect of such Senior Debt
or Guarantor Senior Debt may be superior to the Guarantee pursuant to
subordination provisions no less favorable in any material respect to the
Holders than those contained in the Indenture and (y) if such assumption,
guarantee or other liability of such Restricted Domestic Subsidiary is
provided in respect of Debt that is expressly subordinated to the Notes, the
guarantee or other instrument provided by such Restricted Domestic Subsidiary
in respect to such subordinated Debt shall be subordinated to the Guarantee
pursuant to subordination provisions no less favorable in any material respect
to the Holders than those contained in the Indenture.
Notwithstanding the foregoing any such Guarantee by a Restricted Domestic
Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, from: (i) the
unconditional release of such Restricted Domestic Subsidiary from its
liability in respect of the Debt in connection with which such Guarantee was
executed and delivered pursuant to the preceding paragraph (including any Debt
in respect of the Senior Credit Facility); or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Domestic Subsidiary of the Company of all of the Company's Capital Stock in,
or all or substantially all of the assets of, such Restricted Domestic
Subsidiary or the parent of such Restricted Domestic Subsidiary; provided that
(a) such sale or disposition of such Capital Stock or assets is otherwise in
compliance with the terms of the Indenture and (b) such assumption, guarantee
or other liability of such Restricted Domestic Subsidiary that has been
released by the holders of the other Debt guaranteed; or (iii) such Guarantor
become an Unrestricted Subsidiary in accordance with the Indenture.
Asset Sales.
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash, properties and assets to be used in the Company's
business or Equity Interest in a Person which becomes a Restricted Subsidiary;
provided that the amount of (x) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or any
Restricted Subsidiary (other than contingent liabilities, liabilities that are
by their terms subordinated to the Notes or any guarantee thereof and
liabilities constituting Senior Debt) that are assumed by the transferee of
any such assets pursuant to a customary novation agreement or other agreement
that releases or indemnifies the Company or such Restricted Subsidiary from
further liability and (y) any securities, notes or other obligations received
by the Company or any such Restricted Subsidiary from such
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transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to
be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or such Restricted Subsidiary may apply such Net Proceeds at its
option, (a) to permanently repay, reduce or secure letters of credit in
respect of Senior Debt and/or Guarantor Senior Debt (and to correspondingly
reduce commitments with respect thereto in the case of revolving borrowings),
and/or (b) to the acquisition of a controlling interest in another business,
the making of a capital expenditure or Permitted Investment or the acquisition
of other assets, in each case, for use in the same or a similar line of
business as the Company or such Restricted Subsidiary was engaged in on the
date of such Asset Sale or reasonable extensions thereof. Pending the final
application of any such Net Proceeds, the Company or such Restricted
Subsidiary may temporarily reduce indebtedness under the Senior Credit
Facility (or any alternative or subsequent revolving credit agreement where
borrowings thereunder constitute Senior Debt and/or Guarantor Senior Debt) or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the
Company will be required to make an offer (an "Asset Sale Offer") to all
Holders of Notes and holders of any other Pari Passu Debt outstanding with
provisions requiring the Company to make an offer to purchase or redeem such
indebtedness with the proceeds from any Asset Sale as follows: (A) the Company
will make an offer to purchase from all holders of the Notes in accordance
with the procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of an
amount (the "Note Amount") equal to such Excess Proceeds multiplied by a
fraction, the numerator of which is the outstanding principal amount of the
Notes, and the denominator of which is the sum of the outstanding principal
amount of the Notes and such Pari Passu Debt (subject to proration in the
event such amount is less than the aggregate Asset Sale Offered Price (as
defined herein) of all Notes tendered), and (B) to the extent required by such
Pari Passu Debt to permanently reduce the principal amount of such Pari Passu
Debt, the Company will make an offer to purchase or otherwise repurchase or
redeem Pari Passu Debt (an "Asset Sale Pari Passu Offer") in an amount (the
"Pari Passu Debt Amount") equal to the excess of the Excess Proceeds over the
Note Amount; provided that in no event will the Company be required to make an
Asset Sale Pari Passu Offer in a Pari Passu Debt Amount exceeding the
principal amount of such Pari Passu Debt plus the amount of any premium
required to be paid to repurchase such Pari Passu Debt. The offer price for
the Notes will be payable in cash in an amount equal to 100% of the principal
amount of the Notes, plus accrued and unpaid interest, if any, to the date
(the "Asset Sale Offer Date") such Asset Sale Offer is consummated (the "Asset
Sale Offered Price"), in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate Asset Sale Offered Price of the
Notes tendered pursuant to the Asset Sale Offer is less than the Note Amount
relating thereto or the aggregate amount of Pari Passu Debt that is purchased
in an Asset Sale Pari Passu Offer is less than the Pari Passu Debt Amount, the
Company may use any remaining Excess Proceeds for general corporate purposes.
If the aggregate principal amount of Notes and Pari Passu Debt surrendered by
holders thereof exceeds the amount of Excess Proceeds, the Trustee shall
select the Notes to be purchased on a pro rata basis. Upon the completion of
the purchase of all the Notes tendered pursuant to an Asset Sale Offer and the
completion of a Pari Passu Offer, the amount of Excess Proceeds, if any, shall
be reset at zero.
The Indenture provides that, if the Company becomes obligated to make an
Asset Sale Offer pursuant to the immediately preceding paragraph, the Notes
and the Pari Passu Debt shall be purchased by the Company, at the option of
the holders thereof, in whole or in part in integral multiples of $1,000, on a
date that is not earlier than 30 days and not later than 60 days from the date
the notice of the Asset Sale Offer is given to holders, or such later date as
may be necessary for the Company to comply with the requirements under the
Exchange Act.
The Indenture provides that the Company will comply with the applicable
tender offer rules, including Rule 14e-1 under the Exchange Act, and any other
applicable securities laws or regulations in connection with an Asset Sale
Offer.
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Issuance and Sale of Capital Stock of Subsidiaries.
The Company will not, and will not permit any Restricted Subsidiary to
transfer, sell or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Restricted Subsidiary) unless the Net Proceeds from such transfer, sale or
other disposition are applied in accordance with "Sale of Assets."
Conduct of Business.
The Company and its Restricted Subsidiaries will not engage in any
businesses which are not the same, similar or related to the businesses in
which the Company and its Restricted Subsidiaries are engaged as of the date
of this Offering Memorandum, except to such extent as would not be material to
the Company and its Restricted Subsidiaries taken as a whole.
Guarantors.
The Indenture provides that so long as any Notes remain outstanding, any
Restricted Domestic Subsidiary shall (a) execute and deliver to the Trustee a
supplemental indenture in form reasonably satisfactory to the Trustee pursuant
to which such Restricted Domestic Subsidiary shall unconditionally guarantee
all of the Company's obligations under the Notes and the Indenture on the
terms set forth in the Indenture and (b) deliver to the Trustee an opinion of
counsel that such supplemental indenture has been duly authorized, executed
and delivered by such Restricted Domestic Subsidiary and constitutes a legal,
valid, binding and enforceable obligation of such Restricted Domestic
Subsidiary. Thereafter, such Restricted Domestic Subsidiary shall be a
Guarantor for all purposes of the Indenture.
If all the Capital Stock of any Guarantor is sold to a Person (other than
the Company or any of its Restricted Subsidiaries) and the Net Proceeds from
such Asset Sale are used in accordance with the terms of the covenant
described under "--Asset Sales," then such Guarantor will be released and
discharged from all of its obligations under its Guarantee of the Notes and
the Indenture.
Rule 144A Information Requirement.
The Company will furnish to the holders or beneficial holders of the Notes
and prospective purchasers of Notes designated by the holders of Notes, upon
their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act for so long as is required for an offer or
sale of the Notes to qualify for an exemption under Rule 144A.
Reports.
Whether or not required by the rules and regulations of the Commission, so
long as any Notes are outstanding, the Company will furnish to the holders of
Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-
K if the Company were required to file such Forms, including for each a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual financial statements only, a
report thereon by the Company's independent auditors and (ii) all reports that
would be required to be filed with the Commission on Form 8-K if the Company
were required to file such reports. From and after the time the Company files
a registration statement with the Commission with respect to the Notes, the
Company will file such information with the Commission, provided the
Commission will accept such filing.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
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"Accounts Receivable Subsidiary" means any Subsidiary of the Company that
is, directly or indirectly, wholly owned by the Company (other than director
qualifying shares) and organized solely for the purpose of and engaged in (i)
purchasing, financing and collecting accounts receivable obligations of
customers of the Company or its Subsidiaries, (ii) the sale or financing or
such accounts receivable or interest therein and (iii) other activities
incident thereto.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such other Person is merged with or into or
became a Restricted Subsidiary of such specified Person, including, without
limitation, Debt incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Restricted Subsidiary of such
specified Person, and (ii) Debt secured by a Lien encumbering any asset
acquired by such specified Person which, in each case, is not repaid at or
within five days following the date of such acquisition.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "Control"
(including, with correlative meanings, the terms "Controlling", "Controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease (other than operating leases entered
into in the ordinary course of business), conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business (provided that the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company and its Restricted Subsidiaries taken as a whole
will be governed by the provisions of the Indenture described above under the
caption "Repurchase at the Option of Holders Upon Change of Control" and/or
the provisions described above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries (to the extent such Equity Interests are held by the Company or
another Restricted Subsidiary of the Company), in the case of either clause
(i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $750,000 or (b)
net proceeds in excess of $750,000. Notwithstanding the foregoing: (t) a
transfer of assets by the Company to a Restricted Subsidiary or by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary, (u)
a disposition of goods held for sale in the ordinary course of business or
obsolete, worn out or damaged property or equipment in the ordinary course of
business, (v) an issuance of Equity Interests by a Restricted Subsidiary to
the Company or to another Restricted Subsidiary, (w) a Restricted Payment or
Permitted Investment that is permitted by the covenant described above under
the caption "--Certain Covenants--Restricted Payments", (x) the sale or
discount, in each case without recourse, of accounts receivable arising in the
ordinary course of business, but only in connection with the compromise or
collection thereof, (y) the grant in the ordinary course of business of any
non-exclusive license of patents, trademarks, registrations therefore and
other similar intellectual property and (z) sales of accounts receivable for
cash at fair market value, and any sale, conveyance or transfer of accounts
receivable in the ordinary course of business to an Accounts Receivable
Subsidiary or to third parties that are not Affiliates of the Company or any
Subsidiary of the Company will not be deemed to be Asset Sales.
"Asset Sale Offer" shall have the definition set forth under "--Certain
Covenants--Asset Sales."
"Asset Sale Offer Date" shall have the definition set forth under "--Certain
Covenants--Asset Sales."
"Asset Sale Offered Price" shall have the definition set forth under "--
Certain Covenants--Asset Sales."
"Asset Sale Pari Passu Offer" shall have the definition set forth under "--
Certain Covenants--Asset Sales."
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"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Borrowing Base" means, as of any date, an amount equal to the sum of (i)
60% of the aggregate book value of inventory (adjusted to include any LIFO
reserves) and (ii) 85% of the aggregate book value of all accounts receivable
(net of bad debt expense) of the Company and its Restricted Subsidiaries on a
consolidated basis, as determined in accordance with GAAP consistently
applied. To the extent that information is not available as to the amount of
inventory or accounts receivable as of a specific date, the Company may use
the most recent available information for purposes of calculating the
Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars and any other currency
that is convertible into U.S. dollars without legal restrictions and which is
utilized by the Company or any Restricted Subsidiary in the ordinary course of
its business, (ii) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or instrumentality
thereof having maturities of not more than one year from the date of
acquisition, (iii) certificates of deposit and eurodollar time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any lender party to the Senior Credit Facility or
with any domestic or foreign commercial bank having capital and surplus in
excess of $500 million and a Keefe Bank Watch Rating of "B" or better (or,
solely in the case of foreign commercial banks, a substantially equivalent
rating from any similarly recognized rating agency publishing ratings of such
banks), (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Corporation and in each case maturing within one year after the date of
acquisition, and (vi) money market, mutual or similar funds registered under
the Investment Company At of 1940, as amended, having assets in excess of
$100.0 million and substantially all of whose investments are comprised of
securities of the type described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act), or group of related persons, together with any affiliates
thereof (other than Permitted Holders), (ii) the adoption by the Company of a
plan relating to the liquidation or dissolution of the Company, (iii) the
first day on which a majority of the members of the Board of Directors of the
Company or the Parent (so long as the Parent beneficially owns a majority of
any class of the Voting Stock of the Company) are not Continuing Directors, or
(iv) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as defined
above) or group of related persons, together with any affiliates thereof
(other than Permitted Holders) becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 35% of the Voting Stock of the Company or the Parent
(measured by voting power
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rather than number of shares) provided that the Permitted Holders
"beneficially own" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the Voting Stock of the Company or the Parent (so long as the
Parent beneficially owns a majority of any class of the Voting Stock of the
Company) than such other Person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a majority of
the Board of Directors of the Company and the Parent (so long as the Parent
beneficially owns a majority of any class of the Voting Stock of the Company).
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, without
duplication, (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Subsidiaries for such
period, to the extent that such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Subsidiaries for such period, (including, without limitation,
amortization of debt issuance costs) to the extent that any such expense was
deducted in computing such Consolidated Net Income, plus (iv) depreciation,
amortization (including amortization of goodwill and other intangibles) and
other non-cash charges or expenses (excluding any such non-cash charge or
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Subsidiaries for such
period to the extent that such depreciation, amortization and other non-cash
charges or expenses were deducted in computing such Consolidated Net Income,
plus (v) the Loss Provision, minus (vi) other non-recurring non-cash items
increasing such Consolidated Net Income for such period (which will be added
back to Consolidated Cash Flow in any subsequent period to the extent cash is
received in respect of such item in such subsequent period), in each case, on
a consolidated basis and determined in accordance with GAAP. Notwithstanding
the foregoing, "Consolidated Cash Flow" shall be calculated without giving
effect to (i) the amortization of any premiums, fees or expenses incurred in
connection with any acquisition permitted under the Indenture and any related
financings and (ii) the amortization or depreciation of any amounts required
or permitted by Accounting Principles Board Opinion Nos. 16 (including non-
cash write-ups and non-cash charges relating to inventory and fixed assets, in
each case arising in connection with any such acquisition) and 17 (including
non-cash charges relating to intangibles and goodwill arising in connection
with any such acquisition).
