-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVEXoA0z7XKd/Ne8BNTHHuJ4607C2xnzkUH4K+nZD2tPMawk92SsQgqnw2zDdPwD HPbAo9gpWOnYbTNhsYYvNw== 0000898430-95-002046.txt : 19951025 0000898430-95-002046.hdr.sgml : 19951025 ACCESSION NUMBER: 0000898430-95-002046 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19951024 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERADYNE INC CENTRAL INDEX KEY: 0000018937 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 330055414 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-62345 FILM NUMBER: 95583392 BUSINESS ADDRESS: STREET 1: 3169 RED HILL CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7145490421 MAIL ADDRESS: STREET 2: 3169 RED HILL CITY: COSTA MESA STATE: CA ZIP: 92626 S-1/A 1 AMENDMENT #2 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1995 REGISTRATION NO. 33-62345 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- CERADYNE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- DELAWARE 3297 33-0055414 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) OF INCORPORATION OR ORGANIZATION) -------------- JOEL P. MOSKOWITZ CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT CERADYNE, INC. 3169 RED HILL AVENUE COSTA MESA, CALIFORNIA 92626 (714) 549-0421 (NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE) -------------- COPIES TO: ROBERT E. RICH, ESQ. MATTHEW P. CAMERON JAY RAINS, ESQ. PAUL E. THULLEN, ESQ. HURDLOW, ESQ. JEFFREY T. BAGLIO, ESQ. STRADLING, YOCCA, CARLSON & RAUTH GRAY CARY WARE & FREIDENRICH 660 NEWPORT CENTER DRIVE, SUITE 1600 4365 EXECUTIVE DRIVE, SUITE 1600 NEWPORT BEACH, CALIFORNIA 92660 SAN DIEGO, CALIFORNIA 92121 (714) 725-4000 (619) 677-1400 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. -------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CERADYNE, INC. CROSS-REFERENCE SHEET
FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS LOCATION OR CAPTION -------------------------------- ------------------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.... Facing Page; Cross Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus... Inside Front Page of Prospectus; Outside Back Cover Page of Prospectus; Available Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges... Summary; Risk Factors 4. Use of Proceeds.............. Summary; Use of Proceeds 5. Determination of Offering Price....................... Front Cover Page of Prospectus; Underwriting 6. Dilution..................... Not Applicable 7. Selling Security Holders..... Not Applicable 8. Plan of Distribution......... Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered............... Summary; Price Range of Common Stock and Dividend Policy; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel................. Not Applicable 11. Information with Respect to the Registrant.............. Summary; The Company; Risk Factors; Use of Proceeds; Price Range of Common Stock and Dividend Policy; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders; Description of Capital Stock; Legal Matters; Experts; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................. Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 10, 1995 1,200,000 SHARES LOGO Logo of Ceradyne, Inc. appears here COMMON STOCK All of the shares of Common Stock offered hereby are being sold by Ceradyne, Inc. The Common Stock of the Company is traded on the Nasdaq National Market under the symbol CRDN. On October 9, 1995, the last sale price of the Common Stock as reported on the Nasdaq National Market was $5.50 per share. See "Price Range of Common Stock and Dividend Policy." THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 5 OF THIS PROSPECTUS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------- Per Share.............. $ $ $ - ------------------------------------------------------------------------------- Total (3).............. $ $ $ ===============================================================================
(1) Does not include (i) a non-accountable expense allowance payable by the Company to the Representatives of the Underwriters, and (ii) the sale by the Company to the Representatives of the Underwriters of five-year warrants to purchase up to 60,000 shares of Common Stock at an exercise price of $ per share (120% of the per share price to the public). See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company estimated at $400,000, including the Representatives' non-accountable expense allowance. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 180,000 additional shares of Common Stock solely to cover over- allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , Underwriting Discount will total $ and the Proceeds to Company will total $ . See "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of Van Kasper & Company, San Francisco, California on or about , 1995. VAN KASPER & COMPANY CRUTTENDEN ROTH INCORPORATED , 1995 Photo depicting Ceramic Orthodontic Brackets . Ceradyne produces Transtar(R) translucent orthodontic ceramic brackets as part of its strategic relationship with 3M/Unitek Corporation. Shown: Typical placement of ceramic brackets during treatment. Drawing depicting Cathodes for Television . The Company has developed a ceramic-impregnated dispenser cathode to be used for large screen television, projection television and high definition television (HDTV). Shown: Back end of color television tube uses three cathodes. Examples of Military Armor . Ceradyne's lightweight ceramic armor utilizes its Ceralloy(R) ceramic plates bonded to a laminate backing to stop up to .50 caliber machine gun bullets for helicopter and personnel protection. Shown: Military armored vest. [PICTURES] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES ACT OF 1934. SEE "UNDERWRITING." 2 SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." THE COMPANY Ceradyne, Inc. ("Ceradyne" or the "Company") develops, manufactures and markets advanced technical ceramic products and components for industrial, defense, consumer and microwave applications. In many high performance applications, products made of advanced technical ceramics meet specifications that similar products made of metals or plastics cannot achieve. Advanced technical ceramics can withstand extremely high temperatures, combine hardness with light weight, are highly resistant to corrosion and wear, and have excellent electrical insulation capability and other special electronic properties. Ceradyne's technology was originally developed primarily for defense and aerospace applications which have historically represented a substantial portion of its business. As a result of the end of the "Cold War," one of the Company's major defense contracts was cancelled and the Company experienced reductions in certain other defense-related business. As a result, the Company began to rely more heavily on the development of new applications and markets, domestic and international, for its advanced technical ceramic technology, while continuing to serve its historical customer base which continued to account for a substantial portion of the Company's business. The Company's international sales have increased in each of the last three years. From a peak of $25.6 million in 1987, the Company's revenues declined to a low of $15.9 million in 1993. Management believes that the Company's financial recovery commenced in the fourth quarter of 1994 due to an increase in new bookings and the divestiture of an historically unprofitable operation. Revenues began to increase in the third quarter of 1994, and have continued to increase in each of the last four fiscal quarters ending with the quarter ended June 30, 1995. In addition, the Company returned to profitability in each of the first two quarters of fiscal 1995, and at June 30, 1995, the Company's total backlog had increased to $24.8 million, up from $13.2 million a year earlier. The Company includes in backlog unfilled firm orders as well as unexercised options since, historically, most options have been exercised. See "Business--Backlog" and "Risk Factors--Dependence on United States Government and Risk of Contract Termination" for a discussion of the categories and components of the Company's backlog. The Company continues to derive a substantial portion of its revenues from its traditional products, such as lightweight ceramic armor for military helicopters and microwave tube products. Management expects that newer products developed or being developed by the Company for defense, industrial and consumer applications will represent a growing share of its business. Examples of these newer products include (i) lightweight ceramic armor vests for military personnel; (ii) a modified translucent ceramic orthodontic bracket which is sold to Unitek Corporation, a subsidiary of 3M, under an exclusive marketing agreement and (iii) wear resistant components for industrial machinery, such as paper making equipment, made from the Company's Ceralloy(R) 147 silicon nitride advanced technical ceramic. Additionally, the Company's ceramic-impregnated dispenser cathode is in early limited production for next generation large screen and projection television. The Company believes this product has applications in high-definition television (HDTV) and enhanced resolution CRT monitors. There can be no assurance, however, of wide market acceptance of this product. The Company has a strategic relationship with the Ford Motor Company, pursuant to which Ford has acquired a 19.2% equity interest in the Company, and transferred ceramic-related technology to the Company with a long-term objective of developing ceramic components for automobile engines. The Company's efforts in automotive and diesel applications are still in the experimental stage and the Company's ability to generate significant revenues from these applications is uncertain and may not occur for several years, if at all. RECENT OPERATING RESULTS. The Company has reported preliminary unaudited operating results for the third quarter and nine months ended September 30, 1995. The Company had net sales of $6.3 million and net income of $0.6 million, or $0.09 per share, for the third quarter ended September 30, 1995, compared to net sales of $4.3 million and a net loss of $0.5 million, or $0.08 per share, for the quarter ended September 30, 1994. For the nine months ended September 30, 1995, the Company reported net sales of $17.4 million and net income of $1.4 million, or $0.21 per share, compared to net sales of $13.1 million and a net loss of $1.2 million, or $0.20 per share, for the nine months ended September 30, 1994. 3 THE OFFERING Common Stock offered.................. 1,200,000 shares Common Stock to be outstanding after the offering......................... 7,474,634 shares(1) Use of proceeds....................... Capital expenditures, repayment of debt, working capital and other general corporate purposes. Nasdaq National Market symbol......... CRDN
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS YEAR ENDED DECEMBER 31 ENDED JUNE 30, ------------------------- --------------- 1992 1993 1994 1994 1995 ------- ------- ------- ------ ------- STATEMENTS OF OPERATIONS DATA: Net sales........................... $18,727 $15,987 $17,996 $8,729 $11,136 Gross profit........................ 2,196 1,195 1,861 1,073 2,912 Income (loss) from operations....... (1,946) (2,569) (1,938) (824) 964 Net income (loss)................... (1,997) (2,597) (1,866) (747) 804 Net income (loss) per share(2)...... $ (.33) $ (.42) $ (.30) $ (.12) $ .13 Weighted average shares outstanding(2)..................... 6,133 6,169 6,238 6,233 6,389
QUARTER ENDED ------------- MARCH JUNE 31, 30, 1995 1995 ------ ------ Net sales........................................................ $5,379 $5,757 Net income....................................................... 351 454 Net income per share--primary.................................... $0.06 $0.07
JUNE 30, 1995 ------------------- DECEMBER 31, AS 1994 ACTUAL ADJUSTED (3) ------------ ------- ----------- BALANCE SHEET DATA: Working capital............................... $ 5,053 $ 5,970 $11,686 Total assets.................................. 16,862 18,666 23,882 Current portion of long-term debt............. 1,029 1,832 1,332 Long-term debt, net of current portion........ 905 787 787 Stockholders' equity.......................... 11,602 12,489 18,205
- -------- (1) Excludes 435,900 shares of Common Stock issuable upon exercise of outstanding stock options as of June 30, 1995 at a weighted average exercise price of $2.45 per share. (2) Net income (loss) per share amounts have been computed using the weighted average number of shares of Common Stock and Common Stock equivalents (when dilutive) outstanding during the periods. See Note 1 of Notes to Consolidated Financial Statements. (3) As adjusted to give effect to the receipt by the Company of the estimated net proceeds from the sale of the 1,200,000 shares offered hereby at an assumed public offering price of $5.50 per share, and the application by the Company of the estimated net proceeds. See "Use of Proceeds." ---------------- Ceradyne, the Ceradyne logo and Ceralloy are major trademarks of the Company. This Prospectus also includes other trademarks of Ceradyne and trademarks of other companies. 4 THE COMPANY The Company is incorporated under the laws of the State of Delaware. As used in this Prospectus, the "Company" and "Ceradyne" refer to Ceradyne, Inc., a Delaware corporation, and its predecessor corporations. The principal executive offices of the Company are located at 3169 Red Hill Avenue, Costa Mesa, California 92626 and the Company's telephone number at that location is (714) 549-0421. RISK FACTORS Prospective investors should carefully consider the factors set forth below, in addition to the other information contained in this Prospectus, in evaluating an investment in the Common Stock offered hereby. HISTORY OF OPERATING LOSSES For the six month period ended June 30, 1995 the Company returned to profitability after sustaining net losses from fiscal 1987 through fiscal 1994 totalling approximately $21.4 million. The Company's operating losses resulted from a number of factors, including a decline in revenues due in part to reduced government spending on defense related products, which historically have represented the majority of the Company's business and are expected to represent a substantial portion of the Company's business in the foreseeable future. Also contributing to the Company's losses was a decline in sales of the Company's translucent ceramic orthodontic bracket, from peak revenues of $6.2 million in fiscal 1988 to $.4 million in fiscal 1994, due in part to excess inventory levels accumulated by the Company's exclusive distributor of this product, Unitek Corporation, a subsidiary of Minnesota Mining & Mfg. Co. ("3M/Unitek"), and also in part to resistance by some orthodontists to use the product because of technical problems experienced with earlier versions of the bracket. To maintain profitability and achieve revenue growth, the Company must, among other things, successfully address new opportunities for armor applications, including the development of capacity to successfully manufacture ceramic body armor in volume; achieve significant sales of a new version of its transluscent orthodontic bracket product, which is currently under development; and continue to upgrade its technologies and commercialize products and services incorporating such technologies. There can be no assurance, however, that the Company will be able to sustain or improve its level of profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." IMPORTANCE OF NEW PRODUCTS; LIMITED VOLUME MANUFACTURING EXPERIENCE FOR PRODUCTS UNDER DEVELOPMENT The Company believes that its future prospects will depend to a large extent on the success of products which currently provide little revenue or which are still under development. These products include, in particular, lightweight ceramic armor vests for military personnel, the Company's ceramic-impregnated dispenser cathode for television and other cathode ray tube ("CRT") applications, improved versions of the Company's translucent ceramic orthodontic bracket, and ceramic components for automobile and diesel engines. Although the Company received its initial production order in January 1995 for lightweight ceramic armor vests, the Company has previously produced only prototype quantities of this vest and has never manufactured it in the volumes required to fulfill this order. As a result, there can be no assurance that the Company will be able to manufacture these vests in a timely manner or on a profitable basis. Wide customer acceptance of the Company's CRT cathode and the Company's ability to manufacture this cathode profitably will depend in part on achieving significant manufacturing cost reductions, the Company's ability to manufacture these components in high volumes at acceptable production yields, and satisfying extensive customer testing and qualification procedures, which often take many months or years to complete. Should the Company be unable to achieve such cost reductions, manufacture with acceptable product yields or satisfy customer testing and qualification procedures, the Company's prospects and operating results may be materially and adversely affected. The Company has recently introduced a metal-lined version of its translucent ceramic orthodontic bracket and plans to introduce another version of this product in early 1996, both of which are designed to improve the performance and market acceptance of this product. The metal-lined bracket is more difficult and costly to produce than earlier versions of this bracket and there can be no assurance that the Company will be able to produce this version in high 5 volume at acceptable yields or that either of these new designs will achieve market acceptance or result in increased sales of this product. The Company's efforts in producing ceramic components for automobile and diesel engines are still in the experimental stage, with future success substantially dependent on achieving significant cost reductions and developing high volume manufacturing capability while maintaining high quality levels. Furthermore, lead times for the introduction of new materials and components into production automobiles are typically several years. The market for ceramic automotive and diesel components is new and evolving, and advanced technical ceramics are not currently used in any significant automotive applications. Accordingly, demand and market acceptance for such products are subject to a high level of uncertainty. As a result of these factors, the Company believes that the use of ceramic components in high volume production automobile or diesel engines cannot be predicted and will not occur for several years, if at all. See "Business--Market Applications." MANAGEMENT OF GROWTH The Company is experiencing a period of new product introductions that have placed, and will continue to place, a significant strain on its resources, including personnel. A significant portion of the Company's backlog relates to a single order for ceramic armor vests for the United States military, and fulfillment of such order will require the Company to manufacture the product in volumes significantly greater than the Company has historically achieved for such products. In addition, the Company believes that future growth is significantly dependent on introductions of other new products applying the Company's core advanced technical ceramics technologies. The Company expects that management of this transition will continue to place a strain on the Company's management, operational and financial resources. The Company's ability to manage growth effectively, particularly given the increasingly international scope of its operations, will require it to add manufacturing capacity and personnel, continue to implement and improve its operational, financial and management information systems as well as to develop the management skills of its managers and supervisors and to train, motivate and manage its employees. These demands are expected to require the addition of new management personnel and the development of additional expertise by existing management personnel. The Company's failure to effectively manage growth could have a material adverse effect on the Company's results of operations. See "Business--Market Applications," "--Backlog" and "Management." DEPENDENCE ON KEY PERSONNEL The Company's future success depends in large part on the continued service of Joel P. Moskowitz, its Chairman, Chief Executive Officer and President, and a principal stockholder of the Company, as well as other principal members of its management, the loss of whose services could have a material adverse effect upon the business and financial condition of the Company. The Company is also dependent on other key personnel, and on its ability to continue to attract, retain and motivate highly qualified personnel. The competition for such employees is intense, and there can be no assurance that the Company will be able to recruit and retain such personnel. Mr. Moskowitz has an employment agreement with the Company which expires in July 1999, but no other employee has an agreement for a specified term of employment with the Company. See "Management." COMPETITION The markets for applications of advanced technical ceramics are competitive. The Company believes the principal competitive factors in these markets are product performance, material's specifications, application engineering capabilities, customer support, reputation and price. Many of the Company's competitors, both domestic and international, have greater financial, marketing and technical resources than Ceradyne. The Company's competitors often are divisions of larger companies with each of Ceradyne's product lines subject to completely different competitors. Some of the competitors of the Company include Kyocera Corporation's Industrial Ceramics Group in industrial ceramic products, Vesuvius McDaniel Co. in fused silica ceramics, and Simula Inc. and Brunswick Corp. in defense products. In many applications the Company also competes with manufacturers of non-ceramic materials. The principal competition for the Company's new CRT cathode are oxide cathodes manufactured in-house by the television manufacturers who are the Company's targeted 6 customers for this product. There can be no assurance that the Company will be able to compete successfully against its current or future competitors or that competition will not have a material adverse effect on the Company's results of operations and financial condition. See "Business--Competition." ENVIRONMENTAL CONCERNS The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials. Certain of the Company's products are produced using beryllium oxide, which is highly toxic in powder form. This powder, if inhaled, can cause chronic beryllium disease ("CBD") in a small percentage of the population. In recent years the Company has been sued by several former employees and a family member of one such former employee alleging that they had contracted CBD as a result of exposure to beryllium oxide powders used in the Company's products. Although these claims have been settled without material liability to the Company, a current employee of the Company and his wife have sued the Company, alleging the employee contracted CBD as a result of exposure to beryllium oxide powder during the course of his employment. There can be no assurance that the Company will avoid liability to persons who contract CBD as a result of exposure to beryllium oxide while employed with the Company. While the Company believes that it is in material compliance with all existing applicable environmental statutes and regulations, any failure by the Company to comply with statutes and regulations presently existing or enacted in the future could subject it to liabilities or the suspension of production. Furthermore, there can be no assurance that claims against the Company related to exposure to beryllium oxide powder will be covered by insurance or that, if covered, the amount of insurance will be sufficient to cover any potential adverse judgment. See "Business--Environmental Concerns and Litigation." DEPENDENCE ON UNITED STATES GOVERNMENT AND RISK OF CONTRACT TERMINATION Of the Company's $24.8 million total backlog at June 30, 1995, approximately $18.0 million, or 73%, represents orders for lightweight ceramic armor for defense applications. This amount includes unfilled firm orders and unexercised options for lightweight ceramic armor for military helicopters of approximately $5.3 million and $3.1 million, respectively, or a total of approximately $8.4 million, and unfilled firm orders and unexercised options for lightweight ceramic armor vests for military personnel of approximately $3.5 million and $6.1 million, respectively, or a total of approximately $9.6 million. The contract for armor vests and some of the contracts for helicopter armor are directly or indirectly with agencies of the United States government. The Company anticipates that it will continue to depend heavily on direct or indirect sales to government agencies for a significant percentage of the Company's revenues for the foreseeable future. In recent years, budgets of many government agencies have been reduced, causing certain customers and potential customers for the Company's products to re-evaluate their needs. Such budget reductions are expected to continue over at least the next several years. Future reductions in United States government spending on defense- related products could have a material adverse effect on the Company's prospects and operating results. Under U.S. law, the Company's defense-related contracts may be cancelled for convenience at any time without cause by the government, with reimbursement to the Company only for its actual expenses incurred. The Company has in the past experienced the cancellation of a significant government order, which had a material adverse effect on the Company's operating results. There can be no assurance that the Company will not experience similar cancellations in the future, and any such cancellations could adversely affect the Company's operating results. See "Backlog." RELIANCE ON 3M/UNITEK RELATIONSHIP The Company developed its translucent ceramic orthodontic bracket pursuant to a joint development agreement with 3M/Unitek, and sells this product only to 3M/Unitek pursuant to an exclusive marketing agreement which expires in 2007. Consequently, the Company depends entirely on the marketing and sales efforts of 3M/Unitek for the sales of this product. The Company also depends on customer and technical feedback from 3M/Unitek for the design of improvements to the bracket. Early versions of this product were not well accepted by some orthodontists due in part to resistance to change from using traditional stainless steel brackets and to certain technical problems experienced by some users of the earlier versions of the Company's 7 translucent ceramic orthodontic bracket. These problems included difficulty in the removal, or debonding, of the bracket from the tooth, breakage of brackets during the treatment process more often than experienced with stainless steel brackets, and slower movement of the metal arch wire through the ceramic bracket, resulting in longer treatment times than with stainless steel brackets. Designs recently introduced and designs scheduled for early 1996 introduction are intended to improve certain features of earlier versions of the bracket, but there can be no assurance that these new products will completely eliminate the previous problems or receive wide market acceptance. Furthermore, no assurance can be given that 3M/Unitek will devote substantial marketing efforts to sales of the Company's orthodontic products, or that it will not re-assess its commitment to the Company's technologies or develop its own competitive technology. Any failure by 3M/Unitek to actively market the Company's orthodontic product, or any failure of such product to achieve market acceptance, would materially and adversely impact the Company's prospects and results of operations. See "Risk Factors--Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development" and "Business--Strategic Relationships." DEPENDENCE ON INTERNATIONAL SALES Shipments to customers outside of North America accounted for approximately 25% and 26% of the Company's sales in fiscal 1994 and the first six months of fiscal 1995, respectively. The Company anticipates that international shipments will continue to account for a significant portion of its sales. Certain of these revenues have been derived from sales to foreign government agencies and may be subject to risks similar to those set forth in "Risk Factors--Dependence on United States Government and Risk of Contract Termination." There are a number of risks inherent in the Company's international business activities, including unexpected changes in regulatory requirements, tariffs and other trade barriers, longer account receivable payment cycles, potentially adverse tax consequences, and the burdens of compliance with foreign laws. Additionally, the Company does not engage in hedging activities to protect against the risk of currency fluctuations. Fluctuations in currency exchange rates could cause sales denominated in U.S. dollars to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Furthermore, future international activity may result in foreign currency denominated sales which may result in gains and losses on the conversion to U.S. dollars of accounts receivable and accounts payable arising from international operations which may contribute significantly to fluctuations in the Company's results of operations. The Company historically has denominated export sales in United States dollars. There can be no assurance, however, that the aforementioned factors will not have an adverse effect on the revenues from the Company's future international sales and, consequently, the Company's results of operations. Some of the Company's products may not be exported to certain foreign countries without an export license obtained from the United States government. The Company has and may in the future experience difficulty in obtaining licenses to export its products to certain countries. Failure to obtain such licenses could have a material adverse effect on the Company's sales and prospects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Ceradyne Strategy" and "-- Marketing and Customers." PROTECTION OF INTELLECTUAL PROPERTY The Company relies on a combination of patents, trade secrets, trademarks, and other intellectual property law, nondisclosure agreements and other protective measures to preserve its proprietary rights pertaining to its products and production processes. Such protection, however, may not preclude competitors from developing products or processes similar or superior to the Company's. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Although the Company continues to implement protective measures and intends to defend its proprietary rights, there can be no assurance that these efforts will be successful. Furthermore, there can be no assurance that the Company's products or processes are not in violation of the patent rights of third parties, or that any of the Company's patents will not be challenged, invalidated or circumvented. See "Business--Patents, Licenses and Trademarks." 8 SIGNIFICANT FLEXIBILITY IN APPLYING NET PROCEEDS OF OFFERING The Company has not designated any specific use for a substantial portion of the net proceeds from the sale of the Common Stock offered hereby. Rather, the Company currently intends to use the net proceeds primarily for general corporate purposes. See "Use of Proceeds." Accordingly, management will have significant flexibility in applying the net proceeds of this offering. Failure to utilize the net proceeds within a reasonable period of time may result in a dilution of the Company's earnings per share, which could have a material adverse effect on the price of the Company's Common Stock. CONCENTRATION OF STOCK OWNERSHIP; ANTITAKEOVER EFFECTS OF DELAWARE LAW Upon completion of this offering, the Company's directors and executive officers and Ford will, in the aggregate, beneficially own approximately 37.5% of the outstanding Common Stock. As a result, these stockholders, acting together, would be able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "Principal Stockholders." In addition, Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders, as defined by statute. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders, and therefore could adversely affect the price of the Company's Common Stock. See "Description of Capital Stock--Delaware Law." VOLATILITY OF STOCK PRICE The Company's Common Stock has experienced substantial price volatility and such volatility may occur in the future, particularly as a result of quarter to quarter variations in the actual or anticipated financial results of the Company, announcements by the Company, its competitors or its customers, actual or anticipated changes in government defense spending, or reports or recommendations by securities industry analysts. In addition, the stock market has experienced extreme price and volume fluctuations which have affected the market price of the common stock of many technology companies in particular and which have at times been unrelated to operating performance of the specific companies whose stock is traded. Broad market fluctuations, as well as economic conditions generally, may adversely affect the market price of the Company's Common Stock. In addition, in the past the Company has not experienced significant trading volume in its Common Stock, has not been actively followed by stock market analysts and has limited market-making support from broker-dealers. If greater market-making support is not generated, supported by broader analyst coverage, resulting in greater average trading volume in the Company's Common Stock, there can be no assurance that an adequate trading market will exist to sell large positions in the Company's Common Stock. See "Price Range of Common Stock and Dividend Policy." 9 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby, assuming a public offering price of $5.50 per share and after deducting the estimated underwriting discount and offering expenses, are estimated to be approximately $5.7 million. The Company intends to use approximately $2.0 million of the net proceeds to purchase tooling and equipment in order to develop additional manufacturing capacity, primarily for sintered reaction bonded silicon nitride (SRBSN) products, at the Company's Costa Mesa, California facility, and for dispenser cathodes for CRT applications, at the Company's Lexington, Kentucky facility. In addition, approximately $0.5 million of the net proceeds will be used to repay outstanding indebtedness under the Company's $4.0 million credit facility, under which borrowings totalled approximately $2.5 million at June 30, 1995, and bear interest at the lender's prime rate (9.0% at June 30, 1995) plus 3.6%. Repayment of any additional amounts outstanding under the credit facility would result in prepayment penalties under the current terms of the credit facility. Approximately $2.0 million of the net proceeds will be used to repay the balance due under the credit facility when it expires on November 29, 1996. The remainder of the net proceeds, approximately $1.2 million, will be used for working capital and other general corporate purposes. A portion of the proceeds may also be used by the Company to acquire or invest in businesses, assets, technologies or product lines that complement the Company's existing businesses. While from time to time the Company evaluates potential acquisitions of such businesses, assets, technologies or product lines, there is no present understanding or agreement with respect to any such acquisitions. Pending use, the Company intends to invest the net proceeds from this offering in short-term, interest-bearing instruments, including government obligations and money market instruments. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The following table sets forth the price range of high and low last sale prices per share for the Common Stock on the Nasdaq National Market for the periods indicated.
HIGH LOW ---- --- Year ended December 31, 1993 First Quarter............................................ 2 3/4 2 1/4 Second Quarter........................................... 3 2 Third Quarter............................................ 4 5/16 2 Fourth Quarter........................................... 4 2 1/2 Year ended December 31, 1994 First Quarter............................................ 3 5/8 2 5/8 Second Quarter........................................... 3 1/2 1 1/2 Third Quarter............................................ 3 1 3/4 Fourth Quarter........................................... 3 1/4 2 Year ended December 31, 1995 First Quarter............................................ 3 3/8 2 1/4 Second Quarter........................................... 5 7/8 3 Third Quarter............................................ 6 1/8 4 3/4 Fourth Quarter (through October 9, 1995)................. 6 1/8 5 1/4
The present policy of the Company is to retain earnings for the operation and expansion of its business. The Company has never paid cash dividends, and does not anticipate that it will do so in the foreseeable future. In addition, the Company's credit agreement restricts the payment of cash dividends. 10 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1995, and as adjusted to reflect the sale by the Company of 1,200,000 shares of Common Stock pursuant to this offering and the receipt and application by the Company of the estimated net proceeds therefrom, assuming a public offering price of $5.50 per share and after deducting the estimated underwriting discount and estimated offering expenses. The capitalization information set forth in the table below is qualified by the more detailed Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus and should be read in conjunction with such Consolidated Financial Statements and Notes.
