SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant Filed by a party other
than the Registrant Check the appropriate box:
x Preliminary proxy statement
Confidential, for Use of the Commission
Only (as specified by Rule 14a-6(e)(2))
Definitive proxy statement
Definitive additional materials
Soliciting material pursuant to Rule 14a-
11(c) or Rule 14a-12
Torotel, Inc.
(Name of Registrant
as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
No fee required. X
Fee computed on table
below per Exchange Act Rules 14a-6(i)(1) and
0-11
(1)Title of each class of securities to which
transaction applies: Common Stock, $.50
par value per share; Class A $1.00
Preferred Stock, $.50 par value per share
(2)Aggregate number of securities to which
transactions applies: 1,800,000 shares of
Common Stock and 2,500,000 shares of
Preferred Stock
(3)Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule
0-11: $1.94 per share of Common Stock and
$1.00 per share of Preferred Stock
(4)Proposed maximum aggregate value of
transaction: $5,992,000
(5)Total fee paid: $1,198.
X Fee paid previously with preliminary
materials.
Check box if any part of the fee is offset
as provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting fee
was paid previously. Identify the previous filing
by registration statement number, or the Form or
Schedule and the date of its filing.
(1)Amount previously paid:
(2)Form, Schedule or Registration Statement
No.:
(3)Filing party:
(4)Date filed:
TOROTEL, INC.
13402 South 71 Highway
Grandview, Missouri 64030
March __, 1999
Dear Shareholder:
You are cordially invited to attend the annual
meeting of the shareholders of Torotel, Inc., a
Missouri corporation (the Corporation), to be held
at _:00 p.m. local time on ________, April __,
1999, in the [to be announced], Kansas City,
Missouri, to transact business as set forth in the
formal notice that follows.
In particular, I would like to call your attention
to the Agreement and Plan of Merger (the
Agreement) that the Corporation has entered into
with Electronika, Inc., a California
corporation(Electronika). The Agreement is
summarized in the accompanying Proxy Statement and
the full text of the Agreement is attached thereto
as Exhibit A. At the annual meeting, the
shareholders of the Corporation are being asked to
approve a proposal whereby, in connection with the
consummation of the Agreement, (i) the Corporation
would issue 1,800,000 shares of its common stock
to the shareholders of Electronika, and (ii) the
Corporation's Articles of Incorporation would be
amended to create a new class of preferred stock,
which also would be issued to the shareholders of
Electronika.
YOUR VOTE IS IMPORTANT. Whether or not you expect
to attend the annual meeting, please sign and date
the accompanying Proxy and return it promptly in
the enclosed postage paid envelope. If you decide
to attend the annual meeting, you may revoke your
Proxy and vote your shares in person.
As always, we appreciate your loyalty and support
as a shareholder of the Corporation.
Sincerely,
Dale H. Sizemore,
Jr.Chairman and Chief Executive
Officer
TOROTEL, INC.NOTICE OF ANNUAL
MEETING OF SHAREHOLDERS
To Be Held April__, 1999
TO THE SHAREHOLDERS OF TOROTEL, INC.:
NOTICE is hereby given that the annual meeting of
the shareholders of Torotel, Inc., a Missouri
corporation (the Corporation), will be held at
_:00 p.m. local time on ________, April __,
1999, at [to be announced], Kansas City, Missouri
(the Meeting), for the following purposes:
1. In connection with the merger (the Merger)
of a subsidiary of the Corporation and
Electronika, Inc., a California corporation
(Electronika):
(a) To approve the issuance of 1,800,000
shares of the Corporation's common stock to the
shareholders of Electronika upon the consummation
of the Merger; and
(b) To approve an amendment to the
Corporation's Articles of Incorporation creating a
new class of preferred stock, with 2,500,000
shares of such preferred stock to be issued to the
shareholders of Electronika upon the consummation
of the Merger.
2. To elect five members of the Board of
Directors of the Corporation (if Proposal One is
approved, the Board of Directors of the
Corporation will appoint two additional directors
designated by the shareholders of Electronika, as
more fully discussed in the accompanying Proxy
Statement); and
3. To transact such other business as may
properly come before the annual meeting or any
postponement or adjournment thereof.
Shareholders of record at the close of business on
February __, 1999 will be entitled to receive
notice of and to vote at the Meeting. The
accompanying Proxy is solicited by the Board of
Directors. All of the above matters are more
fully described in the accompanying Proxy
Statement, into which this Notice is incorporated
by reference.
Shareholders are cordially invited to attend the
Meeting in person. WHETHER OR NOT YOU EXPECT TO
ATTEND THE MEETING, PLEASE SIGN AND DATE THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE PAID ENVELOPE. IF YOU DECIDE TO
ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND
VOTE YOUR SHARES IN PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
H. James Serrone
Secretary of Torotel, Inc.
March __, 1999
TOROTEL, INC.
PROXY STATEMENT
TABLE OF CONTENTS
Page
GENERAL INFORMATION
Security Holders Entitled to Vote
Solicitation
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED
UPON
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
PROPOSAL ONE: THE SHARE ISSUANCE AND THE ARTICLES
AMENDMENT
Summary of the Merger
The Merger.
Merger Consideration
The Escrow; Distribution of the
Preferred Shares
Net Worth Adjustments
Closing
Employment of Mr. Caloyeras
Representations and Warranties
Exclusive Dealing
Voting Trust
Control; Certain Restricted Actions
Due Diligence Period
Interim Operations
Conditions to Closing
Regulatory Compliance
Mandatory Termination
Restrictions on Transfer on the
Electronika
Shareholders' Common Stock
Electronika Directors
Indemnification; Insurance
Accounting Treatment
Certain Federal Income Tax Consequences
Interests of Certain Persons in the
Merger
Information Regarding Electronika
Description of Electronika's Business
Market for Electronika Common Equity and
Related Stockholder Matters
Discussion and Analysis of Electronika's
Financial Condition and Results of
Operations
Financial Information
Information Regarding the Corporation
Special Factors
Risk Factors
Background of the Merger
Reasons for the Merger
Board Approval and Recommendation
Fairness Opinion
The Share Issuance
The Articles Amendment
Text of the Amendment to the
Corporation's
Articles of Incorporation
Rights of Holders of Preferred Shares
General Effect Upon the Rights of
Existing
Shareholders
Required Vote; Board Recommendation
PROPOSAL TWO: ELECTION OF THE BOARD OF DIRECTORS
Biographical Information Regarding the
Directors and Executive Officers
Board Meetings and Director Compensation
Committees
Cumulative Voting
Board Recommendation
Section 16(a) Beneficial Ownership
Reporting
Compliance
Executive Officer Compensation
Option Grants Table
Aggregate Option Exercises and Fiscal
Year-
End Option Value Table
Certain Relationships and Legal
Proceedings
OTHER MATTERS
Other Business
Availability of Accountants
Deadline for Receipt of Shareholders'
Proposals
General
TOROTEL INC.
13402 South 71 Highway
Grandview, Missouri 64030
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
To Be Held, April __, 1999
GENERAL INFORMATION
Security Holders Entitled to Vote
Holders of shares of common stock, par value $.50
per share (the Common Stock), of Torotel, Inc., a
Missouri corporation (the Corporation), of record
at the close of business on March __, 1999 (the
Shareholders), will be entitled to vote at the
annual meeting of the Shareholders to be held at
_:00 p.m. local time on ________, April __,
1999, at [to be announced], Kansas City, Missouri,
and any postponement or adjournment thereof (the
Meeting). The Corporation's principal executive
offices are located at 13402 South 71 Highway,
Grandview, Missouri 64030, and its telephone
number is (816) 761-6314.
This Proxy Statement, together with the Notice of
Annual Meeting, the enclosed Proxy, and the
accompanying 1998 Annual Report to Shareholders,
were initially distributed to the Shareholders on
or about March __, 1999.
If the enclosed Proxy is properly executed and
returned prior to voting at the Meeting, the
shares represented thereby will be voted in
accordance with any specifications made therein.
In the absence of instructions, the shares will be
voted as follows: (i) in connection with the
merger of a subsidiary of the Corporation and
Electronika, Inc., a California
corporation(Electronika), IN FAVOR of
(a) the issuance of 1,800,000 shares of the Common
Stock to the shareholders of Electronika (the
Share Issuance) and (b) the amendment to the
Corporation's Articles of Incorporation creating a
new class of preferred stock to be issued to the
shareholders of Electronika (the Articles
Amendment), each as more fully described in the
section herein entitled Proposal One ;
and (ii) FOR the nominees to the Board
of Directors of the Corporation (the Directors,
or the Board of Directors) in the election of
Directors, as more fully described in the section
herein entitled Proposal Two.
A majority of the outstanding shares of Common Stock
entitled to be voted at the Meeting,
represented in person or by Proxy, is necessary to
constitute a quorum to transact business at the
Meeting. If a quorum is present, (i) and a
majority of the outstanding shares of Common Stock
of the Corporation are voted IN FAVOR of
Proposal One, then such proposal shall be approved
by the Shareholders of the Corporation, and (ii)
the five nominees for Director receiving the
greatest number of votes at the Meeting will be
elected to the Board of Directors. Abstentions
and broker non-votes (which occur if a broker or
other nominee does not have discretionary
authority and has not received voting instructions
from the beneficial owner with respect to a
particular item) are counted for purposes of
determining the presence or absence of a quorum
for the transaction of business. Abstentions are
counted in tabulations of the votes cast on
proposals presented to the shareholders and have
the same legal effect as a vote against a
particular proposal. Broker non-votes are not
counted for purposes of determining whether a
proposal has been approved by the requisite
shareholder vote. The Shareholders will not have
dissenters' rights of appraisal with respect to
any of the actions to be taken at the Meeting.
Shareholders who execute Proxies retain the right
to revoke them at any time before they are voted
by notifying the Secretary of the Corporation in
writing, by delivering a duly authorized Proxy
bearing a later date, or by attending the Meeting
and voting in person.
Solicitation
The accompanying Proxy is being solicited by and
on behalf of the Board of Directors. The
Corporation estimates that the total amount to be
spent in solicitation of the Proxies will be
approximately $2,000. The entire cost of this
solicitation will be paid by the Corporation. In
addition, the Corporation may reimburse brokerage
firms and others for their expenses in forwarding
solicitation materials regarding the Meeting to
beneficial owners. In addition to solicitation by
mail, officers and regular employees of the
Corporation may solicit proxies from Shareholders
by telephone, telegram, or personal interview.
Such persons will receive no additional
compensation for such services.
INTEREST OF CERTAIN PERSONS IN MATTERS
TO BE ACTED UPON
For information regarding the interests of the
current shareholders of Electronika and their
affiliates in the matters to be acted upon at the
Meeting, see the section below entitled
Proposal One -- Summary of the Merger -- Interests
of Certain Persons in the Merger.
VOTING SECURITIES AND PRINCIPAL
HOLDERS THEREOF
The securities entitled to be voted at the Meeting
consist of shares of Common Stock of the
Corporation. Each Shareholder is entitled one
vote per each share of Common Stock. There were
[2,811,590] shares of Common Stock issued and
outstanding (exclusive of treasury shares) at the
close of business on the record date of the
Meeting.
The close of business on February __, 1999 has
been fixed by the Board of Directors as the record
date for determining the Shareholders who will be
entitled to vote at the Meeting.
The following persons beneficially owned more than
5% of the outstanding Common Stock of the
Corporation at the close of business on the record
date of the Meeting:
Name and Address
Amt Beneficially
Percent of Beneficial Owner
Owned
of Class
Richard A. Sizemore
415,374
(a) 14.7%Linda V. Sizemore
(b) 8356 HalletLenexa, KS 66215
Gregory M. Sizemore
404,358
(b) 14.4%Julie Sizemore12735 Mohawk
CircleLeawood, KS 66209
Dale H. Sizemore
379,509
(c) 13.5%
Carol J. Sizemore
2705 W. 121st Terrace
Leawood, KS 66209
Paulette A. Durso
325,131
(d) 11.5%
James T. Durso
3917 N.E. 59th St.
Kansas City, MO 64119
Caloyeras Fam. Prtnr, L.P.
207,900
(e) 7.4%
2041 W. 139th Street
Gardena, CA 90249
Thomas E. Foster
176,600 6.3%
5506 Brite Drive
Bethesda, MD 20817
(a) Richard A. Sizemore and Linda V. Sizemore
are husband and wife. Mr. and Mrs. Sizemore's
individual direct ownerships are 140,226 and
15,666 shares, respectively. Mr. Sizemore's
indirect ownership includes (i) 58,976 shares
which are owned by Mr. Sizemore as trustee for his
children and (ii) 200,506 shares owned by Sizemore
Enterprises, a general partnership, in which Mr.
Sizemore is a general partner.
(b) Gregory M. Sizemore and Julie Sizemore are
husband and wife. Mr. and Mrs. Sizemore's
individual direct ownerships are 137,654 and
15,666 shares, respectively. Mr. Sizemore's
indirect ownership includes (i) 50,532 shares
which are owned by Mr. Sizemore as trustee for his
children and (ii) 200,506 shares owned by Sizemore
Enterprises, a general partnership, in which Mr.
Sizemore is a general partner.
(c) Dale H. Sizemore, Jr. and Carol J.
Sizemore are husband and wife Mr. and Mrs.
Sizemore's individual direct ownerships are
130,964 and 14,351 shares, respectively. Mr.
Sizemore's indirect ownership includes (i) 33,688
shares which are owned by Mr. Sizemore as trustee
for his children and (ii) 200,506 shares owned by
Sizemore Enterprises, a general partnership, in
which Mr. Sizemore is a general partner.
(d) James T. Durso and Paulette A. Durso are
husband and wife. Mr. and Mrs. Durso's individual
direct ownerships are 9,000 and 103,149 shares,
respectively. Mrs. Durso's indirect ownership
includes (i) 12,476 shares which are owned by Ms.
Durso as trustee for her children and (ii) 200,506
shares owned by Sizemore Enterprises, a general
partnership, in which Ms. Durso is a general
partner.
(e) The Caloyeras Family Partnership L.P., is
a limited partnership in which the three
shareholders of Electronika (who are siblings) are
the sole limited partners and PBC, Inc., a
California corporation, is the sole general
partner. Peter B. Caloyeras, who is the father of
the three shareholders of Electronika, is the sole
shareholder, sole director and president of PBC,
Inc. Each of the three shareholders of
Electronika owns 33% of the outstanding
partnership interests in the Caloyeras Family
Limited Partnership L.P., with PBC, Inc. owning
the remaining 1% partnership interest. The number
of shares indicated as owned by the Caloyeras
Family Partnership L.P. also includes 3,000 shares
owned individually by each of the shareholders of
Electronika.
Note: The total amount of shares of Common
Stock owned by Sizemore Enterprises is 200,506.
The general partners of Sizemore Enterprises are
Dale H. Sizemore, Jr., Paulette A. Durso, Gregory
M. Sizemore, and Richard A. Sizemore, who are
brothers and sisters. The 200,506 shares are
included in each of the general partners'
beneficial ownerships.
PROPOSAL ONE
THE SHARE ISSUANCE AND THE
ARTICLES AMENDMENT
The Corporation has entered into an Agreement and
Plan of Merger (the Merger Agreement) with
Electronika and the three shareholders of
Electronika (the Electronika Shareholders),
pursuant to which Electronika will be merged (the
Merger) with and into a wholly owned subsidiary of
the Corporation(MergerSub). The consummation of
the Merger is subject to the satisfaction of a
number of conditions, including approval of the
Share Issuance and the Articles Amendment,
discussed herein, by the Shareholders. See the
section below entitled Summary of the Merger
- -- Conditions to Closing.
SUMMARY OF THE MERGER
The following summary is qualified in its entirety
by the terms and provisions of the Merger
Agreement, which is attached hereto as a Exhibit A
and is incorporated herein by reference. All
capitalized terms not defined herein shall have
the meanings ascribed to such terms in the Merger
Agreement.
The Merger
Subject to the terms and conditions of the Merger
Agreement, and subject to the provisions of laws
of the State of California (where Electronika is
incorporated) and the State of Missouri (where
MergerSub is incorporated), at the time when the
Merger officially becomes effective (the Effective
Time), Electronika will merge with and into
MergerSub. MergerSub will continue as a wholly
owned subsidiary of the Corporation and will
continue its corporate existence following the
Merger in accordance with the Missouri Business
and General Corporation Law. Following the
Merger, MergerSub will change its name to
Electronika, Inc. and will succeed to all of the
assets, and will be subject to all of the
liabilities, of the former Electronika, which will
no longer exist as a separate corporate entity.
MergerSub, as the surviving corporation in the
Merger, is sometimes referred to in this Proxy
Statement as the Surviving Corporation.
Merger Consideration
Upon the consummation of the Merger, the
outstanding shares of capital stock of Electronika
will be converted into a total of (a) 1,800,000
newly issued shares of the Common Stock of the
Corporation and (b) 2,500,000 shares of newly
issued Class A $1.00 Preferred Stock of the
Corporation (the Preferred Shares). The Preferred
Shares, however, will not be issued directly to
the Electronika Shareholders, but, instead, will
be deposited into escrow and held in accordance
with the terms of the escrow. The Preferred
Shares will only be distributed to the Electronika
Shareholders if certain conditions are satisfied
and certain earning targets following the Merger
are reached, all as more fully described in the
section below entitled The Escrow;
Distribution of the Preferred Shares.
The Corporation's Common Stock trades on the
American Stock Exchange (the ASE), under the
symbol TTL. On July 27, 1998, the last
trading day before the public announcement
regarding the proposed Merger, the last reported
sales prices of the Common Stock on the ASE were
as follows: High -- $1.00; and Low -- $0.75. The
rights, preferences and privileges of the
Preferred Shares are described in the section
below entitled The Articles Amendment.
The Preferred Shares will not be registered under
any federal or state securities laws and will not
be publicly traded.
The consideration to be paid to the Electronika
Shareholders was determined through arm's-length
negotiations between the Corporation and
Electronika. Other than for the transactions
contemplated by the Merger Agreement, there have
been no prior transactions, and there are no
presently proposed transactions, between the
Corporation and Electronika or the Electronika
Shareholders.
The Escrow; Distribution of the Preferred Shares
The escrow will be administered pursuant to the
terms of an Escrow Agreement to be entered into
among the Corporation, the Electronika
Shareholders and an escrow agent. As more fully
described below, under the terms of the Merger
Agreement and the Escrow Agreement, the number of
Preferred Shares to be distributed to the
Electronika Shareholders will depend primarily on
the amount of earnings before interest, taxes,
depreciation and amortization(EBITDA) of the
Surviving Corporation, if any, after the
completion of the Merger. The EBITDA of the
Surviving Corporation will be measured at the end
of five separate periods, with the first period
beginning at the completion of the Merger and
ending on the last day of the fiscal year of the
Corporation immediately following the completion
of the Merger. The next three measurement periods
will be the next three successive full fiscal
years of the Corporation and the final measurement
period will be nine months of the fourth full
fiscal year after the Merger (measured as three-
fourths of the entire fiscal year).
At the end of each measurement period, the
Corporation and the Electronika Shareholders will
determine the amount of EBITDA of the Surviving
Corporation in accordance with the provisions
specified in the Merger Agreement. For each
dollar of EBITDA as finally determined by the
Corporation and the Electronika Shareholders,
there will be one Preferred Share distributed to
the Electronika Shareholders from the escrow for
that measurement period, subject to adjustment
based on the final determination of the net worth
of Electronika at the time of the Merger. This
net worth adjustment is described in the section
below entitled Net Worth Adjustments.
If there is a negative EBITDA during a particular
measurement period, no Preferred Shares will be
distributed to the Electronika Shareholders for
that measurement period, and the negative EBITDA
will carry forward to the next measurement period
and reduce, on a dollar-for-dollar basis, any
EBITDA for that next measurement period. If at
the end of the four measurement periods there are
still Preferred Shares remaining in the escrow,
those Preferred Shares will be canceled and the
Electronika Shareholders will lose all rights to
those Preferred Shares. Regardless of the actual
amount of EBITDA of the Surviving Corporation
after the Merger, in no event will the Electronika
Shareholders be entitled to receive more than the
2,500,000 Preferred Shares or be required to
return any of the shares of Common Stock issued to
them in the Merger.
Net Worth Adjustments
Electronika has represented in the Merger
Agreement that it will have a net worth
of at least $400,000 at the Effective Time of the
Merger. For purposes of this calculation,
net worth will be determined by taking the
total value of all cash, cash equivalents,
accounts receivable, notes receivable, inventory,
work in process, prepaids, machinery, equipment
and deposits and subtracting from this figure the
total amount of all liabilities of Electronika.
If on or before April 30, 1999, the Corporation
determines that Electronika's net worth was less
than $400,000, it may deliver to the Electronika
Shareholders a schedule setting forth its
calculation of Electronika's net worth. If the
Corporation does not deliver this schedule to the
Electronika Shareholders by April 30, 1999 it will
be deemed to have waived its rights to raise any
objections to Electronika's net worth at the
Effective Time. The Merger Agreement allows the
Electronika Shareholders to verify and challenge
any net worth schedule delivered by the Company
and spells out the procedures to follow if there
is any dispute over the schedule. Once
Electronika's net worth is finally agreed to by
the Corporation and the Electronika Shareholders,
any shortfall in the actual net worth and $400,000
will reduce, on a dollar-for-dollar basis, the
number of Preferred Shares to be distributed from
the escrow during a measurement period, until the
full amount of the shortfall is made up.
Conversely, if the net worth as finally determined
is more than $400,000, the number of Preferred
Shares to be distributed from the escrow will be
increased, on a dollar-for-dollar basis, by the
full amount of the excess. If there is a net
worth shortfall, and over the term of the escrow
there has not been enough EBITDA to make up for
the shortfall, the Electronika Shareholders will
be required to pay the Corporation, in cash, the
full amount of any shortfall remaining.
Closing
The Closing of the Merger will take place on the
third business day following the satisfaction or
waiver of all conditions to closing contained in
the Merger Agreement, including the approval by
the Shareholders of this Proposal One. The
Closing is expected to occur on April __, 1999.
Employment of Mr. Caloyeras
Pursuant to the Merger Agreement, following the
consummation of the Merger, Peter B. Caloyeras
will become the Chairman of the Board and Chief
Executive Officer of the Corporation and the
Surviving Corporation. The Corporation and Mr.
Caloyeras have not entered into an employment
agreement with respect to his employment, and Mr.
Caloyeras will continue to devote a portion of his
business time to his other businesses and
interests, including businesses that may market
products that are competitive with the products
manufactured by the Corporation. The Corporation
has agreed that Mr. Caloyeras will receive a
salary of least $50,000 per year during the Escrow
Period. Mr. Caloyeras is the father of the three
Electronika Shareholders and the sole shareholder,
sole director and president of the sole general
partner of Caloyeras Family Partnership L.P.,
which owns approximately 7.4% of the outstanding
Common Stock of the Corporation.
Representations and Warranties
Electronika and the Electronika Shareholders, on
the one hand, and the Corporation and MergerSub,
on the other, make various customary
representations and warranties to each other as
set forth in Articles III and IV of the Merger
Agreement. The representations and warranties
survive the Closing and continue in force and
effect until the expiration of the Escrow Period.
Therefore, if a party were to materially breach a
representation or warranty, such party would be
liable to the non-breaching parties for breach of
contract under applicable law.
Exclusive Dealing
Until the Closing, the Corporation and Electronika
have agreed to deal exclusively with each other
and have agreed not to have dealings with others
that would result in the sale of their respective
businesses, subject to the fiduciary obligations
of the respective boards of directors of the
Corporation and Electronika under applicable state
law.
Voting Trust
In connection with the Merger, various members of
the founder's family shareholders of the
Corporation (the Sizemore Family) and Mr.
Caloyeras will enter into a voting trust agreement
(the Voting Trust) whereby Mr. Caloyeras will be
granted the power to vote during the Escrow
Period, 525,165 shares of Common Stock held by the
Sizemore Family (the Sizemore Stock).
Control; Certain Restricted Actions
After giving effect to the Merger and the Voting
Trust, the Electronika Shareholders and their
affiliates will hold, or direct the voting of,
54.9% of the Corporation's outstanding Common
Stock, thus effectively resulting in a change of
control of the Corporation. However, pursuant to
the Voting Trust, at the end of the Escrow Period
the voting power associated with the Sizemore
Stock will revert to the members of the Sizemore
Family and the Electronika Shareholders will no
longer have majority control of the Corporation.
Assuming no further stock issuances by the
Corporation during such period, upon the
termination of the Voting Trust the Electronika
Shareholders and their affiliates would then own
approximately 43.5% of the outstanding shares of
Common Stock of the Corporation.
During the Escrow Period, the Electronika
Shareholders have agreed not to, without prior
Independent Approval (as that term is defined
below): (a) vote their shares of Common Stock in
favor of any action or agreement, or take any
other action, that would (i) result in a breach of
any covenant, representation or warranty or any
other obligation of Electronika under the Merger
Agreement or (ii) impede, interfere with or
discourage the intended purposes of the Merger
Agreement; (b) acquire, offer to acquire, or agree
to acquire, directly or indirectly, by purchase or
otherwise, any voting securities or direct or
indirect rights or options to acquire any voting
securities of the Corporation, other than as a
result of a stock split, stock dividend or similar
recapitalization; or (c) make or cause to be made
any proposal for any transaction between (i) the
Electronika Shareholders or any of their
affiliates and (ii) the Corporation or any of its
affiliates, including without limitation any
acquisition or disposition of assets, merger, or
other business combination, restructuring, tender
offer, exchange offer, recapitalization or similar
transaction. As used in the Merger Agreement, the
term Independent Approval means either (a) the
approval of a majority of the Board of Directors
of the Corporation who are disinterested with
respect to the matter to be acted upon or (b) if
there are less than two disinterested directors,
the approval of a majority of the outstanding
voting stock of the Corporation, excluding for
this purpose the shares of voting stock held by
any shareholders, or their affiliates, who have an
interest in the matter to be acted upon.
During the Escrow Period, in addition to any
shareholder vote or vote by the Board of Directors
that may be required by law, prior Independent
Approval will be required in order to authorize
any of the following actions or matters: (a)
entering into, or proposing to enter into, any
agreement, arrangement or transaction with the
Electronika Shareholders, the Sizemore Family or
any of their respective affiliates; (b) amendment
of the articles of incorporation or the bylaws of
the Corporation that may benefit the Electronika
Shareholders, the Sizemore Family or any of their
respective affiliates, to the exclusion of, or
disproportionately to, the other shareholders of
the Corporation; (c) approval of salary increases
or bonus payments to officers or employees
affiliated with the Electronika Shareholders, the
Sizemore Family or any of their respective
affiliates; (d) amendment to, or modification,
waiver or termination of, the Merger Agreement;
(e) dissolution of the Corporation; (f) initiation
of bankruptcy, insolvency or reorganization
proceedings involving the Corporation; and (g)
withdrawal of the registration of the
Corporation's Common Stock under the Securities
Exchange Act of 1934, as amended (the Exchange
Act).
Due Diligence Period
On January 8, 1999, the Corporation and MergerSub, on
the one hand, and Electronika and the Electronika
Shareholders, on the other, each delivered to the
other a disclosure letter detailing such parties'
exceptions to their respective representations and
warranties. Each of the disclosure letters were
approved by the receiving party on January 15, 1999.
In addition, the Corporation and MergerSub, and
Electronika and the Electronika Shareholders, are
required to update and supplement their respective
disclosure letters to reflect any changes that may
occur until the Merger is completed. If any such
update is not acceptable to the receiving party, such
party may terminate the Merger Agreement.
Interim Operations
During the period from the date of the Merger
Agreement to the Closing Date, except (i) as
otherwise required in connection with the
transactions contemplated by the Merger Agreement,
or (ii) as otherwise consented to in writing by
Electronika, the Corporation has agreed, and has
agreed to cause its subsidiaries to: (a) use its
reasonable efforts to do all of the following:
conduct its business diligently and only in the
ordinary course, and, without making any
commitment prohibited by the Merger Agreement,
preserve its business organization intact, keep
available its present officers and employees and
preserve its relationships with suppliers,
customers and others having business relations
with it; (b) not (i) enter into, modify or extend
the term of any employment agreement with any of
its officers or employees or increase the rate of
compensation payable or to become payable to any
of its officers or employees over the rates being
paid to them at the date hereof, except for normal
merit or cost of living increases, or (ii) adopt
any new employee benefit plan or amend or
otherwise increase or accelerate the payment or
vesting of the amounts payable or to be payable
under any existing employee benefit plan; (c) not
pay any obligation or liability, fixed or
contingent, other than current liabilities
incurred in the ordinary course of business or
payments due under its existing loan agreements or
lines of credit, or cancel, without full payment,
any debts, claims or other obligations (including
accounts receivable) owing to it; (d) not make any
material alteration in the manner of keeping its
books, accounts or records or in the accounting
practices therein reflected except as required by
law or generally accepted accounting principles;
(e) use its reasonable efforts to perform all of
its obligations under any contracts or agreements
to which it is a party or by which any of its
properties are bound (except those being contested
in good faith) and not cancel, amend, modify,
renew or extend any such contracts or agreements
that are material to its business or waive any
rights thereunder; (f) not enter into any
contracts or commitments that are material to its
business, other than contracts to provide goods
and services entered into in the ordinary course
of business consistent with past practices; (g)
use its reasonable efforts to maintain and keep in
good order and repair, subject to ordinary wear
and tear, taking into account the respective ages
of the assets involved, all of its tangible assets
and properties; (h) not sell, lease, license or
otherwise dispose of any of its properties and
assets (including any of its intangible assets);
(i) use its reasonable efforts to both maintain in
full force and effect all of the insurance
policies in effect as of the date hereof and not
take (or fail to take) any action that would
enable insurers under such policies to avoid
liabilities pursuant to the terms of such policies
for claims arising prior to the Closing Date; (j)
not make any capital expenditures or enter into
any leases for capital equipment or real estate or
commitments with respect thereto, except for
expenditures for ordinary repairs and maintenance
and for capital expenditures not exceeding $10,000
in the aggregate; (k65535 not accept any orders
from any of its customers under conditions
relating to price, terms of payment or like
matters materially different from the conditions
regularly and usually specified, or place any
orders for inventory, merchandise or supplies in
exceptional or unusual quantities based on past
operating practices; (1) not (i) permit any lien
to attach upon any of its properties and assets,
whether now owned or subsequently acquired; (ii)
assume, guaranty, endorse or otherwise become
liable or responsible (whether directly,
contingently or otherwise) for the obligations of
any other person or entity; or (iii) make any
loans, advances or capital contributions to, or
investments in, any other person or entity; (m)
not initiate, compromise or settle any material
litigation or arbitration proceeding; (n) use its
reasonable efforts to not change its Board of
Directors; and (o) not enter into any other
transaction or make or enter into any contract or
commitment which is not in the ordinary course of
business.
In addition, the Corporation and its subsidiaries
are prohibited from (x) issuing shares of capital
stock (and options or warrants for such shares,
rights to subscribe to or purchase such shares, or
securities convertible into or exchangeable for
such shares), (y) authorizing, declaring or paying
any dividends, stock splits or liquidating or
other distributions, or redeeming, purchasing or
otherwise acquiring any shares of Common Stock,
and (z) borrowing or guaranteeing the borrowing of
money, except for the borrowing of money under the
Corporation's loan agreements or lines of credit,
or in the ordinary course of business or as
disclosed in or contemplated by the Merger
Agreement or the transactions contemplated
thereby.
Electronika and the Electronika Shareholders have
agreed to similar restrictions, except that
Electronika, as an S corporation, will be
permitted to continue to pay cash dividends to the
Electronika Shareholders until the consummation of
the Merger.
Conditions to Closing
The obligations of the parties to consummate the
transactions contemplated by the Merger Agreement
are subject to the following conditions, among
others: (i) the entering into of the Voting
Trust; (ii) no material adverse change occurring
with respect to either of the Corporation and its
subsidiaries or Electronika; (iii) the fairness
opinion (as discussed in the section below
entitled Special Factors -- Fairness Opinion)
being confirmed as of the Effective Time; (iv) the
consents of third parties being obtained; (v)
Shareholder approval of Proposal One; and (vi) the
approval by each party of the other's updated
disclosure letter.
Regulatory Compliance
Pursuant to New Jersey's Industrial Site Recovery
Act, because the Corporation owns an industrial
establishment in New Jersey, the Corporation is
required to notify the New Jersey Department of
Environmental Protection (the Department) of the
change of control contemplated by the Merger
Agreement. As a precondition to closing the
Merger Agreement, the Corporation must receive,
and the Corporation is currently seeking,
clearance from the Department. The Corporation is
not aware of any other federal or state regulatory
requirements that must be complied with or
approvals that must be obtained in order to
consummate the Merger.
Mandatory Termination
The Merger Agreement will terminate automatically
if Proposal One is not approved by the
Shareholders at the Meeting.
Restrictions on Transfer on the Electronika
Shareholders' Common Stock
The Electronika Shareholders will be prohibited
from selling or transferring their respective
shares of Common Stock during the Escrow Period
(other than with respect to certain estate
planning transfers). In addition, neither the
shares of Common Stock nor the shares of Preferred
Stock to be issued to the Electronika
Shareholders will be registered under the
Securities Act of 1933, as amended, or under any
other federal or state securities laws, and may
not be sold or transferred unless such sale or
transfer is exempted from registration under such
securities laws. Other than compliance with such
securities laws, any shares of Preferred Stock
released from the Escrow will be freely
transferable by the Electronika Shareholders.
Electronika Directors
Upon the consummation of the Merger, the
Corporation has agreed to appoint to its Board of
Directors two additional directors designated by
the Electronika Shareholders. The Electronika
Shareholders have indicated that they intend to
designate Peter B. Caloyeras and W. Edgar Jessup,
Jr. to the Corporation's Board of Directors
following the Merger, and they have both indicated
that they are able and willing to serve as
directors.