"Consolidated Fixed Charge Coverage Ratio" means with respect to any Person
for any period, the ratio of the Consolidated Cash Flow of such Person for
such period to the Consolidated Fixed Charges of such Person for such period.
In the event that the Company or any of its Restricted Subsidiaries incurs,
assumes, Guarantees or redeems any Debt (other than revolving credit
borrowings) or issues preferred stock subsequent to the commencement of the
period for which the Consolidated Fixed Charge Coverage Ratio is being
calculated but prior to the date on which the event for which the calculation
of the Consolidated Fixed Charge Coverage Ratio is made (the "Calculation
Date"), then the Consolidated Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Debt, or such issuance or redemption of preferred stock, as if
the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the
proviso set forth in the definition of Consolidated Net Income, and (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Consolidated Fixed Charges
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, but only to the extent that the obligations giving rise to
such Consolidated Fixed Charges will not be obligations of the referent Person
or any
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of its Subsidiaries following the Calculation Date. In calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (l)
interest on Debt determined on a fluctuating basis as of the Calculation Date
and which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Calculation Date; (2) if interest on any
Indebtedness actually incurred on the Calculation Date may be optionally
determined at an interest rate based upon a factor of a prime or similar rate,
a eurocurrency interbank offered rate or other rates, then the interest rate
in effect in the Calculation Date will be deemed to have been in effect during
the relevant four-quarter period reference; and (3) notwithstanding the
foregoing, interest on Debt determined on a fluctuating basis, to the extent
such interest is covered by agreements relating to interest swap agreements,
shall be deemed to accrue at the rate per annum resulting after giving effect
to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs (other
than those debt issuance costs incurred on the Issue Date in connection with
the Offering and the Senior Credit Facility) and original issue discount, non-
cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations) and (ii) the consolidated interest expense of
such Person and its Subsidiaries that was capitalized during such period, and
(iii) any interest expense on Debt of another Person that is Guaranteed by
such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) the product of (a) all dividend payments, whether or not
in cash, on any series of preferred stock of such Person or any of its
Subsidiaries, other than dividend payments on Equity Interests payable solely
in Equity Interests of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries (other
than in the case of the Company and its Subsidiaries, Unrestricted
Subsidiaries) for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Subsidiary or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of dividends
or distributions paid in cash to the referent Person or a Wholly Owned
Subsidiary thereof (other than in the case of the Company and its
Subsidiaries, Unrestricted Subsidiaries), (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is
not at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Subsidiary
or its stockholders, (iii) the Net Income of any Person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) the cumulative effect of a change in accounting
principles shall be excluded, (v) all extraordinary gains and extraordinary
losses and any unusual or non-recurring charges recorded or accrued in
connection with the Transactions (including any such fees and expenses
relating to the Transactions and the Exchange Offer) shall be excluded, and
(vi) the Consolidated Net Income of the Company and its Subsidiaries shall
include (without duplication) the Net Income of any Unrestricted Subsidiary
if, and only to the extent that, such Net Income has been distributed in cash
to the Company or any of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the ordinary shareholders of such
Person and its consolidated Subsidiaries as of such date and (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
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dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of the
foregoing determined in accordance with GAAP.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of the Company or the Parent (so long as the Parent
beneficially owns a majority of any class of the Voting Stock of the Company)
who (i) was a member of such Board of Directors on the date of the Indenture,
(ii) was nominated for election or elected to such Board of Directors with the
approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election or (iii) was nominated for
election or elected to such Board of Directors by or with the approval of the
Permitted Holders.
"Credit Facilities" means, with respect to the Company or any Subsidiary,
one or more debt facilities (including, without limitation, the Senior Credit
Facility) or commercial paper facilities with banks or other lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables), bankers
acceptance or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to
time. Debt under Credit Facilities outstanding on the date on which Notes are
first issued and authenticated under the Indenture shall be deemed to have
been incurred on such date in reliance on the exception provided by clause (i)
of the definition of Permitted Debt.
"Debt" means, with respect to any Person, any indebtedness of such Person,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all Debt of
others secured by a Lien on any asset of such Person (whether or not such Debt
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any Debt of any other Person. The amount of any
Debt outstanding as of any date shall be (i) the accrued value thereof, in the
case of any Debt that does not require current payments of interest, and (ii)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Debt.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Debt under the Senior Credit Facility
and (ii) any other Senior Debt permitted under the Indenture the principal
amount of which is $10 million or more and that has been expressly designated
by the Company in such Senior Debt instrument as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
first anniversary of the Stated Maturity of the Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"Equity Offering" means a bona fide underwritten sale to the public of
Equity Interests (other than Disqualified Stock) of the Company or of the
Parent (to the extent the Net Proceeds thereof are contributed to the Company
as common equity) pursuant to a registration statement (other than on Form S-8
or any other form relating to securities issuable under any benefit plan of
the Company or the Parent, as the case may be) that is declared effective by
the Commission.
"Existing Debt" means the principal amount of Debt of the Company and its
Subsidiaries (other than Debt under the Senior Credit Facility) in existence
on the date of the Indenture, until such amounts are repaid.
"Foreign Subsidiary" means any Subsidiary not organized or validly existing
under the laws of the United States or any state thereof or the District of
Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any Debt.
"Guarantor" means each of the Company's Restricted Domestic Subsidiaries
that executes a supplemental indenture in which such Restricted Domestic
Subsidiaries agree to be bound by the terms of the Indenture as a Guarantor;
provided that any Person constituting a Guarantor as described above shall
cease to constitute a Guarantor when its respective Guarantee is released in
accordance with the terms of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements, or (ii)
other agreements or arrangements designed to protect such Person against
fluctuations in interest rates or currency exchange rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances
or capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the
Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of the
Company such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary of the Company, the Company shall
be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--
Restricted Payments."
"Issue Date" means the date upon which the Notes are originally issued under
the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Loss Provision" means the provision for loss recorded by the Company in the
quarter ended June 30, 1997 for certain receivables.
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"Management Agreement" means the Management Agreement among the Company, the
Parent and CHS Management as in effect on the date of the Indenture or as
thereafter amended in a manner that is not adverse to the Holders of the
Notes.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Subsidiaries or
the extinguishment of any Debt of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of (i) the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, (ii) taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), (iii) any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP, or against any liabilities associated with the Asset Sale, or the
assets subject thereto, and retained by the Company or any Restricted
Subsidiary, and (iv) amounts required to be applied to the repayment of Debt
secured by a Lien on the asset or assets that were the subject of such Asset
Sale, or to the satisfaction of contractual obligations either existing at the
date of the Indenture, or entered into after the date of the Indenture in
connection with the payment of deferred purchase price of the properties or
assets that were the subject of such Asset Sale.
"Obligations" means any principal interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Parent" means CII Technologies Inc. and its successors and assigns.
"Pari Passu Debt" shall mean (i) any Debt of the Company that is pari passu
in right of payment to the Notes and (ii) with respect to any Guarantee of the
Notes, Debt which ranks pari passu in right of payment to such Guaranty.
"Pari Passu Debt Amount" shall have the definition set forth under "--
Certain Covenants--Asset Sales."
"Permitted Holders" means Code, Hennessy & Simmons, Inc., Code, Hennessy &
Simmons III, L.P., and their respective Affiliates.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company that is engaged in the same or a similar
line of business as the Company and its Restricted Subsidiaries (or reasonable
extensions or expansions thereof or businesses ancillary thereto); (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (i) such Person becomes a Restricted Subsidiary of the Company that
is engaged in the same or a similar line of business as the Company and its
Restricted Subsidiaries (or reasonable extensions or expansions thereof or
businesses ancillary thereto) or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of
the Company that is engaged in the same or a similar line of business as the
Company and its Restricted Subsidiaries (or reasonable extensions or
expansions thereof or businesses ancillary thereto); (d) any Restricted
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Certain Covenants--Asset Sales"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
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(other than Disqualified Stock) of the Company; (f) Investments made in
exchange for accounts receivable arising in the ordinary course of business
which have not been collected for 180 days and which are, in the good faith of
the Company, substantially uncollectible, provided that any such Investments
in excess of $500,000 shall be approved by the Board of Directors (evidenced
by a resolution of the Board of Directors set forth in an officers'
certificate delivered to the Trustee); (g) Investments constituting loans or
advances to employees and officers of the Company and its Restricted
Subsidiaries (i) in the ordinary course of business for bona fide business
purposes or (ii) in connection with the purchase of Equity Interests of the
Parent or the Company, provided that the aggregate amount of Investments
outstanding under this clause (g) does not exceed $1.0 million at any one
time; (h) Investments in Permitted Joint Ventures, and Investments in
suppliers to the Company and its Restricted Subsidiaries, in an aggregate
amount when taken together with all other Investments pursuant to this clause
(h) does not exceed the greater of $3.0 million or 5% of Total Assets at any
one time outstanding; (i) Guarantees by the Company of Debt otherwise
permitted to be incurred by Restricted Subsidiaries of the Company, permitted
by clause (x) of Permitted Debt or permitted by the covenant described under
the caption "--Guarantees by Restricted Domestic Subsidiaries"; (j) Hedging
Obligations entered into in the ordinary course of the Company's business and
otherwise in compliance with the Indenture and; (k) other Investments in any
Person having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause
(k) that are at the time outstanding, not to exceed $2.0 million. For purposes
of calculating the aggregate amount of Permitted Investments permitted to be
outstanding at any one time pursuant to clauses (h) and (k) of the preceding
sentence, (i) to the extent the consideration for any such Investment consists
of Equity Interests (other than Disqualified Stock) of the Company, the value
of the Equity Interests so issued will be ignored in determining the amount of
such Investment and (ii) the aggregate amount of such Investments made by the
Company and its Restricted Domestic Subsidiaries on or after the date of the
Indenture will be decreased (but not below zero) by an amount equal to the
lesser of (w) the cash return of capital to the Company or a Restricted
Domestic Subsidiary with respect to such Investment that is sold for cash or
otherwise liquidated or repaid for cash (less the cost of disposition,
including applicable taxes, if any) and (x) the initial amount of such
Investment.
"Permitted Joint Venture" means any Person which is, directly or indirectly
through its Subsidiaries or otherwise, engaged principally in the principal
business of the Company, or a reasonably related business, and the Capital
Stock of which is owned by the Company and one or more Persons other than the
Company or any affiliate of the Company.
"Permitted Junior Securities" means Equity Interests in the Company or
unsecured debt securities of the Company that are subordinated to all Senior
Debt (and any debt securities issued in exchange for Senior Debt) to the same
extent as, or to a greater extent than, the Notes are subordinated to Senior
Debt pursuant to Article 10 of the Indenture and which, in any case, do not
mature or become subject to a mandatory redemption obligation prior to the
maturity of the Notes and do not cause the Notes to be treated in any case or
proceeding or similar event under any bankruptcy or insolvency law as part of
the same class of claims as the Senior Debt.
"Permitted Refinancing Debt" means any Debt of the Company or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other Debt of
the Company or any of its Restricted Subsidiaries; provided that: (i) the
principal amount (or accrued value, if applicable) of such Permitted
Refinancing Debt does not exceed the principal amount of (or accrued value, if
applicable), plus accrued interest on, the Debt so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable
expenses incurred in connection therewith); (ii) such Permitted Refinancing
Debt has a final maturity date later than the final maturity date of, and has
a Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Debt being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Debt being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Notes, such Permitted Refinancing Debt has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the
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documentation governing the Debt being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Debt is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Debt being
extended, refinanced, renewed, replaced, defeased or refunded.
"Purchase Money Obligations" of a Person means Debt of such Person incurred
in connection with the purchase, construction or improvement of property,
plant or equipment used in the business of such Person.
"Related Person" means with respect to any Person (a) any Affiliate of such
Person, (b) any individual or other Person who directly or indirectly is the
registered or beneficial owner of 5% or more of any class of Capital Stock of
such Person or warrants, rights, options or other rights to acquire more than
5% of any class of Capital Stock of such Person, (c) any relative of such
individual by blood, marriage or adoption not more remote than first cousin
and (d) any officer or director of such Person.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Senior Debt, provided that if, and for so
long as, any Senior Debt lacks such a representative, then the Representative
for such Senior Debt shall at all times constitute the holders of a majority
in outstanding principal amount of such Senior Debt.
"Restricted Domestic Subsidiary" means a Restricted Subsidiary organized and
validly existing under the laws of the United States or any state thereof or
the District of Columbia.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment" means (i) any dividend or any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or such Restricted
Subsidiary or dividends or distributions payable to the Company or any Wholly
Owned Subsidiary); (ii) any payment to purchase, redeem or otherwise acquire
or retire for value any Equity Interests of the Company, any direct or
indirect parent of the Company or any Restricted Subsidiary of the Company
(other than any Equity Interests owned by the Company or any Wholly Owned
Subsidiary); (iii) any payment to purchase, redeem, defease or otherwise
acquire or retire for value any Subordinated Debt of the Company or a
Restricted Subsidiary, except a payment of interest or principal at Stated
Maturity; and (iv) any Restricted Investment.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Senior Credit Facility" means, collectively, the Credit Agreement dated as
of September 18, 1997, among the Parent, the Company, the lenders party
thereto in their capacity as such, BancAmerica Securities, Inc., as arranger,
and Bank of America National Trust and Savings Association, as administrative
agent, together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including, without limitation, increasing the amount of
available borrowings thereunder or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
indebtedness under such agreement or any successor or replacement agreement,
whether by the same or any other agent, lender or group of lenders, whether
contained in one or more agreements.
