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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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PACIFIC RESEARCH & ENGINEERING CORPORATION
(NAME OF SUBJECT COMPANY)
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PACIFIC RESEARCH & ENGINEERING CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
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COMMON STOCK, NO PAR VALUE
SHAREHOLDER WARRANTS TO PURCHASE SHARES OF COMMON STOCK
REPRESENTATIVE WARRANTS TO PURCHASE SHARES OF COMMON STOCK AND SHAREHOLDER
WARRANTS
THE EXECUTIVE WARRANT TO PURCHASE SHARES OF COMMON STOCK
(TITLE OF CLASS OF SECURITIES)
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SHARES OF COMMON STOCK: 694932104 REPRESENTATIVE WARRANT: N/A
SHAREHOLDER WARRANTS: 694932112 EXECUTIVE WARRANT: N/A
(CUSIP NUMBER OF CLASS OF SECURITIES)
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JACK WILLIAMS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PACIFIC RESEARCH & ENGINEERING CORPORATION
2070 LAS PALMAS DRIVE
CARLSBAD, CA 92009
(760) 438-3911
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO
RECEIVE NOTICE AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
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Copy to:
REBECCA K. SCHMITT, ESQ.
CHRISTOPHER P. BIFONE, ESQ.
GRAY CARY WARE & FREIDENRICH LLP
4365 EXECUTIVE DRIVE, SUITE 1600
SAN DIEGO, CA 92121-2189
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INTRODUCTION
This Solicitation/Recommendation Statement on Schedule 14D-9 (this
"Schedule 14D-9") relates to an offer by Harris Corporation, a Delaware
corporation ("Harris"), through its wholly-owned subsidiary Space Coast Merger
Corp., a California corporation ("Offeror"), to purchase all of the Offer
Securities (as defined below) of Pacific Research & Engineering Corporation, a
California corporation (the "Company").
ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is Pacific Research & Engineering
Corporation, a California corporation. The address of the principal executive
office of the Company is 2070 Las Palmas Drive, Carlsbad, California, 92009. The
classes of equity securities to which this Schedule 14D-9 relates are (i) all
outstanding shares of Common Stock, no par value (the "Shares") of the Company,
at a purchase price of $2.35 per Share, (ii) any and all issued and outstanding
warrants issued by the Company pursuant to the Warrant Agreement (the
"Shareholder Warrant Agreement"), dated as of May 28, 1996, by and between the
Company and Wells Fargo Bank N.A. as Warrant Agent (the "Shareholder Warrants")
of the Company, at a purchase price of $0.15 per Shareholder Warrant, (iii) any
and all issued and outstanding warrants issued to representatives of Nutmeg
Securities, Ltd. pursuant to the Representative's Warrant to Purchase Units of
Common Stock and Redeemable Warrants (the "Representative Warrant Agreement"),
each dated as of May 31, 1996, by and between the Company and each of John Lane,
Daniel Guifoile, Matthew Rochlin, Gayle Aufderhide, Cathy Mayberry and Stephen
Marchese (the "Representative Warrants"), at a purchase price of $0.15 per each
Share underlying each such Representative Warrant, and (iv) the issued and
outstanding warrant issued to John W. Barrett pursuant to the Warrant to
Purchase Common Stock of the Company (the "Executive Warrant Agreement"), by and
between John W. Barrett and the Company (the "Executive Warrant" and,
collectively with the Shareholder Warrants and the Representative Warrants, the
"Warrants") at a purchase price of $0.15 per each Share underlying the Executive
Warrant. As used herein, "Offer Securities" shall mean the Shares and the
Warrants.
ITEM 2. TENDER OFFER OF THE BIDDER
This Schedule 14D-9 relates to the tender offer (the "Offer") disclosed in
the Schedule 14D-1, dated August 9, 1999 (as amended or supplemented, the
"Schedule 14D-1"), filed with the United States Securities and Exchange
Commission (the "Commission") by Harris and Offeror, relating to an offer by the
Offeror on behalf of Harris, to purchase (i) all outstanding Shares at a price
of $2.35 per Share (the "Share Offer Price"), (ii) any and all of the
Shareholder Warrants at a price of $0.15 per Shareholder Warrant (the
"Shareholder Warrant Offer Price"), (iii) any and all of the Representative
Warrants at a price of $0.15 per each Share underlying each such Representative
Warrant ("the Representative Warrant Offer Price") and (iv) the Executive
Warrant at a price of $0.15 per each Share underlying the Executive Warrant (the
"Executive Warrant Offer Price" and, collectively with the Share Offer Price,
the Shareholder Warrant Offer Price and the Representative Warrant Offer Price,
the "Offer Price"), in each case, net to the seller in cash, without interest,
upon the terms and subject to the conditions set forth therein. The principal
executive offices of each of Harris and the Offeror are located at 1025 West
NASA Blvd., Melbourne, Florida, 32919.
The Offer is being made pursuant to an Agreement and Plan of Merger dated
as of August 2, 1999 (the "Merger Agreement") by and among the Company, Harris
and the Offeror, which provides that, among other things, as soon as practicable
after the purchase of Offer Securities validly tendered and not withdrawn
pursuant to the Offer, and the satisfaction of the other conditions set forth in
the Merger Agreement, and in accordance with the relevant provisions of the
General Corporation Law of the State of California ("California Law"), Offeror
will be merged with and into the Company (the "Merger"). Following consummation
of the Merger, the Company will continue as the surviving corporation (the
"Surviving Corporation") and will become a wholly-owned subsidiary of Harris. At
the effective time of the Merger (the "Effective Time"), (i) each Share that is
issued and outstanding (other than Shares owned by the Company, any wholly owned
subsidiary of the Company, Harris, the Offeror or any wholly owned subsidiary of
Harris or Shares held by shareholders who perfect their dissenters' rights under
the California General Corporation Law will be canceled and converted into the
right to receive $2.35 (or any higher price that may be paid for each Share
pursuant to the Offer) in cash, without interest thereon, (ii) each Shareholder
Warrant that is issued and outstanding immediately prior to the Effective Time
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(other than any Shareholder Warrants owned by the Company, any wholly owned
subsidiary of the Company, Harris, the Offeror or any other wholly owned
subsidiary of Harris) shall no longer be exercisable into the right to receive
Shares, but shall become exercisable into the right to receive $2.35 (or any
higher price that may be paid for each Share pursuant to the Offer) in cash,
without interest, upon exercise of the Shareholder Warrant and payment by the
holder of the $8.00 per Share exercise price provided in the Shareholder Warrant
Agreement, (iii) each Representative Warrant that is issued and outstanding
immediately prior to the Effective Time (other than any Representative Warrants
owned by the Company, any wholly owned subsidiary of the Company, Harris, the
Offeror or any other wholly owned subsidiary of Harris) shall no longer be
exercisable into the right to receive Shares or Shareholder Warrants, but shall
become exercisable into the right to receive (A) for each Share underlying the
Representative Warrant, $2.35 (or any higher price that may be paid for each
Share pursuant to the Offer) in cash, without interest, upon exercise of the
Representative Warrant and payment by the holder of the $8.52 per Share exercise
price for each Share provided in the Representative Warrant Agreement and (B)
for each Shareholder Warrant underlying the Representative Warrant, $0.15 (or
any higher price that may be paid for each Shareholder Warrant pursuant to the
Offer) in cash, without interest, upon exercise of the Representative Warrant
and payment by the holder of the $0.155 per Shareholder Warrant exercise price
for each Shareholder Warrant provided in the Representative Warrant Agreement,
and (iv) if issued and outstanding immediately prior to the Effective Time, the
Executive Warrant shall no longer be exercisable into the right to receive
Shares, but shall become exercisable into the right to receive for each Share
underlying the Executive Warrant, $2.35 (or any higher price that may be paid
for each Share pursuant to the Offer) in cash, without interest, upon exercise
of the Executive Warrant and payment of the $4.68 per Share exercise price for
each Share provided in the Executive Warrant Agreement. The Merger Agreement is
summarized in Item 3 of this Schedule 14D-9. Although Harris is offering to
purchase the Offer Securities through Offeror, Harris has agreed to take all
action necessary to cause Offeror to fulfill all its obligations with respect to
the Offer and otherwise under the Merger Agreement, including without limitation
the obligation to make payment for the Offer Securities.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and business address of the Company, which is the person
filing this Schedule 14D-9, are set forth in Item 1 above. Unless the context
otherwise requires, references to the Company in this Schedule 14D-9 are to
Pacific Research & Engineering Corporation.
(b) Except as set forth below, to the Company's knowledge, as of the date
hereof, there are no material contracts, agreements, arrangements or
understandings and actual or potential conflicts of interest between the Company
or its affiliates and (i) its executive officers, directors or affiliates, or
(ii) Harris, Offeror or their respective executive officers, directors or
affiliates.
(1) Certain Contracts, Agreements, Arrangements or Understandings
between the Company and its Executive Officers, Directors and Affiliates.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS; OTHER AGREEMENTS
In March 1996, the Company entered into an employment agreement with Jack
Williams with an initial term of three years. Mr. Williams continues to serve as
Chairman and Chief Executive Officer of the Company pursuant to the terms of the
agreement, although the initial term expired in April 1999. Mr. Williams' base
salary is currently $170,000. He is also eligible to receive a bonus based upon
achievement of certain goals as determined by the Board of Directors. Mr.
Williams also receives an automobile allowance of $250 per month.
In June 1998, the Company entered into a employment agreement with Mr.
Donald Naab, pursuant to which he became President and Chief Operating Officer.
The initial term of the employment agreement continues until December 31, 1999,
at which time it may be renewed for a future unspecified term at the discretion
of the Company. The agreement provides for a base salary of $204,360 per annum
and a bonus based upon achievement of certain goals as determined by the Board
of Directors. In addition, the agreement provided for a one-time $15,000 bonus
payable upon the condition that Mr. Naab was employed by the Company on December
31, 1998. Furthermore, Mr. Naab was granted stock options to purchase an
aggregate of 75,000 shares of the Company's Common Stock at $3.625 per share and
the Company agreed to pay Mr. Naab the real estate agent commission
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on the sale of his home totaling up to $57,109. Mr. Naab also receives an
automobile allowance of $250 per month. Effective April 12, 1999, the Company
amended the employment agreement with Mr. Naab to extend the initial term of
employment for two additional years continuing until December 31, 2001.
In February 1999, the Company entered into an employment agreement with Mr.
Blake Clark, pursuant to which he became Vice President and Chief Financial
Officer. The agreement provides for a base salary of $130,000 per annum and a
bonus based upon achievement of certain goals as determined under a management
incentive plan. In addition, Mr. Clark received 30,000 stock options in
accordance with the terms and conditions of the Company's 1996 Omnibus Stock
Plan. Mr. Clark also receives an automobile allowance of $250 per month. Mr.