Peter B. Caloyeras, 68, is the father of the three
Electronika Shareholders. Mr. Caloyeras is
currently Chairman of the Board of Magnetika,
Inc., which he founded in 1960, a privately held
manufacturer of magnetic components, including
components manufactured for Electronika. See
Interests of Certain Person in the Merger
below. In 1979, Mr. Caloyeras co-founded
Metrobank and served as a director of Metrobank
until it was acquired by Comerica Bank in January
1996. Mr. Caloyeras also currently serves as a
director of Prime Bank, a Los Angeles, California
bank. From 1967 to 1996, Mr. Caloyeras served as
a director of the Robert F. Kennedy Medical Center
in California, and was Chairman of the Board of
this entity at the time of its acquisition by
Catholic Healthcare West/Southern California
Region. Mr. Caloyeras also served as a director
of Catholic Healthcare West/Southern California
Region until September 1998. Together with his
wife, Mr. Caloyeras founded the Basil P. Caloyeras
Center for Modern Greek Studies at Loyola
Marymount University in Los Angeles, California,
in honor of his father, and has previously served
as Chairman of the Board of Regents of this
University. Mr. Caloyeras currently serves as a
member of the Board of Trustees of Loyola
Marymount University. Mr. Caloyeras holds three
degrees in electrical engineering and is a Life
Senior Member of the Institute of Electrical and
Electronic Engineers and a Life Member of the
World President's Organization.
W. Edgar Jessup, Jr., 76, is a founding partner of
Ervin, Cohen & Jessup LLP, corporate counsel to
Electronika. Mr. Jessup's legal practice focuses
primarily on corporate, general business and
securities law, corporate and business tax law and
estate planning. Mr. Jessup received his Sc.B. in
engineering from Brown University and received his
J.D. degree from the University of Southern
California School of Law. He was admitted to the
California Bar in 1950. Mr. Jessup is currently a
director of several non-profit corporations and,
until
recently, was a director of Magneticka, Inc. Mr.
Jessup also was a director of Logicon, Inc., a
provider of advanced technology systems in support of
national security, civil, and industrial needs, prior
to its recent merger with Northrop-Grumman
Corporation, and was a director of Software
Technologies Corporation, a privately-held developer
of software for the commercial and healthcare fields.
Indemnification; Insurance
Pursuant to the Merger Agreement, the Corporation
will indemnify and hold harmless each person who
is or was, prior to the Closing Date, an officer,
director or employee of the Corporation or any of
its subsidiaries (collectively, the Indemnified
Parties and individually, an Indemnified
Party) against all losses, liabilities, expenses,
claims or damages in connection with any claim,
suit, action proceeding or investigation based in
whole or in part on the fact of such Indemnified
Party's position with the Corporation or its
subsidiaries and arising out of acts or omissions
occurring prior to and including the Closing Date
to the fullest extent permitted by Missouri law
for a period of not less than six years following
the Closing Date; provided that, if any claim is
asserted or made within such six-year period, all
rights to indemnification in respect to such claim
will continue until final disposition of such
claim(s). The Corporation has agreed to pay an
Indemnified Party's legal and other expenses
incurred in connection with any matter occurring
on or before the Closing Date, including the
transactions contemplated by the Merger Agreement.
The Electronika Shareholders have agreed to cause
the articles of incorporation and bylaws of the
Corporation and its subsidiaries to include
provisions for the limitation of liability of
directors and indemnification of the Indemnified
Parties to the fullest extent permitted under
applicable law and consistent with the
indemnification terms outlined in the paragraph
above, and will not permit the amendment of such
provisions in any manner adverse to the
Indemnified Parties without their written consent
for a period of six years from the effective date
of the Merger Agreement.
The Corporation has agreed to maintain, for six
years after the Closing Date, policies of
directors' and officers' liability insurance, in
amounts not less than 1997 coverage (provided that
the Corporation may substitute policies of at
least the same coverage containing terms and
conditions which are substantially equivalent)
with respect to matters occurring prior to the
Closing Date, to the extent such policies are
available. However, if annual premiums for the
Corporation's director and officer liability
insurance exceed 150% of 1997 premiums (the
Maximum Premium), the Corporation will only be
obligated to purchase such insurance coverages as
may be purchased by a premium payment equal to the
Maximum Premium. The Corporation intends to maintain
directors and officers insurance coverage for all of
its directors and officers after the Merger, in
accordance with its current practices.
Accounting Treatment
The Merger will be recorded as a purchase of
Electronika by the Corporation for accounting and
financial reporting purposes.
Certain Federal Income Tax
The Merger should qualify as a tax-free
reorganization under Section 368(a)(2)(D) of the
Internal Revenue Code. Neither the Corporation
nor the Shareholders should be required to
recognize income, gain or loss as a result of the
Merger. However, neither the Corporation nor
Electronika has requested a ruling from the
Internal Revenue Service in connection with the
Merger. There can be no assurance that future
legislative, judicial or administrative changes or
interpretations will not adversely affect the tax
consequences of the Merger, and any such changes
or interpretations could be applied retroactively.
Interests of Certain Persons in the Merger
Pursuant to the Merger Agreement, following the
consummation of the Merger, Peter B. Caloyeras
will become the Chairman of the Board and Chief
Executive Officer of the Corporation and the
Surviving Corporation. While the Corporation and
Mr. Caloyeras have not entered into an employment
agreement, the Corporation has agreed that Mr.
Caloyeras will receive a salary of least $50,000
per year during the Escrow Period. Mr. Caloyeras
will not devote his entire business time to the
Corporation and the Surviving Corporation, but
will continue to be involved with his other
businesses and interests, including businesses
that may market products that are competitive with
the products manufactured by the Corporation.
Mr. Caloyeras is the father of the three
Electronika Shareholders and is the sole
shareholder, sole director and president of PBC,
Inc., a California corporation which is the sole
general partner of Caloyeras Family Partnership
L.P., a California limited partnership (the Family
Partnership). The Electronika Shareholders are
the sole limited partners of the Family
Partnership, and each Electronika Shareholder owns
33% of the outstanding partnership interests in
the Family Partnership. PBC, Inc. owns the
remaining 1% partnership interest in the Family
Partnership. The Family Partnership and the
Electronika Shareholders currently own 207,900
shares of Common Stock, or approximately 7.4% of
the outstanding shares of Common Stock of the
Corporation.
Mr. Caloyeras is the Chairman of the Board of
Magnetika, Inc., a company engaged in the
manufacture, design and sale of precision magnetic
components, including transformers, inductors,
reactors and chokes. Several of the components
manufactured and marketed by Magnetika, Inc. are
competitive with the products manufactured and
marketed by the Corporation. A wholly-owned
subsidiary of Magnetika, Inc. also manufactures
all of Electronika's requirements of ballast
transformers, pursuant to the terms of a
Manufacturing Agreement which is described below
under Information Regarding Electronika-
Description of Electronika's Business. Each
of the Electronika Shareholders owns approximately
15% of the outstanding equity of Magnetika, Inc.
After giving effect to the Merger and the Voting
Trust, and after taking into account the number of
shares of Common Stock currently owned, directly
and indirectly, by the Electronika Shareholders,
following the Merger the Electronika Shareholders
and their affiliates will have the power to direct
the voting of approximately 54.9% of the
outstanding voting shares of the Corporation.
None of the Electronika Shareholders is expected
to become an officer, director or employee of the
Corporation or of the Surviving Corporation
following the Merger.
INFORMATION REGARDING ELECTRONIKA
Description of Electronika's Business.
Electronika's is engaged in two primary lines of
business. First, Electronika distributes and
sells ballast transformers that are used to
activate and control the lights in commercial
airplane cockpits. Electronika's ballast
transformers are used in McDonnell Douglas
aircraft, which are now manufactured by Boeing
Company, and in Fokker aircraft. Electronika's
net revenues from the sale of these ballast
transformers was approximately $672,000 for the
year ended December 31, 1997, and approximately
$505,000 for the nine months ended September 30,
1998.
All of Electronika's requirements for the ballast
transformers are manufactured by a wholly-owned
subsidiary of Magnetika, Inc., a corporation in
which each of the Electronika Shareholders owns
approximately 15% of the outstanding equity.
Under the terms of the Manufacturing Agreement,
Magnetika, Inc. provides all necessary material,
labor, testing, packaging and related services
required to complete the manufacture, delivery and
sale of the ballast transformers, and Electronika
is obligated to order all of its ballast
transformer requirements exclusively from
Magnetika, Inc.. However, Electronika retains
ownership of all of the designs, drawings,
specifications and intellectual property rights
associated with the ballast transformers. In
exchange for the services provided to Electronika
under the Manufacturing Agreement, Magnetika, Inc.
receives 40% of the net sales price of all ballast
transformers sold by Electronika. The
Manufacturing Agreement continues in effect until
August 1, 2001, and automatically renews for
successive one-year periods thereafter. However,
either party may terminate the Manufacturing
Agreement upon six months' prior written notice.
Electronika's ballast transformers are sold to
both Boeing Company and to Fokker Aircraft for use
in the manufacture of aircraft, as well as to
numerous airline carriers for use as spare or
replacement parts. During 1997, approximately 25%
of Electronika's revenues were generated from
sales to Boeing and Fokker Aircraft, and
approximately 75% of its revenues were generated
from sales to over 42 different carriers. During
the first nine months of 1998, approximately 12.5%
of Electronika's revenues were generated from
sales to Boeing and Fokker Aircraft, and
approximately 82.5% of its revenues were generated
from sales to over 39 different carriers.
Electronika's other primary line of business is
the custom design, manufacture and sale of
precision magnetic components, consisting of
transformers, inductors, reactors and chokes.
These products are sold by Electronika to original
equipment manufactures, who, in turn, use them in
products such as aircraft navigational equipment,
conventional missile guidance systems and aircraft
and naval radar and instrument systems. A
substantial portion of the magnetic products sold
by Electronika are used for military purposes.
All of Electronika's magnetic products are
designed and manufactured to customer
specifications at Electronika's leased facilities
in Marlborough, Massachusetts. Electronika's net
revenues from the sale of these products was
approximately $1,118,000 for the year ended
December 31, 1997, and approximately $901,000 for
the nine months ended September 30, 1998, with
approximately 70% of these revenues generated from
sales to the military.
The magnetic components portion of Electronika's
business has historically been conducted by a
related entity, Magnetika/East Limited, a
Massachusetts limited partnership(Mag East). The
Electronika Shareholders, who are the sole limited
partners of Mag East, own 98.5% of the outstanding
partnership interests of Mag East, with PBC, Inc.
owning the remaining 1.5% interest as the sole
general partner. Prior to the consummation of the
Merger, the business and assets of Mag East will
be transferred by the Electronika Shareholders to
Electronika as a capital contribution without
additional consideration. In addition, the Family
Partnership has historically leased certain
equipment to Mag East, and all of such equipment
has been transferred to Electronika as a capital
contribution, again without additional
consideration.
Electronika was incorporated under the laws of the
State of California in 1968. Its executive
offices are located at 2041 W. 139th Street,
Gardena, California 90249, and its telephone
number is (310) 527-8100. In September 1998,
Electronika changed its name from Caloyeras, Inc.
to Electronika, Inc. The term Electronika
as used herein includes Electronika, Inc. and its
predecessors (including Mag East), unless the
context otherwise requires.
Market for Electronika Common Equity and Related
Stockholder Matters.
The common stock of Electronika is held by the
three Electronika Shareholders and, accordingly,
there is no public trading market for such common
stock. As of the date hereof, there are 1,000
shares of common stock, without par value, of
Electronika currently outstanding, with 333.33
shares of common stock owned by each of the
Electronika Shareholders. In addition, the
Electronika Shareholders, who are the sole limited
partners of Mag East, own 98.5% of the outstanding
partnership interests of Mag East, with PBC, Inc.
owning the remaining 1.5% interest as the sole
general partner.
The profits of Electronika, which is an S
corporation, and Mag East, which is a limited
partnership, are paid out to the Electronika
Shareholders either as salaries or distributions,
depending on the amount of cash available and the
needs of the Electronika Shareholders. These
distributions can be made at any time, as
determined by the Electronika Shareholders in
their discretion. For information regarding the
salaries paid to the Electronika Shareholders by
Electronika and Mag East during the years ended
December 31, 1996 and 1997, and during the nine
months ended September 30, 1998, see the
Electronika Financial Statements attached to this
proxy statement as Exhibit B. The following table
sets forth the additional dividends or
distributions paid by Electronika and Mag East, as
the case may be, to the Electronika Shareholders
for the periods indicated:
Year ended Nine months ended
December 31, September 30, 1998
1996 1997
Electronika $509,000 $180,000 $52,000
Mag East $ 15,000 $303,000 $ -0-
Total $524,000 $483,000 $52,000
Discussion and Analysis of Electronika's Financial
Condition and Results of Operations.
The following discussion of Electronika's
financial condition, results of operations,
liquidity and capital resources should be read in
conjunction with the financial statements of
Electronika attached hereto as Exhibit B.
General
Electronika has historically operated as two
separate entities, with the ballast transformer
portion of its business being conducted directly
by Electronika and its magnetic components
business being conducted by a related entity, Mag
East. The Electronika Shareholders, who are the
sole limited partners of Mag East, own 98.5% of the
outstanding partnership interests of Mag East,
with PBC, Inc. owning the remaining 1.5% interest as
the sole general partner. Prior to the
consummation of the Merger, the business and
assets of Mag East will be transferred by the
Electronika Shareholders to Electronika as a
capital contribution without additional
consideration. In addition, the Family
Partnership has historically leased certain
equipment to Mag East, and all of such equipment
has been transferred to Electronika as a capital
contribution, again without additional
consideration. For purposes of the information
provided below, the financial information of
Electronika and Mag East have been combined as if
they had operated as a single entity for all of
the periods presented.
All of Electronika's requirements for the ballast
transformers are manufactured by a wholly-owned
subsidiary of Magnetika, Inc., a corporation in
which each of the Electronika Shareholders owns
approximately 15% of the outstanding equity.
Under the terms of the Manufacturing Agreement,
Magnetika, Inc. provides all necessary material,
labor, testing, packaging and related services
required to complete the manufacture, delivery and
sale of the ballast transformers. In exchange for
the services provided to Electronika under the
Manufacturing Agreement, Magnetika, Inc. receives
40% of the net sales price of all ballast
transformers sold by Electronika.
Neither Electronika, as an S corporation, nor Mag
East, as a limited partnership, is required to pay
federal income taxes, and each pays state income
taxes at reduced rates. In addition, the profits
of Electronika and Mag East are paid out to the
Electronika Shareholders either as salaries or
distributions, depending on the amount of cash
available and the needs of the Electronika
Shareholders. These distributions can be made at
any time, as determined by the Electronika
Shareholders in their discretion. As such,
comparisons of officers salaries between periods
is difficult and has been listed separately in the
tables below.
Results of Operations
The following table sets forth, for the periods
indicated, the percentage of net sales represented
by certain items included in the statements of
operations attached hereto as Exhibit B:
Year Three months Nine months
ended ended ended
Dec. 31, Sept. 30, Sept. 30,
1996 1997 1997 1998 1997 1998
Sales 100.0% 100.0% 100.0% 100.0% 100.0 %100.0%
Cost of
sales 57.1 55.0 60.2 60.4 53.5 59.2
Gross
profit 42.9 45.0 39.8 39.6 46.5 40.8
Selling
exp. 1.4 1.1 1.3 1.1 0.9 0.7
General
and
admin
exp.(1) 10.9 9.9 7.6 11.1 7.1 7.9
Officer
salaries
and
related
exp 7.3 25.0 - - - -
Operating
income 23.3 9.0 30.9 27.4 38.5 32.2
Other
expenses
(income) (0.1) - - - - -
Net
income 23.4% 9.0% 30.9% 27.4% 38.5% 32.2%
(1) Excludes officer salaries and related
expenses, including payroll taxes.
1997 Compared to 1996
Sales for 1997 increased by $416,000, or 30.2%,
from 1996. This increase consisted of a $133,000,
or 24.6%, increase in sales of ballast
transformers by Electronika and a $283,000, or
33.9%, increase in sales of magnetic components by
Mag East.
Cost of sales for 1997 increased by $200,000, or
25.5%, from 1996, with cost of sales for
Electronika increasing by $53,000, or 24.6%, and
cost of sales for Mag East increasing by $147,000,
or 31.4%. The increase is attributable to the
higher level of sales. As a percentage of sales,
cost of sales remained relatively constant between
the periods, with Mag East accounting for
substantially all of the 2.0% reduction indicated.
The cost of sales for Electronika is fixed at 40%
of sales pursuant to the terms of the
manufacturing agreement between Electronika and
Magnetika.
Selling expenses for the 1996 and 1997 periods
remained relatively constant despite the higher
level of sales, with an increase of less than
$1,000 in 1997. For each of the periods
indicated, all of the selling expenses were
incurred by Mag East, as all selling expenses with
respect to Electronika's ballast transformer
business are paid by Magnetika, Inc. pursuant to
the terms of the manufacturing agreement.
General and administrative expenses, which exclude
officer salaries and related expenses, increased
by $27,000, or 18.0%, in 1997 as compared to 1996,
with these expenses decreasing by $7,000, or
35.2%, for Electronika and increasing by $34,000,
or 26.1%, for Mag East. As a percentage of sales,
general and administrative expenses decreased by
0.9%, with Electronika's general and
administrative expenses decreasing from 3.7% to
2.0% of net sales, and Mag East's general and
administrative expenses decreasing from 15.6% to
14.7% of net sales. In each case, Electronika and
Mag East were able to increase sales without
material additions to personnel or facilities.
Officer salaries and related expenses for 1997
increased by $347,000, or 346%, from 1996, as the
Electronika Stockholders elected to receive
salaries in 1997. All of the salaries and related
expenses were paid by Electronika. The
Electronika Stockholders will not be officers of
the Surviving Corporation after the Merger and
will not receive any salary from the Corporation
or the Surviving Corporation following the Merger.
As a result of the payment of substantially higher
officer salaries in 1997, net income for 1997
decreased by $161,000, or 49.8%, from 1996. For
1997, Electronika's net income decreased by
$260,000, resulting in a loss of $57,000, which
was only partially offset by an $100,000 increase
in net income for Mag East.
As a result of the foregoing factors, operating
income for 1997 decreased by $159,000, or 49,5%,
from 1996, with Electronika increasing $101,000
and Mag East decreasing $260,000. As a percentage
of sales, operating income decreased by 14.3%, with
Electronika's operating incoming (loss) decreasing
from
37.6% to (8.5%) of net sales, and Mag East's
operating income increasing from 14.1% to 19.6% of
net sales.
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Sales for the three months ended September 30,
1998 increased by $3,000, or less than 1%, over
the comparable period of the prior year. Sales
for Electronika for the 1998 quarter actually
increased by $23,000, or 15.1%, over the 1997
quarter, but this increase was offset by a
decrease of $20,000, or 6.9%, in sales made by Mag
East over the same period. Electronika attributes
this decrease to a shift in the timing of orders.
Cost of sales for the three months ended September
30, 1998 remained relatively constant as a
percentage of sales as compared to the three
months ended September 30, 1997, and increased in
dollar amount by approximately $3,000. While
Electronika's cost of sales is fixed at 40% of
sales pursuant to the terms of the Manufacturing
Agreement, Mag East's cost of sales increased as a
percentage of sales from 70.9% for the 1997
quarter to 73.7% for the 1998 quarter. The
increase in cost of sales reflects Mag East's
discovery of an error in the calculation of the
amount of payroll taxes paid during the 1997
period, resulting in the payment of additional
taxes and penalties in the current period. A
portion of these taxes were attributable to
production workers and, accordingly, were
allocated to cost of sales.
Selling expenses for the 1998 quarter decreased by
$1,000, or 15.6%, as compared to the 1997 quarter,
as a result of the decrease in sales. All of the
selling expenses were incurred by Mag East, as all
selling expenses with respect to Electronika's
ballast transformer business are paid by
Magnetika, Inc. pursuant to the terms of the
manufacturing agreement.
General and administrative expenses for the 1998
quarter increased by $16,000, or 47.0%, as
compared to the 1997 quarter, with these expenses
increasing by $12,000 for Electronika and $4,000
for Mag East. As a percentage of sales, general
and administrative expenses increased from 7.6% of
sales in the 1997 quarter to 11.1% of sales in the
1998 quarter, with Electronika showing an increase
from 3.1% to 9.5% and Mag East showing an increase
from 9.9% to 12.1%.
No salaries were paid to any of the officers of
Electronika or Mag East during the three months
ended September 30, 1998 or September 30, 1997.
As a result of the foregoing factors, operating
income for the 1998 quarter decreased by $15,000,
or 10.8%, as compared to the 1997 quarter, with
operating income for Electronika increasing by
$2,000, or 2.1%, and operating income for Mag East
decreasing by $17,000, or 33.3%. As a percentage
of sales, operating income for Electronika
decreased from 56.9% for the 1997 quarter to 50.5%
for the 1998 quarter, and for Mag East from 17.1%
in the 1997 quarter to 12.3% in the 1998 quarter.
Nine Months Ended September 30, 1998 Compare to
Nine Months Ended September 30, 1997
Sales for the nine months ended September 30, 1998
decreased by $10,000, or 0.7%, over the comparable
period of the prior year, with Mag East accounting
for $3,000 of this decrease.
Cost of sales for the nine months ended September
30, 1998 increased by $75,000, or 9.9%, as
compared to the nine months ended September 30,
1997, with cost of sales for Electronika
decreasing slightly and cost of sales for Mag East
increasing by $76,000, or 13.7%. The increase in
cost of sales reflects Mag East's discovery of an
error in the calculation of the amount of payroll
taxes paid during the 1997 period, resulting in
the payment of additional taxes and penalties in
the current period. A portion of these taxes were
attributable to production workers and,
accordingly, were allocated to cost of sales.
Selling expenses for the 1998 period decreased by
$2,000, or 15.8%, as compared to the 1997 period,
as a result of the decrease in sales. All of the
selling expenses were incurred by Mag East, as all
selling expenses with respect to Electronika's
ballast transformer business are paid by
Magnetika, Inc. pursuant to the terms of the
manufacturing agreement.
General and administrative expenses for the 1998
period increased by $10,000, or 9.5%, as compared
to the 1997 quarter, with these expenses
increasing by $14,000 for Electronika and
decreasing by $4,000 for Mag East. As a
percentage of sales, general and administrative
expenses increased from 7.1% of sales in the 1997
period to 7.9% of sales in the 1998 period, with
Electronika showing an increase from 2.6% to 5.4%,
and Mag East showing a decrease from 9.7% to
9.3%.
No salaries were paid to any of the officers of
Electronika or Mag East during the nine months
ended September 30, 1998 or September 30, 1997.
As a result of the foregoing factors, operating
income for the nine months ended September 30,
1998 decreased by $93,000, or 17.0%, as compared
to the 1997 period, with operating income for
Electronika decreasing by $16,000, or 5.5%, and
operating income for Mag East decreasing by
$77,000, or 30.0%. As a percentage of sales,
operating income for Electronika decreased from
57.4% for the 1997 period to 54.6% for the 1998
period, and for Mag East from 28.0% in the 1997
period to 19.7% in the 1998 period.
Liquidity and Capital Resources
Electronika's working capital needs have
historically been met from operating cash flow and
cash on hand, and an occasional advance from
affiliated entities. Electronika has no
outstanding bank financing, and presently has no
commitments beyond its working capital by which it
could obtain additional funds for current
operations. Electronika does not anticipate any
material capital expenditures for the remainder of
1998. Electronika believes that its current
working capital, coupled with internally generated
funds, will be sufficient to support its working
capital and capital expenditure requirements for
the foreseeable future. Electronika is not aware
of any material expenditures, significant balloon
payments or other payments, demands or
commitments, including off-balance sheet items, to
be incurred beyond the next 12 months.
Financial Information.
Attached hereto as Exhibit B and incorporated
herein by reference are the following combined
financial statements of Electronika and
Mag East: (i) audited balance sheets as of December
31, 1996 and December 31, 1997; (ii) audited
statements of operations for the years
ended December 31, 1996 and December 31, 1997; (iii)
audited statements of cash flows for the years ended
December 31, 1996 and December 31, 1997; (iv)
unaudited balance sheet as of September 30, 1998;
(v) unaudited statements of operations for the three
month and nine month periods ended September 30,
1997 and 1998; and (vi) unaudited statements of cash
flows for the nine month periods ended September 30,
1998 and 1997. In the opinion of management of
Electronika, the quarterly financial information
presented for Electronika and Mag East includes all
adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial
position and results of operations for such companies
as of such dates and for such periods. Results of
operations for interim periods are not necessarily
indicative of results for the full year. Also
attached hereto as Exhibit B and incorporated herein
by reference are the following pro forma financial
statements of the Corporation: (i) consolidated
balance sheet as of October 31, 1998, which assumes
that the Merger occurred on that date; and (ii)
consolidated statements of operations for the fiscal
year ended April 30, 1998 and the fiscal quarter
ended
October 31, 1998, which assume that the Merger
occurred on May 1, 1997. In preparing the pro forma
information, no adjustments have been made to
operations for the impact of certain anticipated
operational and administrative efficiencies. The pro
forma consolidated financial information is not
necessarily indicative of the results which actually
would have occurred had the transactions been in
effect on the dates and for the periods indicated or
which may result in the future. In future
statements,
Electronika will be consolidated only from the
closing
date of the acquisition.
INFORMATION REGARDING THE CORPORATION
This Proxy Statement is accompanied by (i) the
Annual Report to Shareholders for the fiscal year
ended April 30, 1998 (the Annual Report) and (ii)
the Corporation's quarterly report on Form 10-QSB,
as filed with the Commission, for the fiscal
quarter ended [October 31, 1998]. The Corporation's
annual report on Form 10-KSB, together with all
other reports filed with the Commission pursuant
to Section 13(a) or 15(d) of the Exchange Act
since April 30, 1998, are incorporated herein by
reference. In addition, the following Items of
the Annual Report are incorporated herein by
reference: Items 1, 5, 6 and 8; provided,
however, that those portions of the Annual Report
not specifically incorporated herein by reference
shall not be deemed to be part of this Proxy
Statement.
SPECIAL FACTORS
Risk Factors
In considering whether or not to approve this
Proposal One, the Shareholders should carefully
consider, among other things, the following risk
factors. The order in which these factors are
discussed is not intended to represent their
relative significance.
Change in Control. Pursuant to the Merger and the
Voting Trust, the Electronika Shareholders and
their affiliates will hold, or have the right to
direct the voting of, approximately 54.9% of the
Common Stock of the Corporation. This represents
a change in control of the affairs of the
Corporation. Because the Electronika Shareholders
will control the voting power of a majority of the
outstanding shares of Common Stock of the
Corporation, any attempt to change control by
shareholders unaffiliated with the Electronika
Shareholders is unlikely to be successful.
Dilution. As of February __, 1999 there were
2,811,590 shares of Common Stock of the
Corporation outstanding. The issuance of Common
Stock pursuant to the Merger will dilute the
Shareholders' percentage interest in the
Corporation by 39%, from 100% to 61%.
Superior Rights of Preferred Stock. The holders
of Preferred Stock will have rights to
distributions of dividends, and rights upon a
dissolution or liquidation of the Corporation,
superior to that of holders of Common Stock.
These superior rights will require the Corporation
to pay annual dividends on the Preferred Stock,
plus any accrued and unpaid dividends thereon,
before any amount may be paid to holders of Common
Stock. Also, these superior rights will require
the Corporation to redeem the Preferred Stock in
full, including any accrued and unpaid dividends
thereon, before any amounts may be paid to holders
of Common Stock upon a dissolution or liquidation
of the Corporation. See the section below
entitled The Articles Amendment for a
full description of the rights, preferences and
designations of the Preferred Stock.
Composition of Board of Directors. The business
and affairs of the Corporation are directed by its
Board of Directors. After the Merger, the Board
of Directors will appoint two representatives of
the Electronika Shareholders to the Board.
Pursuant to the Merger Agreement, the Electronika
Shareholders have agreed not to remove any of the
Directors prior to the Corporation's 1999 annual
meeting of shareholders. Thereafter, although two
members of the Board must be independent directors
pursuant to the rules and regulations of the
America Stock Exchange, the Electronika
Shareholders will have the power to elect a
majority of the Board of Directors. Accordingly,
they will have the ability to control the business
and affairs of the Corporation, subject to the
restrictions contained in the Merger Agreement and
the Voting Trust that will be in effect during the
Escrow Period, as described above under
Control: Certain Restricted Actions. .
Dependence on Key Management. The Corporation is
dependent upon its key officers for the management
of its business. Pursuant to the Merger
Agreement, Peter Caloyeras will be appointed as
the Chairman of the Board and Chief Executive
Officer of the Corporation. See the section above
entitled Summary of the Merger -- Electronika
Directors for a description of the business
experience of Peter Caloyeras. The Corporation
and Mr. Caloyeras have not entered into an
employment agreement with respect to his services
to the Corporation and the Surviving Corporation.
In addition, Mr. Caloyeras will not be devoting
his full business time to the Corporation and the
Surviving Corporation, as he will continue to be
involved in the pursuit of his other business
interests, including business interests that may
be competitive with the business of the
Corporation.
Uncertainty Regarding Business Combination. The
Corporation and Electronika entered into the
Merger Agreement expecting that the Merger will
result in enhanced operations, cost savings and
synergies for the two companies. However, there
can be no assurance that such enhanced operations,
cost savings or synergies will be realized.
Integrating the operations and management of the
Corporation and Electronika will be a complex
process, and there can be no assurance that this
integration will be completed rapidly or will
result in the achievement of all of the
anticipated synergies and other benefits expected
to be realized from the Merger. Moreover, the
integration of the Corporation and Electronika
will require significant management attention,
which may temporarily distract management from its
usual focus on the daily operations of the
combined company.
The Corporation and Electronika estimate that, as
a result of the Merger, the combined company will
incur consolidation and integration expenses of
approximately $25,000. In addition, it is
expected that the Corporation and Electronika will
incur merger-related expenses of approximately
$158,000, consisting of investment banking,
legal and accounting fees and financial and other
related charges. The combined company expects to
account for the above-referenced expenses in
fiscal years 1999 and 2000. The amount of these
charges is a preliminary estimate and is subject to
change. Additional unanticipated expenses may be
incurred in connection with the integration of the
businesses of the Corporation and Electronika.
Going Concern. The Report of the Independent
Certified Public Accountants of the Corporation,
dated as of June 19, 1998, noted that the
Corporation has sustained losses in 1998 and 1997
and its ability to obtain adequate financing is
uncertain. Because of these factors, the
accountants stated that there are substantial
doubts about the Corporation's ability to continue
as a going concern.
Background of the Merger
From September 1994 to October 1996 Peter
Caloyeras, either directly or through the Family
Partnership, acquired beneficial ownership of
6.81% of the Common Stock for investment purposes.
In February 1998, after the Corporation's
agreement to form a strategic alliance with
Brockson Investment Company was terminated, Mr.
Caloyeras contacted Dale H. Sizemore, Jr., the
Chief Executive Officer of the Corporation, to
inquire regarding the Corporation's future plans.
In March 1998, Mr. Caloyeras visited the
Corporation's headquarters, and met with various
officers and directors of the Corporation. From
March 1998 through June 1998, the Corporation and
Mr. Caloyeras held preliminary discussions
regarding a potential strategic alliance between
the Corporation and Electronika. Also during this
time period, the Corporation conducted internal
deliberations regarding the future of the
Corporation. From June 1998 through July 1998,
the parties negotiated the terms of a letter of
intent for the Merger. The letter of intent was
executed on July 27, 1998. From July 27, 1998 to
November 12, 1998, the parties negotiated the
terms of the Merger Agreement. The Merger
Agreement was approved by the Board of Directors
of the Corporation on November 16, 1998 and was
executed by the parties on November 24, 1998. See
the section below entitled Board Approval and
Recommendation.
Reasons for the Merger
The Merger is designed to accomplish several
objectives of the Corporation, including the
following:
(1) The Merger will bring to the Corporation
an experienced senior executive, Peter Caloyeras,
who has a proven, successful track record in the
Corporation's industry, and who is expected to
build a strong management team to operate the
Corporation.
(2) The Merger is expected to bring operating
profits to the Corporation, through the future
earnings of Electronika.
(3) The Merger is expected to bring operating
efficiencies to the Corporation by reducing costs
and utilizing both companies' existing production
capacity more efficiently.
(4) The Merger is expected to provide the
Corporation with a solid financial and managerial
base on which to make future acquisitions in the
Corporation's industry.
(5) The Merger is expected to increase the
capital and earnings of the Corporation to a
sufficient level to maintain its listing on the
American Stock Exchange.
Board Approval and Recommendation
On November 12, 1998, the Board of Directors, all
members being present, unanimously (i) determined
that
the Merger and the transactions contemplated by the
Merger Agreement are advisable and in the best
interests of the Company and its shareholders, (ii)
approved the form and terms of the Merger Agreement
and the other documents required thereunder, and
(iii)
approved the other transactions contemplated by
the Merger Agreement. In reaching its
determination, the Board consulted the
Corporation's management and legal counsel and
considered a number of factors, including the
following:
(1) the Corporation's financial condition,
results of operations and business prospects;
(2) Electronika's financial condition, results
of operations and business prospects;
(3) Peter Caloyeras' perceived ability to
effectively direct the growth of the Corporation;
(4) the fairness opinion, as described below;
(5) current industry, economic and market
conditions;
(6) the likelihood that the Merger could be
consummated;
(7) the structure of the transaction and the
terms of the Merger Agreement; and
(8) the compatibility of the corporate
cultures and operating philosophies of the
Corporation and Electronika.
THE BOARD OF DIRECTORS BELIEVES THAT THE
CONSUMMATION OF THE MERGER IS IN THE BEST
INTERESTS OF THE CORPORATION AND THE SHAREHOLDERS,
AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS
VOTE FOR APPROVAL OF THE SHARE ISSUANCE AND THE
ARTICLES AMENDMENT AT THE ANNUAL MEETING.
The Board of Directors believes that the Merger
represents an attractive strategic fit between
two companies with similar business strategies, as
well as complementary operations and geographic
presences. The Board of Directors believes that
the combined company will have greater financial
strength, operational efficiencies, earning power
and growth potential than either the Corporation
or Electronika would have on its own. In this
regard, the Board of Directors reviewed a number
of potential benefits of the Merger which it
believed would contribute to the success of the
combined company, and thus inure to the benefit of
the Shareholders, including the following:
Synergies of the Combined Company. The Board of
Directors believes that the Merger will produce a
number of important synergies, including (i)
reduced product costs as a result of greater
purchasing volume; (ii) reduced costs of
production as a percentage of revenues as a result
of the consolidation of duplicate manufacturing
facilities and equipment; (iii) reduced
distribution costs as a percentage of revenues
resulting from the combination of distribution
networks; and (iv) reduced general and
administrative expenses as a result of the
opportunity to leverage certain financial and
administrative functions over a larger operation
and the elimination of duplicate costs.