"Senior Debt" means (i) all Debt of the Company outstanding under Credit
Facilities and all Hedging Obligations with respect thereto (including, but
not limited to, the principal of, premium, if any, interest (including any
interest accruing subsequent to a filing of a petition of bankruptcy at the
rate provided for in documentation with respect thereto, whether or not such
interest is an allowed claim under applicable law) on, reimbursement
obligations under letters of credit issued under, and fees, expenses,
indemnities and other amounts
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owing in respect of, the foregoing Debt); (ii) any other Debt permitted to be
incurred by the Company under the terms of the Indenture, unless the
instrument under which such Debt is incurred expressly provides that it is on
a parity with or subordinated in right of payment to the Notes and (iii) all
Obligations with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (w) any liability for
federal, state, local or other taxes owed or owing by the Company, (x) any
Debt of the Company to any of its Subsidiaries or other Affiliates, (y) any
trade payables or (z) that portion of any Debt that is incurred in violation
of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Debt, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing
such Debt, and shall not include any contingent obligations to repay, redeem
or repurchase any such interest or principal prior to the date originally
scheduled for the payment thereof.
"Subordinated Debt" means any Debt of the Company which is by its terms
subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Tax Sharing Agreement" means the Tax Sharing Agreement between the Company
and Parent as in effect on the date of the Indenture or as thereafter amended
in a manner that is not adverse to the Company or the Holders of the Notes.
"Total Assets" means, with respect to any date of determination, the total
assets of the Company shown on the Company's consolidated balance sheet in
accordance with GAAP on the last day of the fiscal quarter prior to the date
of determination.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that as of the time of determination shall be or continue to be
designated an Unrestricted Subsidiary in the manner provided below and (ii)
any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such subsidiary owns any
Capital Stock of its own or holds any Lien on any property of the Company or
any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated; provided that (x) the Company certifies to the Trustee
that such designation complies with the "Limitation on Restricted Payments"
covenants and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any indebtedness pursuant to which the
Lender has recourse to any of the assets of the Company or any its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Debt pursuant to the Consolidated Fixed Charge Coverage Ratio set forth in the
first paragraph of the covenant described under the caption "--Incurrence of
Debt and Issuance of Disqualified Stock" and (y) immediately before and
immediately after giving effect to such designation, no Default or Event of
Default shall have occurred and be continuing. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board
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Resolution giving effect to such designations and an officers' certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such
date and the making of such payment, by (ii) the then outstanding principal
amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person that is a Wholly Owned Subsidiary of such Person.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture), (ii) default in payment when due of the principal of or premium,
if any, on the Notes (whether or not prohibited by the subordination
provisions of the Indenture), (iii) failure by the Company for 30 days after
notice from either the Trustee or the Holders of at least 25% in principal
amount of the then-outstanding Notes to comply with the provisions described
under the captions "--Repurchase at the Option of Holders Upon Change of
Control", "--Certain Covenants--Asset Sales", "--Certain Covenants--Restricted
Payments", "--Certain Covenants--Incurrence of Debt and Issuance of
Disqualified Stock" or "--Certain Covenants--Merger, Consolidation or Sale of
Assets"; (iv) failure by the Company for 60 days after notice from either the
Trustee or the Holders of at least 25% in principal amount of the then-
outstanding Notes to comply with any of its other agreements in the Indenture
or the Notes; (v) any Guarantees of a Significant Restricted Domestic
Subsidiary cease to be in full force and effect or any of the Guarantors that
is a Significant Restricted Domestic Subsidiary denies its liability under its
Guarantee (other than by reason of a release of a Guarantee in accordance with
the terms of the Indenture); (vi) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Debt for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries) whether such Debt or guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such Debt at
the final stated maturity thereof (giving effect to any extensions thereof) (a
"Payment Default") or (b) results in the acceleration of such Debt prior to
its express maturity and, in each case, the principal amount of any such Debt,
together with the principal amount of any other such Debt or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vii) failure
by the Company or any of its Significant Restricted Subsidiaries to pay final
judgments aggregating in excess of $3.0 million (to the extent not covered by
third party insurance as to which the insurance company has acknowledged
coverage), which judgments are not paid, discharged or stayed for a period of
60 days; and (viii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Significant Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may, after
five business days prior written notice to the Representative under the Senior
Credit Facilities (but only if such Event of Default is then continuing),
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from
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certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Notes
will become due and payable without further action or notice. Holders of the
Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
September 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to September 15, 2003, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
All references herein to payments of principal, premium, if any, and
interest on the Notes shall be deemed to include any applicable Additional
Interest that may become payable in respect of the Notes.
MODIFICATION OF THE INDENTURE
Except as provided in the two succeeding paragraphs, the Indenture or the
Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders Upon Change of
Control"), (iii) reduce the rate of or change the time for payment of interest
on any Note, (iv) waive a Default or Event of Default in the payment of
principal, premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other
than that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of or premium, if any, or interest on
the Notes, (vii) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders Upon Change of Control") (viii)
modify or change any provision of the Indenture or the related definitions,
affecting the subordination or ranking of the Notes or any Guarantee in any
manner that adversely affects the Holders, (ix) release any Significant
Restricted Domestic Subsidiary from any of its obligations under its Guarantee
or the Indenture otherwise than
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in accordance with the terms of the Indenture or (x) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement, which solicitation documents must be mailed
to all Holders of the Notes a reasonable length of time prior to the
expiration of the solicitation.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations and the obligation of the Guarantors discharged with respect to
the outstanding Notes ("Legal Defeasance") except for (i) the rights of
Holders of outstanding Notes to receive payments in respect of the principal,
premium, if any, and interest on such Notes when such payments are due from
the trust referred to below, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal, premium, if any, and interest on the
outstanding Notes on the stated maturity or on the applicable redemption date,
as the case may be, and the Company must specify whether the Notes are being
defeased to maturity or to a particular redemption date;
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(ii) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
GOVERNING LAW
The Indenture, the Notes and the Registration Rights Agreement are governed
by, and construed in accordance with, the laws of the State of New York,
without giving effect to the conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in
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the conduct of his own affairs. Subject to such provisions, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
REGISTRATION RIGHTS AGREEMENT
The Company, the Subsidiary Guarantors and the Initial Purchasers entered
into a registration rights agreement on September 18, 1997 (the "Registration
Rights Agreement") pursuant to which each of the Company and the Subsidiary
Guarantors agreed, for the benefit of the Holders, that it will, at its cost
(i) within 45 days after the Issue Date, file the Exchange Offer Registration
Statement with the Commission with respect to the Exchange Offer and (ii)
within 135 days after the Issue Date (or later under certain circumstances),
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act. Upon the Exchange Offer Registration Statement being
declared effective, the Company and the Subsidiary Guarantors will offer the
Exchange Notes (and the related guarantees) in exchange for surrender of the
Notes (and the related guarantees). The Company and the Subsidiary Guarantors
will keep the Exchange Offer open for not less than 30 days (or longer if
required by applicable law) after the date notice of the Exchange Offer is
mailed to the Holders. For each Note surrendered pursuant to the Exchange
Offer, the Holder who surrendered such Note will receive an Exchange Note
having a principal amount equal to that of the surrendered Note. Interest on
each Exchange Note will accrue from the last interest payment date on which
interest was paid on the Note surrendered in exchange therefor or, if no
interest has been paid on such Note, from the Issue Date. Under existing
Commission interpretations, the Exchange Notes (and the related guarantees)
would be freely transferable by holders other than affiliates of the Company
and the Subsidiary Guarantors after the Exchange Offer without further
registration under the Securities Act if the holder of the Exchange Notes
represents that it is acquiring the Exchange Notes in the ordinary course of
business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Company or the Subsidiary Guarantors, as such terms are
interpreted by the Commission; provided that broker-dealers ("Participating
Broker-Dealers") receiving Exchange Notes in the Exchange Offer will have a
prospectus delivery requirement with respect to resales of such Exchange
Notes. The Commission has taken the position that Participating Broker-Dealer
may fulfill their prospectus delivery requirements with respect to the
Exchange Notes (other than a resale of an unsold allotment from the original
sale of the Notes) with the prospectus contained in the Exchange Offer
Registration Statement. Under the Registration Rights Agreement, the Company
and the Subsidiary Guarantors are required to allow Participating Broker-
Dealers and other persons, if any, with similar prospectus delivery
requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such Exchange Notes.
Each Holder who wishes to exchange its Notes for Exchange Notes in the
Exchange Offer will be required to represent that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business and
that at the time of the commencement of the Exchange Offer it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes
and that it is not an affiliate of the Company or the Subsidiary Guarantors.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the applicable Exchange Notes. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Notes that were
acquired as a result of market-making activities or other trading activities,
it will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company and the Subsidiary Guarantors to effect such an
Exchange Offer, or if for any other reason the Exchange Offer is not
consummated within 180 days after the Issue Date, or, under certain
circumstances, if the Initial Purchasers shall so request by written notice to
the Company (a "Shelf Notice"), the Company and the Subsidiary Guarantors,
jointly and severally, will, at their cost, (a) as promptly as practicable,
file a shelf registration statement covering resales of the Notes (the "Shelf
Registration Statement"), (b) cause the Shelf Registration Statement to be
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declared effective under the Securities Act and (c) keep effective the Shelf
Registration Statement until two years after its effective date. The Company
will, in the event of the filing of the Shelf Registration Statement, provide
to each Holder copies of the prospectus which is a part of such Shelf
Registration Statement, notify each such Holder when such Shelf Registration
Statement has become effective and take certain other actions as are required
to permit unrestricted resales of the Notes. A Holder that sells its Old Notes
pursuant to a Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a Holder (including certain indemnification obligations).
Although the Company and the Subsidiary Guarantors intend to file the
registration statements described above, there can be no assurance that such
registration statements will be filed, or, if filed, that they will become
effective. If (i) the Exchange Offer Registration Statement or Shelf
Registration Statement is not filed within 45 days following the Issue Date,
(ii) an Exchange Offer Registration Statement or Shelf Registration Statement
is filed within 45 days following the Issue Date and is not declared effective
on or prior to the later of (A) 135 days following the Issue Date or (B) the
date 30 days following the Company's receipt of a Shelf Notice, or (iii) (A)
the Company and the Subsidiary Guarantors have not exchanged Exchange Notes
for all Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to 30 days after the date on which the Exchange Offer
Registration Statement was declared effective or (B) the Exchange Offer
Registration Statement ceases to be effective at any time prior to the time
that the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf Registration
Statement ceases to be effective at any time prior to the second anniversary
of its effective date (each such event referred to in clauses (i) through
(iii), a "Registration Default"), then commencing on the first day following
the occurrence of a Registration Default, additional interest ("Additional
Interest") shall be accrued on the Notes over and above the accrued interest
at a rate of 0.50% per annum; provided however, that (1) upon the filing of
the Exchange Offer Registration Statement or a Shelf Registration Statement
(in the case of (i) above), (2) upon the effectiveness of the Exchange Offer
Registration Statement or a Shelf Registration Statement (in the case of (ii)
above), or (3) upon the exchange of Exchange Notes for all Notes tendered (in
the case of (iii)(A) above), or upon the effectiveness of the Exchange Offer
Registration Statement which had ceased to remain effective (in the case of
(iii)(B) above), or upon the effectiveness of the Shelf Registration Statement
which had ceased to remain effective (in the case of (iii)(C) above), such
Registration Default shall be deemed cured and Additional Interest on the
Notes as a result of such clause (or the relevant subclause thereof), as the
case may be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment
dates as the Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Notes, multiplied by a fraction, the numerator of which is the number of
days such Additional Interest rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months),
and the denominator of which is 360.
If the Company and the Subsidiary Guarantors effect the Exchange Offer, they
will be entitled to close the Exchange Offer 30 days after the commencement
thereof provided that they have accepted all Notes theretofore validly
tendered in accordance with the terms of the Exchange Offer.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which will be available upon request to the Company.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Registration Rights Agreement without charge by writing to the Trustee.
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BOOK-ENTRY PROCEDURES AND TRANSFER
GENERAL
Except as set forth in the next paragraph, the Notes will be issued in the
form of one Global Note (the "Global Note"). The Global Note will be deposited
on the date of the closing of the sale of the Notes offered hereby (the
"Closing Date") with, or on behalf of, the Depository and registered in the
name of Cede & Co., as nominee of the Depository (such nominee being referred
to herein as the "Global Note Holder").
Notes that are issued as described below under "--Certificated Securities"
will be issued in the form of registered definitive certificates (the
"Certificated Securities"). Upon the transfer of Certificated Securities, such
Certificated Securities may, unless the Global Note has previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depository is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depository's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depository's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depository's Indirect Participants" ) that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depository only thorough the Depository's
Participants or the Depository's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Note, the Depository will credit the
accounts of Participants designated by the applicable Initial Purchaser with
portions of the principal amount of the Global Note and (ii) ownership of the
Notes evidenced by the Global Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depository (with respect to the interests of the Depository's Participants),
the Depository's Participants and the Depository's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent. For certain other restrictions on the
transferability of the Notes, see the restrictions set forth on the cover page
and on the inside front cover of this Offering Memorandum.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of
any Notes evidenced by the Global Note. Beneficial owners of Notes evidenced
by the Global Note will not be considered the owners or Holders thereof under
the Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depository or for maintaining, supervising or
reviewing any records of the Depository relating to the Notes.
Payments in respect of the principal, premium, if any, and interest on any
Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the
Global Note Holder in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the
policy of the Depository to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depository. Payments by the Depository's Participants and the
Depository's Indirect Participants to the beneficial owners of Notes will be
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governed by standing instructions and customary practice and will be the
responsibility of the Depository's Participants or the Depository's Indirect
Participants.
Certificated Securities.
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). All such certificated Notes would be subject to
the legend requirements described on the cover page and on the inside front
cover page herein. In addition, if (i) the Company notifies the Trustee in
writing that the Depository is no longer willing or able to act as a
depository and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, notifies the Trustee in writing that
it elects to cause the issuance of Notes in the form of Certificated
Securities under the Indenture, then, upon surrender by the Global Note Holder
of its Global Note, Notes in such form will be issued to each person that the
Global Note Holder and the Depository identify as being the beneficial owner
of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depository in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depository for all purposes.
Next Day Settlement and Payment.
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, and interest) be
made by wire transfer of immediately available next day funds to the accounts
specified by the Global Note Holder. With respect to Certificated Securities,
the Company will make all payments of principal, premium, if any, and
interest, if any, by wire transfer of immediately available next day funds to
the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address. The
Company expects that secondary trading in the Certificated Securities will
also be settled in immediately available funds.