JUNE 30, 1995 -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Current portion of long-term debt......................... $ 1,832 $ 1,332 ======= ======= Long-term debt, net of current portion.................... $ 787 $ 787 ------- ------- Stockholders' equity: Common Stock, $.01 par value; 12,000,000 shares authorized, 6,274,634 shares outstanding, actual; 7,474,634 shares outstanding, as adjusted(1)........... 30,512 36,228 Accumulated deficit..................................... (18,023) (18,023) ------- ------- Total stockholders' equity............................ 12,489 18,205 ------- ------- Total capitalization................................ $13,276 $18,992 ======= =======
- -------- (1) Excludes 435,900 shares of Common Stock issuable upon exercise of outstanding stock options as of June 30, 1995 at a weighted average exercise price of $2.45 per share. 11 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data as of December 31, 1993 and 1994 and for the years ended December 31, 1992, 1993 and 1994 are derived from financial statements of the Company which have been audited by Arthur Andersen LLP, which are included elsewhere in this Prospectus. The selected consolidated financial data of the Company as of December 31, 1990, 1991 and 1992 and for the years ended December 31, 1990 and 1991 are derived from consolidated financial statements of the Company which have been audited by Arthur Andersen LLP, which are not included in this Prospectus. The selected consolidated financial data of the Company for the six month periods ended June 30, 1994 and 1995, and as of June 30, 1995, are derived from unaudited financial statements included elsewhere herein and, in the opinion of the Company, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The results for the six months ended June 30, 1995 are not necessarily indicative of the results to be expected for the full year ending December 31, 1995. The following information should be read in conjunction with the Consolidated Financial Statements of the Company and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------- ---------------- 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net sales............... $23,131 $21,886 $18,727 $15,987 $17,996 $ 8,729 $11,136 Cost of product sales... 18,385 18,877 16,531 14,792 16,135 7,656 8,224 ------- ------- ------- ------- ------- ------- ------- Gross profit.......... 4,746 3,009 2,196 1,195 1,861 1,073 2,912 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Selling............... 1,664 1,593 1,465 1,372 1,502 801 751 General and administrative....... 2,436 2,345 2,465 2,392 2,297 1,096 1,197 Royalty............... 253 240 212 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- 4,353 4,178 4,142 3,764 3,799 1,897 1,948 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations........... 393 (1,169) (1,946) (2,569) (1,938) (824) 964 Other income (expense): Other income.......... 280 319 160 212 366 216 2 Interest expense...... (302) (255) (211) (240) (294) (139) (162) ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision (credit) for taxes on income.. 371 (1,105) (1,997) (2,597) (1,866) (747) 804 Provision for taxes on income(1).............. -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net income (loss)..... $ 371 $(1,105) $(1,997) $(2,597) $(1,866) $ (747) $ 804 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share(2)............... $ .06 $ (.18) $ (.33) $ (.42) $ (.30) $ (.12) $ .13 Weighted average shares outstanding(2)......... 6,418 6,178 6,133 6,169 6,238 6,233 6,389 DECEMBER 31, JUNE 30, ------------------------------------------- ---------------- 1990 1991 1992 1993 1994 1994 1995 ------- ------- ------- ------- ------- ------- ------- BALANCE SHEET DATA: Working capital......... $ 7,404 $ 7,805 $ 6,808 $ 5,630 $ 5,053 $ 5,727 $ 5,970 Total assets............ 23,556 22,317 20,567 18,130 16,862 18,316 18,666 Current portion of long- term debt.............. 722 465 1,044 1,306 1,029 1,426 1,832 Long-term debt, net of current portion........ 1,319 1,774 1,413 1,367 905 1,246 787 Stockholders' equity.... 18,637 17,734 15,813 13,443 11,602 12,705 12,489
- -------- (1) The Company makes no provision for income taxes due to the existence of a tax net operating loss carryforward of approximately $14 million at December 31, 1994. See Note 5 of Notes to Consolidated Financial Statements. (2) Net income (loss) per share amounts have been computed using the weighted average number of shares of Common Stock and Common Stock equivalents (when dilutive) outstanding during the periods. See Note 1 of Notes to Consolidated Financial Statements. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Ceradyne develops, manufactures and markets advanced technical ceramic products and components for industrial, defense, consumer and microwave applications. The Company's technology was developed primarily for defense and aerospace applications which have historically represented a substantial portion of its business. With the end of the "Cold War," one of the Company's major defense contracts was cancelled and the Company experienced reductions in certain other defense-related business. As a result, the Company began to rely more heavily on the development of new applications and markets for its technology, while continuing to serve its historical customer base which continued to account for a substantial portion of the Company's business. From a peak of $25.6 million in 1987, the Company's revenues declined to a low of $15.9 million in 1993. Management believes that the Company's financial recovery commenced in the fourth quarter of 1994 due to an increase in new bookings and the divestiture of an historically unprofitable operation. Revenues began to increase in the third quarter of 1994, and have continued to increase in each of the last four fiscal quarters ending with the quarter ended June 30, 1995. In addition, the Company returned to profitability in each of the first two quarters of fiscal 1995, and at June 30, 1995, the Company's total backlog had increased to $24.8 million, up from $13.2 million a year earlier. The Company includes in backlog unfilled firm orders as well as unexercised options since, historically, most options have been exercised. See "Business--Backlog" and "Risk Factors--Dependence on United States Government and Risk of Contract Termination." The Company's cost of product sales includes the cost of materials, direct labor expenses and manufacturing overhead expenses. The Company's business requires that it maintain a relatively high fixed manufacturing overhead. As a result, the Company's gross profit, in absolute dollars and as a percentage of net sales, is greatly impacted by the Company's sales volume and the corresponding absorption of fixed manufacturing overhead expenses. Furthermore, due to the customized nature of many of its products, the Company is frequently required to devote resources to sustaining engineering expenses, which are also included in cost of product sales and are generally expensed as incurred. RESULTS OF OPERATIONS The percentage relationships to net sales of certain income and expense items for the three years ended December 31, 1994 and the six month periods ended June 30, 1994 and 1995 are contained in the following table:
YEAR ENDED DECEMBER SIX MONTHS ENDED 31, JUNE 30, ------------------------ ------------------- 1992 1993 1994 1994 1995 ------ ------ ------ -------- -------- Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of product sales.......... 88.27 92.53 89.66 87.71 73.85 ------ ------ ------ -------- -------- Gross profit................. 11.73 7.47 10.34 12.29 26.15 ------ ------ ------ -------- -------- Operating expenses: Selling...................... 7.82 8.58 8.35 9.18 6.74 General and administration... 13.16 14.96 12.76 12.55 10.75 Royalty...................... 1.14 -- -- -- -- ------ ------ ------ -------- -------- 22.12 23.54 21.11 21.73 17.49 ------ ------ ------ -------- -------- Income (loss) from operations.. (10.39) (16.07) (10.77) (9.44) 8.66 Other income (expense): Other income................. 0.86 1.33 2.03 2.47 0.01 Interest expense............. (1.13) (1.50) (1.63) (1.59) (1.45) ------ ------ ------ -------- -------- (0.27) (0.17) 0.40 0.88 (1.44) Income (loss) before provision for taxes on income........... (10.66) (16.24) (10.37) (8.56) 7.22 Provision for taxes............ -- -- -- -- -- ------ ------ ------ -------- -------- Net income (loss).............. (10.66)% (16.24)% (10.37)% (8.56)% 7.22% ====== ====== ====== ======== ========
13 SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994 Net Sales. Net sales for the six months ended June 30, 1995 were $11.1 million, which represents a 27.6% increase over $8.7 million in net sales for the corresponding period of the prior year. This increase was primarily due to a 59.6% (or $1.6 million) increase in sales of the Company's industrial products (consisting of a $1.0 million increase in fused silica ceramic products and a $.6 million increase in industrial wear products), a $.4 million increase in sales of translucent ceramic orthodontic brackets, as well as an increase in sales in substantially all of the Company's other product lines. International sales have and will continue to be an important part of the Company's business, representing 26.2% of the Company's net sales for the period ending June 30, 1995, up from 21.9% for the comparable period of the prior year, due primarily to shipments of microwave tube products and CRT cathode products. The Company intends to increase its efforts to expand sales in the international market. Gross Profit. The Company's gross profit increased to $2.9 million, or 26.1% of net sales, for the six months ended June 30, 1995, compared to $1.1 million, or 12.3% of net sales, for the six months ended June 30, 1994. Of the $1.8 million increase in gross profit, approximately $.5 million resulted from increased gross profit at the Company's Semicon division in Lexington, Kentucky and approximately $.4 million resulted from increased gross profit at the Company's Thermo Materials division in Scottdale, Georgia. These increases were attributable primarily to increased sales and improvements in manufacturing productivity at those facilities. Also contributing to the improvement in gross profit in the first six months of 1995 was the absence of the Company's ceramic-to-metal operations, which were divested in the fourth quarter of 1994 and which had a negative gross margin of approximately $.3 million during the six months ended June 30, 1994. Other factors contributing to the improvement in gross profit during the six months ended June 30, 1995 included increased sales of products with greater profit margins, increased manufacturing productivity, a 27.6% increase in total net sales during the period, and absorption of fixed manufacturing overhead over the increased sales volume. During the fiscal quarter ended June 30, 1995 the Company renegotiated the lease for its West Coast facility, reducing both leased space and rent. This reduction of approximately $350,000 per year, the majority of which will reduce manufacturing overhead expense, commences in November 1995. Operating Expense. Operating expenses were $1.9 million for the period ended June 30, 1995, an increase of 2.7% from the comparable period of the prior year, and represented 17.5% of net sales compared to 21.7% of net sales for the six months ended June 30, 1994. The improvement as a percentage of net sales was due to increased sales for the period ended June 30, 1995. Selling expenses were $751,000 for the six months ended June 30, 1995, a decrease of 6.2% from the comparable period of the prior year. This decrease in aggregate selling expenses was due primarily to the sale by the Company in the fourth quarter of 1994 of its ceramic-to-metal product line, which historically had required a relatively higher commitment of selling expenses. Selling expenses attributable to this product line were approximately $89,000 during the six months ended June 30, 1994. While actual amounts expended will depend upon a variety of factors, the Company anticipates that selling expenses will increase during the remainder of fiscal 1995 and in future years as the Company increases its marketing efforts both domestically and internationally. General and administrative expenses were $1.2 million for the six months ended June 30, 1995, a 9.2% increase from the comparable period of the prior year. This increase was primarily due to the payment of $62,000 in employee incentive bonuses indexed to the Company's profitability during the six months ended June 30, 1995. Given the nature of the Company's business, management believes that the present aggregate dollar level of operating expense, which has not changed materially over the last several years, is necessary to support the Company at its current sales level, as well as that experienced in the recent past. On the other hand, management believes that the Company should be able to significantly increase its sales without corresponding increases in selling, general and administrative expenses. 14 Other Income. Other income decreased to $2,000 for the six months ended June 30, 1995 compared to $216,000 for the six months ended June 30, 1994. During the latter period the Company had recorded other income from the finalization of a contract cancellation, the settlement of a contract claim and license fees received in excess of an amount accrued in prior periods. Interest Expense. For the six months ended June 30, 1995 interest expense was $162,000, a 16.5% increase over the comparable period of the prior year, primarily attributable to higher interest rates. Income Taxes. The Company has made no provision for income taxes due to the existence of approximately $18.2 million in tax net operating loss and tax credit carryforwards available as of December 31, 1994. Subject to certain limitations and differences between federal and state tax laws, the Company expects to apply these carryforwards against any tax liability in 1995 and in future years until such carryforwards are fully utilized. Net Income. Reflecting all of the matters discussed above, net income was $804,000 (or $.13 per share) for the six month period ended June 30, 1995 compared to a loss of $747,000 (or $.12 per share) for the comparable period of the prior year. YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 Net Sales. Net sales for the year ended December 31, 1994 were $17.9 million, a 12.5% increase over net sales of $15.9 million for the year ended December 31, 1993. Net sales in 1993 reflected a 14.6% decrease compared to net sales of $18.7 million for the year ended December 31, 1992. The increase in net sales in 1994 was due primarily to a 25.5% (or $.8 million) increase in sales of lightweight ceramic armor for helicopters, a $.3 million increase in sales of ceramic-to-metal products, a $.2 million increase in sales of wear-resistant products for industrial applications, revenues of $.4 million from sales of ceramic tiles produced for a prototype heat exchange container program, and, to a lesser extent, increased sales of other product lines. The decrease in net sales in 1993 was due primarily to a 77.9% (or $1.3 million) decrease in sales of translucent ceramic orthodontic brackets because of reduced demand, due to excess inventory held by the Company's exclusive customer, 3M/Unitek, a decline of $.6 million in sales of microwave tube products due to cutbacks in defense programs, and a decrease of $.4 million in sales of ceramic-to-metal products. In addition, in 1993 net sales were adversely affected by the termination of a strategic weapons system program in August 1992, which accounted for $.5 million of net sales in 1992. International sales represented 25.5%, 18.1% and 13.9% of total net sales in 1994, 1993 and 1992, respectively. These year-to-year increases reflect the Company's increasing emphasis on developing international markets. Gross Profit. The 1994 increase in gross profit percentage to 10.3% of net sales was primarily attributable to a change in sales mix in favor of more profitable products, improved manufacturing productivity, and, to a lesser extent, absorption of fixed manufacturing overhead over higher sales. These factors were most evident in the Company's lightweight ceramic armor product line, where sales increased by $.8 million, or 25.6%, to $3.9 million in 1994 from $3.1 million in 1993, while gross profit increased by $.5 million, or 98.9%, to $1.0 in 1994 from $.5 million in 1993. Conversely, the decrease in gross profit percentage in 1993 to 7.5% of net sales was primarily attributable to manufacturing overhead expense being spread over a much lower sales volume and a less favorable profit margin profile in the Company's sales mix. Operating Expenses. Operating expenses for the year ended December 31, 1994 were $3.8 million, an increase of less than 1% over operating expenses for the year ended December 31, 1993. The 1993 level represented a decrease of 9.1% compared to 1992 operating expenses of $4.1 million. These expenses represented 21.1%, 23.5% and 22.1% of net sales in 1994, 1993 and 1992, respectively. The increase in 1994 selling expenses was primarily attributable to greater selling effort associated with increased marketing activities. The decrease in 1993 selling expenses resulted from reductions in marketing personnel and advertising. General and administrative expenses decreased in 1994 and 1993 primarily as a result of reductions in administrative personnel. Royalty expenses ceased in 1992 with the final amortization of royalties which had been prepaid in 1986. 15 Other Income. Other income was $366,000 for the year ended December 31, 1994, a 72.6% increase over other income of $212,000 for the year ended December 31, 1993. The 1993 level represented a 32.5% increase over 1992 other income of $160,000. The increase in 1994 resulted from income recorded as a result of a contract cancellation, the settlement of a contract claim and receipt of licensing fees in excess of an amount accrued in prior periods. The increase in 1993 resulted primarily from income recorded as a result of a contract cancellation. Interest Expense. Interest expense was $294,000 for the year ended December 31, 1994, a 22.5% increase over interest expense of $240,000 for the year ended December 31, 1993, which in turn was a 13.7% increase over interest expense of $211,000 for the year ended December 31, 1992. The steady increase in interest expense is due to a combination of increasing interest rates and increased borrowing under the Company's credit facilities. Income Taxes. The Company adopted the provisions of the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," effective the first quarter of 1993. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. Net Income. As a result of all of the items discussed above, the net loss for the year ended December 31, 1994 was $1.9 million (or $.30 per share), representing a 26.9% improvement over the net loss of $2.6 million (or $.42 per share) for the year ended December 31, 1993. The 1993 net loss was 30.0% greater than the 1992 net loss of approximately $2 million (or $.33 per share). RECENT OPERATING RESULTS The Company has reported preliminary unaudited operating results for the third quarter and nine months ended September 30, 1995. The Company had net sales of $6.3 million and net income of $0.6 million, or $0.09 per share, for the third quarter ended September 30, 1995, compared to net sales of $4.3 million and a net loss of $0.5 million, or $0.08 per share, for the quarter ended September 30, 1994. For the nine months endedSeptember 30, 1995, the Company reported net sales of $17.4 million and net income of $1.4 million, or $0.21 per share, compared to net sales of $13.1 million and a net loss of $1.2 million, or $0.20 per share, for the nine months ended September 30, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company meets its operating and capital requirements from cash flow from operating activities and borrowings under its credit facilities. After producing a negative cash flow from operating activities in 1992 ($35,000) and 1993 ($380,000), the Company produced $736,000 in cash flow from operating activities in 1994 and $89,000 for the six months ended June 30, 1995. The Company has a revolving credit agreement with an asset-based lender for the purpose of financing the Company's working capital needs. The credit facility, which expires on November 29, 1996, is limited to $4.0 million, and is composed of two parts--a $1,585,600 term loan and a $2,414,400 revolving line of credit. Under both parts of the credit facility, borrowings are tied to availability formulas: 80% of the appraised value of fixed assets for the term loan, 75% of eligible trade receivables, and 25% of eligible inventory (up to $250,000) for the revolving line of credit. The term loan and the revolving line of credit are secured by all of the Company's assets and require the Company, among other things, to maintain certain financial ratios and limit capital expenditures. Borrowings under the credit facility totaled approximately $2.5 million at June 30, 1995. At June 30, 1995, the Company had short-term cash resources (i.e., cash and cash equivalents) equal to $302,000. Management believes that the net proceeds from this offering, funds generated from operations and the ability to borrow under the revolving credit facility will be sufficient to finance anticipated capital and operating requirements for at least the next twelve months. However, the Company may find it necessary to seek additional sources of financing to support its capital needs, for additional working capital, potential investments, acquisitions or otherwise. There is no assurance that such financing would be available on commercially acceptable terms or at all. Total property and equipment expenditures for 1995 are expected to be approximately $1.0 million. 16 BUSINESS OVERVIEW Ceradyne develops, manufactures and markets advanced technical ceramic products and components for industrial, defense, consumer and microwave applications. In many high performance applications, products made of advanced technical ceramics meet specifications that similar products made of metals or plastics cannot achieve. Advanced technical ceramics can withstand extremely high temperatures, combine hardness with light weight, are highly resistant to corrosion and wear, and have excellent electrical insulation capability and other special electronic properties. Ceradyne's technology was developed primarily for defense and aerospace applications which have historically represented a substantial portion of its business. As a result of the end of the "Cold War," one of the Company's major defense contracts was cancelled and the Company experienced reductions in certain other defense-related business. As a result, the Company began to rely more heavily on the development of new applications and markets for its advanced technical ceramic technology, while continuing to serve its historical customer base which continued to account for a substantial portion of the Company's business. Although the Company continues to derive a substantial portion of its revenues from its traditional products, such as lightweight ceramic armor for military helicopters and products for microwave tube applications, management expects that newer products developed or being developed by the Company for defense, industrial and consumer applications will represent a growing share of the Company's business. Examples of these newer products include: . Lightweight ceramic armor vests for military personnel. . A metal-lined version of the Company's translucent ceramic orthodontic bracket which it sells to Unitek Corporation, a subsidiary of Minnesota Mining & Mfg. Co. ("3M/Unitek"), under an exclusive marketing agreement. . Wear resistant components for industrial machinery, such as paper making equipment, made from the Company's Ceralloy(R) 147 silicon nitride advanced technical ceramic. . Ceramic-impregnated dispenser cathodes for large-screen television and projection television. This product is in an early limited production phase with no assurance of wide market acceptance. The Company believes this product also may have applications in high definition television ("HDTV") and exhanced resolution CRT monitors. INDUSTRY BACKGROUND Developments in industrial processing, military systems, microwave electronics, consumer electronics and orthodontics have generated a demand for high performance materials with certain properties not readily available in metals or plastics. In certain high performance applications, this demand has been met by products made of advanced technical ceramics. The following table compares certain favorable properties of selected advanced technical ceramics commonly used by the Company with those of other selected materials.
MELTING POINT CHEMICAL DENSITY (DEGREES HARDNESS RESISTANCE ELECTRICAL (GMS PER MATERIALS FAHRENHEIT) (VICKERS SCALE) TO ACIDS PROPERTIES CC) Advanced technical 2,500 to 6,900 1,600 to 7,000 Excellent From conductors to 2.5 to 4.5 ceramics excellent insulators - ------------------------------------------------------------------------------------------------ High strength alloy 2,500 to 2,700 250 to 900 Fair Conductors 7.0 to 9.0 steel - ------------------------------------------------------------------------------------------------ High performance 275 to 750 5 to 10 Good to Good to excellent 1.0 to 2.0 plastics Excellent insulators
17 Ceramics such as earthenware, glass, brick and tile have been made for centuries and are still in common use today. The inertness and lasting qualities of ceramics are illustrated by the artifacts uncovered intact in modern times. Almost all traditional ceramics, including those of ancient times, were based on clay. In recent years, significant advances have been made in ceramic technology through the application of specialized processes to produce man-made ceramic powders. In the 1950's and 1960's, developments in aluminum oxide and other oxides provided ceramics that were excellent electrical insulators and were capable of withstanding high temperatures. In the 1970's, these and other developments resulted in the ability to manufacture advanced technical ceramics with great strength at elevated temperatures and reduced brittleness, historically a primary limitation of ceramics. The industry that has emerged from these advances is known as advanced technical (or structural) ceramics. The properties of advanced technical ceramics present a compelling case for their use in a wide array of applications. However, manufacturing costs associated with the production of these materials need to be reduced in order to accelerate the use of advanced technical ceramics as a direct replacement for metals, plastics or other ceramics. A portion of these costs are related to the need for diamond grinding finished components to exacting tolerances. Industry cost reduction efforts have included the production of blanks or feed stock to "near net shape" configurations, thus reducing the need for final finishing. Manufacturers are also seeking to reduce costs through the use of high volume automated processing and finishing equipment and techniques, and to achieve economies of scale in areas such as powder processing, blank fabrication, firing, finishing and inspection. The automobile industry is particularly sensitive to initial as well as life cycle costs. Although the current state of the art of advanced technical ceramics suggests potential automotive acceptance, the cost factors currently will not permit automobile related production. The industry goal is to bring advanced technical ceramics' costs down as close as possible to the cost of equivalent current metal parts. CERADYNE STRATEGY The Company's strategy is to capitalize on its existing technologies, developed originally for defense and aerospace applications, to broaden its product and customer base through increased marketing efforts both domestically and internationally. The Company is focusing on additional customer opportunities for existing products, and on emerging markets and products which require or can benefit from the physical, chemical or electronic properties of advanced technical ceramics. The Company believes that this strategy will depend more on increased marketing efforts to promote its existing products and technologies than it will on pure research and development of new products. Ceradyne seeks to increase sales of its traditional products primarily through expanded domestic and global marketing efforts. Examples of these products and market applications include: . Lightweight ceramic armor for military helicopters. . Industrial ceramics utilizing fused silica ceramics for the glass tempering and steel making markets. . Microwave cathodes, microwave absorbing Ceralloy(R) ceramics and samarium cobalt magnets for use in microwave power tubes in communications, radar and electronic countermeasure applications. As part of the Company's strategy to leverage its existing technologies, the Company expects much of its future growth to come from products which are currently in early production or still in development. There can be no assurance, however, that products still under development will be successfully completed, or that any of these newer products, including those already in production, will achieve wide market acceptance. The following table illustrates these newer and planned products and the markets for which they are intended. 18
CERADYNE'S MARKET OPPORTUNITY TECHNICAL DEMANDS OF MARKET STRATEGIC RESPONSE - ----------------------------------------------------------------------------------------- INDUSTRIAL Wear resistant compo- Failure of industrial equipment is Ceralloy 147 Sintered nents required on the often caused by premature wearing Reaction Bonded Silicon rubbing or cutting sur- out of surfaces due to abrasive Nitride (SRBSN) industrial faces of industrial ma- action. Examples include paper wear parts and cutting chinery, such as in pa- making where the pulp slurry runs tool inserts are designed per making equipment, at 5000 feet per minute, or in to replace hard metal or centrifuges, and cutting metal cutting where as much as even oxide ceramic wear tool inserts. .125 inch depth of cut are removed surfaces, resulting in in a single pass. greater productivity, quality and longer "uptime."
DEFENSE Lightweight armor for As tactical conflicts as well as Ceralloy 546 (boron military and law terrorist and other activities carbide) or Ceralloy 146 enforcement personnel. result in the increased use of (silicon carbide) backed automatic weapons, it has become with Kevlar(TM), necessary to stop bullets as great Spectra(TM) or other as a .50 caliber machine gun laminates are designed to round. However, vests or other provide lightweight armor must be light enough in ballistic protection weight to allow freedom of greater than Kevlar alone movement without undue fatigue. at an acceptable weight. Missile nose cones Next generation tactical missiles The Company's advanced (radomes). (Standard Missile Block IV and technical ceramic radomes PAC-3) will be required to fly at are designed to address extremely high velocities, tight demanding specifications turning radii, and severe weather of next generation missile conditions. These operating nose cones. conditions may preclude the use of conventional polymer materials.
CONSUMER Orthodontic brackets. Traditional stainless steel Ceradyne's Transtar orthodontic ceramic brackets are translucent orthodontic often considered unsightly. brackets are inert, pick Substitute clear plastic materials up the color of the can be weak and may stain. Some patient's teeth and allow orthodontic patients prefer the orthodontist to aesthetically pleasing brackets correct the patient's which can be affixed to each tooth bite. The Company and its to support the archwire. marketing partner, 3M/Unitek, plan to introduce an enhanced version of this ceramic bracket in 1996. Large screen To achieve sharper, brighter Ceradyne's CRT ceramic- televisions, projection pictures in next generation impregnated dispenser televisions, HDTV, and television picture tubes, it may cathodes are designed to other cathode ray tube be necessary to increase current offer the television (CRT) applications. density (amperes/cm/2/) from manufacturer increased currently used oxide cathodes. power levels compared to Television manufacturers may conventional cathodes. The require extra power as size of Company is now in early picture and number of pixels limited production for a increase. large projection television and a wide screen 29" consumer television.
AUTOMOTIVE Automobile internal In order to achieve diesel engine Ceradyne's Ceralloy 147 combustion engine and life of one million miles and SRBSN is a candidate for a diesel engine valve automobile engine life of over variety of engine compo- train and other engine 100,000 miles without major nents including bucket components. maintenance, it may be necessary tappet inserts, to replace metal engine components engine valves, clevis pins with longer lasting, lighter and fuel injection pump weight, higher temperature parts. The Company is in resistant parts at acceptable unit prototype development of costs. parts for Detroit Diesel Corp., Catepillar Inc., and Ford Motor Company. Volume production orders may not occur for several years, if at all, and will depend on significant cost reduction and other fac- tors.