Combination of the Most Favorable Attributes of
the Companies. The combined company will be able
to take advantage of the best personnel and best
operating systems and practices currently employed
by the Corporation and Electronika.
Fairness Opinion
The Corporation engaged Stern Brothers Valuation
Advisors(Stern Brothers) to render its opinion
with respect to the fairness, from a financial
point of view, to the shareholders of the
Corporation of the transactions contemplated by
the Merger Agreement (the Opinion).
In a letter to the Corporation dated November 12,
1998, Stern Brothers expressed its opinion that,
based upon and subject to certain matters as
stated in its Opinion, other matters it considers
relevant and its general knowledge of such matters
as investment bankers, the transactions
contemplated by the Merger Agreement are fair,
from a financial point of view, to the
shareholders of the Corporation as of November 12,
1998. As a condition to the Corporation's
obligation to consummate the Merger, the
Corporation will require Stern Brothers to confirm
in writing that the fairness opinion continues to
be valid as of the Effective Time.
Stern Brothers is a national business valuation
and financial advisory firm engaged in, among
other things, corporate finance, business
valuation, financial advisory and litigation
support services for a wide variety of public and
private businesses throughout the United States,
representing virtually every industry. Since
1985, it has performed over 1,200 valuation
assignments. Stern Brothers was selected for this
assignment based upon its valuation services
provided to the Corporation on a previous
transaction for which it received a fee of
approximately $20,000.
In the course of Stern Brothers' analysis for
purposes of rendering the Opinion, Stern Brothers
(i) visited the Corporation's headquarters and
manufacturing facility; (ii) interviewed key
management regarding the background, operations,
financial performance and prospects of the
Corporation and Electronika; (iii) reviewed and
considered the following information: (a) annual
reports of the Corporation for the periods ended
April 30, 1991 through April 30, 1998; (b) Form
10-Q reports of the Corporation for the quarters
ended October 31, 1997, January 31, 1998 and July
31, 1998; (c) federal and state income tax returns
filed by the Corporation for fiscal year 1997; (d)
four year income statement forecast prepared by
the Corporation for fiscal years 1999 through
2002; (e) Board of Directors minutes from April
21, 1997 through August 10, 1998; (f) the
Corporation's proxy statement dated August 15,
1997; (g) the Articles of Incorporation and
Bylaws, as amended, of the Corporation and its
subsidiaries; (h) Certificate of Merger of Torotel
Magnetics into OPT Industries, Inc.; (i) second
edition brochure of the Corporation's products;
(j) various newspaper articles and other published
information regarding the Corporation; (k) the
Corporation's product brochure of
Inductors/Transformers; and (l) a draft of the
Merger Agreement dated October 1998; (iv) reviewed
and considered the following additional
information: (a) draft of financial statements
and accountants' review report for Magnetika/East
Ltd as of December 31, 1997; (b) draft of
financial statements and accountants' review
report for Caloyeras, Inc. d/b/a Electronika as of
December 31, 1997; (c) tax returns for Caloyeras,
Inc. from 1994 through 1997; (d) tax returns for
Magnetika-East Limited Partnership from 1992
through 1997; (e) management-prepared financial
statements for Magnetika/East Ltd as of December
31, 1996, December 31, 1997, June 30, 1997 and
June 30, 1998; (f) management-prepared financial
statements for Caloyeras, Inc. as of December 29,
1996, December 31, 1997, June 30, 1997 and June
30, 1998; (g) Articles of Incorporation and Bylaws
of Caloyeras, Inc. (a California corporation); (h)
Agreement and Certificate of Limited Partnership
for Magnetika-East Limited Partnership (a
Massachusetts limited partnership); (i)
Manufacturing Agreement dated August 1, 1998
between Caloyeras, Inc. d/b/a Electronika and
Ferrodyne Corporation d/b/a Magnetika West, Inc.;
(j) Statement of Corporate Objectives of the
Corporation, its subsidiaries and affiliates; (k)
board actions by unanimous written consent for
Caloyeras, Inc.; (l) resume of Peter B. Caloyeras;
(m) annual reports, interim reports, Forms 10-K,
Forms 10-Q and other published information on
publicly traded companies as nearly comparable to
the Corporation as Stern Brothers could find; and
(n) publications by Standard & Poor's and
Bloomberg Financial Services, The Value Line
Investment Survey, the Federal Reserve Bulletin,
the Wall Street Journal, Directory of Companies
Required to File Annual Reports with the
Securities and Exchange Commission, Stock Bonds,
Bills and Inflation 1997 Yearbook by Ibbotson
Associates and Mergerstat Review 1997 by Houlihan
Lokey Howard & Zukin; (v) interviews with the
Corporation's and Electronika's accountant and
attorney; (vi) conducted an analysis of the value
of the Corporation and Electronika using several
market comparison methods and a discounted cash
flow approach; and (vii) conducted such other
studies, analyses, inquiries and investigations as
Stern Brothers deemed appropriate. The foregoing
is only a summary of the information reviewed and
factors considered by Stern Brothers which have
influenced their Opinion and does not recite in
detail all of such information and factors that
they have taken into consideration in connection
with the Opinion.
In rendering the Opinion, the Corporation and its
representatives warranted to Stern Brothers that
the information they provided was complete and
accurate to the best of their knowledge and that
the financial statement information reflects the
Corporation's results of operations and financial
condition in accordance with generally accepted
accounting principles, unless otherwise noted.
Stern Brothers has assumed no responsibility for
independent verification of information and
financial forecasts supplied by the Corporation
and its representatives (and Stern Brothers
expresses no opinion on that information). Stern
Brothers has not obtained any independent
appraisal of the assets of the Corporation or
Electronika, nor have they attempted to verify the
information furnished to Stern Brothers by the
Corporation or Electronika. Stern Brothers used
public information and industry and statistical
data from sources which they deem to be reliable;
however, they make no representation as to the
accuracy or completeness of such information and
have accepted such information without further
verification. Stern Brothers was not authorized
to solicit, and did not solicit, interest from any
party with respect to a merger or other business
combination transaction involving the Corporation
or any of its assets, nor did they have any
discussion or negotiation with any parties, other
than the Corporation, in connection with the
issuance of the Corporation's shares. The Opinion
is valid only for the purposes and standard of
value specified therein. The Opinion assumes that
the Corporation will continue to operate as a
going concern, and that the character of the
present business will remain intact. The Opinion
contemplates facts and conditions existing as of
the opinion date. Events, conditions and
circumstances occurring after that date have not
been considered, and Stern Brothers has no
obligation to update their opinion for such events
and conditions.
THE FULL TEXT OF THE OPINION AS OF NOVEMBER 12,
1998, WHICH SETS FORTH THE DESCRIPTION OF THE
ASSIGNMENT, THE SCOPE OF THE WORK, THE ASSUMPTIONS
AND LIMITING CONDITIONS, THE CERTIFICATIONS AND
THE CONCLUSION, IS ATTACHED HERETO AS EXHIBIT C
AND IS INCORPORATED HEREIN BY REFERENCE. THE
STOCKHOLDERS OF THE CORPORATION ARE URGED TO READ
THE OPINION, TOGETHER WITH THE ASSUMPTIONS AND
LIMITING CONDITIONS SET FORTH THEREIN, IN ITS
ENTIRETY. THE OPINION, AS EXPRESSED HEREIN AND
THEREIN, IN ANY EVENT, IS LIMITED TO THE FAIRNESS
OF THE TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT FROM A FINANCIAL POINT OF VIEW TO THE
STOCKHOLDERS OF THE CORPORATION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SUCH
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VIEW
THE MERGER. THE SUMMARY OF THE OPINION SET FORTH
IN THIS TRANSACTION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION ATTACHED HERETO AS EXHIBIT C.
The following is a summary of certain of the
financial analyses used by Stern Brothers in
connection with providing its Opinion.
Market Comparison Approach
Stern Brothers analyzed and compared certain
financial information relating to the Corporation
with publicly-available financial and operating
information of the following seven publicly traded
companies engaged in the Corporation's industry
(collectively, the Selected Companies): Adflex
Solutions, Inc.; Ault, Inc.; Bel Fuse; Espey Mfg.
& Electronics Corp.; Jetronic, Inc.; Pico
Products, Inc.; and Robinson Nugent, Inc. None of
the Selected Companies used in Stern Brothers'
analysis is identical to the Corporation. Stern
Brothers' analysis involves complex considerations
and judgments concerning differences in the
potential financial and operating characteristics
of the Selected Companies and other factors
regarding the trading values of the Selected
Companies.
In conducting its analyses, Stern Brothers
reviewed and considered a variety of multiples and
ratios. In particular, Stern Brothers computed
the following multiples of the stock price of each
of the Selected Companies, the Corporation and
Electronika (the Stock Price Multiples): (i) the
last twelve months(LTM) earnings per share(EPS)
from continuing operations; (ii) LTM EPS; (iii)
LTM operating income per share; (iv) LTM earnings
before interest, taxes, depreciation and
amortization(EBITDA) per share; (v) invested
capital as a percentage of earnings before
interest and taxes(EBIT) per share; (vi) invested
capital as a percentage of sales per share; and
(vii) invested capital as a percentage of EBITDA
per share. Stern Brothers compared the average
and median Stock Price Multiples of the Selected
Companies with the Stock Price Multiples of
Electronika. In conducting its analyses, Stern
Brothers assumed the total value of Electronika to
be equal to $3,850,000, which is the aggregate
value of (A) the Preferred Stock being issued to
the Electronika Shareholders in the Merger
($2,500,000) plus (B) the value of the Common
Stock being issued to the Electronika Shareholders
in the Merger (1,800,000 shares valued at $.75 per
share, the value of the Common Stock on the date
that the Merger was announced to the public, which
equals $1,350,000). Stern Brothers also
considered Electronika's LTM EBIT as a percentage
of sales, and Electronika's historical growth in
net income from continuing operations, EBITDA,
EBIT and sales, each as compared to the Selected
Companies. Stern Brothers determined that the
cumulative results of the market comparison
approach indicated that the transactions
contemplated by the Merger Agreement are fair,
from a financial point of view, to the
shareholders of the Corporation.
Discounted Future Returns Approach
Stern Brothers performed a discounted cash flow
analysis of the projected future returns of the
Corporation and Electronika to calculate the
present value per share of the Corporation's
Common Stock using (i) a discount rate of 25%,
(ii) the financial projections prepared by
management of the Corporation for the duration of
the Escrow Period (which projected net income for
the Corporation of $59,000 for the fourth fiscal
quarter of 1999, $450,000 for fiscal year 2000,
$800,000 for fiscal year 2001 and $1,250,000 for
fiscal year 2002), and (iii) a terminal value of
the Corporation and Electronika as of April 31,
2002 of $14,375,000 (calculated by multiplying the
projected cash flows in fiscal year 2002
($1,250,000) by 1.00 plus the projected long-term
growth rate of 15% and dividing that result by the
discount rate minus the long-term growth rate).
The results of this discounted cash flow approach
indicated a present value for the Corporation's
Common Stock of $1.80 per share (assuming
4,700,000 shares outstanding). Comparing this
result to the value of the Common Stock prior to
the public announcement of the Merger, Stern
Brothers determined that the cumulative results of
the discounted future returns approach indicated
that the transactions contemplated by the Merger
Agreement are fair, from a financial point of
view, to the shareholders of the Corporation.
General
The summary of the Opinion set forth above does
not purport to be a complete description of the
analyses performed, or the matters considered, by
Stern Brothers in rendering the Opinion. Stern
Brothers believes that its analyses and the
summary set forth above must be considered as a
whole and that selecting portions of such
analyses, without considering all of the analyses,
or of the above summary, would create an
incomplete view of the processes underlying the
analyses set forth in the Opinion. The fact that
any specific analyses has been referred to in the
summary above is not meant to indicate that such
analysis was given greater weight by Stern
Brothers than any of the other analyses.
The preparation of the Opinion is not necessarily
susceptible to partial analyses or summary. In
rendering the Opinion, Stern Brothers applied its
judgment to a variety of complex analyses and
assumptions. Stern Brothers may have given
various analyses more or less wight than other
analyses, and may have deemed various assumptions
more or less probable than other assumptions. The
assumptions made, and the judgments applied, by
Stern Brothers in rendering the Opinion are not
readily susceptible to description beyond that set
forth in the written text of the Opinion itself.
In performing its analyses, Stern Brothers made
numerous assumptions with respect to industry
performance and general business and economic
considerations, which are beyond the control of
the Corporation. The analyses performed by Stern
Brothers are not necessarily indicative of actual
values or actual future results, which may be
significantly more or less favorable than
suggested by such analyses.
The terms of engagement of Stern Brothers by the
Corporation are set forth in a letter agreement
between Stern Brothers and the Corporation (the
Engagement Letter). Pursuant to the terms of the
Engagement Letter, as compensation for rendering
its Opinion to the Corporation, the Corporation
agreed to pay Stern Brothers at the rate of $150
per hour, plus out-of-pocket expenses. The
Corporation currently anticipates that the
aggregate amount to be charged by Stern Brothers
for fees and costs will be approximately $25,000.
In addition, the Corporation has agreed to
indemnify Stern Brothers against certain
liabilities and expenses in connection with the
engagement of Stern Brothers. The Opinion is
subject to the understanding that the obligations
of Stern Brothers in the Opinion are solely
corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person
of Stern Brothers shall be subjected to any
personal liability whatsoever to any person, nor
will any such claim be asserted by or on behalf of
the Corporation or its affiliates. No material
ongoing relationship between the Corporation and
Stern Brothers or its affiliates or
representatives is contemplated.
Reasons for Submitting the Transaction to a
Shareholder Vote
Section 6.1 of the Merger Agreement requires the
Corporation to convene a meeting of the
Shareholders for the purpose of approving the
transactions contemplated by the Merger Agreement.
In addition, (i) the rules and regulations of the
American Stock Exchange require that the Share
Issuance be approved by the Shareholders and (ii)
Missouri law requires that the Articles Amendment
be approved by the Shareholders. If the
Shareholders do not approve Proposal One, the
Merger Agreement will automatically terminate and
the Merger will not be consummated.
THE SHARE ISSUANCE
Pursuant to the Merger Agreement, the Corporation
will issue 1,800,000 shares of Common Stock to the
Electronika Shareholders (the Electronika Shares)
in the Merger. The Electronika Shares issued in
connection with the Merger will have the same
rights, preferences and privileges as the shares
of Common Stock currently outstanding. Holders of
the Electronika Shares will have no preemptive
rights to acquire additional Common Stock of the
Corporation. For a description of the Merger, the
merger consideration, restrictions on the ability
of the Electronika Shareholders to transfer the
Electronika Shares, the fairness opinion received
by the Corporation in connection with the Merger
and the reasons for the Merger, see the above
sections entitled Summary of the Merger
and Special Factors.
As of the record date of the Meeting, there were
[2,811,590] shares of Common Stock of the
Corporation outstanding, including 207,900 shares
owned, directly or indirectly, by the Electronika
Shareholders. The issuance of the Electronika
Shares in the Merger will dilute the Shareholders'
percentage interest in the Corporation by 39%,
from 100% to 61%, and will result in the
Electronika Shareholders owning an aggregate of
2,070,900 shares of the Corporation's Common
Stock. These shares, together with the 525,165
shares of Common Stock over which Peter Caloyeras
will have voting control under the Voting Trust,
will result in the Electronika Shareholders and
their affiliates holding approximately 54.9% of
the outstanding voting power of the Corporation.
See Summary of the Merger-Voting Trust and
Control; Certain Restricted Actions.
THE ARTICLES AMENDMENT
In connection with the Merger, the Corporation
will issue 2,500,000 shares (the Preferred
Shares) of a new Class A $1.00 Preferred Stock of
the Corporation (the Preferred Stock) to the
Electronika Shareholders. Holders of the
Preferred Shares will have no preemptive rights to
acquire additional Common Stock or Preferred Stock
of the Corporation. For a description of the
Merger, the merger consideration, restrictions on
the ability of the Electronika Shareholders to
transfer the Preferred Stock, the fairness opinion
received by the Corporation in connection with the
Merger and the reasons for the Merger, see the
above sections entitled Summary of the Merger and
Special Factors.
Text of Amendment to the Corporation's Articles of
Incorporation
Article III of the Corporation's Articles of
Incorporation will be deleted in its entirety and
amended to read as follows:
Article III
(a The aggregate number of shares which the
Corporation shall be authorized to issue shall be
Eight Million Five Hundred Thousand (8,500,000)
shares of capital stock, par value $.50 per share,
consisting of Six Million (6,000,000) shares of
common stock (the Common Stock) and Two Million
Five Hundred Thousand (2,500,000) shares of Class
A $1.00 Preferred Stock (the Preferred Stock). No
holder of shares of Common Stock or Preferred
Stock shall have any preemptive right to acquire
additional shares of the Corporation's capital
stock. The Common Stock shall have no
preferences, qualifications, limitations,
restrictions or special rights of any character
whatsoever in respect thereof.
(b The following is a statement of the
designations, powers, privileges and rights, and
the qualifications, limitations and restrictions,
in respect of the Preferred Stock:
(i Accumulation and Payment of Dividends.
The holders of outstanding shares of Preferred
Stock shall be entitled, in preference to the
holders of Common Stock, to receive, out of any
funds legally available therefor, cumulative
mandatory dividends on each share of Preferred
Stock payable in cash at the rate per annum of
$0.05 per share (the Preferred Dividends);
provided, that Preferred Dividends need not be
paid in cash if and to the extent that such
payment is prohibited by law or under the terms of
one or more agreements or instruments evidencing
indebtedness for money borrowed of the Corporation
at the time such payment would otherwise be due,
in which case such Preferred Dividends shall
accumulate as provided herein. Preferred
Dividends shall accumulate commencing as of the
date of issuance of the Preferred Stock, will be
payable annually within forty-five (45) days of
the Corporation's fiscal year end and will be
cumulative, to the extent unpaid, whether or not
they have been declared and whether or not there
are profits, surplus or other funds of the
Corporation legally available for the payment of
dividends. Preferred Dividends not paid or paid
in an amount less than the total amount of such
dividends at the time accumulated and payable on
all outstanding shares of Preferred Stock,
including fractions, shall be allocated pro rata
on a share-by-share basis among all such shares at
the time outstanding. The amount of accumulated
dividends on any share of Preferred Stock, or
fraction thereof, at any date, shall be the amount
of any dividends payable thereon to and including
such date, whether or not declared, which have not
been paid in cash, with additional dividends
accumulating on any such accumulated but unpaid
dividends (including without limitation, dividends
which remain unpaid as a result of a prohibition
against payment in any agreement for money
borrowed) until paid. The Preferred Dividends
shall be cumulative, so that if any Preferred
Dividend shall not have been paid when due, the
deficiency shall be fully paid or declared and set
apart for all outstanding shares of Preferred
Stock before the Corporation pays any dividend on
or redeems or makes any other distribution on its
Common Stock. The Preferred Dividends for any
calendar year on any share of Preferred Stock
which is not outstanding on every day of the year
shall be prorated based on the number of days such
share was outstanding during the year. All numbers
relating to the calculation of dividends pursuant
hereto shall be subject to equitable adjustment in
the event of any stock split, combination,
reorganization, recapitalization, reclassification
or other similar event involving a change in the
Preferred Stock. Other than as provided herein,
holders of Preferred Stock shall have no other
right to receive dividends of the Corporation.
(ii Redemption. The Preferred Stock shall be
redeemable as follows:
a) The Corporation may redeem
Preferred Stock at any time, at its sole option,
in whole or in part, out of funds legally
available therefor, at a per share redemption
price payable in cash equal to the sum of (x) One
Dollar and Ten Cents ($1.10) per share of
Preferred Stock (adjusted appropriately for stock
splits, stock dividends, recapitalizations and the
like with respect to the Preferred Stock) plus (y)
all accumulated, accrued and unpaid dividends
thereon, whether or not declared, in cash to the
date of redemption (the Total Per Share Preference
Amount).
b) Any redemption of Preferred Stock
shall be accomplished out of funds legally
available for such purpose, subject to such
limitations as may be imposed under any agreement
or instrument evidencing indebtedness for money
borrowed of the Corporation at the time of such
redemption, and shall otherwise be accomplished in
accordance with all applicable laws.
c) If fewer than all of the Preferred
Stock at the time issued and outstanding are to be
redeemed, the shares shall be redeemed from the
holders of Preferred Stock pro rata based on their
respective holdings of such shares.
d) Notice of any redemption of
Preferred Stock (a Redemption Notice) shall
be mailed at least ten (10) but not more than
sixty (60) calendar days prior to the date fixed
for redemption to each holder of Preferred Stock
to be redeemed, at such holder's address as it
appears on the books of the Corporation. In order
to facilitate any redemption of Preferred Stock,
the Board of Directors may fix a record date for
the determination of holders of Preferred Stock to
be redeemed, which shall not be less than ten (10)
nor more than thirty (30) calendar days prior to
the date fixed for such redemption. The
Redemption Notice shall include the date fixed for
redemption, the Total Per Share Preference Amount
to be paid and the place at which the preferred
stockholders may obtain payment of the Total Per
Share Preference Amount upon surrender of their
share certificates.
e) On or after the redemption date
specified in any Redemption Notice, each holder of
shares of Preferred Stock called to be redeemed
shall surrender the certificate or certificates
evidencing such shares to the Corporation and
shall then be entitled to receive payment of the
redemption price for each such share. If fewer
than all the shares represented by one share
certificate are to be redeemed, the Corporation
shall issue a new share certificate for the shares
not redeemed.
f) If funds are available on the date
fixed in the Redemption Notice, then, whether or
not the share certificates are surrendered for
payment of the Total Per Share Preference Amount,
on such date the holders of Preferred Stock to be
redeemed on such redemption date shall cease to be
stockholders with respect to such shares, such
shares shall no longer be transferable on the
books of the Corporation and such holders shall
have no interest in or claim against the
Corporation with respect to such shares except the
right to receive payment of the redemption price
upon delivery to the Corporation of (x) the
certificates representing such shares of Preferred
Stock, or fractions thereof, and (y) appropriate
endorsements and transfer documents sufficient to
transfer such shares of Preferred Stock, or
fractions thereof, to the Corporation free of any
adverse interest or lien. The Board of Directors
shall cause the transfer books of the Corporation
to be closed as to shares to be redeemed pursuant
hereto. The Corporation shall return to the
status of unauthorized and undesignated shares
each share of Preferred Stock which it shall
redeem or for any other reason acquire.
g) The Corporation shall redeem all of
the outstanding shares of Preferred Stock from
funds lawfully available therefor twenty-one (21)
days after the consummation of any of the
following events: (x) a reorganization, merger or
consolidation with one or more other corporations
as a result of which the Corporation is not the
surviving corporation or the Corporation survives
as a subsidiary (at least majority owned) of
another corporation, or (y) the sale of all or
substantially all of the assets and property of
the Corporation to another person or entity.
(iii Liquidation, Dissolution or Winding Up.
Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, no
distribution shall be made to the holders of
shares of Common Stock unless, prior thereto, the
holders of shares of Preferred Stock, including
any fractional shares, shall have received per
share in cash the Total Per Share Preference
Amount (the Liquidation Preference). If, upon
such liquidation, dissolution or winding up, the
assets thus distributed among the holders of the
Preferred Stock shall be insufficient to permit
the payment to such stockholders of the full
preferential amount set forth herein, then the
entire assets of the Corporation to be distributed
shall be distributed ratably among the holders of
the Preferred Stock. After payment in full of the
Liquidation Preference to holders of all shares of
Preferred Stock, including any fractional shares,
the Preferred Stock shall not be entitled to
receive any additional cash, property or other
assets of the Corporation upon the liquidation,
dissolution or winding up of the Corporation.
(iv Voting Rights. Except as otherwise
required by law, the holders of shares of
Preferred Stock shall have no voting rights.
Notwithstanding the foregoing, without the
affirmative vote or written consent of the holders
of at least a majority of the outstanding shares
of Preferred Stock, voting as a class, the
Corporation shall not:
a) amend or repeal any provision of or
add any provision to the Corporation's Articles of
Incorporation, or in any other manner modify any
class of capital stock, if such action would alter
or change the rights, preferences, privileges or
powers of, or the restrictions provided for the
benefit of, the Preferred Stock so as to affect
adversely the Preferred Stock; or
b) except as provided elsewhere herein,
authorize or issue any additional shares of
Preferred Stock or reissue any shares of Preferred
Stock that have been reacquired by the
Corporation, by purchase, redemption or otherwise;
or
c) authorize or create shares of any
class of capital stock having equal priority with
the Preferred Stock or any preference or priority
over the Preferred Stock as to dividends or
distribution of assets on liquidation, dissolution
or winding up.
(v Fractional Shares; Uncertificated Shares.
The Corporation may issue fractional shares of
Preferred Stock. The holders of fractional shares
shall be entitled to all rights as preferred
stockholders of the Corporation to the extent
provided herein and under applicable law in
respect of such fractional shares. Shares of
Preferred Stock, or fractions thereof, may, but
need not, be represented by share certificates.
Shares of Preferred Stock, or fractions thereof,
not represented by share
certificates(Uncertificated Shares) shall be
registered in the stock record book of the
Corporation. The Corporation at any time at its
sole option may deliver to any registered holder
of Preferred Stock share certificates to represent
Uncertificated Shares previously issued (or deemed
issued) to such holder.
(c The Board of Directors is authorized in its
discretion to determine, fix and approve the
consideration other than cash for shares which may
be issued, and to determine the fair value to the
Corporation of such consideration.
Rights of Holders of Preferred Shares
For a description of the dividend, voting,
liquidation, redemption and other material rights
of the holders of Preferred Shares, see the above
text of the amendment to the Corporation's
Articles of Incorporation.
General Effect Upon the Rights of Existing
Shareholders
The issuance of the Preferred Shares will have no
effect on the voting control of the Corporation
because the Preferred Stock has no voting rights
(except in the limited circumstances discussed
above). However, the holders of Preferred Stock
will have rights to distributions of dividends,
and rights upon a dissolution or liquidation of
the Corporation, superior to that of holders of
Common Stock. These superior rights will require
the Corporation to pay annual dividends on the
Preferred Stock, plus any accrued and unpaid
dividends thereon, before any amount may be paid
to holders of Common Stock, regardless of whether
the Corporation has any earnings during the year
and regardless of whether any dividends are
declared with respect to the Preferred Stock or
the Common Stock. To the extent the Corporation
is prohibited from paying these annual dividends,
either by law or under the terms of any of its
financing agreements, these unpaid dividends will
accrue and will be payable as soon as permitted.
Also, these superior rights will require the
Corporation to redeem the Preferred Stock in full,
and pay in full any accrued and unpaid dividends
thereon, before any amounts may be paid to holders
of Common Stock upon a dissolution or liquidation
of the Corporation. The Corporation also will be
required to redeem the Preferred Shares, and pay
in full any accrued but unpaid dividends thereon,
upon a reorganization, merger or consolidation
with one or more other corporations as a result of
which the Corporation is not the surviving
corporation or survives as a subsidiary of another
corporation, or upon the sale of all or
substantially all of the assets of the
Corporation.
REQUIRED VOTE; BOARD RECOMMENDATION
A vote of a majority of all outstanding shares of
the Common Stock of the Corporation, whether or
not present in person or by proxy and voting at
the Meeting, is necessary for the approval of the
above-described Share Issuance and Articles
Amendment. THE BOARD OF DIRECTORS RECOMMENDS THAT
THE SHAREHOLDERS APPROVE THIS PROPOSAL ONE.
PROPOSAL TWO
ELECTION OF THE BOARD OF DIRECTORS
At the Meeting, five individuals will be nominated
for
election as members of the Board of Directors, to
serve until the next annual meeting of shareholders,
and until their successors have been elected. The
Corporation's Articles of Incorporation authorize
seven directors. After consummation of the Merger,
the Board of Directors will appoint two persons
selected by the Electronika Shareholders to the two
open director positions, as described in the section
above entitled Proposal One -- summary of the Merger
- -
- - Electronika Directors.
The five nominees to be elected at the Meeting,
each a present member of the Board of Directors,
are as follows: Ronald L. Benjamin, Christian T.
Hughes, Dr. Thomas L. Lyon, Jr., Dale H. Sizemore,
Jr., and Richard A. Sizemore.
Biographical Information
Biographical summaries concerning the five
nominees, the Corporation's executive officers and
significant employees, and information with
respect to the number of shares of Common Stock
beneficially owned by each of them as of February __
1999, are shown below. The number of shares
beneficially owned includes shares, if any, held
in the name of the spouse, minor children, or
other relative of the individual living in his or
her home, as well as shares, if any, held in the
name of another person under an arrangement
whereby the individual enjoys the right to vote
such shares or use of the income from such shares,
or whereby the individual can vest or revest title
in himself or herself immediately or at some
future time. Dale H. Sizemore, Jr., both a
Director and an executive officer, and Richard A.
Sizemore, a Director, are brothers.
Biographical Summaries Shares of
of Nominees, Executive Common Stock
Officers, and Significant Owned at Percent
Employees Feb. __, 1999 of class
Dale H. Sizemore, Jr., 379,509 13.5%
age 46, Chairman of
the Board and Chief
Executive Officer
of the Corporation
13402 South 71 Highway
Grandview, MO 64030
Mr. Sizemore became a Director of the Corporation
in 1984. He has served as Chairman since 1995,
and served as President from 1995 to 1996. Mr.
Sizemore was President of Kansas Communications,
Inc., located in Lenexa, Kansas, from 1983 to
1995, and was Chairman of the Board and Treasurer
from 1995 to 1998. Mr. Sizemore is currently self
employed.
Christian T. Hughes,
age 49, Director -0- 0.0%
Director, President
and Chief Operating
Officer of the Corp
13402 South 71 Highway
Grandview, MO 64030
Mr. Hughes became a Director of the Corporation in
1995. He became President and Chief Operating
Officer in 1996. He became President of Torotel
Products in 1996, and President of OPT Industries
in 1995, each of which are subsidiaries of the
Corporation. He joined OPT in 1992 as Vice
President of Sales and Marketing, and became
Executive Vice President in 1993. Prior to
joining OPT, Mr. Hughes was Vice President of
Sales for Hitran Corporation, located in
Flemington, New Jersey, from 1987 to 1992.
Ronald L. Benjamin,
age 53, Director of -0- 0.0%
the Corp
13402 South 71 Highway
Grandview, MO 64030
Mr. Benjamin became a Director of the Corporation
in 1993. He has been President of Resource and
Development Group, Inc. located in Lenexa, Kansas,
since 1985. Mr. Benjamin is also a 50% owner of
Robinson Potato Supply. He holds a B.S. degree in
electrical engineering from Bucknell University
and received his M.B.A. from Harvard University.
Dr. Thomas L. Lyon, Jr.,
age 54, Director of 210 0.0%
the Corp
13402 South 71 Highway
Grandview, MO 64030
Dr. Lyon became a Director of the Corporation in
1993. He is a professor and Academic Chair of the
Executive Fellows Program at Rockhurst College,
located in Kansas City, Missouri. Dr. Lyon is a
past director of the Graduate and Undergraduate
Business Division, has been Acting Dean of the
School of Management, and was the first director
of Rockhurst's M.B.A. Program. He has been at
Rockhurst since 1975. He holds his B.A. in
economics from Rockhurst, and his M.A. in
economics and Ph.D. in economics and finance from
the University of Missouri.
Richard A. Sizemore,
age 38, Director of 415,374 (b) 14.7%
the Corp
13402 South 71 Highway
Grandview, MO 64030
Mr. Sizemore became a Director of the Corporation
in 1995. He has been owner and President of
Interactive Design, Inc., located in Lenexa,
Kansas, since 1987. He holds a B.S. degree in
electrical engineering and an M.B.A. from the
University of Kansas.
H. James Serrone,
age 43, Vice President 10,273 (c) 0.4%
of Finance and Chief
Financial Officer of
the Corporation
13402 South 71 Highway
Grandview, MO 64030
Mr. Serrone joined Torotel in 1979, became
Controller in 1982, and was named Vice President
in 1993. Mr. Serrone has served as Vice President
of Torotel Products since 1992, and became Vice
President of OPT Industries in 1993. He has been
Acting General Manager of Torotel Products since
August 1996.
All Directors and
Executive Officers
as a Group
(6 persons) 604,860 (d) 21.5%
(a) See the text and footnotes regarding Mr.
Sizemore's beneficial ownership discussed above in
the section entitled Voting Securities and
Principal Holders Thereof.
(b) See the text and footnotes regarding Mr.
Sizemore's beneficial ownership discussed above in
the section entitled Voting Securities and
Principal Holders Thereof.
(c) H. James Serrone's beneficial ownership
includes 3,357 shares which are acquirable within
60 days pursuant to the exercise of outstanding
stock options.
(d) The beneficial ownership of all directors
and executive officers as a group includes 3,357
shares which are acquirable within 60 days
pursuant to the exercise of outstanding stock
options. The percentage ownership of the
individuals identified above does not equal the
percentage ownership of all directors and officers
as a group because the 200,506 shares owned by
Sizemore Enterprises, in which Dale H. Sizemore,
Jr. and Richard Sizemore are general partners, is
included only once in the total beneficial
ownership of the 604,860 shares.
Board Meetings and Director Compensation
During the fiscal year ended April 30, 1998, the
Board of Directors held seven meetings (including
regularly scheduled and special meetings). Each
of the incumbent directors being nominated for re-
election attended 100% of the Board of Directors
meetings held while he was a Director. Christian
T. Hughes was compensated at the rate of $100 per
Board of Directors meeting attended. Ronald L.
Benjamin, Dr. Thomas L. Lyon, Jr., Dale H.
Sizemore, Jr., and Richard A. Sizemore were
compensated at the rate of $6,000 per fiscal year,
plus $600 per Board of Directors meeting attended,
and $400 per committee meeting attended.