Clark's employment was not for any specified period and could be terminated at
any time. Effective April 12, 1999, the Company amended the employment agreement
with Mr. Clark to provide for a term of employment continuing until March 31,
2001. In the event that Mr. Clark's employment under this agreement is
terminated involuntary for any reason other than termination for cause (as
defined in the agreement), Mr. Clark's base salary will continue for the
duration of the employment term.
The Company has entered into employment agreements with all of the
remaining executive officers which provide for base salary and bonus based upon
achievement of certain goals as determined by a management incentive plan.
The Company has borrowed $240,000 in the form of promissory notes payable
to Mr. Williams. The notes are payable upon demand and bear interest at 9% per
annum.
As a result of the Company entering into the Merger Agreement on August 2,
1999, all stock options outstanding under the 1996 Omnibus Stock Plan, either
pursuant to the terms of the respective option agreements or by agreement
between Company and Harris, will vest in full immediately prior to the
consummation of the Offer or the Effective Time, whichever is earlier. See "The
Merger Agreement; the Shareholder Agreements; and the Option Agreement -- Stock
Based Compensation."
COMPENSATION OF DIRECTORS
Michael Bosworth, John Robbins, John Lane, and Herbert McCord each receive
$1,000 per month as a retainer and $750 per directors' meeting and committee
meeting attended. In addition, Messrs. Bosworth, Robbins, Lane and McCord each
have been granted options to purchase 12,500, 12,500, 7,500, and 10,000 shares
of Common Stock, respectively. For each meeting of the Board of Directors which
they attend, directors are reimbursed for reasonable travel expenses incurred.
At the time of the Company's public offering in 1996, Mr. Lane was an
executive officer and controlling person of Nutmeg Securities, the principal
underwriter of such offering. The total underwriting discounts and commissions
paid by the Company with respect to such offering were $550,000. In addition,
Nutmeg Securities received (i) a non-accountable expense allowance of $165,000
and (ii) warrants to purchase up to 50,000 units at $17.05 per unit exercisable
over four (4) years commencing May 28, 1997, with each unit consisting of two
shares of the Company's Common Stock and one redeemable Common Stock Purchase
Warrant of the Company, and (iii) a consulting fee of $72,000.
INDEMNIFICATION
The Articles of Incorporation of the Company provide that the liability of
a director of the Company for monetary damages shall be eliminated to the
fullest extent permissible under California law.
The By-Laws of the Company provide that the Company may indemnify its
agents, including its directors and officers, and persons serving in such
capacities in other business enterprises at the Company's request, against
expenses actually and reasonably incurred in connection with the defense or
settlement of any threatened, pending or completed action brought against such
person by reason of the fact that such person is or was an agent of the Company,
if such person acted in good faith, in a manner such person believed would be in
the best interests of the Company and with such care, including reasonable
inquiry, as an ordinarily prudent person in a like position would use under
similar circumstances. The By-Laws allow the Company to advance expenses
incurred in connection with defending such a proceeding upon receipt of an
undertaking by or on behalf of the agent to repay such amount unless it shall
ultimately be determined that the agent is entitled to indemnification.
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The rights conferred in the By-Laws are not exclusive, and the Company is
authorized to enter into indemnification agreements with its directors,
officers, employees and agents. In addition, the By-Laws permit the Company to
maintain director and officer liability insurance.
The Company has entered into indemnification agreements with all of its
directors and executive officers.
(2) Certain Contracts, Agreements, Arrangements or Understandings
between the Company and Harris, Offeror or the Executive Officers,
Directors and Affiliates of Harris or Offeror.
Pursuant to the Merger Agreement, within five days after the purchase of
the Shares constituting the Minimum Condition (as defined later) by Offeror
pursuant to the Offer or the Effective Time of the Merger, whichever is earlier,
Harris shall pay, or shall cause a subsidiary of Harris to pay, the principal
amount and any accrued interest under the certain promissory notes payable to
The Williams Family Trust dated June 11, 1999, June 17, 1999, July 8, 1999 and
July 9, 1999, in the principal aggregate amount of $240,000.
In addition, pursuant to the terms of the Merger Agreement and as a
condition of the Offer, Jack Williams shall enter into an employment agreement
with the Company which shall include, among other things, a covenant not to
compete. Other employees of the Company may enter into agreements with the
Company regarding their employment after the completion of the Merger.
THE MERGER AGREEMENT; THE SHAREHOLDER AGREEMENTS; AND THE STOCK OPTION AGREEMENT
The following summary of certain provisions of the Merger Agreement,
Shareholder Agreements and the Stock Option Agreement is presented only as a
summary and is qualified in its entirety by reference to each of the Merger
Agreement, Shareholder Agreements and the Stock Option Agreement, copies of
which are filed as exhibits to this Schedule 14D-9.
The Offer. The Offeror commenced the Offer in accordance with the terms of
the Merger Agreement. Each of the Company, Harris and the Offeror has agreed to
use its commercially reasonable efforts to take, or cause to be taken, all
actions necessary to comply promptly with all legal requirements that may be
imposed on itself with respect to the Offer and the Merger and shall cooperate
with each other in connection with any such requirements imposed upon any of
them in connection with the Offer and the Merger. Each of the Company, Harris
and the Offeror shall, and shall cause its subsidiaries to, use its commercially
reasonable efforts to take all reasonable actions necessary to obtain (and shall
cooperate with each other in obtaining) any consent, approval of, or any waiver
from, any governmental entity or other public or private third party required to
be obtained or made by Harris, the Offeror or the Company or any of their
subsidiaries in connection with the Offer and the Merger or the taking of any
action contemplated thereby or by the Merger Agreement.
The Merger. The Merger Agreement provides that, upon the terms and subject
to the conditions of the Merger Agreement, and in accordance with California
Law, the Offeror shall be merged with and into the Company at the Effective
Time. Following the Merger, the separate corporate existence of the Offeror
shall cease and the Company shall continue its corporate existence under the
laws of the State of California as the Surviving Corporation and shall succeed
to and assume all the rights and obligations of the Offeror and the Company in
accordance with California Law. At the Effective Time, the charter and the
bylaws of the Offeror shall be the charter and the bylaws of the Surviving
Corporation, and the directors and officers of the Offeror shall become the
directors and officers of the Surviving Corporation. The Merger Agreement
further provides that upon the terms and subject to the conditions of the Merger
Agreement, if the Offeror acquires at least 90% of the outstanding Shares, the
parties to the Merger Agreement will take all necessary and appropriate action
to cause the Merger to become effective as soon as practicable after acceptance
and payment for the Shares by the Offeror pursuant to the Offer without a
meeting of the shareholders of the Company, in accordance with California Law.
Conversion of Securities. As of the Effective Time, by virtue of the Merger
and without any action on the part of the Offeror, the Company or the holders of
any securities of the Offeror or the Company, each Share (other than Shares
owned by the Company, any wholly owned subsidiary of the Company, Harris, the
Offeror, any other wholly-owned subsidiary of Harris or shares held by
shareholders who perfect their dissenter's rights under California Law) shall be
converted into the right to receive from the Surviving Corporation, in cash,
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without interest, the Share Offer Price (or any higher price that may be paid
for each Share pursuant to the Offer). Each share of stock of the Offeror issued
and outstanding immediately prior to the Effective Time shall, at the Effective
Time, by virtue of the Merger and without any action on the part of the holder
of any shares of stock of the Offeror, be converted into and become one fully
paid and nonassessable share of common stock, no par value, of the Surviving
Corporation and shall constitute the only outstanding shares of capital stock of
the Surviving Corporation. As a result, the Surviving Corporation will be a
wholly owned subsidiary of Harris. Each Shareholder Warrant that is issued and
outstanding immediately prior to the Effective Time (other than any Shareholder
Warrants owned by the Company, any wholly owned subsidiary of the Company,
Harris, the Offeror or any other wholly owned subsidiary of Harris) shall, by
virtue of the Merger and without any action on the part of the holder thereof,
no longer be exercisable into the right to receive Shares, but shall become
exercisable, in accordance with Section 9.4 of the Shareholder Warrant
Agreement, into the right to receive an amount in cash equal to the Share Offer
Price (or any higher price that may be paid for each Share pursuant to the
Offer), without interest, upon exercise of the Shareholder Warrant and payment
by the holder of the exercise price as provided in the Shareholder Warrant
Agreement. Each Representative Warrant that is issued and outstanding
immediately prior to the Effective Time (other than any Representative Warrants
owned by the Company, any wholly owned subsidiary of the Company, Harris, the
Offeror or any other wholly owned subsidiary of Harris) shall, by virtue of the
Merger and without any action on the part of the holder thereof, no longer be
exercisable into the right to receive Shares or Shareholder Warrants, but shall
become exercisable, in accordance with Section (g)(B) of the Representative
Warrant Agreement, into the right to receive (i) for each Share underlying the
Representative Warrant, an amount in cash equal to the Share Offer Price (or any
higher price that may be paid for each Share pursuant to the Offer), without
interest, upon exercise of the Representative Warrant and payment by the holder
of the exercise price for each Share as provided in the Representative Warrant
Agreement and (ii) for each Shareholder Warrant underlying the Representative
Warrant, an amount in cash equal to the Shareholder Warrant Offer Price (or any
higher price that may be paid for each Shareholder Warrant pursuant to the
Offer), without interest, upon exercise of the Representative Warrant and
payment by the holder of the exercise price for each Shareholder Warrant as
provided in the Representative Warrant Agreement. If issued and outstanding
immediately prior to the Effective Time, the Executive Warrant shall, by virtue
of the Merger and without any action on the part of the holder thereof, no
longer be exercisable into the right to receive Shares, but shall become
exercisable, in accordance with Section 13.1(a) of the Executive Warrant
Agreement, into the right to receive for each Share underlying the Executive
Warrant, an amount in cash equal to the Share Offer Price (or any higher price
that may be paid for each Share pursuant to the Offer), without interest, upon
exercise of the Executive Warrant and payment of the exercise pr ice for each
Share as provided in the Executive Warrant Agreement.
Representations and Warranties. In the Merger Agreement, the Company has
made customary representations and warranties to Harris and the Offeror. The
representations and warranties of the Company relate, among other things, to its
organization, good standing and corporate power; capital structure; authority to
enter into the Merger Agreement and the Option Agreement and to consummate the
transactions contemplated thereby; required consents and approvals and no
violations; filings made by the Company with the Commission under the Securities
Act and the Exchange Act (including financial statements included in the
documents filed by the Company under these acts); information supplied by the
Company; the absence of certain events since December 31, 1998; permits and
compliance with laws; tax matters; actions and proceedings; certain agreements;
benefit plans and employees, employment practices and change of control
agreements; compliance with worker safety laws; liabilities; products; certain
labor matters; intellectual property matters and Year 2000 compliance; title to
assets; state takeover laws; required votes; accounts receivable; inventories;
environmental matters; suppliers and customers; insurance; accuracy of certain
information; transactions with affiliates; brokers and contracts.
