SCHEDULE 14C
(RULE 14C-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE
SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
[X] Preliminary Information Statement
[X] Confidential, For Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive information statement
NETWORKS ELECTRONIC CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
under the Exchange Act.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, PAR VALUE $0.25 PER SHARE
(2) Aggregate number of securities to which transaction applies:
1,673,888 SHARES OF COMMON STOCK
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined): $7.50
PER SHARE
(4) Proposed maximum aggregate value of transaction: $12,554,160.00*
(5) Total fee paid: $2,511**
[ ] Fee previously paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the form or schedule and the date
of its filing.
(1) Amount previously paid: NOT APPLICABLE
(2) Form, Schedule or Registration Statement No.: NOT APPLICABLE
(3) Filing party: NOT APPLICABLE
(4) Date filed: NOT APPLICABLE
* For purposes of calculation of the filing fee only. Assumes the purchase, at
a purchase price of $7.50 per share, of 1,673,888 shares of common stock of
the Registrant, representing all of such shares outstanding on a fully
diluted basis.
** The amount of the filing fee represents 1/50th of 1% of the transaction
value.
<PAGE>
NETWORKS ELECTRONIC CORP.
9750 DE SOTO AVENUE
CHATSWORTH, CALIFORNIA 91311
--------------------
INFORMATION STATEMENT
--------------------
SEPTEMBER ___, 1999
--------------------
This information statement (the "Information Statement") is furnished by
the Board of Directors (the "Board") of Networks Electronic Corp., a California
corporation (the "Company"), to holders of the outstanding shares of common
stock, $0.25 par value per share, of the Company (the "Common Stock") in
connection with an Agreement and Plan of Merger, dated as of July 16, 1999 (the
"Merger Agreement"), by and among the Company, NE Holdco Corp., a Delaware
corporation (the "Parent"), and NE Merger Corp., a Delaware corporation
specifically organized for the purpose of effecting the Merger (as defined
below) and a direct, wholly owned subsidiary of the Parent (the "Sub") providing
for the merger (the "Merger") of Sub with and into the Company.
As a result of the Merger, the Company, as the surviving corporation in
the Merger (the "Surviving Corporation"), will become a wholly-owned subsidiary
of the Parent, and each issued and outstanding share of Common Stock (other than
shares owned by Parent, Sub, the Company or any of their respective
subsidiaries, or by shareholders who have validly perfected their dissenters'
rights under the California General Corporation Law (the "CGCL")) will be
converted into the right to receive $7.50 in cash plus the Additional Amount.
The "Additional Amount" is an amount equal to the product of: (a) $7.50
multiplied by (b) 10%, multiplied by (c) a fraction, the numerator of which
shall be the number of days in the period from and including the date which is
the 120th day following July 16, 1999 (the date of the Merger Agreement) to but
excluding the date on which the Effective Time occurs, and the denominator of
which shall be 365. See "THE MERGER AGREEMENT -- Consideration to be Received in
the Merger." The total aggregate amount of consideration to be received by the
Company's shareholders in the Merger (including the holders of outstanding
options) is approximately $12.6 million. A copy of the Merger Agreement is
attached hereto as Annex A.
In the probate matter of IN RE: MIHAI D. PATRICHI TRUST (L.A.S.C. Case
No.BP037966) (the "Patrichi Probate Matter"), the Superior Court of the State of
California, County of Los Angeles (the "Court") ruled that the trustees of the
Mihai D. Patrichi Trust (the "Trust") must dispose of the Trust's shares in the
Company. On August 11, 1999, the Court approved the pending sale of the Trust's
shares to the Parent. The Trust currently owns approximately 47% or 790,383
shares of the Company's 1,673,888 shares of outstanding Common Stock, which were
acquired by the Trust upon the death of the Company's founder, Mihai D.
Patrichi.
Concurrently with the parties' execution of the Merger Agreement, pursuant
to a Stock Purchase Agreement dated as of July 16, 1999 with Parent (the "Stock
Purchase Agreement"), Ileana Wachtel and Rodica Patrichi, as trustees of the
Trust (the "Trustees"), David Wachtel, Ileana Wachtel, Radu Patrichi and Rodica
Patrichi (such persons and the Trust, collectively, the "Sellers") agreed to
sell all shares of the Company's Common Stock held by them for $7.50 per share
in cash. As of the date of the Stock Purchase Agreement, David Wachtel and
Ileana Wachtel owned in the aggregate 82,277 shares of Common Stock, and Radu
and Rodica Patrichi owned 20,881 shares and 1,103 shares, respectively. In the
aggregate, the Sellers own 894,644 shares of Common Stock, representing
approximately 53% of the total outstanding shares of Common Stock. See "THE
MERGER -- Ancillary Agreements."
All parties to the Stock Purchase Agreement controlling in the aggregate
approximately 53% of the Common Stock of the Company, representing a majority of
the votes entitled to be cast at a meeting to consider the Merger Agreement and
the Merger, executed and delivered to the Company, on August 25, 1999, a written
consent in lieu of a meeting of shareholders (the "Consent") approving the
Merger Agreement and the Merger and adopting the Merger Agreement.
THE MERGER AGREEMENT PROVIDES THAT THE MERGER WILL BECOME EFFECTIVE AT THE
TIME OF ACCEPTANCE FOR FILING BY THE CALIFORNIA SECRETARY OF STATE AND THE
SECRETARY OF STATE OF DELAWARE OF A COPY OF THE MERGER AGREEMENT AND SUCH OTHER
DOCUMENTS AS MAY BE REQUIRED BY APPLICABLE LAW. THE EFFECTIVE TIME OF THE MERGER
WILL BE ON SEPTEMBER __, 1999 UNLESS YOU ARE OTHERWISE NOTIFIED.
--------------------
Page 2
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS INFORMATION STATEMENT, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS INFORMATION STATEMENT SHALL
NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THE
DATE OF SUCH DOCUMENT, OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THE DATE OF SUCH DOCUMENT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. PLEASE DO NOT SEND IN ANY OF YOUR STOCK CERTIFICATES AT THIS TIME.
This Information Statement is first being mailed to shareholders on or about
September ___, 1999.
--------------------
The date of this Information Statement is September ___, 1999
Page 3
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
<S> <C>
SUMMARY......................................................................5
General................................................................5
The Parties ...........................................................5
Required Vote; Written Consent in Lieu of Meeting; Effective Time of
Merger.......................................................................5
Procedure for Receipt of Merger Consideration..........................6
Dissenters' Rights.....................................................6
The Merger.............................................................6
Summary Consolidated Historical Financial Data.........................7
GENERAL......................................................................9
REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING............................9
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION................................9
DISSENTERS' RIGHTS..........................................................10
THE MERGER..................................................................11
Background of the Merger..............................................11
Recommendation of the Board...........................................13
Opinion of the Company's Financial Advisors...........................14
Projections...........................................................16
Interests of Certain Persons in the Merger............................16
Purpose of the Merger.................................................17
Certain Effects of the Merger; Plans for the Company After the Merger.17
Accounting Treatment of the Merger....................................18
Regulatory Approvals..................................................18
Certain Federal Income Tax Consequences of the Merger.................18
Ancillary Agreements..................................................18
THE MERGER AGREEMENT........................................................18
The Merger............................................................19
Consideration to be Received in the Merger............................19
Exchange of Stock Certificates........................................19
Representations and Warranties........................................20
Certain Covenants.....................................................20
Conditions to Consummation of the Merger..............................23
Termination; Fees and Expenses........................................24
Amendment and Waiver..................................................25
ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS...............................25
Financing for the Merger..............................................26
Payment and Waiver....................................................26
CERTAIN INFORMATION REGARDING THE COMPANY...................................30
CERTAIN INFORMATION REGARDING PARENT AND SUB................................28
SELECTED HISTORICAL FINANCIAL DATA..........................................28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............28
PRICE RANGE OF COMMON STOCK.................................................30
AVAILABLE INFORMATION.......................................................30
INDEX TO FINANCIAL STATEMENTS..............................................F-1
ANNEXES
Annex A: Agreement and Plan of Merger...............................A-1
Annex B: Chapter 13 of the General Corporation Law of the State of
California.................................................................B-1
Annex C: Opinion of The Seidler Companies Incorporated...............C-1
</TABLE>
Page 4
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS INFORMATION STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
INFORMATION STATEMENT, THE ANNEXES HERETO AND THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN. SHAREHOLDERS OF THE COMPANY ARE ENCOURAGED TO REVIEW CAREFULLY
THIS INFORMATION STATEMENT, THE ANNEXES HERETO AND THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN, IN THEIR ENTIRETY. THIS INFORMATION STATEMENT, INCLUDING THE
ANNEXES HERETO, CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING, WITHOUT LIMITATION, ACTUAL AND POTENTIAL COMPETITION AND CERTAIN
TECHNOLOGY RISKS.
GENERAL
This Information Statement is being delivered in connection with the
Merger of Sub with and into the Company pursuant to the Merger Agreement. As a
result of the Merger, the Company will become a wholly-owned subsidiary of the
Parent, and each issued and outstanding share of Common Stock (other than shares
that are owned by the Parent, Sub, the Company or any of their respective
subsidiaries, or by shareholders who have validly perfected their dissenters'
rights under the CGCL) will be converted into the right to receive $7.50 in cash
plus the Additional Amounts (together, the "Merger Consideration"), and the
equity interest of all pre-Merger shareholders in the Company (other than the
Parent, if applicable) will be terminated.
Concurrently with the parties' execution of the Merger Agreement, pursuant
to the Stock Purchase Agreement, the Sellers have agreed to sell all shares of
the Company's Common Stock held by them to Parent for $7.50 per share in cash.
See "THE MERGER -- Ancillary Agreements."
THE PARTIES.
COMPANY. The Company designs, fabricates, assembles and sells high
technology components for aerospace and U.S. Government defense prime
contractors. The Company was incorporated in the State of California in October
1953. The Company operates two divisions: the US Bearing Division and the
Ordnance Technology Division. The Company's principal executive offices are
located at 9750 De Soto Avenue, Chatsworth, California 91311, and its telephone
number is (818) 341-0440. See "CERTAIN INFORMATION REGARDING THE COMPANY."
PARENT. The Parent is a special purpose holding company formed by GWB
(USA), Inc. for use in connection with the Merger. Its principal executive
offices are located at Five Concourse Parkway, Suite 810, Atlanta, Georgia
30328-6111, and its telephone number is (770) 395-2970. GWB (USA), Inc. is
an investment firm specializing in leveraged buyouts.
SUB. The Sub is a newly incorporated Delaware corporation organized by the
Parent to acquire all the outstanding shares of Common Stock of the Company
pursuant to the Merger Agreement and has not carried on any activities other
than in connection with the Merger. The Sub is a direct wholly owned subsidiary
of the Parent. The Sub's principal executive offices are located at Five
Concourse Parkway, Suite 810, Atlanta, Georgia 30328-6111, and its telephone
number is (770) 395-2970.
See "CERTAIN INFORMATION REGARDING PARENT AND SUB" and "EXPENSES."
REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING; EFFECTIVE TIME OF THE
MERGER
Under the California General Corporation Law (the "CGCL") and the
Company's Articles of Incorporation, (the "Articles of Incorporation"), the
affirmative vote of holders of at least a majority of the outstanding shares of
Common Stock is required to approve and adopt the Merger Agreement and Merger.
On August 30, 1999, the Sellers, who combined then held of record, in the
aggregate 894,644 shares of Common Stock, representing a majority of the votes
entitled to be cast at a meeting to consider the Merger Agreement and the
Merger, executed and delivered to the Company the Consent approving the Merger
Agreement and the Merger and adopting the Merger Agreement. On August 30, 1999,
there were issued and outstanding 1,673,888 shares of Common Stock. The Merger
Agreement provides that the Merger will become effective at such time (the
"Effective Time") as the certificate of merger is filed with the Secretary of
State of the State of Delaware and the articles of merger are filed with the
Secretary of the State of California, in accordance with the laws of the
respective states. The required filings are expected to be made as soon as
practicable 20 days after the date of this Information Statement. See "THE
MERGER AGREEMENT"; "REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING."
Page 5
<PAGE>
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION
Upon consummation of the Merger, each holder of a certificate or
certificates representing shares of Common Stock of the Company ("Certificates")
outstanding immediately prior to the Effective Time (except for the Sellers, the
Parent, Sub, any other of Parent's wholly owned subsidiaries, or in the treasury
of the Company or by any wholly owned subsidiary of Company or any shareholder
who has validly perfected dissenter's rights under the CGCL (the "Public
Shareholders")) will, upon the surrender thereof, duly endorsed if required, to
a bank or trust company to be designated by Parent and reasonably acceptable to
the Company (the "Exchange Agent"), be entitled to receive the Merger
Consideration.
Detailed instructions with regard to the surrender of certificates,
together with a letter of transmittal, will be forwarded to former holders of
Common Stock by the Exchange Agent promptly following the Effective Time. For
purposes of receiving the Merger Consideration, a shareholder need only hold the
Common Stock immediately before the Effective Time. Holders of Common Stock
should not submit their certificates to the Exchange Agent until they have
received such materials. Payment for shares of Common Stock will be made to
former holders of shares as promptly as practicable following receipt by the
Exchange Agent of their certificates and other required documents. No interest
will be paid or accrued on the cash payable upon the surrender of certificates.
See "PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION." SHAREHOLDERS SHOULD NOT
SEND ANY SHARE CERTIFICATES AT THIS TIME.
DISSENTERS' RIGHTS
Under Chapter 13 of the CGCL, holders of Common Stock at the Effective
Time who strictly comply with the applicable requirements of the CGCL may
dissent from the Merger and demand payment in cash from the Company of the fair
value of their Common Stock. Chapter 13 of the CGCL is set forth in full in
Annex B hereto. See "Dissenters' Rights" and Annex B.
THE MERGER
BACKGROUND TO THE MERGER. For a description of the events leading to
the approval of the Merger Agreement by the Board, see "THE MERGER --
Background to the Merger."
APPROVAL OF THE BOARD. On July 16, 1999, the Board determined that the
Merger Agreement and the Merger are fair to and in the best interests of the
shareholders of the Company and approved and adopted the Merger Agreement.
See "THE MERGER -- Background to the Merger."
OPINIONS OF THE COMPANY'S FINANCIAL ADVISORS. At the July 16 meeting of
the Company's Board, The Seidler Companies Incorporated ("TSC"), financial
advisor to the Company, delivered its oral opinion (which was subsequently
confirmed in writing dated August 30, 1999) that as of such date, the Merger
Consideration to be received by the holders of shares of Common Stock pursuant
to the Merger Agreement is fair to such holders. The full text of the written
opinion of TSC, which sets forth the assumptions made, matters considered and
limitations on the review undertaken in connection with the opinion, is attached
hereto as Annex C and is incorporated herein by reference. Holders of such
shares of Common Stock are urged to, and should, read such opinion in its
entirety.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Certain members of the
existing senior management of the Company may be designated as members of senior
management of the Company following the Merger. David Wachtel, currently the
Company's Chairman, has an employment agreement that will provide him with
certain benefits if the Merger occurs. For example, Mr. Wachtel's employment
agreement with the Company entitles him to compensation if his employment with
the Company is terminated under certain specified conditions following a change
in control transaction. Mr. Wachtel is currently negotiating a new employment
agreement with Parent to be effective upon consummation of the Merger. The
Company estimates that the maximum aggregate payments required to be paid under
this agreement would be approximately $87,500. Mr. Wachtel is also considered
the beneficial owner of 82,277 shares of Company Common Stock. Ileana Wachtel
and Rodica Patrichi and Glen Linderman are directors of the Company who also own
shares in the Company. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT." In addition, Michael Patrichi, Ileana Wachtel and Rodica Patrici
are beneficiaries of the Trust. See "THE MERGER -- Interests of Certain Persons
in the Merger."
PURPOSE OF THE MERGER. The purpose of the Merger is to maximize the value
of the Company to its shareholders in the context of a sale of control pursuant
to the order of the California Superior Court mandating the sale of the Trust's
interest in the Company.