Committees
Christian T. Hughes and H. James Serrone are
members of the Administrative Committee for the
Employee Stock Purchase Plan (the Plan
Committee). Mr. Serrone is not a Director but is
an officer of the Corporation. The Plan Committee
receives its authority from the Employee Stock
Purchase Plan (the Plan) and from the Board of
Directors. The Plan Committee administers and
implements the Plan and determines the
eligibility of employees to participate in the
Plan. The Plan Committee does not meet on a
regular basis but meets as required. The Plan
Committee did not meet during the last fiscal
year.
Ronald L. Benjamin and Dr. Thomas L. Lyon, Jr. are
members of the Audit Committee. The Audit
Committee held one meeting during the last fiscal
year. In fulfilling its responsibilities, the
Audit Committee's activities included, but were
not limited to, reviewing internal accounting
controls, financial activities, financial position
and related consolidated reports of the
Corporation.
Ronald L. Benjamin, Dr. Thomas L. Lyon, Jr., and
Dale H. Sizemore, Jr., are members of the
Compensation Committee, the purpose of which is to
determine the compensation of the executive
officers of the Corporation. The Compensation
Committee held one meeting during the last fiscal
year.
The Corporation does not have a nominating
committee.
Cumulative Voting
There will be cumulative voting for the election
of Directors. In cumulative voting, each share
carries as many votes as there are vacancies to be
filled and each Shareholder is permitted to
distribute the votes for all of his or her shares
among the nominees in any way he or she desires.
Since five Directors are nominated, each
Shareholder may cast that number of votes which is
equal to the number of shares owned by him or her
multiplied by five. If no choice is
indicated on the enclosed Proxy, the persons named
in the Proxy will cumulate the votes and
distribute them among the nominees in their
discretion. If a Shareholder desires to cumulate
his or her votes for the Directors in a particular
manner, he or she should indicate the number of
votes to be cast on the Shareholder's behalf for
each nominee immediately following that nominee's
name on the Proxy. The Proxies cannot be voted
for a greater number of persons than the number
named herein. If any nominee should be unable to
serve, the Proxy will be voted for such person as
shall be designated by the Board of Directors of
the Corporation to replace any such nominee. The
Board of Directors presently has no knowledge that
any of the nominees will be unable to serve.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT THE
SHAREHOLDERS VOTE IN FAVOR OF THE ELECTION OF EACH
OF THE NOMINEES TO THE BOARD OF DIRECTORS.Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires
executive officers and directors of the
Corporation, and persons who beneficially own more
than ten percent (10%) of the Corporation's Common
Stock (collectively referred to herein as
Reporting Persons), to file initial reports of
ownership and reports of changes in ownership with
the Securities and Exchange Commission (the
Commission). Reporting Persons are required by
Commission regulations to furnish the Corporation
with copies of all Section 16(a) forms they file.
Based solely upon a review of copies of Forms 3,
4 and 5 and amendments thereto furnished to the
Corporation during its most recent fiscal year,
the Corporation believes that all of these forms
required to be filed by Reporting Persons were
timely filed pursuant to Section 16(a) of the
Exchange Act, except that each of Dale H.
Sizemore, Jr., Gregory M. Sizemore, Paulette A.
Durso and Richard A. Sizemore filed one report
late with respect to one transaction.
Executive Officer Compensation
Summary Compensation Table. The following table
sets forth the compensation of the named executive
officers for each of the Corporation's last three
completed fiscal years.
Annual Long-Term
Compensation Compensation
Name and
Principal Options Allother
Position Year Salary Bonus Awarded Comp
Dale H.
Sizemore,
Jr. (a)
Chief Exec.
Officer 1998 $0 $0 $0 $0
1997 $0 $0 $0 $0
1998 $0 $0 $0 $0
Christian
T. Hughes (b)
President
and
Chief
Operating
Officer 1998 $124216 $0 $0 $0
1997 $126676 $36000 $37500 $7500
Alfred F.
Marsh (c)
Former
President
and Chief
Executive
Officer 1996 $24078 $0 $0 $0
(a) Dale H. Sizemore, Jr. became Chief
Executive Officer effective August 4, 1996.
(b) Christian T. Hughes became President and
Chief Operating Officer effective September 16,
1996.
(c) Alfred F. Marsh served as President and
Chief Executive Officer during all of fiscal year
1995, and for the period of May 1 to August 3 of
fiscal 1996.
Option Grants Table. There were no grants of
stock options made to any executive officers
during the Corporation's last completed fiscal
year.
Aggregate Option Exercises and Fiscal Year-End
Option Value Table. The following table sets
forth the aggregate stock option exercises made
during the last completed fiscal year and the
fiscal year-end option values for each of the
named executive officers.
Value of
No. unexercised
unexer opt./ in-the-money
Shares SARs at options/SARs
Acq. FY-end($) at FY-end($)
Name on Value exer/ exercisable/
Name Exer.# Real($) unexer unexercisable
Dale
H.
Sizemore,
Jr. 0 $0 0 $0
Christian
T.
Hughes 0 $0 0 $0
Certain Relationships and Legal Proceedings
Indebtedness to Former Officer. The Corporation
has a $429,000 promissory note with Alfred F.
Marsh, former President of Torotel, Inc., dated
July 10, 1996. The amount of this note consists
of the principal sum of $250,000 from a note
executed in April 1986, plus $179,000 of accrued
unpaid interest. For the year ended April 30,
1998, the Corporation incurred $41,000 in interest
on the note. The outstanding balance of this
unsecured note bears interest at a fixed rate of
10% per annum. The note requires monthly
principal and interest payments of $10,881, and
matures on July 1, 2000. Under the terms of the
note, no payments will be made to Mr. Marsh as
long as any default condition exists under the
terms of the Corporation's credit agreement with
Phillipsburg National Bank & Trust Corporation,
unless the bank has waived the default condition
prior to any payment. As of April 30, 1998, the
aggregate amount due under the note was $438,000,
which consists of the outstanding principal
balance of $384,000 plus accrued interest of
$54,000. The Corporation has suspended all
payments under the note due to the reasons
discussed in the section below entitled Legal
Proceedings.
Legal Proceedings. On May 6, 1997, Torotel
Products, Inc., one of the Corporation's operating
subsidiaries, was accepted into the Voluntary
Disclosure Program of the United States Department
of Defense resulting from its failure to perform
certain required thermal shock testing
as frequently as required and for inaccurately
certifying that all required testing had been
performed. As a result of the Corporation's
investigation into the testing deficiencies, which
were first reported in November 1996, the
Corporation recorded an estimated charge of
$416,000 against earnings in its fiscal fourth
quarter ended April 30, 1997. Because the
investigation was ongoing, the Corporation
subsequently determined that there also were some
deficiencies in performing some required
electrical testing as frequently as required. As
a result, the Corporation recorded an additional
charge of $70,000 against earnings in the first
quarter of the fiscal year ended April 30, 1998.
The Corporation does not anticipate incurring any
additional significant charges related to the
investigation; however, the aggregate amount of
the estimated penalty is still subject to
fluctuation as further investigation is conducted.
At this time, the Corporation is not certain when
payment of the damage amount will be required;
however, the Corporation does not anticipate
making any payments during the fiscal year ending
April 30, 1999. The legal fees associated with
the investigation amounted to $68,000 during the
fiscal year ended April 30, 1998, and $203,000 for
the fiscal year ended April 30, 1997. The
Corporation believes that certain of its former
officers may have been responsible for the
misconduct related to the test failures, and will
evaluate ways of recovering the damages once the
government completes its investigation. In the
meantime, the Corporation has suspended all
payments under a note payable to a former officer.
OTHER MATTERS
Other Business
The Board of Directors is not aware of any other
business to be transacted at the Meeting. If any
other business is properly brought before the
Meeting, it is intended that the shares
represented by the enclosed Proxy will be voted in
respect thereof in accordance with the judgment of
the persons voting the Proxies.
Availability of Accountants
Representatives of Grant Thornton LLP, the
principal accountants for the Corporation (i) are
expected to be present at the Meeting, (ii) will
have the opportunity to make a statement if they
desire to do so and (iii) are expected to be
available to respond to appropriate questions.
Deadline for Receipt of Shareholders' Proposals
Proposals of shareholders of the Corporation which
are intended to be presented by the Corporation at
the Corporation's 1999 annual meeting of
shareholders must be received by the Corporation
no later than September 15, 1999, so that they may
be included in the Proxy Statement relating to
that meeting.
General
In order that your shares may be represented if
you do not plan to attend the Meeting, and in
order to assure the required quorum and voting,
please sign, date and return the enclosed Proxy
promptly.
BY ORDER OF THE BOARD OF DIRECTORS
H. James Serrone
Secretary of the Corporation
Exhibit A
Merger Agreement
AGREEMENT AND PLAN OF MERGER
AMONG
TOROTEL, INC.
TOROTEL MERGER SUBSIDIARY, INC.
ELECTRONIKA, INC.
AND THE
ELECTRONIKA STOCKHOLDERS
NAMED HEREIN
Dated November 24, 1998
TABLE OF CONTENTS
Page
ARTICLE ITHE MERGER
Section 1.1 The Merger
Section 1.2 Effective Time of the Merger
Section 1.3 Merger Consideration and
Conversion of Shares.
Section 1.4 Preferred Shares Escrow.
Section 1.5 Distributions of Preferred Shares.
Section 1.6 Net Worth Determination.
Section 1.7 Net Worth Adjustment.
Section 1.8 EBITDA.
Section 1.9 Closing
ARTICLE IITHE SURVIVING CORPORATION
Section 2.1 Articles of Incorporation and Bylaws
Section 2.2 Board of Directors and Officers Section
2.3
Employment of Peter Caloyeras
ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF
ELECTRONIKA
Section 3.1 Subsidiaries.
Section 3.2 Organization and Qualification.
Section 3.3 Capitalization.
Section 3.4 Financial Condition.
Section 3.4.1 Assets and Liabilities at Closing.
Section 3.4.2 Electronika Financial Statements
Section 3.5 Taxes.
Section 3.6 Undisclosed Liabilities
Section 3.7 Litigation and Claims.
Section 3.8 Properties.
Section 3.9 Contracts and Other Instruments.
Section 3.10 Validity of Electronika Material
Contracts.
Section 3.11 Charter Instruments
Section 3.12 Related Party Transactions.
Section 3.13 Employee Benefit Plans
Section 3.13.1 Arrangements.
Section 3.13.2 ERISA Plans.
Section 3.13.3 Other Employee Fringe Benefits.
Section 3.13.4 ERISA Affiliate.
Section 3.13.5 Identification of Benefit Plans.
Section 3.13.6 MEPPA Liability/Post-Retirement
Medical
Benefits/Defined Benefit Plans/Supplemental
Retirement
Plans
Section 3.13.7 Liabilities
Section 3.14 Patents, Trademarks, Et
Section 3.15 Questionable Payments
Section 3.16 Authority to Merge
Section 3.17 Year 2000 Compliance
Section 3.18 Assets of Magnetika/East; Name
Change
Section 3.19 Environmental Matters
Section 3.20 Completeness of Disclosure
ARTICLE IVREPRESENTATIONS AND WARRANTIES OF
PARENT AND ACQUISITION
Section 4.1 Subsidiaries
Section 4.2 Organization and Qualification
Section 4.3 Capitalization.
Section 4.4 Financial Condition
Section 4.5 Taxes.
Section 4.6 Undisclosed Liabilities.
Section 4.7 Litigation and Claims.
Section 4.8 Properties.
Section 4.9 Contracts and Other Instruments.
Section 4.10 Validity of Parent Material
Contracts.
Section 4.11 Charter Instruments
Section 4.12 Employee Benefit Plans
Section 4.12.1 Arrangements
Section 4.12.2 ERISA Plans
Section 4.12.3 Other Employee Fringe Benefits
Section 4.12.4 ERISA Affiliate
Section 4.12.5 Identification of Benefit Plans
Section 4.12.6 MEPPA Liability/Post-Retirement
Medical
Benefits/Defined Benefit Plans/Supplement
Section 4.12.7 Liabilities
Section 4.13 Patents, Trademarks, Et Cetera
Section 4.14 Questionable Payments
Section 4.15 Authority to Merge.
Section 4.16 Environmental Matters
Section 4.17 Related Party Transactions
Section 4.18 Year 2000 Compliance
Section 4.19 Interim Operations of MergerSub
Section 4.20 Completeness of Disclosure.
ARTICLE VCOVENANTS OF
ELECTRONIKA
Section 5.1 Articles of Incorporation and Bylaws
Section 5.2 Shares and Options.
Section 5.3 Dividends and Purchases of Stock.
Section 5.4 Borrowing of Money
Section 5.5 Access.
Section 5.6 Advice of Changes.
Section 5.7 Confidentiality
Section 5.8 Public Statements.
Section 5.9 Parent Stockholder Approval.
Section 5.10 Conduct of Business.
Section 5.11 Reasonable Efforts.
Section 5.12 Exclusive Dealing
Section 5.13 Obligation to Update Disclosure
Letter
ARTICLE VICOVENANTS OF PARENT AND
ACQUISITION
Section 6.1 Stockholder Approval.
Section 6.2 Proxy Statement.
Section 6.3 Articles of Incorporation and Bylaws
Section 6.4 Shares and Options.
Section 6.5 Dividends and Purchases of Stock.
Section 6.6 Borrowing of Money.
Section 6.7 Access
Section 6.8 Advice of Changes
Section 6.9 Confidentiality
Section 6.10 Public Statements
Section 6.11 Conduct of Business
Section 6.12 Reasonable Efforts
Section 6.13 Exclusive Dealing
Section 6.14 Business After the Effective Time
Section 6.15 Issuance and Listing of Stock
Section 6.16 Obligation to Update Disclosure
Letter
ARTICLE VII ELECTRONIKA'S CONDITIONS TO CLOSING
Section 7.1 Voting Trust.
Section 7.2 Accuracy of Representations and
Compliance
With Conditions.
Section 7.3 Material Adverse Change.
Section 7.4 Other Documents.
Section 7.5 Review of Proceedings.
Section 7.6 Legal Action.
Section 7.7 No Governmental Action.
Section 7.8 Consents Needed
Section 7.9 Other Agreements.
Section 7.10 Closing Certificate
Section 7.11 Parent Disclosure Letter
ARTICLE VIII PARENT'S AND ACQUISITION'SCONDITIONS
TO
CLOSING
Section 8.1 Voting Trust
Section 8.2 Accuracy of Representations and
Compliance
With Conditions.
Section 8.3 Material Adverse Change.
Section 8.4 Other Documents
Section 8.5 Review of Proceedings.
Section 8.6 Legal Action.
Section 8.7 No Governmental Action.
Section 8.8 Fairness Opinion.
Section 8.9 Consents Needed
Section 8.10 Other Agreements
Section 8.11 Stockholder Approval
Section 8.12 Closing Certificate
Section 8.13 Electronika Disclosure Letter
ARTICLE IX TERMINATION
Section 9.1 Mandatory Termination
Section 9.2 Optional Termination
Section 9.3 Effect of Termination
ARTICLE X TRANSFER RESTRICTIONS; GOVERNANCE
Section 10.1 Restrictive Legends.
Section 10.2 Further Restrictions
Section 10.3 Investment Representations.
Section 10.4 Directors.
Section 10.5 Prohibited Stockholder Actions.
Section 10.6 Prohibited Actions by Parent.
Section 10.7 Definition of Independent Approval
Section 10.8 Definition of Affiliate and Family
Members
Section 10.9 Indemnification; Insurance.
ARTICLE XI MISCELLANEOUS
Section 11.1 Survival
Section 11.2 Further Actions
Section 11.3 Modification
Section 11.4 Notices
Section 11.5 Waiver
Section 11.6 Binding Effect
Section 11.7 No Third-Party Beneficiaries
Section 11.8 Separability
Section 11.9 Headings
Section 11.10 Counterparts; Governing Law
Section 11.11 Assignment.
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of
November 24 , 1998 (the Agreement), is entered
into by and among Torotel, Inc., a Missouri
corporation(Parent), Torotel Merger Subsidiary,
Inc., a Missouri corporation and a wholly-owned
subsidiary of Parent(MergerSub), Electronika,
Inc., a California corporation(Electronika), and
the stockholders of Electronika identified on the
signature page to this Agreement (the Electronika
Stockholders). MergerSub and Electronika may
sometimes be referred to herein collectively as
the Constituent Corporations. Parent,
MergerSub, Electronika and the Electronika
Stockholders may collectively be referred to
herein as the Parties.
WHEREAS, the Parties desire to enter into this
Agreement pursuant to which Parent will purchase
Electronika by merging Electronika with and into
MergerSub in a tax free reorganization;
WHEREAS, pursuant to the Merger (as defined
below), MergerSub will be the surviving
corporation (the Surviving Corporation),
Electronika will cease to exist and Parent will
own 100% of the outstanding capital stock of
MergerSub; and
WHEREAS, pursuant to the Merger, the Electronika
Stockholders will receive, in the aggregate,
(i)1,800,000 shares of the common stock of Parent,
par value $0.50 per share (the Parent Common
Stock), and (ii) 2,500,000 shares of new Class A
$1.00 Preferred Stock of Parent, par value $.50
per share (the Parent Preferred Stock), which will
be deposited in escrow for the benefit of the
Electronika Stockholders. The rights, preferences
and privileges of the Parent Preferred Stock are
as set forth in Exhibit A attached hereto.
NOW, THEREFORE, in consideration of the foregoing
and the mutual covenants and agreements herein
contained, and intending to be legally bound
hereby, the Parties hereby agree as follows:
ARTICLE I.
Section 1.1 THE MERGER At the Effective Time
(as defined below), Electronika shall be merged
with and into MergerSub and the separate existence
of Electronika shall thereupon cease (the Merger).
Upon the effectiveness of the Merger, the
Surviving Corporation shall possess all of the
rights, privileges, powers and franchises, of a
public as well as of a private nature, and be
subject to all of the restrictions, disabilities
and duties, of each of the Constituent
Corporations; and the rights, privileges, powers
and franchises of each of the Constituent
Corporations, and all property, real, personal,
and mixed, and all that is due to any of the
Constituent Corporations on whatever account,
shall be vested in the Surviving Corporation; but
all rights of creditors and owings upon any
property of any of the Constituent Corporations
shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent
Corporations shall thenceforth attach to the
Surviving Corporation and may be enforced against
it to the same extent as if these debts,
liabilities and duties had been incurred or
contracted by it.
Section 1.2 Effective Time of the Merger. If
all of the conditions precedent to the Parties'
obligations to consummate the Merger under this
Agreement are satisfied or waived and this
Agreement has not been terminated, the Parties
shall cause the Articles of Merger in the form
attached hereto as Exhibit B (the Articles of
Merger) to be properly executed and filed with the
Missouri Secretary of State, in accordance with
Section 351.458 of the Missouri General and
Business Corporation Law, and shall cause to be
filed with the California Secretary of State, in
accordance with Section 1108(d)(1) of the
California General Corporation Law, a copy of the
Articles of Merger certified by the Missouri
Secretary of State. The Merger shall become
effective at such time as (i) the Missouri
Secretary of State issues a Certificate of Merger
and (ii) said Certificate of Merger is filed with,
and accepted for filing by, the California
Secretary of State (the Effective Time).
Section 1.3 Merger Consideration and
Conversion of Shares. As of the Effective Time, by
virtue of the Merger and without any action on the
part of any holder thereof:
a) The shares of common stock of MergerSub
which are issued and outstanding immediately prior
to the Effective Time shall not be changed or
converted as a result of the Merger, but shall
remain outstanding as shares of the Surviving
Corporation.
b) All of the outstanding shares of capital
stock of Electronika issued and outstanding
immediately prior to the Effective Time (the
Electronika Shares) shall be converted into the
right to receive, in the aggregate, the following:
(i) 1,800,000 newly issued shares of Parent Common
Stock (the Common Shares); and (ii) 2,500,000
shares of Parent Preferred Stock (the Preferred
Shares). The Preferred Shares shall be deposited
into, and shall be subject to the terms of, the
escrow described in Section 1.4 below and the
Escrow Agreement to be entered into in accordance
therewith. The Common Shares and the Preferred
Shares (together, the Merger Shares) shall be
subject to the restrictions on transfer as
described in Article X below.
c) Upon surrender to Parent of the certificate
or certificates which, immediately prior to the
Effective Time, represented the Electronika
Shares, the Electronika Stockholders shall be
entitled to receive in exchange therefor, on a pro
rata basis (as set forth on Schedule 1.3 hereto),
a certificate or certificates representing the
Merger Shares into which the Electronika Shares
shall have been converted pursuant to the
provisions of Section 1.3(b), subject to the
depositing of the Preferred Shares into escrow in
accordance with Section 1.4.
Section 1.4 Preferred Shares Escrow. At the
Effective Time, the Preferred Shares shall be
deposited into escrow (the Escrow), to be held by
an escrow agent mutually acceptable to the parties
(the Escrow Agent), in accordance with the
provisions of an Escrow Agreement in the form
attached hereto as Exhibit C. The Escrow
Agreement shall provide for the distribution to
the Electronika Stockholders of the Preferred
Shares, on a pro rata basis, at the expiration of
each of five payment periods, based on the
economic performance of the Surviving Corporation
during each such period, as determined in
accordance with the provisions of Section 1.5
below. The determination of the number of
Preferred Shares to be distributed shall be made
at the completion of each of five periods (each an
Escrow Payment Period and together the Escrow
Period), with (i) the first Escrow Payment Period
commencing at the Effective Time and ending on the
last day of the first fiscal year of the Surviving
Corporation following the Effective Time, (ii) the
next three Escrow Payment Periods being the next
three successive full fiscal years of the
Surviving Corporation immediately following the
fiscal year in which the Effective Time is a part
and (iii) the remaining Escrow Payment Period
being nine (9) months of the fourth fiscal year of
the Surviving Corporation immediately following
the fiscal year in which the Effective Time is a
part (provided that for the calculations to be
made pursuant to Section 1.5, such nine-month
period shall be treated as three-fourths of the
full fiscal year). At the end of the Escrow
Period, after taking into account all
distributions to be made pursuant to Section 1.5
and all Net Worth Adjustments to be made
pursuant to Section 1.7, all Preferred Shares
remaining in the Escrow, if any, shall be canceled
and return to the status of authorized but
unissued shares. In no event shall the
Electronika Stockholders (i) be entitled to
receive in excess of 2,500,000 Preferred Shares or
(ii) be required to return to Parent any Common
Shares received by them in the Merger or (except
as set forth in Section 1.7) pay to Parent any
other amounts with respect to the failure of the
Surviving Corporation to attain any financial
targets following the Effective Time.
Section 1.5 Distributions of Preferred Shares.
The number of Preferred Shares to be distributed
at the end of each Escrow Payment Period shall be
determined based on the amount of EBITDA (as
defined below) generated by the Surviving
Corporation during such Escrow Payment Period,
subject to any Net Worth Adjustment as provided in
Section 1.7 below, as follows: (i) for each One
Dollar ($1.00) of EBITDA generated by the
Surviving Corporation during the applicable Escrow
Payment Period, one Preferred Share shall be
released to the Electronika Stockholders, on a pro
rata basis; and (ii) if the EBITDA for any Escrow
Payment Period is negative, then such negative
amount shall be carried forward to the next Escrow
Payment Period (and succeeding Escrow Payment
Periods, if necessary) and subtracted from the
EBITDA for that next period, such that Preferred
Shares shall only be released when such sum is
positive. Within 90 days after the end of the
applicable Escrow Payment Period, Parent shall
prepare and deliver to the Electronika
Stockholders a schedule (the EBITDA Schedule),
which shall set forth in reasonable detail
Parent's estimate of the EBITDA of the Surviving
Corporation for such Escrow Payment Period. The
EBITDA Schedule shall (i) be based upon the books
and records of the Surviving Corporation and the
generally accepted accounting principles used by
Parent in the preparation of its financial
statements, (ii) be certified as true and correct
by the Chief Financial Officer of Parent and (iii)
be accompanied by the certification of the
independent auditors of Parent. Upon the receipt
by the Electronika Stockholders of the EBITDA
Schedule, the Electronika Stockholders may have
the same verified by their independent public
accountants. If the EBITDA Schedule as submitted
by Parent is acceptable to the Electronika
Stockholders, then such EBITDA Schedule shall be
deemed final and shall be used to determine the
amount of the Preferred Shares to be released from
the Escrow. If the EBITDA Schedule is not
acceptable to the Electronika Stockholders, the
Electronika Stockholders shall deliver to Parent
within 30 days after their receipt of the EBITDA
Schedule a statement describing their objections
thereto (setting forth the amount proposed as an
adjustment thereto and the basis for such
objection). Failure of the Electronika
Stockholders to so object to the EBITDA Schedule
as submitted by Parent shall constitute acceptance
thereof by the Electronika Stockholders. If the
Electronika Stockholders object to such EBITDA
Schedule, Parent and the Electronika Stockholders
shall use their reasonable efforts to resolve any
such objections, but if they do not reach a final
resolution within 20 days after Parent has
received the statement of objections, Parent and
the Electronika Stockholders shall select an
independent, nationally recognized accounting firm
(the Accounting Firm) to resolve any remaining
objections. The Accounting Firm shall, within 30
days after submission to it of any remaining
objections, determine and report to the parties
upon the items objected to and such determination
by the Accounting Firm shall be conclusive and
binding upon Parent and the Electronika
Stockholders absent fraud or manifest error. If
the Accounting Firm determines that a net
adjustment should be made to the EBITDA Schedule
in favor of the Electronika Stockholders equal to
at least $25,000, then the costs and fees of the
Accounting Firm shall be borne and paid by Parent;
otherwise, the costs and fees of the Accounting
Firm shall be borne and paid by the Electronika
Stockholders. If Parent fails to deliver an
EBITDA Schedule to the Electronika Stockholders
within the requisite 90-day period, the
Electronika Stockholders may deliver a proposed
EBITDA Schedule to Parent, and, if the EBITDA
Schedule so submitted is acceptable to Parent,
then such EBITDA Schedule shall be deemed final.
If said EBITDA Schedule is not acceptable to
Parent, Parent shall follow the same procedures
specified above with respect to the Electronika
Stockholders for objecting to said EBITDA
Schedule.
Section 1.6 Net Worth Determination.
As provided in Section 3.4.1, Electronika has
represented and warranted that, on the Closing
Date (as defined below), the assets of Electronika
will include at least $400,000 of cash, cash
equivalents, accounts receivable, notes
receivable, inventory, work in process, prepaids,
machinery, equipment and deposits, net of all
liabilities of any kind whatsoever (the Net Worth
Amount). If on or before April 30, 1999, Parent
determines that the Net Worth Amount was less than
$400,000, Parent shall prepare and deliver to the
Electronika Stockholders a schedule setting forth
Parent's proposed determination of the Net Worth
Amount as of the Closing Date (the Closing
Schedule). Failure of Parent to deliver a Closing
Schedule to the Electronika Stockholders on or
before such date shall constitute acceptance of
the Net Worth Amount by Parent. The Closing
Schedule shall be based upon the books and records
of the Surviving Corporation and the generally
accepted accounting principles used by Parent in
the preparation of its financial statements and be
certified as true and correct by the Chief
Financial Officer of Parent. Upon the receipt by
the Electronika Stockholders of the Closing
Schedule, the Electronika Stockholders may have
the same verified by their independent public
accountants. If the Closing Schedule as submitted
by Parent is acceptable to the Electronika
Stockholders, then such Closing Schedule shall be
deemed final and shall be used to determine the
amount of the Net Worth Adjustment required by
Section 1.7. If the Closing Schedule is not
acceptable to the Electronika Stockholders, the
Electronika Stockholders shall deliver to Parent
within 30 days after their receipt of the Closing
Schedule a statement describing their objections
thereto (setting forth the amount proposed as an
adjustment thereto and the basis for such
objection). Failure of the Electronika
Stockholders to so object to the Closing Schedule
as submitted by Parent within said 30-day period
shall constitute acceptance thereof by the
Electronika Stockholders. If the Electronika
Stockholders object to such Closing Schedule,
Parent and the Electronika Stockholders shall use
their reasonable efforts to resolve any such
objections, but if they do not reach a final
resolution within 20 days after Parent has
received the statement of objections, Parent and
the Electronika Stockholders shall utilize the
Accounting Firm to resolve any remaining
objections. The Accounting Firm shall, within 30
days after submission to it of any remaining
objections, determine and report to the parties
upon the items objected to and such determination
by the Accounting Firm shall be conclusive and
binding upon Parent and the Electronika
Stockholders absent fraud or manifest error. If
the Accounting Firm determines that a net
adjustment should be made to the Closing Schedule
in favor of the Electronika Stockholders equal to
at least $25,000, then the costs and fees of the
Accounting Firm shall be borne and paid by Parent;
otherwise, the costs and fees of the Accounting
Firm shall be borne and paid by the Electronika
Stockholders.
Section 1.7 Net Worth Adjustment. If the Net
Worth Amount as shown on the Closing Schedule as
finally determined pursuant to Section 1.6 is less
than $400,000, the number of Preferred Shares to
be distributed from the Escrow during an Escrow
Payment Period shall be reduced, on a dollar-for-
dollar basis, in an amount equal to the difference
between the Net Worth Amount as finally determined
and $400,000 (the Net Worth Adjustment). If the
Net Worth Amount as shown on the Closing Schedule
as finally determined pursuant to Section 1.6 is
more than $400,000, the number of Preferred Shares
to be distributed from the Escrow during an Escrow
Payment Period shall be increased, on a dollar-
for-dollar basis, in an amount equal to the
difference between $400,000 and the Net Worth
Amount as finally determined. For example, if the
Net Worth Amount as finally determined pursuant to
Section 1.6 is $200,000 and during the first
Escrow Payment Period the Surviving Corporation
has $300,000 in EBITDA, 100,000 Preferred Shares
would be released to the Electronika Stockholders
from the Escrow and no further Net Worth
Adjustments would be made during the Escrow
Period. Conversely, if the Net Worth Amount as
finally determined is $500,000 and during the
first Escrow Payment Period the Surviving
corporation has $300,000 in EBITDA, 400,000
Preferred Shares would be released to the
Electronika Stockholders from the Escrow. If the
aggregate amount of EBITDA (as finally determined
pursuant to Section 1.5) generated by the
Surviving Corporation during the Escrow Period is
less than the aggregate amount of the Net Worth
Adjustment (as finally determined pursuant to
Section 1.6), any remaining Net Worth Adjustment
that has not been applied against the Preferred
Shares distribution shall be paid by the
Electronika Stockholders, on a pro rata basis (as
set forth on Schedule 1.3 hereto), to Parent in
cash within 30 days after the termination of the
Escrow.
Section 1.8 EBITDA. As used herein, the term
EBITDA shall mean, with respect to any fiscal
period, the sum of the Surviving Corporation's net
earnings (or loss) before interest expense, taxes,
depreciation and amortization for said period, as
determined in accordance with generally accepted
accounting principles, exclusive of any mutually
agreeable allocations between Parent and the
Surviving Corporation.
Section 1.9 Closing. The closing of the
transactions contemplated by this Agreement shall
take place on the third business day following the
satisfaction or waiver of all conditions to
closing contained herein at the offices of Shook,
Hardy & Bacon L.L.P., 9401 Indian Creek Parkway,
Overland Park, Kansas 66210, or at such other
date, time and place as the Parties may agree (the
Closing). The date on which the Closing occurs is
sometimes referred to herein as the Closing Date
.
ARTICLE II.
THE SURVIVING CORPORATION
EMPLOYMENT OF PETER CALOYERAS
Section 2.1 Articles of Incorporation and
Bylaws. The articles of incorporation and the
bylaws of Merger Sub as in effect at the Effective
Time shall from and after the Effective Time be
the articles of incorporation and bylaws of the
Surviving Corporation, as the same may be amended
from time to time, except that the name of the
Surviving Corporation shall be changed to
Electronika, Inc.
Section 2.2 Board of Directors and Officers.
The officers and directors of Merger Sub at the
Effective Time shall be the officers and directors
of the Surviving Corporation, each to serve,
subject to the Surviving Corporation's bylaws,
until his or her respective successor shall have
been elected and qualified.
Section 2.3 Employment of Peter Caloyeras.
From and after the Effective Time, Peter Caloyeras
shall be the Chairman of the Board and Chief
Executive Officer of Parent and the Surviving
Corporation (subject to his removal by the Board
of Directors of Parent and the Surviving
Corporation in accordance with their respective
bylaws), for which he will receive an annual
salary during the Escrow Period of at least
$50,000.
ARTICLE III.
REPRESENTATIONS AND
WARRANTIES OF ELECTRONIKA
Electronika and the Electronika Stockholders shall
deliver to Parent, within 30 days of the execution
hereof, a disclosure letter (the Electronika
Disclosure Letter). Except as specifically set
forth in the Electronika Disclosure Letter,
Electronika and the Electronika Stockholders
hereby represent and warrant to Parent and
MergerSub, as follows:
Section 3.1 Subsidiaries. Electronika (i) has
no subsidiaries and (ii) has no material debt
(other than trade accounts receivable) or equity
interest, or right or option to acquire any debt
or equity interest, in any corporation,
partnership, individual, association, trust or any
other entity or organization (a Person). As
of the date hereof, the Electronika Stockholders
own, directly and indirectly, the number of shares
of Parent Common Stock set forth in Schedule 3.1
of the Electronika Disclosure Letter.
Section 3.2 Organization and Qualification.
Electronika is a corporation duly organized,
validly existing, and in good standing under the
laws of its jurisdiction of incorporation, with
all requisite power and authority, and all
necessary consents, authorizations, approvals,
orders, licenses, certificates, and permits of and
from, and declarations and filings with, all
federal, state, local, and other governmental
authorities and all courts and other tribunals, to
own, lease, license, and use its properties and
assets and to carry on the business in which it is
now engaged and the business in which it
contemplates engaging, except where the failure to
have obtained any of the foregoing would not have
a material adverse effect on its financial
condition, results of operations, business or
prospects (a Material Adverse Effect).
Electronika is duly qualified to transact the
business in which it is engaged and is in good
standing as a foreign corporation in every
jurisdiction in which its ownership, leasing,
licensing, or use of property or assets or the
conduct of its business makes such qualification
necessary, except where failure to be so qualified
would not have a Material Adverse Effect.
Schedule 3.2 of the Electronika Disclosure Letter
includes a list of the jurisdictions in which
Electronika is qualified to do business.