The Offeror and Harris have also made customary representations and
warranties to the Company. Representations and warranties of the Offeror and
Harris relate, among other things, to: their organization and authority to enter
into the Merger Agreement, the Option Agreement and the Shareholder Agreements
and to consummate the transactions contemplated thereby; required consents and
approvals and no violations; information supplied; operations of the Offeror;
and brokers.
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Covenants Relating to the Conduct of Business. During the period from the
date of the Merger Agreement through the Effective Time, the Company has agreed
that, except as otherwise expressly contemplated by the Merger Agreement or
without the prior written consent of Harris:
(a) the Company shall in all material respects carry on its business
in the ordinary course of its business as currently conducted and, to the
extent consistent therewith, use its commercially reasonable efforts to
preserve intact its current business organizations, keep available the
services of its current officers and employees and preserve its
relationships with customers, suppliers and others having business dealings
with it;
(b) the Company shall not (i) declare, set aside or pay any dividends
on, or make any other actual, constructive or deemed distributions in
respect of, any of its capital stock, or otherwise make any payments to its
shareholders in their capacity as such, (ii) split, combine or reclassify
any of its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or (iii) purchase, redeem or otherwise acquire any shares of
capital stock of the Company or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities;
(c) the Company shall not issue, deliver, sell, pledge, dispose of or
otherwise encumber any shares of its capital stock, any other voting
securities or equity equivalent or any securities convertible into, or any
rights, warrants or options (including options under the Company stock
option plans) to acquire any such shares, voting securities, equity
equivalent or convertible securities, other than (i) the issuance of Shares
upon the exercise of Company stock options outstanding on the date of the
Merger Agreement in accordance with their current terms, (ii) the issuance
of Shares upon exercise of the Warrants, or (iii) the issuance of Shares
pursuant to the Option Agreement.
(d) the Company shall not amend its charter or bylaws;
(e) the Company shall not acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of
or equity in, or by any other manner, any business or any corporation,
limited liability company, partnership, association or other business
organization or division thereof;
(f) the Company shall not, sell, lease or otherwise dispose of, or
agree to sell, lease or otherwise dispose of, any of its assets, other than
sales of inventory that are in the ordinary course of business consistent
with past practice;
(g) the Company shall not incur any indebtedness for borrowed money,
guarantee any such indebtedness or make any loans, advances or capital
contributions to, or other investments in, any other person, other than in
the ordinary course of business consistent with past practice;
(h) the Company shall not alter (through merger, liquidation,
reorganization, restructuring or in any other fashion) the corporate
structure or ownership of the Company;
(i) the Company shall not enter into or adopt any, or amend any
existing, severance plan, agreement or arrangement or enter into or amend
any employee benefit plan or employment or consulting agreement;
(j) the Company shall not increase the compensation payable or to
become payable to its directors, officers or employees (except for
increases in the ordinary course of business consistent with past practice
in salaries or wages of employees of the Company who are not officers of
the Company) or grant any severance or termination pay to, or enter into
any employment or severance agreement with, any director or officer of the
Company or establish, adopt, enter into, or, except as may be required to
comply with applicable law, amend in any material respect or take action to
enhance in any material respect or accelerate any rights or benefits under,
any labor, collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer
or employee;
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(k) the Company shall not knowingly violate or knowingly fail to
perform any obligation or duty imposed upon it by any applicable material
federal, state or local law, rule, regulation, guideline or ordinance;
(l) the Company shall not make any change to accounting policies or
procedures (other than actions required to be taken by generally accepted
accounting principles);
(m) the Company shall not prepare or file any tax return inconsistent
with past practice or, on any such tax return, take any position, make any
election, or adopt any method that is inconsistent with positions taken,
elections made or methods used in preparing or filing similar tax returns
in prior periods;
(n) the Company shall not settle or compromise any federal, state,
local or foreign income tax dispute;
(o) the Company shall not settle or compromise any claims or
litigation or commence any litigation or proceedings;
(p) the Company shall not enter into or amend any agreement or
contract (i) having a term in excess of 12 months and which is not
terminable by the Company without penalty or premium by notice of 30 days
or less, (ii) which involves or is expected to involve future payments of
$100,000 or more during the term thereof; or (iii) any other agreement or
contract material to the Company; or purchase any real property, or make or
agree to make any new capital expenditure or expenditures (other than the
purchase of real property) which in the aggregate are in excess of
$100,000;
(q) the Company shall not pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction
of any such claims, liabilities or obligations, in the ordinary course of
business consistent with past practice or in accordance with their terms;
(r) the Company shall not purchase or exercise the option to purchase
the aircraft pursuant to the Aircraft Purchase and Sale Agreement between
the Company and VisionAire Corporation dated December 18, 1996; and
(s) the Company shall not authorize, recommend, propose or announce an
intention to do any of the foregoing, or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing.
No Solicitation. The Company shall not, nor shall it permit any affiliate
to, nor shall it authorize or permit any officer, director or employee of or any
financial advisor, attorney or other advisor or representative of, the Company
or any of its affiliates to, (i) solicit, initiate or encourage the submission
of, any Takeover Proposal (as defined below), (ii) enter into any agreement with
respect to or approve or recommend any Takeover Proposal or (iii) participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to the Company or any affiliate in connection with, or
take any other action to facilitate any inquiries or the making of any proposal
that constitutes, or may reasonably be expected to lead to, any Takeover
Proposal; provided, however, that prior to the acceptance for payment of Offer
Securities pursuant to the Offer, if the Board of Directors of the Company
reasonably determines that a Takeover Proposal constitutes a Superior Proposal
(as defined below), then, to the extent required by the fiduciary obligations of
the Board of Directors of the Company, as determined in good faith by a majority
thereof after consultation with independent counsel, the Company and its
representatives may, in response to an unsolicited request therefor, and subject
to compliance with the Merger Agreement, furnish information with respect to the
Company and its affiliates to any person pursuant to a customary confidentiality
statement (as determined by the Company's independent counsel) and participate
in discussions or negotiations with such person. For purposes of the Merger
Agreement, "Takeover Proposal" means any proposal for a merger or other business
combination involving the Company or any of its affiliates or any proposal or
offer to acquire in any manner, directly or indirectly, an equity interest in,
any voting securities of, or a substantial portion of the assets of the Company
or any of its affiliates, other than the transactions contemplated by the Merger
Agreement, the Option Agreement and certain financing or investment solely by
the Company's officers and directors after termination of the Merger Agreement,
if applicable, and "Superior Proposal" means a bona fide proposal made by a
third party to acquire the Company pursuant to a tender or exchange offer, a
merger, a sale of all or substantially all its assets or otherwise on terms
which a majority of the disinterested members of the Board of Directors of the
Company determines, at a duly constituted
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<PAGE> 9
meeting of the Board of Directors or by unanimous written consent, in its
reasonable good faith judgment to be more favorable to the Company's
shareholders than the Merger (after consultation with the Company's independent
financial advisor) and for which financing, to the extent required, is then
committed or which, in the reasonable good faith judgment of a majority of such
disinterested members, as expressed in a resolution adopted at a duly
constituted meeting of such members (after consultation with the Company's
independent financial advisor), is reasonably capable of being obtained by such
third party.
The Merger Agreement provides further that, the Company must advise Harris
orally and in writing of (i) any Takeover Proposal or any inquiry with respect
to or which could lead to any Takeover Proposal received by any officer or
director of the Company or, to the knowledge of the Company, any financial
advisor, attorney or other advisor or representative of the Company, (ii) the
material terms of such Takeover Proposal (including a copy of any written
proposal), and (iii) the identity of the person making any such Takeover
Proposal or inquiry no later than 24 hours following receipt of such Takeover
Proposal or inquiry. If the Company intends to furnish any person with any
information with respect to any Takeover Proposal, the Company is required to
advise Harris orally and in writing of such intention not less than one full
business day in advance of providing such information. The Company is further
required to keep Harris fully informed of the status and details of any such
Takeover Proposal or inquiry.
Third Party Standstill Agreements. During the period from the date of the
Merger Agreement through the Effective Time, the Company has agreed not to
terminate, amend, modify or waive any provision of any Confidentiality or
standstill agreement to which the Company is a party (other than any involving
Harris). The Company has also agreed to enforce, to the fullest extent permitted
under applicable law, the provisions of any such agreements, including, but not
limited to, obtaining injunctions to prevent any breaches of such agreements and
to enforce specifically the terms and provisions thereof in any court of the
United States or any state thereof having jurisdiction.
Stock Based Compensation. Prior to the consummation of the Offer or the
Effective Time, whichever is earlier, the Board of Directors of the Company (or,
if appropriate, any committee thereof) shall adopt appropriate resolutions and
take all other actions necessary or appropriate to (i) cause each option to
purchase Shares that was outstanding as of the date of the Merger Agreement to
vest and to be exercisable immediately prior to the consummation of the Offer or
the Effective Time, whichever is earlier, and (ii) cause each option to purchase
Shares that is outstanding upon the consummation of the Offer or the Effective
Time, whichever is earlier, to be canceled as of the consummation of the Offer
or the Effective Time, whichever is earlier. In consideration of such
cancellation, each holder of such canceled option shall be entitled to receive
from the Company an amount equal to (A) the product of (1) the number of Shares
subject to such option and (2) the excess, if any, of the Share Offer Price over
the exercise price per share for the purchase of Shares subject to such option,
minus (B) all applicable federal, state and local taxes required to be withheld
in respect of such payment. The amounts payable pursuant to the Merger Agreement
will be paid as soon as reasonably practicable following the acceptance for
payment by the Offeror pursuant to the Offer or the Effective Time, whichever is
earlier. The amount payable to any option holder will be reduced to the extent
necessary to prevent such payment, together with any other amounts payable to
such option holder by the Company, from constituting a "parachute payment,"
within the meaning of section 280G of the Code.
The Company has also agreed to take all actions necessary to provide that,
effective as of acceptance for payment by the Offeror of Offer Securities
pursuant to the Offer or the Effective Time, whichever is earlier, each of the
Company's stock option plans and any similar plan or agreement of the Company
will be terminated, any rights under any other plan, program, agreement or
arrangement to the issuance or grant of any other interest in respect of the
capital stock of the Company or any of its subsidiaries will be terminated, and
no holder of an option to purchase Shares will have any right to receive any
shares of capital stock of the Company or, if applicable, the Surviving
Corporation, upon exercise of any stock option.
Indemnification. Pursuant to the Merger Agreement, Harris and the Offeror
agreed that from and after the Effective Time, Harris will cause the Surviving
Corporation to indemnify and hold harmless all past and present officers and
directors of the Company to the same extent and in the same manner and subject
to the same limits as
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<PAGE> 10
such persons are indemnified as of the date of the Merger Agreement by the
Company pursuant to California Law, the Company's charter or bylaws for acts or
omissions occurring at or prior to the Effective Time.