Page 6
<PAGE>
CERTAIN EFFECTS OF THE MERGER. Following the Effective Time, the Parent
will own 100% of the Company's outstanding capital stock, and the public
Shareholders will cease to have any ownership interests in, or rights as,
shareholders of the Company. As a result of the Merger, the Company will be a
privately held corporation and a wholly owned subsidiary of the Parent and there
will be no public market for the Common Stock. The directors of the Sub at the
Effective Time will be the directors of the Company after the Merger and will
hold office from the Effective Time until the next annual meeting of the
shareholders of the Company and until their successors are elected or appointed
and are duly qualified. The officers of the Company at the Effective Time will
be the officers of the Company following the Merger and will hold office from
the Effective Time until their respective successors are duly elected or
appointed and qualified in the manner provided in the Company's Articles of
Incorporation, as in effect at the Effective Time, or as otherwise provided by
law. See "THE MERGER - Certain Effects of the Merger."
CONDITIONS TO THE MERGER. The respective obligations of the Parent, the
Sub and the Company to effect the Merger are subject to the satisfaction, at or
prior to the Effective Time, of certain conditions, including shareholder
approval, no violation of any statute or law and obtaining proper consents. See
"THE MERGER AGREEMENT -- Conditions to Consummation of the Merger."
REGULATORY MATTERS. Upon providing this Information Statement to
shareholders of the Company, the Parent and the Company know of no remaining
federal or state regulatory requirements that must be complied with or approvals
that must be obtained in order to consummate the Merger, other than the filing
of the certificate of merger with the Secretary of States of the State of
Delaware and the State of California.
EFFECTIVE TIME. The Merger Agreement provides that the Merger will become
effective at the time of acceptance for filing by the California Secretary of
State and the Secretary of State of Delaware of a copy of the Merger Agreement
and such other documents as may be required by applicable law. The effective
date of the Merger will be on September __, 1999 unless you are otherwise
notified.
TERMINATION, AMENDMENT AND WAIVER. The Merger Agreement may be terminated
at any time prior to the Effective Time, notwithstanding the approval thereof by
the shareholders of the Company: (i) by the mutual written consent, duly
authorized by the boards of directors of the Parent and the Company; (ii) by the
Parent or the Company if the conditions to each party's obligation to effect the
Merger have been satisfied and the Effective Time shall not have occurred on or
before September 30, 1999; (iii) by the Parent or the Company if the Effective
Time shall not have occurred on or before December 31, 1999; (iv) by either the
Parent or the Company if a court of competent jurisdiction in the United States
or other U.S. governmental authority shall have issued a non-appealable final
order, decree or ruling or taken any other action having the effect of
restraining, enjoining or otherwise prohibiting the Merger. See "THE MERGER
AGREEMENT -- Termination; Fees and Expenses."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. It is expected that
the receipt of cash for shares of Common Stock in the Merger or pursuant to the
exercise of Dissenters' Rights will be treated for federal income tax purposes
as a taxable transaction. Holders of Common Stock are strongly urged to consult
their own tax advisors regarding the tax consequences of the Merger. See "THE
MERGER -- Certain Federal Income Tax Consequences of the Merger."
ACCOUNTING TREATMENT. The Merger will be accounted for under the
"purchase" method of accounting.
ANCILLARY AGREEMENTS. The Sellers and Parent entered into a Stock
Purchase Agreement dated as of July 16, 1999. See "THE MERGER - Ancillary
Agreements."
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated financial data presented below for, and as of the
end of, each of the years in the five-year period ended June 30, 1999 are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by Hurley & Company, independent
certified public accountants.
Page 7
<PAGE>
FIVE-YEAR FINANCIAL HISTORY
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------- ------- --------
Operations
Net sales ........................$6,000 $4,010 $3,933 $3,007 $2,783
------ ------ ------- ------- --------
Net income (loss) ................ 980 162 31 1,767 (800)
------ ------ ------- ------- ---------
Net income (loss) per common share .59 .10 .02 1.11 (.50)
------ ------ ------- ------- --------
Financial position
Working capital (deficiency)...... 1,467 882 835 1,128 (1,004)
------ ------ ------- ------- --------
Stockholders' equity (deficiency in
assets)............................. 945 (111) (242) (32) (1,877)
------ ------ ------- ------- --------
Total assets...................... 5,681 4,641 3,282 3,175 2,603
------ ------ ------- ------- --------
Long-term debt.................... 3,009 3,408 2,367 2,327 1,966
------ ------ ------- ------- --------
No cash dividends have been paid or accrued during the past five years.
Reference is made to the financial statements and notes thereto included
beginning on page F-1.
Page 8
<PAGE>
GENERAL
This Information Statement is being delivered in connection with the
Merger of Sub with and into the Company pursuant to the Merger Agreement. As a
result of the Merger, the Company will become a wholly-owned subsidiary of the
Parent, each issued and outstanding share of Common Stock (other than shares
that are owned by the Parent, Sub, the Company or any of their respective
subsidiaries, or by shareholders who have validly perfected their Dissenters'
Rights under the CGCL) will be converted into the right to receive the Merger
Consideration, and the equity interest of all pre-Merger shareholders in the
Company (other than the Parent) will be terminated.
Concurrently with the parties' execution of the Merger Agreement and
pursuant to the Stock Purchase Agreement, the Sellers agreed to sell all shares
of the Company's Common Stock held by them. As of the date of the Stock Purchase
Agreement, the Trust owned 790,383 shares of Common Stock, David Wachtel and
Ileana Wachtel owned in the aggregate 82,277 shares of Common Stock, and Radu
Patrichi and Rodica Patrichi owned 20,881 shares and 1,103 shares, respectively.
In the aggregate, the Sellers owned 894,644 shares of Common Stock, representing
approximately 53% of the total outstanding shares of Common Stock at the date of
the Stock Purchase Agreement. All parties to the Stock Purchase Agreement
controlling in the aggregate approximately 53% of the Common Stock of the
Company, representing a majority of the votes entitled to be cast at a meeting
to consider the Merger Agreement and the Merger, executed and delivered to the
Company, on August 25, 1999, a written consent in lieu of a meeting of
shareholders (the "Consent") approving the Merger Agreement and the Merger and
adopting the Merger Agreement.
The information contained in this Information Statement with respect to
the Parent, Sub and their respective affiliates has been furnished to the
Company by the Parent, and the Company assumes no responsibility for the
accuracy or completeness of such information.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MERGER AND RELATED TRANSACTIONS DESCRIBED
HEREIN, OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON.
REQUIRED VOTE; WRITTEN CONSENT IN LIEU OF MEETING
Under the CGCL and the Company's Articles of Incorporation, the
affirmative vote of holders of a majority of the voting power of the outstanding
shares of Common Stock is required to approve and adopt the Merger Agreement and
Merger at a duly convened meeting of the shareholders of the Company called for
such purpose. Pursuant to Section 603 of the CGCL, any action required by the
CGCL to be taken at any meeting of shareholders of the Company may be taken
without a meeting, without prior notice and without a vote of the shareholders
of the Company if a written consent, setting forth the action to be taken, is
signed by the holders of a majority of the votes entitled to be cast at such
meeting of shareholders.
The Sellers currently own approximately 53% or 894,644 shares of the
Company's 1,673,888 shares of outstanding Common Stock. This gives the Sellers
the effective power to approve or disapprove any corporate action submitted to a
vote of the Company's shareholders, in each case, regardless of how other
shareholders of the Company may vote.
On August 25, 1999, the Sellers, who combined then held of record, in the
aggregate 894,644 shares of Common Stock, representing a majority of the votes
entitled to be cast at a meeting to consider the Merger Agreement and the
Merger, executed and delivered to the Company the Consent approving the Merger
Agreement and the Merger and adopting the Merger Agreement. On August 25, 1999,
there were issued and outstanding 1,673,888 shares of Common Stock. The Merger
Agreement provides that the Merger will become effective at such time (the
"Effective Time") as the certificate of merger is filed with the Secretary of
State of the State of Delaware and the articles of merger are filed with the
Secretary of State of the State of California, in accordance with the laws of
the respective states. Rule 14c-2(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") requires that this Information Statement be sent to
shareholders at least 20 calendar days prior to the earliest date on which the
Merger may be effective. The required filings are expected to be made as soon as
practicable 20 days after the date of this Information Statement.
PROCEDURE FOR RECEIPT OF MERGER CONSIDERATION
Upon consummation of the Merger, each holder of a Certificate or
Certificates representing shares of Common Stock of the Company outstanding
immediately prior to the Effective Time (except for the Sellers or any
Page 9
<PAGE>
shareholder who has validly perfected Dissenter's Rights under the CGCL) (the
"Public Shareholders") will, upon the surrender thereof, duly endorsed, if
required, to the Exchange Agent, be entitled to receive the Merger Consideration
into which such shares of Common Stock of the Company represented thereby will
have been automatically converted as a result of the Merger. The Merger
Agreement provides that Parent will take appropriate steps to cause the
Surviving Corporation to deposit with the Exchange Agent, at or prior to the
Effective Time, the amount necessary to enable the Exchange Agent to exchange
the Merger Consideration for Certificates received by the Exchange Agent. A
Letter of Transmittal will be sent to all shareholders of the Company of record
as of the Effective Time under separate cover, promptly after the Effective Time
for use in surrendering their Common Stock. Detailed instructions concerning the
procedure for completing the Letter of Transmittal, surrendering certificates
and the payment of Merger Consideration will be set forth in the Letter of
Transmittal. For Common Stock to be validly surrendered pursuant to the Merger,
a Letter of Transmittal (or a manually signed facsimile thereof), properly
completed and duly executed, with any required signature guarantees, must be
received by the Exchange Agent at one of its addresses set forth in the Letter
of Transmittal and the certificates representing Common Stock must be received
by the Exchange Agent. Checks representing the Merger Consideration payable to
each shareholder will be sent to such shareholder as soon as practicable after
the receipt of the Letters of Transmittal and certificates for Common Stock, as
applicable. CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED.
DISSENTERS' RIGHTS
Shareholders who comply with the applicable statutory procedures of
Chapter 13 of the CGCL may be entitled to Dissenters' Rights under Chapter 13 of
the CGCL. In order to exercise and perfect Dissenters' Rights, the record holder
of Common Stock at the Effective Time must follow the steps summarized below
properly and in a timely manner. A person having a beneficial interest in shares
of Common Stock held of record in the name of another person, such as a broker
or nominee, must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect Dissenters' Rights.
CHAPTER 13 OF THE CGCL IS REPRINTED IN ITS ENTIRETY AS ANNEX B TO THIS
INFORMATION STATEMENT. SET FORTH BELOW IS A SUMMARY DESCRIPTION OF CHAPTER 13.
THE FOLLOWING SUMMARY IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO
DISSENTERS' RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ANNEX B. ALL
REFERENCES IN CHAPTER 13 AND THIS SUMMARY TO "SHAREHOLDER" ARE TO THE RECORD
HOLDER OF THE SHARES OF COMMON STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME AS
TO WHICH DISSENTERS' RIGHTS ARE ASSERTED. FAILURE TO COMPLY STRICTLY WITH THE
PROCEDURES SET FORTH IN CHAPTER 13 OF THE CGCL WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
Company shareholders of record who comply with the requirements of Chapter
13 will be entitled to exercise dissenters' rights pursuant to the provisions of
Chapter 13 of the California Corporations Code. In accordance with these
provisions, dissenting Company shareholders will have the right to be paid in
cash the fair market value of their shares of Common Stock as determined by
appraisal (excluding any appreciation or depreciation as a consequence of the
Merger) by fully complying with the procedures set forth under California
Corporations Code.
DISSENTERS' RIGHTS CANNOT BE VALIDLY EXERCISED BY PERSONS OTHER THAN
SHAREHOLDERS OF RECORD REGARDLESS OF THE BENEFICIAL OWNERSHIP OF THE SHARES.
Persons who are beneficial owners of shares held of record by another person,
such as brokers, banks or nominees, should instruct the record holder to follow
the procedures outlined below if they wish to dissent from the Merger with
respect to any or all of their shares.
Dissenting shareholders must submit to the Company at its principal
office, 9750 De Soto Avenue, Chatsworth, California 91311, Attention: Secretary,
a written demand that the Company purchase for cash some or all of their shares.
The notice must state the number of shares held of record which the shareholder
demands to be purchased and the amount claimed to be the "fair market value" of
those shares. That statement of fair market value will constitute an offer by
the dissenting shareholder to sell such shares at that price. SUCH DEMAND WILL
NOT BE EFFECTIVE UNLESS IT IS RECEIVED NOT LATER THAN TWENTY (20) DAYS FROM THE
DATE OF THIS INFORMATION STATEMENT ("DISSENTERS DUE DATE").
If Company shareholders have a right to require the Company to purchase
their shares for cash under the dissenters' rights provisions of the California
Corporations Code, the Company will mail to each such shareholder a notice of
approval of the Merger within ten days after the effective date of the Merger,
stating the price determined by it to represent the "fair market value" of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise such dissenters' rights. The statement of
price will constitute an offer to purchase any dissenting shares at that price.
Page 10
<PAGE>
To perfect their dissenters' rights, shareholders of record must: (i) make
written demand for the purchase of their dissenting shares upon the Company on
or before the Dissenters Due Date and (ii) within 30 days after the mailing to
shareholders by the Company of the notice of approval of the principal terms of
the Merger, submit the certificate(s) representing their dissenting shares to
the Company or its transfer agent for notation thereon that they represent
dissenting shares. The notice of approval of the Merger will specify the date by
which the submission of certificates for endorsement must be made and a
submission made after that date will not be effective for any purpose. Failure
to follow any of these procedures may result in the loss of statutory
dissenters' rights.
If a dissenting shareholder and the Company agree that shares are
dissenting shares and agree upon the price of the shares, the Company, upon
surrender of the certificates, will make payment of that amount (plus interest
thereon at the legal rate on judgments from the date of such agreement) within
30 days after such agreement. Any agreement between dissenting shareholders and
the Company fixing the "fair market value" of any dissenting shares must be
filed with the Secretary of the Company.
If the Company denies that the shares are dissenting shares, or the
Company and a dissenting shareholder fail to agree upon the "fair market value"
of the shares, the dissenting shareholder may, within six months after the date
on which notice of approval of the Merger was mailed to the shareholder, but not
thereafter, file a complaint (or intervene in a pending action, if any) in the
Superior Court for the County of Los Angeles, State of California, requesting
that the Superior Court determine whether the shares are dissenting shares and
the "fair market value" of such dissenting shares. The Superior Court may
appoint one or more impartial appraisers to determine the "fair market value"
per share of the dissenting shares. The costs of the action will be assessed or
apportioned as the Superior Court considers equitable, but if the "fair market
value" is determined by the Superior Court to exceed 125% of the price offered
in the Merger, the Company will be required to pay such costs including, in the
discretion of the Superior Court, attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments. A dissenting shareholder must bring
such an action within six months after the date on which the notice of approval
of the Merger Agreement was mailed to the shareholder, whether or not the
Company responds within such time to the shareholder's written demand that the
Company purchase for cash shares voted against the Merger Agreement.
SHAREHOLDERS DESIRING TO EXERCISE THEIR DISSENTERS' RIGHTS MUST STRICTLY
COMPLY WITH THE PROCEDURES SET FORTH IN CHAPTER 13 OF THE CGCL. FAILURE TO TAKE
ANY REQUIRED STEP IN CONNECTION WITH THE EXERCISE OF DISSENTERS' RIGHTS WILL
RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
THE MERGER
BACKGROUND TO THE MERGER
The Mihai D. Patrichi Trust (the "Trust") presently owns of record 790,383
shares, or approximately 47.3% of the Company's outstanding Common Stock. The
provisions of the Trust provide that the trustees act in a prudent manner for
the benefit of the Trust's beneficiaries. On [_____], 1998, one of the
beneficiaries of the Trust, Michael Patrichi instutited the Patrichi Probate
Matter by filing objections to the accountings filed by the Trustees on _______,
1998, asserting that the Trustees should be removed and replaced as the Trustees
of the Trust.
On October 1, 1998, the Court ordered the Trustees to sell the Trust's
interest in the Company as soon as possible at the highest and best price. On
October 9, 1998, the Board determined that a change of control of the Company
was probable and established a special committee comprised of David Wachtel and
Glenn Linderman to investigate measures to enhance shareholder value, evaluate
proposals seeking to acquire shares of the Company and retain investment
bankers. The Company and the Trust decided to cooperate in the process of the
Court ordered sale of the Trust's shares in the Company. The Court ordered the
Trust to select an investment banking firm from among four firms listed in the
Court's order. With approval from the Court, on November 9, 1998, the Company
executed an engagement letter with TSC (the "TSC Engagement Letter"), to
investigate methods of maximizing shareholder value and facilitating the sale of
the Company pursuant to the Court's order.