As part of the Company's strategy, management intends to establish additional sales representative and distributor relationships, particularly in international markets. The Company will also seek to develop strategic product development or marketing relationships with other manufacturing companies or key customers whose expertise, marketing or financial resources will assist the Company in accomplishing these objectives. 19 STRATEGIC RELATIONSHIPS The Company has established two strategic relationships which have been, and the Company expects will continue to be, important factors in the Company's efforts to develop and expand its advanced technical ceramic technology into new products and markets. These relationships are described below. Ford Motor Company Joint Product Development Program. Ceradyne completed a series of transactions with the Ford Motor Company ("Ford") in March 1986 with a long-term objective of developing ceramic components for automobiles. Key to this venture was the transfer of technology developed by Ford relating to technical ceramics, including a portfolio of United States and corresponding foreign patents and patent applications, and the investment of $10 million in the Company in exchange for Common Stock which eventually resulted in an ownership interest in Ceradyne of approximately 20%. Ford and the Company also entered into a joint development program pursuant to which Ceradyne has been applying its experience and expertise in technical ceramics to develop this technology into commercial products with a view to eventually developing components for automobile engines. Through fiscal 1994, Ford has contributed to the Company, on a cost sharing basis, a total of $3.1 million in cash and equipment under this joint development program. The technology acquired from Ford and the efforts of this joint development program have led to the development of Ceradyne's Ceralloy(R) 147 sintered reaction bonded silicon nitride (SRBSN) advanced technical ceramic, from which the Company now produces a line of industrial wear components and has made prototype parts for evaluation and testing in internal combustion and diesel engines. See "Risk Factors--Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development," "Business--Market Applications-Industrial," "--Market Applications-Automotive Market," and "--Manufacturing Processes- Sintering and Reaction Bonding of Silicon Nitride" and "Certain Transactions." 3M/Unitek Orthodontic Bracket Joint Program. In 1986, Ceradyne entered into a joint development and supply agreement with 3M/Unitek, for the development of a translucent ceramic bracket for orthodontic appliances commonly known as braces. Under this agreement, 3M/Unitek, which is a major manufacturer of stainless steel orthodontic brackets, provided Ceradyne with information regarding the functional specifications and properties which ceramic brackets would be required to satisfy. Based on this information and utilizing its experience with translucent ceramics originally produced by Ceradyne for defense electronic countermeasure applications, Ceradyne developed, and in 1987 began manufacturing, translucent ceramic brackets. These brackets cosmetically blend with the natural color of the patient's teeth while performing the structural functions formerly performed by traditional stainless steel brackets. See "Risk Factors--Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development," "-- Reliance on 3M/Unitek Relationship," "Business--Market Applications-Consumer" and "--Manufacturing Processes-Fabrication of Translucent Ceramics (Transtar(R))." Ceradyne and 3M/Unitek have obtained and jointly own two United States patents covering the basic use of translucent ceramics for an orthodontic bracket. 3M/Unitek has an exclusive right to market brackets based on this technology until 2007, provided that 3M/Unitek purchases at least 50% of its requirements for the brackets from Ceradyne and pays a royalty to Ceradyne based on 3M/Unitek's net selling price for any brackets that Unitek manufactures. During the term of the agreement, Ceradyne may sell the brackets only to 3M/Unitek. To date, 3M/Unitek has purchased all of its requirements from the Company and has not manufactured any brackets itself. See "Business-- Patents, Licenses and Trademarks." MARKET APPLICATIONS The Company's products can be categorized by the principal market applications they address: (i) industrial, (ii) defense, (iii) consumer, (iv) microwave tube products and (v) automotive. These markets accounted for approximately 29.2%, 24.6%, 3.7%, 41.1% and 1.4%, respectively, of the Company's net sales for fiscal 1994 and 37.5%, 18.4%, 9.3%, 33.7% and 1.2%, respectively, of net sales for the six months ended June 30, 1995. Set forth below is a description of the Company's principal products itemized by market: INDUSTRIAL Industrial Wear Components. Ceradyne's industrial wear components are made primarily of its Ceralloy(R) 147 sintered reaction bonded silicon nitride (SRBSN). These SRBSN ceramic components are generally 20 incorporated in industrial machinery where severe abrasive conditions exist which wear out vital components. The Ceradyne wear resistant parts are used to replace conventional wear materials such as tungsten carbide or ceramics such as alumina or zirconia. Often these parts are incorporated in high wear areas at the original equipment manufacturer's plant. Applications include metal cutting tool inserts, paper and can making equipment, abrasive blasting nozzles as well as custom applications. Tempered Glass Furnace Components and Metallurgical and Industrial Tooling. Fused silica ceramic is a ceramic which does not materially expand when heated, nor materially contract when cooled. Therefore, it is used to produce industrial tooling and molds where complicated shapes and dimensions must be maintained over a wide range of temperatures. Such applications include the forming and shaping of titanium metal, used in the manufacture of aircraft. Other applications take advantage of fused silica's excellent thermal shock resistance and inertness when in contact with glass. These applications include components for equipment used in the fabrication of flat plate and tempered glass or contoured shapes such as automobile windshields. Fused silica ceramic shapes of up to 14 feet in length are produced in the Company's facility located near Atlanta, Georgia. DEFENSE Lightweight Ceramic Armor. Although armor has progressed through the centuries from animal skin shields to metal armored suits, to Kevlar(TM) vests (for light arms), to heavy steel plate, the requirements for light weight and maximum projectile stopping capability vary little. Ceradyne has developed and is producing lightweight ceramic armor capable of protecting against threats as great as .50 caliber armor piercing machine gun bullets at 50% of the equivalent steel plate weight. Utilizing hot pressed Ceralloy(R) ceramic, the Company's armor plates are laminated with either Kevlar(TM), Spectra(TM) or fiberglass and formed into a wide variety of shapes, structures and components. To date, ceramic armor manufactured by the Company has been used principally for military helicopter crew seats and airframe panels. The Company currently supplies ceramic armor systems for the following helicopter programs: the Blackhawk helicopter manufactured by Sikorsky Aircraft, the Apache helicopter manufactured by McDonnell-Douglas Helicopters, Inc., the Cobra helicopter manufactured by the Bell Helicopter division of Textron Inc., and the Sea King helicopter manufactured by Westland Helicopters. The Company believes it is a leader in producing lightweight ceramic armor for military helicopters. See "Risk Factors--Dependence on United States Government and Risk of Contract Termination." The Company received its first production contract for ceramic armor vests for military personnel in January 1995. This order, from the Defense Logistics Agency of the United States government, includes $3.5 million in vests which the Company expects to ship over the next 12 to 18 months and unexercised options for up to an additional $6.1 million in vests. These options, if exercised, are to be shipped over an additional 24 month period. The Company believes that factors affecting whether these options will be exercised include the quality and timeliness of vests shipped under the firm portion of this order, military requirements and the continued availability of government funding for this program. There can be no assurance, however, that all or any portion of these options will be exercised. See "Risk Factors--Dependence on United States Government and Risk of Contract Termination" and "Business-- Backlog." Missile Nose Cones (Radomes). The Company produces conical shaped, precision machined ceramic components, which are designed to be mounted by its customers on the front end of tactical missiles. These nose cones, or radomes, are designed for applications where the velocities and operating environments are severe enough that the thermal shock and erosion resistance, high strength and microwave transparency properties of advanced technical ceramics are required. Revenues from sales of radomes have not been material to date. However, radomes manufactured by the Company have been qualified for the Standard Missile Block IV missile program and are currently undergoing early testing for the PAC-3 missile program. CONSUMER Ceramic Orthodontic Brackets. In the orthodontic process of correcting a patient's teeth alignment, typically small (about 1/4") stainless steel brackets are adhered to each individual tooth in order to serve as a guide to the archwire which is the wire that sets into each bracket. The cosmetic appearance of all this metal is often 21 considered quite unattractive. Ceradyne, together with its marketing partner, 3M/Unitek, have developed and are marketing ceramic orthodontic brackets made of Ceradyne's translucent ceramic, Transtar(R). The translucency of this ceramic bracket, together with the classical ceramic properties of hardness, chemical inertness and imperviousness, have resulted in a cosmetic substitute for traditional stainless steel brackets. These products are generally sold as aesthetic alternatives to conventional metal brackets and have been in production since 1987. Ceradyne is in advanced stages of development of an enhanced Transtar(R) bracket design whereby a small metal channel is placed in the archwire slot allowing for easier sliding between the wire and bracket. Ceradyne and 3M/Unitek plan to introduce this new design in 1996. See "Risk Factors--Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development" and "--Reliance on 3M/Unitek Relationship." CRT (Television) Ceramic-Impregnated Dispenser Cathodes. Cathodes are the tiny elements in an electron gun of a television tube that, when heated, emit a stream of electrons. This electron stream strikes the phosphors (pixels) on the inside glass of the tube, causing them to excite and glow creating a picture when viewed from the outside. Dispenser cathodes, which are the most efficient type of cathode, typically have been used for microwave tube applications, but historically have not been cost effective for televisions. The Company has developed a cathode design and manufacturing process which enables the Company to produce a high current density ceramic-impregnated dispenser cathode for CRT applications at a fraction of the cost of microwave tube ceramic-impregnated dispenser cathodes. The Company's process and equipment are designed to produce these cathodes at a very rapid rate with a current density (measured in amperes/cm/2/) significantly greater than conventional oxide cathodes currently used in televisions. These CRT dispenser cathodes are intended for large screen televisions, projection televisions, HDTV and other high-end CRT applications, and are currently being used by two manufacturers in limited production high-end television sets. Any potential production volume use of the Company's CRT cathode will require extensive customer evaluation and may be limited by cost factors. There can be no assurance that the Company will obtain large volume orders for this product. See "Risk Factors--Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development." MICROWAVE TUBE PRODUCTS Microwave Ceramic-Impregnated Dispenser Cathodes. The Company manufacturers ceramic-impregnated dispenser cathodes which are used in microwave tubes for applications in radar, satellite communications, electronic countermeasures and other uses. Dispenser cathodes, when heated, provide the stream of electrons which are magnetically focused into an electron beam. Microwave frequency signals which interact with this beam of electrons are substantially increased in power. Microwave dispenser cathodes are primarily composed of a porous tungsten matrix impregnated with ceramic oxide compounds. Samarium Cobalt Permanent Magnets. The Company's samarium cobalt magnets are sold as components primarily for microwave tube applications. Electron beams in microwave tubes generated by the dispenser cathodes described above can be controlled by the magnetic force provided by these powerful permanent magnets. The magnets are generally small sub-components of microwave traveling wave tubes. Precision Ceramics. Ceradyne produces a wide variety of hot pressed Ceralloy(R) ceramic compositions, precision diamond ground to close tolerances, primarily for microwave tube applications. The interior cavities of microwave tubes often require ceramic components capable of operating at elevated temperatures and in high vacuums. AUTOMOTIVE MARKET Internal Combustion and Diesel Engine Components. The demand for higher performance, more efficient and more durable engines for heavy duty diesel trucks and automobiles creates additional opportunities for advanced technical ceramics. For instance, the Company believes that if engines could be produced using certain advanced technical ceramic components, they could be lighter and longer lasting than those using metal components and could operate at higher temperatures, with reduced cooling and lubrication requirements. As a 22 result, engines would use less fuel, achieve more complete combustion, thereby reducing emissions, and be less costly to maintain. Because of these potential benefits, industry-wide efforts are being made to develop advanced technical ceramic technology to replace critical steel components in diesel and automobile engines. Ceradyne has provided a limited number of prototype parts made of Ceralloy(R) 147 SRBSN materials for evaluation and testing in internal combustion and diesel engines. Ceradyne has no production contracts to produce any ceramic components for automotive or diesel engine use. However, Ceradyne is engaged in a joint program with Ford to develop ceramic components for automobile engines, and with a heavy-duty diesel engine manufacturer to develop silicon nitride engine valves and clevis pins for diesel engines. Ford is not obligated to purchase any minimum quantities of components developed under this program, and Ceradyne's efforts in this area are still in the experimental stage with future success greatly dependent on achieving cost reductions while maintaining high quality levels. The Company believes that use of ceramic components in high volume production automobile or diesel engines will not occur for several years, if at all. See "Risk Factors-- Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development." OTHER Utilizing its advanced technical ceramics technologies and facilities, the Company also manufactures a number of other products related to the foregoing markets, such as dispenser cathodes for ion laser applications, samarium cobalt permanent magnets for motors and instruments, and other precision advanced technical ceramics. None of these products provides a material amount of revenue to the Company. MARKETING AND CUSTOMERS Each of Ceradyne's three manufacturing locations maintains an autonomous sales and marketing force promoting their individual products. The Company has more than 10 employees directly involved in marketing and has agreements with more than 25 manufacturers' representatives in the United States and other countries who are compensated as a percent of sales in their territory. Ceradyne is focusing much of its marketing effort outside the United States through direct involvement of senior management personnel from the Company's U.S. facilities in concert with local manufactures' representatives. Revenues from export sales represented approximately 14%, 18%, 25% and 26% of total net sales in fiscal years 1992, 1993 and 1994 and the first six months of fiscal 1995, respectively. Generally, the Company sells components to prime contractors or original equipment manufacturers. To a lesser extent, Ceradyne sells its products directly to the end user. The Company sells its translucent ceramic orthodontic brackets only to 3M/Unitek pursuant to an exclusive marketing agreement with that customer. See "Risk Factors--Reliance on 3M/Unitek Relationship" and "Business--Strategic Relationships." Varian Associates, Inc., which purchases microwave tube products from the Company, accounted for approximately 13% of the Company's total net sales in fiscal 1994, and no customer accounted for more than 10% of total net sales in the first six months of fiscal 1995. The Company continues to explore various domestic and international marketing, and other relationships to increase its sales and market penetration. Furthermore, Ceradyne is attempting to create long-term relationships with its customers to promote a smoother, more predictable flow of orders and shipments by entering into multi-year agreements or exclusive relationships where possible. MANUFACTURING PROCESSES Ceradyne has a number of manufacturing processes which are dedicated to specific products and markets. These processes and the product applications are described below. Hot Pressing. The Company's hot pressing process is generally used to fabricate ceramic plates for lightweight ceramic armor. Ceradyne has developed and constructed induction heated furnaces capable of operating at temperatures exceeding 4000(degrees)F in inert atmospheres at pressures up to 5000 lbs. per square inch. 23 This equipment enables Ceradyne to fabricate parts more than 20 inches in diameter, which is considered large for advanced technical ceramics. Through the use of multiple cavity dies and special tooling, the Company can produce a number of parts in one furnace during a single heating and pressing cycle. Ceradyne procures its raw materials as fine powders from several outside suppliers. After processing by the Company, the powders are either loaded directly into the hot pressing molds or are shaped into preforms prior to loading into the hot pressing molds. The powders are placed in specially prepared graphite tooling, most of which is produced by Ceradyne. Heat and pressure are gradually applied to the desired level, carefully maintained and finally reduced. The furnace is removed from the press while cooling to permit the press to be used with another furnace. For most products, about 20 hours are required to perform this cycle. The resultant ceramic product generally has mechanical, chemical and electrical properties of a quality approaching that only theoretically obtainable. Almost all products are then finished by diamond grinding to meet precise dimensional specifications. Sintering of Fused Silica Ceramics. Sintering of fused silica ceramics is the process Ceradyne uses to fabricate fused silica ceramic shapes for applications in glass tempering furnaces, metalurgical tooling and other industrial uses. To fabricate fused silica ceramic shapes, fused silica powders are made into unfired shapes through slip casting or other ceramic compaction processes. These unfired "green" shapes are fired as they move through a continuously operated 150 foot long tunnel kiln at temperatures up to 2500(degrees)F. The final shapes are often marketed in the "as fired" condition or, in some cases, precision diamond ground to achieve specific dimensional tolerances or surface finishes required by certain customers. See "Business--Manufacturing Processes-Diamond Grinding." Ceramic-Impregnated Dispenser Cathode Fabrication. Ceramic-impregnated dispenser cathode fabrication is used to produce cathodes for microwave power tube applications and cathode ray tube ("CRT") cathodes for televisions. To produce ceramic-impregnated dispenser cathodes, both tungsten metal powders and ceramic powders are used. The tungsten metal powders are isostatically pressed in polymer tooling, removed and fired in special atmospheres at temperatures in excess of 4000(degrees)F. The tungsten billets are machined into precision shapes with exacting tolerances. The tungsten machined shapes are impregnated with a ceramic composite and fired at high temperatures in special atmospheres. The ceramic impregnated components are assembled and furnace brazed. Final processing includes the insertion of a metal heating element within a ceramic insulating compound and the addition of an extremely thin layer of precious metals to the surface. The Company's final quality inspection often includes a test of the cathode's electron emitting capabilities at normal operating temperatures. In order to produce high volume, inexpensive CRT cathodes for television and other CRT applications, the Company has developed and built high speed automated assembly equipment capable of producing a cathode approximately every 6.5 seconds. To date, however, the Company has not produced CRT cathodes in sustained high volumes. See "Risk Factors--Importance of New Products; Limited Volume Manufacturing Experience for Products Under Development." Sintering and Reaction Bonding of Silicon Nitride. Sintering and reaction bonding of silicon nitride results in the Company's Ceralloy(R) 147 SRBSN, which is used in industrial and automotive applications. Ceradyne SRBSN is based on technology acquired from Ford. See "Business--Strategic Relationships." This SRBSN process begins with relatively inexpensive high purity elemental silicon (Si) powders, which contrasts sharply with most other manufacturing techniques which start with relatively more expensive silicon nitride (Si/3/N/4/) powders. After additives are incorporated by milling and spray drying, the silicon powders are formed into shapes through conventional ceramic processing such as dry pressing. These shapes are then fired in a nitrogen atmosphere which converts the silicon part to a silicon nitride part. At this step (reaction bonding), the silicon nitride is pressure sintered in an inert atmosphere increasing the strength of the component three fold. As a result of SRBSN processing, the ceramic crystals grow in an intertwining "needle-like" fashion which the Company 24 has named NeedleLok(TM). Ceradyne's NeedleLok(TM) structure results in a tough, high fracture energy part. The process is economical due to the low cost of the starting powders and can be used to produce extremely high production volumes of parts due to the use of conventional pressing processes. Fabrication of Translucent Ceramics (Transtar(R)). Ceradyne produces translucent aluminum oxide (Transtar(R)) components primarily for use as orthodontic ceramic brackets. The high purity powders are purchased from outside vendors and processed by dedicated conventional ceramic mechanical dry presses. The formed blanks are then fired in a segregated furnace in a hydrogen atmosphere at 1800(degrees)C until the ceramics enter to a strong translucent condition. These fired aesthetic appearing brackets then have certain critical features diamond ground into them. The final step is a proprietary treatment of the bonding side in order to permit a sound mechanical seal when bound to the patient's teeth. Diamond Grinding. Many of Ceradyne's advanced technical ceramic products must be finished by diamond grinding because of their extreme hardness. The Company's finished components typically are machined to tolerances of ^.001 inch and occasionally are machined to tolerances up to ^.0001 inch. To a limited extent, the Company also performs diamond grinding services for customers independently of its other manufacturing processes to specifications provided by the customer. The Company's diamond grinding department can perform surface grinding, diameter grinding, ultrasonic diamond grinding, diamond lapping, diamond slicing and honing. The equipment includes manual, automatic and computer numerically controlled (CNC) grinders. The CNC grinders have been specially adapted by the Company for precision grinding of ceramic contours to exacting tolerances. Fabrication of Samarium Cobalt Permanent Magnets. The fabrication of samarium cobalt permanent magnets results in various magnet shapes which are primarily used in microwave tube applications. The Company procures premixed samarium cobalt powder either as SmCo/5/ or Sm/2/Co/1//7/ compositions. The powders are then milled and formed into the final configuration by pressing in a magnetic field using a specially designed magnet press. These "pre-fired" or "green" magnets are then sintered at 2000(degrees)F in helium or vacuum. The magnets may then be subsequently diamond ground and characterized as to each individual magnet's strength. Raw Materials. The starting raw materials for Ceradyne's manufacturing operations are generally fine, man-made powders available from several domestic and foreign sources. Except for beryllium oxide powder, raw materials, such as Kevlar(TM), graphite, metal components and other ancillary items are readily available from several commercial sources. Although beryllium oxide powder is available from only one domestic source, the Company has not experienced any difficulty in obtaining this powder and has substantially reduced its use of this material. See "Business--Environmental Concerns and Litigation." Quality Control. Ceradyne products are made to a number of exacting specifications. In order to meet both internal quality criteria and customer requirements, the Company has implemented a number of quality assurance and in-process statistical process control programs. These quality programs are implemented separately at each of Ceradyne's three manufacturing locations. ENGINEERING AND RESEARCH Ceradyne's engineering and research efforts consist primarily of application engineering in response to customer requirements. These efforts are directed to the creation of new products, the modification of existing products to fit specific customer needs, or the development of enhanced ceramic process technology. The Company is also engaged in internally-funded research to improve and reduce the cost of production and to develop new products. Costs associated with application engineering and internally-funded research are generally expensed as incurred and are included in cost of product sales. Costs associated with Company-funded research were approximately $250,000, $400,000, $360,000 and $100,000 in 1992, 1993, 1994 and the first six months of 1995, respectively. 25 COMPETITION Ceradyne competes on the basis of product performance, material's specifications, application engineering capabilities, customer support, reputation and price. Competitive pressures vary in each specific product market, depending on the product and program. In many instances, the competitors are well-known companies with greater financial, marketing and technical resources than Ceradyne. Ceradyne intends to continue to focus on selected business areas in which it can exploit its technological, manufacturing and marketing strengths. Some of Ceradyne's competitors often are divisions of larger companies with each of Ceradyne's product lines subject to completely different competitors. Some of the competitors of the Company include Kyocera Corporation's Industrial Ceramics Group in industrial ceramic products, Vesuvius McDaniel Co. in fused silica ceramics, and Simula Inc. and Brunswick Corp. in defense products. In many applications the Company also competes with manufacturers of non-ceramic materials. The principal competition for the Company's new CRT cathode are oxide cathodes manufactured in-house by the television manufacturers who are the Company's targeted customers for this product. For future automotive applications, there is a wide range of both current and potential domestic and international competitors. See "Risk Factors--Competition." BACKLOG Ceradyne records an item as backlog when it receives a contract or purchase order indicating the number of units to be purchased, the purchase price, specifications and other customary terms and conditions. Ceradyne customarily includes unexercised options as a separate item in its backlog because the purchase orders are given on the basis of the total order, including options. Although there can be no assurance that options will be exercised, Ceradyne's experience has been that, with the exception of one significant strategic weapons systems contract that was cancelled in 1992, substantially all options or equivalents have been exercised at the prices set forth in the original contract. At June 30, 1995, backlog consisted of unfilled firm orders of approximately $14.3 million and unexercised options of approximately $10.5 million, for a total of approximately $24.8 million, compared with a backlog at June 30, 1994, which consisted of unfilled firm orders of approximately $8.8 million, and unexercised options of approximately $4.4 million for a total of approximately $13.2 million. Typically, firm orders are scheduled to be shipped within 12 to 18 months from receipt of order. The Company's backlog at June 30, 1995 includes unfilled firm orders and unexercised options for lightweight ceramic armor for military helicopters of approximately $5.3 million and $3.1 million, respectively, or a total of approximately $8.4 million, and unfilled firm orders and unexercised options for lightweight ceramic armor vests for military personnel of approximately $3.5 million and $6.1 million, respectively, or a total of approximately $9.6 million. The contract for armor vests and some of the contracts for helicopter armor are directly or indirectly with agencies of the United States government. Under U.S. law, such contracts may be cancelled for convenience at any time without cause by the government, with reimbursement to the Company only for its actual expenses incurred. See "Risk Factors--Dependence on United States Government and Risk of Contract Termination." FACILITIES The Company serves its markets from three manufacturing facilities across the United States. The Company's West Coast operations, located in Costa Mesa, California, primarily produces armor and orthodontic products, and houses the Company's SRBSN research and development activities. The Company's cathode development and production are handled through its Semicon Associates division located in Lexington, Kentucky. Fused silica products, including missile radomes, are produced at the Company's Thermo Materials division located in Scottdale, Georgia. These three facilities comprise approximately 63,000, 35,000 and 85,000 square feet, respectively. The Company's Costa Mesa and Scottdale facilities are held under long-term leases which expire in October 2000 and December 2000, respectively. The Company owns its Lexington, Kentucky facilities. 26 Ceradyne's manufacturing structure is summarized in the following table:
FACILITY LOCATION PRODUCTS Costa Mesa, California . Lightweight ceramic armor Approximately 63,000 . Orthodontic ceramic brackets square feet . Ceralloy(R) 147 SRBSN wear parts . Precision ceramics . Ceralloy(R) 147 SRBSN diesel/automotive engine parts (R&D) - ------------------------------------------------------------------------------- Lexington, Kentucky . Microwave ceramic-impregnated dispenser cathodes Approximately 35,000 . CRT (television) ceramic-impregnated dispenser cathodes square feet . Ion laser ceramic-impregnated dispenser cathodes . Samarium cobalt magnets - ------------------------------------------------------------------------------- Scottdale, Georgia . Glass tempering rolls (fused silica ceramics) Approximately 85,000 . Metallurgical tooling (fused silica ceramics) square feet . Missile radomes (fused silica ceramics) . Castable and other fused silica products