Harris has also agreed to cause the Surviving Corporation to provide, for a
period of not less than three years from the Effective Time, the Company's
current directors and officers an insurance and indemnification policy that
provides coverage for events occurring prior to the Effective Time that is
substantially similar to the Company's existing policy or, if substantially
equivalent insurance coverage is unavailable, the best available coverage;
provided, however, that the Surviving Corporation will not be required to pay an
annual premium for the director's and officer's insurance in excess of the last
annual premium paid prior to the date of the Merger Agreement but in such case
will purchase as much coverage as possible for such amount.
Effective at the Effective Time, Harris will guarantee the obligations of
the Surviving Corporation under the immediately preceding two paragraphs.
Board Representation. The Merger Agreement provides that promptly after
such time as the Offeror acquires Offer Securities pursuant to the Offer, the
Offeror will be entitled to designate at its option up to that number of
directors of the Company's Board of Directors, subject to compliance with
Section 14(f) of the Exchange Act, as will make the percentage of the Company's
directors designated by the Offeror equal to the percentage of the aggregate
voting power of the Shares held by Harris or any of its subsidiaries and the
Company shall, at such time cause the Offeror's designees to be so elected by
its existing Board of Directors; provided, however, that if Harris and its
subsidiaries shall hold at least 90% of the aggregate voting power of the
Shares, the Offeror shall be entitled to designate all of the members of the
Company's Board of Directors provided, further, that if the Offeror shall have
purchased the Revised Minimum Number of Shares in the Offer, such number of
directors shall be rounded up to the greatest whole number plus one to give the
Offeror at least a majority of the members of the Company's Board of Directors.
However, in the event that the Offeror's designees are elected to the Board of
Directors of the Company, until the Effective Time, such Board of Directors
shall have at least three directors who are directors on the date of the Merger
Agreement and who are not officers of the Company (the "Independent Directors").
If the number of Independent Directors shall be reduced below three for any
reason whatsoever, the remaining Independent Directors shall designate a person
or persons to fill such vacancy each of whom shall be deemed to be an
Independent Director for purposes of the Merger Agreement or, if no Independent
Directors then remain, the other directors of the Company shall designate three
persons to fill such vacancies who shall not be officers or affiliates of the
Company, or officers or affiliates of Harris or any of its subsidiaries, and
such persons shall be deemed to be Independent Directors for purposes of the
Merger Agreement. In connection with the foregoing, the Company will promptly,
at the option of Harris, either increase the size of the Company's Board of
Directors and/or obtain the resignation of such number of its current directors
as is necessary to enable the Offeror's designees to be elected or appointed to
the Company's Board of Directors as provided above.
Obligations of Harris. Subject to obtaining the consent from Imperial Bank
to an assignment and assumption of the Line of Credit Facility and Note Payable
between the Company and Imperial Bank, dated October 5, 1998, Harris shall
assume and pay, or shall cause a subsidiary of Harris to assume and pay, the
indebtedness for borrowed money under such Facility in the principal amount of
$2,705,812 plus accrued interest within five days of the purchase of Shares
constituting the Minimum Condition by the Offeror pursuant to the Offer or the
Effective Time, whichever is earlier.
Harris shall assume, or shall cause a subsidiary of Harris to assume, the
promissory notes payable by the Company to the Williams Family Trust dated June
11, 1999, June 17, 1999, July 8, 1999 and July 9, 1999 in the aggregate amount
of $240,000 and shall pay the principal amount and any accrued interest in
respect of such notes within five days of the purchase of the Shares
constituting the Minimum Condition by the Offeror pursuant to the Offer or the
Effective Time, whichever is earlier, upon delivery and cancellation of such
notes.
Harris has agreed that, after the Effective Time, it shall use commercially
reasonable efforts to terminate the guarantee obligations of Jack and Ellyn
Williams related to those certain lease agreements with the Levine Family Trust
and Carlsbad Las Palmas, LLC, respectively. Harris and its affiliates shall not
be obligated to pay any fees in connection with such efforts.
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<PAGE> 11
Conditions Precedent. The respective obligations of each party to effect
the Merger shall be subject to the satisfaction (or waiver by each party) prior
to the Effective Time of the following conditions: (i) if required by applicable
law, the shareholders of the Company shall have approved the Merger Agreement;
(ii) no court or other Governmental Entity (as defined in the Merger Agreement)
having jurisdiction over the Company or Harris or any of their respective
subsidiaries shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of making the Merger illegal; and (iii) the Offeror shall have
previously accepted for payment and paid for Offer Securities pursuant to the
Offer, or, if the Minimum Condition is not satisfied, the Offeror shall have
exercised its right to call the Special Shareholders Meeting pursuant to the
Merger Agreement.
The obligations of Harris and the Offeror to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
additional conditions: (i) the Company shall have performed in all material
respects each of its agreements contained in the Merger Agreement required to be
performed on or prior to the Effective Time, and the representations and
warranties of the Company contained in the Merger Agreement shall be true and
correct on and as of the Effective Time as if made on and as of such date, and
Harris shall have received a certificate signed on behalf of the Company by its
Chief Executive Officer and its Chief Financial Officer to such effect, (ii) the
Company shall have obtained the consent or approval of each person or
Governmental Entity whose consent or approval shall be required in connection
with the transactions contemplated by the Merger Agreement under any loan or
credit agreement, note, mortgage, indenture, lease or other agreement or
instrument, except as to which the failure to obtain such consents and approvals
would not, in the reasonable opinion of Harris, individually or in the
aggregate, have a Material Adverse Effect (as defined in the Merger Agreement)
on the Company or Harris or upon the consummation of the transactions
contemplated in the Merger Agreement, the Option Agreement or the Shareholder
Agreements, (iii) in obtaining any approval or consent required to consummate
any of the transactions contemplated in the Merger Agreement, in the Option
Agreement or the Shareholder Agreements, no Governmental Entity shall have
imposed or shall have sought to impose any condition, penalty or requirement
which, in the reasonable opinion of Harris, individually or in aggregate would
have a Material Adverse Effect (as defined in the Merger Agreement) on the
Company or Harris, and (iv) since the date of the Merger Agreement, there shall
have been no Material Adverse Change (as defined in the Merger Agreement) with
respect to the Company, and Harris shall have received a certificate signed on
behalf of the Company by its Chief Executive Officer and Chief Financial Officer
to such effect.
Termination. The Merger Agreement provides that it may be terminated at any
time prior to the Effective Time, whether before or after the approval of the
terms of the Merger Agreement by the shareholders of the Company: (a) by mutual
written consent of Harris and the Company; (b) by either Harris or the Company:
(i) if (x) as a result of the failure of any of the conditions to the Offer as
set forth in this Offer to Purchase (see Section 15) shall have terminated or
expired in accordance with its terms without the Offeror having accepted for
payment any Offer Securities pursuant to the Offer or (y) the Offeror shall not
have accepted for payment any Offer Securities pursuant to the Offer prior to
and the Offeror shall not have exercised its right to request the Company to
call the Special Shareholders Meeting pursuant to the Merger Agreement on or
prior to September 30, 1999 (provided that the right to terminate the Merger
Agreement pursuant to this clause (b)(i) shall not be available to any party
whose failure to perform any of its obligations under the Merger Agreement
results in the failure of any such condition or if the failure of such condition
results from facts or circumstances that constitute a breach of any
representation or warranty under the Merger Agreement by such party) or (ii) if
any Governmental Entity shall have issued an order, decree or ruling or taken
any other action permanently enjoining, restraining or otherwise prohibiting the
acceptance for payment of, or payment for, Offer Securities pursuant to the
Offer and such order, decree or ruling or other action shall have become final
and nonappealable; (c) by Harris or the Offeror prior to the purchase of Offer
Securities pursuant to the Offer in the event of a breach by the Company of any
representation, warranty, covenant or other agreement contained in the Merger
Agreement which (i) would give rise to the failure of condition (e) or (f)
described below in Section 15 and (ii) cannot be or has not been cured within 30
days after the giving of written notice to the Company; (d) by Harris or the
Offeror if either Harris or the Offeror is entitled to terminate the Offer as a
result of the occurrence of any event set forth in paragraph (d) described below
in Section 15; (e) by the Company if the Board of Directors of the Company
reasonably determines that a Takeover Proposal constitutes a Superior Proposal
and a majority of the Board of
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<PAGE> 12
Directors of the Company determines in its reasonable good faith judgment, after
consultation with independent counsel, that failing to terminate the Merger
Agreement would constitute a breach of its fiduciary duties under applicable
law; provided, that the Company has complied with the no solicitation, notice
and other provisions of the Merger Agreement and it complies with requirements
of the Merger Agreement relating to payment of Expenses and the Termination Fee
(each as defined below under "Fees and Expenses"); and provided further that the
Company may not terminate the Merger Agreement pursuant to this clause (e)
unless and until one full business day has elapsed following the delivery to
Harris of a written notice of such determination by the Board of Directors of
the Company; or (f) by the Company, if (i) any of the representations or
warranties of Harris or the Offeror set forth in the Merger Agreement shall not
be true and correct in any material respect or (ii) Harris or the Offeror shall
have failed to perform in any material respect any material obligation or to
comply in any material respect with any material agreement or covenant of Harris
or the Offeror to be performed or complied with by it under the Merger Agreement
and such untruth, incorrectness or failure cannot be or has not been cured
within 30 days after the giving of written notice to Harris or the Offeror, as
applicable. In the event of a termination of the Merger Agreement by either the
Company or Harris, the Merger Agreement shall become void (except for certain
specified provisions, including those pertaining to the payment of certain
expenses and fees and except for certain confidentiality obligations of the
parties) and there shall be no liability or obligation on the part of Harris,
the Offeror or the Company or their respective officers or directors, other than
for liability for any willful breach of a representation or warranty contained
in the Merger Agreement or the breach of any covenant contained in the Merger
Agreement.
Fees and Expenses. Except as provided in the Merger Agreement, whether or
not the Merger is consummated, all costs and expenses incurred in connection
with the Offer, the Merger and the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such costs and
expenses.
The Merger Agreement provides that the Company will pay, or cause to be
paid, in same day funds to Harris the following amounts under the circumstances
and at the times set forth as follows: (i) if Harris or the Offeror terminates
the Merger Agreement in accordance with the provisions described in clause (d)
under "Termination" above, the Company shall pay the Expenses (as defined below)
of Harris and a $750,000 termination fee (the "Termination Fee") upon demand;
(ii) if the Company terminates the Merger Agreement in accordance with the
provision described in clause (e) under "Termination" above, the Company shall
pay the Termination Fee within one business day following such termination and
the Expenses of Harris upon demand; and (iii) if Harris or the Offeror
terminates the Merger Agreement under clause (c) under "Termination" above and,
at the time of such termination, a Takeover Proposal shall have been made, the
Company shall pay the Expenses of Harris, upon demand; in addition, if
concurrently therewith or within nine months after such termination, (A) the
Company enters into a merger agreement, acquisition agreement or similar
agreement (including a letter of intent) with respect to a Takeover Proposal or
a Takeover Proposal is consummated, involving any party (1) with whom the
Company had any discussions with respect to a Takeover Proposal, (2) to whom the
Company furnished information with respect to or with a view to a Takeover
Proposal or (3) who had submitted a proposal or expressed any interest publicly
in a Takeover Proposal, in the case of each of clauses (1), (2) and (3), prior
to such termination, or (B) the Company enters into a merger agreement,
acquisition agreement or similar agreement (including a letter of intent) with
respect to a Superior Proposal, or a Superior Proposal is consummated, then, in
the case of either (A) or (B) above, the Company shall pay the Termination Fee
upon the earlier of the execution of such agreement or upon consummation of such
Takeover Proposal or Superior Proposal. The Merger Agreement provides that
Harris will pay, or cause to be paid, in same day funds to the Company, the
Expenses of the Company if the Company terminates the Merger Agreement in
accordance with the provisions described in clause (f) under "Termination"
above.