TSC commenced the solicitation process with a letter to selected financial
and strategic investors whom TSC identified as likely to have an interest in a
transaction with the Company. Included among those contacted were entities in
the manufacturing industry as well as potential financial investors. Those who
showed greater interest were asked to enter into a confidentiality agreement
with the Company. Upon the execution of such agreement, each prospective bidder
was provided with a Confidential Information Memorandum, which was prepared by
TSC and the Company in connection with the sale process and contained detailed
information about the Company's operations and financial position. TSC
distributed the Confidential Information Memorandum to certain identified
potential buyers
Page 11
<PAGE>
during January and February 1999. Certain of the potential purchasers who
received the Confidential Information Memorandum conducted additional due
diligence on the Company including, meeting with members of the Company's
management to discuss structural and economic factors important to the business.
TSC received indications of interest from a number of potential
purchasers. On May 26, 1999 TSC sent a letter to each of the prospective
purchasers which requested preliminary proposals to be delivered to the Company
and TSC by Wednesday June 2, 1999 and which specified the procedures to be
followed in submitting proposals, indicating that the terms of any submitted
proposal, including any conditions, would be considered together with price in
determining whether an offer was acceptable. On May 28, 1999, Parent provided a
preliminary proposal to TSC.
On June 23, 1999, TSC sent a letter to each prospective bidder which
provided each such bidder with a form stock purchase agreement and form merger
agreement and which requested that each such bidder respond with a formal bid by
July 2, 1999. On July 2, 1999, TSC received two bids, one from Parent and one
from Bidder 1 which met certain minimum standards set by the Company upon the
advice of TSC. Each of the two bids proposed the acquisition of all of the
shares of the Common Stock of the Company, including those held by the Trust.
On July 9, TSC received a bid from a third bidder, Bidder 2. On July 9,
the Special Committee of the Board held a meeting to evaluate alternatives
concerning the Court ordered sale by the Trust of its interest in the Company.
Representatives of TSC in attendance at the meeting outlined the terms of the
proposals made to purchase all of the outstanding shares of the Common Stock.
TSC began its presentation by stating that for over nine months TSC had
investigated methods for maximizing shareholder value and that during that time
TSC had received together with the three formal offers two expressions of
interest to purchase the Company.
TSC gave a detailed presentation of the Parent, Bidder 1 and Bidder 2
offers, including TSC's analysis of the strength of each party's ability to
finance the transaction. Explained that based on TSC's knowledge of Parent and
Bidder 1 and TSC's analysis of each party's financial condition that Parent and
Bidder 1 had the financial capibility to consumate the transaction. TSC reviewed
the terms of the Bidder 2 offer, and advised the Special Committee that the
offer from Bidder 2 contained a substantially lower price per share and advised
the Committee to pursue the Parent and Bidder 1 offers. Following extensive
discussion and review, the members of the Special Committee determined, based
upon part on TSC's advice and the Special Committee's own review of the offers
to pursue the Parent and Bidder 1 offers. Bidder 4's offer was structured as a
stock swap, but Bidder 4's offer was contingent upon the receipt of a fairness
opinion from TSC which TSC was unwilling to provide. TSC advised the Special
Committee that although Bidder 3 made no formal offer, Bidder 3 continued to be
interested in the Company.
The remainder of the July 9 meeting was spent discussing the Company's
strategy for pursuing the offers of Parent and Bidder 1. Legal counsel to the
Company recommended that the Company distribute a revised Merger Agreement and
Stock Purchase Agreement to Parent and Bidder 1, specifying a $7.50 price. TSC
advised the Special Committe of its concerns that neither Parent nor Bidder 1
would continue to pursue the transaction absent an executed definitive
agreement. TSC stated that both offers were very favorable to the Company and
that they were almost equal. Following significant discussion on the matter, it
was determined to distribute a Merger Agreement to both parties with a $7.50
price and, ask both parties to sign and return the Agreements. The Special
Committee also requested that each bidder deliver a "highly confident letter"
from a bank.
TSC presented the competing bids to the entire Board at a meeting held on
July 16. At that meeting, TSC outlined the positive and negative aspects of the
competing bids. After TSC's presentation and substantial analysis and discussion
by the board, and after being advised by TSC with respect to the fairness and
integrity of the competing bids and receiving the oral opinion of TSC as to the
fairness of the bids (subsequently confirmed by delivery of a written opinion
dated August 27, 1999), the Company accepted Parent's bid. At the Board meeting
on July 16, the Sellers executed the Stock Purchase Agreement and the Company
executed the Merger Agreement. On July 28, the Company issued a press release
announcing that the Merger Agreement had been executed.
Page 12
<PAGE>
Following announcement, Bidder 2 delivered a second acquisition proposal
to TSC, which included a stated offer of $8.10 per share for all or a portion of
the Common Stock. The Special Committee held an emergency meeting on July 30 in
order to fully evaluate the terms of the new offer. TSC presented an analysis to
the Special Committee of Bidder 2's new proposal. TSC informed the Special
Committee that Bidder 2's proposal was not in the form of a binding merger
agreement, but in the form of a proposal for a letter of intent, which had not
yet been provided to TSC or the Company. Bidder 2's second proposal also
included a financing condition, but it was without evidence of the availability
of such financing. In addition, Bidder 2's proposal included a due diligence
condition which would provide Bidder 2 with a broad basis upon which to abandon
the merger. After significant discussion, the Special Committee determined to
proceed with its merger transaction with Parent, pending receipt of further
clarification of Bidder 2's new proposal. On August 10, a motion was heard
before the Court to obtain approval of the Parent bid. This motion was opposed
by Bidder 2 and Bidder 2 had the opportunity to provide the Court with evidence
as to the merits of the Parent bid. On August 11, 1999, Judge Harvey Schneider
of the Superior Court of the State of California for the County of Los Angeles
approved of the disposition to Parent of the Trust's interest in the Company
pursuant to the terms of the Stock Purchase Agreement, over the bid of Bidder 2,
and found that the Board had acted reasonably and made the only reasonable
decision available in determining to accept the offer of Parent.
RECOMMENDATION OF THE BOARD OF DIRECTORS
On July 16, 1999 the Board, with three directors in favor and one
abstaining, approved the Merger and recommended that shareholders vote to
approve the Merger and adopt the Merger Agreement. See "THE MERGER -- Background
of the Merger." In making its determination and recommendation, the members of
the Board considered various factors, including, but not limited to, the
following, all of which they believe support such approval and adoption:
(i) the Company's business, its current financial condition and results of
operations, its future prospects and the current and anticipated developments in
the Company's industry;
(ii) the relationship between the Merger Consideration and the historical
market prices and recent trading activity of the Common Stock, including the
fact that the $7.50 per share price represents a premium of more than 37.9% over
the market price of the Common Stock at the time TSC sent out the first round of
Confidential Information Memoranda on February 4, 1999 and an approximately
44.5% premium over the average closing price of the Common Stock for the 90
trading days prior to receipt of Parent's offer (See "PRICE RANGE OF COMMON
STOCK");
(iii) the oral opinion of TSC delivered to the Board on July 16, 1999 (and
subsequently confirmed by delivery of a written opinion dated August 27, 1999)
to the effect that, as of such date, the Merger Consideration to be received by
the holders of the Company's Common Stock pursuant to the Merger Agreement is
fair to such holders (see " -- Opinion of the Company's Financial Advisor" and
Annex C hereto);
(iv) the fact that the holders of a majority of the voting power of the
Company were prepared to support the Merger and to receive $7.50 per share for
their Common Stock;
(v) the other terms and conditions of the Merger Agreement, including the
facts that the Merger Agreement was structured as much as possible to be the
equivalent of the immediate sale of the Company, with limited representations
and warranties by the Company and limited conditions to Parent's obligation to
consummate the Merger;
(vi) the fact that the Merger Consideration is all cash, and the amount
will be adjusted under certain conditions;
(vii) the fact that the Company and TSC had previously identified and
contacted the parties believed most likely to be interested in a transaction
with the Company; that thereafter it was widely reported that a change of
control transaction was available; and that several other parties, including
companies previously contacted, did emerge as possible bidders, but that with
the exception of one other bid, no firm proposal at $7.50 per share or higher
was received from any other party; and
(viii) the fact that stockholders at the Effective Time (other than those
executing the Consent if the Stock Purchase Agreement are not consummated prior
thereto) have the right to dissent from the Merger and to demand appraisal of
the fair value of their Common Stock under the CGCL (See "DISSENTERS' RIGHTS").
In view of the wide variety of factors considered, the Board did not find
it practicable to, and did not, quantify, or otherwise attempt to assign
relative weights to, the specific factors considered or determine that any
factor was of
Page 13
<PAGE>
particular importance in reaching its determination that the Merger is fair to,
and in the best interests of, the Shareholders.
THE COMPANY BOARD HAS APPROVED THE MERGER AND HAS DETERMINED THAT THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY'S PUBLIC
SHAREHOLDERS.
OPINION OF THE COMPANY'S FINANCIAL ADVISORS
The Board of the Company requested TSC to provide an opinion as to the
fairness from a financial point of view to shareholders of the consideration to
be received by such shareholders pursuant to the terms of the Merger Agreement.
On August 27, 1999, TSC delivered its written opinion (the "TSC Fairness
Opinion") to the effect that, as of the date of such opinion and based upon and
subject to the assumptions, limitations and qualifications set forth therein,
the Merger Consideration to be received by shareholders pursuant to the Merger
Agreement is fair to such shareholders from a financial point of view.
A COPY OF THE TSC FAIRNESS OPINION IS ATTACHED HERETO AS APPENDIX C.
SHAREHOLDERS ARE URGED TO READ THE TSC FAIRNESS OPINION CAREFULLY IN ITS
ENTIRETY FOR THE ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, THE MATTERS
CONSIDERED AND THE LIMITS OF THE REVIEW MADE BY TSC IN CONNECTION WITH SUCH
UPDATED OPINION.
In connection with the TSC Fairness Opinion, TSC performed certain
procedures and reviewed with the management of the Company the assumptions on
which such analyses were based. The following is a summary of the results of
such analyses made by TSC in connection with the TSC Fairness Opinion.
HISTORICAL STOCK PRICE PERFORMANCE. To provide comparative market data,
TSC examined the Company's historical Common Stock performance. TSC's analysis
consisted of a historical analysis of closing prices and trading volumes from
January 1, 1994 through August 20, 1999. TSC also examined trading volumes at
specified prices of the Common Stock for the twelve months ended August 20,
1999. Since January 1, 1994, the Common Stock reached a high of $8.50 per share
and a low of $.000625 per share. On August 20, 1999, the closing price of the
Common Stock was $7.25 per share.
PREMIUM ANALYSIS. TSC reviewed publicly available information to determine
the premiums paid in (i) 16 selected transactions in the aerospace and defense
industry completed between January 1, 1995 and July 30, 1999 (the "Selected
Aerospace and Defense Transactions") and (ii) 36 mergers and acquisitions
transactions ranging in size from $5 million to $25 million completed between
January 1, 1996 and July 30, 1999 (the "Selected M&A Transactions"). For the
Selected Aerospace and Defense Transactions, TSC reviewed the percentage premium
in each transaction represented by the offer prices over the trading prices one
day, one week and one month prior to the announcement date of each respective
transaction. The mean percentage amount by which the offer prices exceeded the
closing stock prices one day, one week and one month prior to the announcement
date for the Selected Aerospace and Defense Transactions was approximately
38.3%, 40.1% and 51.2%, respectively. For the Selected M&A Transactions, TSC
reviewed the percentage premium in each transaction represented by the offer
prices over the trading prices one day, one week and one month prior to the
announcement date of each respective transaction. The mean percentage amount by
which the offer prices exceeded the closing stock prices one day, one week and
one month prior to the announcement date for the Selected M&A Transactions was
approximately 69.3%, 58.3% and 59.3%, respectively. The percentage amount by
which the Merger Consideration exceeded the closing stock price of the Common
Stock one day, one week and one month prior to July 23, 1999 the date of the
announcement of the Merger, was approximately 25.0%, 25.0% and 87.5%,
respectively. The percentage by which the Merger Consideration exceeded the
closing stock price of the Common Stock one day, one week and one month prior to
August 20, 1999 was 9.1%, 11.1% and 36.4%, respectively.
COMPARISON OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES. TSC analyzed
the Company's operating performance relative to select publicly traded bearing
manufacturers (the "Bearing Comparable Companies"). TSC compared certain market
trading statistics for the Company with the Bearing Comparable Companies,
including total enterprise value (defined as market value of common equity plus
book value of total debt less cash and cash equivalents) (based on reported
closing prices for the Bearing Comparable Companies on August 20, 1999 as a
multiple of latest twelve months ("LTM") revenues, LTM earnings before interest,
taxes, depreciation and amortization ("EBITDA") and LTM earnings before interest
and taxes ("EBIT"), and price to earnings ratios ("P/E") based on LTM earnings
per share ("EPS") and book value of common equity per share. As of August 20,
1999, this analysis resulted in (i) a range of 0.6x to 2.5x, and a mean of 1.2x
total enterprise value to LTM revenues compared to 2.0x for the Common
Page 14
<PAGE>
Stock based on the Merger Consideration, (ii) a range of 4.2x to 7.4x, and a
mean of 5.7x total enterprise value to LTM EBITDA compared to 6.1x for the
Company based on the Merger Consideration, (iii) a range of 6.2x to 11.8x, and a
mean of 8.8x total enterprise value to LTM EBIT compared to 7.3x for the Company
based on the Merger Consideration, (iv) a range of 7.4x to 20.1x, and a mean of
13.4x P/E based on LTM EPS compared to 8.6x for the Company based on the Merger
Consideration, and (v) a range of 1.1x to 3.2x, and a mean of 1.8x price to book
value of common equity per share compared to 6.0x for the Company based on the
Merger Consideration.
TSC also analyzed the Company's operating performance relative to select
publicly traded pyrotechnic manufacturers (the "Pyrotechnic Comparable
Companies"). TSC compared certain market trading statistics for the Company with
the Pyrotechnic Comparable Companies, including total enterprise value (defined
as market value of common equity plus book value of total debt less cash and
cash equivalents) based on reported closing prices for the Pyrotechnic
Comparable Companies on August 20, 1999 as a multiple of latest twelve months
("LTM") revenues, LTM earnings before interest, taxes, depreciation and
amortization ("EBITDA") and LTM earnings before interest and taxes ("EBIT"), and
price to earnings ratios ("P/E") based on LTM earnings per share ("EPS") and
book value of common equity per share. As of August 20, 1999, this analysis
resulted in (i) a range of 0.7x to 1.0x, and a mean of 0.8x total enterprise
value to LTM revenues compared to 2.0x for the Common Stock based on the Merger
Consideration, (ii) a range of 6.9x to 10.5x, and a mean of 8.3x total
enterprise value to LTM EBITDA compared to 6.1x for the Company based on the
Merger Consideration, (iii) a range of 2.1x to 9.3x, and a mean 4.5x total
enterprise value to LTM EBIT compared to 7.3x for the Company based on the
Merger Consideration, (iv) a range of 11.6x to 12.2x and a mean of 11.9 P/E
based on LTM EPS compared to 8.6x for the Company based on the Merger
Consideration, and (v) a range of 0.8x to 6.6x, and a mean of 2.9x price to book
value of common equity per share compared to 6.0x for the Company based on the
Merger Consideration.
ANALYSIS OF SELECTED TRANSACTIONS IN THE AEROSPACE AND DEFENSE SECTOR. TSC
reviewed publicly available information for the Selected Aerospace and Defense
Transactions. TSC reviewed the consideration paid in such transactions in terms
of the total enterprise value as a multiple of LTM revenues, EBITDA and EBIT of
the acquired entity prior to its acquisition as well as the equity value
(defined as market value of common equity) as a multiple of LTM net income and
book value of common equity of the acquired entity prior to its acquisition. The
analysis resulted in (i) a range of 6.3x to 14.0x, and a mean of 10.0x total
enterprise value to LTM revenue compared to 2.0x for the Company based on the
Merger Consideration, (ii) a range of 7.8x to 27.0x, and a mean of 15.2x total
enterprise value to LTM EBITDA compared to 6.1x for the Company based on the
Merger Consideration, (iii) a range of 0.5x to 2.3x, and a mean of 1.5x total
enterprise value to LTM EBIT compared to 7.3x for the Company based on the
Merger Consideration, (iv) a range of 3.6x to 21.2x, and a mean of 13.7x equity
value to LTM net income compared to 8.6x for the Company based on the Merger
Consideration, and (v) a range of 2.4x to 5.2x, and a mean of 3.8x equity value
to book value of common equity compared to 6.0x for the Company based on the
Merger Consideration.