ENVIRONMENTAL CONCERNS AND LITIGATION Certain of the Company's products are produced using beryllium oxide, which is highly toxic in powder form. This powder, if inhaled, can cause chronic beryllium disease ("CBD") in a small percentage of the population. The Company has implemented handling procedures and employee awareness programs in order to comply with standards adopted by the Environmental Protection Agency and the Occupational Safety and Health Administration. In recent years, however, three former employees and a family member of one such former employee sued the Company alleging that they had contracted CBD as a result of working with beryllium oxide powders used in the Company's products. These claims were covered by insurance, and all have been resolved without material liability to the Company. In December 1994, a current employee and his wife filed suit against the Company in the Superior Court of the State of California, County of Orange, alleging that he contracted CBD as a result of exposure to beryllium oxide powder during the course of his employment. Defense of this case has been tendered to the Company's insurance carriers. This case is in the early stages of discovery. However, based upon information currently available, the Company believes that the employee's claim is without merit and that the resolution of this matter will not have a material adverse effect on the financial condition or operations of the Company. There can be no assurance, however, that this claim or other claims related to exposure to beryllium oxide powder will be covered by insurance or that, if covered, the amount of insurance will be sufficient to cover any potential adverse judgment. Moreover, since the symptoms of CBD may take many years to manifest themselves, there can be no assurance that there will not be future claims for CBD filed by others against the Company. See "Risk Factors--Environmental Concerns." PATENTS, LICENSES AND TRADEMARKS The Company relies primarily on trade secrecy to protect compositions and processes that it believes are proprietary. In certain cases, the disclosure of information concerning such compositions or processes in issuing a patent could be competitively disadvantageous. However, management believes that patents are important for technologies where trade secrecy alone is not a reliable source of protection. Accordingly, Ceradyne has applied for, or been granted, several United States patents relating to compositions, products or processes that management believes are proprietary, including lightweight ceramic armor. 27 Two U.S. patents have been issued to the Company relating to translucent ceramics for orthodontic brackets. The earliest of these patents expires in 2007. These patents are co-invented and co-owned by Ceradyne and 3M/Unitek. Ceradyne and 3M/Unitek have granted licenses to eight companies whose ceramic orthodontic brackets infringe the Ceradyne-3M/Unitek patents, wherein those companies pay royalties to Ceradyne and 3M/Unitek based on sales of their orthodontic ceramic brackets for the remaining life of the patents. See "Risk Factors--Reliance on 3M/Unitek Relationship" and "Business--Strategic Relationships." Ceradyne has been issued two U.S. patents and has one patent pending relating to its CRT ceramic-impregnated dispenser cathode and has applied for corresponding foreign patents in various foreign countries. The earliest of these patents expires in 2006. Through its association with Ford, Ceradyne acquired in excess of 80 U.S. patents, of which 37 are still active, and corresponding foreign patents and applications relating to technical ceramics for automotive technology. The last of these patents will expire in August 2007. See "Business--Strategic Relationships" and "Certain Transactions." "Ceralloy(R)," the name of Ceradyne's technical ceramics, "Ceradyne(R)" and the Ceradyne logo, comprising the stylized letters "CD(R)," are major trademarks of the Company which have been registered in the United States and various foreign countries. The Company also has other trademarks, including "Transtar(R)," "Semicon(R)," "Thermo(R)," "Isomolded(R)" and "NeedleLok(TM) ." EMPLOYEES At June 30, 1995, Ceradyne employed approximately 220 persons, including nine employees with undergraduate or graduate degrees in ceramic engineering. Management considers its employee relations to be excellent. The Company has not experienced difficulty in attracting personnel. None of the Company's employees are represented by a labor union. 28 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows:
NAME AGE POSITION ---- --- -------- Joel P. Moskowitz....... 56 Chairman of the Board, President and Chief Executive Officer James F. Gardner........ 48 Vice President, Finance; Chief Financial Officer and Secretary Louis R. Falce.......... 67 Executive Vice President, Cathodes David M. Bowling........ 42 Vice President Earl E. Conabee......... 58 Vice President James N. Cuppy.......... 39 Vice President Donald A. Kenagy........ 53 Vice President David P. Reed........... 40 Vice President Leonard M. Allenstein... 57 Director Richard A. Alliegro..... 65 Director Frank Edelstein......... 69 Director Norman A. Gjostein...... 64 Director William P. Lanphear IV.. 48 Director Milton L. Lohr.......... 70 Director Melvin A. Shader........ 70 Director
- -------- Joel P. Moskowitz co-founded the Company's predecessor in 1967. He served as President of the Company from 1974 until January 1987, and from September 1987 to the present. Mr. Moskowitz currently serves as Chairman of the Board, President and Chief Executive Officer of the Company, which positions he has held since 1983. Mr. Moskowitz currently serves on the Board of Trustees of Alfred University. Mr. Moskowitz obtained a B.S. in Ceramic Engineering from Alfred University in 1961 and an M.B.A. from the University of Southern California in 1966. James F. Gardner joined the Company in June 1988 and has served as Vice President, Finance, Chief Financial Officer and Secretary since September 1988. Prior to joining the Company, Mr. Gardner served for four years as Vice President, Finance and Secretary of SensorMedics Corporation, a manufacturer of cardiopulmonary and critical care medical devices. From 1979 to 1984, Mr. Gardner was Vice President of Finance at Control Components, Incorporated, a manufacturer of critical service, velocity control valves. Mr. Gardner received an M.B.A. from Ohio University in 1970, a B.S.B.A. from John Carroll University in 1969, and is a Certified Public Accountant. Louis R. Falce joined the Company in 1985 and has served as Vice President since January 1987, and as Executive Vice President, Cathodes since July 1995. Mr. Falce is responsible for the marketing of cathodes for the Company's Semicon Associates division, and for the development and marketing of the Company's CRT cathode for television and other CRT applications. Prior to joining the Company, Mr. Falce served for ten years in various scientific and engineering positions at Hughes Aircraft Company. Mr. Falce received B.S. degrees in Chemistry and Industrial Management from Rutgers University in 1952. David M. Bowling joined Ceradyne in October 1986 when the Company acquired Semicon Associates, where he served as Controller. Mr. Bowling joined Semicon Associates in 1983. He was appointed to the position of Vice President of the Company in October 1994. Mr. Bowling serves as President of the Company's Semicon Associates division and is responsible for the overall operations of Semicon Associates. Mr. Bowling received a B.S. in Business Administration in 1975 from Union College. Earl E. Conabee joined the Company in July 1985, and has served as Vice President of the Company since June 1986. Mr. Conabee serves as Vice President of Marketing for the Company's Thermo Materials division, where he is responsible for the overall marketing and sales effort for fused silica ceramics. Prior to joining the 29 Company, Mr. Conabee served as General Manager of Ceramatec, a manufacturer of technical ceramics, from 1983 to 1985, and as Director of Refinery Operations for Englehard Minerals Corporation from 1973 to 1983. Mr. Conabee obtained a B.S. in Ceramic Engineering from Alfred University in 1960. James N. Cuppy joined Ceradyne in October 1986 when the Company acquired Semicon Associates, has served as a Vice President of the Company since October 1994 and serves as Vice President of Operations of the Company's Semicon Associates division. Mr. Cuppy had worked at Semicon Associates since 1981, and from 1978 to 1981 he was employed by General Instrument Corp. as a process engineer. Mr. Cuppy's formal education is in Mechanical Engineering at the California State University at Hayward and Business Administration at the University of Kentucky. Donald A. Kenagy joined the Company in December 1986 when the Company acquired Thermo Materials, and has served as Vice President of the Company since July 1991. Mr. Kenagy is currently President of the Company's Thermo Materials division, and as such is responsible for the operations, finances and marketing of Thermo Materials. Mr. Kenagy joined Thermo Materials in 1972. Mr. Kenagy received a B.S. in Ceramic Technology from Penn State in 1963, an M.S. in Metallurgy from the Massachusetts Institute of Technology in 1965, and a Met. Eng. degree from MIT in 1968. David P. Reed joined the Company in November 1983, and has served as Vice President since January 1988. Mr. Reed is responsible for the operations, finances and marketing of the Company's Costa Mesa, California operations. Prior to joining the Company, Mr. Reed served as Manager, Process Engineering for the Industrial Ceramic Division of Norton Co. from 1980 to 1983. Mr. Reed obtained a B.S. in Ceramic Engineering from Alfred University in 1976 and an M.S. in Ceramic Engineering from the University of Illinois in 1978. Leonard M. Allenstein has served on the Board of Directors of the Company since 1983. Mr. Allenstein has been a private investor and businessman for more than the past five years. Mr. Allenstein was a founder and general partner of Bristol Restaurants, which owns and operates restaurants in the Southern California area, from 1978 until December 1986. Richard A. Alliegro has served on the Board of Directors of the Company since 1992. Mr. Alliegro retired from Norton Company in 1990 after 33 years, where his last position was Vice President, Refractories and Wear, for Norton's Advanced Ceramics operation. He served as President of Lanxide Manufacturing Co., a subsidiary of Lanxide Corporation, from May 1990 to February 1993. Mr. Alliegro currently is the owner of AllTec Consulting, Inc., a ceramic technology consulting firm. Mr. Alliegro obtained B.S. and M.S. degrees in Ceramic Engineering from Alfred University in 1951 and 1952, respectively, and serves as a member of the Board of Trustees of that university. Frank Edelstein has served as a director of the Company since 1984. Mr. Edelstein has been a Vice President of Gordon + Morris Group (a spinoff of Kelso & Company), an investment banking firm, since November 1986, and from 1979 to November 1986 he was Chairman of the Board of International Central Bank & Trust Company, which was acquired by Continental Insurance Co. in July 1983. Mr. Edelstein is currently a director of Arkansas Best Corp., IHOP Corp. and DMI, Incorporated. Dr. Norman A. Gjostein was appointed a director on February 6, 1995 to fill a vacancy on the Board of Directors, and was elected to a full term on the Board of Directors at the Company's Annual Meeting on July 24, 1995. Dr. Gjostein has held various management positions on the Research Staff of the Ford Motor Company since 1973. Presently he is Director of the Scientific Research Laboratory, which includes research activities in CAE, advanced materials and manufacturing systems. Dr. Gjostein earned B.S. and M.S. degrees in Metallurgical Engineering from the Illinois Institute of Technology, and M.S. and Ph.D degrees in Metallurgical Engineering from Carnegie-Mellon University. William P. Lanphear IV has served as a director of the Company since 1994. He is currently Senior Vice President and member of the board of directors of Bridgestone Multimedia Group, Inc., which is a publisher of family-oriented video, audio and software products distributed through mass merchandisers and specialty 30 channels. From 1989 through 1993, Mr. Lanphear was Chairman and Chief Executive Officer of Epyx, Inc., a publisher of home entertainment software. Mr. Lanphear obtained a B.A. in 1969 from Albion College, an M.S. in Nuclear Engineering in 1970 from the University of Illinois, and an M.B.A. in 1972 from Harvard Graduate School of Business. Milton L. Lohr served as a director of the Company from 1986 until October 1988, when he resigned to accept a position as Deputy Undersecretary of Defense for Acquisitions, and thereafter was re-elected as a director of the Company in July 1989 after leaving that position in May 1989. Mr. Lohr is currently the President of Defense Development Corporation, a defense-related research and development company. Mr. Lohr previously held the position of Senior Vice President of Titan Systems, a defense-related research and development company, from 1986 to 1988, and was founder and President of Defense Research Corporation, a defense consulting firm, from 1983 to 1986. Mr. Lohr served from 1969 to 1983 as Executive Vice-President of Flight Systems, Inc., a firm engaged in aerospace and electronic warfare systems. Mr. Lohr has over thirty-five years experience in government positions and aerospace and defense management, and currently serves as a panel member of the President's Science Advisory Committee, a member of the Office of the Secretary of Defense, Army Science Board, as well as other ad hoc government related assignments. Melvin A. Shader has served as a director of the Company since 1984. Dr. Shader retired in 1991 from TRW, Inc., where he was Vice President, Business Development and Vice President, International at the Space and Defense Sector of TRW, Inc. Dr. Shader had been with TRW, Inc. since 1970. From 1969 to 1970, Dr. Shader was Director of Planning in the Information Network Division of Computer Sciences Corp. and from 1954 to 1968, he was an executive with International Business Machines Corp. Directors are elected annually and hold office until the next annual meeting of stockholders and until their successors have been elected and qualified. The Company has agreed to nominate a representative of Ford for election as a director pursuant to an agreement made in March 1986, pursuant to which agreement Ford has acquired a total of 1,207,299 shares of the Company's Common Stock. Joel P. Moskowitz and members of his family have agreed to vote a portion of their shares of the Company's Common Stock, if necessary, for the election of Ford's nominee. Dr. Norman Gjostein is Ford's current representative. See "Certain Transactions." Officers serve at the discretion of the Board of Directors except for Mr. Moskowitz, who serves pursuant to a five-year employment agreement which expires in July 1999. See "Management-- Compensation of Executive Officers." 31 COMPENSATION OF EXECUTIVE OFFICERS Summary Compensation Table The following table shows certain information concerning the compensation of the Chief Executive Officer and each other executive officer of the Company whose aggregate compensation for services in all capacities rendered during the year ended December 31, 1994 exceeded $100,000 (collectively, the "Named Executive Officers"):
ANNUAL LONG TERM COMPENSATION COMPENSATION -------------- ------------ SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) --------------------------- ---- -------- ----- ------------ Joel P. Moskowitz....................... 1994 $150,909 $-- -- Chairman of the Board 1993 164,902 -- -- Chief Executive Officer and President 1992 178,356 -- -- David P. Reed........................... 1994 $103,278 -- 10,000 Vice President 1993 97,353 -- -- 1992 96,015 -- -- James F. Gardner........................ 1994 $101,999 -- -- Vice President, Finance 1993 101,999 -- -- Chief Financial Officer and Secretary 1992 103,961 -- 500
Option Grants in Last Fiscal year The following table sets forth certain information concerning grants of options to each of the Named Executive Officers during the year ended December 31, 1994. In addition, in accordance with the rules and regulations of the Securities and Exchange Commission, the following table sets forth the hypothetical gains or "option spreads" that would exist for the options. Such gains are based on assumed rates of annual compound stock appreciation of 5% and 10% from the date on which the options were granted over the full term of the options. The rates do not represent the Company's estimate or projection of future Common Stock prices, and no assurance can be given that any appreciation will occur or that the rates of annual compound stock appreciation assumed for the purposes of the following table will be achieved.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE PERCENT OF APPRECIATION TOTAL OPTIONS FOR OPTION GRANTED TO EXERCISE TERM(2) OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION --------------- NAME (NO. OF SHARES)(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) ---- ------------------ ------------- --------- ---------- ------ ------- Joel P. Moskowitz....... -- -- -- -- -- -- David P. Reed........... 10,000 9.2% $2.25 12/28/04 $14,340 $33,500 James F. Gardner........ -- -- -- -- -- --
- -------- (1) The per share exercise price of all options granted is the fair market value of the Company's Common Stock on the date of grant. Options have a term of 10 years and become exercisable in five equal installments, each of which vests at the end of each year after the grant date. (2) The potential realizable value is calculated from the exercise price per share, assuming the market price of the Company's Common Stock appreciates in value at the stated percentage rate from the date of grant to the expiration date. Actual gains, if any, are dependent on the future market price of the Common Stock. 32 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth certain information regarding option exercises during the year ended December 31, 1994 by the Named Executive Officers, the number of shares covered by both exercisable and unexercisable options as of December 31, 1994 and the value of unexercised in-the-money options held by the Named Executive Officers as of December 31, 1994:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED NUMBER OF OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS SHARES END AT FISCAL YEAR END(1) ACQUIRED VALUE ------------------------- ------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Joel P. Moskowitz....... -- -- -- -- -- -- David P. Reed........... -- -- 22,300 22,200 $1,050 $7,950 James F. Gardner........ -- -- 26,500 1,000 (2) (2)
- -------- (1) Based upon the closing price of the Common Stock on December 31, 1994, as reported by the Nasdaq National Market ($2.375 per share). (2) The closing price of the Common Stock on December 31, 1994 was below the exercise price per share. Therefore, the value of the options was $0. Employment Agreement. In July 1994, the Company entered into a five-year employment agreement with Mr. Moskowitz, pursuant to which he will serve as Chairman of the Board of Directors, Chief Executive Officer and President of the Company. The agreement provides for a base salary at the rate of $175,000 per year; however, Mr. Moskowitz voluntarily agreed to accept a reduced salary at the rate of $150,000 per year through March 31, 1995 to aid the Company in its cost-cutting efforts. His annual base salary was reinstated to $175,000 as of April 1, 1995. Under the agreement, if Mr. Moskowitz' employment is terminated by the Company (other than as a result of death, incapacity or for "good cause" as defined in the agreement) or if Mr. Moskowitz elects to resign for "good reason" (as defined in the agreement), Mr. Moskowitz will be entitled to receive severance pay in an amount equal to his annual base salary, at the rate in effect on the date of termination, payable on normal pay dates for the remainder of the term of the agreement. "Good reason" includes a "change in control" of the Company, a removal of Mr. Moskowitz from any of his current positions with the Company without his consent, or a material change in Mr. Moskowitz' duties, responsibilities or status without his consent. A "change in control" of the Company shall be deemed to occur if (1) there is a consolidation or merger of the Company where the Company is not the surviving corporation and the shareholders prior to such transaction do not continue to own at least 80% of the common stock of the surviving corporation, (2) there is a sale of all or substantially all of the assets of the Company, (3) the stockholders approve a plan for the liquidation or dissolution of the Company, (4) any person becomes the beneficial owner, directly or indirectly, of 30% or more of the Company's outstanding Common Stock or (5) if specified changes in the composition of the Company's Board of Directors occur. COMPENSATION OF DIRECTORS Directors are paid fees for their services on the Board of Directors in such amounts as are determined from time to time by the Board. Until July 31, 1994, a fee of $500 per month plus $1000 for each Board meeting attended was paid to each non-employee director other than the Ford representative and Mr. Lanphear, who did not receive a fee. These fees terminated as of July 31, 1994 by agreement of the Board, but may be reinstated in the future if the Board deems appropriate. In 1994, options to purchase 10,000 shares of Common Stock at the then-current market price of $2.00 per share were granted to each of Messrs. Allenstein, Alliegro, Edelstein, Lohr and Shader as compensation for their service as directors. COMPENSATION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors has established Audit, Compensation and Stock Option Committees. The Compensation Committee's function is to review and make recommendations to the Board regarding executive 33 officers' compensation. This committee is composed of Messrs. Edelstein, Alliegro, Shader and Lohr. The Audit Committee meets with the Company's independent accountants to review the Company's financial condition and internal accounting controls. This committee is composed of Messrs. Edelstein, Shader and Lohr. The Stock Option Committee is composed of Messrs. Moskowitz and Gjostein. This committee administers the Company's 1994 Stock Incentive Plan and the 1995 Employee Stock Purchase Plan. Dr. Gjostein is serving as Ford's representative of the Board of Directors. See "Certain Transactions." The Company does not have a standing nominating committee. On September 20, 1994, the Company obtained a loan in the amount of $100,000 from Joel P. Moskowitz, the Chairman of the Board of Directors, Chief Executive Officer and President of the Company, as well as a member of the Compensation Committee and Stock Option Committee. The loan bore interest at the rate of prime plus 3.6% and was for a period not to exceed 120 days. The loan was repaid in full by December 31, 1994. COMPENSATION PLANS 1994 Stock Incentive Plan The Ceradyne, Inc. 1994 Stock Incentive Plan (the "1994 Plan") was adopted by the Board of Directors on April 11, 1994 and approved by the Company's stockholders on July 18, 1994. An amendment to the 1994 Plan was adopted by the Company's Board of Directors on April 24, 1995 and approved by the Company's stockholders on July 24, 1995. The 1994 Plan is designed to enhance the Company's ability to attract and retain the services of qualified persons upon whose judgment, initiative and efforts the successful conduct and development of the Company's business largely depends, by providing them with an opportunity to participate in the ownership of the Company and thereby have an interest in the success and increased value of the Company. Options may be granted to employees, officers and directors (including non-employee officers and directors), consultants and other service providers of the Company and of present or future subsidiaries of the Company. Effective as of July 24, 1995, options to purchase a total of up to 350,000 shares of Common Stock may be granted under the 1994 Plan. The 1994 Plan provides for appropriate adjustments in the number and kind of shares subject to the 1994 Plan and to outstanding options in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. Options may be granted either as "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or as nonqualified stock options. The 1994 Plan is administered by the Stock Option Committee (the "Committee") of the Board of Directors, which selects the recipients of options. The Committee also determines the number of shares, the exercise price, the term, any conditions on exercise, the consequences of any termination of employment, and other terms of each option. The term of options may not exceed ten years from the date of grant (five years in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). The option exercise price may not be less than 100% of fair market value per share of the Common Stock on the date of grant (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). The option price is payable in full upon exercise, and payment may be made in cash, or in the discretion of the Committee by delivery of shares of Common Stock (valued at their fair market value at the time of exercise), the optionee's promissory note in a form and on terms acceptable to the Committee, the cancellation of indebtedness of the Company to the optionee, the waiver of compensation due or accrued to the optionee for services rendered, a "same day sale" commitment from the optionee and a broker-dealer that is a member of the National Association of Securities Dealers, Inc. ("NASD Dealer"), a "margin" commitment from the optionee and an NASD Dealer whereby the optionee irrevocably elects to exercise the option and to pledge the shares purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the 34 amount of the exercise price and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the exercise price to the Company, or by any combination of the foregoing methods of payment. Options granted under the 1994 Plan may not be transferred by an optionee other than by will or by the laws of descent and distribution. The Board of Directors has the right at any time to terminate or amend the 1994 Plan, but no such action may terminate options already granted or otherwise substantially affect or impair the rights of any optionee under an outstanding option without the optionee's consent. Unless sooner terminated by the Board of Directors, the 1994 Plan will terminate on April 11, 2004. 1995 Employee Stock Purchase Plan The Ceradyne, Inc. 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on April 24, 1995 and approved by the Company's stockholders on July 24, 1995. The purposes of the Purchase Plan are to provide to employees an incentive to join and remain in the service of the Company and its subsidiaries, to promote employee morale and to encourage employee ownership of the Common Stock by permitting them to purchase shares at a discount through payroll deductions. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. A total of 100,000 shares of Common Stock may be sold under the Purchase Plan. The number and type of shares subject to the Purchase Plan, and the number and type of shares subject to and the purchase price of outstanding rights to purchase shares under the Purchase Plan, shall be appropriately adjusted in the event of any subdivision or combination of outstanding shares, the payment of a stock dividend, the reclassification or exchange of shares or a similar change in the capital structure of the Company. Every employee of the Company who customarily works more than 20 hours per week and more than five months per year will be eligible to participate in offerings made under the Purchase Plan if on the offering date such employee has been employed by the Company for at least 30 days. Employees of any subsidiary of the Company may also participate in the Purchase Plan at the discretion of the Board of Directors. An employee may not participate in an offering under the Purchase Plan if he or she owns shares of stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of any parent or subsidiary of the Company. As of June 9, 1995, approximately 220 employees were eligible to participate in the Purchase Plan. The Purchase Plan is administered by a committee consisting of at least two directors appointed by the Board of Directors (the "Committee"). The Board has delegated administration of the Purchase Plan to the Stock Option Committee. Subject to the provision of the Purchase Plan, the Committee has full authority to implement, administer and make all determinations necessary under the Purchase Plan. Each offering under the Purchase Plan will commence on such date (the "Offering Date") and shall continue for such period (the "Offering Period") as the Committee in its discretion shall designate from time to time. Unless the Committee designates otherwise, offerings will be made once each year and each Offering Period will be for a period of 12 months. Eligible employees who elect to participate in an offering will purchase shares of Common Stock through regular payroll deductions in an amount of not less than 1% nor more than 15% of base pay, as designated by the employee. For this purpose, "base pay" includes all salaries and regular hourly wages, but does not include bonuses, commission, overtime pay, or other special payments, fees or allowances. Shares of Common Stock will be purchased automatically on the last day of the Offering Period (the "Purchase Date") at a price equal to the lower of 85% of the fair market value of the shares on the Offering Date or 85% of the fair market value of the shares as of the Purchase Date. A participant may withdraw from an offering at any time prior to the Purchase Date and receive a refund of his payroll deductions, without interest. A participant's rights in the Purchase Plan are nontransferable. 35 A maximum of 750 shares may be purchased by a participant in any one offering. Furthermore, no employee may purchase stock in an amount which would permit his rights under the Purchase Plan (and any similar purchase plans of the Company and any parent and subsidiaries of the Company) to accrue at a rate which exceeds $25,000 in fair market value, determined as of the Offering Date, for each calendar year. The Board of Directors may at any time amend, suspend or terminate the Purchase Plan; provided that any amendment that would (1) increase the aggregate number of shares authorized for sale under the Purchase Plan (except pursuant to adjustments provided for in the Purchase Plan), or (2) change the standards of eligibility for participation, shall not be effective unless approved by the shareholders within 12 months of the adoption of such amendment by the Board. Unless previously terminated by the Board, the Purchase Plan will terminate on April 24, 2005. CERTAIN TRANSACTIONS On March 11, 1986, the Company sold 526,316 shares of its Common Stock to the Ford Motor Company ("Ford") at a price of $19.00 per share, for a total purchase price of $10,000,000. At the same time, the Company and Ford created a new corporation, Ceradyne Advanced Products, Inc. ("CAPI"), and entered into agreements involving a broad-based technology transfer, licensing and joint development program. Under the agreements, Ford contributed technology and a portfolio of United States and foreign patents relating to technical ceramics to CAPI in exchange for 80% of CAPI's capital stock, and Ceradyne acquired the remaining 20% of CAPI in exchange for $200,000. The technology and patents contributed by Ford were developed in the Ford research laboratories over a 15-year period. Under the March 11, 1986 agreements, the Company was granted an option to acquire Ford's 80% interest in CAPI in exchange for an additional 680,983 shares of Ceradyne Common Stock, which the Company exercised effective February 12, 1988. As a result, Ceradyne now owns 100% of CAPI and Ford owns a total of 1,207,299 shares of the Company's Common Stock. The Company and Ford also entered into a joint development agreement which includes a commitment by Ford to contribute up to $5,000,000, on a matching value basis with Ceradyne, for the development by Ceradyne of technical ceramic products oriented towards the automotive market. Through December 31, 1994, Ford agreed to fund a total of $3,061,000 in cash and equipment pursuant to this agreement. So long as Ford continues to own 5% or more of the Company's outstanding Common Stock, Ceradyne has agreed to use its best efforts to cause one person designated by Ford to be elected a member of the Ceradyne Board of Directors and, under certain circumstances in the event the Company issues additional shares of its Common Stock in a public or private transaction, to permit Ford to purchase, at the same price and terms upon which sold by the Company in such transaction, additional shares of Ceradyne Common Stock to enable Ford to maintain its percentage ownership of the Company. Ford has notified the Company that it does not intend to exercise this purchase right in connection with this offering. In connection with the sale of stock to Ford, Joel P. Moskowitz, Chairman of the Board, Chief Executive Officer and President of the Company, and members of his immediate family agreed to vote shares of the Company's Common Stock owned by them in favor of the election of Ford's nominee to the Board of Directors. However, they may first vote that number of shares that is necessary to assure the election of Joel P. Moskowitz as a director of the Company, and any shares that are not necessary to assure the election of Mr. Moskowitz and a Ford nominee to the Board of Directors may be voted by them without restriction. Reference is hereby made to the transaction described under "Management-- Compensation Committee Interlocks and Insider Participation." 36 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of the Common Stock as of June 30, 1995, and as adjusted to reflect the sale of 1,200,000 shares of Common Stock by the Company by (i) each person or entity known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's named executive officers and directors and (iii) all directors and executive officers of the Company as a group. The information as to each person or entity has been furnished by such person or entity, and each person or entity has sole voting power and sole investing power with respect to all shares beneficially owned by such person or entity except as otherwise indicated.