It is expected that delivery of the Notes will be made against payment
therefor on or about the date specified in the last paragraph of the cover
page of this Prospectus, which will be the fourth business day following the
date hereof. Under Rule 15c6-1 adopted by the Commission under the Exchange
Act, trades in the secondary market generally are required to settle in three
business days, unless the parties to any such trade expressly agree otherwise.
Accordingly, purchasers who wish to trade the Notes on the date hereof or the
next succeeding business day will be required, by virtue of the fact that the
Notes initially will settle in T+4, to specify an alternate settlement cycle
at the time of any such trade to prevent a failed settlement. Purchasers of
the Notes who wish to trade the Notes on the date hereof or the next
succeeding business day should consult their own advisors.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on September 18, 1997 to
the Initial Purchaser pursuant to the Purchase Agreement. The Initial
Purchaser subsequently resold the Old Notes to qualified institutional buyers
in reliance on Rule 144A under the Securities Act. As a condition to the
Purchase Agreement, the Company, the Guarantors and the Initial Purchaser
entered into the Registration Rights Agreement on the date of the Initial
Offering (the "Issue Date").
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration
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rights and such Old Notes will continue to be subject to certain restrictions
on transfer. Accordingly, the liquidity of the market for such Old Notes could
be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Old Notes accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the Exchange Notes bear a Series B
designation and a different CUSIP Number from the Old Notes, (ii) the Exchange
Notes have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (iii) the holders of the Exchange
Notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate on the Old Notes in certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
terminated. The Exchange Notes will evidence the same debt as the Old Notes
and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $95,000,000 aggregate principal amount of
Old Notes were outstanding. The Company has fixed the close of business on
, 1997 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the general corporation law of the State of North Carolina or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
December , 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
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<PAGE>
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Old Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes. Such interest will be paid with the first interest payment on the
Exchange Notes on March 15, 1998. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each March 15 and
September 15, commencing on March 15, 1998.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
For a holder to validly tender Old Notes pursuant to the Exchange Offer, a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantee, or (in the case of a book-
entry transfer) an Agent's Message in lieu of the Letter of Transmittal, and
any other required documents must be received by the Exchange Agent at the
address set forth under "Exchange Agent" prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, prior to 5:00 p.m., New York City
time, on the Expiration Date, either (a) certificates for tendered Old Notes
must be received by the Exchange Agent at such address or (b) such Old Notes
must be transferred pursuant to the procedures for book-entry transfer
described below (and a confirmation of such tender received by the Exchange
Agent, including an Agent's Message if the tendering holder has not delivered
a Letter of Transmittal). The term "Agent's Message" means a message,
transmitted by the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), to and received by the Exchange Agent
and forming a part of a book-entry confirmation, which states that the Book-
Entry Transfer Facility has received an express acknowledgment from the
tendering participant that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Company may enforce such
Letter of Transmittal against such participant.
By executing the Letter of Transmittal (or transmitting an Agent's Message
in lieu thereof), each holder will make to the Company the representations set
forth above in the third paragraph under the heading "--Purpose and Effect of
the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
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<PAGE>
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a recognized participant in the Securities
Transfer Agent Medallion Program, the New York Stock Exchange Medallion
Signature Program or the Stock Exchange Medallion Program (each a "Medallion
Signature Guarantor"), unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal or (ii) for the account of a member firm of a registered
national securities exchange, a member of the NASD or a commercial bank or
trust company having an office or correspondent in the United States (each of
the foregoing being an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by a Medallion Signature Guarantor.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the Book-Entry Transfer Facility for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee (or, in the
case of book-entry transfer, an Agent's Message in lieu thereof) and all other
required documents must in each case be transmitted to and received or
confirmed by the Exchange Agent at its address set forth below on or prior to
the Expiration Date, or, if the guaranteed delivery procedures described below
are complied with, within the time period provided under such procedures.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in its sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured
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<PAGE>
or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal (or, in the case of book-entry transfer, an Agent's Message) or
any other required documents to the Exchange Agent or (iii) who cannot
complete the procedures for book-entry transfer (including delivery of an
Agent's Message), prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution (i) an Agent's Message with respect to guaranteed
delivery that is accepted by the Company, or (ii) a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder,
the certificate number(s) of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes (or a
confirmation of book-entry transfer of such Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility), and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal or
facsimile thereof (or, in the case of book-entry transfer, an Agent's
Message), as well as the certificate(s) representing all tendered Old Notes
in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Old Notes so withdrawn are validly retendered. Any Old Notes which
have been tendered but which are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as
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<PAGE>
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described above under "--Procedures for Tendering" at
any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries;
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the sole judgment
of the Company, might materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By Registered or Certified Mail: Overnight Courier:
Norwest Bank Minnesota, National Norwest Bank Minnesota, National
Association Association
P.O. Box 1517 Norwest Center
Minneapolis, Minnesota 55480-1517 6th and Marquette Avenue
Minneapolis, Minnesota 55479-0113
By Hand: Facsimile Transmission:
Norwest Bank Minnesota, National (for Eligible Institutions Only)
Association (612) 667-4927
NorthStar East, 12th Floor Confirm by telephone: (612) 667-9764
608 Second Avenue South, North Star
East
Minneapolis, Minnesota 55479-0113
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
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<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, less the original issue discount (net of
amortization) as reflected in the Company's accounting records on the date of
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A,
to a person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Notes, whether or not such person is the holder (other than a person
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who receives Exchange Notes in exchange for Old Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each Participating Broker-
Dealer that receives Exchange Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such Participating Broker-Dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
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<PAGE>
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Exchange Notes are to
be acquired by the holder or the person receiving such Exchange Notes, whether
or not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, and (v) the holder or any such other person acknowledges
that if such holder or other person participates in the Exchange Offer for the
purpose of distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on those no-
action letters. As indicated above, each Participating Broker-Dealer that
receives an Exchange Note for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based on the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury
regulations, judicial authority and administrative rulings and practice. There
can be no assurance that the Internal Revenue Service (the "Service") will not
take a contrary view, and no ruling from the Service has been or will be
sought. Legislative, judicial or administrative changes or interpretations may
be forthcoming that could alter or modify the statements and conditions set
forth herein. Any such changes or interpretations may or may not be
retroactive and could affect the tax consequences to holders. Certain holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. The Company recommends that each holder consult such
holder's own tax advisor as to the particular tax consequences of exchanging
such holder's Old Notes for Exchange Notes, including the applicability and
effect of any state, local or foreign tax laws.
The Company believes that the exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for
federal income tax purposes because the Exchange Notes will not be considered
to differ materially in kind or extent from the Old Notes. Rather, the
Exchange Notes received by a holder will be treated as a continuation of the
Old Notes in the hands of such holder. As a result, there should be no federal
income tax consequences to holders exchanging Old Notes for Exchange Notes
pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired as
a result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, they will
make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale. In
addition, until February , 1997 (90 days after the commencement of the
Exchange Offer), all dealers effecting transactions in the Exchange Notes may
be required to deliver a prospectus.
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<PAGE>
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker-Dealer that requests such
documents in the Letter of Transmittal.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon on
behalf of the Company by Kirkland & Ellis, Chicago, Illinois, legal advisors
to the Company.
EXPERTS
The consolidated balance sheets of the Company at December 31, 1995 and 1996
and the consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1994, 1995 and 1996 included in this
Prospectus and the related financial statement schedule included elsewhere in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in this Registration Statement and included herein in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.
The consolidated statements of income and cash flows of Kilovac for the year
ended December 31, 1994 and for the period from January 1, 1995 through
October 11, 1995 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
included herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The statements of operations and cash flows of the Hartman Division for the
years ended December 31, 1994 and 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and included herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
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<PAGE>
AVAILABLE INFORMATION
The Company is not currently subject to the periodic reporting and other
informational requirements of the Exchange Act. The Company has agreed that,
whether or not it is required to do so by the rules and regulations of the
Commission, for so long as any of the Notes remain outstanding, it will
furnish to the holders of the Notes and file with the Commission (unless the
Commission will not accept such a filing) as specified in the Commission's
rules and regulations: (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-
Q and 10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified independent accountants and (ii) all reports that
would be required to be filed with the Commission on Form 8-K if the Company
were required to file such reports. In addition, for so long as any of the
Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owner of the Notes in
connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act.
95
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COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and
Unaudited June 30, 1997............................................. F-3
Consolidated Statements of Operations for the Years Ended December
31, 1994, 1995 and 1996 and the Unaudited Six Months Ended June 30,
1996 and 1997....................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and the Unaudited Six Months Ended
June 30, 1997....................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December
31, 1994, 1995 and 1996 and the Unaudited Six Months Ended June 30,
1996 and 1997....................................................... F-6
Notes to Consolidated Financial Statements........................... F-7
KILOVAC CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report......................................... F-17
Consolidated Statements of Income for the Year Ended December 31,
1994 and for the Period From January 1, 1995 to October 11, 1995.... F-18
Consolidated Statements of Cash Flows for the Year Ended December 31,
1994 and for the Period From January 1, 1995 to October 11, 1995.... F-19
Notes to Consolidated Financial Statements........................... F-20
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF
FIGGIE INTERNATIONAL INC.:
Independent Auditors' Report......................................... F-22
Statements of Operations for the Years Ended December 31, 1994 and
1995 and the Unaudited Six Months Ended June 30, 1995 and 1996...... F-23
Statements of Cash Flows for the Years Ended December 31, 1994 and
1995 and the Unaudited Six Months Ended June 30, 1995 and 1996...... F-24
Notes to Financial Statements........................................ F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Communications Instruments, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Communications Instruments, Inc. (a wholly owned subsidiary of CII
Technologies Inc., formerly Communications Instruments Holdings, Inc.) (the
"Company"), as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1994, 1995 and 1996. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at December 31, 1995 and 1996, and the results of its operations and
its cash flows for the years ended December 31, 1994, 1995 and 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Greenville, South Carolina
February 14, 1997
F-2
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
ASSETS (NOTE 5) 1995 1996 1997
--------------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash....................................... $ 193 $ 116 $ 124
Accounts receivable (less allowance for
doubtful accounts:
1995--$420; 1996--$466; 1997--$888) (Note
1)........................................ 7,610 9,245 11,238
Inventories (Notes 1 and 2)................ 10,642 17,141 15,790
Deferred income taxes (Note 7)............. 1,454 1,761 1,760
Other current assets....................... 1,803 600 681
------- ------- -------
Total current assets..................... 21,702 28,863 29,593
------- ------- -------
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1,
3 and 6).................................... 13,225 15,796 15,121
------- ------- -------
OTHER ASSETS:
Cash restricted for environmental
remediation (Note 9)...................... 1,755 685 --
Environmental settlement receivable (Note
9)........................................ 1,050 1,104 1,636
Goodwill (net of accumulated amortization:
1995--$130; 1996--$448; 1997--$639) (Note
1)........................................ 7,726 11,074 10,876
Intangible assets, net (Notes 1 and 4)..... 3,061 2,972 2,767
Investment (Note 1)........................ -- 166 133
Other noncurrent assets.................... 12 65 --
------- ------- -------
Total other assets....................... 13,604 16,066 15,412
------- ------- -------
Total assets............................. $48,531 $60,725 $60,126
======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable........................... $ 2,579 $ 5,059 $ 5,428
Accrued interest (Note 5).................. 128 269 246
Other accrued expenses..................... 3,231 6,869 6,062
Current portion of long-term debt (Note 5). 3,721 4,523 4,500
Current payable due to minority
stockholders of subsidiary (Note 1)....... 1,453 -- --
------- ------- -------
Total current liabilities................ 11,112 16,720 16,236
------- ------- -------
LONG-TERM DEBT (Note 5)...................... 19,731 26,099 24,261
------- ------- -------
ACCRUED ENVIRONMENTAL REMEDIATION COSTS (Note
9).......................................... 3,491 2,511 2,377
------- ------- -------
DEFERRED INCOME TAXES AND OTHER LIABILITIES
(Notes 7 and 8)............................. 3,004 2,883 2,736
------- ------- -------
DUE TO MINORITY STOCKHOLDERS OF SUBSIDIARY
(Note 1).................................... 865 694 694
------- ------- -------
MINORITY INTEREST IN SUBSIDIARY.............. 35 68 --
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
STOCKHOLDERS' EQUITY (Notes 5 and 10):
Common stock, $.01 par value; 1,000 shares
authorized; 1,000 shares issued and
outstanding............................... -- -- --
Additional paid-in capital................. 12,317 12,317 12,317
Accumulated (deficit) retained earnings.... (1,744) (115) 3,264
Accounts receivable--due from parent....... (244) (414) (1,720)
Currency translation loss, net............. (36) (38) (39)
------- ------- -------
Total stockholders' equity............... 10,293 11,750 13,822
------- ------- -------
Total liabilities and stockholders'
equity.................................. $48,531 $60,725 $60,126
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES (Note 11)............... $31,523 $39,918 $66,336 $27,399 $46,079
COST OF SALES..................... 24,330 28,687 46,779 19,018 30,589