DISCOUNTED CASH FLOW ANALYSIS. For purposes of this analysis, TSC
performed a discounted cash flow analysis for the Company on a stand-alone basis
based on projections provided by management. In performing its analysis, TSC
calculated the estimated "Free Cash Flow" based on stand-alone projected
unleveraged operating income adjusted for cash taxes paid. TSC analyzed the
projections and discounted the stream of Free Cash Flows from fiscal 2000 to
fiscal 2004, provided in such projections, back to August 20, 1999 using
discount rates ranging from 11.0% to 16.0%. TSC based the discount rate
assumptions on the Company's weighted average cost of capital, as adjusted to
reflect potential adverse factors, including the strict qualification process
which the Company's products are subject to, narrow customer concentration,
dependence upon the defense industry and uncertainty concerning the future
market for the Company's products. To estimate the residual values of the
Company on a stand-alone basis at the end of the forecast period, TSC applied
terminal multiples of 6.0x to 10.0x projected fiscal 2004 EBITDA and discounted
such value estimates back to August 20, 1999 using discount rates ranging from
11.0% to 16.0%. TSC then aggregated the present values of the Free Cash Flows
and the present values of the residual values to derive a range of implied
enterprise values for the Company on a stand-alone basis. The range of implied
enterprise values stand-alone were then adjusted for the Company's net debt to
yield implied equity values of the Company on a stand-alone basis. The range of
equity values were then divided by the number of fully diluted shares to
determine a range of equity values per share for the Company on a stand-alone
basis. The results of this analysis indicated a range of implied equity values
of $5.25 to $6.87 per share.
The summary set forth above does not purport to be a complete description
of the analyses performed by TSC, but describes, in summary form, the principal
elements of the analyses made by TSC in connection with the TSC Fairness
Opinion. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Each of the
analyses conducted by TSC was carried out in order to provide a different
perspective on the transaction and to add to the total mix of information
available. TSC did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or
Page 15
<PAGE>
failed to support an opinion as to
fairness from a financial point of view. Rather, in reaching its conclusion, TSC
considered the results of the analyses in light of each other and ultimately
reached its opinion based on the results of all analyses taken as a whole. TSC
did not place particular reliance or weight on any individual analysis, but
instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, notwithstanding the separate factors summarized
above, TSC believes that its analyses must be considered as a whole and that
selecting portions of its analysis and the factors considered by it, without
considering all analyses and factors, could create an incomplete or misleading
view of the process underlying its opinion. In performing its analyses, TSC made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters. The analyses performed by TSC are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
The TSC Fairness Opinion was provided pursuant to the TSC Engagement
Letter.
PROJECTIONS
In connection with the solicitation of bids for the Company, the Company
made available to interested parties access to certain financial projections
prepared by the Company's management. These projections were prepared by the
Company's management to assist in financial planning and analysis and not with a
view to publication. Such projections were prepared based on historical
information available at such time and estimates as to the future financial
performance of the Company. The projections encompassed estimates of future
revenues, expenses, taxes and income. The projections were not prepared in
accordance with the guidelines established by the American Institute of
Certified Public Accountants for preparation and presentation of financial
forecasts, nor have they been audited, compiled or otherwise examined by
independent accountants or auditors.
These projections were also delivered to TSC as part of the information
reviewed by TSC in rendering its opinion as to the fairness from a financial
point of view to shareholders of the consideration to be received by such
shareholders pursuant to the Merger Agreement.
Projections are based upon forecasts of future financial performance, and
the projections as well as the assumptions on which they are based are
inherently subject to substantial uncertainties. Consequently, projections are
not indicative of actual future results, which may be significantly more or less
favorable than suggested by the projections. The projections provided to
potential bidders and to TSC were based upon the assumed realization in full of
all the Company's management's goals. The Company updated its projections
following the end of its fourth fiscal quarter. This set of management
projections projected fiscal year 1999 revenues of $8.1 million and fiscal year
2000 revenues of $9.9 million. In addition, this set of management projections
projected fiscal year 1999 EBITDA of $2.9 million and fiscal year 2000 EBITDA of
$3.5 million.
Projections are not intended by management to be indicative of actual
future results, but were prepared to assist in financial planning and analysis.
The Board does not assume that the projections are indicative of actual future
results but are the best currently available estimates and judgments of
management as to the future operating and financial performance of the Company.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Information with respect to certain contracts, agreements, arrangements,
or understandings with certain of the Company's executive officers, directors or
affiliates is set forth below. See, also, "-- Ancillary Agreements" and
"-- Background of the Merger."
THE TRUST. The Trust is the beneficial owner of 790,383 shares, or
approximately 47% of the Company's outstanding Common Stock.
EMPLOYMENT AGREEMENT. David Wachtel, the Company's chairman, is currently
in negotiations for an agreement (the "Wachtel Letter Agreement"), providing for
termination of the existing employment agreement between the Company and Mr.
Wachtel upon consummation of the Merger and the waiver by Mr. Wachtel of all
severance pay thereunder, and providing for Mr. Wachtel to continue in the
employment of the Company for a term of three (3) years.
TREATMENT OF STOCK OPTIONS. The Company has outstanding options to
purchase shares of Common Stock which are held by officers of the Company.
Pursuant to the Merger Agreement, the Company agreed to use its reasonable good
faith efforts to cause all outstanding stock options to be canceled at the
Effective Time for an amount in cash equal to the Merger Consideration, less the
per share option exercise price, except as otherwise agreed. Pursuant thereto,
the
Page 16
<PAGE>
Company has entered into an agreement with each holder of outstanding options
providing for such cancellation. See "THE MERGER AGREEMENT -- Conditions to the
Merger."
DIRECTOR LIABILITY AND INDEMNIFICATION. Under the CGCL, a corporation may
indemnify any agent to the corporation, including a director to the corporation
or its stockholders, for monetary damages for breach of fiduciary duty as a
director. Such provision may not, however, eliminate or limit director monetary
liability for: (i) breaches of the director's duty of loyalty to the corporation
or its stockholders (unless determined otherwise by the court) and (ii) amounts
paid in defending or settling or otherwise disposing of a pending action without
court approval (unless the agent is successful in its defense). The Company's
by-laws provide that the Company shall indemnify each present and former
director and officers of the Company or any of its subsidiaries to the fullest
extent permitted by applicable law.
Under the CGCL, a corporation has the power to indemnify any director or
officer against expenses, judgments, fines, and settlements incurred in a
proceeding, other than an action by or in the right of the corporation, if the
person acted in good faith and in a manner that the person reasonably believed
to be in the best interests of the corporation or not opposed to the best
interests of the corporation, and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. In the case
of an action by or in the right of the corporation, the corporation has the
power to indemnify any officer or director against expenses incurred in
defending or settling the action if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation; provided, however, that no indemnification may be
made when a person is adjudged liable to the corporation, unless a court
determines such person is entitled to indemnity for expenses, and then such
indemnification may be made only to the extent such court shall determine. The
CGCL requires that to the extent an officer or director of a corporation is
successful on the merits or otherwise in defense of any third-party or
derivative proceeding, or in defense of any claim, issue, or matter therein, the
corporation must indemnify the officer or director against expenses incurred in
connection therewith.
The Merger Agreement provides that the indemnification and exculpation
provisions in favor of the past and present directors or officers of the Company
currently in effect will remain in effect for at least six years from the
Effective Time and that the current directors' and officers' liability insurance
policies (or other policies providing, subject to certain conditions, at least
the same coverage as the current policies).
PURPOSE OF THE MERGER
The purpose of the Merger is to maximize the value of the Company to its
shareholders in the context of a sale of control pursuant to the order of the
California Superior Court mandating the sale of the Trust's interest in the
Company.
CERTAIN EFFECTS OF THE MERGER; PLANS FOR THE COMPANY AFTER THE MERGER
Following the Effective Time, the Parent will own 100% of the Company's
outstanding capital stock. Accordingly, the Parent will be the sole beneficiary
of any future earnings and growth of the Company after the Effective Time (until
shares of capital stock, if any, are issued to other shareholders) and will have
the ability to benefit from any corporate opportunities that may be pursued by
the Company in the future. At the Effective Time, the public Shareholders will
cease to have any ownership interests in, or rights as, shareholders of the
Company. Following the Effective Time, the public Shareholders will not benefit
from any increase in the value of the Company or any payment of dividends on the
Common Stock and will not bear the risk of any decrease in the value of the
Company.
As a result of the Merger, the Company will be a privately held
corporation and a wholly owned subsidiary of the Parent and there will be no
public market for the Common Stock. At the Effective Time, the Common Stock will
cease to be quoted on the OTC Bulletin Board and price quotations with respect
to sales of shares of the Common Stock in the public market will no longer be
available. In addition, registration of the Common Stock under the Exchange Act
will be terminated. This termination will make certain provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) and the requirement under the proxy rules of Regulation 14A of furnishing
a proxy or information statement in connection with shareholders meetings, no
longer applicable to the Company. After the Effective Time, the Company will no
longer be required to file periodic reports with the Securities and Exchange
Commission (the "Commission") in connection with the Common Stock.
The directors of the Sub at the Effective Time will be the directors of
the Company after the Merger and will hold office from the Effective Time until
the next annual meeting of the shareholders of the Company and until their
successors are elected or appointed and are duly qualified. The officers of the
Company at the Effective Time will be the officers of the Company following the
Merger and will hold office from the Effective Time until their respective
Page 17
<PAGE>
successors are duly elected or appointed and qualified in the manner provided in
the Company's Articles of Incorporation, as in effect at the Effective Time, or
as otherwise provided by law.
ACCOUNTING TREATMENT OF THE MERGER
Under applicable accounting standards, the Merger will treated as a
purchase of the Company by the Parent.
REGULATORY APPROVALS
The Parent and the Company know of no remaining federal or state
regulatory requirements that must be complied with or approvals that must be
obtained in order to consummate the Merger, other than the filing of the
certificate of merger with the Secretary of State of the State of Delaware and
the filing of articles of merger with the Secretary of States of the State of
California.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of Merger Consideration for Common Stock pursuant to the
Merger or cash pursuant to the exercise of dissenters' rights will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local or foreign tax laws. In general, a
shareholder of the Company will recognize gain or loss for federal income tax
purposes equal to the difference between the amount of cash received for the
shares of Common Stock sold and such shareholder's adjusted tax basis in such
shares. Assuming the shares constitute capital assets in the hands of the
shareholder, such gain or loss will be capital gain or loss. Capital gain
recognized in 1999 generally will be taxed to individuals and certain other
non-corporate entity shareholders at a maximum federal tax rate of 20 percent
with respect to shares of Common Stock held for more than 12 months. The federal
tax rates applicable to ordinary income will generally apply to gain recognized
on the sale or exchange of shares held for one year or less. The highest
statutory federal income tax rate currently applicable to an individual
shareholder is 39.6%. Capital losses not offset by capital gains may be deducted
against individuals' and offer non-corporate shareholders' ordinary income up to
a maximum annual amount of $3,000 ($1,500 for a married person filing
separately). Unused capital losses may be carried forward indefinitely by
individuals and other non-corporate shareholders. All net capital gain of a
corporate shareholder is subject to tax at ordinary corporate rates. A corporate
shareholder can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
SHAREHOLDERS, SUCH AS FINANCIAL INSTITUTIONS, BROKER-DEALERS, PERSONS WHO
RECEIVED PAYMENT IN RESPECT OF OPTIONS TO ACQUIRE COMMON STOCK, SHAREHOLDERS WHO
ACQUIRED COMMON STOCK PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR
OTHERWISE AS COMPENSATION, PERSONS OWNING COMMON STOCK AS PART OF A "STRADDLE,"
"HEDGE" OR "CONVERSION TRANSACTION," INDIVIDUALS WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES AND FOREIGN CORPORATIONS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM
TAX, AND STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS AND CHANGES IN SUCH
TAX LAWS.
ANCILLARY AGREEMENTS
Concurrently with the parties' execution of the Merger Agreement, pursuant
to the Stock Purchase Agreement, the Sellers agreed to sell all shares of the
Company's Common Stock held by them, subject to approval if the sale by the
Court. As of the date of the Stock Purchase Agreement, the Trust owned 790,383
shares of Common Stock, David and Ileana Wachtel owned in the aggregate 82,277
shares of Common Stock, and Radu and Rodica Patrichi owned 20,881 shares and
1,103 shares, respectively. In the aggregate, the Sellers own 894,644 shares of
Common Stock, representing approximately 53% of the total outstanding shares of
Common Stock.
THE MERGER AGREEMENT
The following is a description of certain terms and provisions set forth
in the Merger Agreement. This description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, which is
attached hereto as Annex A and is incorporated by reference herein.
Page 18
<PAGE>
THE MERGER
The Merger Agreement provides that, upon the terms and subject to the
conditions thereof, and in accordance with the CGCL, at the Effective Time, the
Sub will be merged with and into the Company. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation") and will
become a wholly owned subsidiary of the Parent. At the Effective Time, each
share of Common Stock issued and outstanding immediately prior to the Effective
Time held by the Public Shareholders will be converted automatically into the
right to receive from the Company the Merger Consideration.
The Merger Agreement provides that the directors of the Sub at the
Effective Time will be the directors of the Surviving Corporation until the next
annual shareholders' meeting and until their successors shall be elected or
appointed and shall be duly qualified and that the officers of the Company at
the Effective Time will continue as the officers of the Surviving Corporation
until their respective successors are elected or appointed as provided in the
Surviving Corporation's Articles of Incorporation and By-laws. The Merger
Agreement provides that the Articles of Incorporation and Bylaws of the Company
as in effect at the Effective Time will be the Articles of Incorporation and
Bylaws of the Surviving Corporation.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time: (i) each share of Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares that are
canceled as described in clause (ii) and Appraisal Shares (as defined below), if
any, which will be treated as described below) will be converted into the right
to receive, by virtue of the Merger and without any further action from the
Parent, the Merger Consideration, subject to applicable withholding or back-up
withholding taxes, if any, payable by the holder thereof, without interest
thereon, upon surrender of the certificate formerly representing such share;
(ii) each share that is held by the Parent, Sub or any other of the Parent's
wholly owned subsidiaries, or in the treasury of the Company or by any wholly
owned subsidiary of the Company, will be canceled and will cease to exist, and
no payment will be made with respect thereto; and (iii) each issued and
outstanding share of common stock of Sub will be converted into the right to
receive one share of common stock of the Surviving Corporation after the Merger.
The Merger Agreement further provides that any shares of Common Stock
which are issued and outstanding immediately prior to the Effective Time and
held by a Shareholder who has not voted (such shares, the "Appraisal Shares") in
favor of or consented to the Merger in writing and who complies with all the
provisions of the CGCL concerning the right of holders of shares of capital
stock to dissent from the Merger and require appraisal of their shares (a
"Dissenting Shareholder") will not be converted into or represent the right to
receive the Merger Consideration as described above but instead will be
converted, at the Effective Time, into the right to receive any consideration
that may be determined to be due to the Dissenting Shareholder pursuant to the
CGCL; provided, however, that the shares of Common Stock outstanding immediately
before the Effective Time and held by a Dissenting Shareholder who, after the
Effective Time, fails to establish his entitlement to dissenters' rights as
provided in Chapter 13 of the CGCL or withdraws or forfeits the Dissenting
Shareholder's right to appraisal, in either case pursuant to the CGCL, will be
deemed to be converted as of the Effective Time into the right to receive the
Merger Consideration, without interest. The Company may not, without the prior
written consent of the Parent, voluntarily make any payment with respect to any
demands for appraisal or offer to settle or settle any such demands.
EXCHANGE OF STOCK CERTIFICATES
Prior to the Effective Time, the Parent will designate a bank or trust
company reasonably satisfactory to the Company to act as Exchange Agent (the
"Exchange Agent") in the Merger and take all steps necessary to enable and cause
the Surviving Corporation to provide such Exchange Agent with funds necessary to
make payments to the holders of shares of Common Stock of the Merger
Consideration. Promptly after the Effective Time, the Exchange Agent will mail
to each record holder of certificates which immediately prior to the Effective
Time represented outstanding shares a letter of transmittal and instructions for
use in effecting the surrender of such certificates in exchange for the Merger
Consideration, subject to any required back-up withholding taxes. Upon surrender
of a certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, the holder of such certificate will be
entitled to receive in exchange therefor an amount equal to the product of the
number of shares represented by such certificate multiplied by the Merger
Consideration, subject to any withholding taxes, without any interest thereon,
and the certificates so surrendered will promptly be canceled.