For purposes of the Merger Agreement, "Expenses" means with respect to
Harris or the Company, as the case may be, documented out-of-pocket fees and
expenses incurred or paid by or on behalf of Harris or the Company, as the case
may be, in connection with the Offer, the Merger or the consummation of any of
the transactions contemplated by the Merger Agreement, including all fees and
expenses of law firms, commercial banks, investment banking firms, accountants,
experts and consultants to Harris or the Company, as the case may be; provided
that the Expenses of Harris or the Company shall not exceed $250,000.
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<PAGE> 13
Pursuant to the Merger Agreement, the aggregate amount of the Termination
Fee and Expenses payable to Harris shall be reduced to an amount not less than
zero by subtracting from the aggregate amount otherwise payable to Harris the
amount realized or anticipated to be realizable (based on the facts as they
exist on the date such aggregate amount shall become due) by Harris under the
Option Agreement; provided, that if such aggregate amount shall be so reduced by
an amount realizable by Harris and thereafter the Option Agreement shall
terminate without receipt by Harris of such amount, then, to the extent Harris
is entitled to receive such aggregate amount, an additional payment shall be
made to Harris in such amount promptly following such termination.
Certain Conditions to the Offeror's Obligations. Notwithstanding any other
term of the Offer or the Agreement, the Offeror shall not be required to accept
for payment or, subject to any applicable rules and regulations of the
Commission, including Rule 14e-1(c) under the Exchange Act (relating to the
Offeror's obligation to pay for or return tendered Offer Securities after the
termination or withdrawal of the Offer), to pay for any Offer Securities
tendered pursuant to the Offer unless there shall have been validly tendered and
not withdrawn prior to the expiration of the Offer such number of Shares that
would constitute at least the Minimum Condition. In the event that any
additional shares are issued after August 2, 1999, the number of shares that
would constitute the Minimum Condition shall be adjusted so that, after such
issuance, the Minimum Condition equals at least 90% of the number of shares then
issued and outstanding. Furthermore, notwithstanding any other term of the Offer
or the Merger Agreement, the Offeror shall not be required to accept for payment
or, subject as aforesaid, to pay for any Offer Securities not theretofore
accepted for payment or paid for, and may terminate the Offer if, at any time on
or after the date of the Merger Agreement and before the acceptance of such
Offer Securities for payment or the payment therefor, any of the following
conditions exists (other than as a result of any action or inaction of Harris or
any of its subsidiaries that constitutes a breach of the Merger Agreement):
(a) there shall be threatened or pending by any Governmental Entity
any suit, action or proceeding (i) challenging the acquisition by Harris or
the Offeror of any Offer Securities under the Offer, seeking to restrain or
prohibit the making or consummation of the Offer or the Merger or the
performance of any of the other transactions contemplated by the Merger
Agreement or the Shareholder Agreements (including the voting provisions
thereunder), or seeking to obtain from the Company, Harris or the Offeror
any damages that would have a Material Adverse Effect on the Company, (ii)
seeking to prohibit or materially limit the ownership or operation by the
Company or Harris or its subsidiaries of a material portion of the business
or assets of the Company or Harris and its subsidiaries, taken as a whole,
or to compel the Company or Harris to dispose of or hold separate any
material portion of the business or assets of the Company or Harris and its
subsidiaries, taken as a whole, as a result of the Offer or any of the
other transactions contemplated by the Merger Agreement or the Shareholder
Agreements, (iii) seeking to impose material limitations on the ability of
Harris or the Offeror to acquire or hold, or exercise full rights of
ownership of, any Offer Securities to be accepted for payment pursuant to
the Offer, including the right to vote the Shares on all matters properly
presented to the shareholders of the Company, (iv) seeking to prohibit
Harris or any of its subsidiaries from effectively controlling in any
material respect any material portion of the business or operations of the
Company or (v) which otherwise is reasonably likely to have a Material
Adverse Effect on the Company; or there shall be pending by any other
person any suit, action or proceeding which is reasonably likely to have a
Material Adverse Effect on the Company.
(b) there shall be enacted, entered, enforced, promulgated or deemed
applicable to the Offer or the Merger by any Governmental Entity any
statute, rule, regulation, judgment, order or injunction, that is
reasonably likely to result, directly or indirectly, in any of the
consequences referred to in clauses (i) through (v) of paragraph (a) above;
(c) there shall have occurred any Material Adverse Change with respect
to the Company or prior to the expiration of the Offer or the withdrawal of
the Offer in which the Offeror calls a Special Shareholders Meeting,
whichever is earlier, the Company shall not have obtained the consent of
Imperial Bank, the Levine Family Trust and Carlsbad Las Palmas, LLC to
enter into the Merger Agreement and the Option Agreement;
(d) (i) the Board of Directors of the Company or any committee thereof
shall have withdrawn or modified in a manner adverse to Harris or the
Offeror its approval or recommendation of the Offer, the
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<PAGE> 14
Merger or the Merger Agreement, or approved or recommended any Takeover
Proposal or (ii) the Board of Directors of the Company or any committee
thereof shall have resolved to take any of the foregoing actions;
(e) any of the representations and warranties of the Company set forth
in the Merger Agreement (other than certain representations relating to
capital structure, corporate authority, brokers and vote of shareholders)
shall not be true and correct, in each case at the date of the Merger
Agreement and at the scheduled or extended expiration of the Offer, except
where the failure of such representations, individually or in the
aggregate, to be so true and correct would not have a Material Adverse
Effect on the Company, and any of the representations and warranties of the
Company excluded from the foregoing shall not be true and correct in any
material respect in each case at the date of the Agreement and at the
scheduled or extended expiration of the Offer;
(f) the Company shall have failed to perform in any material respect
any material obligation or to comply in any material respect with any
material agreement or covenant of the Company to be performed or complied
with by it under the Merger Agreement;
(g) there shall have occurred and be continuing (i) any general
suspension of trading in, or limitation on prices for, securities on a
national securities exchange in the United States (excluding any
coordinated trading halt triggered solely as a result of a specified
decrease in a market index), (ii) a declaration of a banking moratorium or
any suspension of payments in respect of banks in the United States, (iii)
any limitation (whether or not mandatory) by any Governmental Entity on, or
other event that materially adversely affects, the extension of credit by
banks or other lending institutions, (iv) a commencement of war or armed
hostilities or other national or international calamity directly or
indirectly involving the United States which in any case is reasonably
expected to have a Material Adverse Effect on the Company or to materially
adversely affect Harris's or the Offeror's ability to complete the Offer
and/or the Merger or materially delay the consummation of the Offer and/or
the Merger, or (v) from the date of the Merger Agreement through the date
of termination or expiration, a decline of at least 25% in either the Dow
Jones Industrial Average or the Standard & Poor's 500 Index;
(h) (i) the Shareholder Agreements shall not be in full force and
effect or any Shareholder (as defined therein) that is a party thereto
shall be in material breach thereof or have indicated such Shareholder's
intention not to perform such Shareholder's obligations thereunder or (ii)
an employment and noncompetition agreement between the Company and Jack
Williams, acceptable to Harris, shall not have been entered into between
Mr. Williams and the Company;
(i) any person or "group" (as defined in Section 13(d)(3) of the
Exchange Act), other than Harris, the Offeror, or their affiliates or any
group of which any of them is a member, shall have acquired or announced
its intention to acquire beneficial ownership (as determined pursuant to
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
Shares, or any beneficial owner of 20% or more of the Shares or any of its
affiliates or any group of which any of them is a member shall have
increased or announced its intention to increase its beneficial ownership
of Shares by more than 1%; or
(j) the Merger Agreement shall have been terminated in accordance with
its terms.
which, in the judgment of Harris in any such case, and regardless of the
circumstances (including any action or omission by Harris or the Offeror) giving
rise to any such condition, makes it inadvisable to proceed with such acceptance
of such Offer Securities for payment or the payment therefor.
The foregoing conditions are for the sole benefit of Harris and the Offeror
and may, subject to the terms of the Merger Agreement, be waived by the Offeror
in whole or in part at any time and from time to time in its sole discretion.
The failure by the Offeror at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right, the waiver of any such right
with respect to particular facts and circumstances shall not be deemed a waiver
with respect to any other facts and circumstances and each such right shall be
deemed an ongoing right that may be asserted at any time and from time to time.
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<PAGE> 15
THE SHAREHOLDER AGREEMENTS
Pursuant to the Shareholder Agreements, each Tendering Shareholder has
agreed that, (a) such Tendering Shareholder shall vote the Shares held by such
Tendering Shareholder in favor of the Merger and the Merger Agreement; (b) such
Tendering Shareholder shall vote his Shares against (i) any other merger
agreement or merger, consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of or
by the Company or any other Takeover Proposal or (ii) any amendment of the
Company's charter or bylaws or other proposal or transaction involving the
Company or any of its subsidiaries, which amendment or other proposal or
transaction would in any manner impede, frustrate, prevent or nullify the
Merger, the Merger Agreement or any of the other transactions contemplated by
the Merger Agreement; (c) such Tendering Shareholder shall not (i) sell,
transfer, pledge, assign or otherwise dispose of, or enter into any contract,
option or other arrangement (including any profit sharing arrangement) with
respect to the sale, transfer, pledge, assignment or other disposition of, their
Shares to any person (except for any sale or transfer of options or warrants to
the Company) other than the Offeror or the Offeror's designee or (ii) enter into
any voting arrangement, whether by proxy, voting agreement or otherwise, in
connection, directly or indirectly, with any Takeover Proposal; (d) such
Tendering Shareholder shall not, and shall not permit any investment banker,
attorney or other adviser or representative of such Tendering Shareholder to,
(i) directly or indirectly solicit, initiate or encourage the submission of, any
Takeover Proposal, (ii) directly or indirectly participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Takeover Proposal or (iii) enter into any agreement with respect to or approve
or recommend any Takeover Proposal; and (e) so long as the Merger Agreement has
not been terminated, the Tendering Shareholder shall tender pursuant to the
Offer and not withdraw the Shares and Warrants owned by such Tendering
Shareholders; provided, however, that Donald Naab shall not be obligated to
tender his Shares pursuant to the Offer until September 30, 1999 or any time
thereafter (so long as the Offer has not expired or been withdrawn by the
Offeror).