PERCENTAGE OF SHARES SHARES OUTSTANDING(2) NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY ------------------------------ OWNERS OWNED(1) BEFORE OFFERING AFTER OFFERING ------------------------------ ------------ --------------- -------------- Joel P. Moskowitz(3)............... 1,264,494 20.2% 16.9% 3169 Red Hill Avenue Costa Mesa, CA 92626 Ford Motor Company................. 1,207,299 19.2% 16.2% The American Road Dearborn, MI 48121 R.B. Haave Assoc., Inc.(4)......... 797,723 12.7% 10.7% 270 Madison Ave. New York, NY 10016 Dimensional Fund Advisors, Inc.(5). 345,000 5.5% 4.6% 1299 Ocean Avenue Suite 650 Santa Monica, CA 90401 Leonard M. Allenstein(6)........... 150,000 2.4% 2.0% Richard A. Alliegro(7)............. 21,000 * * Frank Edelstein(8)................. 13,900 * * Dr. Norman A. Gjostein............. -- * * William P. Lanphear IV............. 10,000 * * Milton L. Lohr(9).................. 15,000 * * Melvin A. Shader(10)............... 14,000 * * David P. Reed(11).................. 24,550 * * James F. Gardner(12)............... 31,250 * * All current executive officers and directors as a group (15 persons including the persons named above)(13).................. 1,629,794 25.3% 21.3%
- -------- * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days of June 30, 1995, are deemed beneficially owned and outstanding for computing the percentage of the person holding such securities, but are not considered outstanding for computing the percentage of any other person. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) Includes 100,200 shares of Common Stock held by Mr. Moskowitz as custodian for his son, as to which shares Mr. Moskowitz disclaims beneficial ownership. (4) Based upon information contained in a statement on Schedule 13G, dated January 22, 1991, and amended by a filing dated January 3, 1995, filed with the Securities and Exchange Commission by R.B. Haave Associates, Inc., all shares of Common Stock are owned by advisory clients of R.B. Haave Associates, Inc. (5) Based upon information contained in a statement on Schedule 13G, dated January 9, 1990, as amended by a filing dated January 30, 1995, filed with the Securities and Exchange Commission by Dimensional Fund 37 Advisors, Inc. ("Dimensional"). The Schedule 13G states that Dimensional, a registered investment advisor, is deemed to have beneficial ownership of 345,000 shares of Common Stock as of December 31, 1994, all of which shares are held in various accounts with respect to which Dimensional serves as investment manager. Dimensional disclaims beneficial ownership of such shares. (6) Includes 10,000 shares of Common Stock which may be acquired by Mr. Allenstein upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. (7) Includes 20,000 shares of Common Stock which may be acquired by Mr. Alliegro upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. (8) Includes 12,500 shares of Common Stock which may be acquired by Mr. Edelstein upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. (9) Includes 15,000 shares of Common Stock which may be acquired by Mr. Lohr upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. (10) Includes 8,000 shares of Common Stock which may be acquired by Dr. Shader upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. (11) Includes 22,300 shares of Common Stock which may be acquired by Mr. Reed upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. (12) Includes 26,500 shares of Common Stock which may be acquired by Mr. Gardner upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. (13) Includes an aggregate of 176,400 shares of Common Stock which may be acquired by such persons upon exercise of stock options which are presently exercisable or will become exercisable within 60 days of June 30, 1995. DESCRIPTION OF CAPITAL STOCK COMMON STOCK The authorized capital stock of the Company consists of 12,000,000 shares of Common Stock, par value $.01 per share. As of August 14, 1995, there were 6,274,634 shares of Common Stock outstanding held of record by approximately 600 stockholders. There will be 7,474,634 shares of Common Stock outstanding after giving effect to the sale of the shares of Common Stock offered by the Company hereby. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. The holders of Common Stock are entitled to receive such lawful dividends as may be declared by the Board of Directors. In the event of liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock shall be entitled to receive on a pro rata basis all of the remaining assets of the Company available for distribution to its stockholders. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable, and shares of Common Stock to be issued pursuant to this offering will be fully paid and nonassessable. REGISTRATION RIGHTS Pursuant to a Stock Sale Agreement dated March 11, 1986, the Company has granted to Ford certain registration rights with respect to 1,207,299 shares of Common Stock owned by Ford. These registration rights entitle Ford to participate in any registration proposed to be made by the Company of its Common Stock (except for a registration relating to an employee stock option or purchase plan). The Company will pay all expenses associated with registrations pursuant to this agreement. However, Ford is required to bear all underwriting discounts and sales commissions applicable to the shares of Common Stock sold by Ford. 38 DELAWARE LAW The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law, a statute designed to impede hostile takeovers. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless either (i) prior to the date at which the person becomes an interested stockholder, the Board of Directors approves such transaction or business combination, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of such transaction, or (iii) the business combination is approved by the Board of Directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of stockholders (and not by written consent). A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to such interested stockholder. For purposes of Section 203, "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. STOCK TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for the Company's Common Stock is American Stock Transfer and Trust Co. 39 UNDERWRITING The underwriters named below (the "Underwriters") acting through their Representatives, Van Kasper & Company and Cruttenden Roth Incorporated, have severally agreed on the terms and subject to the conditions of an Underwriting Agreement with the Company to purchase from the Company the number of shares of Common Stock set forth opposite their respective names:
NUMBER NAME OF UNDERWRITER OF SHARES ------------------- --------- Van Kasper & Company............................................ Cruttenden Roth Incorporated.................................... --------- Total......................................................... 1,200,000 =========
The shares of Common Stock are being offered by the Underwriters named herein, subject to receipt and acceptance by them, to their right to reject any order in whole or in part, and to certain other conditions. The Underwriters are committed to purchase all of the above shares of Common Stock if any are purchased. The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock to the public initially at the offering price set forth on the cover page of this Prospectus and to certain dealers at that price less a concession not in excess of $ per share, and that the Underwriters and such dealers may reallow to certain dealers, including any Underwriters, a discount not in excess of $ per share. After the initial offering, the public offering price, concessions and reallowance to dealers may be changed by the Representatives as a result of market conditions or other factors. Certain of the Underwriters, and certain dealers, may have engaged in "passive market-making" activities in the Common Stock of the Company on Nasdaq pursuant to the rules of the Securities and Exchange Commission. Because the Nasdaq market-makers for the Common Stock include Underwriters and prospective Underwriters accounting for more than 30% of the recent trading volume of the Common Stock, the rules permit Underwriters and dealers, during the two business day period ending immediately prior to the date of this Prospectus, to continue to make a market in the Common Stock, so long as bids and transactions are at prices which do not exceed the then-highest independent bid price for the security, net purchases by the market-makers do not exceed prescribed limits, and the market-makers comply with the other provisions of the passive market-making rule. Passive market-making may stabilize the market price of the Common Stock at a level which might otherwise not prevail, and, if commenced, may be discontinued at any time. The Company has granted an option to the Underwriters, exercisable by the Representatives within 30 days after the date of this Prospectus, to purchase up to 180,000 additional shares of Common Stock at the initial offering price, less underwriting discounts and commissions. The Representatives may exercise the over-allotment option solely for the purpose of covering over-allotments, if any, incurred in the sale of the shares of Common Stock offered hereby. To the extent that the over-allotment option is exercised, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of the additional shares as the number of shares to be purchased and offered by that Underwriter in the above table bears to the total. Upon completion of this offering, the Company will sell to the Representatives warrants to purchase up to 60,000 shares of Common Stock. The warrants will be exercisable upon the completion of this offering at a per share exercise price equal to 120% of the public offering price, subject to adjustment in certain events, and will expire five years from the date of the Prospectus. For a period of one year after the completion of this offering, the warrants are transferable only between the Representatives and officers of the Representatives and thereafter 40 will be freely transferable. The holders of shares of Common Stock acquired upon exercise of the warrants have the right to include such shares in any future registration statements filed by the Company and to demand one registration for the shares. For the term of the warrants, the holders of the warrants are given the opportunity to profit from a rise in the market price of the Common Stock with a resulting reduction in the interest of the Company's stockholders upon exercise of the warrants. The Company has agreed to pay the Representatives a non-accountable expense allowance of one and one-quarter percent of the total proceeds of the offering. The Underwriting Agreement contains covenants of indemnity among the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act. The Company, all of its executive officers and directors who own Common Stock and certain beneficial owners of the Common Stock have agreed not to, directly or indirectly, offer to sell, contract to sell, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for shares of Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent of the Representatives. LEGAL MATTERS The validity of the shares offered hereby will be passed upon for the Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation, Newport Beach, California. Certain legal matters arising in connection with this offering will be passed upon for the Underwriters by Gray Cary Ware & Freidenrich, A Professional Corporation, San Diego, California. EXPERTS The consolidated financial statements of the Company at December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, included in this Prospectus and in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such periodic reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.; 219 South Dearborn Street, Chicago, Illinois; 26 Federal Plaza, New York, New York; and 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California; and copies of such material may be obtained from the Public Reference Section of the Commission at 451 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits and schedules thereto filed with the Commission pursuant to the Securities Act and the rules and regulations of the Commission thereunder. The Registration Statement, including exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., 41 Washington, D.C. 20549 and copies may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to the exhibit for a more complete description of the matter involved. 42 CERADYNE, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................................. F-3 Consolidated Balance Sheets at December 31, 1993 and 1994, and at June 30, 1995..................................................................... F-4 Consolidated Statements of Operations for the Years Ended December 31, 1992, 1993 and 1994, and for the Six Months Ended June 30, 1994 and 1995. F-6 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1992, 1993 and 1994, and for the Six Months Ended June 30, 1995..................................................................... F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 1992, 1993 and 1994, and for the Six Months Ended June 30, 1994 and 1995. F-8 Notes to Consolidated Financial Statements................................ F-9
F-1 (THIS PAGE INTENTIONALLY LEFT BLANK) F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Ceradyne, Inc.: We have audited the accompanying consolidated balance sheets of CERADYNE, INC. (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. 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 financial statements referred to above present fairly, in all material respects, the financial position of Ceradyne, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California March 6, 1995 F-3 CERADYNE, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1994 AND JUNE 30, 1995 ASSETS (NOTE 2) (AMOUNTS IN THOUSANDS)
DECEMBER 31, --------------- JUNE 30, 1993 1994 1995 ------- ------- ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents........................ $ 94 $ -- $ 302 Accounts receivable, net of allowances of approximately $204, $199 and $157 for doubtful accounts in 1993, 1994 and 1995 respectively (Note 2)...................... 2,625 2,891 3,684 Receivable from related parties (Note 11)........ 21 6 10 Inventories (Notes 1 and 2)...................... 5,634 5,736 6,432 Production tooling............................... 378 243 310 Prepaid expenses and other....................... 91 21 149 ------- ------- ------- Total current assets........................... 8,843 8,897 10,887 ------- ------- ------- PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 1 and 2) Land............................................. 422 422 422 Buildings and improvements....................... 1,825 1,825 1,825 Lease rights..................................... 2,659 2,659 2,659 Machinery and equipment.......................... 15,098 14,083 14,483 Leasehold improvements........................... 1,296 1,118 1,135 Office equipment................................. 1,339 1,344 1,363 Construction in progress......................... 3 -- 119 ------- ------- ------- 22,642 21,451 22,006 ------- ------- ------- Less accumulated depreciation and amortization... 16,511 16,410 17,050 ------- ------- ------- 6,131 5,041 4,956 ------- ------- ------- COSTS IN EXCESS OF NET ASSETS ACQUIRED, net of accumulated amortization of $1,131, $1,286 and $1,364 in 1993, 1994 and 1995, respectively (Notes 1 and 11)................................ 2,544 2,389 2,311 ------- ------- ------- OTHER ASSETS, net of accumulated amortization of $426, $503 and $526 in 1993, 1994 and 1995, respectively (Note 1)........................... 612 535 512 ------- ------- ------- Total assets................................... $18,130 $16,862 $18,666 ======= ======= =======
See accompanying notes to consolidated statements. F-4 CERADYNE, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1993 AND 1994 AND JUNE 30, 1995 LIABILITIES AND STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------- JUNE 30, 1993 1994 1995 ------- ------- ----------- (UNAUDITED) CURRENT LIABILITIES: Current portion of long-term debt (Note 2)..... $ 1,306 $ 1,029 $ 1,832 Accounts payable............................... 1,013 1,930 1,531 Accrued expenses: Payroll and payroll related.................. 430 433 548 Deferred contract billing.................... -- -- 439 Other........................................ 464 452 567 ------- ------- ------- Total current liabilities.................. 3,213 3,844 4,917 ------- ------- ------- LONG-TERM DEBT (Note 2).......................... 1,367 905 787 ------- ------- ------- DEFERRED REVENUE (Note 1)........................ 107 511 473 ------- ------- ------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY (Notes 1, 8, 9, and 11): Common Stock, $.01 par value: Authorized--12,000,000 shares Outstanding--6,231,079 shares in 1993, 6,243,734 shares in 1994 and 6,274,634 in 1995........................................ 30,404 30,429 30,512 Accumulated deficit............................ (16,961) (18,827) (18,023) ------- ------- ------- Total stockholders' equity..................... 13,443 11,602 12,489 ------- ------- ------- Total liabilities and stockholders' equity. $18,130 $16,862 $18,666 ======= ======= =======
See accompanying notes to consolidated statements. F-5 CERADYNE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- --------------- 1992 1993 1994 1994 1995 ------- ------- ------- ------ ------- (UNAUDITED) NET SALES (Notes 1 and 7).......... $18,727 $15,987 $17,996 $8,729 $11,136 COST OF PRODUCT SALES.............. 16,531 14,792 16,135 7,656 8,224 ------- ------- ------- ------ ------- Gross profit................... 2,196 1,195 1,861 1,073 2,912 ------- ------- ------- ------ ------- OPERATING EXPENSES: Selling.......................... 1,465 1,372 1,502 801 751 General and administrative....... 2,465 2,392 2,297 1,096 1,197 Royalty (Note 3)................. 212 0 0 0 0 ------- ------- ------- ------ ------- 4,142 3,764 3,799 1,897 1,948 ------- ------- ------- ------ ------- Income (loss) from operations.. (1,946) (2,569) (1,938) (824) 964 ------- ------- ------- ------ ------- OTHER INCOME (EXPENSE): Other income, net................ 160 212 366 216 2 Interest expense................. (211) (240) (294) (139) (162) ------- ------- ------- ------ ------- (51) (28) 72 77 (160) ------- ------- ------- ------ ------- Income (loss) before provision for income taxes.............. (1,997) (2,597) (1,866) (747) 804 PROVISION FOR INCOME TAXES (Note 5)................................ -- -- -- -- -- ------- ------- ------- ------ ------- Net income (loss)................ $(1,997) $(2,597) $(1,866) $ (747) $ 804 ======= ======= ======= ====== ======= NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE (Note 1)......... $ (0.33) $ (0.42) $ (0.30) $(0.12) $ 0.13 ======= ======= ======= ====== =======
See accompanying notes to consolidated statements. F-6 CERADYNE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ----------------- NUMBER ACCUMULATED OF SHARES AMOUNT DEFICIT --------- ------- ----------- BALANCE, December 31, 1991........................ 6,121,521 $30,101 $(12,367) Issuance of common stock........................ 14,514 50 Exercise of stock options....................... 9,500 26 Net loss........................................ -- -- (1,997) --------- ------- -------- BALANCE, December 31, 1992........................ 6,145,535 30,177 (14,364) Issuance of common stock........................ 10,644 20 Exercise of stock options....................... 74,900 207 Net loss........................................ -- -- (2,597) --------- ------- -------- BALANCE, December 31, 1993........................ 6,231,079 30,404 (16,961) Issuance of common stock........................ 9,655 8 Exercise of stock options....................... 3,000 17 Net loss........................................ -- -- (1,866) --------- ------- -------- BALANCE, December 31, 1994........................ 6,243,734 30,429 (18,827) Exercise of stock options....................... 30,900 83 Net income...................................... -- -- 804 --------- ------- -------- BALANCE, June 30, 1995 (unaudited)................ 6,274,634 $30,512 $(18,023) ========= ======= ========
See accompanying notes to consolidated statements. F-7 CERADYNE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER SIX MONTHS 31, ENDED ------------------------- ------------- 1992 1993 1994 1994 1995 ------- ------- ------- ------ ----- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.................. $(1,997) $(2,597) $(1,866) $(747) $804 Adjustments to reconcile net (loss) income (used in) provided by operating activities: Depreciation and amortization.... 2,007 1,694 1,577 738 741 Gain on sale of property, plant and equipment................... -- -- 103 -- -- Decrease (increase) in accounts receivable, net................. 640 691 (266) (201) (793) Decrease (increase) in receivables from related parties......................... (86) 133 15 12 (4) Decrease (increase) in inventories..................... (470) (237) (344) (705) (696) Decrease (increase) in production tooling......................... 115 37 135 71 (67) Decrease (increase) in prepaid expenses and other assets....... (197) 182 70 (87) (128) (Decrease) increase in accounts payable......................... (183) (33) 917 596 (399) (Decrease) increase in accrued expenses........................ 243 (143) (9) 55 669 (Decrease) increase in deferred revenue......................... (107) (107) 404 274 (38) ------- ------- ------- ------ ----- Net cash provided by (used in) operating activities................ (35) (380) 736 6 89 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment............... -- -- 140 -- -- Purchases of property, plant and equipment......................... (514) (349) (256) (56) (555) ------- ------- ------- ------ ----- Net cash used in investing activities.......................... (514) (349) (116) (56) (555) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock, net...... 76 227 25 9 83 Net borrowings (payments) on long- term borrowings................... 95 216 (739) (1) 685 Proceeds from capital leases....... 123 -- -- -- -- ------- ------- ------- ------ ----- Net cash provided by (used in) financing activities................ 294 443 (714) 8 768 ------- ------- ------- ------ ----- (Decrease) increase in cash and cash equivalents......................... (255) (286) (94) (42) 302 Cash and cash equivalents, beginning of period........................... 635 380 94 94 -- ------- ------- ------- ------ ----- Cash and cash equivalents, end of period.............................. $ 380 $ 94 $ -- $ 52 $ 302 ======= ======= ======= ====== ===== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid...................... $ 211 $ 240 $ 294 $ 139 $ 162 Income taxes paid.................. $ 28 $ 26 $ 22 $ -- $ --
See accompanying notes to consolidated statements. F-8 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (INFORMATION AT JUNE 30, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Presentation The consolidated financial statements include the financial statements of Ceradyne, Inc. and its subsidiaries (the Company). All material intercompany accounts and transactions have been eliminated. b. Interim Financial Information The financial statements at June 30, 1995 and for the six months ended June 30, 1994 and 1995 are unaudited, but include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. Results for interim periods are not necessarily indicative of results to be expected for the entire year. c. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Inventory costs include the cost of material, labor and manufacturing overhead. The following is a summary of inventory by component:
DECEMBER 31, JUNE 30, --------------------- ----------- 1993 1994 1995 ---------- ---------- ----------- (UNAUDITED) Raw materials........................... $2,560,000 $1,984,000 $2,424,000 Work-in-process......................... 2,469,000 3,090,000 3,120,000 Finished goods.......................... 605,000 662,000 888,000 ---------- ---------- ---------- $5,634,000 $5,736,000 $6,432,000 ========== ========== ==========
d. Property, Plant and Equipment Depreciation and amortization of property, plant and equipment are provided using the straight-line method over the following estimated useful lives: Buildings and improvements............... 20 years Lease rights............................. Term of lease and renewal option Machinery and equipment.................. 3 to 12 years Leasehold improvements................... Term of lease Office equipment......................... 5 years
Maintenance, repairs and minor renewals are charged to expense as incurred. Repairs and maintenance expense was $482,000 in 1992, $437,000 in 1993, $370,000 in 1994 and was $189,000 for the six months ended June 30, 1994 and $190,000 for the six months ended June 30, 1995. Additions and improvements are capitalized. When assets are disposed of, the applicable costs and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. F-9 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 e. Sales Recognition Sales are recorded as of the date shipments are made to or goods are accepted by customers for production contracts. Revenue is recognized using the percentage-of-completion method for cost plus fixed fee, government sponsored, research and development contracts. For the years ended December 31, 1992, 1993, 1994 and for the six months ended June 30, 1994 and 1995, revenues from cost plus fixed fee contracts were less than 10 percent of net sales. f. Deferred Revenue As part of the sales in October 1989 of the wholly-owned subsidiary, Ceradyne Specialty Products, Inc., the Company received proceeds of $785,000 for an option to issue a license attributable to certain technology and an agreement not to compete for a period of five years. These proceeds have been reflected as Deferred Revenue in the accompanying balance sheets. During 1992, 1993, and 1994, the Company included $107,000 as other income in the financial statements. For the six months ended June 30, 1994 and 1995, the Company included $53,000 and $-0- as other income in the financial statements, respectively. The revenue was fully recognized at December 31, 1994. In September 1994, the Company entered into an agreement which waived the minimum production per quarter requirement as well as the minimum rework lot quantity for the translucent bracket. In consideration for entering into this contract, the Company received a cash fee of $250,000. The fee has been deferred at December 31, 1994 and is being recognized at the rate of $.40 per part on the first 625,000 pieces sold. At June 30, 1995, $103,500 of the fee had been recognized. In September 1994, the Company finalized an agreement to manufacture and supply a specific cathode to a third party at reduced prices. In consideration for entering into this contract, the Company received a cash fee of $261,000. The fee was deferred at December 31, 1994 and will be recognized over the life of the agreement. At June 30, 1995, none of the fee had been recognized. g. Net (Loss) Income Per Share The number of shares used in computing primary net (loss) income per share equals the total of the weighted average number of shares outstanding during the periods plus common stock equivalents relating to options. Common stock equivalents relating to options issued under the 1983 Stock Option Plan (as amended), the 1994 Stock Incentive Plan and 1985 Employee Stock Purchase Plan (see Note 8) represent additional shares which may be issued in connection with their exercise, reduced by the number of shares which could be repurchased with the proceeds at the average market price per share. Common stock equivalents relating to options are not included when their effect is antidilutive. The following is a summary of the number of shares entering into the computation of net (loss) income per common equivalent share:
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------- ------------------- 1992 1993 1994 1994 1995 --------- --------- --------- --------- --------- (UNAUDITED) Weighted average number of shares outstanding.......... 6,133,000 6,169,000 6,238,000 6,233,000 6,253,000 Common stock equivalents: Employee Stock Purchase Plan...................... -- -- -- -- 12,000 Stock options.............. -- -- -- -- 124,000 --------- --------- --------- --------- --------- Number of shares............. 6,133,000 6,169,000 6,238,000 6,233,000 6,389,000 ========= ========= ========= ========= =========
F-10 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 g. Cost in Excess of Net Assets Acquired Costs in excess of net assets acquired from the Company's acquisitions are being amortized over a 20 to 30 year period. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through projected non-discounted future cash flows over the remaining amortization period. If projected future cash flows indicate that the unamortized intangible asset balances will not be recovered, an adjustment is made to reduce the net intangible asset to an amount consistent with projected future cash flows discounted at the Company's incremental borrowing rate. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. h. Deferred Start-up Costs Start-up costs incurred to establish the technological feasibility of a new product to be sold or otherwise marketed are charged to expense in the period incurred. Costs incurred subsequent to establishing technological feasibility but prior to commercial sales to customers are capitalized and amortized over the estimated economic life of the product. Amortization will be computed, once shipments commence, using the greater of the ratio of current revenues to anticipated current and future revenues or the straight-line method. During the years ended December 31, 1992, 1993 and 1994 and the six months ended June 30, 1995, there were no deferred costs capitalized. These costs, totaling $338,000, are included in Other Assets. No amortization expense was charged to operations for the years ended December 31, 1992, 1993 and 1994 and the six months ended June 30, 1994 and 1995, respectively. Revenues and associated amortization are expected to commence late in 1995. 2. DEBT AND BANK BORROWING ARRANGEMENTS Long-term debt consisted of the following at December 31, 1993 and 1994 and at June 30, 1995:
DECEMBER 31, --------------------- 1993 1994 JUNE 30, 1995 ---------- ---------- ------------- (UNAUDITED) Credit facility with asset-based lender, bearing interest at the institution's prime rate (9.00 percent at June 30, 1995) plus 3.6 percent: Five year term loan, payable in monthly installments of $26,428................ $1,506,000 $1,189,000 $1,030,000 Revolving line of credit................ 764,000 566,000 1,506,000 ---------- ---------- ---------- $2,270,000 $1,755,000 $2,536,000 Four contract capital leases, bearing interest between 5.38 percent and 11.64 percent, payable in monthly installments of $14,432 expiring from July 1995 through September 1996, secured by equipment with a net book value of $502,000 at December 31, 1993, $315,000 at December 31, 1994 and $227,000 at June 30, 1995 ................................ 403,000 179,000 83,000 ---------- ---------- ---------- 2,673,000 1,934,000 2,619,000 Less--current portion..................... 1,306,000 1,029,000 1,832,000 ---------- ---------- ---------- Long-term debt............................ $1,367,000 $ 905,000 $ 787,000 ========== ========== ==========
F-11 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 Payments due on the Company's long-term debt are as follows:
YEAR ENDING AMOUNT - ------ ---------- 1995 $1,029,000 1996 350,000 1997 317,000 1998 238,000 ---------- $1,934,000 ==========
On September 22, 1994, the Company amended its existing revolving credit agreement with an asset-based lender for the purpose of financing the Company's working capital needs. The facility, limited to $4,000,000, is composed of two parts: a $1,585,600 (previously $1,553,300) five-year term loan dated September 22, 1993 and a $2,414,400 (previously $2,446,700) revolving line of credit expiring on November 29, 1996. Included in the revolving line of credit is a foreign accounts receivable sub-limit which is the lesser of $500,000 or 33.3% of the total outstanding borrowings against "eligible domestic accounts." Borrowings under both sections of the facility are tied to availability formulas--eighty percent (80%) of the appraised value of fixed assets for the term loan, and for the revolving line of credit, seventy-five percent (75%) of eligible trade receivables and twenty-five percent (25%) of eligible inventory (up to $250,000). The term loan and the revolving line of credit are secured by all of the Company's assets and require the Company, among other things, to maintain certain financial ratios and limit capital expenditures. The Corporation is in compliance with the loan covenants at June 30, 1995. The interest rate under this credit facility is equal to the lender's prime rate (nine percent (9.0%) at June 30, 1995) plus three and six-tenths percent (3.6%). A one and one-half percent (1.5%) facility fee is payable annually on the total value of the credit facility. 3. DEFERRED EXPENSE Effective January 1, 1983, the Company was formed by acquisition from the former parent company. In connection with the acquisition, the Company agreed to pay its former parent a royalty equal to the greater of three percent (3.0%) of annual net sales during a 10-year period or graduated annual minimum installments. The royalty was subject to prepayment for an amount equal to the difference between $3,000,000 and the royalties already paid. In June 1986, the Company exercised its prepayment option for the sum of $1,755,000. The prepayment was capitalized as deferred expense and was amortized on a straight-line basis over the remaining term of the original agreement. The deferred expense was fully amortized on December 31, 1992. 4. LOAN FROM OFFICER On September 20, 1994, the Company obtained a loan from an officer in the amount of $100,000. The loan bore interest at the rate of prime plus three and six-tenths percent and was for a period of time not to exceed one hundred twenty days. Payment of principal and interest can be made prior to maturity without any prepayment penalty. The loan was repaid in full by December 31, 1994. 5. INCOME TAXES Effective the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The new standard provides revised criteria for the recognition of net deferred tax assets. The Company's net deferred tax asset, which is approximately $7,000,000 at June 30, F-12 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 1995, relates to its tax net operating loss carryforward and tax credit carryforward, which total approximately $18.2 million and expire as follows: 2001.......................................................... $ 603,000 2002.......................................................... 4,243,000 2003.......................................................... 4,546,000 2004.......................................................... 3,801,000 2007.......................................................... 1,093,000 2008.......................................................... 2,050,000 2009.......................................................... 1,828,000 ----------- $18,164,000 ===========
The Company's net deferred tax asset has been offset with a valuation allowance since there is uncertainty regarding the Company's ability to recognize this tax benefit because the benefit is dependent upon the Company's ability to continue to generate future taxable income. The components of the Company's net deferred income tax asset as of December 31, 1993 and 1994 are as follows:
DECEMBER 31, ------------------------ 1993 1994 ----------- ----------- Inventory reserves.............................. $ 463,500 $ 359,800 Contingency reserves............................ 140,700 118,400 Deferred revenue................................ 39,600 189,200 Vacation accrual................................ 138,000 120,800 Bad debt allowance.............................. 166,500 159,000 Net operating loss carryforward................. 4,909,900 5,606,800 Tax credit carryforwards........................ 332,000 332,000 Other........................................... 109,800 114,000 ----------- ----------- 6,300,000 7,000,000 Valuation allowance............................. (6,300,000) (7,000,000) ----------- ----------- Net deferred tax asset........................ $ 0 $ 0 =========== ===========
The effective income tax rate for the years ended December 31, 1993 and 1994 and for the six months ended June 30, 1995 differs from the federal statutory federal income tax rate due to the limitation of net operating loss benefits. 6. COMMITMENTS AND CONTINGENCIES The Company leases certain of its manufacturing facilities under noncancellable operating leases. The Company incurred rental expenses under these leases of $812,000, $876,000, $915,000 for the years ended December 31, 1992, 1993 and 1994 and $573,000 and $584,000 for the six months ended June 30, 1994 and 1995 respectively. The approximate rental commitments required under existing noncancellable leases as of December 31, 1994, are as follows: 1995........................................................... $ 812,100 1996........................................................... 167,000 1997........................................................... 150,900 1998........................................................... 147,200 1999 and thereafter............................................ 248,800 ---------- $1,526,000 ==========
F-13 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 The Company has an employment agreement with the Chief Executive Officer which expires on July 5, 1999. In addition to a base salary, the agreement provides for a bonus to be determined by the Compensation Committee of the Board of Directors. No maximum compensation limit exists. The compensation expensed in the year ended December 31, 1992, 1993 and 1994 was $178,000, $165,000, $151,000 and in the six months ended June 30, 1994 and 1995 was $77,890 and $84,135, respectively. The Company is, from time to time, involved in various legal and other proceedings that relate to the ordinary course of operating its business, including, but not limited to, employment-related actions and workers' compensation claims. Currently the Company is involved in one action filed by a current employee in the Superior Court of the State of California, County of Orange. The employee and his wife filed suit in December 1994 alleging that he contracted chronic beryllium disease during the course and scope of his employment. Defense of the case has been tendered to the Company's insurance carriers. While the Company is unable to predict the outcome of current proceedings, based upon the facts currently known to it, the Company, after consultation with legal counsel, does not believe that resolution of these proceedings will have a material adverse effect on the financial condition or operations of the Company. During the fourth quarter of 1994 the following actions were concluded: two former employees each filed suit during 1992 alleging that they had contracted chronic beryllium disease during the course and scope of their employment at the Company. Both suits were settled during 1994 and final releases were executed in January 1995. The impact of these settlements on the Company's financial statements is included in the 1994 results of operations. During the second quarter of 1994, the following proceedings where concluded: an employee of a customer and his wife filed suit in the United States District Court, Eastern District of Tennessee, on September 22, 1992, alleging he contracted chronic beryllium disease during his employment as a laboratory technician. Ceradyne was one of at least 18 defendants who allegedly sold products containing beryllium oxide to his employer. The complaint did not state the specific dollar amount sought, but requested compensatory and punitive damages. In May 1994, the customer's employee voluntarily dismissed Ceradyne from this action. The dismissal is without prejudice, which allows the customer's employee up to one year to refile the action. 7. SEGMENT AND CUSTOMER INFORMATION The Company operates solely in the development, manufacture and sale of advanced technical ceramics. In the years ended December 31, 1992, 1993, 1994, export sales, primarily to Europe, were approximately $2,600,000, $2,900,000 and $4,584,000 and for the six months ended June 30, 1994 and 1995 sales were $1,907,000 and $2,913,000, respectively. For the year ended December 31, 1992, the Company had one customer that accounted for 12 percent of sales. For the year ended December 31, 1993, the Company had one customer that accounted for 14 percent of sales. For the year ended December 31, 1994, the Company had one customer that accounted for 13 percent of sales. For the six months ended June 30, 1994, the Company had one customer that accounted for 13 percent of sales. For the six months ended June 30, 1995, the Company did not have any customer that accounted for 10 percent of sales. No other customer accounted for 10 percent of more of the Company's net sales for the periods presented. F-14 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 8. STOCK OPTIONS At the Annual Meeting held on July 18, 1994, the stockholders of the Company approved the Company's 1994 Stock Incentive Plan. At June 30, 1995, the Company has reserved 250,000 shares of its common stock for issuance. Under the Plan, the Company can issue both incentive and nonqualified stock options. Options are granted at or above the fair market value at the date of grant and generally become exercisable over a five-year period. At December 31, 1993, the Company has reserved 600,000 shares of its common stock for issuance under the 1983 Stock Plan (as amended). Under the Plan, the Company can issue both incentive and nonqualified stock options. Options are granted at or above the fair market value at the date of grant and generally become exercisable over a five-year period. No option shares were available for grant since the plan terminated on December 31, 1993. The following is a summary of the transactions relating to the Plans for the periods 1992 through the six months ended June 30, 1995:
STOCK OPTIONS ----------------------- SHARES PRICE ------- -------------- OUTSTANDING, December 31, 1991.................... 395,100 $2.75--$3.625 Granted........................................... 31,500 $3.125--$3.875 Exercised......................................... (9,500) $2.75 Canceled.......................................... (40,800) $2.75 ------- -------------- OUTSTANDING, December 31, 1992.................... 376,300 $2.75--$3.875 Granted........................................... 80,500 $2.00--$2.75 Exercised......................................... (74,900) $2.75--$3.875 Canceled.......................................... (18,200) $2.75--$3.875 ------- -------------- OUTSTANDING, December 31, 1993.................... 363,700 $2.00--$3.875 Granted........................................... 159,500 $2.00 Exercised......................................... (3,000) $2.75 Canceled.......................................... (48,000) $2.00--$3.875 ------- -------------- OUTSTANDING, December 31, 1994.................... 472,200 $2.00--$3.875 Granted........................................... -0- Exercised......................................... (30,900) $2.00--$3.875 Canceled.......................................... (5,400) $2.00--$3.875 ------- -------------- OUTSTANDING, June 30, 1995 (unaudited)............ 435,900 $2.00--$3.875 ======= ==============
At June 30, 1995, options to acquire 314,640 shares were exercisable and 93,500 shares were available for grant. The Company has also reserved 150,000 shares of its common stock for issuance under an employee stock purchase plan which became effective during 1985 and was amended in 1994. At June 30, 1995, 51,454 shares were available for issuance under the Plan. Under the terms of the Plan, employees may purchase shares at the lower of 85 percent of the quoted market value of the shares as determined on the first or last day of the Plan year. Effective July 3, 1995, the Plan expired. Compensation expense has been immaterial under the aforementioned Plans. F-15 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 9. SUPPLEMENTAL RETIREMENT PLAN In December 1988 the Board of Directors of the Company approved the adoption of a supplemental retirement plan (Ceradyne SMART 401(k) Plan) in which substantially all employees are eligible to participate after completing one year of employment. Participation in the Plan is voluntary. An employee may elect to contribute up to seven percent (7%) of the employee's pretax compensation as a basic contribution. The Company may contribute any amount which the Board of Directors annually determines appropriate. For 1995, the Company will contribute five percent (5%) of consolidated net income. Company contributions fully vest and are nonforfeitable after the participant has completed five years of service. The Company made no contributions to the plan during the years ending December 31, 1992 through 1994 and the six months ended June 30, 1995. The Company's contribution is in the form of shares of its common stock. The number of shares to be contributed will be determined by dividing the total Company match for the Plan year by the higher of the market value per share of common stock as of the end of that Plan year (December 31), or the audited book value per share of common stock as of the end of that Plan year. The member's contributions may be invested, at their discretion, in one or all of the following: (1) Fixed Income Fund, (2) Bond and Mortgage Fund, (3) International Stock Fund or (4) Equity Fund. The member can elect to allocate the accumulated and future contributions to their accounts among these funds in increments of 10 percent. The Company has reserved 250,000 shares of its common stock for possible issuance under the Plan. At June 30, 1995, 210,287 shares were available for issuance under the Plan. 10. INTERIM FINANCIAL INFORMATION (UNAUDITED) The results by quarter for 1993 and 1994 and for the six months ended June 30, 1994 and June 30, 1995 are as follows:
QUARTER ENDED -------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1993 1993 1993 1993 ---------- ---------- ------------- ------------ Net sales............... $4,112,000 $4,132,000 $3,812,000 $3,931,000 Net loss................ (488,000) (849,000) (577,000) (683,000) Net loss per share-- primary................ ($0.08) ($0.14) ($0.09) ($0.11) ========== ========== ========== ==========
QUARTER ENDED -------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1994 1994 1994 1994 ---------- ---------- ------------- ------------ Net sales............... $4,500,000 $4,229,000 $4,323,000 $4,944,000 Net loss................ (189,000) (558,000) (493,000) (626,000) Net loss per share-- primary................ ($0.03) ($0.09) ($0.08) ($0.10) ========== ========== ========== ==========
QUARTER ENDED --------------------- MARCH 31, JUNE 30, 1995 1995 ---------- ---------- Net sales................................................ $5,379,000 $5,757,000 Net income............................................... 351,000 453,000 Net income per share--primary............................ $0.06 $0.07 ========== ==========
F-16 CERADYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 AND SIX MONTHS ENDED JUNE 30, 1994 AND 1995 11. JOINT VENTURE AND JOINT DEVELOPMENT AGREEMENT On March 11, 1986, the Company sold 526,316 shares of its common stock to Ford Motor Company (Ford) for a gross sales price of $10,000,000. In addition, Ford and the Company formed a joint venture, Ceradyne Advanced Products, Inc. (CAPI), in which the Company acquired a 20 percent interest for $200,000. Ford contributed certain technology in exchange for its 80 percent interest in the joint venture. The Company granted Ford an option to put Ford's 80 percent interest in the joint venture to the Company in exchange for 608,020 shares of the Company's common stock. Ford granted the Company an option to call Ford's 80 percent interest in the joint venture in exchange for 680,983 shares of the Company's common stock. On February 13, 1988, the Company exercised its call option and issued 680,983 shares of its common stock to Ford. The value of the shares issued ($2,043,000) was allocated to the technology acquired and is being amortized over a 20 year period utilizing the purchase method of accounting (see Note 1). Ford and the Company have also entered into a joint development program to develop a prototype production facility to produce ceramics with automotive applications. Under the terms of the joint development agreement, Ford and the Company share equally in the cost of this project. For the years ended December 31, 1992, 1993 and 1994, Ford agreed to contribute $495,000, $424,000 and $250,000, respectively, and for the six months ended June 30, 1994 and 1995, Ford agreed to contribute $125,000 and $100,000, respectively. These amounts have been reflected as a reduction of the expenses incurred or a reduction in the capitalized value of the fixed assets acquired for this project in the accompanying consolidated financial statements. Included in accounts receivable on the accompanying consolidated balance sheets is approximately $115,000, $-0- and $50,000, respectively, due from Ford related to this agreement as of December 31, 1993, 1994 and the six months ended June 30, 1995, respectively. 12. SUBSEQUENT EVENTS In 1995, the Board of Directors adopted and the shareholders approved the Company's 1995 Employee Stock Purchase Plan, and the amendment to the 1994 Stock Incentive Plan. 1995 Employee Stock Purchase Plan A total of 100,000 shares of common stock are reserved for issuance under the 1995 Employee Stock Purchase Plan (the Plan) to eligible employees. Under the terms of the Plan, employees may purchase shares at the lower of 85 percent of the quoted market value of the shares as determined on the first or last day of the Plan year. Amendment to 1994 Stock Incentive Plan The amendment was to increase the number of shares of Common Stock authorized for issuance under the Plan from 250,000 to 350,000. All other provisions of the Plan remain unchanged. F-17 Photo depicting Cutting Tool/Lathe . Ceralloy(R) 147 silicon nitride industrial cutting tool inserts are effective in milling or turning operations requiring high speed metal removal. Shown: Typical cutting tool insert/lathe setup. Photo depicting Glass Tempering Furnace . Tempering glass furnaces require large rolls and tooling which will support but not "mark" hot glass. This industrial need is met with Ceradyne's fused silica ceramic components. Shown: Glass tempering roll being placed in furnace. Photo depicting Cathodes for Satellites . The Company produces microwave cathodes and other parts for microwave power tubes. These tubes are used in a wide variety of applications including satellite communications. Shown: Various cathodes. Photo of Ceramic Engine Parts . Ceralloy(R) 147 silicon nitride components are candidates for future substitution of metal parts in diesel and automobile engines. The Company is in preliminary development of such components as part of its strategic relationship with the Ford Motor Company. Shown: Diesel and automobile engine prototype components. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH IN- FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UN- LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMA- TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Summary................................................................... 3 The Company............................................................... 5 Risk Factors.............................................................. 5 Use of Proceeds........................................................... 10 Price Range of Common Stock and Dividend Policy........................... 10 Capitalization............................................................ 11 Selected Consolidated Financial Data...................................... 12 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 13 Business.................................................................. 17 Management................................................................ 29 Certain Transactions...................................................... 36 Principal Stockholders.................................................... 37 Description of Capital Stock.............................................. 38 Underwriting.............................................................. 40 Legal Matters............................................................. 41 Experts................................................................... 41 Available Information..................................................... 41 Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,200,000 SHARES LOGO(R) Logo of Ceradyne(R), Inc. appears here COMMON STOCK --------------- PROSPECTUS --------------- VAN KASPER & COMPANY CRUTTENDEN ROTH INCORPORATED , 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all costs and expenses, other than the underwriting discount and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered hereunder.