NO FURTHER OWNERSHIP RIGHTS IN THE COMPANY. At and after the Effective
Time, each holder of a certificate that represented issued and outstanding
shares of Common Stock immediately prior to the Effective Time shall cease to
have
Page 19
<PAGE>
any rights as a Shareholder of the Company, except for the right to surrender
his or her certificates in exchange for the Merger Consideration or to perfect
his or her right to receive payment for his or her shares pursuant to Chapter 13
of the CGCL and Section 2.7 of the Merger Agreement and there shall be no
further transfers on the stock transfer books of the Company of the shares that
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates that formerly represented shares of Common Stock
are presented to the Company, such certificates will be canceled and exchanged
for cash in the manner described above, subject to applicable law with respect
to Appraisal Shares.
FAILURE TO EXCHANGE. Any cash which remains undistributed to the former
shareholders of the Company for six months after the Effective Time will be
delivered by the Exchange Agent to the Company, and the Company shall thereafter
act as the Exchange Agent.
NO LIABILITY. Notwithstanding anything to the contrary contained in the
Merger Agreement, none of the Company, the Parent, Sub or the Exchange Agent
will be liable to any holder of shares of Common Stock for any Merger
Consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Each of the Parent, the Exchange
Agent and the Company, as applicable, will be entitled to deduct and withhold
from the Merger Consideration otherwise payable to any holder of certificates
which prior to the Effective Time represented shares such amounts as it is
required to deduct and withhold with respect to the making of such payment under
the Code, or any provision of state, local or foreign tax law.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, the Company has made to the Parent and Sub
various customary representations and warranties, subject to identified
exceptions, with respect to, among other things: (i) due organization, valid
existence and good standing of the Company and certain of its subsidiaries and
certain similar corporate matters; (ii) the capital structure of the Company and
certain of its subsidiaries; (iii) the authorization, execution, delivery and
enforceability of the Merger Agreement; (iv) conflicts under the Company's
Articles of Incorporation or By-laws, required consents or approvals and
violations of instruments or law; (v) documents and financial statements filed
by the Company with the Commission and the accuracy of information contained
therein; (vi) the accuracy of the information, other than information supplied
by the Parent or Sub, included in this Information Statement; (vii) the absence
of certain material adverse events or changes; (viii) the absence of certain
broker and other similar fees; (ix) litigation; (x) violations of applicable
law; (xi) any payments due to third parties as a result of the Merger Agreement;
(xii) ownership of property; (xiii) material agreements and (xiv) opinion of
financial advisor to the Company.
In the Merger Agreement, the Parent and Sub have made to the Company
various customary representations and warranties, subject to identified
exceptions, with respect to, among other things: (a) due organization, valid
existence and good standing and certain similar corporate matters; (b) the
authorization, execution, delivery and enforceability of the Merger Agreement;
(c) conflicts under articles of incorporation or by-laws, required consents or
approvals and violations of instruments or law; (d) the accuracy of the
information supplied by the Parent, Sub and their respective affiliates,
included in this Information Statement and certain other documents; (e)
financing arrangements; (f) the absence of certain prior activities and
liabilities; (g) the financial condition of the Surviving Corporation after the
Effective Time; and (h) the absence of certain fees.
None of the representations and warranties in the Merger Agreement will
survive the Effective Time.
CERTAIN COVENANTS
CONDUCT OF BUSINESS. Pursuant to the Merger Agreement, the Company has
agreed that, during the period from the date of the Merger Agreement to the
Effective Time, except as contemplated by the Merger Agreement or previously
disclosed to the Parent, each of the Company and its subsidiaries will carry on
its respective operations according to its ordinary and usual course of business
and consistent with past practice in all material respects.
In addition, except as contemplated by the Merger Agreement or as
previously disclosed to the Parent prior to the Effective Time, neither the
Company nor its subsidiaries will, without the prior written consent of the
Parent: (a) issue, sell or repurchase or authorize or propose the issuance, sale
or repurchase of any shares of capital stock of the Company and its subsidiaries
or securities convertible into such shares, or any warrants, options or other
convertible securities other than the issuance of shares pursuant to the
exercise of options outstanding on the date of the Merger Agreement; (b) declare
or pay any dividend or distribution on any shares of its capital stock; (c)
except for such transactions in the ordinary and usual course of business and
consistent with past practice, authorize or enter into any agreement with
respect to any material commitment or transaction which requires the Company to
pay in excess of $50,000; (d) except in the ordinary course of business and
consistent with past practice and except as previously
Page 20
<PAGE>
disclosed to Parent or as may be required by law, adopt or amend in any material
respect any material profit sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, plan, fund or other arrangement (collectively, "Compensation
Plans"), or grant, or become obligated to grant, any general or specific
increase in the compensation of executive officers or any increase in the
compensation (including severance pay) payable or to become payable to any
executive officer or institute any material new welfare program or Compensation
Plan or make any change in any Compensation Plan; (e) except as required by the
consummation of the Merger, pay, discharge or satisfy any material claims,
liabilities or obligations (absolute, accrued, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary and usual course of
business and consistent with past practice; (f) except for such transactions in
the ordinary and usual course of business and consistent with past practice,
incur any material liability (absolute, accrued, contingent or otherwise) or
issue any debt securities or assume, guarantee, endorse or otherwise as an
accommodation become responsible for, the obligations of any other individual or
entity; (g) subject to the rights of the Company's shareholders under applicable
law, propose or adopt any amendments to the Articles of Incorporation or
By-laws; or (h) agree, in writing or otherwise, to take any of the foregoing
actions.
ACCESS TO INFORMATION AND CONFIDENTIALITY. So long as the Merger Agreement
has not been terminated, between the date of the Merger Agreement and the
Effective Time, the Company has agreed to (i) give the Parent and its authorized
representatives reasonable access during normal business hours to all offices
and other facilities and to all books and records of it and its subsidiaries and
(ii) permit the Parent to make such inspections as Parent may reasonably require
and cause the Company's officers and those of its subsidiaries to furnish the
Parent (at such time as it would otherwise become available in the ordinary and
usual course of business and consistent with past practice) with such financial
and operating data and other information (consistent with that which is
currently being prepared by the Company) with respect to the business and
properties of the Company as the Parent may from time to time reasonably
request.
Subject to any additional requirements of law and the terms of the
Confidentiality Agreement between the parties dated January 25, 1999 (the
"Confidentiality Agreement"), the Merger Agreement provides that Parent and Sub
will hold and will cause their respective representatives, advisors and
financing sources to hold in strict confidence, unless compelled to disclose by
judicial or administrative process, or, in the written opinion of its counsel
with a copy sent to the Company, by other requirements of law, all documents and
information concerning the Company furnished to Parent, Sub or any of their
respective representatives, advisors and financing sources in connection with
the transactions contemplated by the Merger Agreement. Prior to any disclosure
pursuant to the foregoing, Parent will notify the Company and afford the Company
an opportunity to obtain a protective order against such disclosure (except to
the extent that such information can be shown to have been (x) previously known
by Parent, (y) in the public domain through no fault of Parent, its
representatives or advisors or (z) later lawfully acquired by Parent from other
sources, unless Parent knows that such other sources are not entitled to
disclose such information). The Merger Agreement also provides that Parent and
Sub will not release or disclose such information to any other person, except in
connection with the Merger Agreement to (1) its auditors, attorneys, and other
representatives and advisors with a need to know such information and (2)
responsible financial institutions in connection with obtaining the financing
contemplated by the Merger Agreement. Any such persons must first be advised of
the confidentiality provisions of the Merger Agreement and the Confidentiality
Agreement and agree to be bound thereby. If the transactions contemplated by
this Agreement are not consummated, such confidence shall be maintained except
to the extent such information can be shown to have been (i) previously known by
Parent, (ii) in the public domain through no fault of Parent, its
representatives or advisors or (iii) later lawfully acquired by Parent from
other sources, unless Parent knows that such other sources are not entitled to
disclose such information and, if requested by the Company, Parent will return
to the Company all copies of information furnished by the Company to Parent or
its agents, representatives, advisors or financing sources, or derived
therefrom, or shall in writing confirm the destruction of such information
NO SOLICITATION. The Merger Agreement provides that the Company will not,
nor will the Company permit any officer, director, employee, representative of
the Company to solicit any proposals or offers from any person relating to any
acquisition or purchase of all or a material amount of the assets of, or any
securities of, or any merger, consolidation or business combination with, the
Company. The Company may, however, furnish information to, and may engage in
discussions or negotiations with, any person, and may waive any provision of any
confidentiality or standstill agreement to which it or any of its
representatives is a party, if (i) counsel advises the Company's Board that
failure to furnish such information, engage in such discussions or negotiations,
or waive any provision of any such agreement, could involve the Board in a
breach of their fiduciary duties or (ii) the Board believes, in good faith,
after consultation with the financial advisor, that such person may make a bona
fide proposal for a transaction, including, without limitation, a tender or
exchange offer for Shares, more favorable to the Company's shareholders than the
transactions contemplated by the Merger (such transaction being a "Superior
Offer"). Provided further that the Board of Directors of the Company may make
such disclosure to shareholders which, in the judgment of the Board of
Directors, upon advice of counsel, may be required by law or necessary to
discharge any fiduciary duty imposed thereby.
Page 21
<PAGE>
INFORMATION STATEMENT. The Merger Agreement requires the Company to
prepare an information statement relating to the Merger and its approval by the
Company's shareholders satisfying the requirements of Section 603 of the CGCL
and Regulation 14C promulgated under the Exchange Act (the "Information
Statement"). From and after the date of the Merger Agreement, the Company shall
use its reasonable best efforts to expeditiously (1) obtain and furnish the
information required to be included by it in the Information Statement, (2)
prepare and file the Information Statement with the Commission, (3) respond to
any comments made by the Commission with respect to the preliminary Information
Statement and (4) cause the definitive Information Statement to be mailed to its
shareholders at the earliest practicable time.
COOPERATION. Subject to the terms and conditions in the Merger Agreement,
each of the parties to the Merger Agreement agreed to use its reasonable best
efforts (i) to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
the Merger Agreement, including, without limitation, (a) promptly making their
respective filings, and thereafter using their reasonable best efforts promptly
to make any required submissions, under the HSR Act and (b) promptly making any
filings that are required to be made or seeking any consents, approvals, permits
or authorizations that are required to be obtained under any other federal,
state or foreign law or regulation and (ii) to refrain from taking, directly or
indirectly, any action contrary to or inconsistent with the provisions of the
Merger Agreement, including actions which would impair such party's ability to
consummate the transactions contemplated in the Merger Agreement. Pursuant to
the Merger Agreement, if, at any time after the Effective Time, any further
action is necessary or desirable to carry out the purposes of the Merger
Agreement, the proper officers and directors of each party to the Merger
Agreement shall use their respective reasonable best efforts to take all such
necessary action.
PUBLIC ANNOUNCEMENTS. The Merger Agreement provides that the Parent, Sub
and the Company will consult with each other before issuing any press release or
otherwise making any public statements with respect to the Merger and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by law or any securities exchange or
similar authority (in which case prior notice of at least 24 hours by the
Company to the Parent or by the Parent or Sub to the Company, as applicable, of
such issuance of a press release or making of a public statement shall be
required).
DIRECTORS AND OFFICERS INDEMNIFICATION AND INSURANCE. The Merger Agreement
provides that, the Company shall and, from and after the Effective Time, the
Parent and the Company shall, maintain the right to indemnification and
exculpation of officers and directors provided for in the Company's Articles of
Incorporation and By-laws as in effect on the date of the Merger Agreement with
respect to indemnification and exculpation for acts and omissions occurring
prior to the Effective Time, including, without limitation, the transactions
contemplated by the Merger Agreement. Further, the Parent agreed that for six
years after the Effective Time, the Parent or the Company will maintain
officers' and directors' liability insurance covering the persons who, on the
date of the Merger Agreement, were covered by the Company's officers' and
directors' liability insurance policies with respect to actions and omissions
occurring prior to the Effective Time, on terms which are not materially less
favorable, in the aggregate, than the terms of such insurance in effect for the
Company on the date of the Merger Agreement.
The Merger Agreement also provides that the Company shall, (i) and from
and after the Effective Time Parent and the Surviving Corporation shall, to the
fullest extent permitted under applicable law, indemnify and hold harmless each
present and former director and officer of the Company (collectively, the
"Indemnified Parties") against any costs or expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any pending, threatened or completed claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to any action or
omission occurring prior to the Effective Time (including, without limitation,
any claim, action, suit, proceeding or investigation arising out of or
pertaining to the transactions contemplated by the Merger Agreement (a
"Claim")), (ii) in the event of any such Claim (whether arising before or after
the Effective Time), advance expenses to each such Indemnified Party, including
the payment of the fees and expenses of counsel selected by such Indemnified
Party, which counsel shall be reasonably satisfactory to the Company or the
Surviving Corporation, as the case may be, promptly after statements therefor
are received, and (iii) cooperate fully in the defense of any such matter. The
Merger Agreement further provides that neither the Company nor the Surviving
Corporation shall be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld).
The Merger Agreement also provides that notwithstanding any provision to
the contrary contained in the Articles of Incorporation or By-Laws of the
Company as in effect on the date of the Merger Agreement, any determination
required to be made with respect to whether an Indemnified Party's conduct
complies with the standards set forth under the CGCL or under such charter
provisions shall be made by independent counsel selected by the Indemnified
Party and reasonably acceptable to the Company, the Parent, Sub or the Surviving
Corporation, which shall pay such counsel's fees and expenses (it being agreed
that neither the Company, nor the Parent, Sub or the Surviving
Page 22
<PAGE>
Corporation shall challenge any such determination by such independent counsel
which is favorable to an Indemnified Party).
This section shall survive the closing of the Merger, is intended to
benefit the Company, Parent, Sub or the Surviving Corporation and each of the
indemnified parties and shall be binding on all successors and assigns of Parent
and Surviving Corporation.
NOTIFICATION OF CERTAIN MATTERS. Pursuant to the Merger Agreement, between
the date of the Merger Agreement and the Effective Time, the Company will
promptly notify the Parent and Sub in writing if it becomes aware of any fact or
condition that causes or constitutes a breach of its representations and
warranties as of the date of the Merger Agreement, or if it becomes aware of the
occurrence after the date of the Merger Agreement of any fact or condition which
would (except as expressly contemplated by the Merger Agreement) cause or
constitute a breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition. Should any such fact or condition require any change
in the Company Disclosure Schedule if such Company Disclosure Schedule were
dated prior to the date of occurrence or discovery of any such fact or
condition, the Company will promptly deliver to Parent and Sub a supplement to
the Company Disclosure Schedule specifying such change. Each party hereto shall
promptly notify each other party of any default, the threat or commencement of
any proceeding or any development before the Effective Time that would be likely
to have a material adverse effect on the financial condition, results of
operations or business of the Company. Notwithstanding the foregoing sentence,
no party to the Merger Agreement shall be required to give notice with respect
to events that are reported in the financial or general interest newspapers that
do not specifically relate to such party or the transactions contemplated by the
Merger Agreement.
EMPLOYEE BENEFITS. In the Merger Agreement, the Parent agreed to honor,
and from and after the Effective Time, to cause the Company to honor after the
Effective Time, in accordance with their respective terms as in effect on the
date of the Merger Agreement, the employment, severance, bonus, and commission
agreements and similar arrangements to which the Company is a party which are
contemplated by the Merger Agreement.