The Shareholder Agreements terminate upon the earliest of (i) the Effective
Time, (ii) the termination of the Merger Agreement in accordance with its terms;
provided, however, that the Shareholder Agreements will not terminate until 60
days after termination pursuant to clause (ii) immediately above if (A) the
Merger Agreement is terminated by Harris or the Offeror pursuant to clause (d)
of "Termination" above because of the withdrawal or modification in the
recommendation by the Board of Directors of the Company of the Offer, the Merger
and the Merger Agreement or because the Board of Directors has adopted a
resolution to that effect, if prior to the time of such withdrawal or
modification or the adoption of such resolution, a Takeover Proposal shall have
been made, (B) the Merger Agreement has been terminated by Harris or the Offeror
pursuant to clause (d) of "Termination" above because of the Board of Director's
recommendation of a Takeover Proposal, or because the Board of Directors has
adopted a resolution to effect such recommendation, or (C) the Merger Agreement
is terminated by the Company pursuant to clause (e) under "Termination" above or
(iii) the Merger Agreement is amended in a manner adverse to the Tendering
Shareholder without the Tendering Shareholder's consent, which consent shall not
be unreasonably withheld or delayed (the "Shareholder Agreement Termination
Date").
STOCK OPTION AGREEMENT
Pursuant to the Stock Option Agreement, the Company has granted Harris an
irrevocable option (the "Option") to purchase from time to time the Company
Option Shares at a price of $2.35 per share, which may be exercised, in whole or
from time to time in part, at any time after the date of the Option Agreement
and prior to the termination of the Option. Harris may exercise the Option if
neither Harris nor the Offeror shall have breached any of its material
obligations under the Merger Agreement and no preliminary or permanent
injunction or other order issued by any federal or state court of competent
jurisdiction in the United States invalidating the grant or prohibiting the
exercise of the Option shall be in effect and if one or more of the following
events shall have occurred on or after the date of the Option Agreement: (i) any
individual, corporation, partnership, limited liability company or other entity
or group (such person, corporation, partnership, limited liability company or
other entity or group being referred to hereinafter, singularly or collectively,
as a "Person"), acquires or becomes the beneficial owner of 20% or more of the
outstanding Shares (other than a person who, as of the date hereof, is
14
<PAGE> 16
the beneficial owner of 20% or more of the outstanding Shares (a "20% Holder"));
(ii) any 20% Holder increases his beneficial ownership of Shares by more than 1%
(other than Jack or Ellyn Williams or the Williams Family Trust pursuant to a
Post-Termination Company Financing (as defined in the Merger Agreement); (iii)
any group (other than a group which includes or may reasonably be deemed to
include Harris or any of its affiliates) is formed which beneficially owns 20%
or more of the outstanding Shares; (iv) any Person (other than Harris or its
affiliates) shall have commenced a tender or exchange offer for 20% or more of
the then outstanding Shares or publicly proposed any bona fide merger,
consolidation or acquisition of all or substantially all the assets of the
Company, or other similar business combination involving the Company; (v) the
Company enters into, or announces that it proposes to enter into, an agreement,
including, without limitation, an agreement in principle, providing for a merger
or other business combination involving the Company or a "significant
subsidiary" (as defined in Rule 1.02(v) of Regulation S-X as promulgated by the
Commission) of the Company or the acquisition of a substantial interest in, or a
substantial portion of the assets, business or operations of, the Company or a
significant subsidiary of the Company (other than the transactions contemplated
by the Merger Agreement); (vi) any Person (other than Harris or its affiliates
or Jack or Ellyn Williams or the Williams Family Trust pursuant to a
Post-Termination Company Financing (as defined in the Merger Agreement) is
granted any option or right, conditional or otherwise, to acquire or otherwise
become the beneficial owner of Shares which, together with all Shares
beneficially owned by such Person, results or would result in such Person being
the beneficial owner of 20% or more of the outstanding Shares; or (vii) there is
a public announcement with respect to a plan or intention by the Company, other
than Harris or its affiliates, to effect any of the foregoing transactions. For
purposes of the Option Agreement, the terms "group" and "beneficial owner" are
defined by reference to Section 13(d) of the Exchange Act.
Harris' obligation to purchase the Company Option Shares following the
exercise of the Option, and the Company's obligation to deliver the Company
Option Shares, are subject to the conditions that (i) no preliminary or
permanent injunction or other order issued by any federal or state court of
competent jurisdiction in the United States prohibiting the delivery of the
Company Option Shares shall be in effect, (ii) the purchase of the Company
Option Shares will not violate Rule 10b-13 promulgated under the Exchange Act;
and (iii) any applicable waiting periods under the HSR Act, shall have expired
or been terminated.
Prior to the termination of the Option in accordance with the Option
Agreement, if a Put Event (as defined below) has occurred, Harris shall have the
right, upon three business days' prior written notice to the Company, to require
the Company to purchase the Option from Harris (the "Put Right") at a cash
purchase price (the "Put Price") equal to the product determined by multiplying
(i) the number of Company Option Shares as to which the Option has not yet been
exercised by (ii) the Spread (as defined below). As used in the Option
Agreement, the term "Put Event" means the occurrence on or after the date hereof
of any of the following: (i) any Person (other than Harris or its affiliates or
Jack or Ellyn Williams or the Williams Family Trust pursuant to a
Post-Termination Company Financing (as defined in the Merger Agreement) acquires
or becomes the beneficial owner of 50% or more of the outstanding Shares or (ii)
the Company consummates a merger or other business combination involving the
Company or a significant subsidiary of the Company or the acquisition of a
substantial interest in, or a substantial portion of the assets, business or
operations of, the Company or a significant subsidiary of the Company (other
than the transactions contemplated by the Merger Agreement) and the term
"Spread" means the excess, if any, of (i) the greater of (x) the highest price
(in cash or fair market value of securities or other property) per Share paid or
to be paid within 12 months preceding the date of exercise of the Put Right for
any Shares beneficially owned by any Person who shall have acquired or become
the beneficial owner of 20% or more of the outstanding Shares after the date of
the Option Agreement or (y) the average of the last reported sales prices quoted
on the Amex of the Shares during the five trading days immediately preceding the
written notice of exercise of the Put Right over (ii) $2.35.
At any time after the termination of the Option and for a period of 90 days
thereafter, the Company shall have the right, upon three business days' prior
written notice, to repurchase from Harris (the "Repurchase Right"), all (but not
less than all) of the Company Option Shares acquired by Harris pursuant to the
Option Agreement and with respect to which Harris then has beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) at a price per share equal to
the greater of (i) the average of the last reported sales price quoted on the
Amex of Shares during the five trading days immediately preceding the written
notice of exercise of the
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<PAGE> 17
Repurchase Right and (ii) $2.35, plus interest at a rate per annum equal to the
costs of funds to Harris at the time of exercise of the Repurchase Right.
In addition, the Stock Option Agreement provides that Harris will have
certain registration rights with respect to any Company Option Shares purchased
by Harris pursuant to the Stock Option Agreement.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company (the "Board") has unanimously
determined that each of the Merger Agreement, the Stock Option Agreement, the
Offer and the Merger are advisable and fair to, and in the best interests of,
the holders of Offer Securities and unanimously recommends that holders of Offer
Securities accept the Offer and tender their Offer Securities to Offeror
thereunder.
As set forth in the Merger Agreement, the Offeror will purchase Shares and
the Warrants tendered prior to the close of the Offer if the conditions to the
Offer have been satisfied (or waived).
SHAREHOLDERS CONSIDERING NOT TENDERING THEIR SHARES IN ORDER TO WAIT FOR
THE MERGER SHOULD NOTE THAT IF THE MINIMUM CONDITION IS NOT SATISFIED OR ANY OF
THE OTHER CONDITIONS TO THE OFFER ARE NOT SATISFIED, THE OFFEROR IS NOT
OBLIGATED TO PURCHASE ANY OFFER SECURITIES AND, SUBJECT TO CERTAIN LIMITATIONS,
CAN TERMINATE THE OFFER AND THE MERGER AGREEMENT AND NOT PROCEED WITH THE
MERGER.
Under California Law, the approval of the Board and the affirmative vote of
the holders of a majority of the outstanding Shares are generally required to
approve the Merger. Accordingly, if Offeror acquires a majority of the
outstanding Shares in the Merger, the Offeror will have sufficient voting power
to cause the approval of the Merger without the affirmative vote of any other
stockholder. Under California law, if Offeror acquires, pursuant to the Offer or
otherwise, at least 90% of the then outstanding Shares, Offeror will be able to
approve and adopt the Merger Agreement and the Merger without a vote of the
Company's shareholders. Harris, Offeror, and the Company have agreed to use
their reasonable best efforts to take, or to cause to be taken, all actions and
to do, or to cause to be done all things necessary, proper or advisable under
applicable laws to consummate the Offer, the Merger and the other transactions
contemplated by the Merger Agreement. If Offeror does not acquire at least 90%
of the then outstanding Shares pursuant to the Offer or otherwise and a vote of
the Company's shareholders is required under California Law, a longer period of
time will be required to effect the Merger.
The Offer is scheduled to expire at 12:00 midnight, New York City time, on
Friday, September 3, 1999, unless the Offeror extends the period of time for
which the Offer is open. A copy of the press release issued by Harris and the
Company on August 3, 1999 announcing the Merger and the Offer is filed as an
exhibit to the Schedule 14D-1 and is incorporated herein by reference in its
entirety.
(b) BACKGROUND OF THE OFFER; REASONS FOR THE RECOMMENDATION
Background of the Offer.
FINANCIAL BACKGROUND OF THE COMPANY
In November 1997, the Company engaged an investment-banking firm to provide
the Company with introductions to acquisition financing sources and to provide
advice with respect to an identified potential acquisition target. In May 1998,
the investment-banking firm introduced the Company to one possible source of
financing. In July 1998, the potential lender terminated negotiations due to
concerns relating to the financial condition of the Company's acquisition target
as well as concerns relating to the Company's financial status and cash flow
issues. Based on these failed negotiations, the Company allowed the term of the
engagement with the investment-banking firm to expire.
Due to concerns relating to the Company's financial status and cash flow,
the Company reassessed its desire to enter into a business combination and
instead sought to obtain working capital and debt financing from banks to
support its operating plans. The Company entered into a line of credit and term
loan facility (the "Loan Agreement") with Imperial Bank (the "Bank") on October
4, 1998.
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<PAGE> 18
In March 1999, the Company restated prior financial results for 1996, 1997
and the first three quarters of 1998. In addition, the Company reported a
significant expense in the fourth quarter of 1998 due to higher costs of
manufacturing, an increase in financial accounting reserves and a reduction in
the carrying value of certain inventory. As a result, the Company reported a
loss in each of 1996, 1997 and 1998.