Section 3.3 Capitalization. The authorized
capital stock of Electronika consists of 20,000
shares of common stock, par value $100.00 per
share (the Electronika Common Stock), of which
1,000 shares are outstanding and 20,000 shares of
preferred stock, no shares of which are
outstanding. All such outstanding shares of
Electronika Common Stock were validly authorized
and issued, and are fully paid, and nonassessable,
have not been issued and are not owned or held in
violation of any preemptive right of stockholders,
and are owned of record and beneficially by the
Electronika Stockholders, in each case free and
clear of all liens, security interests, pledges,
charges, encumbrances, stockholders' agreements,
and voting trusts. There is no commitment, plan,
or arrangement to issue, and no outstanding
option, warrant, or other right calling for the
issuance of, any shares of capital stock of
Electronika or any security or other instrument
convertible into, exercisable for, or exchangeable
for capital stock of Electronika. There are no
preemptive or similar rights to subscribe for or
to purchase capital stock of Electronika.
Section 3.4 Financial Condition.
Section 3.4.1 Assets and Liabilities at
Closing. On the Closing Date, the assets of
Electronika will include at least $400,000 of
cash, cash equivalents, accounts receivable, notes
receivable, inventory, work in process, prepaids,
machinery, equipment and deposits, net of all
liabilities of any kind whatsoever.
Section 3.4.2 Electronika Financial
Statements. Electronika has heretofore delivered
to Parent (a) its unaudited balance sheet as at
fiscal year-end in each of the years 1996 and 1997
together with statements of income for each of the
years then ended and (b) its unaudited balance
sheet as at June 30, 1998 (the Electronika Balance
Sheet Date), and unaudited statements of income
for the quarterly period then ended (collectively,
the Electronika Financial Statements). The
balance sheets included in the Electronika
Financial Statements are true, complete and
accurate in all material respects and fairly
present the assets, liabilities and financial
condition of Electronika as at the respective
dates thereof, and the statements of income
included in the Electronika Financial Statements
are true, complete and accurate in all material
respects and fairly present the results of
operations for the periods referred to therein.
Each of the Electronika Financial Statements (a)
has been prepared from, is in accordance with and
accurately reflects in all material respects the
books and records of Electronika and (b) has been
prepared in accordance with generally accepted
accounting principals (except as may be indicated
in the notes thereto) consistently applied
throughout the periods involved. Except as set
forth in Schedule 3.4.2 of the Electronika
Disclosure Letter, since June 30, 1998:
a) There has at no time been a material
adverse change in the financial condition, results
of operations, business, properties, assets,
liabilities, or future prospects of Electronika.
b) Electronika has not authorized, declared,
paid, or effected any liquidating distribution in
respect of its capital stock or any direct or
indirect redemption, purchase, or other
acquisition of any stock of Electronika.
c) The operations and business of Electronika
have been conducted in all respects only in the
ordinary course.
d) There has been no accepted purchase order
or quotation, arrangement, or understanding for
future sale of the products or services of
Electronika other than in the ordinary course of
business.
a) Electronika has not suffered an
extraordinary loss (whether or not covered by
insurance) or waived any right of substantial
value.
There is no fact known to Electronika which
materially adversely affects or in the future (as
far as the Electronika Stockholders can foresee)
may materially adversely affect the financial
condition, results of operations, business,
properties, assets, liabilities, or future
prospects of Electronika, other than economic
matters of general applicability.
Section 3.5 Taxes. Electronika has filed all
income, franchise and other tax returns required
to be filed by it on and before the date hereof.
All taxes imposed by the United States, the State
of California or by any other state, municipality,
subdivision, or other taxing authority, which are
due and payable by Electronika have been paid in
full or are adequately provided for by reserves
reflected on the latest balance sheet included in
the Electronika Financial Statements. All
contributions due from Electronika pursuant to any
unemployment insurance or workers compensation
laws and all sales or use taxes which are due or
payable by Electronika have been paid in full.
Electronika has withheld and paid to, or will
cause to be paid to, the appropriate taxing
authorities all amounts required to be withheld
from the wages of its employees under state law
and the applicable provisions of the Internal
Revenue Code of 1986, as amended (the Code).
Electronika has furnished to Parent true and
complete copies of the federal income tax returns
and comparable state tax returns of Electronika
covering the years ended December 31, 1996 and
1997, constituting complete and accurate
representations in all material respects of the
tax liabilities of Electronika for the relevant
periods stated therein and accurately setting
forth all relevant material items, including the
tax bases of all assets, where required to be set
forth in such tax returns.
Section 3.6 Undisclosed Liabilities. Except as
disclosed in Schedule 3.6 of the Electronika
Disclosure Letter and except for liabilities and
obligations reflected on the latest balance sheet
included in the Electronika Financial Statements
or arising in the ordinary course of business
since the date of such balance sheet, none of
which latter items, individually or in the
aggregate, have a Material Adverse Effect: (a)
Electronika is not, and none of its properties
are, subject to any debts, liabilities or
obligations of any nature, whether accrued,
absolute, contingent or otherwise, which are of a
type required to be shown or reflected on
financial statements prepared in a manner
consistent with generally accepted accounting
principles; and (b) Electronika is not, and none
of its properties are, subject to any material
debts, liabilities or obligations of any nature,
whether accrued, absolute, contingent or
otherwise, whether or not of a type which are
required to be shown or reflected on financial
statements prepared in a manner consistent with
generally accepted accounting principles.
Section 3.7 Litigation and Claims. There is no
litigation, arbitration, claim, governmental or
other proceeding (formal or informal), or
investigation pending or, to the best knowledge of
Electronika, threatened, or any basis therefor
known to Electronika, with respect to Electronika
or any of its businesses, properties, or assets.
Electronika is not in violation of, or in default
with respect to, any law, rule, regulation, order,
judgment, or decree such as would cause a Material
Adverse Effect; nor is Electronika required to
take any action in order to avoid such violation
or default.
Section 3.8 Properties. Electronika represents
and warrants as to its properties as follows:
a) All accounts and notes receivable reflected
in the Electronika Financial Statements, or
arising since the Electronika Balance Sheet Date,
have been collected, or, to the best knowledge of
Electronika, are and will be good and collectible,
in each case at the aggregate recorded amounts
thereof without right of recourse, defense,
reduction, return of goods, counterclaim, offset,
or set off on the part of the obligor, net, in the
aggregate, of the applicable reserve reflected on
the Electronika Balance Sheet.
b) All inventory of raw materials and work in
process of Electronika included in the Electronika
Balance Sheet or acquired since the Electronika
Balance Sheet Date is usable, and all inventory of
finished goods is good and marketable, on a normal
basis in the existing product lines of
Electronika. In no event do such inventories
represent more than a six-month supply measured by
the volume of sales or use for the year ended
December 31, 1997. All inventory is usable and
salable in the normal course of business.
c) Attached as Schedule 3.8(c) to the
Electronika Disclosure Letter hereto is a true and
complete list of all real and other properties and
assets owned by Electronika or leased or licensed
by Electronika from or to a third party (including
inventory but not including Intangible Assets, as
defined in Section 3.14 hereof), including with
respect to such properties and assets owned by
Electronika a statement of cost, book value and
(except for land) reserve for depreciation of each
item for tax purposes, and net book value of each
item for financial reporting purposes, and with
respect to such properties and assets leased or
licensed by Electronika, a description of such
lease or license. All such real and other
properties and assets (including Intangibles)
owned by Electronika are reflected on the
Electronika Balance Sheet (except for acquisitions
subsequent to the Electronika Balance Sheet Date
and prior to the Effective Time which are either
noted on Schedule 3.8 or were approved in writing
by Parent) and are owned by Electronika free and
clear of all liens, mortgages, security interests,
pledges, charges and encumbrances other than (a)
liens, mortgages, security interests, pledges,
charges or encumbrances disclosed in the
Electronika Financial Statements or Schedule
3.8(c) of the Electronika Disclosure Letter, (b)
landlords', mechanics', carriers', workers' and
similar statutory liens arising in the ordinary
course of business for sums not delinquent, for
which adequate reserves or other appropriate
provisions have been made in the Electronika
Financial Statements, (c) deed restrictions and
similar exceptions to clear title not incurred in
connection with indebtedness that do not
materially impair the existing use or materially
detract from the value of the assets or property
subject thereto, and (d) liens for current taxes
not delinquent, for which adequate reserves or
other appropriate provisions have been made in the
Electronika Financial Statements. All real and
other tangible properties and assets owned,
leased, or licensed by Electronika are in good and
usable condition (reasonable wear and tear, taking
into account the respective ages of the assets
involved, which is not such as to affect adversely
the operation of the business of Electronika,
excepted).
d) No real property owned, leased, or licensed
by Electronika lies in an area which is, or to the
knowledge of Electronika will be, subject to
zoning, use, or building code restrictions which
would prohibit, and to the best knowledge of
Electronika, no state of facts relating to the
actions or inaction of another person or entity or
its ownership, leasing, licensing, or use of any
real or personal property exists which would
prevent, the continued effective ownership,
leasing, licensing, or use of such real property
in the business in which Electronika is now
engaged or the business which it now contemplates
engaging.
e) The assets set forth on Schedule 3.8(c) of
the Electronika Disclosure Letter constitute all
such properties and assets which are necessary for
the operation of the business of Electronika in
accordance with its current methods of operation
in all material respects.
Section 3.9 Contracts and Other Instruments.
Schedule 3.9 of the Electronika Disclosure Letter
includes a listing of all oral or written (a)
contracts, commitments, sales orders or purchase
orders, whether or not entered into in the
ordinary course of business, which involve future
payments, performance of services or delivery of
goods and/or materials, to or by Electronika of an
amount or value in excess of $50,000; (b) bonus,
incentive compensation, pension, profit sharing,
stock option, group insurance, medical
reimbursement or employee welfare or benefit plans
of any nature whatsoever; (c) collective
bargaining agreements or other contracts or
commitments to or with labor unions or other
employee groups; (d) leases, contracts or
commitments affecting ownership of, title to, use
of or any material interest in real estate; (e)
employment contracts or other contracts,
agreements, or commitments to or with indi-vidual
employees, consultants or agents of Electronika
that (i) extend for a period of more than six
months from the date hereof, (ii) provide for
earlier termination upon payment of a penalty or
the equivalent thereof or (iii) involve
consideration having a value in excess of $50,000;
(f) equipment leases providing (in any one lease
or group of related leases) for payments in excess
of $25,000 per year; (g) contracts under which the
performance of any obligation of Electronika is
guaranteed by any of the Electronika Stockholders
or any third party, including performance bonding
arrangements; (h) contracts or commitments
providing for payments based in any manner upon
the revenues, purchases or profits of Electronika;
(i) bank credit, factoring and loan agreements,
indentures, promissory notes and other documents
representing indebtedness for borrowed money; (j)
patent licensing agreements and all other
agreements with respect to patents, patent
applications, trademarks, service marks, trade
names, technical assistance, special processes,
know-how, copyright or other like items; (k) other
contracts and agreements to which Electronika is a
party and which have not been fully performed,
involving consideration having a value in excess
of $50,000 or a remaining period for performance
in excess of nine months; (l) any non-competition
agreements or indemnification agreements to which
Electronika is a party; and (m) any other
contract, agreement, commitment or understanding
that is material to the financial condition,
results of operations, business or prospects of
Electronika. The items described in this Section
3.9 are referred to herein collectively as the
Electronika Material Contracts . Electronika
has furnished to Parent true and complete copies
of the Electronika Material Contracts.
Section 3.10 Validity of Electronika Material
Contracts. All of the Electronika Material
Contracts are valid and binding obligations of
Electronika and, to the best knowledge of
Electronika, the other parties thereto, in
accordance with their respective terms, subject to
the applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws of
general application relating to or affecting the
enforcement of the rights of creditors or by
equitable principles, whether enforcement is
sought in equity or at law (the Bankruptcy
Exception); there have been no amendments or
modifications to any of the Electronika Material
Contracts (except as set forth in the copies
furnished to Parent); no event has occurred which
is, or, following any grace period or required
notice, would become a material default by
Electronika under the terms of any of the
Electronika Material Contracts; except to the
extent specifically reserved for on the latest
balance sheet included in the Electronika
Financial Statements, Electronika is not a party
to any Electronika Material Contract for which
Electronika or the Electronika Stockholders
anticipate expenses materially in excess of
revenues or which is otherwise materially adverse;
and Electronika has not expressly waived any
material rights under any Electronika Material
Contract.
Section 3.11 Charter Instruments. Electronika
has furnished to Parent complete and correct
copies of its Articles of Incorporation and Bylaws
as in effect on the date hereof. Electronika has
heretofore made available to Parent for its
examination copies of the minute books, stock
certificate books and corporate seal of
Electronika. Said minute books are accurate in
all material respects and reflect all resolutions
adopted and all material actions expressly
authorized or ratified by the stockholders and
directors of Electronika. The stock certificate
books reflect all issuances, transfers and
cancellations of capital stock of Electronika.
Section 3.12 Related Party Transactions
Schedule 3.12 of the Electronika Disclosure Letter
contains a description of any transaction, during
the last two years, or proposed transaction, to
which Electronika was or is to be a party in which
any of the following persons had or is to have a
direct or indirect material interest: (1) any
director or officer of Electronika; (2) any
Electronika Stockholder; and (3) any member of the
immediate family (including spouse, parents,
children, siblings and in-laws) of any of the
foregoing persons (in each case, a Related
Party). Such description shall include the name
of the person, the relationship to Electronika,
the nature of the person's interest in the
transaction and, the amount of such interest;
provided, however, that no disclosure is required
if the amount involved in the transaction or a
series of similar transactions does not exceed
$60,000.
Section 3.13 Employee Benefit Plans. As used
in this Section 3.13, the term Benefit Plan
means any plan, program, arrangement, practice or
contract which provides benefits or compensation
to or on behalf of employees or former employees
of Electronika or any ERISA Affiliate
(as hereinafter defined), whether formal or
informal, whether or not written, including but
not limited to the following:
Section 3.13.1 Arrangements. Any bonus,
incentive compensation, stock option, deferred
compensation, commission, severance, golden
parachute or other compensation plan, rabbi trust,
program, contract, arrangement or practice.
Section 3.13.2 ERISA Plans. Any employee
benefit plan (as defined in Section 3(3) of
ERISA), including, but not limited to, any
multi-employer plan (as defined in Section
3(37) and Section 4001(a)(3) of ERISA), defined
benefit pension plan, profit sharing plan, money
purchase pension plan, 401(k) plan, savings or
thrift plan, stock bonus plan, employee stock
ownership plan, or any plan, fund, program,
arrangement or practice providing for medical
(including post-retirement medical),
hospitalization, accident, sickness, disability,
or life insurance benefits.
Section 3.13.3 Other Employee Fringe Benefits.
Any stock purchase, vacation, scholarship, day
care, prepaid legal services, severance pay or
other fringe benefit plan, program, arrangement,
contract or practice.
Section 3.13.4 ERISA Affiliate. For purposes
of this Section 3.13, the term ERISA
Affiliate means each trade or business
(whether or not incorporated) which together with
Electronika is treated as single employer under
Section 414(b), (c), (m) or (o) of the Code.
Section 3.13.5 Identification of Benefit
Plans. Except as set forth in Section 3.13 of the
Electronika Disclosure Letter, neither Electronika
nor any ERISA Affiliate maintains, has not at any
time established or maintained, and has not at any
time been obligated to make contributions to or
under or otherwise participate in any Benefit
Plan.
Section 3.13.6 MEPPA Liability/Post-Retirement
Medical Benefits/ Defined Benefit
Plans/Supplemental Retirement Plans. Neither
Electronika nor any ERISA Affiliate maintains, or
has at any time established or maintained, or has
at any time been obligated to make contributions
to or under any multi-employer plan. Neither
Electronika nor any ERISA Affiliate maintains, or
has at any time established or maintained, or has
at any time been obligated to make contributions
to or under (i) any plan which provides post-
retirement medical or health benefits, (ii) any
organization described in Sections 501(c)(9) or
501(c)(20) of the Code, (iii) any defined benefit
pension plan subject to Title IV of ERISA or (iv)
any plan which provides retirement benefits in
excess of the limitations of Section 415 of the
Code.
Section 3.13.7 Liabilities. The execution and
performance of the transactions contemplated by
this Agreement will not create, accelerate or
increase any obligation to make any payment which,
as an excess parachute payment under
Section 280G of the Code, would not be deductible.
Section 3.14 Patents, Trademarks, Et Cetera.
Schedule 3.14 of the Electronika Disclosure
Letter includes a list of all material patents,
patent applications, trade names, trademark
registrations and applications therefor,
copyrights, licenses, franchises and other assets
of like kind(Intangible Assets) and all interests
in Intangible Assets which are owned in whole or
in part by or registered in the name of
Electronika. Electronika owns or has the right to
use all Intangible Assets now used in the conduct
of its business. Such Intangible Assets include
all of the proprietary products and formulations
developed by Electronika or used by it in its
business. Electronika is not obligated to pay any
royalty or other fee to any licensor or other
third party with respect to any Intangible Assets.
Electronika has not received any claim alleging
any conflict between any aspect of the business of
Electronika and any Intangible Assets claimed to
be owned by others which, if determined adversely
to Electronika, would have a Material Adverse
Effect. None of the Electronika Stockholders or
any Related Party has any interest in any
Intangible Assets which are presently used by
Electronika or which infringe upon, conflict with
or relate to improvements or modifications of any
Intangible Assets presently used by Electronika.
To the best knowledge of Electronika, there is no
infringement by others of any Intangible Assets of
Electronika.
Section 3.15 Questionable Payments. Neither
Electronika, nor, to the best knowledge of
Electronika, any director, officer, agent,
employee, or other person associated with or
acting on behalf of Electronika nor any
stockholder of Electronika has, directly or
indirectly: used any corporate funds for unlawful
contributions, gifts, entertainment, or other
unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic
government officials or employees or to foreign or
domestic political parties or campaigns from
corporate funds; violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended;
or made any bribe, payoff, influence payment,
kickback, or other unlawful payment of any kind.
Section 3.16 Authority to Merge. Electronika
has full corporate power and authority to execute,
deliver, and perform this Agreement. All
necessary corporate proceedings of Electronika
(including stockholder actions) have been duly
taken to authorize the execution, delivery, and
performance of this Agreement (including without
limitation the consummation of the Merger) by
Electronika. This Agreement (i) has been duly
authorized, executed, and delivered by
Electronika, (ii) constitutes the legal, valid,
and binding obligation of Electronika, and (iii)
is enforceable as to it in accordance with its
terms, subject to the Bankruptcy Exception.
Except for the filing of the Articles of Merger
with the Missouri and California Secretaries of
State, no consent, authorization, approval, order,
license, certificate, or permit of or from, or
declaration or filing with, any federal, state,
local, or other governmental authority or any
court or other tribunal is required by Electronika
for the execution, delivery, or performance of
this Agreement by Electronika. No consent of any
party to any Electronika Material Contract is
required for the execution, delivery, or
performance of this Agreement; and the execution,
delivery, and performance of this Agreement will
not violate, result in a breach of, conflict with,
or (with or without the giving of notice or the
passage of time or both) entitle any party to
terminate or call a default under, entitle any
party to any material rights or privileges that
such party was not receiving or entitled to
receive immediately before this Agreement was
executed under, or create any obligation on the
part of Electronika that it was not paying or
obligated to pay immediately before this Agreement
was executed under, any term of any Electronika
Material Contract, or violate or result in a
breach of any term of the articles of
incorporation (or other charter document) or
bylaws of Electronika, or violate, result in a
breach of, or conflict with any law, rule,
regulation, order, judgment, or decree binding on
Electronika, or to which any of its businesses,
properties, or assets are subject. Neither
Electronika nor any of its officers, directors,
employees, or agents has employed any broker or
finder or incurred any liability for any fee,
commission, or other compensation payable by any
person on account of alleged employment as a
broker or finder, or alleged performance of
services as a broker or finder, in connection with
or as a result of this Agreement, the Merger, or
the other transactions contemplated by this
Agreement.
Section 3.17 Year 2000 Compliance. To the best
knowledge of Electronika, each item of hardware,
software and firmware owned or used by
Electronika(Electronika Information Technology) is
able to accurately process date/time data
(including, but not limited to, calculating,
comparing, and sequencing) from, into, and between
the twentieth and twenty-first centuries and the
years 1999 and 2000 and make leap year
calculations independently and to the extent that
other information technology, used in combination
with the Electronika Information Technology,
properly exchanges date/time data with it. If
certain items of the Electronika Information
Technology are required to perform as a system,
then this warranty shall apply to those items of
Electronika Information Technology as a system.
Section 3.18 Assets of Magnetika/East; Name
Change. Prior to the Closing Date, Electronika
shall have acquired the business and assets of
Magnetika/East. The business and assets to be
acquired are set forth in Schedule 3.18 of the
Electronika Disclosure Letter. Electronika shall
own such business and assets free and clear of any
liens or encumbrances. Prior to the date hereof,
Electronika changed its corporate name from
Caloyeras, Inc. to Electronika, Inc.
Electronika possesses all of the rights,
privileges, powers and preferences, and is subject
to all of the obligations, restrictions,
disabilities and duties, of the former Caloyeras,
Inc.
Section 3.19 Environmental Matters.
a) For purposes of this Agreement, the
following terms shall have the following meanings:
(i) Environmental Claims means any
and all administrative, regulatory or judicial
actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation,
investigations or proceedings relating to any
Environmental Law or Environmental Permit,
including, without limitation, (A) any and all
claims by governmental or regulatory authorities
for enforcement, cleanup, removal, response,
remedial or other actions or damages pursuant to
any applicable Environmental Law, and (B) any and
all claims by any third party seeking damages,
contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from
Hazardous Substances or arising from alleged
injury or threat of injury to the environment.
(ii) Environmental Laws means any
federal, state, or local statute, law, rule,
regulation, ordinance, code or rule of common law
in effect as of the date hereof, and any judicial
or administrative interpretation thereof,
including any judicial or administrative order,
consent decree or judgment, relating to human
health and the environment or Hazardous
Substances, including, without limitation, the
Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended by the
Superfund Amendments and Reauthorization Act of
1986, 42 U.S.C. 9601, et seq.; the Emergency
Planning and Community Right-to-Know Act, 42
U.S.C. 11001, et seq.; The Resource Conservation
and Recovery Act, 42 U.S.C. 6901 et seq.; the
Federal Water Pollution Control Act, 33 U.S.C.
1251 et seq.; the Clean Air Act, as amended, 42
U.S.C. 7401, et seq.; the Federal Insecticide,
Fungicide and Rodenticide Act, 7 U.S.C. 136, et
seq.; the Safe Drinking Water Act, 42 U.S.C.
300f, et seq.; the Toxic Substances Control Act,
15 U.S.C. 2601, et seq.; the Oil Pollution Act
of 1990, 33 U.S.C. 1001, et seq.; the Hazardous
Materials Transportation Act, as amended, 49
U.S.C. 1801, et seq.; the Occupational Safety
and Health Act, as amended, 29 U.S.C. 651, et
seq.; or the Federal Food, Drug and Cosmetic Act,
as amended, 21 U.S.C. 301, et seq., or any
environmental transfer laws which regulate the
transfer of property and the corresponding state
laws, regulations and local ordinances, etc.,
which may be applicable, as any such acts have
been or may be amended.
(iii) Environmental Permits means
all permits, approvals, identification numbers,
licenses and other authorizations required under
any applicable Environmental Law.
(iv) Hazardous Substances means (A)
any chemicals, materials or substances defined as
or included in the definition of hazardous
substances,
hazardous wastes, hazardous materials, extremely
hazardous
wastes, restricted hazardous wastes, toxic
substances,
toxic
pollutants, hazardous air pollutants, pollutants,
contaminants, toxic chemicals, petroleum or petroleum
products, toxics, hazardous chemicals, extremely
hazardous
substances, pesticides or related materials, as
presently
defined in any applicable Environmental Law; (B) any
petroleum or petroleum products, natural or synthetic
gas,
radioactive materials, asbestos-containing materials,
urea
formaldehyde foam insulation, and radon; and (C) any
other
chemical, material or substance, the presence of
which
requires investigation or remediation under any
Environmental Law.
b) With respect to real property owned or
leased by Electronika, to the best knowledge of
Electronika: (i) Electronika has not violated nor
is in violation in any respect of any applicable
Environmental Law; (ii) Electronika has all
Environmental Permits and is in material
compliance with their requirements; (iii) such
real property (including, without limitation,
soils and surface, ground waters and buildings) is
not contaminated with any Hazardous Substances
requiring remediation under applicable
Environmental Laws; (iv) Electronika has not
received written notice of any past, pending or
threatened Environmental Claims or circumstances
that could reasonably be anticipated to form the
basis thereof against Electronika; (v) such real
property is not listed on CERCLIS, the NPL, or any
similar state or local listing nor is it included
in an area included in such a list, and
Electronika has not received written notice that
such a listing is pending or contemplated.
Section 3.20 Completeness of Disclosure. No
representation or warranty by Electronika or the
Electronika Stockholders in this Agreement
contains or at the Effective Time will contain an
untrue statement of material fact or omits or at
the Effective Time will omit to state a material
fact required to be stated therein or necessary to
make the statements made, in the light of the
circumstances under which they were made, not
misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
PARENT AND ACQUISITION
Parent and MergerSub shall deliver to Electronika
and the Electronika Stockholders, within 30 days
of the execution hereof, a disclosure letter (the
Parent Disclosure Letter). Except as specifically
set forth in the Parent Disclosure Letter, Parent
and MergerSub hereby represent and warrant to
Electronika and the Electronika Stockholders, as
follows:
Section 4.1 Subsidiaries. Parent owns all of
the outstanding shares of capital stock of
MergerSub, Torotel Products, Inc., a Missouri
corporation, and OPT Industries, Inc., a New
Jersey corporation (each, a Parent
Subsidiary). Other than as described in the
immediately preceding sentence, neither Parent nor
any Parent Subsidiary (i) has any subsidiaries or
(ii) has any material debt (other than trade
accounts receivable) or equity interest, or right
or option to acquire any debt or equity interest,
in any Person.
Section 4.2 Organization and Qualification.
Each of Parent and the Parent Subsidiaries is a
corporation duly organized, validly existing, and
in good standing under the laws of its
jurisdiction of incorporation, with all requisite
power and authority, and all necessary consents,
authorizations, approvals, orders, licenses,
certificates, and permits of and from, and
declarations and filings with, all federal, state,
local, and other governmental authorities and all
courts and other tribunals, to own, lease,
license, and use its properties and assets and to
carry on the business in which it is now engaged
and the business in which it contemplates
engaging, except where the failure to have
obtained any of the foregoing would not have a
Material Adverse Effect. Each of Parent and the
Parent Subsidiaries is duly qualified to transact
the business in which it is engaged and is in good
standing as a foreign corporation in every
jurisdiction in which its ownership, leasing,
licensing, or use of property or assets or the
conduct of its business makes such qualification
necessary, except where the failure to be so
qualified would not have a Material Adverse
Effect. Schedule 4.2 of the Parent Disclosure
Letter includes a list of the jurisdictions in
which Parent and/or the Parent Subsidiaries is
qualified to do business.
Section 4.3 Capitalization. As of the date
hereof, the authorized capital stock of Parent
consists of 6,000,000 shares of Parent Common
Stock, of which 2,811,590 shares are issued and
outstanding (as of November 1, 1998). The
authorized capital stock of MergerSub consists of
1,000 shares of common stock, all of which are
owned by Parent, free and clear of any liens,
security interests, pledges, charges and
encumbrances. All such outstanding shares of
Parent Common Stock and MergerSub common stock
were validly authorized and issued, and are fully
paid and nonassessable, and have not been issued
and are not owned or held in violation of any
preemptive right of stockholders. Other than as
contemplated hereby and except as set forth on
Schedule 4.3 of the Parent Disclosure Letter,
there is no commitment, plan, or arrangement to
issue, and no outstanding option, warrant, or
other right calling for the issuance of, any share
of capital stock of Parent or any Parent
Subsidiary or any security or other instrument
convertible into, exercisable for, or exchangeable
for capital stock of Parent or any Parent
Subsidiary. There are no preemptive or similar
rights to subscribe for or to purchase capital
stock of Parent or any Parent Subsidiary.
Section 4.4 Financial Condition. Parent has
heretofore delivered to Electronika (a) its Form
10-KSB for the fiscal year ended April 30, 1998
(the Form 10-KSB), as filed with the Securities
and Exchange Commission (the SEC) and (b) its Form
10-QSB for the fiscal quarter ended July 31, 1998
(the Form 10-QSB), as filed with the SEC. The
Form 10-KSB and the Form 10-QSB, together with all
reports, forms and other documents filed by Parent
with the SEC are referred to herein, collectively
as the Parent SEC Documents. As of their
respective dates, the Parent SEC Documents
complied in all material respects with the
requirements of the Securities Act of 1933, as
amended (the Securities Act) or the Securities
Exchange Act of 1934, as amended, as the case may
be, and the rules and regulations of the SEC
thereunder applicable to such Parent SEC
Documents. The Parent SEC Documents, in the
aggregate, do not contain any untrue statement of
a material fact or omit 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. The consolidated financial statements
of Parent included in the Parent SEC Documents:
(i) are true and complete as of the respective
dates thereof; (ii) fairly and accurately present
the consolidated financial condition of Parent as
of the respective dates thereof, and the
consolidated results of the operations of Parent
for the respective periods covered thereby; (iii)
disclose all liabilities required to be disclosed
therein; and (iv) have been prepared in accordance
with generally accepted accounting principles
applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and
except as the application may be modified in
accordance with generally accepted accounting
principles for interim reporting. Except as set
forth in Schedule 4.4 of the Parent Disclosure
Letter, since July 31, 1998:
a) There has at no time been a Material
Adverse change in the financial condition, results
of operations, business, properties, assets,
liabilities or future prospects of Parent or any
Parent Subsidiary.
b) Neither Parent nor any Parent Subsidiary
has authorized, declared, paid, or effected any
dividend or liquidating or other distribution in
respect of its capital stock or any direct or
indirect redemption, purchase, or other
acquisition of any stock of Parent or any Parent
Subsidiary.
c) The operations and business of Parent and
all Parent Subsidiaries have been conducted in all
respects only in the ordinary course.
d) There has been no accepted purchase order
or quotation, arrangement or understanding for
future sale of the products or services of Parent
or any Parent Subsidiary, other than in the
ordinary course of business.
e) Neither Parent nor any Parent Subsidiary
has suffered an extraordinary loss (whether or not
covered by insurance) or waived any right of
substantial value. Other than as disclosed in
Parent SEC Documents, there is no fact known to
Parent or any Parent Subsidiary which materially
adversely affects or in the future (as far as
Parent or any Parent Subsidiary can foresee) may
materially adversely affect the financial
condition, results of operations, business,
properties, assets, liabilities, or future
prospects of Parent or any Parent Subsidiary,
other than economic matters of general
applicability.
Section 4.5 Taxes. Parent and each Parent
Subsidiary has filed all income, franchise and
other tax returns required to be filed by it on
and before the date hereof. All taxes imposed by
the United States, the State of Missouri or by any
other state, municipality, subdivision, or other
taxing authority, which are due and payable by
Parent or any Parent Subsidiary have been paid in
full or are adequately provided for by reserves
reflected on the latest balance sheet included in
the Parent SEC Documents. All contributions due
from Parent or any Parent Subsidiary pursuant to
any unemployment insurance or workers compensation
laws and all sales or use taxes which are due or
payable by Parent or any Parent Subsidiary have
been paid in full. Parent and each Parent
Subsidiary has withheld and paid to, or will cause
to be paid to, the appropriate taxing authorities
all amounts required to be withheld from the wages
of its employees under state law and the
applicable provisions of the Code. Parent has
furnished to Electronika true and complete copies
of the federal income tax returns and comparable
state tax returns of Parent covering the years
ended December 31, 1996 and 1997, constituting
complete and accurate representations in all
material respects of the tax liabilities of Parent
for the relevant periods stated therein and
accurately setting forth all relevant material
items, including the tax bases of all assets,
where required to be set forth in such tax
returns.
Section 4.6 Undisclosed Liabilities. Except as
disclosed in the Schedule 4.6 of the Parent
Disclosure Letter or in Parent SEC Documents and
except for liabilities and obligations arising in
the ordinary course of business since July 31,
1998, none of which latter items, individually or
in the aggregate, have a Material Adverse Effect:
(a) neither Parent nor any Parent Subsidiary is,
and none of their properties are, subject to any
debts, liabilities or obligations of any nature,
whether accrued, absolute, con-tingent or
otherwise, which are of a type required to be
shown or reflected on financial statements
prepared in a manner consistent with generally
accepted accounting principles; and (b) neither
Parent nor any Parent Subsidiary is, and none of
their properties are, subject to any material
debts, liabilities or obligations of any nature,
whether accrued, absolute, contingent or
otherwise, whether or not of a type which are
required to be shown or reflected on financial
statements prepared in a manner consistent with
generally accepted accounting principles.
Section 4.7 Litigation and Claims. Other than
as disclosed in the Parent SEC Documents or as set
forth in Schedule 4.7 of the Parent Disclosure
Letter, there is no litigation, arbitration,
claim, governmental or other proceeding (formal or
informal), or investigation pending, or, to the
best knowledge of Parent, threatened, or any basis
therefor known to Parent or any Parent Subsidiary,
with respect to Parent or any Parent Subsidiary or
any of their respective businesses, properties, or
assets. Neither Parent nor any Parent Subsidiary
is in violation of, or in default with respect to,
any law, regulation, order, judgment, or decree;
nor is Parent or any Parent Subsidiary required to
take any action in order to avoid such violation
or default.