ACKNOWLEDGMENT OF THE PARENT AND SUB. In the Merger Agreement, the Parent
and Sub acknowledged that any projections prepared by the Company and provided
to the Parent and/or Sub as part of the due diligence process were and are
merely estimates made by the Company as of the time they were provided and the
Parent and Sub have in no way relied on any such projections. The Parent and Sub
agree and acknowledge that neither the Company nor any of its affiliates has
made or is making any representation or warranty as to the accuracy or
completeness of the confidential information memorandum furnished by the
financial advisor on behalf of the Company or any subsequent or supplemental
materials provided by such person. The Parent and Sub further agreed and
acknowledged in the Merger Agreement that the only representations and
warranties made by the Company with respect to the transactions contemplated by
the Merger Agreement are those representations and warranties contained in the
Merger Agreement (together with the exceptions to such representations and
warranties set forth in the disclosure schedules to the Merger Agreement) and
only those representations and warranties have and will have any legal effect
following the date of the Merger Agreement, which effect will continue solely to
the extent specifically set forth in the Merger Agreement.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of the Company, the Parent and Sub to effect
the Merger are subject to the satisfaction or waiver, where legally permissible,
of the following conditions: (i) Shareholder Approval of the Merger Agreement
shall have been obtained; (ii) no statute, rule, regulation, order, decree or
injunction shall have been enacted, entered, promulgated or enforced by any
court or governmental authority of competent jurisdiction which restrains,
enjoins or otherwise prohibits the consummation of the Merger; provided,
however, that the Company, the Parent and Sub shall use their reasonable best
efforts to have any such order, decree or injunction vacated and (iii) all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any court, administrative
agency or commission or other governmental authority or instrumentality, the
failure of which to file, obtain or occur is reasonably likely to have a
material adverse effect on the Company or the Parent.
The obligations of the Parent and Sub to effect the Merger are subject to
the satisfaction or waiver, where legally permissible, prior to the Effective
Time of the following conditions: (i) the representations and warranties of the
Company set forth in the Merger Agreement shall be true and correct as of the
date of the Merger Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of immediately before the Effective
Time, except as otherwise contemplated by the Merger Agreement, and the Company
shall have performed all obligations required to be performed by it at or prior
to the Effective Time, except to the extent the failure of such representations
and warranties to be true and correct or the failure to perform obligations
thereunder would not,
Page 23
<PAGE>
individually or in the aggregate, have a material adverse
effect on the financial condition, results of operations or business of the
Company, taken as a whole; (ii) the Parent shall have received a certificate
signed on behalf of the Company by the chief executive officer and the chief
financial officer of the Company to the effect of clause (i) above; (iii) Parent
shall have received an opinion, dated as of the Closing Date, from Troop Steuber
Pasich Reddick & Tobey, LLP, counsel to the Company, as to matters that are
customary for transactions of this type; (iv) Parent shall have received
financing of the Merger Consideration and associated transaction expenses on
terms and conditions satisfactory to Parent in its sole discretion and (v)
Parent shall have confirmed that the Confidential Information Memorandum
furnished by the Financial Advisor on behalf of the Company does not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, and Parent shall have certified such confirmation or
the failure thereof to the Company in writing no later than August 18, 1999.
The obligation of the Company to effect the Merger is subject to the
satisfaction or waiver, where legally permissible, prior to the Effective Time
of the following conditions: (i) the representations and warranties of the
Parent and Sub set forth in the Merger Agreement shall be true and correct as of
the date of the Merger Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of immediately before the
Effective Time, except as otherwise contemplated by the Merger Agreement, and
the Parent and Sub shall have performed all obligations required to be performed
by them at or prior to the Effective Time, except to the extent the failure of
such representations and warranties to be true and correct or the failure to
perform obligations thereunder would not, individually or in the aggregate, have
a Material Adverse Effect (as defined in the Merger Agreement); and (ii) the
Company shall have received a certificate signed on behalf of Parent and Sub by
their respective chief executive officers and the chief financial officers to
the effect of clause (i) above; and (iii) the Board shall have approved the
Merger.
TERMINATION; TERMINATION FEES AND EXPENSES
The Merger Agreement may be terminated and the Merger contemplated thereby
may be abandoned at any time prior to the Effective Time, whether before or
after Shareholder Approval:
(i) if the boards of directors of the Company and the Parent both
consent in writing; or
(ii) by the Company or the Parent if the conditions to each party's
obligation to effect the Merger have been satisfied and the Effective Time shall
not have occurred before September 30, 1999 or by the Company or the Parent if
the Effective Time shall not have occurred before December 31, 1999, provided,
however, that the right of the Company or the Parent to terminate the Merger
Agreement pursuant to the foregoing provision shall not be available in the
event that the Company's or the Parent's, as the case may be, failure to fulfill
any obligation under the Merger Agreement has been the cause of, or resulted in,
the failure of the Effective Time to occur on or before such date; or
(iii) by the Parent or the Company if any court of competent jurisdiction
in the United States or other United States governmental body shall have issued
an order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have become final and nonappealable; or
(iv) by the Company, subject to certain other provisions of the Merger
Agreement, if the Board shall concurrently approve, and the Company shall
concurrently enter into, a definitive agreement providing for the implementation
of a Superior Offer (as defined below), provided, however, that (a) the Company
is not then in breach of its non-solicitation covenant, (b) the Board shall have
complied with the other terms of the Merger Agreement in connection with such
Superior Offer, and (c) the Company shall simultaneously make the termination
fee payments required by the Merger Agreement. "Superior Offer" means an
Alternative Proposal which is superior from a financial point of view to the
Company's Public Shareholders to the Merger and the other transactions
contemplated thereby and for which financing, to the extent required, is then
committed or which, in the good faith judgment of the Company's Board after
consultation with the Company's financial advisors, is reasonably capable of
being obtained.
The Merger Agreement provides that if the Company intends to terminate the
Merger Agreement pursuant to paragraph (iv) above, the Company shall provide to
the Parent written notice of its intention to terminate the Merger Agreement
pursuant to such provision, advising the Parent (a) that the Board has
determined, by action of a majority of the members of the Board who are not
affiliated with either the Parent or the person making such Alternative Proposal
or their respective affiliates, that such Alternative Proposal is a Superior
Offer and that, in the exercise of its good faith judgment as to fiduciary
duties to shareholders under applicable law, after consultation with the
Company's outside legal counsel, failure by the Board to terminate the Merger
Agreement could reasonably be expected to result in a breach of such duties and
(b) as to the material terms of any such Alternative Proposal. At any time after
the fifth business day following receipt of such notice, the Company may
terminate the Merger Agreement as provided in paragraph (iv) above
Page 24
<PAGE>
only if the Board determines, by action of a majority of the members of the
Board who are not affiliated with either the Parent or the person making such
Alternative Proposal or their respective affiliates, that failure by the Board
to terminate the Merger Agreement continues to be reasonably expected to result
in a breach of its fiduciary duties to shareholders under applicable law (which
determination shall be made in light of any revised proposal made by the Parent
prior to the expiration of such five business day period) and concurrently
enters into a definitive agreement providing for the implementation of such
Alternative Proposal.
In the event of termination of the Merger Agreement by the Company or the
Parent as provided in the Merger Agreement, the Merger Agreement shall forthwith
become void, except as otherwise provided in the Merger Agreement, provided that
no party thereto shall be relieved from liability for any breach of the Merger
Agreement.
If the Merger Agreement is terminated under the circumstances described in
paragraph (iv) above the Company shall pay to the Parent a termination fee of
$750,000.
AMENDMENT AND WAIVER
The Merger Agreement provides that, to the extent permitted by applicable
law, the Merger Agreement may be amended by action taken by the Company, the
Parent and Sub (and the shareholders, if required by applicable law) at any time
before or after adoption of the Merger Agreement by the shareholders; provided,
however, that after the adoption of the Merger Agreement by the shareholders, no
amendment shall be made which decreases the price per share, changes the form of
consideration to be received by the holders of Common Stock in the Merger or
which adversely affects the rights of shareholders of the Company thereunder
without the approval of the Shareholders. The Merger Agreement further provides
that it may not be amended, except by an instrument in writing signed on behalf
of all the parties. Under the terms of the Merger Agreement, at any time prior
to the Effective Time, the parties thereto may (a) extend the time for the
performance of any of the obligations or other acts of the other parties
thereto, (b) waive any inaccuracies in the representations and warranties
contained in the Merger Agreement or in any document, certificate or writing
delivered pursuant thereto or (c) waive compliance with any of the agreements or
conditions contained in the Merger Agreement unless such waiver is unlawful or
specifically prohibited. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party
ESTIMATED FEES AND EXPENSES; SOURCES OF FUNDS
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby will be paid by the party incurring such expenses, except that the
Parent will pay certain costs and expenses related to this Information
Statement. It is estimated that, if the Merger is consummated, expenses incurred
in connection therewith will be approximately as follows:
<TABLE>
<CAPTION>
THE COMPANY THE PARENT
<S> <C>
SEC filing fees...................... $2,511 --
Legal fees and expenses.............. $200,000 $100,000
Accounting fees and expenses......... $5,000 $15,000
Printing costs....................... $20,000 --
Exchange agent fees and expenses..... $10,000 --
Miscellaneous........................ $10,000 --
Total.......................... $247,511 $115,000
=========== ===========
</TABLE>
Page 25
<PAGE>
FINANCING FOR THE MERGER
The Parent expects to obtain the funds for the Merger Consideration
payable to holders of Common Stock in the Merger and fees and expenses related
to the Merger from a combination of a cash contribution to capital by Parent's
sole stockholder and loans from an affiliate of Parent and from a reputable
financial institution.
PAYMENT FOR SHARES OF COMMON STOCK
As a result of the Merger, the Public Shareholders will cease to have any
equity interest in the Company. After consummation of the Merger, each share of
Common Stock issued and outstanding immediately prior to the consummation of the
Merger held by Public Shareholders will be required to be surrendered to the
Exchange Agent in order that such share be canceled and converted automatically
into the right to receive the Merger Consideration. No interest will be paid or
accrued on the cash payable upon the surrender of such certificates.
DETAILED INSTRUCTIONS WITH REGARD TO THE SURRENDER OF CERTIFICATES,
TOGETHER WITH A LETTER OF TRANSMITTAL, WILL BE FORWARDED TO FORMER HOLDERS OF
COMMON STOCK BY THE EXCHANGE AGENT PROMPTLY FOLLOWING THE EFFECTIVE TIME.
HOLDERS OF COMMON STOCK SHOULD NOT SUBMIT THEIR CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED SUCH MATERIALS. PAYMENT FOR SHARES OF COMMON
STOCK WILL BE MADE TO FORMER HOLDERS OF SHARES AS PROMPTLY AS PRACTICABLE
FOLLOWING RECEIPT BY THE EXCHANGE AGENT OF THEIR CERTIFICATES AND OTHER REQUIRED
DOCUMENTS.
CERTAIN INFORMATION REGARDING THE COMPANY
INTRODUCTION.
PRINCIPAL BUSINESS. The principal business of the Company is the
design, fabrication, assembly and sale of high technology components for
aerospace and U.S. Government defense prime contractors. The Company was
incorporated in the State of California in October 1953. The Company
operates two divisions:
1. The U.S. Bearing Division
The US Bearing Division designs, engineers and fabricates spherical,
self-aligned, self-lubricating and specialized bearings used primarily in the
aerospace and defense industries. In many cases these high precision bearings,
including rod-ends, journals, bushings and connecting links are designed and
fabricated under demanding quality standards in order to support extreme load
and temperature criteria. These parts are used in numerous applications in both
aircraft as well as space applications including space shuttles and the space
station. Examples of usage are in door and window structures, landing gear,
wings, engines and turbo-thrust support. The Company utilizes its engineering
capability to support its marketing efforts by maintaining an ongoing rapport
with engineers at numerous original equipment manufacturers (OEMs). This
cooperative engineering relationship provides the US Bearing Division the
opportunity to win approvals to manufacture many new items.
The Division competes primarily in an arena where the items are
non-catalog items, termed "specials". In this arena, it is necessary to be
pre-approved to manufacture the parts by having the Company's name listed as an
approved manufacturer on the OEM drawing. The US Bearings Division holds
thousands of such approvals, and is in constant communication with many OEMs on
cooperative engineering projects. Once approvals are obtained, the Division is
able to sell its product both in the production and after market cycles. The
Division sells its products through agents, manufacturer's representatives,
distributors and its own in house sales effort.
2. Ordnance Technology Division
The Ordnance Technology Division designs, engineers and fabricates high
precision miniature pyrotechnic devices. These devices are mostly sold to prime
defense contractors for munitions applications. These highly specialized
electro-mechanical devices, such as switches, piston actuators, cord and wire
cutters, initiator-igniters, and thermal relay switches are all single use items
and are used in numerous custom applications to cut cords and wires, initiate
subsequent charges, pull pins, push switches and alternate circuits. As in the
US Bearing Division the marketing of the Division's products is supported by
ongoing cooperative engineering relationships. These efforts have resulted in
the creation of many new approvals over the years. Currently in excess of 30% of
the Ordnance Division backlog of unfilled
Page 26
<PAGE>
orders are from approvals received in the past 24 months. The Division sells its
products through agents, distributors and its own in house sales effort.
PRODUCT DEPENDENCY. For fiscal year 1998, Ordnance Division igniters
represented approximately 15% of the total revenue for the year, and spherical
bearings represented approximately 29% of the Company's total revenue. For
fiscal year 1997, Ordnance Division igniters represented approximately 20%,
switches and relays represented approximately 15% of the Company's revenue while
spherical bearings represented 30% of the Company's total revenue. For fiscal
year 1996 the Ordnance Division switches and relays represented approximately
20% of the Company's revenue and spherical bearings represented approximately
38% of the Company's revenue.
The Company uses a self-lubricating teflon based liner system on many of
its bearings. Specifications for this liner system are governed by the military
standard MIL-I-81820. It is necessary for the Company to requalify this system
once every five years. The Company is currently undergoing the necessary testing
to achieve this certification and has no reason to believe that it will not do
so. However, failure to achieve this certification could adversely affect the
Company's business.
Many of the Company's parts including various bearings, igniters, and
actuators are sold as sub-components of larger systems. The Company is not
always able to track the actual usage of these items and therefore may be
affected by cancellations of any programs that use these parts as
sub-components.
CUSTOMER DEPENDENCY. The Company's Bearing Division manufactures
specialized bearings for sale to the defense and aerospace industries either
directly to the U.S. Government or to Government prime contractors, such as: The
Boeing Company and Lockheed Martin Corporation. The Ordnance Division of the
Company manufactures electro-pyrotechnic devices for the defense and aerospace
industries. Its products are sold to a few prime contractors such as: Eagle
Picher and Textron Systems. Most of the items sold to Textron Systems are for
the Sensor Fuzed Weapon (SFW) missile program. The Company has in place a long
term supplier agreement through 2003 whereby the Company may supply parts to
Textron Systems for this and similar programs. While the Company has no reason
to believe it will lose any of its key customers, or that any key programs might
be canceled, the loss of business of any key customer, or program cancellation
could adversely affect the Company's overall business.
The Company does a significant amount of business with government agencies
and prime contractors of the government. In many of these contracts the customer
has the ability to terminate these contracts at their convenience. Even though
these contracts may be terminated under this provision, the customer is still
liable to pay all incurred expenses plus profit on the contract.
COMPETITION. The Company encounters varied degrees of competition
depending upon the division involved. The Bearing Division sells its product
lines in competitive markets on the basis of a combination of price, delivery,
and product quality. Many of the Division's competitors are divisions or
segments of large diversified companies with financial resources greater than
those of the Company. The Ordnance Division sells its products on a less
competitive basis than does the Bearing Division, although they do compete with
other ordnance component manufacturers with similar capacity to the Company's
Ordnance Division. The Company's two divisions sell a number of products for
which they are the sole source.
RESEARCH AND DEVELOPMENT. During the last three fiscal years, the Company
has engaged in limited Company-sponsored research and development activities.
The estimated amount spent during the years ended June 30, 1999, 1998, and 1997
on such activities was approximately $100,000, $51,000 and $6,000, respectively.
EMPLOYEES. At June 30, 1999, the Company had approximately 75
employees, as compared with 71 at June 30, 1998.
Page 27
<PAGE>
<TABLE>
CORPORATE SUMMARY OF RESULTS BY DIVISION
(IN THOUSANDS)
<CAPTION>
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Bearing Division:
Sales* ........................... $3,338 $2,087 $2,383 $1,895 $1,530
Pretax income (loss)** ........... 474 51 212 1,117 (398)
Identifiable assets .............. 3,434 2,892 1,984 2,133 1,759
Ordnance Division:
Sales* ........................... 2,662 1,923 1,550 1,112 1,253
Pretax income (loss)** ........... 1,068 457 47 633 (146)
Identifiable assets .............. 2,247 1,749 1,298 1,042 844
Capital expenditures of each segment:
Bearings ......................... 216 856 181 28 2
Ordnance ......................... 110 442 138 17 3
- -------------
<FN>
* No intersegment sales.