On March 28, 1999, the Company was notified by the Bank that it did not
comply with the financial covenants in the Loan Agreement and accordingly was in
default. Although the Bank did not demand immediate repayment of the loan, the
Bank indicated that no further amounts could be borrowed under the Loan
Agreement and that the Bank would reassess the creditworthiness of the Company
with respect to the operating losses and shareholders' deficit.
During the months of April and May, the Company's financial management held
numerous meetings and discussions with the Bank in order to assist the Bank in
its assessment of the Company. As a result of these discussions, the Company and
the Bank agreed to maintain the line of credit at $2,175,000 total principal
outstanding and to work towards a plan that would result in repayment in full of
all outstanding borrowings under the Loan Agreement upon maturity of the
existing line of credit on October 4, 1999.
The Company has been restricted from borrowing additional funds under the
line of credit and the Company has experienced increasing liquidity pressure. In
order to satisfy its working capital requirements, the Company has extended its
trade payables days outstanding with vendors and suppliers. The ability to
procure materials necessary for production has become increasingly difficult due
to the extended trade payables.
In June and July 1999, the Company borrowed an aggregate of $240,000 from
its CEO in order to meet its cash flow shortages. The Company incurred a loss of
$654,000 for its second quarter of 1999.
BACKGROUND OF THE COMPANY'S DISCUSSIONS WITH POTENTIAL STRATEGIC PARTNERS
In addition to the negotiations with Harris described in the following
section, the Company simultaneously explored and considered a number of
alternative transactions in the first half of 1999 and in July 1999, subject to
the limitations imposed by the Exclusivity Agreement with Harris (as described
in the following section).
In January and February 1999, the Company was contacted by a party in the
Company's industry regarding a possible joint venture.
On March 16, 1999, at a meeting of the Company's Board, the Board
considered challenges facing the Company and its need for a cash infusion. The
Board determined that the Company should explore possible transactions with
investors as a means to address those challenges. The Board appointed a
negotiating committee (the "Negotiating Committee"), which was authorized to
conduct preliminary negotiations with potential investors, acquirors or
strategic partners on behalf of the Company and provide a report of such
negotiations and proceedings to the Board.
On March 19, 1999, at a meeting of the Board, the Board discussed with the
Negotiating Committee the proceedings of the Negotiating Committee's preliminary
discussions with potential investors. The Board considered a number of possible
strategic and financial relationships.
The Company's senior executive officers (referred to herein as
"management") then had meetings in March through July with potential partners.
In addition to its discussions with Harris, the Company held discussions with
two other parties in the industry, one financial investor and one investment
banking firm that specializes in the sale of companies (the "Alternative
Parties"). The Company provided information to the Alternative Parties under
Non-disclosure agreements with each. The Company had more than fourteen (14)
meetings with Alternative Parties in the March through July time period.
At Board meetings held on March 24, April 15 and May 3, management reported
to the Board on the status of their discussions with Harris and the Alternative
Parties. The Board considered the financial circumstances of the Company, cash
flow issues, the Banks status and other factors and management presented its
analysis of the Company's long-term prospects. The Board continued to authorize
officers of the Company to negotiate with respect to potential business
combinations.
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<PAGE> 19
In late April, the Company was notified by one of the industry parties that
the party was not able to pursue an investment in or acquisition of the Company.
On May 20, 1999, the Board again met to discuss the status of discussions
with Harris and the Alternative Parties. The Board also discussed the status of
the Company's relationship with the Bank and a potential bridge financing by
affiliates of the Company to meet the Company's immediate cash needs.
Within the following week, the Company met with each party that showed a
continued interest in the Company. The Company discussed the timing of an
investment in or acquisition of the Company and possible structures.
At a meeting on June 10, 1999, the Board discussed the status of the
Company's discussions with Harris and each of the Alternative Parties. The Board
also approved a bridge financing by affiliates of the Company. Due to the
Company's financial circumstances and cash flow problems, the Board directed
management to proceed diligently with discussions for a sale of or investment in
the Company.
At a meeting on June 22, 1999, the Board again considered the status of the
Company's discussions with Alternative Parties and the potential timing of
transactions. The Board also discussed the issues facing the Company if it did
not enter into a transaction with any of Harris or the Alternative Partners. The
Board determined that the best alternative for the Company's shareholders was a
transaction with Harris and directed management to focus on completing such a
transaction while still pursuing possible transactions with Alternative Parties.
On June 23, 1999, management met with the investment-banking firm to
discuss valuation issues regarding the Company and the investment banking firm's
desire to go forward with the relationship and market the Company as an
acquisition target. The Board conveyed to the management that the Company should
not engage the investment-banking firm due to the cost of the services and the
Company's cash flow situation.
Thereafter, the Company continued its discussions with the remaining
Alternative Parties to the extent it was not restricted by the Exclusivity
Agreement with Harris as described in the following section. The Board continued
to consider a possible transaction by the Company with the Alternative Parties
at each of the five (5) Board meetings held in July.
NEGOTIATIONS WITH HARRIS
In the second half of 1998, management met with an independent consultant
for Harris on a number of occasions to discuss potential strategic
relationships, including possible business combinations. The Company provided
financial information to the consultant under the terms of a non-disclosure
agreement.
The Company's Board met on March 16, 1999, as described above.
On March 18, 1999, management met with Harris' representatives to discuss
the complementary technologies and market positions of Harris and the Company
and the feasibility of an acquisition of the Company by Harris. The parties
agreed to put together a business model that could be presented to the Board of
Directors of the Company and the Board of Directors of Harris.
The Company's Board met on March 19, 1999, as described above.
In early April 1999, a Harris representative paid a visit to the Company's
facility in order to stay abreast of the Company's operating procedures and
financial performance.
In mid April, Harris and the Company began preliminary discussions of
valuation ranges for a possible acquisition of the Company.
In late April and early May 1999, Harris and the Company continued to
discuss the potential acquisition of the Company by Harris.
On May 3, 1999, at a meeting of the Board, management briefed the Board
regarding the status of discussions with Harris, including the preliminary
indication of valuation. The Board considered methods for
18
<PAGE> 20
determining valuation and negotiating valuation issues. The Board instructed
management to continue negotiations with Harris.
The Company continued its discussions with Harris in May and early June. On
June 10, 1999, the Board met to discuss the status of negotiations and
discussions with Harris. The Board instructed management to continue such
negotiations.
On June 14, 1999, management met with representatives from Harris to
discuss the business operations of a potential business combination between the
Company and Harris.
On June 15, 1999, Harris notified the Company that the Board of Directors
of Harris would discuss the potential acquisition at a later meeting and
representatives of Harris met with management to discuss moving forward with the
potential acquisition of the Company by Harris. The Company and Harris executed
a confidentiality agreement.
On June 17, 1999, management met with representatives from Harris to review
the Company's historical financial statements and to discuss structuring the
Company as a business unit on the west coast and the integration of the
Company's operations with Harris. Harris discussed its preliminary valuation of
the Company.
On June 21, 1999, management spoke with representatives of Harris to
discuss the structure of a potential transaction and the resulting organization
following an acquisition of the Company by Harris. The representatives of Harris
informed management that Harris believed the appropriate value to be paid to the
shareholders of the Company was approximately $9.1 million, less any debt to be
assumed by Harris.
On June 22, 1999, a Harris representative contacted the Company to discuss
valuation issues. Harris indicated that it was unwilling to pay a higher price
because of the Company's significant debt. Later that day, at a meeting of the
Board, management briefed the Board on the status of proceedings with Harris and
the valuation range proposed by Harris for an acquisition of the Company. The
Board instructed management to continue negotiations with Harris.
On June 23, 1999, the Company and a Harris representative discussed
valuation issues and the retention of executive officers and key personnel.
On June 25, 1999, Harris representatives contacted the Company and
indicated that the Board of Directors of Harris had approved proceeding with the
acquisition of the Company and that Harris wished to conduct due diligence at
the Company the following week.
On June 28, 1999, representatives of Harris contacted the Company and
reaffirmed Harris' interest in proceeding with an acquisition of the Company.
They then indicated that Harris would not proceed with its due diligence
investigation of the Company unless the Company agreed to negotiate exclusively
with Harris. An Exclusivity Agreement (the "Exclusivity Agreement") was
distributed to the Board and the Company's legal counsel for review. The Company
requested that the exclusivity period end July 14, 1999. The parties then agreed
that representatives of Harris and its legal counsel would conduct due diligence
at the Company on July 1 and July 2, 1999.
On July 1, 1999, Harris agreed to certain requested revisions to the
Exclusivity Agreement and provided a revised agreement.
On July 2, 1999, at a meeting of the Board, management briefed the Board
regarding the status of negotiations with Harris. The Company's legal counsel
made a detailed presentation regarding the Board's fiduciary obligations. The
Board determined that a transaction with Harris on the terms tentatively
proposed would be fair to the shareholders and that a transaction with Harris
had a greater possibility of success than any other potential transaction.
Accordingly, the Board approved the form of Exclusivity Agreement proposed by
Harris.
Later that day, the Company contacted representatives of the Alternative
Parties to notify them that the Company could not proceed with conversations or
take any further action regarding a joint venture with, investment in, or
possible acquisition of the Company by Alternative Parties while the Exclusivity
Agreement with Harris was in effect. The Company then entered into an
Exclusivity Agreement with Harris, with an
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<PAGE> 21
expiration date of July 14, 1999. The Company subsequently renewed the
Exclusivity Agreement on July 16, 1999 through July 23, 1999 and on July 30,
1999 through August 2, 1999.
Harris continued to perform its due diligence review from July 1 to July 9,
1999, and the parties continued their discussions regarding the structure of the
acquisition and the Company's operations.
On July 10, 1999, counsel to Harris provided the initial draft of the
Merger Agreement and related documents to the Company and its counsel. The
Merger Agreement, the Stock Option Agreement and the Shareholders Agreements
(collectively, the "Merger Documents") were distributed to each member of the
Board.
On July 16, 1999, the Board held a regularly scheduled meeting. Management
reviewed with the Board the Merger Documents and communicated to the Board its
understanding that Harris was prepared to assume the Company's debt obligations
and initiate a tender offer to purchase all outstanding shares, options and
warrants of the Company for an aggregate approximate value of $9.1 million. The
Board discussed Harris' request to extend the period of the Exclusivity
Agreement and agreed that such extension would be necessary to continue further
progress in negotiations with Harris. The Board also discussed the interest
shown by Alternative Parties in pursuing a potential transaction, but agreed
that it was in the best interests of the Company and its shareholders to pursue
an acquisition by Harris. The Company's legal counsel discussed with the Board
its fiduciary duties in connection with a potential transaction and discussed
the terms and conditions of the Merger Documents. The Board instructed
management to continue with negotiations and to report on the results.
On July 19, 1999, the Company's counsel contacted Harris' counsel to raise
certain issues presented by the draft Merger Documents. On July 20, Harris'
counsel contacted the Company's counsel to communicate Harris' responses to the
issues raised.