Section 4.8 Properties. Each of Parent and
MergerSub represents and warrants as to its
properties as follows:
a) All accounts and notes receivable reflected
on the balance sheet included in the Parent Form
10-QSB (the Parent Balance Sheet), or arising
since the date of the Parent Balance Sheet (the
Parent Balance Sheet Date), have been collected,
or, to the best knowledge of Parent, are and will
be good and collectible, in each case at the
aggregate recorded amounts thereof without right
of recourse, defense, deduction, return of goods,
counterclaim, offset, or set off on the part of
the obligor, net, in the aggregate, of the
applicable reserve reflected in the Parent Balance
Sheet.
b) All inventory of raw materials and work in
process of Parent and each Parent Subsidiary
included in the Parent Balance Sheet or acquired
since the Parent Balance Sheet Date is usable, and
all inventory of finished goods is good and
marketable, on a normal basis in the existing
product lines of Parent or any Parent Subsidiary,
as the case may be. In no event do such
inventories represent more than a six-month supply
measured by the volume of sales or use for the
year ended April 30, 1998. All inventory is
usable and saleable in the normal course of
business.
c) Attached as Schedule 4.8 to the Parent
Disclosure Letter is a true and complete list of
all real and other properties and assets owned by
Parent and each Parent Subsidiary or leased or
licensed by Parent or any Parent Subsidiary from
or to a third party (including inventory but not
including Intangibles), including with respect to
such properties and assets owned by Parent or by
any Parent Subsidiary a statement of cost, book
value and (except for land) reserve for
depreciation of each item for tax purposes, and
net book value of each item for financial
reporting purposes, and with respect to such
properties and assets leased or licensed by Parent
or by any Parent Subsidiary from or to a third
party, a description of such lease or license.
All such real and other properties assets
(including Intangibles) owned by Parent or any
Parent Subsidiary are reflected on the Parent
Balance Sheet (except for acquisitions subsequent
to the Parent Balance Sheet Date and prior to the
Effective Time which are either noted in Schedule
4.8 hereto or were approved in writing by
Electronika) and are owned by Parent or any Parent
Subsidiary free and clear of all liens, mortgages,
security interests, pledges, charges and
encumbrances other than (a) liens, mortgages,
security interests, pledges, charges or
encumbrances disclosed in the Parent SEC Documents
or Schedule 4.8, (b) landlords', mechanics',
carriers', workers' and similar statutory liens
arising in the ordinary course of business for
sums not delinquent, for which adequate reserves
or other appropriate provisions have been made in
the Parent SEC Documents, (c) deed restrictions
and similar exceptions to clear title not incurred
in connection with indebtedness that do not
materially impair the existing use or materially
detract from the value of the assets or property
subject thereto, and (d) liens for current taxes
not delinquent, for which adequate reserves or
other appropriate provisions have been made in the
Parent SEC Documents. All real and other tangible
properties and assets owned, leased, or licensed
by Parent or any Parent Subsidiary are in good and
usable condition (reasonable wear and tear, taking
into account the respective ages of the assets
involved, which is not such as to affect adversely
the operation of the business of Parent or of such
Parent Subsidiary, excepted).
d) No real property owned, leased, or licensed
by Parent or by any Parent Subsidiary lies in an
area which is, or to the knowledge of Parent or
any Parent Subsidiary will be, subject to zoning,
use, or building code restrictions which would
prohibit, and to the best knowledge of Parent, no
state of facts relating to the actions or inaction
of another person or entity or its ownership,
leasing, licensing or use of any real or personal
property exists which would prevent, the continued
effective ownership, leasing, licensing, or use of
such real property in the business in which Parent
or any Parent Subsidiary is now engaged or the
business in which it now contemplates engaging.
e) The assets set forth on Schedule 4.8 of the
Parent Disclosure Letter constitute all such
properties and assets which are necessary for the
operation of the business of Parent and each
Parent Subsidiary in accordance with their current
methods of operation in all material respects.
Section 4.9 Contracts and Other Instruments.
Schedule 4.9 of the Parent Disclosure Letter
includes a listing of all oral or written (a)
contracts, commitments, sales orders or purchase
orders, whether or not entered into in the
ordinary course of business, which involve future
payments, performance of services or delivery of
goods and/or materials, to or by Parent or any
Parent Subsidiary of an amount or value in excess
of $50,000; (b) bonus, incentive compensation,
pension, profit sharing, stock option, group
insurance, medical reimbursement or employee
welfare or benefit plans of any nature whatsoever;
(c) collective bargaining agreements or other
contracts or commitments to or with labor unions
or other employee groups; (d) leases, contracts or
commitments affecting ownership of, title to, use
of or any material interest in real estate; (e)
employment contracts or other contracts,
agreements, or commitments to or with individual
employees, consultants or agents of Parent or any
Parent Subsidiary that (i) extend for a period of
more than six months from the date hereof, (ii)
provide for earlier termination upon payment of a
penalty or the equivalent thereof or (iii) involve
consideration having a value in excess of $50,000;
(f) equipment leases providing (in any one lease
or group of related leases) for payments in excess
of $25,000 per year; (g) contracts under which the
performance of any obligation of Parent or any
Parent Subsidiary is guaranteed by any of the
Parent Subsidiaries or Parent, as applicable, or
any third party, including performance bonding
arrangements; (h) contracts or commitments
providing for payments based in any manner upon
the revenues, purchases or profits of Parent or
any Parent Subsidiary; (i) bank credit, factoring
and loan agreements, indentures, promissory notes
and other documents representing indebtedness for
borrowed money; (j) patent licensing agreements
and all other agreements with respect to patents,
patent applications, trademarks, service marks,
trade names, technical assistance, special
processes, know-how, copyright or other like
items; (k) other contracts and agreements to which
Parent or any Parent Subsidiary is a party and
which have not been fully performed, involving
consideration having a value in excess of $50,000
or a remaining period for performance in excess of
nine months; (l) any non-competition agreements or
indemnification agreements to which Parent or any
Parent Subsidiary is a party; and (m) any other
contract, agreement, commitment or understanding
that is material to the financial condition,
results of operations, business or prospects of
Parent or any Parent Subsidiary. The items
described in this Section 4.9 are referred to
herein collectively as the Parent Material
Contracts. Parent has furnished to
Electronika true and complete copies of the Parent
Material Contracts.
Section 4.10 Validity of Parent Material
Contracts. All of the Parent Material Contracts
are valid and binding obligations of Parent or the
Parent Subsidiary party thereto and, to the best
knowledge of Parent, the other parties thereto, in
accordance with their respective terms, subject to
the Bankruptcy Exception; there have been no
amendments or modifications to any of the Parent
Material Contracts (except as set forth in the
copies furnished to Electronika); no event has
occurred which is, or, following any grace period
or required notice, would become a material
default by Parent or any Parent Subsidiary under
the terms of any of the Parent Material Contracts;
except to the extent specifically reserved for on
the latest balance sheet included in the Parent
SEC Documents, neither Parent nor any Parent
Subsidiary is a party to any Parent Material
Contract for which Parent anticipates expenses
materially in excess of revenues or which is
otherwise materially adverse; and neither Parent
nor any Parent Subsidiary has expressly waived any
material rights under any Parent Material
Contract.
Section 4.11 Charter Instruments. Parent and
each Parent Subsidiary have furnished to
Electronika complete and correct copies of their
respective Articles of Incorporation and Bylaws as
in effect on the date hereof. Parent and each
Parent Subsidiary have heretofore made available
to Electronika for its examination copies of their
respective minute books, which are accurate in all
material respects and reflect all resolutions
adopted and all material actions expressly
authorized or ratified by the stockholders and
directors of Parent and each Parent Subsidiary.
Section 4.12 Employee Benefit Plans. As used
in this Section 4.12, the term Benefit Plan
means any plan, program, arrangement, practice or
contract which provides benefits or compensation
to or on behalf of employees or former employees
of Parent, any Parent Subsidiary or any ERISA
Affiliate (as hereinafter defined), whether
formal or informal, whether or not written,
including but not limited to the following:
Section 4.12.1 Arrangements. Any bonus,
incentive compensation, stock option,
deferred compensation, commission, severance,
golden parachute or other compensation plan, rabbi
trust, program, contract, arrangement or practice.
Section 4.12.2 ERISA Plans. Any employee benefit
plan (as
defined in Section 3(3) of ERISA), including, but not
limited to, any multi-employer plan (as defined in
Section
3(37) and Section 4001(a)(3) of ERISA), defined
benefit pension plan, profit sharing plan, money
purchase pension plan, 401(k) plan, savings or
thrift plan, stock bonus plan, employee stock
ownership plan, or any plan, fund, program,
arrangement or practice providing for medical
(including post-retirement medical),
hospitalization, accident, sickness, disability,
or life insurance benefits.
Section 4.12.3 Other Employee Fringe Benefits.
Any stock purchase, vacation, scholarship, day care,
prepaid
legal services, severance pay or other fringe benefit
plan,
program, arrangement, contract or practice.
Section 4.12.4 ERISA Affiliate. For purposes of
this Section 4.12, the term ERISA Affiliate means
each
trade
or business (whether or not incorporated) which
together
with Parent or any Parent Subsidiary is treated as
single
employer under Section 414(b), (c), (m) or (o) of the
Code.
Section 4.12.5 Identification of Benefit Plans.
Except as set forth in Schedule 4.12 of the Parent
Disclosure Letter, neither Parent, any
Parent Subsidiary nor any ERISA Affiliate
maintains, has not at any time established or
maintained, and has not at any time been obligated
to make contributions to or under or otherwise
participate in, any Benefit Plan.
Section 4.12.6 MEPPA Liability/Post-Retirement
Medical Benefits/Defined Benefit
Plans/Supplemental Retirement Plans. Neither
Parent, any Parent Subsidiary nor any ERISA
Affiliate maintains, or has at any time
established or maintained, or has at any time been
obligated to make contributions to or under any
multi-employer plan. Neither Parent, any Parent
Subsidiary nor any ERISA Affiliate maintains, or
has at any time established or maintained, or has
at any time been obligated to make contributions
to or under (i) any plan which provides post-
retirement medical or health benefits, (ii) any
organization described in Sections 501(c)(9) or
501(c)(20) of the Code, (iii) any defined benefit
pension plan subject to Title IV of ERISA or (iv)
any plan which provides retirement benefits in
excess of the limitations of Section 415 of the
Code.
Section 4.12.7 Liabilities. The execution and
performance of the transactions contemplated by
this Agreement will not create, accelerate or
increase any obligation to make any payment which,
as an excess parachute payment under Section 280G of
the
Code, would not be deductible.
Section 4.13 Patents, Trademarks, Et Cetera.
Schedule 4.13 of the Parent Disclosure Letter
includes a list of all of Parent's Intangible
Assets and all interests in Intangible Assets
which are owned in whole or in part by or
registered in the name of Parent or any Parent
Subsidiary. Parent and each Parent Subsidiary
owns or has the right to use all Intangible Assets
now used in the conduct of its business. Such
Intangible Assets include all of the proprietary
products and formulations developed by Parent or
any Parent Subsidiary or used by it in its
business. Neither Parent nor any Parent
Subsidiary is obligated to pay any royalty or
other fee to any licensor or other third party
with respect to any Intangible Assets. Neither
Parent nor any Parent Subsidiary has received any
claim alleging any conflict between any aspect of
the business of Parent or any Parent Subsidiary
and any Intangible Assets claimed to be owned by
others which, if determined adversely to Parent or
any Parent Subsidiary, would have a Material
Adverse Effect. No stockholder or affiliate of
Parent has any interest in any Intangible Assets
which are presently used by Parent or any Parent
Subsidiary or which infringe upon, conflict with
or relate to improvements or modifications of any
Intangible Assets presently used by Parent or any
Parent Subsidiary. To the best knowledge of
Parent, there is no infringement by others of any
Intangible Assets of Parent.
Section 4.14 Questionable Payments. Neither
Parent, any Parent Subsidiary nor, to the best
knowledge of Parent, any director, officer, agent,
employee, or other person associated with or
acting on behalf of Parent or any Parent
Subsidiary has, directly or indirectly: used any
corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating
to political activity; made any unlawful payment
to foreign or domestic government officials or
employees or to foreign or domestic political
parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any
bribe, payoff, influence payment, kickback, or
other unlawful payment of any kind.
Section 4.15 Authority to Merge. Parent and
MergerSub each has full corporate power and
authority to execute, deliver, and perform this
Agreement. All necessary corporate proceedings of
Parent and MergerSub have been duly taken to
authorize the execution, delivery, and performance
of this Agreement by Parent and MergerSub
(including without limitation the consummation of
the Merger), other than the approval of the
holders of Parent Common Stock. This Agreement
(i) has been duly authorized, executed, and
delivered by Parent and MergerSub, (ii)
constitutes the legal, valid, and binding
obligation of Parent and MergerSub, and (iii) is
enforceable as to them in accordance with its
terms, subject to the Bankruptcy Exception.
Except for the filing of the Articles of Merger
with the Missouri and California Secretaries of
State, and except as set forth in Section 7.8, no
consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration
or filing with, any federal, state, local, or
other governmental authority or any court or other
tribunal is required by Parent or MergerSub for
the execution, delivery, or performance of this
Agreement by Parent or MergerSub. No consent of
any party to any Parent Material Contract is
required for the execution, delivery, or
performance of this Agreement (except for such
consents disclosed on Schedule 4.15 of the Parent
Disclosure Letter); and the execution, delivery,
and performance of this Agreement will not (if the
consents referred to in such Schedule 4.15 are
obtained prior to the Effective Time) violate,
result in a breach of, conflict with, or (with or
without the giving of notice or the passage of
time or both) entitle any party to terminate or
call a default under, entitle any party to any
material rights or privileges that such party was
not receiving or entitled to receive before this
Agreement was executed under, or create any
obligation on the part of Parent or any Parent
Subsidiary that it was not paying or obligated to
pay immediately before this Agreement was executed
under, any Parent Material Contract or violate or
result in a breach of any term of the articles of
incorporation (or other charter document), or the
bylaws of Parent or any Parent Subsidiary, or
violate, result in a breach of, or conflict with
any law, rule, regulation, order, judgment, or
decree binding on Parent or any Parent Subsidiary
or to which any of their respective businesses,
properties, or assets are subject. Neither
Parent, any Parent Subsidiary, nor any of their
respective officers, directors, employees, or
agents has employed any broker or finder or
incurred any liability for any fee, commission, or
other compensation payable by any person on
account of alleged employment as a broker or
finder, or alleged performance of services as a
broker or finder, in connection with or as a
result of this Agreement, the Merger, or the other
transactions contemplated by this Agreement.
Section 4.16 Environmental Matters. With
respect to real property owned or leased by Parent
or any Parent Subsidiary, to the best knowledge of
Parent: (i) neither Parent nor any Parent
Subsidiary has violated nor is in violation in any
respect of any applicable Environmental Law; (ii)
Parent and each Parent Subsidiary has all
Environmental Permits and is in material
compliance with their requirements; (iii) such
real property (including, without limitation,
soils and surface, ground waters and buildings) is
not contaminated with any Hazardous Substances
requiring remediation under applicable
Environmental Laws; (iv) neither Parent nor any
Parent Subsidiary has received written notice of
any past, pending or threatened Environmental
Claims or circumstances that could reasonably be
anticipated to form the basis thereof against
Parent or any Parent Subsidiary; (v) such real
property is not listed on CERCLIS, the NPL, or any
similar state or local listing nor is it included
in an area included in such a list, and neither
Parent nor any Parent Subsidiary has received
written notice that such a listing is pending or
contemplated.
Section 4.17 Related Party Transactions.
Schedule 4.17 of the Parent Disclosure Letter
contains a description of any transaction, during
the last two years, or proposed transaction, to
which Parent or any Parent Subsidiary was or is to
be a party in which any of the following persons
had or is to have a direct or indirect material
interest: (1) any director or officer of Parent;
(2) any nominee for election as a director of
Parent; (3) any holder of more than 5% of Parent's
Common Stock; and (4) any member of the immediate
family (including spouse, parents, children,
siblings and in-laws) of any of the foregoing
persons (a Related Party). Such description
shall include the name of the person, the
relationship to Parent, the nature of the person's
interest in the transaction and, the amount of
such interest; provided, however, that no
disclosure is required if the amount involved in
the transaction or a series of similar
transactions does not exceed $60,000.
Section 4.18 Year 2000 Compliance. To the
best knowledge of Parent, each item of hardware,
software and firmware owned or used by Parent or
any Parent Subsidiary (Parent Information
Technology) is able to accurately process
date/time data (including, but not limited to,
calculating, comparing and sequencing) from, into
and between the twentieth and twenty-first
centuries and the years 1999 and 2000 and make
leap year calculations independently and to the
extent that other information technology, used in
combination with the Parent Information
Technology, properly exchanges date/time data with
it. If certain items of Parent Information
Technology are required to perform as a system,
then this warranty shall apply to those items of
Parent Information Technology as a system.
Section 4.19 Interim Operations of MergerSub.
MergerSub was formed solely for the purpose of
engaging in the transactions contemplated by this
Agreement, has engaged in no other business
activities and has conducted its operations only
as contemplated by this Agreement.
Section 4.20 Completeness of Disclosure. No
representation or warranty by Parent or MergerSub
in this Agreement contains or will contain an
untrue statement of material fact or omits or at
the Effective Time will omit to state a material
fact required to be stated therein or necessary to
make the statements made, in light of the
circumstances under which they were made, not
misleading.
ARTICLE V
COVENANTS OF ELECTRONIKA
During the period from the date of this Agreement
and continuing until the earlier of the
termination of this Agreement or the Effective
Time, Electronika and the Electronika Stockholders
agree as follows:
Section 5.1 Articles of Incorporation and
BylawsSection 5.1. No amendment will be made in
the articles of incorporation or bylaws of
Electronika.
Section 5.2 Shares and Options. No shares of
capital stock of Electronika, options or warrants
for such shares, rights to subscribe to or
purchase such shares, or securities convertible
into or exchangeable for such shares, shall be
issued or sold by Electronika, otherwise than as
may be required by this Agreement or the
transactions contemplated hereby.
Section 5.3 Dividends and Purchases of Stock.
No liquidation or stock split shall be authorized,
declared, paid, or effected by Electronika in
respect of the outstanding shares of Electronika
common stock. No direct or indirect redemption,
purchase, or other acquisition shall be made by
Electronika of shares of Electronika common stock,
except as may be otherwise required by this
Agreement or the transactions contemplated hereby.
Section 5.4 Borrowing of Money. Electronika
shall not borrow money, guarantee the borrowing of
money, or engage in any material transaction or
enter into any material agreement therefor, except
for the borrowing of money under Electronika's
loan agreements and lines of credit, or in the
ordinary course of business or as disclosed in or
contemplated by this Agreement or the transactions
contemplated hereby.
Section 5.5 Access. Subject to the provisions
of Section 5.7 regarding confidentiality,
Electronika will afford the officers, directors,
employees, counsel, agents, investment bankers,
accountants, and other representatives of Parent
free and full access to its plants, properties,
books, and records, will permit them to make
extracts from and copies of such books and
records, and will from time to time furnish Parent
with such additional financial and operating data
and other information as to the financial
condition, results of operations, business,
properties, assets, liabilities, or future
prospects of Electronika as Parent from time to
time may reasonably request. Electronika will
cause the independent certified public accountants
of Electronika to make available to Parent and its
independent certified public accountants the work
papers relating to the preparation, review and/or
examination of any of the financial statements of
Electronika.
Section 5.6 Advice of Changes. Electronika
will immediately advise Parent in a detailed
written notice of any fact or occurrence or any
pending or threatened occurrence of which it
obtains knowledge and which (if existing and known
at the date of the execution of this Agreement)
would have been required to be set forth or
disclosed in or pursuant to this Agreement, which
(if existing and known at any time prior to or at
the Effective Time) would make the performance by
any party of a covenant contained in this
Agreement impossible or make such performance
materially more difficult than in the absence of
such fact or occurrence, or which (if existing and
known at the Effective Time) would cause a
condition to any parties' obligations under this
Agreement not to be fully satisfied.
Section 5.7 Confidentiality. Electronika and
the Electronika Stockholders shall keep
confidential all non-public information of Parent
and MergerSub which is disclosed to Electronika;
provided, however, that such information may be
shared (i) with Electronika' directors, employees,
partners, consultants and advisors to the extent
necessary to consummate the transactions
contemplated by this Agreement and (ii) to the
extent Electronika is required by order of a court
of competent jurisdiction (by subpoena or similar
process) to disclose or discuss any confidential
information (provided that in such case,
Electronika shall promptly inform Parent of such
event, shall cooperate, at Parent's expense, with
the Parent in attempting to obtain a protective
order or to otherwise restrict such disclosure and
shall only disclose confidential information to
the minimum extent necessary to comply with any
such court order). If the transactions
contemplated by this Agreement are not
consummated, (a) Electronika will not use any such
non-public information to its competitive
advantage unless Electronika independently
acquires such information from another source, and
(b) Electronika will promptly return or destroy
all confidential materials provided to it by or on
behalf of Parent or MergerSub. To the extent non-
public information is provided to any person(s) by
Electronika and such person(s) fail to keep such
information confidential as required by this
Section, Electronika will be deemed to be
responsible for and in breach of this Section 5.7.
Section 5.8 Public Statements. Before
Electronika releases any information concerning
this Agreement, the Merger, or any of the other
transactions contemplated by this Agreement, which
is intended for or may result in public
dissemination thereof, Electronika shall cooperate
with Parent, shall furnish drafts of all documents
or proposed oral statements to Parent for comments
and shall not release any such information without
the written consent of Parent. Nothing contained
herein shall prevent Electronika from releasing
any information if required to do so by law.
Section 5.9 Parent Stockholder Approval.
Electronika shall (i) cooperate with Parent in the
preparation and filing of its Proxy Statement (as
defined below) in connection with the Meeting (as
defined below), (ii) promptly obtain and furnish
any information relating to it and within its
control required to be included in the Proxy
Statement and (iii) respond promptly to any
comments or requests made by the SEC with respect
to information respecting Electronika contained in
the Proxy Statement. If at any time prior to the
Effective Time any event relating to Electronika
or any of its affiliates, officers or directors
should be discovered by Electronika which is
required to be set forth in an amendment to the
Proxy Statement, Electronika shall promptly inform
Parent. In addition, Electronika shall correct
any information supplied by it for use in the
Proxy Statement which shall have become, or is,
false, incomplete or misleading.
Section 5.10 Conduct of Business. Except (i)
as otherwise required in connection with the
transactions contemplated by this Agreement or
(ii) as otherwise consented to in writing by
Parent, Electronika shall, and the Electronika
Stockholders shall cause Electronika to:
a) Use its reasonable efforts to do all of the
following: conduct its business diligently and
only in the ordinary course, and, without making
any commitment prohibited by this Agreement,
preserve its business organization intact, keep
available its present officers and employees and
preserve its relationships with suppliers,
customers and others having business relations
with it;
b) Not (i) enter into, modify or extend the
term of any employment agreement with any of its
officers or employees or increase the rate of
compensation payable or to become payable to any
of its officers or employees over the rates being
paid to them at the date hereof, except for normal
merit or cost of living increases, or (ii) adopt
any new Benefit Plan or amend or otherwise
increase or accelerate the payment or vesting of
the amounts payable or to be payable under any
existing Benefit Plan;
c) Not pay any obligation or liability, fixed
or contingent, other than current liabilities
incurred in the ordinary course of business, or
cancel, without full payment, any debts, claims or
other obligations (including, without limitation,
accounts receivable) owing to it;
d) Not make any material alteration in the
manner of keeping its books, accounts or records
or in the accounting practices therein reflected
except as required by law or generally accepted
accounting principles;
e) Use its reasonable efforts to perform all
of its obligations under any contracts or
agreements to which it is a party or by which any
of its properties are bound (except those being
contested in good faith) and not cancel, amend,
modify, renew or extend any such contracts or
agreements that are material to its business or
waive any rights thereunder;
f) Not enter into any contracts or commitments
that would constitute Electronika Material
Contracts, other than contracts to provide goods
and services entered into in the ordinary course
of business consistent with past practices;
g) Use its reasonable efforts to maintain and
keep in good order and repair, subject to ordinary
wear and tear, taking into account the respective
ages of the assets involved, all of its tangible
assets and properties;
h) Not sell, lease, license or otherwise
dispose of any of its properties and assets
(including any of its Intangible Assets);
i) Use its reasonable efforts to both maintain
in full force and effect all of the insurance
policies in effect as of the date hereof and not
take (or fail to take) any action that would
enable insurers under such policies to avoid
liabilities pursuant to the terms of such policies
for claims arising prior to the Closing Date;
j) Not make any capital expenditures or enter
into any leases for capital equipment or real
estate or commitments with respect thereto, except
for expenditures for ordinary repairs and
maintenance and for capital expenditures not
exceeding $10,000 in the aggregate;
k) Not accept any orders from any of its
customers under conditions relating to price,
terms of payment or like matters materially
different from the conditions regularly and
usually specified, or place any orders for
inventory, merchandise or supplies in exceptional
or unusual quantities based on past operating
practices;
l) Not (i) permit any lien to attach upon any
of its properties and assets, whether now owned or
hereafter acquired; (ii) assume, guaranty, endorse
or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the
obligations of any other Person; or (iii) make any
loans, advances or capital contributions to, or
investments in, any other Person;
m) Not initiate, compromise or settle any
material litigation or arbitration proceeding;
n) Not change its Board of Directors; and
o) Not enter into any other transaction or
make or enter into any contract or commitment
which is not in the ordinary course of business.
Section 5.11 Reasonable Efforts. Subject to
the other provisions of this Agreement,
Electronika shall, and the Electronika
Stockholders shall cause Electronika to, use its
reasonable efforts: (a) to perform its obligations
hereunder; (b) to take, or cause to be taken, all
actions necessary, proper or advisable to obtain
all approvals of governmental entities and
consents of third parties required to be obtained
by or on behalf of Electronika to consummate the
transactions contemplated by this Agreement; and
(c) to satisfy or cause to be satisfied all of the
conditions precedent to its obligations hereunder
or the obligations of Parent and MergerSub
hereunder to the extent that its action or
inaction can control or influence the satisfaction
of such conditions.
Section 5.12 Exclusive Dealing. Unless this
Agreement has been terminated in accordance with
its terms, neither Electronika, any of its
officers, directors or other representatives, nor
any of the Electronika Stockholders, shall,
directly or indirectly, solicit or encourage
inquiries or proposals from, or participate in any
negotiations or discussions or enter into any
agreements or understandings with, or furnish any
information to, third parties with respect to the
sale or other disposition of any shares of the
capital stock of Electronika, any sale, transfer
or other disposition of any of the business or any
substantial portion of the assets of Electronika
(including by way of merger) or any similar
transaction.
Section 5.13 Obligation to Update Disclosure
Letter. Electronika and the Electronika
Stockholders shall update and supplement the
Electronika Disclosure Letter, as necessary, to
reflect the changes therein during the period
between the date of this Agreement and the Closing
Date (the Updated Electronika Disclosure Letter).
The Updated Electronika Disclosure Letter shall be
acceptable to Parent, in Parent's reasonable
discretion.
ARTICLE VI
COVENANTS OF PARENT AND ACQUISITION
During the period from the date of this Agreement
and continuing until the earlier of the
termination of this Agreement or the Effective
Time, Parent agrees as follows:
Section 6.1 Stockholder Approval. Parent shall
hold a meeting of its stockholders, in accordance
with its articles of incorporation, bylaws and
the corporation laws of the State of Missouri, no
later than January 31, 1999 (the Meeting). The
Meeting shall be held, among other things, to
consider and vote upon the approval of the
issuance of the Common Shares to the Electronika
Stockholders and the amendment to the Parent's
Articles of Incorporation creating the Parent
Preferred Stock. The board of directors of Parent
shall recommend to its stockholders that such
matters be adopted and approved; provided that the
Board of Directors of Parent may withdraw such
recommendation if (but only if) such Board of
Directors, upon advice of its outside legal
counsel, determines that it is reasonably likely
that a failure to withdraw such recommendation
would constitute a breach of its fiduciary duties
under applicable law. Parent may also submit
additional routine proposals to its stockholders
at the Meeting, separate from the proposals on the
transactions contemplated hereby, provided that
Parent shall consult with Electronika as to the
submission of such proposals. The approval by
Parent's stockholders of such additional proposals
shall not be a condition to the closing of the
Merger under this Agreement.
Section 6.2 Proxy Statement. The information
(except for information supplied by Electronika
for inclusion therein, as to which Parent makes no
representation) in the proxy statement to be
provided to the stockholders of Parent in
connection with the Merger (the Proxy Statement)
shall not, on the date the Proxy Statement is
first mailed to stockholders of Parent, at the
time of the meeting of Parent stockholders and at
the Effective Time, contain any statement which,
at such time and in light of the circumstances
under which it shall be made, is false or
misleading with respect to any material fact, or
omit to state any material fact necessary in order
to make the statements made in the Proxy Statement
not false or misleading; or omit to state any
material fact necessary to correct any statement
in any earlier communication with respect to the
solicitation of proxies for the meeting of Parent
stockholders which has become false or misleading.
If at any time prior to the Effective Time any
event relating to Parent or any of its affiliates,
officers or directors should be discovered by
Parent which is required to be set forth in an
amendment to the Proxy Statement, Parent shall
promptly inform Electronika.
Section 6.3 Articles of Incorporation and
Bylaws. No amendment will be made in the articles
of incorporation or bylaws of Parent or of any
Parent subsidiary unless required by this
Agreement or the transactions contemplated hereby.
Section 6.4 Shares and Options. Except as
required hereby, no shares of capital stock of
Parent or any Parent subsidiary, options or
warrants for such shares, rights to subscribe to
or purchase such shares, or securities convertible
into or exchangeable for such shares, shall be
issued or sold or proposed to be issued or sold by
Parent or any Parent subsidiary, otherwise than as
may be required upon the exercise of warrants,
stock options or related stock appreciation rights
now outstanding.
Section 6.5 Dividends and Purchases of Stock.
No dividend or liquidating or other distribution
or stock split shall be authorized, declared,
paid, or effected by Parent in respect of the
outstanding shares of the Parent Common Stock. No
direct or indirect redemption, purchase, or other
acquisition shall be made by Parent or any Parent
subsidiary of shares of the Parent Common Stock.
Nothing in this Section 6.5 shall be construed to
prohibit purchases or other acquisitions of the
Parent Common Stock by any Parent employee benefit
plan which was or is now in effect.
Section 6.6 Borrowing of Money. Neither Parent
nor any Parent Subsidiary shall borrow money,
guarantee the borrowing of money, or engage in any
material transaction or enter into any material
agreement therefor, except for the borrowing of
money under Parent's loan agreements or lines of
credit, or in the ordinary course of business or
as disclosed in or contemplated by this Agreement
or the transactions contemplated hereby.
Section 6.7 Access. Subject to the provisions
of Section 6.9 regarding confidentiality, Parent
and MergerSub will afford the officers, directors,
employees, counsel, agents, investment bankers,
accountants, and other representatives of
Electronika free and full access to the plants,
properties, books, and records of Parent and the
Parent Subsidiaries, will permit them to make
extracts from and copies of such books and
records, and will from time to time furnish
Electronika with such additional financial and
operating data and other information as to the
financial condition, results of operations,
business, properties, assets, liabilities, or
future prospects of Parent and the Parent
Subsidiaries as Electronika from time to time may
reasonably request. Parent will cause the
independent certified public accountants of Parent
and the Parent Subsidiaries to make available to
Electronika and its independent certified public
accountants the work papers relating to the
preparation, review and/or examination of any of
the financial statements of Parent and/or the
Parent Subsidiaries.
Section 6.8 Advice of Changes. Parent will
immediately advise Electronika in a detailed
written notice of any fact or occurrence or any
pending or threatened occurrence of which it
obtains knowledge and which (if existing and known
at the date of the execution of this Agreement)
would have been required to be set forth or
disclosed in or pursuant to this Agreement which
(if existing and known at any time prior to or at
the Effective Time) would make the performance by
any Party of a covenant contained in this
Agreement impossible or make such performance
materially more difficult than in the absence of
such fact or occurrence, or which (if existing and
known at the time of the Effective Time) would
cause a condition to any Party's obligations under
this Agreement not to be fully satisfied.
Section 6.9 Confidentiality. Parent and the
Parent Subsidiaries shall keep confidential all
non-public information of Electronika disclosed to
Parent or the Parent Subsidiaries; provided,
however, that such information may be shared (i)
with Parent's and the Parent Subsidiaries'
directors, employees, partners, consultants and
advisors to the extent necessary to consummate the
transactions contemplated by this Agreement and
(ii) to the extent Parent or the Parent
Subsidiaries are required by order of a court of
competent jurisdiction (by subpoena or similar
process) to disclose or discuss any confidential
information (provided that in such case, Parent
and/or the Parent Subsidiaries shall promptly
inform Electronika of such event, shall cooperate
with Electronika, at Electronika's expense, in
attempting to obtain a protective order or to
otherwise restrict such disclosure and shall only
disclose confidential information to the minimum
extent necessary to comply with any such court
order). If the transactions contemplated by this
Agreement are not consummated, (a) neither Parent
nor the Parent Subsidiaries will use any such non-
public information to its competitive advantage
unless Parent or the Parent Subsidiaries
independently acquire such information from
another source, and (b) Parent and the Parent
Subsidiaries will promptly return or destroy all
confidential materials provided to it by or on
behalf of Electronika. To the extent non-public
information is provided to any person(s) by Parent
or the Parent Subsidiaries and such person(s) fail
to keep such information confidential as required
by this Section, Parent will be deemed to be
responsible for and in breach of this Section 6.9.
Section 6.10 Public Statements. Before Parent
releases any information concerning this
Agreement, the Merger, or any of the other
transactions contemplated by this Agreement, which
is intended for or may result in public
dissemination thereof, Parent shall cooperate with
Electronika, shall furnish drafts of all documents
or proposed oral statements to Electronika for
comments, and shall not release any such
information without the written consent of
Electronika. Nothing contained herein shall
prevent Parent from releasing any information if
required to do so by law.