** Does not include interest expense in any of the five years presented.
</FN>
</TABLE>
CERTAIN INFORMATION REGARDING PARENT AND SUB
The Parent is a special purpose holding company formed by GWB (USA), Inc.
for use in connection with the Merger. The Sub is a newly incorporated Delaware
corporation organized by the Parent to acquire all the outstanding shares of
Common Stock of the Company pursuant to the Merger Agreement and has not carried
on any activities other than in connection with the Merger. The Sub is a direct
wholly owned subsidiary of the Parent. GWB (USA) is the United States arm of
Gartland Whalley and Barker plc ("GWB"), a U.K. publicly traded company listed
on the Alternative Investment Market (AIM) that focuses on developing industrial
businesses. GWB currently has three publicly traded affiliates in the UK that
principally manufacture industrial products for numerous industries, including
aerospace, telecommunications and household construction and improvement, and
GWB, through its affiliates, has acquired several industrial businesses in the
United States.
SELECTED HISTORICAL FINANCIAL DATA
Set forth below is selected financial data relating to the Company. The
data should be read in conjunction with the historical consolidated financial
statements of the Company and the notes thereto.
FIVE-YEAR FINANCIAL HISTORY
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------- ------- --------
Operations
Net sales ........................$6,000 $4,010 $3,933 $3,007 $2,783
------ ------ ------- ------- --------
Net income (loss) ................ 980 162 31 1,767 (800)
------ ------ ------- ------- ---------
Net income (loss) per common share .59 .10 .02 1.11 (.50)
------ ------ ------- ------- --------
Financial position
Working capital (deficiency)...... 1,467 882 835 1,128 (1,004)
------ ------ ------- ------- --------
Stockholders' equity (deficiency in
assets)............................. 945 (111) (242) (32) (1,877)
------ ------ ------- ------- --------
Total assets...................... 5,681 4,641 3,282 3,175 2,603
------ ------ ------- ------- --------
Long-term debt.................... 3,009 3,408 2,367 2,327 1,966
------ ------ ------- ------- --------
No cash dividends have been paid or accrued during the past five years.
Reference is made to the financial statements and notes thereto included
beginning on page F-1.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information regarding the Company's financial condition, changes in
financial condition, and results of operations for the fiscal year ended June
30, 1998 and the nine months ended March 31, 1999, is set forth under the
caption entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages F-__ through F-___, respectively, hereof.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Trust owns 790,383 shares (approximately 47%) and together with the
other Sellers, beneficially controls 894,644 shares (approximately 53%) of the
Common Stock. The Trust is administered by Ileana Wachtel (Mihai Patrichi's
daughter) and Rodica Patrichi (Mihai Patrichi's widow). As a result of the
probate action by Michael Patrichi (Mihai Patrichi's son and one of the
beneficiaries of the Trust) to force the sale of the interest in the Company
held by the Trust (L.A.S.C. Case No. BP037966), the Court ordered the sale of
the Trust's shares and has approved the sale contemplated by the Stock Purchase
Agreement. There is no such other person who owns 10% or more of the Common
Stock.
The following table sets forth, to the knowledge of the Company, based
upon information provided by the shareholders set forth below or publicly
available filings, information regarding the ownership of the Common Stock at
August 25, 1999 by (a) all persons known to the Company to be the beneficial
owners of more than 5% of the Common
Page 28
<PAGE>
Stock outstanding, (b) each director and executive officer of the Company, and
(c) all directors and executive officers of the Company as a group. Except as
noted below, each such owner (a) has sole voting and investment power for the
shares indicated as beneficially owned by such owner and (b) is located at the
Company's executive offices at 9750 De Soto Avenue, Chatsworth, California
91311. In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided; in
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person's actual voting power at
any particular date.
<TABLE>
<CAPTION>
AMOUNT ERCENTAGE
NAME AND ADDRESS BENEFICIALLY OF CLASS
CATEGORY OF BENEFICIAL OWNER OWNED P (4)
------------- ----------------------- ---------------- ------------
<S> <C> <C> <C>
Director Ileana Wachtel 872,660(1)(2)(3) 52.1%
9750 De Soto Avenue
Chatsworth, CA 91311
Director Rodica Patrichi 791,486(2) 47.2%
73095 Shadow Mt. Drive
Palm Desert, CA 92260
Director/ David Wachtel 872,660(3) 52.1%
Officer 9750 De Soto Avenue
Chatsworth, CA 91311
Director Glenn Linderman 4,000 ***
2101 Robinson, #1
Redondo Beach, CA
90278
Officer Mohammad Tabassi 25,513 1.5%
19442 Romar St.
Northridge, CA 91324
Officer Robert Shearin 1,500 ***
14164 Terra Bella Street
Arleta, CA 91331
All directors and 904,776 54.0%
officers as a group
(6 persons)
Other Moldovita Church 90,909(5) 5.4%
c/o 73095 Shadow Mt.
Dr.
Palm Desert, CA 92260
- ----------------------
<FN>
*** Represents less than 1% of the outstanding Common Stock.
(1) Ileana Wachtel is the wife of David Wachtel, the CEO of the Company.
(2) For Ileana Wachtel, approximately 156,076 shares and for Rodica Patrichi,
approximately 166,076 shares are being held in the Mihai D. Patrichi trust
(a total of 790,383 shares) which currently has voting power over the
holdings and in which Ileana Wachtel and Rodica Patrichi are co-trustees.
(3) Includes shares of Common Stock held by the Mihai D. Patrichi Trust and
controlled by trustees including Mr. Wachtel's spouse, Ileana Wachtel, a
beneficiary.
(4) Based on 1,673,888 shares of Common Stock outstanding as of August 30, 1999,
including 3,000 exercisable stock options.
(5) Rodica Patrichi is a co-trustee along with an unrelated party of a trust
that has voting power over these shares.
</FN>
</TABLE>
As of July 31, 1999, there were no required filings under Section 16 of the
Exchange Act of 1934 with respect to changes in beneficial ownership of the
Common Stock occurring during or subsequent to the year ended June 30, 1999,
which have not been reported on Forms 3, 4, or 5, respectively.
Page 29
<PAGE>
<TABLE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
<CAPTION>
The Company's Common Stock is quoted on the OTC Bulletin Board. The
following table sets forth the high and low bid quotations of the Common Stock
as reported on the OTC Bulletin Board for the periods listed.
<S> <C> <C> <C>
Year Ended December 31, 1997
First Quarter......................................... $1 3/8 $ 7/8
Second Quarter........................................ 1 3/8
Third Quarter......................................... 7/8 3/8
Fourth Quarter........................................ 1 5/16 5/8
Year Ending December 31, 1998
First Quarter......................................... $11/16 5/8
Second Quarter ....................................... 1 5/16 1
Third Quarter......................................... 2 9/16 1 1/8
Fourth Quarter........................................ 3 7/8 2 1/16
Year Ending December 31, 1999
First Quarter......................................... $8 1/4 $ 3 3/8
Second Quarter ....................................... 8 3
Third Quarter (as of August 13, 1999)................. 8 1/2 4 1/4
</TABLE>
The quotations above reflect inter-dealer prices, without mark-up, mark-down
or commission and may not necessarily represent actual transactions.
Shareholders are urged to obtain current market quotations for the Common Stock.
Networks Electronic Corp. stock was formerly listed on NASDAQ, the
over-the-counter market, as NWRK. As of May 7, 1993, the stock has been quoted
on the OTC electronic bulletin board. On July 27, 1998, the day prior to the
Company's announcement of the execution of the Merger Agreement, the Company's
closing bid quotation on the OTC Bulletin Board was $7 1/16.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed by the Company can be inspected and copied at the Commission's
Public Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C.,
20549 and at the Commission's regional offices at Suite 1400, Citicorp Center,
5600 West Madison Street, Chicago, Illinois 60661 and Suite 1300, Seven World
Trade Center, New York, New York 10048. Copies of such materials can be obtained
from the Commission at prescribed rates from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission (such as the Company) at
This Information Statement includes information required to be disclosed
pursuant to Rule 14c-2 under the Exchange Act.
Page 30
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL INFORMATION
PAGE
<S> <C>
Report of Independent Certified Public Accountant ............................15
Balance Sheets - Assets ......................................................16
Balance Sheets - Liabilities and Stockholders' Equity (Deficiency in Assets)..16
Statements of Operations .....................................................17
Statement of Stockholders' Equity (Deficiency in Assets) .....................18
Statements of Cash Flows .....................................................19
Notes to the Financial Statements ............................................20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I have audited the accompanying balance sheets of Networks Electronic
Corp. as of June 30, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficiency in assets) and cash flows for each of the three
years in the period ended June 30, 1998. My audits also included the financial
statement schedule listed in the Index at Item 14. These financial statements
and financial statement schedule are the responsibility of the Corporation's
management. My responsibility is to express an opinion on these financial
statements and financial statement schedule based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, such financial statements referred to above present
fairly, in all material respects, the financial position of Networks Electronic
Corp. as of June 30, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles. Also, in my opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
HURLEY & COMPANY
August 28, 1998
Granada Hills, California
F-2
<PAGE>
<TABLE>
NETWORKS ELECTRONIC CORP.
BALANCE SHEETS
ASSETS
<CAPTION>
MARCH 31, JUNE 30,
----------- ---------------------------
1999 1998 1997
----------- ------------ ------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents ............................................. $ 476,751 $ 338,666 $ 185,144
---------- ------------ ------------
---------- ------------ ------------
Receivables:...........................................................
Trade accounts receivable ........................................... 1,142,439 1,308,501 712,709
Less allowance for doubtful accounts ................................ - 5,000 5,000
---------- ------------ ------------
---------- ------------ ------------
1,303,501 707,709
---------- ------------ ------------
---------- ------------ ------------
Other receivables ..................................................... 6,563 7,787 79,354
Due from officer 3,669 15,093 -
Inventories, less reserve for obsolescence of $375,000 and $180,000, 2
respectively ........................................................ 1,529,348 1,432,781 1,189,80
Prepaid expenses and deposits ......................................... 58,936 30,576 39,832
Deferred income taxes, current portion ................................ 50,000 65,000 24,000
---------- ------------ ------------
Total current assets ........................................... 3,267,706 3,193,404 2,225,841
---------- ------------ ------------
PROPERTY AND EQUIPMENT, AT COST:
Land and improvements ................................................. 146,664 146,664 131,773
Buildings and improvements ............................................ 3,705,944 3,698,588 3,438,250
Machinery and equipment ............................................... 4.512,773 4,418,639 4,367,555
---------- ------------ ------------
8,365,381 8,263,891 7,937,578
Less accumulated depreciation ......................................... 5,966,145 5,854,878 5,723,480
---------- ------------ ------------
Property and equipment, net............................................ 2,399,236 2,409,013 2,214,098
---------- ------------ ------------
DEFERRED INCOME TAXES, NON-CURRENT PORTION ............................... 11,701 16,701 119,571
DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $29,444 AND $7,495, 2
RESPECTIVELY ........................................................ 72,239 61,387 81,15
========== ============ ============
$ 5,750,882 $ 5,680,505 $ 4,640,662
========== ============ ============
LIABILITIES AND STOCKHOLDERS EQUITY/(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt................. $ 157,000 $ 492,000 $ 220,000
Note payable, related party - current portion......................... - 100,000 100,000
Accounts payable...................................................... 215,430 291,619 479,384
Customer advances and deposits........................................ - 238,318 2,834
Current portion of pre-petition debt:
Adjudication award payable.......................................... - - 41,951
Accrued pension liability........................................... 167,304 152,157 279,079
Other payables...................................................... - 6,689 29,997
Other accrued expenses................................................ 220,281 213,419 190,262
Income taxes payable.................................................. 82,455 232,295 -
------------ ------------ ------------
Total current liabilities...................................... 842,470 1,726,497 1,343,507
------------ ------------ ------------
LONG-TERM DEBT:
Long-term debt, less current maturities............................... 2,781,712 2,829,329 3,042,193
Long-term portion of accrued pension liability........................ 41,387 179,633 366,209
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 12 AND 15).......................... - - -
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
Common stock - par value $.25 per share; authorized 10,000,000 shares, 418,472
issued and outstanding 1,671,221 shares............................. 417,805 417,805
Additional paid-in capital............................................ 285,327 280,985 280,985
Stock options exercisable............................................. 4,625 6,750 -
Retained earnings (accumulated deficit)............................... 1,705,081 567,698 (412,111)
Stock subscriptions receivable........................................ - - (14,063)
Pension liability adjustment.......................................... (328,192) (328,192) (383,863)
------------ ------------ ------------
Total stockholders' equity (deficiency in assets).............. 2,085,313 945,046 (111,247)
============ ============ ============
$ 5,750,882 $ 5,680,505 $ 4,640,662
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
NETWORKS ELECTRONIC CORP.
STATEMENTS OF OPERATIONS
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED JUNE 30,
----------------- -------------------------------------
MARCH 31, 1999 1998 1997 1996
----------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET SALES......................................... $6,065,880 $ 6,000,054 $ 4,009,719 $ 3,932,925
COST OF SALES..................................... 3,626,229 4,098,050 2,980,518 3,189,521
------------ ------------ ----------- -----------
GROSS PROFIT................................... 2,439,651 1,902,004 1,029,201 743,404
SELLING, ADMINISTRATIVE AND OTHER................. 528,829 575,749 794,202 568,560
------------ ------------ ----------- -----------
OPERATING INCOME............................... 1,910,822 1,326,255 234,999 174,844
------------ ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense............................... (156,432) (264,327) (225,023) (229,291)
Loss on disposition of assets.................. - - - (7,273)
CRA debt forgiveness........................... - - 161,875 33,125
Vendor debt forgiveness........................ - 19,551 40,296 -
Rental income, net............................. 139,093 181,920 57,583 -
Other, net..................................... - 14,426 13,386 58,489
------------ ------------ ----------- -----------
(48,430) 48,117 (144,950)
------------ ------------ ----------- -----------
INCOME BEFORE INCOME TAX PROVISION (BENEFIT)... 1,893,483 1,277,825 283,116 29,894
INCOME TAX PROVISION (BENEFIT).................... 756,100 298,016 121,493 (690)
============ ============ =========== ===========
NET INCOME..................................... 1,137,383 $ 979,809 $ 161,623 $ 30,584
============ ============ =========== ===========
NET INCOME PER SHARE - BASIC...................... .68 $ .59 $ .10 $ .02
============ ============ =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC...... 1,672,367 1,671,221 1,671,221 1,647,515
============ ============ =========== ===========
NET INCOME PER SHARE - DILUTED.................... .68 $ .59 $ .10 $ .02
============ ============ =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED.... $1,677,310 1,672,399 1,671,848 1,648,284
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
NETWORKS ELECTRONIC CORP.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
<CAPTION>
RETAINED
COMMON COMMON ADDITIONAL STOCK STOCK EARNINGS/
STOCK STOCK PAID-IN OPTIONS SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT CAPITAL EXERCISABLE RECEIVABLE DEFICIT
------------ ------------- ------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July l, 1995................ 1,596,221 $ 399,055 $ 285,672 $ - $ - $ (604,318)
Net income....................... - - - - - 30,584
Stock options exercised.......... 75,000 18,750 (4,687) - (14,063) -
Pension liability adjustment..... - - - - - -
------------ ------------- ------------ ------------- --------------- ---------------
Balance, June 30, 1996............... 1,671,221 417,805 280,985 - (14,063) (573,734)
Net income....................... - - - - - 161,623
Pension liability adjustment..... - - - - - -
------------ ------------- ------------ ------------- --------------- ---------------
Balance, June 30, 1997............... 1,671,221 417,805 280,985 - (14,063) (412,111)
Net Income....................... - - - - - 979,809
Stock options Issued............. - - - 6,750 - -
Reclass stock Subscription
Receivable to Current Asset... - - - - 14,063 -
Pension liability Adjustment..... - - - - - -
------------ ------------- ------------ ------------- --------------- ---------------
Balance, June 30, 1998............... 1,671,221 $ 417,805 $ 280,985 $ 6,750 $ - $ 567,698
============ ============= ============ ============= =============== ===============
ADJUSTMENTS
TO EQUITY TOTAL
-------------- ------------
Balance, July l, 1995................$ (I12,671 ) $ (32,262)
Net income....................... - 30,584
Stock options exercised.......... - -
Pension liability adjustment..... (240,732) (240,732)
-------------- ------------
Balance, June 30, 1996............... (353,403) (242,410)
Net income....................... - 161,623
Pension liability adjustment..... (30,460) (30,460)
-------------- ------------
Balance, June 30, 1997............... (383,863) (111,247)
Net Income....................... - 979,809
Stock options Issued............. - 6,750
Reclass stock Subscription
Receivable to Current Asset... - 14,063
Pension liability Adjustment..... 55,671 55,671
-------------- ------------
Balance, June 30, 1998...............$ (328,192 ) $ 945,046
============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
NETWORKS ELECTRONIC CORP.
