Mail Stop 7010
November 22, 2005
James L. Green
President and Chief Executive Officer
PECO II, Inc.
1376 State Route 598
Galion, Ohio 44833
Re: PECO II, Inc.
Preliminary Schedule 14A
Filed on November 4, 2005
File No. 0-31283
Dear Mr. Green:
We have limited our review of your filing to those issues we
have addressed on our comments. Where indicated, we think you
should
revise your documents in response to these comments. If you
disagree, we will consider your explanation as to why our comment
is
inapplicable or a revision is unnecessary. Please be as detailed
as
necessary in your explanation. In some of our comments, we may
ask
you to provide us with information so we may better understand
your
disclosure. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. Please include a section describing interests of certain
persons
in the forepart of the document describing the benefits that
officers
and directors receive the transaction and any conflicts of
interest.
We note, for example, that the Voting Agreement provides for board
designees. Also provide this information in the Summary section.
See
Item 5 of Schedule 14A.
2. In addition, under the Voting Agreement, Delta has agreed to
vote
its shares a certain way. It is not clear, since the asset
purchase
agreement has not been completed yet, whether Delta already owned
shares of your stock or whether the stock ownership is a result of
the shares to be issued in the asset purchase agreement. Please
clarify and provide appropriate disclosure regarding the resulting
conflicts of interest.
3. Please provide information about Delta, as required by Item
14(c)(2) of Schedule 14A.
4. We note that you have 50 million shares authorized, that you
will
have approximately 40 million issued and outstanding after the
issuance of the warrant shares, and that you have shares reserved
under your stock option plans. Please advise us if you also plan
to
seek shareholder approval to amend your articles of incorporation
to
increase the amount of shares authorized.
5. Please attach all material agreements to the transaction to the
proxy statement, such as the voting agreement. Also include the
full
text of the Ohio Control Share Acquisition Act. All material
agreements should also be filed with your Exchange Act reports or
advise us where you have filed these agreements.
6. It is not clear from the disclosure what assets you will
purchase
from Delta. Please describe in more detail and quantify if
possible
what you will acquire (including the nature of the assets and the
business conducted pursuant to these assets) so that investors are
aware of how the company or its business will change as a result
of
the acquisition. Briefly describe how this acquisition relates to
or
complements your current business.
Summary, page 4
7. Please quantify the estimated purchase price for the
transaction.
8. Please disclose whether this transaction will cause a change of
control. If so, describe any other material triggering events to
the
company, such as severance payments or acceleration of option
vesting.
9. You describe mostly positive, but not negative, aspects of the
transaction with respect to the shareholders. Please revise to
provide a more balanced summary. For example, discuss the dilutive
effects to existing shareholders and the effect of waiving the
unaffiliated shareholder protections afforded by the Ohio statute.
10. Ensure that the Summary includes the key terms of the
transaction
from an investor`s point of view. For example, disclose the
changes
to the board. Consider whether other aspects of your transaction
are
material to shareholders and should be discussed in the Summary.
Conditions to the Transactions Contemplated by the Asset Purchase
Agreement and Expected Timing, page 6
11. Clarify that you will recirculate a new proxy statement and
resolicit the vote if material conditions to the merger are
waived.
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information with Delta, page 17
12. Please tell us whether the acquisition of Delta Products
Corporation represents the acquisition of a business or of assets
based on the guidance in Rule 11-01(d) of Regulation S-X. Please
also tell us the facts and circumstances that you considered in
determining whether the acquisition constituted the purchase of a
business or assets based on this guidance. Please bear in mind,
that
the acquisition of a product line constitutes the acquisition of a
business under the broad guidelines of Rule 11-01(d) of Regulation
S-
X. In the event that you determine that you have acquired a
business, please file three years of historical financial
statements
and interim financial statements for Delta Products Corporation.
Please refer to Item 14 of the Proxy Rules.
13. Please tell us whether the acquisition of Delta Products
Corporation represents the acquisition of a business or of assets
under generally accepted accounting principles based on the
guidance
in EITF 98-3. Please also tell us the facts and circumstances
that
you considered in determining whether the acquisition constituted
the
purchase of a business or assets based on this guidance. In the
event that you determine that you have acquired assets as opposed
to
a business, please tell us why you have allocated a portion of the
purchase price to goodwill given the guidance in paragraph 9 of
SFAS
142 that goodwill does not arise from the purchase of a group of
assets.
Background of the Transaction, page 22
14. Please disclose the background and discussions relating to the
material ancillary agreements, such as the voting, support, and
supply agreements.