Section 6.11 Conduct of Business. Except (i)
as otherwise required in connection with the
transactions contemplated by this Agreement or
(ii) as otherwise consented to in writing by
Electronika, Parent shall and shall cause each of
the Parent Subsidiaries to:
a) Use its reasonable efforts to do all of the
following: conduct its business diligently and
only in the ordinary course, and, without making
any commitment prohibited by this Agreement,
preserve its business organization intact, keep
available its present officers and employees and
preserve its relationships with suppliers,
customers and others having business relations
with it;
b) Not (i) enter into, modify or extend the
term of any employment agreement with any of its
officers or employees or increase the rate of
compensation payable or to become payable to any
of its officers or employees over the rates being
paid to them at the date hereof, except for normal
merit or cost of living increases, or (ii) adopt
any new Benefit Plan or amend or otherwise
increase or accelerate the payment or vesting of
the amounts payable or to be payable under any
existing Benefit Plan;
c) Not pay any obligation or liability, fixed
or contingent, other than current liabilities
incurred in the ordinary course of business or
payments due under its existing loan agreements or
lines of credit, or cancel, without full payment,
any debts, claims or other obligations (including,
without limitation, accounts receivable) owing to
it;
d) Not make any material alteration in the
manner of keeping its books, accounts or records
or in the accounting practices therein reflected
except as required by law or generally accepted
accounting principles;
e) Use its reasonable efforts to perform all
of its obligations under any contracts or
agreements to which it is a party or by which any
of its properties are bound (except those being
contested in good faith) and not cancel, amend,
modify, renew or extend any such contracts or
agreements that are material to its business or
waive any rights thereunder;
f) Not enter into any contracts or commitments
that would constitute Parent Material Contracts,
other than contracts to provide goods and services
entered into in the ordinary course of business
consistent with past practices;
g) Use its reasonable efforts to maintain and
keep in good order and repair, subject to ordinary
wear and tear, taking into account the respective
ages of the assets involved, all of its tangible
assets and properties;
h) Not sell, lease, license or otherwise
dispose of any of its properties and assets
(including any of its Intangible Assets);
i) Use its reasonable efforts to both maintain
in full force and effect all of the insurance
policies in effect as of the date hereof and not
take (or fail to take) any action that would
enable insurers under such policies to avoid
liabilities pursuant to the terms of such policies
for claims arising prior to the Closing Date;
j) Not make any capital expenditures or enter
into any leases for capital equipment or real
estate or commitments with respect thereto, except
for expenditures for ordinary repairs and
maintenance and for capital expenditures not
exceeding $10,000 in the aggregate;
k) Not accept any orders from any of its
customers under conditions relating to price,
terms of payment or like matters materially
different from the conditions regularly and
usually specified, or place any orders for
inventory, merchandise or supplies in exceptional
or unusual quantities based on past operating
practices;
l) Not (i) permit any lien to attach upon any
of its properties and assets, whether now owned or
hereafter acquired; (ii) assume, guaranty, endorse
or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the
obligations of any other Person; or (iii) make any
loans, advances or capital contributions to, or
investments in, any other Person;
m) Not initiate, compromise or settle any
material litigation or arbitration proceeding;
n) Use its reasonable efforts to not change
its Board of Directors; and
o) Not enter into any other transaction or
make or enter into any contract or commitment
which is not in the ordinary course of business.
Section 6.12 Reasonable Efforts. Subject to
the other provisions of this Agreement, Parent
shall, and shall cause each of the Parent
Subsidiaries to, use its reasonable efforts: (a)
to perform its obligations hereunder; (b) to take,
or cause to be taken, all actions necessary,
proper or advisable to obtain all approvals of
governmental entities and consents of third
parties required to be obtained by or on behalf of
Parent or any of its subsidiaries to consummate
the transactions contemplated by this Agreement;
and (c) to satisfy or cause to be satisfied all of
the conditions precedent to their obligations
hereunder or the obligations of Electronika
hereunder to the extent that its action or
inaction can control or influence the satisfaction
of such conditions.
Section 6.13 Exclusive Dealing. Unless this
Agreement has been terminated in accordance with
its terms, neither Parent, nor any of its
officers, directors or other representatives,
shall, directly or indirectly, solicit or
encourage inquiries or proposals from, or
participate in any negotiations or discussions or
enter into any agreements or understandings with,
or furnish any information to, third parties with
respect to the sale or other disposition of any
shares of the capital stock of Parent or any
subsidiary of Parent, any sale, transfer or other
disposition of any of the business or any
substantial portion of the assets of Parent or any
subsidiary of Parent (including by way of merger)
or any similar transaction.
Section 6.14 Business After the Effective
Time. During the Escrow Period or such shorter
period as Parent on the advice of counsel believes
will not cause the Merger to fail to qualify as a
tax free reorganization under the federal tax laws
as then construed, the Surviving Corporation will
continue the historic business of Electronika or
use a significant portion of Electronika's
historic assets in its business.
Section 6.15 Issuance and Listing of Stock.
Parent has reserved for issuance and, if, as and
when required by the provisions of this Agreement,
will issue the Merger Shares into and for which
the shares of capital stock of Electronika are to
be converted and exchanged in the Merger, and the
Merger Shares, when so issued, will be validly
issued, fully paid and nonassessable. Parent
shall file an application with the American Stock
Exchange (the ASE) to approve the Common Shares
for listing, subject to official notice of
issuance. Parent shall use its reasonable efforts
to cause the Common Shares to be approved for
listing on the ASE, subject to official notice of
issuance.
Section 6.16 Obligation to Update Disclosure
Letter. Parent and MergerSub shall update and
supplement the Parent Disclosure Letter, as
necessary, to reflect the changes therein during
the period between the date of this Agreement and
the Closing Date (the Updated Parent Disclosure
Letter). The Updated Parent Disclosure Letter
shall be acceptable to Electronika and the
Electronika Stockholders, in their reasonable
discretion.
ARTICLE VII
ELECTRONIKA'S CONDITIONS TO CLOSING
The obligations of Electronika and the Electronika
Stockholders under this Agreement are subject to
all of the following conditions being met or
waived as of the Closing:
Section 7.1 Voting Trust. Certain members of
the Sizemore family (the Sizemore Family) and
Peter Caloyeras shall have entered into a voting
trust, which shall be in form and substance
satisfactory to the parties thereto.
Section 7.2 Accuracy of Representations and
Compliance With Conditions. All representations
and warranties of Parent and MergerSub contained
in this Agreement, as modified by the Updated
Parent Disclosure Letter, shall be accurate in
all material respects as of the Effective Time
except as to changes contemplated or permitted by
this Agreement. Parent and MergerSub shall have
performed and complied with all covenants and
agreements in all material respects and satisfied
all conditions required to be performed and
complied with by them at or before the Effective
Time by this Agreement.
Section 7.3 Material Adverse Change. Between
the date hereof and the Closing Date, there shall
not have occurred any material adverse change in
the financial condition or in the results of
operations or the business, properties, assets
(tangible or intangible), liabilities or prospects
of Parent and its subsidiaries, taken as a whole.
Section 7.4 Other Documents. Parent and
MergerSub shall have delivered to Electronika at
or prior to the Effective Time such other
documents as Electronika may reasonably request in
order to carry out transactions contemplated by
this Agreement.
Section 7.5 Review of Proceedings. All
actions, proceedings, instruments, and documents
required to carry out this Agreement or incidental
thereto and all other related legal matters shall
be subject to the reasonable approval of counsel
to Electronika, and Parent shall have furnished
such counsel such documents as such counsel may
have reasonably requested for the purpose of
enabling them to pass upon such matters.
Section 7.6 Legal Action. There shall not have
been instituted or threatened any legal proceeding
relating to, or seeking to prohibit or otherwise
challenge the consummation of, the transactions
contemplated by this Agreement, or to obtain
substantial damages with respect thereto.
Section 7.7 No Governmental Action. There
shall not have been any action taken, or any law,
rule, regulation, order, judgment, or decree
proposed, promulgated, enacted, entered, enforced,
or deemed applicable to the transactions
contemplated by this Agreement by any federal,
state, local, or other governmental authority or
by any court or other tribunal, including the
entry of a preliminary or permanent injunction,
which, in the reasonable judgment of Electronika,
(i) makes this Agreement, the Merger, or any of
the other transactions contemplated by this
Agreement illegal, (ii) results in a material
delay in the ability of any of the Parties to
consummate the Merger or any of the other
transactions contemplated by this Agreement, or
(iii) otherwise prohibits, restricts, or
materially delays consummation of the Merger or
any of the other transactions contemplated by this
Agreement or impairs the contemplated benefits to
the Electronika Stockholders of this Agreement,
the Merger, or any of the other transactions
contemplated by this Agreement.
Section 7.8 Consents Needed. Parent shall
have obtained at or prior to the Effective Time
all consents required for the consummation of the
Merger and the other transactions contemplated by
this Agreement, including without limitation
consents from (i) the New Jersey Department of
Environmental Protection and (ii) any party to any
Parent Material Contract.
Section 7.9 Other Agreements. The Escrow
Agreement and any other agreements between the
Parties to be executed prior to the Effective Time
shall have been authorized, executed, and
delivered by the parties thereto at or prior to
the Effective Time, at the Effective Time shall be
in full force, valid, and binding upon the parties
thereto, and shall (subject to the Bankruptcy
Exception) be enforceable by them in accordance
with their terms at the Effective Time.
Section 7.10 Closing Certificate. Electronika
and the Electronika Stockholders shall have
received from Parent and MergerSub a certificate
dated the Closing Date, certifying that the
conditions specified in Sections 7.2, 7.3, 7.6,
7.7 and 7.8 hereof have been satisfied.
Section 7.11 Parent Disclosure Letter. Parent
and MergerSub shall have delivered to Electronika
and the Electronika Stockholders the Parent
Disclosure Letter by December 23, 1998, and the
Parent Disclosure Letter shall be, in form and
substance, acceptable to Electronika and the
Electronika Stockholders in their sole and
absolute discretion. Within ten (10) days
following receipt of the Parent Disclosure Letter,
Electronika and the Electronika Stockholders shall
deliver to Parent and MergerSub a written notice
either accepting or rejecting the Parent
Disclosure Letter. If Electronika and the
Electronika Stockholders reject the Parent
Disclosure Letter, or fail to deliver a notice of
acceptance within said 10-day period, this
Agreement shall immediately terminate and be of no
further force and effect as provided in Section
9.3.
ARTICLE VIII
PARENT'S AND ACQUISITION'S
CONDITIONS TO CLOSING
The obligations of Parent and MergerSub under this
Agreement are subject to all of the following
conditions being met or waived as of the Closing:
Section 8.1 Voting Trust. Certain members of
the Sizemore Family and Peter Caloyeras shall have
entered into a voting trust, which shall be in
form and substance satisfactory to the parties
thereto.
Section 8.2 Accuracy of Representations and
Compliance With Conditions. All representations
and warranties of Electronika contained in this
Agreement, as modified by the Updated Electronika
Disclosure Letter, shall be accurate in all
material respects as of the Effective Time, except
as to changes contemplated or permitted by this
Agreement. Electronika and the Electronika
Stockholders shall have performed and complied
with all covenants and agreements in all material
respects and satisfied all conditions required to
be performed and complied with by them at or
before the Effective Time by this Agreement.
Section 8.3 Material Adverse Change. Between
the date hereof and the Closing Date, there shall
not have occurred any material adverse change in
the financial condition or in the results of
operations or the business, properties, assets
(tangible or intangible), prospects, or
liabilities of Electronika and its subsidiaries,
taken as a whole.
Section 8.4 Other Documents. Electronika and
the Electronika Stockholders shall have delivered
to Parent and MergerSub at or prior to the
Effective Time such other documents as Parent may
reasonably request in order to carry out the
transactions contemplated by this Agreement.
Section 8.5 Review of Proceedings. All
actions, proceedings, instruments, and documents
required to carry out this Agreement or incidental
thereto and all other related legal matters shall
be subject to the reasonable approval of counsel
to Parent and MergerSub, and Electronika shall
have furnished such counsel such documents as such
counsel may have reasonably requested for the
purpose of enabling them to pass upon such
matters.
Section 8.6 Legal Action. There shall not have
been instituted or threatened any legal proceeding
relating to, or seeking to prohibit or otherwise
challenge the consummation of, the transactions
contemplated by this Agreement, or to obtain
substantial damages with respect thereto.
Section 8.7 No Governmental Action. There
shall not have been any action taken, or any law,
rule, regulation, order, judgment, or decree
proposed, promulgated, enacted, entered, enforced,
or deemed applicable to the transactions
contemplated by this Agreement by any federal,
state, local, or other governmental authority or
by any court or other tribunal, including the
entry of a preliminary or permanent injunction,
which, in the reasonable judgment of Parent, (i)
makes this Agreement, the Merger, or any of the
other transactions contemplated by this Agreement
illegal, (ii) results in a material delay in the
ability of any of the parties to consummate the
Merger or any of the other transactions
contemplated by this Agreement, or (iii) otherwise
prohibits, restricts, or materially delays
consummation of the Merger or any of the other
transactions contemplated by this Agreement or
impairs the contemplated benefits to Parent or
MergerSub of this Agreement, the Merger, or any of
the other transactions contemplated by this
Agreement.
Section 8.8 Fairness Opinion. Parent shall
have received the opinion of Stern Brothers
Valuation Advisors, dated as of the date of the
Proxy Statement and for inclusion therein, to the
effect that the Merger and the other transactions
contemplated by this Agreement are fair, from a
financial point of view, to Parent and its
stockholders, and such opinion shall have been
confirmed in writing as of the Effective Time.
Section 8.9 Consents Needed. Electronika
shall have obtained at or prior to the Effective
Time all consents required for the consummation of
the Merger and the other transactions contemplated
by this Agreement, including without limitation
consents from any party to any Electronika
Material Contract. Parent shall have obtained at
or prior to the Effective Time the consent of the
New Jersey Department of Environmental Protection
to the transactions contemplated hereby.
Section 8.10 Other Agreements. The Escrow
Agreement and any other agreements to be executed
between the Parties prior to the Effective Time
shall have been duly authorized, executed, and
delivered by the parties thereto at or prior to
the Effective Time, at the Effective Time shall be
in full force, valid, and binding upon the parties
thereto, and shall (subject to the Bankruptcy
Exception) be enforceable by them in accordance
with their terms at the Effective Time.
Section 8.11 Stockholder Approval. The
stockholders of Parent shall have duly approved,
by the affirmative vote of at least a majority of
all shares of Parent Common Stock outstanding, the
issuance of the Common Shares to the Electronika
Stockholders and the amendment to the Parent's
Articles of Incorporation creating the Parent
Preferred Stock.
Section 8.12 Closing Certificate. Parent and
MergerSub shall have received from Electronika and
the Electronika Stockholders a certificate dated
the Closing Date, certifying that the conditions
specified in Sections 8.2, 8.3, 8.6, 8.7 and 8.9
hereof have been satisfied.
Section 8.13 Electronika Disclosure Letter.
Electronika and the Electronika Stockholders shall
have delivered to Parent and MergerSub the
Electronika Disclosure Letter by December 23,
1998, and the Electronika Disclosure Letter shall
be, in form and substance, acceptable to Parent
and MergerSub in their sole and absolute
discretion. Within ten (10) days following
receipt of the Electronika Disclosure Letter,
Parent and MergerSub shall deliver to Electronika
and the Electronika Stockholders a written notice
either accepting or rejecting the Electronika
Disclosure Letter. If Parent and MergerSub reject
the Electronika Disclosure Letter, or fail to
deliver a notice of acceptance within said 10-day
period, this Agreement shall immediately terminate
and be of no further force and effect as provided
in Section 9.3.
ARTICLE IX
TERMINATION
Section 9.1 Mandatory Termination This
Agreement shall be automatically terminated if (a)
the holders of at least a majority of all shares
of Parent Common Stock outstanding shall not have
voted in favor of the adoption and approval of the
matters described in Section 8.11 hereof (b)
Electronika and the Electronika Stockholders
reject the Parent Disclosure Letter, or fail to
deliver a notice of acceptance within the
specified 10-day period, as provided in Section
7.11, (c) Electronika and the Electronika
Stockholders shall determine, in their reasonable
discretion, that any Updated Parent Disclosure
Letter is not acceptable and shall have delivered
a written notice of rejection to Parent and
MergerSub within ten days following their receipt
of the Updated Parent Disclosure Letter, (d)
Parent and MergerSub reject the Electronika
Disclosure Letter, or fail to deliver a notice of
acceptance within the specified 10-day period, as
provided in Section 8.13, or (e) Parent and
MergerSub shall determine, in their reasonable
discretion, that any Updated Electronika
Disclosure Letter is not acceptable and shall have
delivered a written notice of rejection to
Electronika and the Electronika Stockholders
within ten days following their receipt of the
Updated Electronika Disclosure Letter.
Section 9.2 Optional Termination. This
Agreement may be terminated on or before the
Effective Time notwithstanding adoption and
approval of this Agreement, the Merger, and the
other transactions contemplated hereby by the
stockholders of the parties hereto:
a) by the mutual written consent of
Electronika and Parent;
b) at the option of either Electronika or
Parent if the Effective Time shall not have
occurred on or before February 28, 1999 (provided
that the right to terminate this Agreement under
this Section 9.2(b) shall not be available to any
party whose failure to fulfill any obligation
under this Agreement has been the cause of or
resulted in the failure of the Effective Time to
occur on or before such date);
c) at the option of Parent, if facts exist
which render impossible the compliance with one or
more of the conditions set forth in Article VIII
and such conditions are not waived by Parent; and
d) at the option of Electronika, if facts
exist which render impossible the compliance with
one or more of the conditions set forth in Article
VII and such conditions are not waived by
Electronika.
Section 9.3 Effect of Termination. If this
Agreement is rightfully terminated as provided for
in this Article IX or pursuant to Sections 7.11 or
8.13:
a) This Agreement shall forthwith become
wholly void and of no effect without liability on
the part of any Party to this Agreement; provided,
however, that nothing in this Section 9.3 shall
release any of the Parties from liability for a
willful failure to carry out its respective
obligations under this Agreement, and provided
further that the provisions of Sections 5.7, 6.9
and 9.3(b) shall remain in full force and effect
and survive any termination of this Agreement; and
b) The Parties shall each pay and bear their
own fees and expenses incident to the negotiation,
preparation, and execution of this Agreement and
its respective meetings of stockholders, including
fees and expenses of its counsel, accountants,
investment banking firm, and other experts.
ARTICLE X
TRANSFER RESTRICTIONS; GOVERNANCE
Section 10.1 Restrictive Legends. The Merger
Shares shall be subject to a stop-transfer order
and the certificate or certificates evidencing
such shares shall bear a legend substantially in
the following form:
THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE ACT).
SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER THE ACT.
In addition, the certificates representing the
Common Shares shall bear a legend substantially in
the following form:
THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF AN AGREEMENT DATED AS OF NOVEMBER
24, 1998 BY AND AMONG TOROTEL, INC. AND THE HOLDER
HEREOF, AMONG OTHERS, A COPY OF WHICH IS ON FILE
WITH THE SECRETARY OF TOROTEL, AND ARE HELD AND
MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE THEREWITH.
Subject to the terms and conditions of this
Agreement, the Electronika Stockholders may make
any disposition of the Common Shares or of the
Preferred Shares (to the extent the Preferred
Shares have been released from the Escrow), upon
giving to Parent, prior to any such disposition,
(i) written notice describing briefly the manner
in which, and the transferee or transferees to
whom, such proposed disposition is to be made, and
(ii) written evidence of (a) compliance with the
Act, or evidence to the satisfaction of Parent
that there is an available exemption from the
application of the Act, and (b) the transferee's
undertaking to be bound by any applicable terms
and conditions of this Agreement.
Section 10.2 Further Restrictions.
Notwithstanding Section 10.1 hereof to the
contrary, the Electronika Stockholders shall not
transfer their shares of Parent Common Stock
during the Escrow Period, except to one or more
trusts of which the Electronika Stockholder is the
sole trustee and which was established for the
benefit of such Electronika Stockholder or such
Electronika Stockholder's spouse, ancestors, issue
(including adopted children and step-children) or
spouses of issue (a Living Trust). Subject
to compliance with the provisions of the
Securities Act, the Preferred Shares shall not be
subject to any restriction on transfer once such
shares are released from the Escrow. During the
Escrow Period, the Electronika Stockholders may
transfer their interests in the Preferred Shares
held in the Escrow only to a Living Trust.
Section 10.3 Investment Representations
Either the Electronika Stockholders are
accredited investors, as that term is defined
in Rule 501 of the rules and regulations
promulgated by the SEC under the Securities Act,
or the Electronika Stockholders, either alone or
with their qualified purchaser representative
(as defined in Rule 501), have such knowledge and
experience in financial and business matters that
they are capable of evaluating the risks and
merits of an investment in the Merger Shares. The
Electronika Stockholders are acquiring the Merger
Shares in the Merger for investment and not with a
view to the sale thereof other than in compliance
with the requirements of the Securities Act and
applicable Blue Sky laws. At the request of
Parent, the Electronika Stockholders will furnish
to Parent evidence reasonably satisfactory to
Parent that the foregoing representations are
true. The Electronika Stockholders acknowledge
that Parent has made available to them the
opportunity to ask questions and receive answers
concerning the terms and conditions of the Merger
and to obtain any additional information that
Parent is required to furnish under the Securities
Act and the rules and regulations promulgated
thereunder.
Section 10.4 Directors. Concurrently with the
Closing, (i) the number of members of the Parent
Board of Directors shall be increased to seven,
(ii) the Electronika Stockholders shall be
entitled to designate two members of the seven
member Parent Board of Directors, and (iii) the
Parent Board of Directors shall appoint such
designees as directors in order to fill the
existing two vacancies. The Electronika
Stockholders agree not to vote their respective
Common Shares to remove any director of Parent
during the period from the Effective Time to the
earlier of September 30, 1999 or the 1999 annual
meeting of Parent stockholders, except for
Cause. For purposes of this Section 10.4, a
removal is for Cause if such removal is
evidenced by a resolution adopted in good faith by
a majority of the Board of Directors of Parent
finding that the director to be removed (a)
committed an act of embezzlement, fraud,
misappropriation or conversion of assets or
opportunities or other dishonesty against Parent
or any Parent Subsidiary, (b) was enjoined by the
Securities and Exchange Commission or any other
industry regulatory authority from being and
officer or director of a publicly-held company,
(c) engaged in conduct demonstrably and materially
injurious to Parent or any Parent Subsidiary, (d)
has been convicted by a court of competent
jurisdiction of, or has pleaded guilty or nolo
contendere to, any felony or misdemeanor involving
dishonesty or moral turpitude or (e) inadequately
or improperly performed his duties as a director
of Parent or any Parent Subsidiary to the
detriment of their respective businesses.
Section 10.5 Prohibited Stockholder Actions.
During the Escrow Period, neither the Electronika
Stockholders nor any of their affiliates
(regardless of whether such person is an affiliate
on the date hereof) shall, without prior
Independent Approval (as hereinafter defined):
a) Vote their Common Shares in favor of any
action or agreement, or take any other action,
that would (i) result in a breach of any covenant,
representation or warranty or any other obligation
of Electronika under this Agreement or (ii)
impede, interfere with or discourage the intended
purposes of this Agreement;
b) Acquire, offer to acquire, or agree to
acquire, directly or indirectly, by purchase or
otherwise, any voting securities or direct or
indirect rights or options to acquire any voting
securities of Parent, other than as a result of a
stock split, stock dividend or similar
recapitalization; or
c) Make or cause to be made any proposal for
any transaction between (i) the Electronika
Stockholders or any of their affiliates and (ii)
Parent or any of its affiliates, including without
limitation any acquisition or disposition of
assets, merger, or other business combination,
restructuring, tender offer, exchange offer,
recapitalization or similar transaction.
Section 10.6 Prohibited Actions by Parent.
During the Escrow Period, in addition to any
stockholder vote or vote by the Board of Directors
of Parent or any affiliate that may be required by
law, neither Parent nor any affiliate shall,
without prior Independent Approval:
a) Enter into, or propose to enter into, any
agreement, arrangement or transaction with the
Electronika Stockholders, the Sizemore Family or
any of their respective affiliates;
b) Amend the Articles of Incorporation or the
Bylaws of Parent or any affiliate that may benefit
the Electronika Stockholders, the Sizemore Family
or any of their respective affiliates, to the
exclusion of, or disproportionately to, the other
stockholders of Parent;
c) Approve salary increases or bonus payments
to officers or employees affiliated with the
Electronika Stockholders, the Sizemore Family or
any of their respective affiliates;
d) Amend, modify, waive or terminate this
Agreement;
e) Dissolve Parent or any affiliate;
f) Initiate bankruptcy, insolvency or
reorganization proceedings involving Parent or any
affiliate; or
g) Withdraw the registration of the Parent
Common Stock under the Exchange Act.
Section 10.7 Definition of Independent
Approval. For the purposes of this Agreement, the
term Independent Approval shall mean,
either (i) the approval of a majority of the Board
of Directors who are disinterested with respect to
the matter which is the subject of the Board or
stockholder action or (ii) if there are fewer than
two such directors, the approval of the holders of
a majority of the then outstanding voting
securities of the Company held by persons other
than stockholders (including affiliates and Family
Members) interested in such Board or stockholder
action.
Section 10.8 Definition of Affiliate and
Family Members. The term affiliate
shall mean, with respect to any Person, any other
Person directly or indirectly controlling,
controlled by or under common control with such
Person and, without limiting the generality of the
foregoing, includes (a) any director or officer of
such Person or of any affiliate of such Person,
(b) any such director's or officer's Family
Members, (c) any group, acting in concert, of one
or more of such directors, officers or Family
Members, and (d) any Person owned or controlled by
any such director, officer, Family Member or group
which beneficially owns or holds 10% or more of
any class of equity securities or profits
interest. The term control means the
possession, directly or indirectly, of the power
to direct or cause the direction of the management
and policies of an entity, whether through the
ownership of voting securities, by contract or
otherwise. The term Family Member shall
mean any brother, sister, spouse, ancestor or
descendant of an affiliate or of a Person,
director of officer.
Section 10.9 Indemnification; Insurance.
a) From and after the Closing Date, Parent
shall indemnify and hold harmless each person who
is, or has been at any time prior to the date
hereof or who becomes prior to the Closing Date,
an officer or director of Parent or any of the
Parent Subsidiaries (collectively, the Indemnified
Parties and individually, an Indemnified
Party) against all losses, liabilities, expenses,
claims or damages incurred in connection with any
claim, suit, action, proceeding or investigation
based in whole or in part on the fact that such
Indemnified Party is or was a director or officer
of Parent or any of its subsidiaries and arising
out of acts or omissions occurring prior to and
including the Closing Date (including but not
limited to the transactions contemplated by this
Agreement) to the fullest extent permitted by
Missouri law and its articles of incorporation and
bylaws in effect on the date hereof, for a period
of not less than six years following the Closing
Date; provided that in the event any claim or
claims are asserted or made within such six-year
period, all rights to indemnification in respect
of any such claim or claims shall continue until
final disposition of any and all such claims.
b) The Electronika Stockholders shall cause
the articles of incorporation and bylaws of Parent
and its subsidiaries to include provisions for the
limitation of liability of directors and
indemnification of the Indemnified Parties to the
fullest extent permitted under applicable law and
consistent with Section 10.9(a) and shall not
permit the amendment of such provision in any
manner adverse to the Indemnified Parties, as the
case may be, without the prior written consent of
such persons, for a period of six years from and
after the date hereof.
c) Without limitation of the foregoing, in the
event any such Indemnified Party is or becomes
involved in any capacity in any action, proceeding
or investigation in connection with any matter,
including without limitation, the transactions
contemplated by this Agreement, occurring prior
to, and including, the Closing Date, Parent shall,
to the fullest extent permitted under applicable
law, pay as incurred such Indemnified Party's
legal and other expenses (including the cost of
any investigation and preparation) incurred in
connection therewith, provided the Indemnified
Party to whom expenses are advanced provides an
undertaking to repay such advances if it is
ultimately determined that such Indemnified Party
is not entitled to indemnification. Parent shall
pay all expenses, including attorneys' fees, that
may be incurred by an Indemnified Party in
enforcing the indemnity and other obligations
provided for in this Section 10.9(c).
d) For six years after the Closing Date,
Parent shall cause policies of directors' and
officers' liability insurance to be maintained by
Parent in amounts not less than 1998 coverage
(provided that Parent may substitute therefor
policies of at least the same coverage containing
terms and conditions which are substantially
equivalent) with respect to matters occurring
prior to the Closing Date, to the extent such
policies are available. Notwithstanding the
foregoing, if annual premiums for Parent's
director and officer liability insurance exceeds
150% of 1998 premiums(Maximum Premium), Parent
shall only be obligated to purchase such insurance
coverage as may be purchased by a premium payment
equal to the Maximum Premium.
e) Any determination to be made as to whether
any Indemnified Party has met any standard of
conduct imposed by law shall be made by legal
counsel reasonably acceptable to such Indemnified
Party and Parent, retained at Parent's expense.
f) This Section 10.9 is intended to benefit
the Indemnified Party and their respective heirs,
executors and personal representatives and shall
be binding on the successors and assigns of
Parent.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Survival. The representations,
warranties, covenants and agreements made herein
shall survive the Closing of the transactions
contemplated hereby and continue in force and
effect only until the expiration of the Escrow
Period.
Section 11.2 Further Actions. At any time and
from time to time, each party agrees, at its
expense, to take such actions and to execute and
deliver such documents as may be reasonably
necessary to effectuate the purposes of this
Agreement.
Section 11.3 Modification. This Agreement
(including the documents and instruments referred
to herein) sets forth the entire understanding of
the Parties with respect to the subject matter
hereof and supersedes all existing agreements and
understandings, both written and oral, among them
concerning such subject matter. This Agreement
may be amended prior to the Effective Time
(notwithstanding stockholder adoption and
approval) by a written instrument executed by the
Parties with the approval of their respective
Boards of Directors; provided, however, that after
approval of this Agreement and the Merger by the
Electronika Stockholders or the stockholders of
Parent, no amendment shall be made which by law
requires further approval of such stockholders
without such further approval.
Section 11.4 Notices. Any notice or other
communication required or permitted to be given
hereunder shall be in writing and shall be mailed
by certified mail, return receipt requested or by
Federal Express, Express Mail, or similar
overnight delivery or courier service or delivered
(in person or by telecopy, telex, or similar
telecommunications equipment) against receipt to
the party to which it is to be given at the
address of such party set forth below (or to such
other address as the party shall have furnished in
writing in accordance with the provisions of this
Section 11.4):
To Parent or MergerSub:
Torotel, Inc.
13402 South 71 Highway
Grandview, MO 64030
Attention: Secretary
With a copy to:
Shook, Hardy & Bacon L.L.P.
1010 Grand Boulevard
5th Floor
P.O. Box 15607
Kansas City, MO 64106
Attention: Randall B. Sunberg, Esq.
To Electronika or the Electronika
Stockholders:
Basil Peter Caloyeras
c/o Magnetika, Inc.
2041 W. 139th Street
Gardena, California 90247
With a copy to:
Ervin, Cohen & Jessup LLP
Ninth Floor
9401 Wilshire Boulevard
Beverly Hills, CA 90212-2974
Attention: W. Edgar Jessup, Jr., Esq.
Any notice given in accordance with this Section
11.4 shall be deemed duly given when received by
the party for whom it is intended, if personally
delivered or delivered by telecopy, telex or
similar telecommunications equipment, twenty-four
(24) hours after delivery if sent by Federal
Express, Express Mail or similar overnight
delivery or courier service or forty-eight (48)
hours after being deposited in the United States
mail, all fees prepaid.
Section 11.5 Waiver. At any time prior to the
Closing, the Parties may, to the extent legally
permitted: (i) extend the time for the
performance of any of the obligations or other
acts or any other party; (ii) waive any
inaccuracies in the representations or warranties
of any other party contained in this Agreement or
in any document or certificate delivered pursuant
hereto; (iii) waive compliance or performance by
any other party with any of the covenants,
agreements or obligations of such party contained
herein; and (iv) waive the satisfaction of any
condition that is precedent to the performance by
the party so waiving of any of its obligations
hereunder. Any waiver by any party of a breach of
any term of this Agreement shall not operate as or
be construed to be a waiver of any other breach of
that term or of any breach of any other term of
this Agreement. The failure of a party to insist
upon strict adherence to any term of this
Agreement on one or more occasions will not be
considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence
to that term or any other term of this Agreement.
Any waiver must be in writing and signed by the
waiving party.
Section 11.6 Binding Effect. The provisions
of this Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their
respective successors and permitted assigns and
shall inure to the benefit of each Indemnified
Party and his, her or its successors and assigns.
Section 11.7 No Third-Party Beneficiaries.
This Agreement does not create, and shall not be
construed as creating, any rights enforceable by
any person not a party to this Agreement except as
specifically provided herein.
Section 11.8 Separability. If any provision
of this Agreement is deemed to be invalid,
illegal, or unenforceable, the balance of this
Agreement shall remain in effect, and if any
provision is inapplicable to any person or
circumstance, it shall nevertheless remain
applicable to all other persons and circumstances.
Section 11.9 Headings. The headings in this
Agreement are solely for convenience of reference
and shall be given no effect in the construction
or interpretation of this Agreement.
Section 11.10 Counterparts; Governing Law.
This Agreement may be executed in any number of
counterparts, each of which shall be deemed 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 laws of Missouri without
giving effect to conflict of laws.
Section 11.11 Assignment. Neither this
Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of
the Parties (whether by operation of law or
otherwise) without the prior written consent of
the other Parties.
[The remainder of this page intentionally
left blank]
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the date first set
forth above.
TOROTEL, INC.
____________________________________
By: ________________________________
Title: _______________________________
TOROTEL MERGER SUBSIDIARY, INC.
____________________________________
By: ________________________________
Title: _______________________________
ELECTRONIKA, INC.
_____________________________________
By: ________________________________
Title: _______________________________
_____________________________________
Alexandra Zoe Caloyeras
_____________________________________
Aliki Sophia Caloyeras
_____________________________________
Basil Peter Caloyeras
Exhibit B
Financial Information
COMBINED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CALOYERAS, INC., d.b.a. ELECTRONIKA
AND MAGNETIKA/EAST LTD.
December 31, 1997 and 1996
C O N T E N T S
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
COMBINED FINANCIAL STATEMENTS
COMBINED BALANCE SHEETS
COMBINED STATEMENTS OF EARNINGS
COMBINED STATEMENT OF OWNERS' EQUITY
(DEFICIT)
COMBINED STATEMENTS OF CASH FLOWS
NOTES TO COMBINED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Caloyeras, Inc., d.b.a. Electronika
Magnetika/East Ltd.
We have audited the accompanying combined balance
sheets of Caloyeras, Inc., d.b.a. Electronika and
Magnetika/East Ltd. as of December 31, 1997 and 1996,
and the related combined statements of earnings,
owners' equity (deficit), and cash flows for the
years
then ended. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
combined financial position of Caloyeras, Inc.,
d.b.a.