TO BE PAID BY THE REGISTRANT ---------- SEC registration fee........................................... $ 2,588 NASD filing fee................................................ 1,250 Non accountable expense allowance.............................. 82,500 Printing expenses.............................................. 30,000 Legal fees and expenses........................................ 150,000 Accounting fees and expenses................................... 75,000 Blue sky fees and expenses..................................... 15,000 Miscellaneous.................................................. 43,662 -------- Total........................................................ $400,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) As permitted by the Delaware General Corporation Law, the Registrant's Certificate of Incorporation eliminates the liability of directors to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent otherwise required by the Delaware General Corporation Law. (b) The Registrant's Bylaws provide that the Registrant will indemnify each person who was or is made a party to any proceeding by reason of the fact that such person is or was a director or officer of the Registrant against all expense, liability and loss reasonably incurred or suffered by such person in connection therewith to the fullest extent authorized by the Delaware General Corporation Law. (c) The Registrant's Bylaws give the Registrant the ability to enter into indemnification agreements with any of its directors, officers, employees or agents. The Registrant has entered into indemnification agreements with each of its directors and executive officers which provide for the indemnification of such directors and executive officers against any and all expenses, judgments, fines, penalties and amounts paid in settlement, to the fullest extent permitted by law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES None. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (A) EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 --Form of Underwriting Agreement. 3.1 --Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form 8-B. 3.2 --Bylaws of Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form 8-B. 4.1 --Form of Representatives' Common Stock Purchase Warrant. 5.1 --Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation. 10.1 --Agreement for Purchase and Sale of Stock of the Registrant dated January 12, 1983. Incorporated herein by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 2- 90821). 10.2 --Payment Schedule dated January 12, 1983. Incorporated herein by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (File No. 2-90821).
II-1
EXHIBIT NO. DESCRIPTION ------- ----------- 10.3 --Ceradyne, Inc. Patent and Know-How License Agreement dated January 12, 1983. Incorporated herein by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (File No. 2-90821). 10.4 --Ceradyne, Inc. 1983 Stock Option Plan as amended and restated. Incorporated herein by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 2-99930). 10.5 --Lease between Trico Rents and the Registrant dated March 23, 1984, covering premises located at 235 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 2-90821). 10.6 --Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California dated October 28, 1985. Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.7 --Stock Sale Agreement between the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.8 --Agreement between certain shareholders of the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1985. 10.9 --Stock Purchase Agreement between Ceradyne Advanced Products, Inc., the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.10 --Patent and Technology Transfer Agreement between Ford Motor Company and Ceradyne Advanced Products, Inc. dated March 11, 1986. Incorporated herein by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.11 --License Agreement between the Registrant and Ceradyne Advanced Products, Inc. dated March 11, 1986. Incorporated herein by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.12 --License Agreement between Ford Motor Company and the Registrant dated March 11, 1986. Incorporated herein by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.13 --Joint Development Agreement between the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.14 --Cathode Purchase Agreement, dated as of October 4, 1986, between the Registrant and Varian Associates. Incorporated herein by reference to Exhibit 28.2 to the Company's Current Report on Form 8-K dated November 17, 1986. 10.15 --Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.16 --Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.46 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.17 --Short-form Memorandum of Lease Assignment dated December 15, 1986, and Lease dated June 23, 1980, covering premises located at 3449 Church Street, Scottdale, Georgia. Incorporated herein by reference to Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.18 --Amendment dated June 3, 1986 to the Ceradyne, Inc. 1983 Stock Option Plan. Incorporated herein by reference to Exhibit 10.50 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986.
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EXHIBIT NO. DESCRIPTION ------- ----------- 10.19 --Amendment dated March 16, 1987 to the Ceradyne, Inc. 1983 Stock Option Plan. Incorporated herein by reference to Exhibit 10.51 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.20 --Joint Development Agreement dated March 28, 1986 between Unitek Corporation and the Registrant, and First and Second Amendments thereto. Incorporated herein by reference to Exhibit 10.52 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.21 --Amendment dated April 30, 1987 to the Ceradyne, Inc. 1983 Stock Option Plan. Incorporated herein by reference to Exhibit 10.56 to the Registrant's Registration Statement on Form 8-B. 10.22 --Loan and Security Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.1 to the Registrant's Current Report on Form 8-K dated December 8, 1989. 10.23 --Promissory Note Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.2 to the Company's Current Report on Form 8-K dated December 8, 1989. 10.24 --Collateral Assignment of Patents Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.3 to the Registrant's Current Report on Form 8-K dated December 8, 1989. 10.25 --Collateral Assignment of Trademarks Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.4 to the Registrant's Current Report on Form 8-K dated December 8, 1989. 10.26 --Amendment dated September 22, 1993 to Loan and Security Agreement dated November 27, 1989, and all addenda and supplements thereto between the Registrant and The CIT Group/Credit Finance, Inc., assignee of Fidelcor Business Credit Corporation. Incorporated herein by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.27 --Amendment dated September 22, 1994 to Loan and Security Agreement dated November 27, 1989, and all amendments and supplements thereto between The CIT Group/Credit Finance, Inc. and the Registrant. Incorporated herein by reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.28 --Employment Agreement entered into as of July 5, 1994 by and between Joel P. Moskowitz and the Registrant. Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.29 --Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.30 --Amendment No. 1 to the Ceradyne, Inc., 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-8 (File No. 33-61675). 10.31 --Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-8 (File No. 33-61677). 10.32+ --Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and the Registrant covering premises located at 235 Paularino Avenue, Costa Mesa, California. 10.33+ --Amendment No. 2, dated June 5, 1995, to Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California. 10.34+ --Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. 10.35+ --Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. 21.1 --Subsidiaries of the Registrant. 23.1 --Consent of Stradling, Yocca, Carlson & Rauth (see Exhibit 5.1). 23.2 --Consent of Arthur Andersen LLP. 24.1+ --Power of Attorney.
- -------- + Previously filed II-3 (B) FINANCIAL STATEMENT SCHEDULE Report of Independent Public Accountants on Schedule VIII Schedule VIII--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of a Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 the Registrant has duly caused this Amendment to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Costa Mesa, State of California, on the 23rd day of October, 1995. Ceradyne, Inc. /s/ James F. Gardner By: _________________________________ James F. Gardner Vice President, Finance and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Chairman, Chief Executive October 23, 1995 ____________________________________ Officer, President and Joel P. Moskowitz Director (Principal executive officer) /s/ James F. Gardner Vice President, Finance and October 23, 1995 ____________________________________ Chief Financial Officer James F. Gardner (Principal financial and accounting officer) * Director October 23, 1995 ____________________________________ Leonard M. Allenstein * Director October 23, 1995 ____________________________________ Richard A. Alliegro * Director October 23, 1995 ____________________________________ Frank Edelstein
II-5
SIGNATURE TITLE DATE --------- ----- ---- * Director October 23, 1995 ____________________________________ Norman A. Gjostein * Director October 23, 1995 ____________________________________ William P. Lanphear IV * Director October 23, 1995 ____________________________________ Milton L. Lohr * Director October 23, 1995 ____________________________________ Melvin A. Shader
*By: /s/ James F. Gardner ______________________ James F. Gardner Attorney-in-fact II-6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Ceradyne, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements of Ceradyne, Inc. (a Delaware corporation) and subsidiaries included in this registration statement and have issued our report thereon dated March 6, 1995. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index is presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Orange County, California March 6, 1995 S-1 SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
BALANCE CHARGED BALANCE AT TO COATS AT BEGINNING AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD - ----------- --------- -------- ---------- ------- FOR THE YEAR ENDED DECEMBER 31, 1994 - ------------------ Allowance for doubtful accounts receivable.............................. $204 $79 $84 $199 ==== === === ==== FOR THE YEAR ENDED DECEMBER 31, 1993: - ------------------ Allowance for doubtful accounts receivable.............................. $164 $82 $42 $204 ==== === === ==== FOR THE YEAR ENDED DECEMBER 31, 1992: - ------------------ Allowance for doubtful accounts receivable.............................. $ 99 $84 $19 $164 ==== === === ====
S-2 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NO. ------- ----------- ---------- 1.1 --Form of Underwriting Agreement. 3.1 --Certificate of Incorporation of the Registrant. Incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form 8-B. 3.2 --Bylaws of Registrant. Incorporated herein by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form 8-B. 4.1 --Form of Representatives' Common Stock Purchase Warrant. 5.1 --Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation. 10.1 --Agreement for Purchase and Sale of Stock of the Registrant dated January 12, 1983. Incorporated herein by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 2-90821). 10.2 --Payment Schedule dated January 12, 1983. Incorporated herein by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (File No. 2-90821). 10.3 --Ceradyne, Inc. Patent and Know-How License Agreement dated January 12, 1983. Incorporated herein by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (File No. 2-90821). 10.4 --Ceradyne, Inc. 1983 Stock Option Plan as amended and restated. Incorporated herein by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (File No. 2-99930). 10.5 --Lease between Trico Rents and the Registrant dated March 23, 1984, covering premises located at 235 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (File No. 2-90821). 10.6 --Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California dated October 28, 1985. Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.7 --Stock Sale Agreement between the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.8 --Agreement between certain shareholders of the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1985. 10.9 --Stock Purchase Agreement between Ceradyne Advanced Products, Inc., the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.10 --Patent and Technology Transfer Agreement between Ford Motor Company and Ceradyne Advanced Products, Inc. dated March 11, 1986. Incorporated herein by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.11 --License Agreement between the Registrant and Ceradyne Advanced Products, Inc. dated March 11, 1986. Incorporated herein by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.12 --License Agreement between Ford Motor Company and the Registrant dated March 11, 1986. Incorporated herein by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985. 10.13 --Joint Development Agreement between the Registrant and Ford Motor Company dated March 11, 1986. Incorporated herein by reference to Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985.
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NO. ------- ----------- ---------- 10.14 --Cathode Purchase Agreement, dated as of October 4, 1986, between the Registrant and Varian Associates. Incorporated herein by reference to Exhibit 28.2 to the Company's Current Report on Form 8-K dated November 17, 1986. 10.15 --Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.16 --Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. Incorporated herein by reference to Exhibit 10.46 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.17 --Short-form Memorandum of Lease Assignment dated December 15, 1986, and Lease dated June 23, 1980, covering premises located at 3449 Church Street, Scottdale, Georgia. Incorporated herein by reference to Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.18 --Amendment dated June 3, 1986 to the Ceradyne, Inc. 1983 Stock Option Plan. Incorporated herein by reference to Exhibit 10.50 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.19 --Amendment dated March 16, 1987 to the Ceradyne, Inc. 1983 Stock Option Plan. Incorporated herein by reference to Exhibit 10.51 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.20 --Joint Development Agreement dated March 28, 1986 between Unitek Corporation and the Registrant, and First and Second Amendments thereto. Incorporated herein by reference to Exhibit 10.52 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.21 --Amendment dated April 30, 1987 to the Ceradyne, Inc. 1983 Stock Option Plan. Incorporated herein by reference to Exhibit 10.56 to the Registrant's Registration Statement on Form 8-B. 10.22 --Loan and Security Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.1 to the Registrant's Current Report on Form 8-K dated December 8, 1989. 10.23 --Promissory Note Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.2 to the Company's Current Report on Form 8-K dated December 8, 1989. 10.24 --Collateral Assignment of Patents Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.3 to the Registrant's Current Report on Form 8-K dated December 8, 1989. 10.25 --Collateral Assignment of Trademarks Agreement dated November 27, 1989 between the Registrant and Fidelcor Business Credit Corp. Incorporated herein by reference to Exhibit 28.4 to the Registrant's Current Report on Form 8-K dated December 8, 1989. 10.26 --Amendment dated September 22, 1993 to Loan and Security Agreement dated November 27, 1989, and all addenda and supplements thereto between the Registrant and The CIT Group/Credit Finance, Inc., assignee of Fidelcor Business Credit Corporation. Incorporated herein by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.27 --Amendment dated September 22, 1994 to Loan and Security Agreement dated November 27, 1989, and all amendments and supplements thereto between The CIT Group/Credit Finance, Inc. and the Registrant. Incorporated herein by reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.28 --Employment Agreement entered into as of July 5, 1994 by and between Joel P. Moskowitz and the Registrant. Incorporated herein by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NO. ------- ----------- ---------- 10.29 --Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.30 --Amendment No. 1 to the Ceradyne, Inc., 1994 Stock Incentive Plan. Incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-8 (File No. 33-61675). 10.31 --Ceradyne, Inc. 1995 Employee Stock Purchase Plan. Incorporated herein by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-8 (File No. 33-61677). 10.32+ --Amendment No. 2, dated June 5, 1995, to Lease between Trico Rents and the Registrant covering premises located at 235 Paularino Avenue, Costa Mesa, California. 10.33+ --Amendment No. 2, dated June 5, 1995, to Lease covering premises located at 3169-A Red Hill Avenue, Costa Mesa, California. 10.34+ --Amendment No. 2, dated June 5, 1995, to Lease dated March 31, 1986 covering premises located at 3163 Red Hill Avenue, Costa Mesa, California. 10.35+ --Amendment No. 2, dated June 5, 1995, to Lease dated August 5, 1986 covering premises located at 225 Paularino Avenue, Costa Mesa, California. 21.1 --Subsidiaries of the Registrant. 23.1 --Consent of Stradling, Yocca, Carlson & Rauth (see Exhibit 5.1). 23.2 --Consent of Arthur Andersen LLP. 24.1+ --Power of Attorney.
- -------- + Previously filed EX-1.1 2 UNDERWRITING AGREEMENT CERADYNE, INC. UNDERWRITING AGREEMENT October, 1995 VAN KASPER & COMPANY CRUTTENDEN ROTH INCORPORATED As Representatives of the several underwriters named in Schedule I, c/o Van Kasper & Company 11661 San Vicente Boulevard, Suite 709 Los Angeles, California 90049 Ladies and Gentlemen: Ceradyne, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters") 1,200,000 shares (the "Firm Stock") of the Company's Common Stock, $0.01 par value (the "Common Stock"). In addition, the Company also proposes to grant to the Underwriters an option to purchase up to an additional 180,000 shares of the Common Stock on the terms and for the purposes set forth in Section 2(b) (the "Option Stock"). The Firm Stock and any Option Stock purchased pursuant to this Agreement are referred to below as the "Stock." Van Kasper & Company and Cruttenden Roth Incorporated are acting as representatives of the several Underwriters and in that capacity are referred to in this Agreement as the "Representatives." The Company hereby confirms its agreement with the several Underwriters as set forth below. 1. Representations and Warranties of the Company. The Company --------------------------------------------- hereby represents and warrants to and agrees with each Underwriter as follows: (a) The Company meets the requirements for use of Form S-1 under the Securities Act of 1933, as amended (the "Securities Act"), and a registration statement (Registration No. 33-62345) on Form S-1, including such amendments to such registration statement as may have been required to the date of this Agreement, relating to the Stock has been prepared by the Company under and in conformity with the provisions of the Securities Act, the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Securities Act, either (A) if the Company relies on Rule 434 under the Securities Act, a Term Sheet (defined below) relating to the Stock, that identifies the Preliminary Prospectus (defined below) that it supplements and contains such information as is required or permitted by Rules 434, 430A and 424(b) of the Rules and Regulations or (B) if the Company does not rely on Rule 434 under the Securities Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment has been filed, in such registration statement), with such changes or insertions as are required by Rule 430A of the Rules and Regulations or permitted by Rule 424(b) of the Rules and Regulations, and in the case of either (i)(A) or (i)(B) of this sentence, as has been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Securities Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended, at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A of the Rules and Regulations and included in the Prospectus (defined below); the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: (A) if the Company relies on Rule 434 under the Securities Act, the Term Sheet relating to the Stock that is first filed pursuant to Rule 424(b)(7) under the Securities Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Securities Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Securities Act; or (C) if the Company does not rely on Rule 434 under the Securities Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Securities Act, the prospectus included in the Registration Statement. provided that if any revised prospectus that is provided to the Underwriters by the Company for use in connection with the offering of the Stock differs from the prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective, whether or not the revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such revised prospectus from and after the time it is first provided to the Underwriters for such use. The term "Term Sheet" as used in this Agreement means any term sheet that satisfies the requirements of Rules 434 and 424(b) under the Securities Act. Any reference in this 2 Agreement to the "date" of a Prospectus that includes a Term Sheet means the date of such Term Sheet. (b) No order suspending the effectiveness of the Registration Statement or preventing or suspending the issue of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated by the Commission; no order suspending the sale of the Stock in any jurisdiction has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated, and any request of the Commission for additional information (to be included in the Registration Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been complied with. (c) When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be contained therein and complied in all respects with the requirements of the Securities Act, the Rules and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder (the "Exchange Act Rules and Regulations") and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective, it (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and at all times subsequent thereto up to and including the Closing Date (defined below) and any date on which Option Stock is to be purchased, the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (c) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. 3 (d) Each of the Company and Ceradyne Advanced Products, Inc. (the "Subsidiary") has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full power (corporate and other) and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and as currently being conducted and proposed to be conducted by it and is duly qualified as a foreign corporation and is in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company or its subsidiaries). Each of the Company and the Subsidiary is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from federal, state, local, foreign and other governmental or regulatory authorities that are material to the conduct of its business, all of which are valid and in full force and effect except where such non-compliance or invalidity would not have a material adverse effect on the Company and its subsidiaries. Except as may be disclosed in the Registration Statement, the Company owns all of the outstanding capital stock of each of its subsidiaries, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest of any type, kind or nature. None of the subsidiaries of the Company, including the Subsidiary, is a "significant subsidiary" as such term is defined in Rule 405 under the Securities Act. As used in this Agreement, the word "subsidiary" means any corporation, partnership, limited liability company or other entity of which the Company directly or indirectly owns 50% or more of the equity or that the Company directly or indirectly controls. The Company does not have any subsidiaries that are not corporations. (e) Since the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there has not been any material loss or interference with the business of the Company or any of its subsidiaries from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any court or governmental action, order or decree, or any changes in the capital stock or long-term debt of the Company or any of its subsidiaries, or any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or any material change, or a development known to the Company that might cause or result in a material change, in or affecting the business, properties, condition (financial or otherwise), results of operation or prospects of the Company and its subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business, in each case other than as may be set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not described in the Registration Statement and the 4 Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (f) There is no agreement, contract, license, lease or other document required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All contracts described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), if any, are in full force and effect on the date hereof, and neither the Company nor any of its subsidiaries nor, to the best knowledge of the Company, any other party thereto is in material breach of or default under any such contract. (g) The authorized and outstanding capital stock of the Company is as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the description of the Common Stock therein conforms with and accurately describes the rights set forth in the instruments defining the same. The unissued shares of the Stock have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and non- assessable, and the issuance of the Stock is not subject to any preemptive or similar rights, other than those which have been duly and validly waived. (h) All of the outstanding shares of Common Stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities. All of the issued shares of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and, except for directors' qualifying shares, are owned by the Company, free and clear of all liens or encumbrances. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. Other than this Agreement and the options to purchase Common Stock described in the Prospectus, there are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the Company's capital stock. There are no preemptive rights applicable to any shares of capital stock of the Company. (i) This Agreement has been duly authorized, executed and delivered by, and constitutes the valid and binding obligation of, the Company, enforceable against it in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable federal or state securities laws. The filing of the Registration Statement does not give rise 5 to any rights, other than those which have been waived, for or relating to the registration of any capital stock of the Company. (j) Neither the Company nor any of its subsidiaries is, or with the giving of notice or lapse of time or both would be, in violation of or in default under, nor will the execution or delivery of this Agreement or the completion of the transactions contemplated by this Agreement result in a violation of or constitute a breach of or a default (including without limitation with the giving of notice, the passage of time or otherwise) under, the certificate or articles of incorporation, bylaws or other governing documents of the Company or any of its subsidiaries or any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, deed of trust, loan agreement, lease, license, joint venture or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of its or their properties may be bound or affected. The Company has not incurred any liability, direct or indirect, for any finders' or similar fees payable on behalf of the Company or the Underwriters in connection with the transactions contemplated by this Agreement. The performance by the Company of its obligations under this Agreement will not violate any law, ordinance, rule or regulation, or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court having jurisdiction over the Company, its subsidiaries or any of their respective properties, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company or any of its subsidiaries. Except for permits and similar authorizations required under the Securities Act, the Exchange Act or under other securities or Blue Sky laws of certain jurisdictions, the clearance of this offering with the National Association of Securities Dealers, Inc. ("NASD") and for such permits and authorizations that have been obtained, no consent, approval, authorization or order of any court, governmental agency or body, financial institution or any other person is required in connection with the completion of the transactions contemplated by this Agreement. (k) Each of the Company and the Subsidiary owns, or has valid rights to use, all items of real and personal property which are material to the business of the Company and its subsidiaries taken as a whole and free and clear of all liens, encumbrances and claims that might materially interfere with the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole. (l) Each of the Company and the Subsidiary owns or possesses adequate rights to use all material patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, tradenames and copyrights described or referred to in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as owned by or used by any of them, or which are necessary for the conduct of their business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); and neither the Company nor any 6 of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, tradenames or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole. (m) There is no litigation or governmental proceeding to which the Company or any of its subsidiaries is a party or to which any property of the Company or any of its subsidiaries is subject which is pending or, to the best knowledge of the Company, is threatened or contemplated against the Company or any of its subsidiaries that might have a material effect on, or might result in any material change in the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole, that might prevent consummation of the transactions contemplated by this Agreement or that are required to be disclosed in the Registration Statement or Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) and are not so disclosed. (n) Neither the Company nor any of its subsidiaries is in violation of, and neither the Company nor any of its subsidiaries has received any notice or claim from any governmental agency or third party that any of them is in violation of, any law, order, ordinance, rule or regulation, or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court, to which it or its properties (whether owned or leased) may be subject, which violation might have a material effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole. (o) The Company has not taken and shall not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to cause or result in, under the Exchange Act, the Exchange Act Rules and Regulations or otherwise, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Stock. No bid or purchase by the Company and, to the best knowledge of the Company, no bid or purchase that could be attributed to the Company (as a result of bids or purchases by an "affiliated purchaser" within the meaning of Rule 10b-6 under the Exchange Act) for or of the Stock, the Common Stock, any securities of the same class or series as the Common Stock or any securities convertible into or exchangeable for or that represent any right to acquire the Common Stock is now pending or in progress or will have commenced at any time prior to the completion of the distribution of the Stock. (p) Arthur Anderson LLP, whose reports appear in the Registration Statement and the Prospectus, are, and during the periods covered by their reports in the Registration Statement were, independent accountants as required 7 by the Securities Act and the Rules and Regulations. The financial statements and schedules included in the Registration Statement, each Preliminary Prospectus and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the financial condition, results of operations, cash flow and changes in stockholders' equity and the financial statements and schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods presented, except as may be stated therein. The selected and summary financial and statistical data included in the Registration Statement and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (q) The pro forma financial information and related notes, if any, included in the Registration Statement, each Preliminary Prospectus and the Prospectus comply (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will comply) in all material respects with the requirements of the Securities Act and the Rules and Regulations and present fairly the pro forma information shown, as of the dates and for the periods covered by such pro forma information. Such pro forma information, including the related notes and schedules, have been prepared on a basis consistent with the historical financial statements and other historical information, as applicable, included in the Registration Statement, the Preliminary Prospectus and the Prospectus (if filed with the Commission), except for the pro forma adjustments specified therein, and give effect to assumptions made on a reasonable basis to give effect to historical and proposed transactions described in the Registration Statement, each Preliminary Prospectus and the Prospectus (if filed with the Commission). (r) The statements in the Registration Statement and Prospectus concerning the reserve information, if any, of the Company, its subsidiaries and the pro forma reserve information giving effect to transactions referred to therein are (or, if the Prospectus has not been filed with the Commission, will, when the Prospectus is so filed, be) correct in all material respects and do not and, if applicable, will not omit to state a material fact necessary to make the statements made in the Registration Statement and the Prospectus not misleading. (s) The books, records and accounts of the Company and each of its subsidiaries accurately and fairly reflect, in reasonable detail, the transactions in and dispositions of the assets of the Company and each of its subsidiaries. The systems of internal accounting controls maintained by the Company and each of its subsidiaries are sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary (x) to permit preparation of financial 8 statements in conformity with generally accepted accounting principles and (y) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (t) The Company will not, and the Company has delivered to the Representatives the written agreement of each of its officers and directors and Ford Motor Company (collectively, "Material Holders") to the effect that each of the Material Holders will not, in each case for a period of 90 days following the date of this Agreement, in each case without the prior written consent of the Representatives, offer, sell or contract to sell, or otherwise dispose of, or announce the offer of, any Common Stock or options or convertible securities exercisable or exchangeable for, or convertible into, Common Stock, in each case without the prior written consent of the Representatives other than, in the case of the Company, the issuance of Common Stock upon the exercise of outstanding stock options and the grant of options to purchase Common Stock under the Stock Option Plans described in the Registration Statement. (u) No labor disturbance by the employees of the Company or any of its subsidiaries exists, is imminent or, to the knowledge of the Company, is contemplated or threatened; and the Company is not aware of an existing, imminent or threatened labor disturbance by the employees of any principal suppliers, contract manufacturing organizations, manufacturers, authorized dealers or distributors that might be expected to result in any material change in the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole. No collective bargaining agreement exists with any of the Company's or any of the Company's subsidiaries' employees and, to the best knowledge of the Company, no such agreement is imminent. (v) Each of the Company and each of its subsidiaries has filed all federal, state, local and foreign tax returns that are required to be filed or has requested extension thereof and has paid all taxes, including withholding taxes, penalties and interest, assessments, fees and other charges to the extent that the same have become due and payable. No tax assessment or deficiency has been made or proposed against the Company or any of its subsidiaries nor has the Company or any of its subsidiaries received any notice of any proposed tax assessment or deficiency. (w) Except as set forth in the Prospectus, there are no outstanding loans, advances or guaranties of indebtedness by the Company to or for the benefit of any of (i) its "affiliates," as such term is deemed in the Rules and Regulations, (ii) any of the officers or directors of any of its subsidiaries or (iii) any of the members of the families of any of them. (x) Neither the Company nor any of its subsidiaries has, directly or indirectly, at any time: (i) made any contributions to any candidate for 9 political office, or failed to disclose fully any such contribution, in violation of law; (ii) made any payment to any local, state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by all applicable laws; or (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended. (y) Except as may be disclosed in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor any of its subsidiaries has any liability, absolute or contingent, relating to: (i) public health or safety; (ii) worker health or safety; (iii) product defect or warranty; or (iv) pollution, damage to or protection of the environment, including, without limitation, relating to damage to natural resources, emissions, discharges, releases or threatened releases of hazardous materials into the environment (including, further without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or otherwise relating to the manufacture, processing, use, treatment, storage, generation, disposal, transport or handling of any hazardous materials, which, in any case or in the aggregate, would have a material adverse effect on the Company and its subsidiaries taken as a whole. As used herein, "hazardous material" includes chemical substances, wastes, pollutants, contaminants, hazardous or toxic substances, constituents, materials or wastes, whether solid, gaseous or liquid in nature. (z) The Company has not distributed and will not distribute prior to the Closing Date or on or prior to any date on which the Option Stock is to be purchased, as the case may be, any prospectus or other offering material in connection with the offering and sale of the Stock other than the Prospectus, the Registration Statement and any other material which may be permitted by the Securities Act and the Rules and Regulations. (aa) The Stock has been approved for inclusion for listing on the Nasdaq National Market, subject only to official notice of issuance. (ab) The Company is not now, and intends to conduct its affairs in the future in such a manner so that it will not become, an investment company within the meaning of the Investment Company Act of 1940, as amended. (ac) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has 10 occurred, whether by action or by failure to act, which would cause the loss of such qualification. (ad) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company or any of its subsidiaries (or, to the knowledge of the Company, any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its subsidiaries or with respect to which the Company or any of its subsidiaries have knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries; and the terms "hazardous wastes," "toxic wastes," "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. 