The parties continued to negotiate the terms of the agreements and Harris
performed additional due diligence.
On July 22, 1999, Harris informed management that it intended to offer
$2.35 per share. The Company conveyed the price information to its directors on
July 23, 1999.
On July 26, 1999, the Board held a meeting to discuss the Offer and the
terms of the Merger Documents including the prices of $2.35 per share and $0.15
per Warrant. The Board discussed other alternative transactions, the likelihood
of receiving a better offer for the Company and the timing of the offer in
comparison to other potential transactions. The Board approved finalizing the
transaction subject to review of the final Merger Documents.
On July 29, 1999, the Company received revised drafts of the Merger
Documents, which were distributed to all directors.
On July 30, 1999, the Board held a telephonic meeting. At the meeting, the
Company's counsel reported on the negotiations and the terms and conditions of
the Merger Documents that had been revised since distribution of the initial
draft to the Board. Following a discussion of the Offer and the Merger, the
Board unanimously approved the Offer and the Merger and unanimously resolved to
recommend that the shareholders and warrant holders of the Company accept the
Offer and tender their shares and warrants in the Offer and that shareholders
approve and adopt the Merger Agreement.
From July 30, 1999 through August 2, 1999, the final terms of the Merger
Documents were negotiated to the mutual satisfaction of the parties. At the end
of business day on August 2, 1999, the Merger Documents were signed and
delivered by the respective parties.
On August 3, 1999, prior to the opening of stock trading, Harris and the
Company issued a press release announcing the execution of the Merger Documents.
Reasons for the Recommendation.
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In reaching its determination described above, the Board considered a
number of factors, including, but not limited to the following:
(i) the financial condition, results of operations and cash flow
situation of the Company;
(ii) the business and strategic objectives of the Company as well as
the risks involved in achieving those objectives;
(iii) the prospects for continued independent operation of the Company
in light of market and competitive conditions, including the potential for
increased competition from Harris or another company having significantly
greater financial resources than the Company that may seek to enter the
Company's market;
(iv) current historical market prices, volatility and trading volume
information with respect to the Common Stock of the Company;
(v) the consideration to be received by the Company holders of Offer
Securities in the Merger;
(vi) the fact that Harris' and Offeror's obligations under the Offer
were not subject to any financing condition, and the fact that the Harris'
financial condition and ability to cause Purchaser to meet its obligations
under the Merger Agreement appear to be sufficient;
(vii) the likelihood that the proposed acquisition would be
consummated, including the experience and reputation of Harris and the
risks to the Company if the acquisition were not consummated, including (a)
the Company's sales and operating results, (b) progress of certain
development projects and products, and (c) the Company's stock price;
(viii) the terms of the Merger Agreement, including the parties'
representations, warranties and covenants, and the conditions to their
respective obligations;
(ix) a review of the possible alternatives to the Offer and the Merger
(including the possibility of continuing to operate the Company as an
independent entity and the potential for other third parties with
sufficient resources to acquire the Company within a short period of time),
the range of possible benefits and risks to the shareholders and warrant
holders of such alternatives and the timing and the likelihood of actually
accomplishing any of such alternatives;
(x) the relationship of the Offer price to historical market prices of
the Company's Common Stock and to the Company's book value and liquidation
value per share, and the fact that the Offer price of $2.35 per share
represented a premium of 98% over the last sale price of the Company's
Common Stock on July 29, 1999, which was $1.1875; and
(xi) the availability to shareholders of dissenters' rights in the
Merger under applicable law.
In view of the wide variety of factors considered in connection with its
evaluation of the Offer and the Merger, the Board did not find it practicable,
and did not quantify or otherwise attempt to assign relative weights to the
factors it considered.
In light of all the factors set forth above, the Board determined that each
of the Merger Agreement, the Stock Option Agreement, the Offer and the Merger is
advisable and fair to, and in the best interests of, the holders of Offer
Securities, and resolved unanimously to approve the Merger Agreement, the Stock
Option Agreement, the Offer and the Merger, and to recommend that holders of
Offer Securities accept the Offer and tender their Offer Securities in the
Offer.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Neither the Company nor any person acting on its behalf has or currently
intends to employ, retain or compensate any person to make solicitations or
recommendations to the shareholders of the Company on its behalf with respect to
the Offer, except that such solicitations or recommendations may be made by
directors, officers or employees of the Company, for which services no
additional compensation will be paid.
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<PAGE> 23
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) During the past 60 days, no transactions in the Offer Securities have
been effected by the Company or, to the Company's knowledge, by any of its
executive officers, directors, affiliates or subsidiaries.
(b) To the Company's knowledge, all of the Company's executive officers and
directors who own Offer Securities currently intend to tender all of their Offer
Securities (other than Shares, if any, held by such person that, if tendered,
could cause such person to incur liability under the provisions of Section 16(b)
of the Exchange Act) pursuant to the Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as set forth herein, no negotiation is being undertaken or is
underway by the Company in response to the Offer that relates to or would result
in (i) an extraordinary transaction, such as a merger or reorganization
involving the Company or any subsidiary thereof; (ii) a purchase, sale or
transfer or a material amount of assets by the Company or any subsidiary
thereof; (iii) a tender offer for or other acquisition or securities by or of
the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as set forth herein, there is no transaction, board resolution,
agreement in principle or signed contract in response to the Offer that relates
to or would result in one or more of the events referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
None.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
1 Offer to Purchase, dated August 9, 1999(1)
2 Letter of Transmittal, dated August 9, 1999(1)
3 Summary Advertisement, dated August 9, 1999(1)
4 Agreement and Plan of Merger, dated August 2, 1999, by and
among Harris Corporation, Space Coast Merger Corp., and
Pacific Research & Engineering Corporation(1)
5 Shareholder Agreements by and among Harris Corporation,
Space Coast Merger Corp. and each of Jack Williams, The
Williams Family Trust, Donald and Eileen Naab, David
Pollard, John Lane, The Robbins Family Trust and John
Robbins, and Herbert McCord, each dated August 2, 1999(1)
6 Stock Option Agreement, dated August 2, 1999, by and between
Harris Corporation and Pacific Research & Engineering
Corporation(1)
7 Press Release, dated August 3, 1999, issued by Harris
Corporation and Pacific Research & Engineering
Corporation(1)
8 Restated Articles of Incorporation of Pacific Research &
Engineering Corporation(2)
9 Restated By-Laws of Pacific Research & Engineering
Corporation(2)
10 Letter to Securityholders of Pacific Research & Engineering
Corporation, dated August 9, 1999
</TABLE>
- ---------------
(1) Incorporated by reference from Harris Corporation's and the Offeror's
Schedule 14D-1 filed with the SEC on August 9, 1999.
(2) Incorporated by reference from an exhibit of Pacific Research & Engineering
Corporation's Form SB-2, file no. 333-858-LA.
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
accurate.
PACIFIC RESEARCH & ENGINEERING CORPORATION
By:
---------------------------------------------
Blake F. Clark, Chief Financial Officer
22
<PAGE> 1
EXHIBIT 10
[PR&E LOGO]
AUGUST 9, 1999
To our Securityholders:
I am pleased to inform you that on August 2, 1999, Pacific Research &
Engineering Corporation ("PR&E") entered into an Agreement and Plan of Merger
with Harris Corporation. Pursuant to this merger agreement, a subsidiary of
Harris Corporation is commencing a cash tender offer to purchase (i) all
outstanding shares of Common Stock (the "Shares") at a purchase price of $2.35
per share, (ii) all issued and outstanding warrants issued by PR&E pursuant to a
Warrant Agreement entered into with Wells Fargo Bank N.A. (the "Shareholder
Warrants") at a purchase price of $0.15 per warrant, (iii) all issued and
outstanding warrants issued to representatives of Nutmeg Securities, Ltd. (the
"Representative Warrants") at a price of $0.15 per each share underlying such
warrants, and (iv) the issued and outstanding warrant issued to John W. Barrett
(the "Executive Warrant") at a purchase price of $0.15 per each share underlying
the warrant. Following completion of the tender offer, upon the terms and
subject to the conditions of the merger agreement, the Harris Corporation
subsidiary will be merged with and into PR&E, and (i) each Share that is issued
and outstanding not purchased in the tender offer (other than Shares owned by
PR&E or Shares held by shareholders who perfect their dissenters' rights under
the California General Corporation Law) will be canceled and converted into the
right to receive $2.35 in cash, without interest, (ii) each Shareholder Warrant
that is issued and outstanding not purchased in the tender offer (other than any
Shareholder Warrants owned by the PR&E) shall no longer be exercisable into the
right to receive Shares, but shall become exercisable into the right to receive
$2.35 in cash, without interest, upon exercise of the Shareholder Warrant and
payment by the holder of the $8.00 per Share exercise price, (iii) each
Representative Warrant that is issued and outstanding not purchased in the
tender offer (other than any Representative Warrants owned by PR&E) shall no
longer be exercisable into the right to receive Shares or Shareholder Warrants,
but shall become exercisable into the right to receive (A) for each Share
underlying the Representative Warrant, $2.35 in cash, without interest, upon
exercise of the Representative Warrant and payment by the holder of the $8.52
per Share exercise price for each Share and (B) for each Shareholder Warrant
underlying the Representative Warrant, $0.15 in cash, without interest, upon
exercise of the Representative Warrant and payment by the holder of the $0.155
per Shareholder Warrant exercise price for each Shareholder Warrant, and (iv) if
outstanding prior to the Effective Time, the Executive Warrant shall no longer
be exercisable into the right to receive Shares, but shall become exercisable
into the right to receive for each Share underlying the Executive Warrant, $2.35
in cash, without interest, upon exercise of the Executive Warrant and payment of
the $4.68 per Share exercise price for each Share.
THE BOARD OF DIRECTORS OF PR&E HAS DETERMINED THAT THE TENDER OFFER AND THE
MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF PR&E SECURITYHOLDERS AND HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE STOCK OPTION AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE TENDER OFFER AND THE MERGER,
AND UNANIMOUSLY RECOMMENDS THAT THE SECURITYHOLDERS OF PR&E ACCEPT THE TENDER
OFFER AND TENDER THEIR SHARES AND WARRANTS THEREUNDER.
In arriving at its recommendation, the Board gave careful consideration to
the factors described in the attached Solicitation/Recommendation Statement on
Schedule 14D-9 (the "Schedule 14D-9") that is being filed today with the United
States Securities and Exchange Commission.
Accompanying this letter, in addition to the attached Schedule 14D-9
relating to the tender offer, is the Offer to Purchase, dated August 9, 1999, of
the Harris Corporation subsidiary making the tender offer together with related
materials including a Letter of Transmittal to be used for tendering your shares
and warrants. These documents set forth the terms and conditions of the offer
and the merger, provide detailed information about the transactions and include
instructions as to how to tender your shares and warrants. I urge you to read
the enclosed materials carefully.
Very truly yours,
Jack Williams
Chairman and Chief Executive Officer