------- ------- ------- ------- -------
GROSS MARGIN...................... 7,193 11,231 19,557 8,381 15,490
------- ------- ------- ------- -------
OPERATING EXPENSES:
Selling expenses................ 2,382 3,229 4,903 2,319 3,052
General and administrative
expenses (Note 12)............. 2,248 3,326 5,464 2,369 4,095
Research and development
expenses....................... 103 301 1,011 461 498
Amortization of goodwill and
other intangible assets........ 177 251 543 246 311
Special compensation charge
(Note 10)...................... -- 1,300 -- -- --
Environmental costs (Note 9).... -- 951 -- -- --
Acquisition related expenses
(Note 1)....................... -- 2,064 -- -- --
------- ------- ------- ------- -------
Total operating expenses...... 4,910 11,422 11,921 5,395 7,956
------- ------- ------- ------- -------
OPERATING INCOME (LOSS)........... 2,283 (191) 7,636 2,986 7,534
OTHER INCOME, NET................. -- 2 201 201 1
INTEREST EXPENSE AND OTHER
FINANCING COSTS (Note 5)......... (1,279) (2,309) (5,055) (1,407) (1,826)
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST............ 1,004 (2,498) 2,782 1,780 5,709
INCOME TAX EXPENSE (BENEFIT) (Note
7)............................... 386 (812) 1,120 712 2,275
------- ------- ------- ------- -------
INCOME (LOSS) AFTER INCOME TAXES
BEFORE MINORITY INTEREST IN
SUBSIDIARY....................... 618 (1,686) 1,662 1,068 3,434
INCOME APPLICABLE TO MINORITY
INTEREST IN SUBSIDIARY........... -- 35 33 51 55
------- ------- ------- ------- -------
NET INCOME (LOSS)................. $ 618 $(1,721) $ 1,629 $ 1,017 $ 3,379
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CURRENCY
COMMON STOCK ADDITIONAL ACCUMULATED TRANSLATION ACCOUNTS
------------- PAID-IN (DEFICIT) ADJUSTMENT, RECEIVABLE
SHARES AMOUNT CAPITAL EQUITY NET DUE FROM PARENT
------ ------ ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1993................... 1,000 $ 7,867 $ (641) $ (72)
Contribution.......... -- -- 30 -- -- --
Currency translation
loss, net............ -- -- -- -- $(11) --
Advances to parent.... -- -- -- -- -- (124)
Net income............ -- -- -- 618 -- --
----- --- ------- ------ ---- -------
BALANCES AT DECEMBER 31,
1994................... 1,000 -- 7,897 (23) (11) (196)
Currency translation
loss, net............ -- -- -- -- (25) --
Special compensation
charge (Note 10)..... -- -- 720 -- -- --
Contribution from
parent
(Note 1)............. -- -- 3,700 -- -- --
Advances to parent.... -- -- -- -- -- (48)
Net loss.............. -- -- -- (1,721) -- --
----- --- ------- ------ ---- -------
BALANCES AT DECEMBER 31,
1995................... 1,000 -- 12,317 (1,744) (36) (244)
Currency translation
loss, net............ -- -- -- -- (2) --
Advances to parent.... -- -- -- -- -- (170)
Net income............ -- -- -- 1,629 -- --
----- --- ------- ------ ---- -------
BALANCES AT DECEMBER 31,
1996................... 1,000 -- 12,317 (115) (38) (414)
Unaudited:
Currency translation
loss, net............ -- -- -- -- (1) --
Advances to parent.... -- -- -- -- -- (1,306)
Net income............ -- -- -- 3,379 -- --
----- --- ------- ------ ---- -------
BALANCES AT JUNE 30,
1997 (UNAUDITED)....... 1,000 -- $12,317 $3,264 $(39) $(1,720)
===== === ======= ====== ==== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............ $ 618 $ (1,721) $ 1,629 $ 1,017 $ 3,379
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization................ 2,158 2,442 3,551 1,553 2,062
Deferred taxes............... (603) (1,376) (500) (294) (360)
Stock compensation charge.... -- 720 -- -- --
Equity (loss) in CIIG
investment.................. -- -- -- -- 33
Minority interest............ -- 35 33 51 55
Gain on sale of assets....... -- -- (386) (201) --
Other........................ -- -- 1 -- --
Changes in operating assets
and liabilities net of
effects of acquisitions:
Decrease (increase) in
accounts receivable........ (1,575) (1,033) 1,175 (524) (1,993)
Decrease in inventories..... (274) 748 607 (29) 1,351
Decrease (increase) in
other current assets....... (3) (121) 432 (1,048) (81)
Increase (decrease) in
accounts payable........... 603 (486) 1,462 594 107
Increase in accrued
expenses................... 363 1,341 554 303 403
Increase in other assets
and liabilities............ 46 1,411 (60) (39) (870)
------- -------- -------- -------- --------
Net cash provided by
operating activities...... 1,333 1,960 8,498 1,383 4,086
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of businesses and
product lines, net of cash
acquired.................... (1,100) (14,345) (12,678) -- --
Investment in joint venture.. -- -- (167) (139) --
Proceeds from sale of assets. -- -- 746 446 --
Purchases of property, plant
and equipment............... (444) (1,139) (2,449) (925) (938)
------- -------- -------- -------- --------
Net cash used in investing
activities................ (1,544) (15,484) (14,548) (618) (938)
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings under line of
credit arrangement.......... (552) 114 -- 2,097 417
Borrowings under long-term
debt agreements............. 2,281 15,245 11,266 -- --
Principal payments under
long-term debt agreements... (1,300) (4,789) (3,375) (2,184) (2,250)
Payment of loan fees......... (50) (577) (346) -- --
Advances to Parent........... (123) (48) (104) (55) (1,306)
Payments of amounts owed to
minority stockholders of
subsidiary.................. -- -- (745) (666) --
Contributions from Parent.... -- 3,700 -- -- --
Payments of short term debt.. -- -- (81) -- --
Payments of capital leases... -- -- (640) -- --
Other........................ -- -- (2) -- (1)
------- -------- -------- -------- --------
Net cash provided by
financing activities...... 256 13,645 5,973 (808) (3,140)
------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN
CASH......................... 45 121 (77) (43) 8
CASH, BEGINNING OF PERIOD..... 27 72 193 193 116
------- -------- -------- -------- --------
CASH, END OF PERIOD........... $ 72 $ 193 $ 116 $ 150 $ 124
======= ======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING ACTIVITIES:
During the year ended
December 31, 1995, the
Company entered into a
capital lease arrangement for
a building totaling $640. See
Notes 5 and 7 for interest
and taxes paid, respectively.
Assets acquired and
liabilities assumed in
acquisitions (see Note 1).
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description--Communications Instruments, Inc. and Subsidiaries (the
"Company") is engaged in the design, manufacture and distribution of
electromechanical and electronic products, which include solid state relays
and solenoids for the commercial/industrial equipment, commercial airframe,
defense/aerospace, communications, automotive and medical industries.
Manufacturing is primarily performed in North Carolina, California, Ohio and
Juarez, Mexico. The Company is a wholly owned subsidiary of Communications
Instruments Holdings, Inc., which changed its name on March 13, 1996 to CII
Technologies Inc. (the "Parent").
Acquisitions--On January 27, 1995, the Company acquired certain assets from
Hi-G 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 $15,681
including acquisition costs of approximately $1,300. Kilovac designs and
manufactures high voltage electromechanical relays. The transaction was
accounted for as a purchase. To the extent of the 80% change in ownership, the
purchase price was 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 and a contribution by the Parent of
$3,700. Additionally, an estimated $2,300 ($865 and $694, net of tax at
December 31, 1995 and 1996, respectively) 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 the remaining 20% interest in Kilovac
at the option of the selling shareholders on either December 31, 2000 or
December 31, 2005, or upon the occurrence of certain events, if earlier, at an
amount determined in accordance with the terms of the purchase agreement.
Certain events that may accelerate the acquisition of the remaining 20%
interest in Kilovac include an initial public offering or the sale of the
Company.
On July 2, 1996, the Company purchased certain assets and assumed certain
liabilities of the Hartman Electrical Division ("Hartman") of Figgie
International, Inc. for an aggregate purchase price of $13,024 including
acquisition costs of approximately $1,000. Hartman is a manufacturer and
marketer of high current electromechanical relays for critical applications in
the military and commercial aerospace markets. The transaction was accounted
for as a purchase. The purchase price was allocated to the assets and
liabilities of Hartman based on their fair values. Fair values were determined
generally by appraisals with the excess cost allocated to goodwill.
F-7
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The following summarizes the purchase price allocation as of the acquisition
date:
<TABLE>
<S> <C>
Current assets................................................... $10,229
Property and equipment........................................... 3,172
Intangibles and other assets..................................... 3,799
Liabilities assumed.............................................. (4,176)
-------
Total purchase price......................................... $13,024
=======
</TABLE>
The transaction was financed through additional borrowings of approximately
$13,000 on the term and revolver loans.
The following unaudited pro forma financial information shows the results of
operations of the Company as though the acquisitions of Kilovac and Hartman
occurred as of January 1, 1995. These results include, but are not limited to,
the straight-line amortization of the excess of purchase price over the net
assets acquired over a thirty-year period and an increase in interest expense
as a result of the debt issued to finance the acquisitions.
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Revenues ..................................................... $68,408 $77,161
Income from continuing operations............................. 4,000 9,594
Net Income (Loss)............................................. (336) 2,381
</TABLE>
The unaudited pro forma financial information presented above does not
purport to be indicative of either (i) the results of operations had the
acquisition taken place on January 1, 1995 or (ii) future results of
operations of the combined businesses.
Principles of Consolidation--The accompanying consolidated financial
statements include the Company and the Company's wholly owned subsidiary,
Electro-Mech S.A. and 80% owned subsidiary, Kilovac. All intercompany
transactions have been eliminated in consolidation.
Investment--In November 1995, the Company formed a joint venture in India
with Guardian Controls Ltd., an Indian Company, a bank and certain financial
investors. The Company has a 31% interest in the joint venture which was
formed for the purpose of manufacturing relays, relay components, and sub-
assemblies in India for the domestic Indian market and global markets. The
Company accounts for the joint venture using the equity method. The joint
venture started production during the fourth quarter of 1996.
Revenue Recognition--Except as stated below, sales and the related cost of
sales are recognized upon shipment of products sold.
Certain sales of Kilovac, which constitute an immaterial component of total
consolidated sales, represent revenues received 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 costs of sales. Provision for estimated losses on fixed
price contracts is made in the period such losses are determined by
management.
Certain sales of Hartman represent revenues received under long-term
commercial and governmental contracts. Revenues under these contracts are
recognized in accordance with the percentage of completion method of
accounting measured by the number of units produced to the number of units
required by the contract. Revisions of estimated profits on contracts are
included in earnings by the reallocation method, which spreads
F-8
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
the change in estimate over future deliveries. Provision for estimated losses
on long-term contracts is made in the period such losses are determined by
management.
Estimated warranty costs for the Company are provided based on known claims
and historical claims experience.
Acquisition Related Expenses--In conjunction with the acquisition of certain
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.
Interest Expense and Other Financing Costs--Interest expense and other
financing costs include interest expense and costs associated with an initial
public offering withdrawn by the Company during 1996. Interest expense and
other financing costs for the years ended December 31, 1994, 1995 and 1996 are
as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Interest expense..................................... $1,279 $2,309 $3,427
Other financing costs................................ -- -- 1,628
------ ------ ------
Total............................................ $1,279 $2,309 $5,055
====== ====== ======
</TABLE>
Allowance for Doubtful Accounts--Allowance for doubtful accounts is provided
based on management's assessment of collectibility of the Company's accounts
receivable and historical experience. The changes in the allowance for doubtful
accounts receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- -----
<S> <C> <C> <C>
Allowance, beginning of year........................... $317 $301 $ 420
Provision for uncollectible accounts................... 64 127 93
Write-off of uncollectible accounts, net............... (80) (48) (147)
Effect of acquisitions and other....................... -- 40 100
---- ---- -----
Allowance, end of year............................. $301 $420 $ 466
==== ==== =====
</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 are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from five to twenty years.
Goodwill--Goodwill represents the excess of cost over net assets acquired and
is being amortized by the straight-line method over the estimated period
benefited, thirty 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.
Income Taxes--The Company files a consolidated federal income tax return with
the Parent. Current and deferred income tax expenses are allocated to the
Company from the Parent as if the Company filed a separate return.
Reclassifications--Certain 1994 and 1995 amounts have been reclassified to
conform with the 1996 presentation.
F-9
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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.
Unaudited Interim Financial Data--The interim financial data relating to the
six months ended June 30, 1996 and 1997 are unaudited; however, in the opinion
of Company's management, the interim data includes all adjustments, consisting
of only normal recurring adjustments, necessary for a fair statement of the
results for the interim periods. The results for the six months ended June 30,
1997 are not necessarily indicative of the results to be expected for the full
year or any other interim period.
2. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Finished goods............................................ $ 2,146 $ 1,793
Work-in-process........................................... 4,305 8,329
Raw materials............................................. 4,191 7,019
------- -------
Total................................................. $10,642 $17,141
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Land.................................................... $ 289 $ 289
Buildings............................................... 2,652 3,083
Machinery and equipment................................. 15,145 19,298
Construction in progress................................ 198 714
------- -------
Total............................................... 18,284 23,384
Less accumulated depreciation........................... (5,059) (7,588)
------- -------
Total............................................... $13,225 $15,796
======= =======
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Debt issuance costs...................................... $1,079 $ 1,426
Covenants not to compete................................. 580 580
Patents.................................................. 1,636 1,675
Trademarks............................................... 360 360
Other.................................................... 3 3
------ -------
3,658 4,044
Less accumulated amortization............................ (597) (1,072)
------ -------
Total................................................ $3,061 $ 2,972
====== =======
</TABLE>
F-10
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. LONG-TERM DEBT
The Company has a borrowing arrangement with a bank which provides for a
maximum credit facility of $39,000 (including $2,000 for stand-by letters of
credit), limited by outstanding indebtedness under the $24,000 term loan
agreement or availability under the borrowing base, as defined in the loan
agreement. Amounts advanced under the revolving loan bear interest at the
prime rate plus 1.5% (10.0% at December 31, 1995 and 9.75% at December 31,
1996) and are due on July 2, 2001. No amounts are outstanding against the
letter of credit portion of the credit arrangement at December 31, 1996.
All of the Company's assets are pledged to secure the revolving credit and
term loan bank indebtedness.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Term loan payable to a bank due in quarterly installments of
$1,125 from January 31, 1997 through January 31, 1999 and
$1,250 from April 30, 1999 through April 30, 2000 and
$1,500 from July 31, 2000 through January 31, 2001 with a
final payment of $1,250 on April 30, 2001. Interest is
prime plus 2% (10.5% at December 31, 1995 and 10.25% at
December 31, 1996)......................................... $16,500 $22,125
Revolving loan payable to a bank, interest at prime plus
1.5% (10.0% at December 31, 1995 and 9.75% at December 31,
1996)...................................................... 6,208 8,474
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............................ 663 23
------- -------
Total....................................................... 23,452 30,622
Less--current portion....................................... (3,721) (4,523)
------- -------
Total................................................... $19,731 $26,099
======= =======
</TABLE>
Debt maturities at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 4,523
1998............................................................ 4,500
1999............................................................ 4,875
2000............................................................ 5,500
2001............................................................ 2,750
Thereafter...................................................... 8,474
-------
Total....................................................... $30,622
=======
</TABLE>
The term and revolving loans payable to a bank contain certain covenants,
including maintenance of minimum net worth, interest coverage ratio, fixed
charge coverage ratio, leverage ratio and limits on expenditures for property
and equipment. At December 31, 1996, the Company was not in compliance with
certain of the covenants, for which it received a waiver of noncompliance from
the bank.