2. Purchase, Sale and Delivery of the Stock. ---------------------------------------- (a) On the basis of the representations, warranties, covenants and agreements of the Company contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company agrees to sell to the several Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of $_____ per share of Stock ("Purchase Price") the respective number of shares of Firm Stock set forth opposite the name of such Underwriter on Schedule I to this Agreement (subject to adjustment as provided in Section 8 of this Agreement). (b) On the basis of the several (and not joint) representations, warranties, covenants and agreements of the Underwriters contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company grants an option to the several Underwriters to purchase from the Company, severally and jointly, all or any portion of the Option Stock at the 11 Purchase Price. This option may be exercised only to cover over-allotments in the sale of the Firm Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of the Prospectus upon written, telecopied or telegraphic notice by the Representatives to the Company setting forth the aggregate number of shares of Option Stock as to which the several Underwriters are exercising the option and the settlement date. The Option Stock shall be purchased severally, and not jointly, by each Underwriter, if purchased at all, in the same proportion that the number of shares of Firm Stock set forth opposite the name of the Underwriter in Schedule I to this Agreement bears to the total number of shares of Firm Stock to be purchased by the Underwriters under Section 2(a) above, subject to such adjustments as the Representatives in its absolute discretion shall make to eliminate any fractional Stock. Delivery of Option Stock, and payment therefor, shall be made as provided in Section 2(c) and Section 2(d) below. (c) Delivery of the Firm Stock and the Option Stock (if the option granted by the Company in Section 2(b) above has been exercised not later than 6:30 a.m., San Francisco time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Van Kasper & Company, 600 California Street, San Francisco, California at 6:30 a.m., San Francisco time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, (but not in excess of the period specified in the Rules and Regulations) as shall be agreed upon in writing by the Company and the Representatives, or as provided in Section 8 of this Agreement. The date and hour of delivery and payment for the Firm Stock are referred to in this Agreement as the "Closing Date." As used in this Agreement, "business day" means a day on which the American Stock Exchange is open for trading and on which banks in New York and California are open for business and not permitted by law or executive order to be closed. (d) If the option granted by the Company in Section 2(b) above is exercised after 6:30 a.m., San Francisco time, on the date two business days preceding the Closing Date, delivery of the Option Stock and payment therefor shall be made at the office of Van Kasper & Company, 600 California Street, San Francisco, California at 6:30 a.m., San Francisco time, on the date specified by the Representatives (which shall be three or four or fewer business days after the exercise of the option, but not in excess of the period specified in the Rules and Regulations). (e) Payment of the Purchase Price for the Stock by the several Underwriters shall be made by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company. Such payment shall be made upon delivery of Stock to you for the respective accounts of the several Underwriters. The Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as the Representatives may request at least two business days before the Closing Date, in the case of Firm Stock, and at least one business prior to the purchase of the Option Stock, in the case of the Option Stock. 12 It is understood that the Representatives, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for Stock to be purchased by any Underwriter whose check shall not have been received by the Representatives on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment shall not relieve such Underwriter from any of its obligations hereunder. (f) It is understood that the several Underwriters propose to offer the Stock for sale to the public as soon as the Representatives deem it advisable to do so. The Firm Stock is to be initially offered to the public at the public offering price set forth (or to be set forth) in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. (g) The Company agrees that the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), the legends respecting stabilization and passive market making set forth on the inside front cover page and the statements set forth under the caption "Underwriting" in any Preliminary Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b) constitute the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement. 3. Further Agreements of the Company. The Company covenants and --------------------------------- agrees with the several Underwriters as follows: (a) The Company will use its best efforts to cause the Registration Statement, and any amendment thereof, if not effective at the time of execution of this Agreement, to become effective as promptly as possible. If the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed (and in form and substance reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Representatives of such timely filing. The Company will not file the Prospectus, any amended Prospectus, any amendment (including post-effective amendments) of the Registration Statement or any supplement to the Prospectus without (i) advising the Representatives of and, a reasonable time prior to the proposed filing of such amendment or supplement, furnishing the Representatives with copies thereof and (ii) obtaining the prior consent of the Representatives to such filing. The Company will prepare and file with the Commission, promptly upon the request of the Representatives, any amendment to the Registration Statement or supplement to the Prospectus that may be necessary or advisable in connection with the distribution of the Stock by the Underwriters and use its best efforts to cause the same to become effective as promptly as possible. (b) The Company will promptly advise the Representatives (i) when the Registration Statement becomes effective, (ii) when any post-effective 13 amendment thereof becomes effective, (iii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (v) of the receipt by the Company of any notification with respect to the suspension of the registration, qualification or exemption from registration or qualification of the Stock for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or suspension and, if issued, to obtain as soon as possible the withdrawal thereof. (c) The Company will (i) on or before the Closing Date, deliver to each of you and your counsel a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the several Underwriters, a sufficient number of additional conformed copies of each of the foregoing (excluding exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to each of you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or a dealer, likewise to send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended Prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or a dealer any event shall occur as a result of which it is necessary to supplement or amend the Prospectus in order to make the Prospectus not misleading or so that the Prospectus will not omit to state a material fact necessary to be stated therein, in each case at the time the Prospectus is delivered to a purchaser of the Stock, or if it shall be necessary to amend or to supplement the Prospectus to comply with the Securities Act or the Rules and Regulations, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and so that it then will otherwise comply with the Securities Act and the Rules and Regulations. If, after the public offering of the Stock by the Underwriters and during such period, the Underwriters propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation and if, in the opinion either of counsel for the Company or 14 counsel for the Underwriters, such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the Underwriters to use the Prospectus, as from time to time so amended or supplemented, in connection with the sale of the Stock in accordance with the applicable provisions of the Securities Act and the Rules and Regulations for such period. (e) The Company will cooperate with you and your counsel in the qualification or registration of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, if applicable, in connection with exemptions from such qualification or registration and, during the period in which a Prospectus is required by law to be delivered by an Underwriter or a dealer, in keeping such qualifications, registrations and exemptions in effect; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports and other documents as are or may be required to continue such qualifications, registrations and exemptions in effect for so long a period as you may reasonably request for the distribution of the Stock. (f) During a period of five years commencing with the date of this Agreement, the Company will promptly furnish to each of you and to each Underwriter who may so request in writing copies of (i) all periodic and special reports furnished by it to shareholders of the Company, (ii) all information, documents and reports filed by it with the Commission, any securities exchange on which any securities of the Company are then listed, Nasdaq or its National Market or the NASD, (iii) all press releases and material news items or articles in respect of the Company or its affairs released or prepared by the Company (other than promotional and marketing materials disseminated solely to customers and potential customers of the Company in the ordinary course of business) and (iv) any additional information concerning the Company or its business which the Representatives may reasonably request. (g) As soon as practicable, but not later than the 45th day following the end of the fiscal quarter first ending after the first anniversary of the Effective Date, the Company will make generally available to its securities holders and furnish to the Representatives an earnings statement or statements in accordance with Section 11(a) of the Securities Act and Rule 158 of the Rules and Regulations. (h) The Company will apply the net proceeds from the offering of the Stock substantially in the manner set forth under the caption "Use of Proceeds" in the Prospectus. 15 (i) The Company will cause the Common Stock (including the Stock) to be listed on the Nasdaq National Market, and the Company will comply with all registration, filing, reporting and other requirements of the Exchange Act and any such exchange or the Nasdaq National Market which may from time to time be applicable to the Company. (j) The Company will use its best efforts to maintain insurance of the types and in the amounts which it deems adequate for its business consistent with insurance coverage maintained by companies of similar size and engaged in similar businesses, including, but not limited to, general liability insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. 4. Fees and Expenses. ----------------- (a) The Company agrees with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with: the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus, any drafts of each of them and any amendments or supplements to any of them; the duplication or, if applicable, printing (including all drafts thereof) of this Agreement, the Agreement Among Underwriters, any Selected Dealer Agreements, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and the Power of Attorney and the duplication and printing (including of drafts thereof) of any other underwriting documents and material (including but not limited to marketing memoranda and other marketing material) in connection with the offering, purchase, sale and delivery of the Stock; the issuance and delivery of the Stock under this Agreement to the several Underwriters; the cost of printing the certificates for the Stock; the Transfer Agents' and Registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent public accountants and any other experts named in the Prospectus; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, the agreements and other documents and instruments referred to above and any amendments or supplements to any of the foregoing; the NASD filing fees; the cost of qualifying or registering the Stock (or obtaining exemptions from qualification or registration) under the laws of such jurisdictions as you may designate (including filing fees and fees and costs/disbursements of Underwriters' counsel in connection with such state securities or 16 Blue Sky qualifications, registrations and exemptions and in preparing the preliminary and any final Blue Sky Memorandum); all fees and expenses in connection with listing of the Stock on the Nasdaq National Market; and all other expenses incurred by the Company in connection with the performance of its obligations hereunder. In addition, the Company will pay the Representatives a non-accountable expense allowance of one and one-quarter percent (1.25%) of the total proceeds of the offering of the Stock. Except as provided in this Section 4(a), Section 4(d) and Section 7(a) hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualifications, registrations and exemptions under Blue Sky laws and the Blue Sky memorandum referred to above). The Representatives estimate that the legal fees for counsel for the Representatives in connection with the offering of the Stock will not exceed $75,000. (ii) In addition to its obligations under Section 7(a) of this Agreement, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 7(a) of this Agreement, it will reimburse or advance to or for the benefit of the Underwriters, and each of them, on a monthly basis (or more often, if requested) for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse or advance for the benefit of the Underwriters for such expenses or the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Underwriters receiving the same shall promptly return such amounts to the Company together with interest, compounded daily, at the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America, NT&SA, San Francisco, California (the "Prime Rate"), but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to or for the Underwriters within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, compounded daily, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (b) In addition to their obligations under Section 7(b) of this Agreement, the Underwriters severally and in proportion to their obligation to purchase Firm Stock as set forth on Schedule I hereto, agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 7(b) of this Agreement, they will reimburse or advance to or for the benefit of the Company on a monthly basis (or more often, if requested) for all reasonable legal and other expenses incurred by the Company in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety or enforceability of the Underwriters' obligation to reimburse or advance for the benefit of the Company for such expenses and the possibility that such payments or advances might later be held to have been improper by a court of 17 competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Company shall promptly return such amounts to the Underwriters together with interest, compounded daily, at the Prime Rate, but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to the Company within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, compounded daily, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement and advance arrangements set forth in Sections 4(a)(ii) and 4(b) above, including the amounts of any requested reimbursement payments or advance, the method of determining such amounts and the basis on which such amounts shall be apportioned among the indemnifying parties, shall be settled by arbitration conducted under the provisions of the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. If the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to the demand or notice is authorized to do so. Any such arbitration will be limited to the interpretation and obligations of the parties under the interim reimbursement and advance provisions contained in Sections 4(a)(ii) and 4(b) above and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for or contribute to expenses that is created by the provisions of Section 7 of this Agreement. (d) If the sale of the Stock provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 5 of this Agreement is not satisfied, or because of any termination pursuant to Section 9(b) of this Agreement, or because of any refusal, inability or failure on the part of the Company to perform any covenant or agreement set forth in this Agreement or to comply with any provision of this Agreement other than by reason of a default by any of the Underwriters, the Company agrees to reimburse the several Underwriters upon demand for all accountable out-of-pocket expenses actually and reasonably incurred (including fees and disbursements of counsel) by any or all of them in connection with investigating, preparing to market or marketing the Stock or otherwise in connection with this Agreement. 5. Conditions of Underwriters' Obligations. The several --------------------------------------- obligations of the Underwriters to purchase and pay for the Stock shall be subject to the accuracy as of the date of execution of this Agreement, the Closing Date and the date and time at which the Option Stock is to be purchased, as the case may be, of the representations and warranties of the Company set forth in this Agreement, to the accuracy of the statements of the Company and its officers made in any certificate 18 delivered pursuant to this Agreement, to the performance by the Company of all of its obligations to be performed under this Agreement at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, to the satisfaction of all conditions to be satisfied or performed by the Company at or prior to that date and to the following additional conditions: (a) The Registration Statement shall have become effective (or, if a post-effective amendment is required to be filed pursuant to Rule 430A under the Act, such post-effective amendment shall become effective and the Company shall have provided evidence satisfactory to the Representatives of such filing and effectiveness) not later than 5:00 p.m., New York time, on the date of this Agreement or at such later date and time as you may approve in writing and, at the Closing Date or, with respect to the Option Stock, the date on which such Option Stock is to be purchased, no stop order suspending the effectiveness of the Registration Statement or any qualification, registration or exemption from qualification or registration for the sale of the Stock in any jurisdiction shall have been issued and no proceedings for that purpose shall have been instituted or threatened; and any request for additional information on the part of the Commission shall have been complied with to the reasonable satisfaction of the Representatives and their counsel. (b) The Representatives shall have received from Gray Cary Ware & Freidenrich, counsel for the Underwriters, an opinion, on and dated as of the Closing Date and, if applicable, the date on which Option Stock is to be purchased, with respect to the issuance and sale of the Stock and such other related matters as the Representatives may reasonably require, and the Company shall have furnished such counsel with all documents which they may request for the purpose of enabling them to pass upon such matters. (c) The Representatives shall have received on the Closing Date and, if applicable, the date on which Option Stock is purchased the opinion of Stradling, Yocca, Carlson & Rauth, counsel for the Company, addressed to the Underwriters and dated the Closing Date or such later date, with reproduced copies or signed counterparts thereof for each of the Underwriters, covering the matters set forth in Annex A to this Agreement and in form and substance satisfactory to you. (d) The Representatives shall be satisfied that there has not been any material change in the market for securities in general or in political, financial or economic conditions as to render it impracticable in your sole judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) The Representatives shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company stating that: 19 (i) the representations and warranties of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as if expressly made at and as of the Closing Date or such later date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or such later date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or are threatened under the Securities Act; (iii) the Stock has been approved for listing on the Nasdaq National Market, subject only to notice of issuance, and the outstanding shares of the Common Stock of the Company are listed on the Nasdaq National Market; and (iv) (A) the respective signers of such certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus and any supplements or amendments to any of them and, as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct in all material respects and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein, or necessary, in light of the circumstances under which they were made, in order to make the statements therein not misleading, (B) since the effective date of the Registration Statement, no event has occurred that should have been set forth in an amendment to the Registration Statement or a supplement or amendment to the Prospectus that has not been set forth in such an amendment or supplement, (C) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus, there has not been any material adverse change or any development involving a prospective material change in or affecting the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (D) there are not any pending or known threatened legal proceedings to which the Company or any of its subsidiaries is a party or of which property of the Company or any of its subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus and (E) there are not any license agreements, contracts, leases or other documents that are required to be filed as exhibits to the Registration Statement that have not been filed as required. (f) The Representatives shall have received from Arthur Anderson & Co. LLP a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent accountants with respect to the Company, as applicable, within 20 the meaning of the Securities Act and the applicable published Rules and Regulations thereunder and, based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (the "Original Letter"), but carried out to a date not more than five business days prior to the Closing Date or such later date on which Option Stock is purchased, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter that are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. Such letters shall not disclose any change, or any development involving a prospective change, in or affecting the business, properties or condition (financial or otherwise), results of operations or prospects of the Company or any of its subsidiaries which, in your sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. In addition, you shall have received from Arthur Anderson & Co. LLP, on or prior to the Closing Date, a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of December 31, 1994 or in delivering their Original Letter, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) Prior to the Closing Date, the Stock shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance and the outstanding shares of the Common Stock of the Company shall be listed on the Nasdaq National Market. (h) On or prior to the Closing Date, the Representatives shall have received from all Material Holders executed agreements covering the matters described in Section 1(f) of this Agreement. (i) The Company shall have furnished to the Representatives such further certificates and documents as you shall reasonably request (including certificates of officers of the Company) as to the accuracy of the representations and warranties of the Company set forth in this Agreement, the performance by the Company of its obligations under this Agreement and such other matters as the Representatives may have then reasonably requested. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement will be in compliance with the provisions of this Agreement only if they are satisfactory to the Representatives. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 21 If any of the conditions specified in this Section 5 shall not have been fulfilled in all material respects when and as provided in this Agreement, time being of the essence, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects satisfactory in form and substance to the Representatives and its counsel, this Agreement and all obligations of the Underwriters hereunder may be canceled by the Representatives at, or at any time prior to, the Closing Date or, with respect to the Option Stock, prior to the date which the Option Stock is to be purchased, as the case may be. Notice of such cancellation shall be given to the Company in writing or by telephone, telecopy or telegraph confirmed in writing. Any such termination shall be without liability of the Company to the Underwriters (except as provided in Section 4 or Section 7 of this Agreement) and without liability of the Underwriters to the Company (except to the extent provided in Section 7 of this Agreement). 6. Conditions of the Obligation of the Company. The obligations ------------------------------------------- of the Company to sell and deliver the Stock required to be delivered as and when specified in this Agreement shall be subject to the condition that, at the Closing Date or, with respect to the Option Stock, the date and time at which the Option Stock is to be purchased, no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. 7. Indemnification and Contribution. -------------------------------- (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereto) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statute, law or regulation, at common law or otherwise, specifically including but not limited to losses, claims, damages or liabilities (or actions in respect thereof) related to negligence on the part of any Underwriter, and the Company agrees to reimburse each such Underwriter and controlling person for any reasonable legal or other expenses (including, except as otherwise provided below, settlement expenses and reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon, in whole or in part, (i) any breach of any representation, warranty, covenant or agreement of the Company in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement in the form originally filed or in any amendment thereto (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements 22 therein, in light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Stock under the securities or Blue Sky laws thereof or to obtain an exemption from such qualification or registration or filed with the Commission, any securities association or the Nasdaq National Market, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that (1) the indemnity agreements of the Company contained in this Section 7(a) shall not apply to such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this Section 7(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock that is the subject thereof (or to the benefit of any person controlling such Underwriter) if the Company can demonstrate that at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) or, for this purpose, if applicable, a copy of the then most recent Preliminary Prospectus was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus or, if applicable, prior Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) or, if applicable, the then most recent Preliminary Prospectus, unless the failure is the result of noncompliance by the Company with Section 3(b) of this Agreement. The indemnity agreements of the Company contained in this Section 7(a) and the representations and warranties of the Company contained in Section 1 of this Agreement shall remain operative and in full force and effect regardless of any investigation made by or behalf of any indemnified party and shall survive the delivery of and payment for the Stock. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such 23 other Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or other federal or state statute, law or regulation or at common law or otherwise and to reimburse each of them for any reasonable legal or other expenses (including, except as otherwise hereinafter provided, settlement expenses and reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any breach of any covenant or agreement of the indemnifying Underwriter in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case under clauses (i), (ii) and (iii) above, as the case may be, only if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such indemnifying Underwriter through the Representatives specifically for use in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The Company acknowledges and agrees that the matters described in Section 2(g) of this Agreement constitute the only information furnished in writing by or on behalf of any of the several Underwriters for inclusion in the Registration Statement or the Prospectus or in any Preliminary Prospectus. The several indemnity agreement of each Underwriter contained in this Section 7(b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (c) Each person or entity indemnified under the provisions of Sections 7(a) and 7(b) above agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such Sections, it will, if a claim in respect thereunder is to be made against the indemnifying party or parties under this Section 7, promptly give written notice (the "Notice") of such service or notification to 24 the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in Sections 7(a) or 7(b) above shall be available to any person who fails to so give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related, but only to the extent such party was materially prejudiced by the failure to receive the Notice, and the omission to so notify such indemnifying party or parties shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of Sections 7(a) and 7(b). Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (the "Notice of Defense") to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses or rights available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then separate counsel for and selected by the indemnified party or parties shall be entitled, at the expense of the indemnifying parties, to conduct the defense of the indemnified parties to the extent determined by counsel to the indemnified parties to be necessary to protect the interests of the indemnified party or parties (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel representing the indemnified parties who are parties to such action) and (ii) in any event, the indemnified party or parties shall be entitled to have counsel selected by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and, unless separate counsel is to be chosen by the indemnified party or parties as provided above, the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under Sections 7(a) through 7(c) for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear and pay the reasonable legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the "provided, however" clause in the preceding sentence and (B) the indemnifying party or parties shall bear and pay such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. In no event shall any indemnifying party be liable in respect to any amounts paid in settlement of any claim or action unless the indemnifying party shall have approved the terms of such settlement, such approval not to be unreasonably withheld. 25 (d) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 7 but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right to appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 7 provides for indemnification in such case, each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in Section 7(a) or 7(b) above (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same respective proportions as the total proceeds from the offering of the Stock, net of the underwriting discounts, received by the Company and the total underwriting discount retained by the Underwriters bear to the aggregate public offering price of the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this Section 7(d) and to the considerations referred to in the third sentence of the first paragraph of this Section 7(d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this Section 7(d) shall be deemed to include any legal or other expenses incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this Section 7(d). Notwithstanding the provisions of this Section 7(d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by that Underwriter. For purposes of this Section 7(d), each person who controls an Underwriter within the meaning of the Securities Act shall have the same rights to contribution as such Underwriter, and each person who controls the Company within the meaning of the Securities Act, each officer of the Company who signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the following sentence. No person guilty of fraudulent 26 misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute in this Section 7(d) are several in proportion to their respective underwriting obligations and not joint. Each party or other entity entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in Section 7(c) above). (e) The Company shall not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of each such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (f) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions of this Agreement, including, without limitation, the provisions of Sections 4(a)(ii), 4(b) and 4(c) and this Section 7 of this Agreement and that they are fully informed regarding all such provisions. They further acknowledge that the provisions of Sections 4(a)(ii), 4(b) and 4(c) and this Section 7 of this Agreement fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act, the Rules and Regulations, the Exchange Act and the rules and regulations of the Commission under the Exchange Act. The parties are advised that federal or state policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain provisions of Sections 4(a)(ii), 4(b) and 4(c) and this Section 7 of this Agreement and, to the extent permitted by law, the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under Sections 4(a)(ii), 4(b) or 4(c) or this Section 7 of this Agreement and further agree not to attempt to assert any such defense. 8. Substitution of Underwriters. If for any reason one or more of ----------------------------- the Underwriters fails or refuses (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 5 or Section 9 of this Agreement) to purchase and pay for the number of shares of Firm Stock agreed to be 27 purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to the Representatives and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by the Representatives of such notice to purchase, or procure one or more other Underwriter to purchase, in such proportions as may be agreed upon among the Representatives and such purchasing Underwriter or Underwriters and upon the terms set forth herein, all or any part of the Firm Stock that such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail to make such arrangements with respect to all such Stock, the number of shares of Firm Stock that each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares of Stock that the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Stock that the defaulting Underwriter or Underwriters agreed to purchase if the aggregate principal amount of such Stock exceeds 10% of the aggregate principal amount of Firm Stock that all Underwriters agreed to purchase under this Agreement. If the total number of shares of Firm Stock that the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the first 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to the Representatives for purchase of such Stock on the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the Closing Date determined as provided in Section 2(c) of this Agreement for not more than seven business days after the date originally fixed as the Closing Date pursuant to Section 2(c) in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the time periods provided in the first three sentences of the first paragraph of this Section 8 for the purchase of all the Firm Stock that the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter (except as provided in Section 4 or Section 7 of this Agreement) and without any liability on the part of any non-defaulting Underwriters to the Company (except to the extent provided in Section 7 of this Agreement). Nothing in this Section 8, and no action taken hereunder, shall relieve any defaulting Underwriter from liability, if any, to the Company or any non-defaulting Underwriter for damages occasioned by its default under this Agreement. The term "Underwriter" in this Agreement shall include any persons substituted for an Underwriter under this Section 8. 9. Effective Date of Agreement and Termination. ------------------------------------------- (a) If the Registration Statement has not been declared effective prior to the date of this Agreement, this Agreement shall become effective at 28 such time, after notification of the effectiveness of the Registration Statement has been released by the Commission, as you and the Company shall agree upon the public offering price and other terms and the purchase price of the Stock. If the public offering price and other terms and the purchase price of the Stock shall not have been determined prior to 5:00 p.m., New York time, on the third full business day after the Registration Statement has become effective, this Agreement shall thereupon terminate without liability on the part of the Company to the Underwriters (except as provided in Section 4 or Section 7 of this Agreement). By giving notice before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, may prevent this Agreement from becoming effective without liability of any party to the other party, except that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 4 and Section 7 of this Agreement. If the Registration Statement has been declared effective prior to the date of this Agreement, this Agreement shall become effective upon execution and delivery by you and the Company. (b) This Agreement may be terminated by you in your sole discretion by giving written notice to the Company at any time on or prior to the Closing Date or, with respect to the purchase of the Option Stock, on or prior to any later date on which the Option Stock is to be purchased, as the case may be, if prior to such time any of the following has occurred or, in your opinion, is likely to occur: (i) after the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or development involving a prospective adverse change in or affecting the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole, whether or not arising in the ordinary course of business, which would, in your sole judgment, make the offering or the delivery of the Stock impracticable or inadvisable; or (ii) if there shall have been suspension of trading in securities generally or a material adverse decline in value of securities generally on the Nasdaq National Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on any such exchange or system; or (iii) if there shall have been the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in your sole judgment materially and adversely affects or may materially and adversely affect the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole; or (iv) if there shall have been the declaration of a banking moratorium by federal, New York or California or state authorities; (v) existing international monetary conditions shall have undergone a material change which, in your sole judgment, makes the offering or delivery of the Stock impracticable or inadvisable. If this Agreement shall be terminated pursuant to this Section 9, there shall be no liability of the Company to the Underwriters (except pursuant to Section 4 and Section 7 of this Agreement) and no liability of the Underwriters to the Company (except to the extent provided in Section 7 of this Agreement). 