15. Please quantify the number of shares and the percent of the
total
shares outstanding that represent the shareholders that are party
to
the Voting Agreement. Please disclose the number of shareholders
and
the group or class of shareholders whose consent you solicited.
Our Reasons for the Transactions Contemplated by the Asset
Purchase
Agreement, page 23
16. Please discuss and quantify the risks that the board
considered
in specific terms and for each of the factors discussed, disclose
how
each factor either supported or did not support your decision to
approve the merger. For example, you state that one of the
factors
is "the presentations of our management regarding our business,
operations, management, financial condition, earnings and
prospects,"
but you do not explain how this information impacted the board`s
decision.
17. Please describe whether the Board considered the dilutive
effect
to shareholders and any potential change of control.
Opinion of Our Financial Advisor, page 25
18. Disclose that the financial advisor has consented to use of
the
opinion in the document.
19. In the first paragraph, you disclose that GBQ rendered an
opinion
to the board that the transaction was "fair to them." Please
clarify
whether you mean the board or the shareholders.
20. In the last bullet at the top of please briefly describe the
nature of the management-prepared documents, lists and schedules.
21. In the first full paragraph n page 26, please either disclose
the
"other studies, analyses and investigations" or delete the
reference.
22. Disclose whether GBQ considered the issuance of additional
shares
and the effect on existing shareholders. If not, please disclose
how
this will affect the fairness opinion.
23. Please supplementally provide to us the entire report of GBQ,
including the financial tables and analyses.
Discounted Cash Flow Method, page 26
24. Please be more specific about you mean by capital expenditure
forecasts of the "telecommunications industry." Explain what
sectors
of the industry or types of companies you reviewed.
Value of Consideration to be Paid by PECO II, page 28
25. It is not clear what the statement "This value is in the lower
range of the fair consideration we will receive, being $7.9
million
to $13.6 million." Disclose what "fair consideration" means.
What
is the value of the consideration you will receive in the
transaction? Why is the range of $7.9 million to $13.6 million so
large?
Amendment to the Amended and Restated Code of Regulations of PECO
II,
Inc. to Opt Out of the Ohio Control Share Acquisition Act, page 39
26. Please quantify the amount and percentage of shares that are
deemed interested shares in connection with the transaction.
27. You state that in this instance, the Ohio Control Share
Acquisition Act is not beneficial to the interests of the company.
Please explain why and clarify whether it is beneficial to the
unaffiliated shareholders. Also balance this disclosure by
explaining
the purpose and the benefits of this Act to shareholders. Describe
the benefits and detriments of this amendment to the company and
shareholders for future transactions.
28. Please clarify that you are only adding Section X or mark the
language in your code that you are proposing to amend.
Proposals 2 and 3, page 41
29. Please disclose the shares you currently have authorized and
issued and discuss the potential dilutive effects of the proposals
to
existing shareholders.
30. Please clarify whether the warrant is immediately exercisable.
Where You Can Find More Information, page 45
31. Please revise this section and add an appendix to include your
quarterly report for the quarter ended September 30, 2005.
Please respond to these comments by filing an amendment to
your
filing and providing the supplemental information requested.
Please
provide us with a supplemental response that addresses each of our
comments and notes the location of any corresponding revisions
made
in your filing. Please also note the location of any material
changes made for reasons other than responding to our comments.
Please file your supplemental response on EDGAR as a
correspondence
file. We may raise additional comments after we review your
responses and amendment.
To expedite our review, you may wish to provide complete
packages to each of the persons named below. Each package should
include a copy of your response letter and any supplemental
information, as well as the amended filing, marked to indicate any
changes.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require.
Since the company and its management are in possession of all
facts
relating to a company`s disclosure, they are responsible for the
accuracy and adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in their filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
Please direct questions regarding accounting comments to Gus
Rodriguez at (202) 551-3752, or in his absence, to Scott Watkinson
at
(202) 551-3741. Please direct all other questions to Brigitte
Lippmann at (202) 551-3713. You may also call the undersigned
Branch
Chief at (202) 551-3767, who supervised the review of your filing.
Sincerely,
Jennifer Hardy
Branch Chief
cc: Mark B. Koogler, Esq.
Porter, Wright, Morris & Arthur LLP
41 South High Street
Columbus, Ohio 43215-6194
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James L. Green
PECO II, Inc.
November 22, 2005
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0404
DIVISION OF
CORPORATION FINANCE