At December 31, 1995 and 1996, $128 and $269, respectively, of accrued
interest on bank debt is included in the accompanying consolidated balance
sheets.
Interest paid amounted to $845, $1,657 and $2,826 for the years ended
December 31, 1994, 1995 and 1996, respectively.
F-11
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. LEASES
The Company leases certain office equipment and a building under capital
lease arrangements. The leased assets have a net book value of $683 and $23 at
December 31, 1995 and 1996, 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 ten years and which
provide for various renewal options. Total rent expense charged to operations
was approximately $63, $120 and $815 for the years ended December 31, 1994,
1995 and 1996, 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, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $ 505
1998............................................................. 403
1999............................................................. 218
2000............................................................. 112
2001............................................................. 106
Thereafter....................................................... 743
------
Total........................................................ $2,087
======
</TABLE>
7. INCOME TAXES
The significant components of income tax expense are:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1994 1995 1996
----- ------- ------
<S> <C> <C> <C>
Current tax expense:
Federal............................................... $ 855 $ 435 $1,404
State................................................. 131 83 175
Foreign............................................... 3 46 41
----- ------- ------
Total current tax expense............................... 989 564 1,620
Deferred tax (benefit).................................. (603) (1,376) (500)
----- ------- ------
Total tax provision................................. $ 386 $ (812) $1,120
===== ======= ======
</TABLE>
Income tax payments amounted to approximately $717, $859 and $1,142 for the
years ended December 31, 1994, 1995 and 1996, respectively.
F-12
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Company's effective tax rate differs from the statutory rate for the
following reasons:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995 1996
---- ----- ----
<S> <C> <C> <C>
Provision at statutory U.S. tax rate....................... 34.0% (34.0)% 34.0%
Effective state income tax rate............................ 3.7 (3.6) 3.5
Nondeductible meals, entertainment and officers' life
insurance expenses........................................ 2.8 1.2 0.9
Mexican income taxes....................................... 1.7 1.5
Other, net................................................. (2.1) 2.2 0.9
---- ----- ----
38.4% (32.5)% 40.8%
==== ===== ====
</TABLE>
Deferred income taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Current deferred tax assets:
U.S. net operating loss carryforward..................... $ 161 $ 192
State net operating loss carryforward.................... 9 53
Other.................................................... 1,284 1,516
------ ------
Total current deferred assets.......................... $1,454 $1,761
====== ======
</TABLE>
<TABLE>
<S> <C> <C>
Long-term deferred tax asset:
Accrued expenses........................................ $ 407 $ 612
U.S. net operating loss carryforward.................... 1,422 787
State net operating loss carryforward................... 182 203
U.S. tax credit carryforward............................ -- 278
------ ------
2,011 1,880
Less--Valuation allowance............................... (75) (114)
------ ------
Total long-term deferred tax asset........................ $1,936 $1,766
====== ======
Long-term deferred tax liabilities:
Property and equipment.................................. $3,217 $2,691
Intangibles............................................. 726 788
Other................................................... 186 287
------ ------
Total long-term deferred tax liability.................... $4,129 $3,766
====== ======
Total long-term deferred tax liability, net............... $2,193 $2,000
====== ======
Deferred tax liability, net............................... $ 739 $ 239
====== ======
</TABLE>
At December 31, 1996, the Kilovac subsidiary has a U.S. net operating loss
carryforward of $2,833 which expires in 2010. Internal Revenue Code Section
382 imposes certain limitations on the ability of a taxpayer to utilize its
U.S. net operating losses in any one year if there is a change in ownership of
more than 50% of the Company. Management has considered the Section 382
limitation and believes that it is more likely than not that the entire U.S.
net operating loss carryforward will be utilized. California tax law limits
loss carryforwards to a five-year period. A valuation allowance has been
recorded for the portion of the California net operating loss carryforward
which could not be realized due to the previously mentioned limitations.
F-13
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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. Such
agreements (which expire in May 1998) 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. The agreements also restrict the executives' ability to compete
directly with the Company or to solicit customers or employees of the Company.
The aggregate commitment for salaries, excluding bonuses, was $697 and $417 at
December 31, 1995 and 1996, respectively.
The Company is obligated to pay the bank that financed the acquisitions 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, 1996, $567 has been accrued related to this
fee, representing the fee based on management's estimate of the value of the
Company.
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 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
formerly were used by hazardous waste disposal companies employed 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. Soil
remediation was completed in January 1996 and the groundwater remediation
system was in the final stages of completion in December 1996.
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
F-14
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
remediation system or $1,250. The Company has reflected the present value of
the receivable, discounted at 5% ($1,050 and $1,104 in 1995 and 1996,
respectively), 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 Owner
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 remediation liability is recorded at the present value,
discounted at 5%, of the best estimate of the cost flows to remediate and
monitor the remediation over the estimated thirty year remediation period,
which was 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 $4,280 calculated as follows:
<TABLE>
<S> <C>
1997........................................... $ 415
1998........................................... 135
1999........................................... 135
2000........................................... 135
2001........................................... 135
Thereafter..................................... 3,325
-------
4,280
Discount to present value...................... (1,769)
-------
Liability at present value..................... $ 2,511
=======
</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 $508, $307 and
$792 for the years ended December 31, 1994, 1995 and 1996, 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 $91, $110 and $297 during the years ended
December 31, 1994, 1995 and 1996, respectively.
During 1995, the Parent sold 5,000 shares of stock to certain employees of
the Company. The issuance price was $10.00 per share for 1,000 shares and
$11.14 per share for 4,000 shares. The Company has recorded compensation
expense of $720 in 1995 representing the difference between the issuance price
and the fair value of the stock as determined by an independent appraiser.
Additionally, in 1995, the Company paid bonuses of $580 to the employees for
reimbursement of the tax impact to the employees of these transactions.
F-15
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(DOLLARS IN THOUSANDS)
11. SIGNIFICANT CUSTOMERS
Sales to foreign customers accounted for 20%, 15% and 19% of total sales for
the years ended December 31, 1994, 1995 and 1996, respectively.
Approximately 22% of the Company's sales are made directly, or indirectly,
to the U.S. Department of Defense.
12. RELATED PARTY TRANSACTIONS
A nonemployee shareholder group provides management services to the Company.
The Company was charged $150, $156 and $150 for such services for the years
ended December 31, 1994, 1995 and 1996, respectively. Additionally, this group
was paid $150 in 1995 for fees related to the Kilovac acquisition and $130 in
1996 for fees related to the Hartman acquisition (see Notes 1 and 5).
13. SUBSEQUENT EVENTS (UNAUDITED)
In September 1997, the Company issued $95,000,000 of 10% Senior Subordinated
Notes due 2004 (the Notes). The proceeds of these Notes were used to pay a
dividend to the Company's parent, CII Technologies, Inc. and to repay certain
indebtedness of the Company and its parent, as well as related fees and
expenses of the recapitalization and refinancing. Additionally, approximately
$4.5 million of the proceeds of the offering were used to acquire the
remaining portion (20%) of Kilovac not presently owned by the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segment Reporting of an
Enterprise and Related Information," both of which will be effective during
the Company's year ending December 31, 1998. The Company has not determined
the effect of the adoption of SFAS No. 130 or SFAS No. 131 on its financial
statements.
* * * * * *
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors, Kilovac Corporation and Subsidiaries:
We have audited the consolidated statements of income and cash flows of
Kilovac Corporation and subsidiaries for the year 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, the consolidated financial statements present fairly, in all
material respects, the results of the operations and the cash flows of Kilovac
Corporation and subsidiaries for the year 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-17
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994
AND THE PERIOD JANUARY 1, 1995 TO OCTOBER 11, 1995
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1995 TO
DECEMBER 31, 1994 OCTOBER 11, 1995
----------------- ------------------
<S> <C> <C>
REVENUES:
Product sales........................... $11,257,160 $ 9,685,620
Engineering sales....................... 961,810 1,343,880
----------- -----------
Total revenues........................ 12,218,970 11,029,500
----------- -----------
COSTS AND EXPENSES:
Cost of product sales................... 6,940,568 5,635,997
Engineering, research and development
costs.................................. 1,431,703 1,364,845
Selling, general and administrative
expenses............................... 2,987,309 2,527,046
----------- -----------
Total costs and expenses.............. 11,359,580 9,527,888
----------- -----------
OTHER EXPENSE (INCOME):
Other (income) expense.................. (112,901) (8,788)
Interest expense........................ 130,247 34,527
----------- -----------
Total other expense................... 17,346 25,739
----------- -----------
INCOME BEFORE INCOME TAXES 842,044 1,475,873
----------- -----------
INCOME TAX PROVISION (BENEFIT):
Current................................. 333,168 622,864
Deferred................................ (104,852) (61,751)
----------- -----------
Total income taxes.................... 228,316 561,113
----------- -----------
NET INCOME................................ $ 613,728 $ 914,760
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-18
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
AND THE PERIOD JANUARY 1, 1995 TO OCTOBER 11, 1995
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, 1995
DECEMBER 31, TO OCTOBER 11,
1994 1995
------------ ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 613,728 $ 914,760
Adjustments to reconcile net income to net cash
provided by activities:
Depreciation and amortization................. 365,718 274,030
Loss on disposal of property.................. 14,543 --
Deferred income taxes......................... (104,852) (61,751)
Provision for doubtful accounts and notes
receivable................................... (30,000) 31,682
Changes in operating assets and liabilities:
Trade and other receivables................. (6,632) (459,373)
Inventories................................. 167,438 (583,039)
Prepaid expenses and deposits............... 59,784 545
Accounts payable............................ 96,384 308,378
Income taxes................................ (345,015) 453,441
Accrued liabilities......................... 268,251 68,079
---------- ---------
Net cash provided by operating activities. 1,099,347 946,752
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property........................... (486,583) (299,374)
Additions to patents............................ (68,779) (14,663)
Proceeds from disposal of fixed assets.......... 1,205 --
---------- ---------
Net cash used in investing activities..... (554,157) (314,037)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net revolving line of credit borrowings......... 200,000 (200,000)
Repayment of notes payable...................... (860,865) (348,936)
Issuance of common stock........................ 69,992 --
Repurchase of common stock...................... (101,063) (307,978)
---------- ---------
Net cash used in financing activities..... (691,936) (856,914)
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (146,746) (224,199)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... 680,278 533,532
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 533,532 $ 309,333
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--
Cash paid during the year for:
Interest........................................ $ 97,810 $ 19,963
Income taxes.................................... $ 717,500 $ 142,200
</TABLE>
See notes to consolidated financial statements
F-19
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994 AND THE PERIOD
FROM 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.
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 measure based on enacted laws and rates.
Revenues--Engineering sales represent revenues under fixed price development
and cost sharing development contracts. Revenues under the contracts are
recognized based on the percentage of completion method, measured by the
percentage of costs incurred to date to estimated total costs for each
contract. Costs in excess of contract revenues on cost sharing development
contracts are expensed in the period incurred as research and development
costs. These estimates are reviewed and revised periodically throughout the
lives of the contracts, and adjustments to profits resulting from such
revisions are recorded in the accounting period in which the revisions are
made. Provision for estimated losses on fixed price development contracts is
made in the period such losses are determined by management. Product sales are
recognized upon product shipment.
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of 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 year ended December 31, 1994 and
the period from January 1, 1995 through October 11, 1995 totaled $2,743,502
and $3,118,545, respectively.
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.
F-20
<PAGE>
KILOVAC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INCOME TAXES
The following is a reconciliation of the effective tax rate to the federal
statutory rate:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1995
DECEMBER 31, TO OCTOBER 11,
1994 1995
------------ ---------------
<S> <C> <C>
Tax provision at statutory rate.............. $294,715 $516,556
Benefit of foreign service corporation....... (9,821) (21,237)
Research and development credit.............. (71,006) (27,610)
State taxes, net of federal benefit.......... 14,915 80,969
Other........................................ (487) 12,435
-------- --------
$228,316 $561,113
======== ========
</TABLE>
3. 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 year ended December 31, 1994 and the period from
January 1, 1995 through
October 11, 1995 was $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.
4. 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 year ended December
31, 1994 and the period from January 1, 1995 through October 11, 1995 totaled
$76,280 and $70,000, respectively. Effective with the consummation of the
merger (see Note 5), the Company has discontinued further contributions to the
plan.
The Company has established a salary deferral savings plan under provisions
of Section 401(k) of the Internal Revenue Code. Employees may elect to defer
up to 15% of their annual compensation under the plan. Company contributions
to the Plan for the year ended December 31, 1994 and the period from January
1, 1995 through October 11, 1995 totaled $25,400 and $89,200, respectively.
5. MERGER AGREEMENT
On September 20, 1995, the Company entered into a merger agreement with
Communications Instruments, Inc. ("CII") that was effective October 11, 1995.
Under the terms of the agreement, CII acquired 80% of the outstanding common
stock of the Company (99,828 shares) for a total cash consideration of
$12,900,000 (less certain transaction fees), distribution of the Company's
ownership in Kilovac Development Corporation, and certain future
consideration. In conjunction with the acquisition, the outstanding stock
options were exercised, representing 72,490 shares of the Company's common
stock. The option holders received their pro rata share of the purchase price
less the aggregate option exercise price totaling $1,202,692.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
Hartman Electrical Manufacturing Division of
Figgie International, Inc.