Electronika and Magnetika/East Ltd. as of December
31,
1997 and 1996, and the combined results of their
operations and their combined cash flows for the
years
then ended in conformity with generally accepted
accounting principles.
/s/GRANT THORNTON LLP
GRANT THORNTON LLP
Kansas City, Missouri
January 6, 1999
COMBINED FINANCIAL STATEMENTS
Caloyeras, Inc., d.b.a. Electronika
and Magnetika/East Ltd.
COMBINED BALANCE SHEETS
December 31,
ASSETS 1997 1996
Current assets
Cash $ 21,658 $
9,520
Accounts receivable,
net of allowance
for doubful accounts
of $28,553 in 1997
and $4,074 in 1996 99,041
258,558
Inventories 115,571
60,635
Due from affiliates -
64,383
Prepaid expenses 10,294
4,947
Total current assets 246,564
408,043
Other assets 5,590
5,590
LIABILITIES AND OWNERS' EQUITY
(DEFICIT)
Current liabilities
Accounts payable $ 53,403 $
49,157
Accrued liabilities 52,129
47,367
Due to affiliates 150,834 -
Total current
liabilities 256,366
96,524
COMMITMENTS - -
Owners' equity (deficit)
Common stock - authorized,
20,000 shares of $100
par value; 1,000 shares
issued and outstanding 100,000
100,000
Preferred stock - authorized,
20,000 shares of $100
par value; no shares
issued and outstanding - -
Accumulated deficit (276,342)
(38,996)
Partners' equity 172,130
256,105
(4,212)
317,109
$ 252,154 $
413,633
The accompanying notes are an integral part
of these statements.
Caloyeras, Inc., d.b.a. Electronika and
Magnetika/East Ltd.
COMBINED STATEMENTS OF EARNINGS
Year ended December 31,
1997 1996
Sales $1,790,695
$1,374,991
Cost of goods sold 984,905
784,784
Gross profit 805,790
590,207
Operating expenses
Selling expenses 19,538
18,960
Officers' salaries
and related expenses 447,385
100,295
General and adminis-
trative expenses 177,158
150,319
644,081
269,574
Earnings
from
operations 161,709
320,633
Other income
Net
earnings -
1,595
$ 161,709 $
322,228
The accompanying notes are an integral part
of these statements.
Caloyeras, Inc., d.b.a. Electronika
and Magnetika/East Ltd.
COMBINED STATEMENT OF OWNERS' EQUITY (DEFICIT)
Years ended December 31, 1997 and 1996
Retained
earnings
Common (accumulated Partners'
stock deficit) equity Total
Balance at
January 1,
1996 $ 100,000 $ 267,165 $ 151,787 $
518,952
Net earnings
for the year - 202,910 119,318
322,228
Stockholders'
distributions/
partners'
draws during
the year - (509,071) (15,000)
(524,071)
Balance at
December 31,
1996 100,000 (38,996) 256,105 317,109
Net earnings
(loss) for
the year - (57,346) 219,055 161,709
Stockholders'
distributions/
partners'
draws during
the year - (180,000) (303,030)
(483,030)
Balance at
December 31,
1997 $ 100,000 $ (276,342) $ 172,130 $
(4,212)
The accompanying notes are an integral part
of this statement.
Caloyeras, Inc., d.b.a. Electronika
and Magnetika/East Ltd.
COMBINED STATEMENTS OF CASH FLOWS
Year ended December 31,
1997 1996
Cash flows from
operating activities
Net earnings
Adjustments to reconcile
net earnings to net cash
provided by operating
activities $ 161,709 $ 322,228
Changes in assets and
liabilities
Decrease (increase)
in accounts receivable 169,518
(115,030)
Increase in inventories (54,936)
(20,255)
Increase in prepaid
expenses (5,347)
(1,400)
Increase in due to
affiliates 215,217 193,412
Increase in accounts
payable 4,246 21,762
Increase in accrued
liabilities 4,761 36,012
Net cash provided by
operating activities 495,168 436,729
Cash flows from investing
activities
Collections of notes
receivable - 45,000
Net cash provided by
investing activities - 45,000
Cash flows from financing
activities
Stockholders'
distributions (180,000)
(509,071)
Partners' draws (303,030)
(15,000)
Net cash used in
operating activities (483,030)
(524,071)
Net increase (decrease) in cash 12,138
(42,342)
Cash at beginning of year 9,520 51,862
Cash at end of year $ 21,658 $ 9,520
The accompanying notes are an integral part
of these statements.
Caloyeras, Inc., d.b.a. Electronika
and Magnetika/East Ltd.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies
consistently applied in the preparation of the
accompanying combined financial statements follows.
1. Principles of Combination
The combined financial statements include the
accounts
of Caloyeras, Inc. d.b.a. Electronika and
Magnetika/East LTD. Voting control of each company
is
vested in members of one family and the companies are
under common management. Because of these
relationships, the financial statements of the
companies (hereinafter collectively referred to as
the
Company) have been prepared as if they were a single
entity. All significant intercompany balances and
transactions have been eliminated.
2. Nature of Operations
Caloyeras, Inc., d.b.a. Electronika is a California
corporation engaged in the sales of ballast and power
supplies to the commercial aircraft and airline
industries nationwide. The Company's only supplier
of
the components it sells is a related party, which
manufactures the parts under an agreement exclusively
with the Company.
Magnetika/East Ltd. is a Massachusetts limited
partnership and is engaged in the manufacturing of
custom magnetic components such as transformers and
inductors. The Company's customers are located
primarily in the New England area.
3. Revenue Recognition
Sales and related costs of sales are recognized upon
shipment of products.
4. Inventory Valuation
Inventories are valued at the lower of cost or
market,
with cost determined on the first-in, first-out
basis.
5. Income Taxes
Income taxes on the net earnings of Caloyeras, Inc.
d.b.a. Electronika for the year are payable
personally
by the stockholders pursuant to an election under
subchapter S of the Internal Revenue Code not to have
the corporation taxed as a corporation. Accordingly,
no provision has been made for federal and state
income taxes in the accompanying combined financial
statements.
Net earnings of Magnetika/East Ltd. is currently
taxable to the partners; accordingly, no provision is
made for federal and state income taxes in the
accompanying combined financial statements.
6. Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, management
is required to make estimates and assumptions that
affect the reported amounts of assets and
liabilities,
the disclosure of contingent assets and liabilities
at
the date of the financial statements, and the
reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
NOTE B - INVENTORIES
Inventories consisted of the following at December
31:
1997 1996
Raw materials $ 6,197 $
12,768
Work-in-process 109,374
47,867
115,571
60,635
NOTE C - LEASES
Magnetika/East Ltd. leases all of its equipment under
an operating lease from a partnership whose general
partner is also the general partner of Magnetika/East
Ltd. The operating lease is a month-to-month lease
that calls for monthly payments of $2,100 plus
property taxes and insurance.
Magnetika/East Ltd. conducts its operations utilizing
leased facilities consisting of warehouse and office
space. The operating lease provides that
Magnetika/East Ltd. pay taxes, insurance,
maintenance,
and other expenses applicable to the leased property.
The lease expires in 1998 and calls for renewal prior
to the expiration.
Minimum rental payments due in 1998 under such
operating leases aggregate $5,313.
Rental expense for all operating leases for the year
ended December 31, 1997 was $62,533, of which $26,953
was to a related party. Rental expense for the year
ended December 31, 1996 was $65,273, of which $25,150
was to a related party.
NOTE D - RELATED PARTY TRANSACTIONS
Sales to related parties accounted for approximately
$82,000 and $157,000 of net sales in 1997 and 1996,
respectively; and $47,000 and $50,000 of cost of
goods
sold, respectively.
The amounts due to related parties included in
accrued
liabilities are $2,100 at December 31, 1997. There
were no such liabilities at December 31, 1996.
Included in the administrative expenses is a
management fee paid to a related party for $2,000 in
1997 and $600 in 1996.
The operations of Caloyeras, Inc. d.b.a. Electronika
are conducted in facilities which also house the
operations of a related party. Electronika does not
own any fixed assets. As needed, Electronika uses
the
fixed assets of the related party sharing the same
facilities and occasionally uses personnel of the
related party. Electronika pays no rent expense for
use of the facilities, nor does it reimburse the
related party for the pay of the personnel used.
Management has determined that the amount of use of
these assets and services is not significant.
NOTE E - EMPLOYEE BENEFIT PLAN
Magnetika/East Ltd. sponsors a defined contribution
retirement plan for employees with one year of
service. Employees may contribute up to 20% of their
compensation. The Company may match the employees'
contributions and periodically makes discretionary
contributions. The Company made no such
contributions
to the plan in 1997 and 1996.
NOTE F - MAJOR CUSTOMERS
In 1997, the Company had one major customer who
accounted for 33% of total sales. In 1996, the
Company had one major customer who accounted for 25%
of total sales. A major customer is considered to be
any customer who accounts for 10% or more of the
Company's total sales.
NOTE G - SUBSEQUENT EVENT
On July 24, 1998, the Company entered into a letter
of
intent for a possible business combination with
Torotel, Inc., which manufactures magnetic components
and power supplies. Torotel, Inc. had net sales of
$11,738,000 and a net loss of $1,523,000 for its
fiscal year ending April 30, 1998. In connection
with
this business combination, Torotel, Inc. would
exchange 1.8 million shares of its common stock for
100 percent of the outstanding securities of the
Company. In addition, Torotel would deposit 2.5
million shares of a new class of preferred stock (5%
cumulative, non-participating, non-convertible, non-
voting) into escrow for the benefit of the Company's
shareholders. The preferred stock will be
distributed
annually over a five-year period based on the
Company's earnings performance following the merger.
Further, the founder's family shareholders of
Torotel,
Inc. would form a voting trust or similar
arrangement,
pursuant to which Peter B. Caloyeras would be allowed
to vote 525,165 shares of common stock of Torotel,
Inc. owned by the Sizemore family during the five-
year
escrow period. As a result of these transactions,
the
Caloyeras family would acquire more than 50 percent
of
the voting control of Torotel, Inc. This transaction
is subject to, among other things, due diligence, the
negotiation and execution of definitive agreements,
and the approval of Torotel, Inc.'s shareholders.
There can be no assurance that the parties will
consummate the transaction contemplated by the letter
of intent.
Unaudited Interim Financial Statements
Caloyeras, Inc. d.b.a Electronika and
Magnetika/East Ltd.
COMBINED BALANCE SHEET
September 30, 1998
(Unaudited)
ASSETS
Current assets
Cash $188,325
Accounts receivable 311,032
Inventories 87,355
Prepaid expenses 10,562
Total current assets 597,274
Other assets 12,399
$609,673
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Accounts payable $ 20,633
Accrued liabilities 41,935
Due to affiliates 150,356
Total liabilities 212,924
Common stock - authorized,
20,000 shares of $100 par
value; 1,000 shares issued
and outstanding 100,000
Preferred stock - authorized
20,000 shares of $100 par
value; no shares issued and
outstanding -
Accumulated deficit (52,681)
Partners' equity 349,430
$609,673
The accompanying notes are an integral part
of this statement.
Caloyeras, Inc. d.b.a. Electronika and
Magnetika/East Ltd.
COMBINED STATEMENTS OF EARNINGS
Nine months ended September 30,
(Unaudited)
1998 1997
Sales $1,405,964 $1,415,273
Cost of goods
sold 831,725 757,030
Gross profit 574,239 659,243
Operating expenses
Selling expenses 10,502 12,475
General and
administrative
expenses 110,776 101,141
Total
operating
expenses 121,278 113,616
Other income - -
NET EARNINGS $ 452,961 $ 545,627
The accompanying notes are an integral part
of these statements.
Caloyeras, Inc. d.b.a. Electronika and
Magnetika/East Ltd.
COMBINED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
(Unaudited)
1998 1997
Cash flows from
operating activities
Net earnings $ 452,961 $ 545,627
Adjustments to reconcile
net earnings to net
cash provided by
operating activities
Changes in assets
and liabilities
Decrease in
accounts receivable (211,991) 13,176
Increase in
inventories 28,216 39,039
Increase in prepaid
expenses (268) (5,217)
Increase in due to
affiliates (478) (24,292)
Increase in other
assets (6,809) -
Increase in accounts
payable (32,770) (32,471)
Decrease in accrued
liabilities (10,194) (23,791)
Net cash provided
by operating
activities 218,667 512,071
Cash flows from financing
activities
Stockholders'
distributions (52,000) (148,400)
Partners' drawings - (303,030)
Net cash used
in financing
activities (52,000) (451,430)
Net increase in cash 166,667 60,641
Cash at beginning of period 21,658 9,520
Cash at end of period $ 188,325 $ 70,161
The accompanying notes are an integral part
of these statements.
Caloyeras, Inc. d.b.a. Electronika and
Magnetika/East Ltd.
COMBINED STATEMENTS OF EARNINGS
Three months ended September 30,
(Unaudited)
1998 1997
Sales $ 453,234 $ 449,897
Cost of goods sold 273,673 270,738
Gross profit 179,561 179,159
Operating expenses
Selling expenses 5,146 6,100
General and
administrative
expenses 50,277 34,032
Total
operating
expenses 55,423 40,132
Other income - -
NET EARNINGS $ 124,138 $ 139,027
The accompanying notes are an integral part
of these statements.
Caloyeras, Inc. d.b.a Electronika and
Magnetika/East Ltd.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A summary of significant accounting policies
consistently applied in the preparation of the
accompanying combined financial statements
follows.
1. Principles of Combination
The combined financial statements include the
accounts of Caloyeras, Inc. d.b.a. Electronika and
Magnetika/East LTD. Voting control of each
company is vested in members of one family and the
companies are under common management. Because of
these relationships, the financial statements of
the companies (hereinafter collectively referred
to as the Company) have been prepared as if they
were a single entity. All significant
intercompany balances and transactions have been
eliminated.
2. Nature of Operations
Caloyeras, Inc., d.b.a. Electronika is a
California Corporation engaged in the sales
of ballast and power supplies to the commercial
aircraft and airline industries nationwide. The
Company's only supplier of the components it sells
is a related party, which manufactures the parts
under an agreement exclusively with the Company.
Magnetika/East Ltd. is a Massachusetts limited
partnership and is engaged in the manufacturing of
custom magnetic components such as transformers
and inductors. The Company's customers are
located primarily in the New England area.
3. Revenue Recognition
Sales and related costs of sales are recognized
upon shipment of products.
4. Inventory Valuation
Inventories are valued at the lower of cost or
market, determined on the first-in, first-out
basis.
5. Income Taxes
Income taxes on the net earnings of Caloyeras,
Inc. d.b.a. Electronika for the year are payable
personally by the stockholders pursuant to an
election under subchapter S of the Internal
Revenue Code not to have the corporation taxed as
a corporation. Accordingly, no provision has been
made for federal and state income taxes in the
accompanying combined financial statements.
Net earnings of Magnetika/East Ltd. is currently
taxable to the partners; accordingly, no provision
is made for federal and state income taxes in the
accompanying combined financial statements.
6. Use of Estimates
In preparing financial statements in conformity
with generally accepted accounting principles,
management is required to make estimates and
assumptions that affect the reported amounts of
assets and liabilities, the disclosure of
contingent assets and liabilities at the date of
the financial statements, and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
NOTE B - INVENTORIES
Inventories consisted of the following at September
30, 1998:
Amount
Raw materials $ 9,696
Work-in-process 77,659
$ 87,355
NOTE C- LEASES
Magnetika/East Ltd. leases all of its equipment,
under an operating lease, from a partnership whose
general partner is also the general partner of
Magnetika/East Ltd.. The operating lease is a
month-to-month lease that calls for monthly
payments of $2,100 plus property taxes and
insurance.
Magnetika/East Ltd. conducts its operations
utilizing leased facilities consisting of
warehouse and office space. The operating lease
provides that Magnetika/East Ltd. pay taxes,
insurance, maintenance, and other expenses
applicable to the leased property. The lease
expires in 2003 and calls for renewal prior to the
expiration.
NOTE D - RELATED PARTY TRANSACTIONS
The operations of Caloyeras, Inc. d.b.a.
Electronika are conducted in facilities which also
house the operations of a related party.
Electronika does not own any fixed assets. As
needed, Electronika uses the fixed assets of the
related party sharing the same facilities and
occasionally uses personnel of the related party.
Electronika pays no rent expense for use of the
facilities, nor does it reimburse the related
party for the pay of the personnel used.
Management has determined that the amount of use
of these assets and services is not significant.
NOTE E - SUBSEQUENT EVENT
On July 24, 1998, the Company entered into a
letter of intent for a possible business
combination with Torotel, Inc., which manufactures
magnetic components and power supplies. Torotel,
Inc. had net sales of $11,738,000 and a net loss
of $1,523,000 for its fiscal year ending April 30,
1998. In connection with this business
combination, Torotel, Inc. would exchange 1.8
million shares of its common stock for 100 percent
of the outstanding securities of the Company. In
addition, Torotel would deposit 2.5 million shares
of a new class of preferred stock (5% cumulative,
non-participating, non-convertible, non-voting)
into escrow for the benefit of the Company's
shareholders. The preferred stock will be
distributed annually over a five-year period based
on the Company's earnings performance following
the merger. Further, the founder's family
shareholders of Torotel, Inc. would form a voting
trust or similar arrangement, pursuant to which
Peter B. Caloyeras would be allowed to vote
525,165 shares of common stock of Torotel, Inc.
owned by the Sizemore family during the five-year
escrow period. As a result of these transactions,
the Caloyeras family would acquire more than 50
percent of the voting control of Torotel, Inc.
This transaction is subject to, among other
things, due diligence, the negotiation and
execution of definitive agreements, and the
approval of Torotel, Inc.'s shareholders. There
can be no assurance that the parties will
consummate the transaction contemplated by the
letter of intent.
Pro Forma Consolidated Financial Statements
TOROTEL, INC. AND SUBSIDIARIES
Pro Forma Consolidated Financial Statements
On November 24, 1998, an Agreement and Plan of Merger
was signed between Torotel and Electronika, Inc.
(formerly Caloyeras, Inc.), a private manufacturer of
magnetic components. The terms of the merger
include:
Torotel exchanging 1,800,000 common shares for all
the outstanding Electronika shares.
Torotel depositing 2,500,000 shares of a new Class A
$1.00 Preferred Stock (5 percent cumulative, non-
participating, non-convertible) into escrow for the
benefit of the Electronika shareholders. The
Preferred Stock will be distributed annually over a
five-year period based on Electronika's earnings
performance following the merger.
Torotel's founding family shareholders (the Sizemore
Family) will form a Voting Trust or similar
arrangement, allowing Peter Caloyeras (Electronika's
founder) to vote 525,165 shares of common stock held
by the Sizemore Family, which will represent 11.4% of
Torotel's outstanding common stock after the merger.
After giving effect to the Merger and the Voting
Trust, the Caloyeras family will hold, or direct the
voting of, 54.9% of Torotel's outstanding common
stock. The term of the Voting Trust will coincide
with the term of the Preferred Stock Escrow Period.
The accompanying unaudited consolidated pro forma
balance sheet and statements of operations reflect
the combined financial position and operations of
Torotel and Electronika.
The pro forma consolidated balance sheet as of
October 31, 1998, assumes the acquisition of
Electronika occurred on that date. The pro forma
consolidated statements of operations assume the
acquisition was completed on May 1, 1997. In
preparing the pro forma information, no adjustments
have been made to operations for the impact of
certain anticipated operational and administrative
efficiencies.
The pro forma consolidated financial information is
not necessarily indicative of the results which
actually would have occurred had the transactions
been in effect on the dates and for the periods
indicated or which may result in the future. In
future statements, Electronika will be consolidated
only from the closing date of the acquisition.
TOROTEL, INC. AND SUBSIDIARIES
Pro Forma Consolidated Balance Sheet
As of October 31, 1998
(Unaudited, in 000s)
Pro Consol-
Electro- Forma idated
Torotel nika Adjust Pro Forma
ASSETS
Current assets:
Cash (Note 1) $ 73 $ 199 $ (174) $ 98
Accounts
receivable, net 875 378 - 1,253
Inventories 3,047 89 - 3,136
Prepaid expenses 156 16 - 172
Asset held for
disposal 76 - - 76
4,227 682 (174) 4,735
Property, plant
and equipment,
net (Note 2) 1,438 - 114 1,552
Other assets
(Note 3) 105 6 (78) 33
Due from
affiliates
(Note 1) - 68 (68) -
Goodwill (Note 4) - - 1,165 1,165
$ 5,770 $ 756 $ 959 $7,485
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term
revolving
credit line $ 1,203 $ - $ - $ 1,203
Current
maturities
of long-term
debt 284 - - 284
Trade accounts
payable 654 29 - 683
Accrued liabil-
ities 313 36 - 349
2,454 65 - 2,519
Long-term debt,
less current
maturities 1,479 - - 1,479
Note and interest
payable to
former officer 458 - - 458
Commitments and
contingencies 486 - - 486
Due to
affiliates
(Note 1) - 242 (242) -
Stockholders'
equity:
Common stock,
at par value
(Note 5) 1,441 - 900 2,341
Capital in
excess of
par value
(Note 5) 8,673 - 750 9,343
Partners'
equity
(Note 5) - 449 (449) -
Accumulated
deficit (9,016) - - (9,016)
1,098 449 1,201 2,668
Less treasury
stock, at cost 205 - - 205
893 449 1,201 2,463
$ 5,770 $ 756 $ 959 $ 7,485
The accompanying notes are an integral
part of these statements.
TOROTEL, INC. AND SUBSIDIARIES
Pro Forma Consolidated Statements of Operations
Six Months Ended October 31, 1998
(Unaudited, in 000s except per share data)
Pro Consol-
Electro- Forma idated
Torotel nika Adjust Pro Forma
Net sales $ 4,649 $ 926 $ - $ 5,575
Cost of goods
sold 4,106 554 - 4,660
Gross profit 543 372 - 915
Operating
expenses
(Note 6) 1,500 94 51 1,645
Earnings
(loss) from
operations (957) 278 (51) (730)
Other income
(expense):
Interest expense (169) - - (169)
Other, net 984 - - 984
815 - - 815
Earnings
(loss) before
provision for
income taxes (142) 278 (51) 85
Provision for
income taxes - - -
- -
Net earnings
(loss) $ (142) $ 278 $ (51) $ 85
Basic earnings
(loss) per
share $ (.05) $ .02
Diluted earnings
(loss) per
share $ (.05) $ .02
Weighted average
common shares
outstanding 2,811 4,611
Incremental shares - 44
The accompanying notes are an integral part
of these statements.
TOROTEL, INC. AND SUBSIDIARIES
Pro Forma Consolidated Statements of
Operations
Fiscal Year Ended April 30, 1998
(Unaudited, in 000s except per share data)
Pro Consol-
Electro- Forma idated
Torotel nika Adjust Pro Forma
Net sales $ 11,738 $ 1,699 $ - $ 13,437
Cost of goods
sold 9,301 979 - 10,280
Gross profit 2,437 720 - 3,157
Operating
expenses
(Note 7) 3,108 634 (327) 3,415
Earnings (loss)
from operations (671) 86 327 (258)
Other income (expense):
Interest expense (279) - - (279)
Other, net (345) - - (345)
(624) - - (624)
Earnings (loss)
before provision
for income taxes (1,295) 86 327 (882)
Provision for
income taxes 228 - - 228
Net earnings
(loss) $ (1,523) $ 86 $ 327 $ (1,110)
Basic loss
per share $ (.54) $ (.24)
Diluted loss
per share $ (.54) $ (.24)
Weighted average
common shares
outstanding 2,809 4,609
Incremental shares - -
The accompanying notes are an integral part
of these statements.
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. Adjustment for payment of amounts due to and from
affiliates.
2. Adjustment for estimated fair market value of
equipment contributed to business by the Caloyeras
Family Partnership, L.P.
3. Adjustment to eliminate the costs incurred for
the acquisition (accounting, legal, consulting,
etc.).
4. Adjustment for the excess of the $1,728,000
acquisition cost over the $563,000 assigned to
identifiable assets acquired less liabilities
assumed. This goodwill amount of $1,165,000 will be
amortized over 40 years.
5. Adjustment for the issuance of 1,800,000 shares
of Torotel Common Stock, $.50 par value, in exchange
for all of the outstanding Electronika shares. The
fair market value of Torotel's stock was determined
to be $.96 per share, which was based on the quoted
market price on the American Stock Exchange three
days before and after the terms of the acquisition
were announced. The adjustment of $900,000 to Common
Stock represents the par value of the shares issued.
The adjustment of $750,000 to Capital in Excess of
Par Value represents the fair market value in excess
of par of $828,000 less $78,000 for the adjustment
discussed in Note 3.
6. Adjustment of $51,000 for the six months ended
October 31, 1998, to increase general and
administrative expenses. This amount includes
depreciation of $12,000 on Electronika as a result of
the adjustment discussed in Note 2, amortization of
$14,000 on Torotel as a result of the adjustment
discussed in Note 4, and officers salary of $25,000
on Torotel for Peter B. Caloyeras, as the new
Chairman of the Board and Chief Executive Officer.
7. Adjustment of $327,000 for the year ended April
30, 1998, to decrease general and administrative
expenses. This amount includes an annual bonus
distribution to Electronika's officers of $429,000,
which will not be incurred on an ongoing basis. This
decrease was offset partially by depreciation of
$23,000 on Electronika as a result of the adjustment
discussed in Note 2, amortization of $29,000 on
Torotel as a result of the adjustment discussed in
Note 4, and officers salary of $50,000 on Torotel for
Peter B. Caloyeras, as the new Chairman of the Board
and Chief Executive Officer.
Exhibit C
Fairness Opinion
[Stern Brothers Letterhead]
November 12, 1998
Board of DirectorsTorotel, Inc.
c/o Mr. Jim Serrone
13402 South 71 Highway
Grandview, Missouri 64030
Gentlemen:
Torotel, Inc.(Torotel or the Company) has
asked Stern Brothers Valuation Advisors(Stern
Brothers) for our opinion as to the fairness, from
a financial point of view, to the minority
interest shareholders, of the purchase of
Electronika, Inc., a California
corporation(Electronika) by merging Electronika
with and into MergerSub (a wholly-owned subsidiary
of Torotel) in a tax free reorganization.
Pursuant to the Merger, the Electronika
stockholders will receive, in the aggregate, (i)
1,800,000 shares of common stock of Torotel, and
(ii) up to 2,500,000 shares of new Class A $1.00
Preferred stock of Torotel based on the amount of
EBITDA generated by the Surviving Corporation
which will be deposited in escrow for the benefit
of the Electronika shareholders. Our opinion is
based on information available to us as of
November 11, 1998.
Scope of Work
In the course of our analysis for purposes of
rendering our opinion, we have, among other
things, done the following:
Visited the Company's administrative headquarters
and manufacturing facility.
2) Interviewed key management regarding the
background, operations, financial performance and
prospects of Torotel and Electronika.
3) Reviewed and considered the following
information: Torotel's annual reports for
the years ended April 30, 1991 through April 30,
1998. Torotel's 10Q reports for the quarters
ended October 31, 1997, January 31, 1998 and July
31, 1998. Federal and state income tax returns
filed by the Company for fiscal year 1997. Four year
income statement forecast prepared by the Company for
Torotel for fiscal years 1999 through 2002. Board of
Directors Minutes from April 21, 1997 through August
10, 1998. Torotel's proxy statement of Notice of
Annual Meeting of Shareholders, dated 8/15/97.
Certificate and Articles of Incorporation and
Amendments, Bylaws and Amendments for Torotel
Products, Inc., Torotel, Inc., and OPT Industries,
Inc. Certificate of Merger of Torotel Magnetics into
OPT Industries, Inc. Second Edition brochure of
Torotel's products. Various newspaper articles
and other published information on Torotel.
Torotel's product brochure of Inductors/Transformers.
Draft of Agreement and Plan of Merger among Torotel,
Inc., Torotel Merger Subsidiary, Inc., Electronika,
Inc. and the Electronika Stockholders dated October,
1998.
4) Reviewed and considered the following
additional information: Draft of Financial
Statements and Accountants' Review Report for
Magnetika/East LTD. as of December 31, 1997.
Draft of Financial Statements and Accountants'
Review Report for Caloyeras, Inc., d/b/a
Electronika as of December 31, 1997. Tax
returns for Caloyeras, Inc. from 1994 through
1997. Tax returns for Magnetika-East Limited
Partnership from 1992 through 1997. Management
prepared financial statements for Magnetika/East
LTD. as of December 31, 1996, December 31, 1997,
June 30, 1997 and June 30, 1998. Management
prepared financial statements for Caloyeras, Inc.
as of December 29,1996, December 31, 1997, June
30, 1997 and June 30, 1998. Articles of
Incorporation and Bylaws of Caloyeras, Inc. (a
California Corporation). Agreement and
Certificate of Limited Partnership for
Magnetika/East Limited Partnership, A
Massachusetts Limited Partnership. Manufacturing
Agreement dated August 1, 1998 between Caloyeras,
Inc. d/b/a Electronika and Ferrodyne, Corporation
d/b/a Magnetika West, Inc. Statement of Corporate
Objectives of Torotel, Inc., its Subsidiaries and
Affiliates. Board Actions by Unanimous Written
Consent for Caloyeras, Inc. Resume of Peter B.
Caloyeras. Annual reports, interim reports, 10-
K's, 10-Q's, and other published information of
publicly traded companies as nearly comparable to
Torotel as we could find. Data on transactions of
privately held companies from The Institute of
Business Appraisers.? Publications by Standard &
Poor's and Bloomberg Financial Services; The Value
Line Investment Survey; Federal Reserve Bulletin; The
Wall Street Journal; Directory of Companies
Required to File Annual Reports with the
Securities and Exchange Commission; Stocks, Bonds,
Bills and Inflation 1996 Yearbook by Ibbotson
Associates; and Mergerstat Review 1996 by Houlihan
Lokey Howard & Zukin.
5) Interviewed Torotel's and Electronika's
attorney and accountant.
6) Conducted an analysis of the value of
Torotel and Electronika using several market
comparison methods and a discounted cash flow
approach.
7) Conducted such other studies, analyses,
inquiries and investigations as we deemed
appropriate.
The foregoing is, of course, only a summary of the
information reviewed and factors considered by us
which have influenced our opinion and does not
recite in detail all of such information and
factors that we have taken into consideration in
connection with our opinion.
Assumptions and Limiting Conditions
The Company, Board of Directors, and its
representatives warranted to us that the
information they supplied was complete and
accurate to the best of their knowledge and that
the financial statement information reflects the
Company's results of operations and financial
condition in accordance with generally accepted
accounting principles, unless otherwise noted. We
have not assumed any responsibility for
independent verification of information and
financial forecasts supplied by the Company, Board
of Directors, and its representatives (and we
express no opinion on that information). We have
not obtained any independent appraisal of the
assets of Torotel or Electronika, nor have we
attempted to verify the information furnished to
us by them.
We have used public information and industry and
statistical data from sources which we deem to be
reliable; however, we make no representation as to
the accuracy or completeness of such information
and have accepted such information without further
verification.
We were not authorized to solicit, and did not
solicit, interest from any party with respect to a
merger with or other business combination
transaction involving the Company or any of its
assets, nor did we have any discussions or
negotiations with any parties, other than Torotel,
in connection with the issuance of Torotel shares.
Possession of this report, or a copy thereof, does
not carry with it the right of publication of all
or part of it, nor may it be used for any purpose
by anyone but the client without the previous
written consent of the client or us and, in any
event, only with proper attribution.
We are not required to give testimony in court, or
be in attendance during any hearings or
depositions, with reference to the Company, unless
previous arrangements have been made.
This opinion is valid only for the purpose(s) and
standard of value specified herein.
This opinion assumes that the Company will
continue to operate as a going concern, and that
the character of the present business will remain
intact.
The opinion contemplates facts and conditions
existing as of the opinion date. Events and
conclusions occurring after that date have not
been considered, and we have no obligation to
update our opinion for such events and conditions.
This opinion is subject to the understanding that
the obligations of Stern Brothers Valuation
Advisors in the opinion are solely corporate
obligations, and no officer, director, employee,
agent, shareholder or controlling person of Stern
Brothers Valuation Advisors shall be subjected to
any personal liability whatsoever to any person,
nor will any such claim be asserted by or on
behalf of you or your affiliates.
By accepting this opinion, the Board of Directors
and the Company acknowledge the terms and
indemnity provisions provided in the executed
engagement letter and the terms and conditions
contained in these assumptions and limiting
conditions.
Certifications
We certify that, to the best of our knowledge and
belief:
The statements of fact in this report and true and
correct.
The reported analyses, opinions, and conclusions
are limited only by the reported assumptions and
limiting conditions, and are our personal,
unbiased professional analyses, opinions, and
conclusions.
Neither Stern Brothers nor the individuals
involved with this opinion have any present or
contemplated future interest in the common stock
of Torotel or Electronika which might prevent the
rendering of an unbiased opinion.
Our fee for this engagement is not contingent on
an action or event resulting from the analyses,
opinions, or conclusions, in, or the use of this
report.
No one provided significant professional
assistance to the persons signing this report.
The American Society of Appraisers has a mandatory
recertification program for all of its Senior
members. We are in compliance with that program.
Conclusion
Based upon the foregoing, other matters we
consider relevant and our general knowledge of
such matters as investment bankers, we are of the
opinion that the purchase of Electronika, Inc. by
merging Electronika with and into MergerSub (a
wholly-owned subsidiary of Torotel) in a tax free
reorganization, is fair, from a financial point of
view, to the minority interest shareholders as of
November 12, 1998. Pursuant to the Merger, the
Electronika stockholders will receive, in the
aggregate, (i) 1,800,000 shares of common stock
of Torotel, and (ii) up to 2,500,000 shares of
new Class A $1.00 Preferred stock of Torotel based
on the amount of EBITDA generated by the Surviving
Corporation which will be deposited in escrow for
the benefit of the Electronika shareholders. Our
opinion is based on information available to us as
of November 11, 1998.
Sincerely,
STERN BROTHERS VALUATION ADVISORS
John C. Korschot, David K. Jones
CFA, ASA, CBA CFA, AM, CBA
President Vice President