29 10. Notices. Except as otherwise provided herein, all ------- communications hereunder shall be in writing or by either telecopier or telegraph and, if to the Underwriters, shall be mailed, telecopied or telegraphed or delivered to Van Kasper & Company, 11661 San Vicente Boulevard, Suite 709, Los Angeles, California 90049, Attention: Bruce P. Emmeluth (telecopier: (310) 820-5032); and if to the Company, shall be mailed, telecopied, telegraphed or delivered to it at its office at 3169 Redhill Avenue, Costa Mesa, California 92626 (telecopier: (714) 549-5787) Attention: Joel P. Moskowitz. All notices given by telecopy or telegraph shall be promptly confirmed by letter. 11. Persons Entitled to the Benefit of this Agreement. This ------------------------------------------------- Agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 4 and Section 7 of this Agreement, the several parties (in addition to the Company and the several Underwriters) indemnified under the provisions of Section 4 and Section 7 and in addition, as to paragraph 14, Van Kasper & Company and Cruttenden Roth Incorporated, and their respect personal representatives, successors and assigns (whether such succession or assignment is by sale, assignment, merger, reverse merger, consolidation, operation of law or, without limitation, otherwise). Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision contained herein. The term "successors and assigns" as herein used shall not include any purchaser, as such, of any of the Stock from the several Underwriters. 12. General. Notwithstanding any provision of this Agreement to ------- the contrary, the reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties, covenants and agreements in this Agreement shall remain in full force and effect regardless of 9(a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof or by or on behalf of the Company or their respective directors or officers and (c) delivery and payment for the Stock under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of Sections 3(f), 3(g), 3(h), 3(i) and 3(j) of this Agreement shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE STATE OF CALIFORNIA. 13. Authority of the Representatives. In connection with this -------------------------------- Agreement, the Representatives will act for and on behalf of the several 30 Underwriters, and any action taken under this Agreement by the Representatives, as representative of the several Underwriters, will be binding on all of the Underwriters. 14. Stock Purchase Warrant. At the Closing Date, the Company will ---------------------- sell to you (for your own account and not as a Representatives of the several Underwriters) for a consideration of $60.00 and upon the terms and conditions set forth in the Stock Purchase Warrant annexed as Exhibit 4.1 to the Registration Statement, a five-year, nontransferable (except as permitted by applicable Blue Sky laws) Stock Purchase Warrants to purchase initially an aggregate of 60,000 shares of the Company's Common Stock. If the foregoing correctly sets forth your understanding, please so indicate by signing in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the several Underwriters. Very truly yours, CERADYNE, INC. By: ------------------------------------ Joel P. Moskowitz Its: President and Chief Executive Officer 31 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. VAN KASPER & COMPANY CRUTTENDEN ROTH INCORPORATED For themselves and on behalf of each of the several Underwiters named in Schedule I hereto By: VAN KASPER & COMPANY By: ----------------------------------- Bruce P. Emmeluth Managing Director 32 SCHEDULE I UNDERWRITERS Number of Shares of Firm Stock Underwriters to be Purchased - ------------ ---------------- Van Kasper & Company Cruttenden Roth Incorporated --------- Total 1,200,000 ========= 33 ANNEX A Matters to be Covered in the Opinion of Stradling, Yocca, Carlson & Rauth* (i) Each of the Company and Ceradyne Advanced Products, Inc. (the "Subsidiary") has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; (ii) Each of the Company and its Subsidiary has the corporate power to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) Each of the Company and its Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure so to qualify would not have a material adverse effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its Subsidiary taken as a whole; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein; the issued and outstanding shares of capital stock of the Company and its Subsidiary have been duly and validly authorized and issued, are fully paid and nonassessable and have not been issued in violation of any preemptive right or, to the knowledge of such counsel, other rights to subscribe for or purchase securities or, except to the extent any such violations would not be material to the Company and its Subsidiary taken as a whole (whether because of the magnitude of the violation, because any claims thereof would be barred by the statute of limitations or otherwise), in violation of any applicable federal or state securities laws, provided that in rendering their opinion as to non-violation of federal and state securities laws, such counsel may assume, unless counsel has knowledge of facts that may render such assumption unreasonable, that any purchasers had, to the extent relevant and represented by such purchasers in writing, any required investment intent and the Company directly or indirectly owns all of the issued and - --------------- * In rendering this opinion, counsel may rely as to questions of law not involving the laws of the United States or the States of California on opinions of local counsel (provided that such counsel states that they believe they and the Underwriters are justified in relying thereon) and, as to questions of fact, upon representations or certificates of officers of the Company and government officials, in which case their opinion is explicitly to state that they are so relying thereon and that they have no knowledge of any material misstatement or inaccuracy in such opinions, representations or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to the Representative and counsel to the Underwriters. 34 outstanding equity securities of its Subsidiary and there are no outstanding options, warrants or other rights to acquire any equity securities of such Subsidiary; (v) The Company has corporate power and authority to enter into the Agreement and the Stock Purchase Warrant and to issue, sell and deliver the Stock and the Stock Purchase Warrant (and the Common Stock issuable upon exercise of the Stock Purchase Warrant) to the Underwriters; (vi) The execution, delivery and performance of this Agreement and the issuance and sale of the Stock and the Common Stock issuable upon exercise of the Stock Purchase Warrant do not (A) conflict with, violate, result in a breach of or constitute a default (or an event that with notice or lapse of time, or both, would constitute a default) under the Articles of Incorporation or By-laws of the Company or any agreement (including, without limitation, an agreement with respect to registration rights) to which the Company is a party or by which it or any of its properties or assets is bound and which is known to such counsel or (B) result in violation of any material federal, Delaware or California law, rule or regulation or, to the best knowledge of such counsel, any writ, judgment, order, injunction or decree of any government, governmental body, agency or court or any arbitration tribunal having jurisdiction over the Company or any of its properties; (vii) The Stock and the Stock Purchase Warrant are, and the Common Stock issuable upon exercise of the Stock Purchase Warrant will be, duly authorized and, when issued and delivered against payment in full therefor, will be validly issued, fully paid, non-assessable, and free of preemptive rights; (viii) The Underwriting Agreement and the Stock Purchase Warrant have been duly authorized by all necessary corporate action on the part of the Company and have been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery of the Underwriting Agreement by the Representatives, are the valid and binding agreements of the Company, except insofar as the indemnification and contribution provisions of the Underwriting Agreement may be limited by public policy concerns and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles; (ix) Except for the order of the Commission making the Registration Statement effective or similar authorizations required under the securities or "Blue Sky" laws of certain jurisdictions (as to which such counsel need express no opinion), no consent, approval, authorization or other order of any federal, Delaware or California governmental body or, to the knowledge of such counsel, other person is required in connection with the authorization, issuance, sale and delivery of the Stock and the execution, delivery and performance by the Company of the Underwriting Agreement or the Stock Purchase Warrant or the issuance and delivery of the Common Stock issuable upon exercise of the Stock Purchase Warrant; 35 (x) The Registration Statement has become effective under the Securities Act and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (xi) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements, financial data and supporting schedules included therein, as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations; (xii) The terms and provisions of the capital stock of the Company conform in all material respects to the description thereof contained in the Registration Statement and Prospectus, and the information in the Prospectus under the caption "Description of Capital Stock," to the extent they constitute matters of law or legal conclusions, has been reviewed by such counsel and is correct and the form of certificate for the Stock complies with California and Delaware law, as applicable; (xiii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes and contracts are accurate in all material respects and fairly present in all material respects the information required to be presented by the Securities Act and the Rules and Regulations; (xiv) To the best knowledge of such counsel, there are no agreements, contracts, licenses, leases or documents of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement that are not described or referred to therein and filed as required; (xv) To the best knowledge of such counsel, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character which are required to be disclosed in the Registration Statement or the Prospectus by the Securities Act or the applicable Rules and Regulations, other than those described therein; (xvi) To the best knowledge of such counsel, neither the Company nor any of its subsidiaries is presently in breach of, or in default under, any bond, debenture, note or other evidence of indebtedness or any contract, indenture, mortgage, deed of trust, loan agreement, lease, license or, without limitation, other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of their properties are bound that, individually or in the aggregate, is material to the business, properties, condition (financial or otherwise), prospects or results of operations or prospects of the Company and its Subsidiary taken as a whole; and 36 (xvii) To the best knowledge of such counsel, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to any securities of the Company. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives, but expresses no such opinion thereon, of the Company, the independent public accountants of the Company, the Representatives and counsel to the Underwriters, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although they have not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that caused them to believe that, at the time the Registration Statement became effective, the Registration Statement (except as to financial statement, financial data and supporting schedules contained therein, as to which such counsel need express no comment or opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or at the Closing Date or any later date on which the Option Stock is to be purchased, as the case may be, the Prospectus contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 37 EX-4.1 3 WARRANT AGREEMENT THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, (ii) THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR (iii) THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT. October ___, 1995 CERADYNE, INC. COMMON STOCK PURCHASE WARRANT _________ Shares Void after October ___, 2000 1. Number and Price of Shares Subject to Warrant. In connection with the --------------------------------------------- of public offering of Common Stock (the "Offering") of Ceradyne, Inc. (the "Company") and subject to the terms and conditions of this Warrant, [Van Kasper & Company\Cruttenden Roth Incorporated] or its permitted transferees (each a "Holder") is entitled to purchase from the Company, at any time after the date hereof and on or before October ___, 2000, up to ___________ shares (which number of shares is subject to adjustment as described below) of fully paid and non-assessable Common Stock of the Company (the "Shares"). Subject to adjustments for any stock splits, reverse stock splits, stock dividends, recapitalization or reclassification, the purchase price of one share of Common Stock shall be equal to $_____ [120% of the per share price to the public]. The purchase price of one share of Common Stock payable from time to time upon the exercise of this Warrant (whether such price be the price specified above or an adjusted price determined as hereinafter provided) is referred to herein as the "Warrant Price." 2. Adjustments. The number of Shares issuable upon the exercise of this ----------- Warrant and the exercise price thereof shall be subject to adjustment from time to time, and the Company agrees to provide notice upon the happening of certain events, as follows: (a) Merger, Sale of Assets, etc. If any capital reorganization of the ---------------------------- capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Shares, then, as a condition of such reorganization, 1 reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the holder hereof shall thereafter have the right to purchase and receive (in lieu of the Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby) such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding Shares equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby. In any such case, appropriate provision shall be made with respect to the rights and interests of Holder to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Warrant Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be possible, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company will not effect any such consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation (if other that the Company) resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. (b) Reclassification, etc. If the Company at any time shall, by ---------------------- subdivision, combination or reclassification of securities or otherwise, change any of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change. If shares of the class of the Company's stock for which this Warrant is being exercised are subdivided or combined into a greater or smaller number of shares of stock, the Warrant Price shall be proportionately reduced in the case of subdivision of shares or proportionately increased in the case of combination of shares, in both cases by the ratio which the total number of shares of such class of stock to be outstanding immediately after such event bears to the total number of shares of such class of stock outstanding immediately prior to such event. (c) Adjustment for Dividends in Stock. In case at any time or from time to --------------------------------- time on or after the date hereof the holders of the shares of the Company's Common Stock (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor, other or additional stock or securities (or any rights or options to subscribe for or purchase any of the foregoing) of the Company by way of dividend, then and in each case, the holder of this Warrant shall, upon the exercise hereof, be entitled to receive, in addition to the number of Shares receivable thereupon, and without payment of any additional consideration therefor, the amount of such other or additional stock of the Company which such holder would hold on the date of such exercise had it been the holder of record of such Shares on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock receivable by it as 2 aforesaid during such period, giving effect to all adjustments called for during such period by paragraph (c) of this Section 2. 3. No Shareholder Rights. This Warrant shall not entitle Holder to any of --------------------- the rights of a shareholder of the Company, except that Holder shall be entitled to receive copies of such annual and periodic reports and other communications as the Company sends to all of its shareholders. 4. Reservation of Stock. The Company covenants that during the period -------------------- this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Shares upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Shares upon the exercise of this Warrant. 5. Exercise and Conversion of Warrant. ---------------------------------- (a) This Warrant may be exercised by Holder or its permitted assigns, in whole or in part, by delivery of the Notice of Exercise in the form attached hereto as Attachment 1 and surrender of this Warrant at the principal office of ------------ the Company, accompanied by payment in full of the Warrant Price as described above. Upon partial exercise hereof, a new warrant or warrants containing the same date and provisions as this Warrant shall be issued by the Company to the registered holder for the number of shares of Common Stock with respect to which this Warrant shall not have been exercised. (b) Notwithstanding anything to the contrary contained in this Section 5, Holder may elect to receive Shares on a "net exercise" basis in an amount equal to the value of this Warrant by delivery of the Notice of Conversion in the form attached hereto as Attachment 2 and surrender of this Warrant at the ------------ principal office of the Company, in which event the Company shall issue to Holder a number of Shares computed using the following formula: (P)(Y)(A-B) X = ----------- A Where: X = the number of Shares to be issued to Holder. P = the portion of the Warrant being exercised. Y = the number of Shares issuable upon exercise of this Warrant. A = the Fair Market Value of one Share. B = Warrant Price. 3 (c) As used herein, the Fair Market Value of the Shares shall mean with respect to each Share the average of the closing prices of the Company's Common Stock sold on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted on the Nasdaq National Market as of 4:00 p.m., New York City time, or, if on any day the Common Stock is not quoted on the Nasdaq National Market, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of five days consisting of the day as of which the current fair market value of the Shares is being determined and the four consecutive business days prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted on the Nasdaq National Market or the over-the-counter market, the current fair market value of a Share shall be the highest price per share which the Company could obtain from a willing buyer (other than a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the current Fair Market Value of a Share shall be deemed to be the value received by the holders of the Company's Common Stock for each share of Common Stock in such merger, acquisition or other consolidation. (d) This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Shares issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable on or after such date, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of full Shares issuable upon such exercise, together with cash in lieu of any fraction of a Share. 6. Transfer of Warrant. This Warrant and all rights hereunder may be ------------------- transferred, in whole or in part, provided that any such transfer is in compliance with the legend appearing on the first page hereof and the transferee delivers a duly executed copy of Attachment 4; provided, however, for a period of one year from the effective date of the Offering, the Warrant may not be sold, transferred, assigned or hypothecated except to officers or partners of Holder and members of the selling group of the Offering and their officers and partners; and, provided further that any transferee other than an officer or partner of Holder must acquire the lesser of the right to acquire (i) 10,000 Shares or (ii) all of the Shares issuable upon exercise of this Warrant. 7. Compliance with Securities Laws. ------------------------------- (a) Holder represents and agrees that this Warrant is being purchased only for investment, for Holder's own account, and without any present intention to sell or distribute the Warrant or the Shares, other than a distribution to certain employees of Holder 4 who agree in writing to be bound by the terms of this Warrant to the same extent as Holder. Holder further acknowledges that the Shares will not be issued pursuant to the exercise of this Warrant unless the exercise of this Warrant and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Act and other federal and state securities laws and regulations and the requirements of any stock exchange or other system upon which the Shares may then be listed. (b) Holder acknowledges and agrees that this Warrant and the Shares (collectively, the "Securities") have not been registered under the Act and accordingly will not be transferrable except as permitted under the various exemptions contained in the Act, or upon satisfaction of the registration and prospectus delivery requirements of the Act. Therefore, the Securities must be held indefinitely unless they are subsequently registered under the Act, or an exemption from such registration is available. Holder understands that unless the Shares are registered under the Act the certificate evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or unless the Company receives an opinion of counsel reasonably satisfactory to the Company that such registration is not required. Holder is aware of the adoption of Rule 144 by the Securities and Exchange Commission and that at the time Holder wishes to sell the Securities, the Company may not be satisfying the current public information requirements of Rule 144 and, in such case, Holder would be precluded from selling the Securities under Rule 144. Holder understands that a stop transfer instruction will be in effect with respect to transfer of Securities inconsistent with the requirements of all applicable securities laws. 8. Registration Rights. Holder shall be entitled to the registration ------------------- rights set forth on Attachment 3 to this Warrant. ------------ 9. Miscellaneous. This Warrant shall be governed by the laws of the ------------- State of California. The headings in this Warrant are for purposes of convenience and reference only, and shall not be deemed to constitute a part hereof. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the Company and the registered Holder hereof. All notices and other communications from the Company to Holder shall be mailed by first-class registered or certified mail, postage prepaid, to the address furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address to the Company in writing. ISSUED effective the ___ day of October, 1995. CERADYNE, INC., a Delaware Corporation By: --------------------------------- Title: ------------------------------ 5 Attachment 1 ------------ NOTICE OF EXERCISE TO: CERADYNE, INC. 1. The undersigned hereby elects to purchase ____________________________ shares of the Common Stock of Ceradyne, Inc., pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. 2. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ------------------------------------------ (Name) ------------------------------------------ (Address) ------------------------------------------ (Tax I.D. Number) ________________________________ Name of Warrant Holder Date:___________________________ By:_____________________________ Title:__________________________ 6 Attachment 2 ------------ NOTICE OF CONVERSION TO: CERADYNE, INC. 1. The undersigned hereby elects to acquire ____________________________ shares of the Common Stock of Ceradyne, Inc., pursuant to the terms of the attached Warrant, by conversion of ________ percent (___%) of the Warrant. 2. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ------------------------------------------ (Name) ------------------------------------------ (Address) ------------------------------------------ (Tax I.D. Number) ________________________________ Name of Warrant Holder Date:___________________________ By:_____________________________ Title:__________________________ 7 ATTACHMENT 3 ------------ STATEMENT OF REGISTRATION RIGHTS -------------------------------- 1. Definitions. For purpose of the Warrant to which this Statement of ----------- Registration Rights is attached as Attachment 3: ------------ (a) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means the shares of Common Stock issued or issuable upon exercise of the Warrant; (c) The term "Holder" means the original holder of the Warrant and any permitted transferee of the Warrant to the extent such persons are the holders of Registrable Securities; (d) The term "Form S-3" means such form under the Act as in effect on the date hereof, or any registration form under the Act subsequently adopted by the Securities and Exchange Commission (the "SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC; and (e) The term "Warrant" means the original Warrants issued in connection with the Offering, as such term is defined in the Warrant, and all Warrants issued as a result of the transfer of such original Warrants. 2. Company Registration. If (but without any obligation to do so) the -------------------- Company proposes at any time before October ___, 2002 to register (including for this purpose a registration effected by the Company for shareholders other than Holder) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give Holder written notice of such registration. Upon the written request of Holder given within 15 days after mailing of such notice by the Company, the Company shall, subject to the provisions of Section 8 hereof and Section 5 of the Warrant, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 3. Demand Registration. In case the Company shall, at any time after ------------------- October __, 1996 and before October __, 2000, receive from Holders holding 40% or more of the outstanding Registrable Securities a written request that the Company effect a 8 registration on Form S-3 (or any successor forms) and any related qualification or compliance with respect to all or a part of the Registrable Securities (which registration shall at the election of Holder either be for a registration for a primary issuance of the Shares upon the exercise of the Warrant or the resale of the Shares previously issued upon exercise of the Warrant at the election of Holder) owned by such Holder, the Company will promptly notify each other Holder (if any) of such request and will: (a) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of a Holder's Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other holder of registration rights joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, -------- however, that the Company shall not be obligated to effect more than one such - ------- registration, qualification or compliance, pursuant to this Section 3 and the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 3: (1) if the Company shall furnish to Holder a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration to be effected at such time, in which event the Company shall have the right to defer the filing of the registration statement for a period of not more than 90 days after receipt of the request of Holder under this Section 3; provided, -------- however, that the Company shall not utilize this right more than once in any 12 - ------- month period; or (2) in any jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; and, (b) subject to the foregoing, file a registration statement covering the Registrable Securities and other securities so requested to be registered promptly after receipt of the request or requests of Holder, and in any event within 45 days of receipt of such request. 4. Obligation of the Company. Subject to the terms of the Warrant, in ------------------------- the event that the Company is to effect the registration of any Registrable Securities pursuant to Section 2 or 3 hereof, the Company shall promptly: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the holders of a majority of the securities registered thereunder, keep such registration statement effective for up to 120 days, or such shorter period as is required to dispose of all securities covered by such registration statement. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration 9 statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to Holder such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by Holder. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by Holder, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions or to agree to any restrictions as to the conduct of its business in the ordinary course thereof. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Holder shall also enter into and perform its obligations under such underwriting agreement, including furnishing an opinion of counsel for such Holder if requested by the managing underwriter. (f) Notify Holder at any time when a prospectus relating to Registrable Securities of Holder covered by such registration statement is required to be delivered under the Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. (g) Furnish, at the request of Holder, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to the Warrant, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to Holder and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to Holder. 5. Availability of Rule 144. Notwithstanding anything in the Warrant or ------------------------ this Statement of Registration Rights to the contrary, the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to Section 2 or 3, if application of Rule 144 would allow Holder requesting a registration under Section 2 or 3 to dispose of the Registrable Securities for which a registration is demanded within a single 90-day period. 10 6. Furnish Information. It shall be a condition precedent to the ------------------- obligations of the Company to take any action pursuant to the Warrant that the selling Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by Holder, and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 7. Expenses. -------- (a) Company Registration. The Company shall bear and pay all expenses -------------------- other than underwriting discounts and commissions incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 2 hereof for Holder, including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto, and the cost of any reasonable fees or disbursements of counsel for Holder. (b) Demand Registration. The Holder(s) participating in a ------------------- registration pursuant to Section 3 shall bear and pay all expenses incurred in connection with such registration, including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto, but excluding the cost of any reasonable fees or disbursements of counsel to the Company, which shall be the responsibility of the Holder. 8. Underwriting Requirements. In connection with any registrations in ------------------------- which Registrable Securities have a right to be included pursuant to Section 2 hereof and which involves an underwriting of securities being issued by the Company, the Company shall not be required, under Section 2 hereof, to include any of Holder's securities in such underwriting unless Holder accepts the terms of the underwriting as agreed upon between the Company and the underwriters selected by it, and then only in such quantity as will not, in the opinion of the underwriters, jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters reasonably believe compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters believe will not jeopardize the success of the offering, the securities so included to be apportioned pro rata among the selling Holder and other shareholders holding contractual registration rights according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by Holder and each other selling shareholder. In the event of an underwritten offering pursuant to Section 3 hereof in which Ford Motor Company ("Ford") elects to participate pursuant to the registration rights previously granted by the Company to Ford, and in connection therewith the underwriters reasonably believe that the total amount of securities, including Registrable Securities, requested by the selling Holder and Ford to be included in such offering exceeds the amount that is compatible with the success of the offering, then the securities that may be included in such offering shall be apportioned among the selling Holder and Ford in the manner set forth in the preceding sentence. 11 9. Delay of Registration. Holder shall have no right to obtain or seek --------------------- an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of the Warrant. 10. Indemnification. In the event any Registrable Securities are included --------------- in a registration statement filed by the Company: (a) To the extent permitted by law, the Company will indemnify and hold harmless Holder, its officers and directors, any underwriter (as defined in the Act) for Holder and each person, if any, who controls Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) asserted by a third party to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation of the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will reimburse Holder, any of its officers or directors, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, -------- ------- that the indemnity agreement contained in this Section 10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, underwriter or controlling person. (b) To the extent permitted by law, Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company with the meaning of the Act, any underwriter and any other shareholder selling securities in such registration statement or any of its directors or officers or any person who controls such shareholder, against any losses, claims, damages, or liabilities (joint or several) asserted by a third party to which the Company or any such director, officer, controlling person, or underwriter or controlling person, or other such shareholder or director, officer or controlling person may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by Holder 12 expressly for use in connection with such registration; and Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or controlling person, other shareholder, officer, director, or controlling person, as incurred, in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the obligations of Holder -------- ------- hereunder shall be limited to an amount equal to the net proceeds (equal to the offering price less the exercise price, expenses and underwriting commissions and discounts) to such Holder of Shares sold as contemplated herein. Notwithstanding the foregoing, the indemnity agreement contained in this Section 10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of Holder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying part under this Section 10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall -------- ------- have the right to retain its own counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel representing the indemnified parties who are parties to such action). The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 10. 11. Reports Under the 1934 Act. With a view to making available to Holder -------------------------- the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company will endeavor to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144; (b) take such action as is necessary to enable Holder to utilize Form S-3 for the sale of its Registrable Securities; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to Holder, so long as Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the 13 reporting requirements of SEC Rule 144, the Act and the 1934 Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 12. Assignment of Registration Rights. The rights to cause the Company to --------------------------------- register Registrable Securities pursuant to the Warrant may be assigned by Holder to a permitted transferee or assignee of the Warrant or of at least 10,000 Shares, provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 14 ATTACHMENT 4 ------------ STATEMENT OF HOLDER ------------------- The undersigned, represents and warrants to Ceradyne, Inc., a Delaware corporation that the representations and warranties contained in Section 7 of the Common Stock Purchase Warrant to which this Statement is attached are true and correct. The undersigned also agrees to be bound by the terms of Section 10(b) of Attachment 3 to such Warrant. ________________________________ Print Name of Holder By:___________________________ _____________________________ Print Name and Title Dated:__________________________ 15 EX-5.1 4 OPINION OF STRADLING Letterhead of Stradling, Yocca, Carlson & Rauth October 23, 1995 Ceradyne, Inc. 3169 Red Hill Avenue Costa Mesa, California 92626 Re: Registration Statement on Form S-1 -- Registration No. 33-62345 Ladies and Gentlemen: At your request, we have examined Registration Statement on Form S-1, Registration No. 33-62345, filed by Ceradyne, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission on September 1, 1995 (as amended, the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 1,380,000 shares of Common Stock, $.01 par value per share, of the Company (the "Common Stock"). Said shares of Common Stock, which include 180,000 shares which will be subject to an over-allotment option to be granted to the underwriters, are to be sold to the underwriters as described in the Registration Statement for sale to the public. As your counsel in connection with this transaction, we have examined the proceedings taken and are familiar with the proceedings proposed to be taken by you in connection with the authorization, issuance and sale of the shares of Common Stock. Based on the foregoing, and subject to compliance with applicable state securities laws, it is our opinion that the 1,380,000 shares of Common Stock, when issued and sold in the manner described in the Registration Statement, will be legally issued, fully paid and nonassessable. Ceradyne, Inc. October 23, 1995 Page 2 We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus which is a part of the Registration Statement. Very truly yours, STRADLING, YOCCA, CARLSON & RAUTH EX-21.1 5 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY Ceradyne Advanced Products, Inc. EX-23.2 6 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports dated March 6, 1995 included in or made a part of this registration on Form S-1. ARTHUR ANDERSEN LLP Orange County, California October 20, 1995 -----END PRIVACY-ENHANCED MESSAGE-----