We have audited the accompanying statements of operations and cash flows of
the Hartman Electrical Manufacturing Division (the "Company") of Figgie
International, Inc. for the years ended December 31, 1994 and 1995. 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 results of the operations and the cash flows of the Company for
the years ended December 31, 1994 and 1995, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Cleveland, Ohio
June 28, 1996
F-22
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------- ---------------
1994 1995 1995 1996
------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................... $19,974 $17,461 $9,404 $10,825
------- ------- ------ -------
COSTS AND EXPENSES:
Cost of sales (Note 5).................... 17,120 11,417 6,007 7,942
Selling................................... 889 445 248 156
General and administrative................ 1,749 1,171 596 578
Research and development.................. 969 615 381 --
Non-recurring charge (Note 6)............. 1,877 -- -- --
Provision for estimated environmental
costs
(Note 7)................................. -- 850 -- --
------- ------- ------ -------
Total costs and expenses................ 22,604 14,498 7,232 8,676
------- ------- ------ -------
INCOME (LOSS) FROM OPERATIONS............... (2,630) 2,963 2,172 2,149
------- ------- ------ -------
OTHER INCOME (EXPENSE):
Allocated debt service charges (Note 1)... (1,582) (1,582) (791) (791)
Interest expense.......................... (332) (50) (27) --
Other..................................... 118 (92) (79) (15)
------- ------- ------ -------
Total other income (expense)............ (1,796) (1,724) (897) (806)
------- ------- ------ -------
INCOME (LOSS) BEFORE INCOME TAXES........... (4,426) 1,239 1,275 1,343
PROVISION (BENEFIT) FOR INCOME TAXES
(Note 2)................................... (1,765) 496 509 536
------- ------- ------ -------
NET INCOME (LOSS)........................... $(2,661) $ 743 $ 766 $ 807
======= ======= ====== =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-23
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ------------------
1994 1995 1995 1996
------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $(2,661) $ 743 $ 766 $ 807
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation........................... 389 332 175 135
Gain on sale of fixed assets........... (167) -- -- --
Loss on write-off of equipment and
other assets.......................... 1,951 -- -- --
Changes in operating assets and
liabilities:
Receivables.......................... (1,322) 1,756 897 (933)
Inventories.......................... 1,315 (1,360) 243 489
Prepaid expenses..................... (4) (10) (33) 9
Prepaid pension and other assets..... 629 56 14 33
Accounts payable..................... (1,314) 393 344 (167)
Accrued expenses..................... (2,613) (1,486) 1,662 (397)
------- ------- -------- -------
Net cash provided by (used in)
operating activities.............. (3,797) 424 744 (24)
------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................... (76) -- -- (63)
Sale of property and equipment........... 217 -- -- --
------- ------- -------- -------
Net cash provided by (used in)
investing activities.............. 141 -- -- (63)
------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations.... (491) (1,076) (562) (273)
Net cash provided by Figgie.............. 4,149 667 (169) 352
------- ------- -------- -------
Net cash provided by (used in)
financing activities.............. 3,658 (409) (731) 79
------- ------- -------- -------
NET INCREASE (DECREASE) IN CASH............ 2 15 13 (8)
CASH, BEGINNING OF PERIOD.................. 5 7 7 22
------- ------- -------- -------
CASH, END OF PERIOD........................ $ 7 $ 22 $ 20 $ 14
======= ======= ======== =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-24
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
(IN THOUSANDS)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity--Hartman Electrical Manufacturing (the "Company") is a
division of Figgie International, Inc. ("Figgie"). The Company, located in
Mansfield, Ohio, is a manufacturer and marketer of high current
electromechanical relays for critical applications in the military and
commercial aerospace markets. The Company specializes in lower volume, highly
engineered relays targeted to aerospace original equipment manufacturers and
aftermarket users. Due to the nature of the industry they serve, the Company's
customer base is highly concentrated. Approximately 86% and 91% of net sales
in 1994 and 1995, respectively, were to the Company's ten largest customers.
Three customers in 1994 and four customers in 1995 exceeded 10% of net sales.
In 1994, customers A, B and C purchased 21.0%, 17.1% and 11.1%, respectively,
while in 1995 customers A, B, C and D purchased 27.4%, 13.2%, 11.3% and 10.5%,
respectively. Net sales to the U.S. Department of Defense (including prime
contractors under U.S. government programs) amounted to 35% and 26% of total
net sales in 1994 and 1995, respectively.
Approximately 13% and 17% of net sales in 1994 and 1995, respectively, were
to entities which principally operate outside of the United States.
The financial statements have been prepared generally as if the Company had
operated as a stand-alone entity for all periods presented. The financial
information included herein is not necessarily indicative of the financial
position and results of operations of the Company in the future. In addition,
these financial statements do not reflect any effects of the proposed change
in ownership transaction described in Note 12.
The Company is charged a corporate "debt service" charge from Figgie
designed to allocate a portion of Figgie's debt service and general and
administrative costs to the Company. Such charges totaled $1,812 for 1994 and
1995.
The Company has estimated the portion of such charges that relates to debt
service and included such amounts ($1,582 in 1994 and 1995) in allocated debt
service charges in the accompanying statements of operations. The Company's
management believes the allocation method is reasonable; however, this
allocated expense is not necessarily indicative of expenses that would have
been incurred by the Company on a stand-alone basis. Effective January 1,
1996, Figgie discontinued allocating expenses for debt service costs discussed
above due to the proposed transaction in Note 12. An estimate of $906, of
which $791 relates to allocated debt service charges, that would have been
charged by Figgie to the Company during the six months ended June 30, 1996 has
been included in the accompanying statement of operations for the six months
ended June 30, 1996.
Concentration of Credit Risk--Credit is extended based on an evaluation of
the customer's financial condition and, generally, collateral is not required.
Receivables from the Company's ten largest customers represent 82% and 78% of
total receivables at December 31, 1994 and 1995, respectively.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions pending completion of related events. These estimates and
assumptions affect the amounts reported at the date of the financial
statements for revenues and expenses and the disclosure of contingencies.
Actual results could differ from those estimates.
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-25
<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, Revisions of
estimated profits on contracts are included in earnings by the reallocation
method, which spreads the change in estimate over future deliveries. Any
anticipated losses on contracts are charged to earnings when identified.
Estimated warranty costs are provided for based on known claims and historical
experience.
Depreciation--Depreciation is computed on the straight-line method over the
assets' estimated useful lives, ranging from 15 to 40 years for buildings and
improvements and 5 to 10 years for machinery and equipment.
Research and Development--Research and development costs are expensed as
incurred.
Unaudited Interim Financial Data--The interim financial data relating to the
six months ended June 30, 1995 and 1996 are unaudited; however, in the opinion
of the Company's management, the interim data includes all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
statement of the results for the interim periods. The results for the six
months ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year or any other interim period.
2. 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 principal 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.
3. 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-26
<PAGE>
HARTMAN ELECTRICAL MANUFACTURING DIVISION OF FIGGIE INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
4. 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>
Implicit interest rates in the capital leases range from 8.9% to 9.8%.
5. RELATED PARTY TRANSACTIONS
The Company purchases certain component parts from Interstate Electronics, a
subsidiary of Figgie. Amounts purchased during the years ended December 31,
1994 and 1995 were $4,670 and $2,005, respectively. Amounts purchased during
the six months ended June 30, 1995 and 1996 were $1,367 and $601,
respectively.
6. 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.
7. CONTINGENCIES
In 1995, the Company recorded an estimated liability of $850 for
environmental remediation and compliance costs related to its facility in
Mansfield, Ohio. Management believes that the actual outcome of any
remediation and compliance costs in excess of the recorded liability would not
have a material effect on the financial condition, results of operations or
cash flows of the Company.
8. SUBSEQUENT EVENT
On July 2, 1996, Communications Instruments, Inc. ("CII") acquired certain
assets and assumed certain liabilities of the Company for approximately
$12,000.
F-27
<PAGE>
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURIS-
DICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 14
Use Of Proceeds........................................................... 21
Capitalization............................................................ 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 31
Business.................................................................. 39
Management................................................................ 50
Principal Stockholders.................................................... 53
Certain Relationships and Related Transactions............................ 54
Description of the Senior Credit Facility................................. 56
Description of the Exchange Notes......................................... 57
Book-Entry Procedures and Transfer........................................ 85
The Exchange Offer........................................................ 86
Certain Federal Income Tax Consequences .................................. 93
Plan of Distribution...................................................... 93
Legal Matters............................................................. 94
Independent Auditors...................................................... 94
Available Information..................................................... 95
Index to Financial Statements............................................. F-1
</TABLE>
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
PRELIMINARY PROSPECTUS
LOGO
$95,000,000
OFFER TO EXCHANGE ITS
10% SENIOR SUBORDINATED NOTES
DUE 2004, SERIES B, FOR
ANY AND ALL OUTSTANDING
10% SENIOR SUBORDINATED NOTES
DUE 2004
, 1997
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company
The Company is incorporated under the laws of the State of North Carolina.
Section 8.51 of the North Carolina Business Corporation Act (the "NCBCA")
provides that a corporation may indemnify an individual made a party to a
proceeding because he is or was a director against liability incurred in the
proceeding if (i) he conducted himself in good faith, (ii) he reasonably
believed (a) in the case of conduct in his official capacity with the
corporation, that his conduct was in its best interests, and (b) in all other
cases, that his conduct was at least not opposed to its best interests, and
(iii) in the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful. Section 8.51 provides that the termination
of a proceeding by judgment, order, settlement, conviction, or upon a plea of
no contest or its equivalent is not, of itself, determinative that the
director did not meet the requisite standard of conduct. Section 8.51
prohibits indemnification of a director (i) in connection with a proceeding by
or in the right of the corporation in which the director was adjudged liable
to the corporation, and (ii) in connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that personal
benefit was improperly received by him. Indemnification permitted under
Section 8.51 in connection with a proceeding by or in the right of the
corporation that is concluded without a final adjudication on the issue of
liability is limited to reasonable expenses incurred in connection with the
proceeding.
Section 8.52 of the NCBCA provides that, unless limited by its articles of
incorporation, a corporation shall mandatorily indemnify a director who was
wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he was a party because he is or was a director of the
corporation against reasonable expenses incurred by him in connection with the
proceeding. Section 8.56 of the NCBCA provides that an officer of the
corporation is entitled to mandatory indemnification under Section 8.52 to the
same extent as a director, and that the corporation may otherwise indemnify
and advance expenses to an officer, employee, or agent of the corporation to
the same extent as to a director. Section 8.57 of the NCBCA provides that, in
addition to and separate and apart from the indemnification provided under the
NCBCA, a corporation may in its articles of incorporation or bylaws or by
contract or resolution indemnify or agree to indemnify any one or more of its
directors, officers, employees, or agents against liability and expenses in
any proceeding (including without limitation a proceeding brought by or on
behalf of the corporation itself) arising out of their status as such or their
activities in any of the foregoing capacities; provided, however, that a
corporation may not indemnify or agree to indemnify a person against liability
or expenses he may incur on account of his activities which were at the time
taken known or believed by him to be clearly in conflict with the best
interests of the corporation. Section 8.57 also provides that any provision of
any articles of incorporation, by-law, contract, or resolution permitted under
such section may include provisions for recovery from the corporation of
reasonable costs, expenses, and attorneys' fees in connection with the
enforcement of rights to indemnification granted therein and may further
include provisions establishing reasonable procedures for determining and
enforcing the rights granted therein.
The articles of incorporation, as amended, of the Company provide that a
director of the corporation shall not be personally liable for monetary
damages for breach of any duty as a director except and only to the extent
applicable law restricts such indemnification. The by-laws of the Company
provide that any person who at any time serves as a director or officer of the
Company, or in such capacity at the request of the Company for any other
corporation, partnership, joint venture, trust or other enterprise, or as a
trustee or administrator under an employee benefit plan, shall have a right to
be indemnified by the Company to the fullest extent permitted by law against
(a) reasonable expenses, including reasonable attorneys' fees, actually
incurred by him in connection with any threatened, pending or completed
action, suit or proceeding (and any appeal thereof), whether civil,
II-1
<PAGE>
criminal, administrative, investigative or arbitrative, and whether or not
brought by or on behalf of the Company, seeking to hold him liable by reason
of the fact that he is or was acting in such capacity, and (b) reasonable
payments made by him in satisfaction of any judgment, money decree, fine
(including, without limitation, an excise tax assessed with respect to an
employee benefit plan), penalty or settlement for which he may have become
liable in any such action, suit or proceeding.
Kilovac and Kilovac International
Kilovac and Kilovac International are incorporated under the laws of the
State of California. Section 317(b) of the California General Corporation Law
(the "CGCL") and Section 15 of the by-laws of each of Kilovac and Kilovac
International (collectively, the "Kilovac By-laws") provide that a corporation
may indemnify an individual made a party to a proceeding because he is or was
a director against liability incurred in the proceeding if (i) he conducted
himself in good faith, (ii) he reasonably believed that his conduct was in the
best interests of the Corporation and (iii) in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful.
Section 317(b) of the GGCL and Section 15 of the Kilovac By-laws also provide
that the termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of no contest or its equivalent does not, of
itself, create a presumption that the director did not meet the requisite
standard of conduct.
Section 317(c) of the CGCL and Section 15 of the Kilovac By-laws provide
that a corporation shall have the power to indemnify any person who was or is
a party, or is threatened to be made a party, to any threatened, pending or
completed action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person is or was an agent of the
corporation, against expenses actually and reasonably incurred by such person
in connection with the defense or settlement of such action if such person
acted in good faith, in a manner such person believed to be in the best
interests of the corporation and with such care, including reasonable inquiry,
as an ordinarily prudent person in a like position would use under similar
circumstances.
Section 317(c) of the CGCL and Section 15 of the Kilovac By-laws prohibit
indemnification of a director (i) in connection with any claim, issue or
matter as to which the director shall have been adjudged to be liable to the
corporation in the performance of his duty to the corporation, unless and only
to the extent that the court in which such action was brought determines upon
application that, in view of all the circumstances of the case, the director
is fairly and reasonably entitled to indemnity for the expenses which such
court shall determine; (ii) of amounts paid in settling or otherwise disposing
of a threatened or pending action, with or without court approval; or (iii) of
expenses incurred in defending a threatened or pending action which is settled
or otherwise disposed of without court approval.
Section 317(d) of the CGCL and Section 15 of the Kilovac By-laws provide
that to the extent that an agent of this corporation has been successful on
the merits in defense of any proceeding referred to in Section 317(b) or (c)
for which indemnification is permitted or in defense of any claim, issue or
matter therein, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith.
Section 317(e) of the CGCL and Section 15 of the Kilovac By-laws provide
that, except as provided in Section 317(d) of the CGCL and Section 15 of the
Kilovac By-laws, any indemnification under this section shall be made by the
corporation only if authorized in the specific case, upon a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct in Section 317(b) or (c) of the
CGCL and Section 15 of the Kilovac By-laws, by: (i) a majority vote of a
quorum consisting of directors who are not parties to such proceeding; (ii)
approval or ratification by the affirmative vote of a majority of the shares
of the corporation entitled to vote represented at a duly held meeting at
which a quorum is present or by the written consent of holders of a majority
of the outstanding shares entitled to vote or (iii) the court in which such
proceeding is or was pending, upon application made by this corporation or the
agent or the attorney or other person rendering services in connection with
the defense, whether or not such application by the agent, attorney or other
person is opposed by the corporation.
Section 317(f) of the CGCL and Section 15 of the Kilovac By-laws provide
that expenses incurred in defending any proceeding may be advanced by the
corporation prior to the final disposition of such proceeding
II-2
<PAGE>
upon receipt of an undertaking by or on behalf of the agent to repay such
amount unless it shall be determined ultimately that the agent is entitled to
be indemnified as authorized in Section 317 of the CGCL and Section 15 of the
Kilovac By-laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBERS
------- -------------------- ----------
<C> <S> <C>
*3.1 Articles of Incorporation of the Company.
*3.2 By-laws of the Company.
*3.3 Articles of Incorporation of Kilovac.
*3.4 By-laws of Kilovac.
*3.5 Articles of Incorporation of Kilovac International.
*3.6 By-laws of Kilovac International.
*4.1 Indenture dated as of September 18, 1997 by and among
the Company, Kilovac, Kilovac International and Norwest
Bank Minnesota, National Association.
*4.2 Purchase Agreement dated as of September 12, 1997
between the Company, Kilovac and Kilovac International
and BancAmerica Securities, Inc. and Salomon Brothers,
Inc.
*4.3 Registration Rights Agreement dated as of September 18,
1997 between the Company, Kilovac and Kilovac
International and BancAmerica Securities, Inc. and
Salomon Brothers, Inc.
*5.1 Opinion and Consent of Kirkland & Ellis.
*10.1 Employment Agreement dated as of May, 1993 between the
Company and Ramzi A. Dabbagh.
*10.2 Employment Agreement dated as of May, 1993 between the
Company and G. Daniel Taylor.
*10.3 Employment Agreement dated as of January 7, 1994
between the Company and Michael A. Steinback.
*10.4 Employment Agreement dated as of November 23, 1994
between the Company and David Henning.
*10.5 Management Agreement, dated as of September 18, 1997
among the Company, Parent and CHS Management III, L.P.
*10.6 Tax Sharing Agreement dated as of September 18, 1997
between the Company, Parent, Kilovac, Kilovac
International and Kilovac International FSC Ltd.
*10.7 Credit Agreement dated as of September 18, 1997 among
the Company, Parent, various banks, Bank of America
National Trust and Savings Association and BancAmerica
Securities, Inc.
*10.8 Pledge Agreements dated as of September 18, 1997 by
Parent, the Company, Kilovac and Kilovac International
in favor of Bank of America Trust and Savings
Association.
*10.9 Subsidiary Guarantee dated as of September 18, 1997 by
Kilovac and Kilovac International in favor of Bank of
America National Trust and Savings Association.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBERS
------- -------------------- ----------
<C> <S> <C>
*10.10 Security Agreement dated as of September 18, 1997 among
Parent, the Company, Kilovac and Kilovac International
in favor of Bank of America National Trust and Savings
Association.
*10.11 Stock Subscription and Purchase Agreement dated as of
September 20, 1995, by and among the Company, Kilovac
and the stockholders and optionholders of Kilovac named
therein.
*10.12 Asset Purchase Agreement dated as of June 27, 1996
between the Company and Figgie International Inc.
*10.13 Environmental Remediation and Escrow Agreement, dated
as of July 2, 1996.
*10.14 Lease Agreement dated as of July 2, 1996 by and between
Figgie Properties, Inc. and Communications Instruments,
Inc. dba Hartman Division of CII Technologies Inc.
*10.15 First Amendment to Stock Subscription and Purchase
Agreement dated as of August 26, 1996, by and among the
Company, Kilovac and the Selling Shareholders.
*10.16 Exchange Agreement dated as of October 31, 1996 between
the Company and CII Associates, L.P.
*10.17 Management Subscription Agreements between the Company
and Messrs. Dabbagh, Gordon, Taylor and Flanagan.
*10.18 Subscription Agreements between the Company and Messrs.
Dabbagh, Steinback, Henning, Anderson, Jr., McGill,
Boyce and McClinton.
*10.19 Registration Rights Agreement between the Company and
CII Associates, L.P.
*12.1 Statement of Computation of Ratios.
*21.1 Subsidiaries of the Company, Kilovac and Kilovac
International.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
*23.4 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
*25.1 Statement of Eligibility of Trustee on Form T-1.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Tender Instructions.
</TABLE>
- - - ---------
* To be filed by amendment
+ The Company agrees to furnish supplementally to the Commission a copy of
any omitted schedule to such agreement upon the request of the Commission
in accordance with Item 601(b)(2) of Regulation S-K.
(b) FINANCIAL STATEMENT SCHEDULE.
I. Condensed Financial Information of Registrant.
Note: All other financial statement schedules have been omitted because the
required information is not present or is not present in amounts sufficient to
require submission of the schedules, or because the information required is
included in the consolidated financial statements and notes thereto.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose 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 the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
(c) 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 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 Securities
Act of 1933 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
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, COMMUNICATIONS
INSTRUMENTS, INC. HAS DULY CAUSED THIS AMENDED REGISTRATION STATEMENT ON FORM
S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED,
IN THE CITY OF FAIRVIEW, STATE OF NORTH CAROLINA, ON OCTOBER 17, 1997.
Communications Instruments, Inc.
/s/ Ramzi A. Dabbagh
By: _________________________________
Ramzi A. Dabbagh
Chairman, Chief Executive Officer
and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS RAMZI A. DABBAGH AND DAVID HENNING, AND EACH OF
THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING POST-
EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME,
WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH
THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM FULL POWER AND AUTHORITY TO DO AND PERFORM EACH
AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE
PREMISES, AS FULLY TO ALL INTENDS AND PURPOSES AS HE MIGHT OR COULD DO IN
PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND
AGENTS OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
* * * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDED
REGISTRATION STATEMENT ON FORM S-4 AND POWER OF ATTORNEY HAVE BEEN SIGNED ON
OCTOBER 17, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Ramzi A. Dabbagh Chairman of the Board, Chief Executive
___________________________________________ Officer, President and Director
Ramzi A. Dabbagh (Principal Executive Officer)
/s/ David Henning Chief Financial Officer (Principal
___________________________________________ Financial and Accounting Officer)
David Henning
/s/ Michael A. Steinback Chief Operating Officer and Director
___________________________________________
Michael A. Steinback
/s/ G. Daniel Taylor Executive Vice President of Business
___________________________________________ Development and Director
G. Daniel Taylor
/s/ Brian P. Simmons Director
___________________________________________
Brian P. Simmons
/s/ Andrew W. Code Director
___________________________________________
Andrew W. Code
/s/ Steven R. Brown Director
___________________________________________
Steven R. Brown
/s/ Jon S. Vesely Director
___________________________________________
Jon S. Vesely
</TABLE>
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, KILOVAC
CORPORATION HAS DULY CAUSED THIS AMENDED REGISTRATION STATEMENT ON FORM S-4 TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF FAIRVIEW, STATE OF NORTH CAROLINA, ON OCTOBER 17, 1997.
Kilovac Corporation
/s/ Ramzi A. Dabbagh
By: _________________________________
Ramzi A. Dabbagh
Chairman and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS RAMZI A. DABBAGH AND DAVID HENNING, AND EACH OF
THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING POST-
EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME,
WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH
THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM FULL POWER AND AUTHORITY TO DO AND PERFORM EACH
AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE
PREMISES, AS FULLY TO ALL INTENDS AND PURPOSES AS HE MIGHT OR COULD DO IN
PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND
AGENTS OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
* * * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDED
REGISTRATION STATEMENT ON FORM S-4 AND POWER OF ATTORNEY HAVE BEEN SIGNED ON
OCTOBER 17, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Ramzi A. Dabbagh Chairman of the Board, President and
___________________________________________ Director
Ramzi A. Dabbagh (Principal Executive Officer)
/s/ David Henning Chief Financial Officer (Principal
___________________________________________ Financial and Accounting Officer)
David Henning
/s/ Brian P. Simmons Director
___________________________________________
Brian P. Simmons
</TABLE>
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, KILOVAC
INTERNATIONAL, INC. HAS DULY CAUSED THIS AMENDED REGISTRATION STATEMENT ON
FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF FAIRVIEW, STATE OF NORTH CAROLINA, ON OCTOBER 17,
1997.
Kilovac International, Inc.
/s/ Ramzi A. Dabbagh
By: _________________________________
Ramzi A. Dabbagh
Chairman and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS RAMZI A. DABBAGH AND DAVID HENNING, AND EACH OF
THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN
ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING POST-
EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME,
WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH
THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM FULL POWER AND AUTHORITY TO DO AND PERFORM EACH
AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE
PREMISES, AS FULLY TO ALL INTENDS AND PURPOSES AS HE MIGHT OR COULD DO IN
PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND
AGENTS OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
* * * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDED
REGISTRATION STATEMENT ON FORM S-4 AND POWER OF ATTORNEY HAVE BEEN SIGNED ON
OCTOBER 17, 1997 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Ramzi A. Dabbagh Chairman of the Board, President and
___________________________________________ Director
Ramzi A. Dabbagh (Principal Executive Officer)
/s/ David Henning Chief Financial Officer, (Principal
___________________________________________ Financial and Accounting Officer)
David Henning
/s/ Brian P. Simmons Director
___________________________________________
Brian P. Simmons
</TABLE>
II-8
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
I.Independent Auditors' Report............................................ II-10
II.Condensed Financial Information of the Registrant...................... II-11
III. Notes to Condensed Financial Information of the Registrant........... II-14
</TABLE>
II-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
Communications Instruments, Inc. and Subsidiaries:
We have audited the financial statements of Communications Instruments, Inc.
and subsidiaries (the Company) as of December 31, 1995 and 1996, and for each
of the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 14, 1997 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule listed in Item 21 of this Registration Statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Greenville, South Carolina
February 14, 1997
II-10
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
ASSETS
------
<S> <C> <C>
Current assets................................................ $15,453 $24,859
Property, plant and equipment................................. 11,371 13,502
Receivable due from subsidiary................................ 9,650 9,183
Investment in subsidiary...................................... 4,138 4,271
Other non current assets...................................... 4,104 6,746
------- -------
Total Assets.............................................. $44,716 $58,561
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities........................................... $ 7,640 $15,309
Long-Term debt................................................ 19,731 26,099
Non current liabilities....................................... 7,052 5,403
Stockholders' equity..........................................
Common stock..................................................
Paid-in capital............................................... 12,317 12,317
Accumulated deficit........................................... (1,744) (115)
Currency translation (loss)................................... (36) (38)
Accounts receivable due from parent........................... (244) (414)
------- -------
Total Liabilities and Stockholders' Equity................ $44,716 $58,561
======= =======
</TABLE>
See notes to condensed financial statements.
II-11
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net sales............................................ $31,523 $36,239 $51,430
Cost of sales........................................ 24,330 26,833 38,399
------- ------- -------
Gross margin......................................... 7,193 9,406 13,031
Operating expenses................................... 4,910 10,158 7,330
------- ------- -------
Operating income..................................... 2,283 (752) 5,701
Interest expense..................................... (1,279) (2,058) (3,682)
Other income......................................... -- 2 314
------- ------- -------
Income before income taxes........................... 1,004 (2,808) 2,333
Income tax expense (benefit)......................... 386 (950) 838
Equity in income of subsidiary....................... -- 137 134
------- ------- -------
Net income (loss).................................... $ 618 $(1,721) $ 1,629
======= ======= =======
</TABLE>
See notes to condensed financial statements.
II-12
<PAGE>
COMMUNICATION INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Net cash provided by operating activities.......... $ 1,333 $ 2,023 $ 7,026
Net cash (used in) investing activities............ (1,544) (15,681) (13,770)
Net cash provided by financing activities.......... 256 13,645 6,799
------- -------- --------
Net increase (decrease) in cash.................... 45 (13) 55
Cash, beginning of period.......................... 27 72 59
------- -------- --------
Cash, end of period................................ $ 72 $ 59 $ 114
======= ======== ========
</TABLE>
See notes to condensed financial statements.
II-13
<PAGE>
COMMUNICATIONS INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. BASIS OF PRESENTATION
The Condensed Financial Information of Registrant reflects the financial
statements of Communications Instruments, Inc. with its subsidiaries, Kilovac
Corporation, Kilovac International FSC Limited and Electro-Mech, S.A. DW C.V.,
presented on the equity method of accounting in order to comply with the
requirements of Schedule I of Form S-4.
2. LONG-TERM DEBT
See Note 5 of the Notes to Consolidated Financial Statements.
3. COMMITMENTS AND CONTINGENCIES
See Note 8 of the Notes to Consolidated Financial Statements.
4. CASH DIVIDENDS PAID TO REGISTRANT
For the fiscal years ended December 31, 1994, 1995 and 1996, Communications
Instruments, Inc. did not receive any dividends.
II-14
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Communications
Instruments, Inc. and subsidiaries on Form S-4 of our report dated February 14,
1997, appearing in the Prospectus, which is part of this Registration Statement,
and of our report dated February 14, 1997 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.
Deloitte & Touche LLP
Greenville, South Carolina
October 16, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-4 of our report
on 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.
Deloitte & Touche LLP
Los Angeles, California
October 16, 1997
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-4 of our report
on Hartman Manufacturing Division of Figgie International, Inc., 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.
Deloitte & Touche LLP
Cleveland, Ohio
October 16, 1997