STATEMENTS OF CASH FLOWS
<CAPTION>
NINE MONTHS
ENDED YEARS ENDED JUNE 30,
------------- --------------------------------------
MARCH 31,
1999 1998 1997 1996
------------- ----------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income....................................... $ 1,137,383 $ 979,809 $ 161,623 $ 30,584
------------- ----------- ------------- -----------
Adjustments to reconcile net income to net
cash provided by operations:
Noncash items included in net income:
Depreciation and amortization................. 125,792 153,347 126,221 130,307
Deferred income taxes......................... 20,000 61,870 120,693 (862)
Loss on disposition of assets................. - - - 7,273
Changes in
Accounts receivable and refundable Income 173,710
taxes......................................... (525,255) 34,096 (14,760)
Inventories................................... (96,567) (242,979) (146,546) 18,690
Prepaid expenses and deposits................. (28,360) 9,256 (20,255) (11,537)
Deferred charges.............................. (25,377) (2,184) (88,647) -
Accounts payable and accrued expenses......... (76,016) (487,694) (77,455) 119,508
Income taxes payable.......................... (149,840) 232,295 - (6,276)
Customer advances and deposits................ (238,318) 235,484 2,834 (11,585)
----------- ------------- -----------
TOTAL ADJUSTMENTS.......................... (418,075) (565,860) (49,059) 230,758
------------- ----------- ------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.. 719,308 413,949 112,564 261,342
------------- ----------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................. (101,490) (326,313) (1,261,318) (318,602)
Proceeds from disposition of assets.............. - - - 64,627
------------- ----------- ------------- -----------
NET CASH USED IN INVESTING ACTIVITIES...... (101,490) (326,313) (1,261,318) (253,975)
------------- ----------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage debt reduction.......................... (1,582,528) (120,000) (120,000) (143,125)
Other payments of long-term debt................. (350,089) (141,488) (19,661) -
Proceeds from long-term borrowings............... 1,550,000 320,624 1,354,667 168,045
Proceeds from notes payable, related parties..... - - 122,000 -
Payments on notes payable, related parties....... (100,000) - (102,222) (50,667)
Stock options issued............................. - 6,750 - -
------------- ----------- ------------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (479,733) 65,886 1,234,784 (25,747)
------------- ----------- ------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 138,085 153,522 86,030 (18,380)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 338,666 185,144 99,114 117,494
------------- ----------- ------------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 476,751 $ 338,666 $ 185,144 $ 99,114
============= =========== ============= ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In the fiscal year ended June 30, 1998, a stock subscription receivable
in the amount of $14,063 that was subsequently collected was reclassified as a
current asset.
In the fiscal year ended June 30, 1998, the Company reduced its
additional minimum pension liability in the amount of $55,671 by increasing
stockholders' equity for the same amount.
In the fiscal year ended June 30, 1997, the Company entered into
capital leases for telephone and office equipment. Total assets and related
lease obligations pertaining to these transactions amounted to $36,951.
In the fiscal year ended June 30, 1997, the Company recognized an
additional minimum pension liability in the amount of $30,460 by increasing
stockholders' deficiency in assets for the same amount.
F-6
<PAGE>
In the fiscal year ended June 30, 1996, the Company recognized an
additional minimum pension liability in the amount of $240,732 by increasing
stockholders' deficiency in assets for the same amount.
NETWORKS ELECTRONIC CORP.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and
highly liquid debt instruments with original maturities of three months or less.
Substantially all cash is on deposit with one financial institution.
PROPERTY AND EQUIPMENT
Depreciation is computed by using the declining-balance and
straight-line methods over the estimated service lives of the assets which range
from three years for tooling to forty years for the building. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is recognized in
income for the period. The cost of maintenance and repairs is charged to income
as incurred; significant renewals and improvements are capitalized. Deduction is
made for retirements resulting from renewals or improvements.
INCOME TAXES
Deferred income taxes are provided for the estimated tax effects of
timing differences between financial and taxable income with respect to
depreciation, pension costs, California franchise tax, reserve for inventory
obsolescence, capitalized inventory costs, net operating loss carryforwards
(when applicable), and other items.
DEFERRED CHARGES
The Company recognizes as deferred charges certain loan fees and lease
costs, which are being amortized over periods ranging from approximately two to
five years.
PENSION PLAN
The Company funds accrued pension costs on its noncontributory pension
plan covering substantially all employees. Unrecognized prior service cost,
previously amortized over thirty years, was expensed in the year ended June 30,
1993, due to the fact that participants' accrued benefits under the plan were
frozen as of August 31, 1992. (See Note 9).
REVENUE RECOGNITION
The Company recognizes sales revenue when parts are shipped to
customers.
EARNINGS PER SHARE
In the quarter ended December 31, 1997, the Company adopted SFAS No.
128, "Earnings Per Share," for all periods presented. This standard specifies
the computation, presentation, and disclosure requirements for earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted earnings per share
calculations reflect the assumed exercise and conversion of employee stock
options.
F-7
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed in the period
incurred. Research and development expense amounted to $50,874, $6,207, and
$97,009 during the years ended June 30, 1998, 1997, and 1996, respectively.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified to conform to
the current year's presentation.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
Fair value estimates are made at a specific point in time and are based
on relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of judgment,
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect the estimates. Since the fair value is
estimated at June 30, 1998, the amounts that will actually be realized or paid
at settlement of the instruments could be significantly different.
The carrying amount of cash and cash equivalents is assumed to be the
fair value because of the liquidity of these instruments. Accounts receivable,
accounts payable, and accrued expenses approximate fair value because of the
short maturity of these instruments. The recorded balances of notes payable and
long-term debt (with the exception of the Company's non-interest bearing CRA
loan) are assumed to be the fair value since the rates specified in the notes
approximate current borrowing rates available for financing with similar terms
and maturities.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in June
1997 which established standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
In addition to net income, comprehensive income includes all changes in equity
during a period, except those resulting from investments by and distributions to
owners. The Company will adopt SFAS 130, which is effective for fiscal years
beginning after December 15, 1997, in the first quarter of the year ending June
30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" that establishes standards for
reporting information about operating segments in annual and interim financial
statements. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS 131 in the first quarter of the year ending June 30, 1999. Reporting
and disclosures under SFAS 131 are not expected to be materially different than
present disclosures.
F-8
<PAGE>
SFAS No. 132 "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" was issued in February 1998 and standardizes
disclosure requirements for pension and other post-retirement benefit plans to
the extent practicable. Adoption of this standard for fiscal years beginning
after December 15, 1997, and restatement of prior period comparative disclosures
is required. The Company will adopt SFAS 132 in the fiscal year ending June 30,
1999.
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited portion of
the condensed financial statements contain all adjustments necessary to present
fairly its financial position and the results of its operations and cash flows
for the periods shown.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The results of operations for the respective nine month period is not
necessarily indicative of the results to be expected for a full year of
operations.
2. INVENTORIES
Inventories are valued as the lower of cost (FIFO) or market. The
inventories at March 31, 1999 and June 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Raw materials............................ $166,410 $ 132,287 $ 93,843
Work in process.......................... 938,750 629,592 523,711
Finished goods and components............ 881,688 1,045,902 752,248
------------ ----------- ----------
1,986,848 1,807,781 1,369,802
Less reserve for obsolescence............ (457,500) (375,000) (180,000)
============ =========== ==========
$1,529,348 $ 1,432,781 $1,189,802
============ =========== ==========
</TABLE>
3. DEFERRED CHARGES
Deferred charges consist of costs associated with the lease of space at
the Company's facility in Chatsworth (See Note 16 below) in the amount of
$78,647, loan fees of $10,000 pertaining to additional financing obtained in
March 1997, plus an additional $2,184 in loan fees paid in March 1998.
Amortization expense related to these costs amounted to $21,949 and $7,495 for
the years ended June 30, 1998 and 1997, respectively.
4. LONG-TERM DEBT, NOTES PAYABLE
At March 31, 1999, June 30, 1998 and June 30, 1997, the Company's long-term
debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
---------------------------------
1999 1998 1997
----------------- -------------- ----------------
<S> <C> <C> <C>
Note payable to bank, secured by first deed of trust
on land and building, payable in monthly installments
of $14,167 including interest at an annual
rate of 7.27%. Matures in February 2014............. 1,544,553 - -
Note payable to bank, secured by first deed of trust
on land and building, principal payable in monthly
installments of $10,000 through June 2000, with
interest payable monthly at a reference rate plus
2.25% (10.75% at both June 30, 1998 and June 30,
1997, respectively). A balloon payment for
$1,342,528 is due in June 2000 (See Notes 5 and 17).. - $ 1,582,528 $ 1,702,528
F-9
<PAGE>
Note payable to Community Redevelopment Agency, City
of Los Angeles ("CRA"),non-interest bearing
construction loan, secured by second deed of trust
on land and building, no principal payments required
through August 2001, with level monthly principal
payments of $4,604 applicable over the remaining 20
years through August 2021............................ 1,105,000 1,105,000 1,105,000
Notes payable to lessee, secured by assignment of
rents, principal payable in monthly installments
totaling $7,663 through March 2002, with interest
payable monthly at annual rates ranging from 7.0% to
10.0% (blended rate 8.88% at June 30, 1998).......... 275,872 344,840 185,635
Note payable to financial institution, secured by
machinery and equipment, principal payable in
monthly installments of $5,667 along with interest
at a reference rate plus 2.75% (11.25% at both June
30, 1998 and June 30, 1997, respectively) through
March 1999, with a balloon payment for the balance
also due in March 1999. A 7.5% prepayment penalty
applies on the outstanding balance if this loan is
refinanced prior to maturity......................... - 268,500 237,500
Note payable to finance company, secured by
telephone equipment, payable in monthly installments
of $656 including interest at an annual rate of
approximately 17.3%. Matures in October 1999......... 3,616 8,259 14,453
Note payable to vendor, secured by office equipment,
payable in monthly installments of $395 including
interest at an annual rate of approximately 12.4%.
Matures in December 2001............................. 9,671 12,202 17,077
----------------- -------------- ----------------
2,938,712 3,321,329 3,262,193
Less current maturities.............................. 157,000 492,000 220,000
----------------- -------------- ----------------
$ 2,781,712 $ 2,829,329 $ 3,042,193
================= ============== ================
</TABLE>
Maturities of long-term debt in each of the next five years are as
follows:
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C> <C>
1999.................... $ 492,000
2000.................... 1,561,000
2001.................... 95,000
2002.................... 115,000
2003.................... 55,000
Thereafter.............. 1,003,329
------------
$ 3,321,329
============
</TABLE>
In February 1999 the Company received a Real Estate Secured Loan (the
"Term Loan") and a Revolving Line of Credit (the "Revolver") from City
National Bank. The Term Loan for approximately $1,550,000, covered the
amount owed under the existing first trust deed, secured with Wells
Fargo Bank (See Note 3 above) and is secured by a first trust deed on
the Chatsworth facility. The loan is fully amortized over 15 years and
is set at an effective annual interest rate of 2.50% over the rate
applicable on Ten Year Treasury Notes at the time of the execution of
the loan documents (approximately 7.27%), with monthly installments of
principal and interest approximating $14,167 and commencing March 1,
1999. The Revolver allows for advances not to exceed the lesser of
$1,250,000 or 80% of eligible accounts receivable, and is secured by a
senior lien and perfected security interest on all personal property of
the Company. The principal matures on approximately February 1, 2000,
with interest payable monthly at a variable annual interest rate
equivalent to a bank reference rate plus 1.50% (currently 10.00%).
Various financial covenants pertaining to a minimum level of working
capital, net worth, etc. apply.
In March 1999 the Company repaid in full its outstanding loan
obligation with a financial institution in the amount of $224,898,
including $223,167 in principal and $2,231 in accrued interest, less a
$500 deposit. The funds for the pay-off were provided by operations.
F-10
<PAGE>
5. CREDIT AGREEMENTS
The Company reached an agreement with its bank, as confirmed by the
Company's plan for reorganization entered into on November 9, 1994. Terms of the
agreement include the payment of interest at the bank's reference rate plus
2.25% (currently 10.75%), $10,000 per month principal payments until maturity,
and a balloon payment of $1,342,528 in June 2000. Additionally, in the event of
default, the entire outstanding principal balance of the note will become
immediately due and payable and will bear interest equal to 4 percentage points
above the applicable interest rate as defined above. The Company is currently in
the process of refinancing this debt (See Note 17).
The Los Angeles City Council approved the funding of $1,300,000 through
the Community Redevelopment Agency for the retrofit and repair of the Company's
Chatsworth building (damaged as a result of the Northridge Earthquake in January
1994) and the remodeling of the north building site, 35,000 square feet of which
were subsequently leased to a tenant beginning March 1997 (See Note 17 below).
Of the total $1,300,000 commitment, 15% ($195,000) is a grant and 85%
($1,105,000) is an interest-free loan to be repaid over 20 years, beginning 5
years from the effective date of the loan, which was August 26, 1996. At June
30, 1996, $220,833 was expended, resulting in the recognition of $33,125 (15%)
as forgiveness of debt income, and the balance of $187,708 as long-term debt.
The remainder of the commitment was disbursed during the year ended June 30,
1997; accordingly, an additional $161,875 was recorded as forgiveness of debt
income.
The Company's average aggregate borrowings were $3,425,000, $2,708,000,
and $2,047,000, at weighted average interest rates of 7.7%, 8.2%, and 10.7% in
1998, 1997, and 1996, respectively. The average aggregate borrowings and
weighted average interest rate computations include notes payable to related
parties during these years. Interest paid amounted to $263,689, $231,536, and
$225,301 during the fiscal years ended June 30, 1998, 1997, and 1996,
respectively.
6. NOTES PAYABLE, RELATED PARTIES
(a) In January 1995, the Company received a $152,000 loan from the
estate of its former president and chief executive officer, secured by specific
machinery and equipment. The loan was being repaid in equal monthly principal
installments of $4,222 (plus interest at 10%) over a three year period. A loan
fee of $2,000 was charged to consummate the transaction. The outstanding loan
balance at June 30, 1996 was $80,222, of which $50,667 was the current portion.
In March 1997, the Company obtained other financing and paid off the remaining
principal balance of $42,222. Interest expense on this note during the years
ended June 30, 1997 and 1996 was $4,296 and $8,391, respectively.
(b) In August 1996 the Company's vice president loaned the Company
$100,000 at an annual interest rate of 13%, secured by the Company's accounts
receivable. The loan maturity date was subsequently extended through December
1998, with interest payable monthly. On October 30, 1998 the Company fully paid
back this officer loan along with accrued interest of $1,104. Interest expense
on this loan during the nine months ended March 31, 1999 and 1998 amounted to
$4,381 and $9,757, respectively.
(c) In September 1996, a Director advanced the Company $22,000 for a
fee of $200. The money was repaid by the Company in October 1996.
7. STOCK OPTION PLAN
The Company's Board of Directors adopted the Networks Electronic Corp.
1996 Stock Incentive Plan (the "1996 Plan"), providing for the grant of up to
100,000 shares of the Company's common stock to directors, officers, employees
and consultants of the Company. The 1996 Plan was submitted to and approved by
the shareholders of the Company at the Annual Meeting of Shareholders held on
December 13, 1996. Under the 1996 Plan, 9,000 options have been issued to
officers and other key employees at the Company. These options were issued at
market ($1.58) on November 21, 1997, and have been valued at approximately
$6,750 under the Black-Scholes pricing model. They become exercisable on a
quarterly pro-rata basis over a three-year period and have an expiration date
for exercise of November 21, 2002.
F-11
<PAGE>
The Company also has a qualified stock option plan, as amended October
15, 1974, under which options to purchase up to an aggregate of 185,200 shares
of the Company's common stock may be granted to key employees at a price not
less than the fair market value at the date of grant. Options issued under this
plan will expire unless exercised within five years of the grant date. During
the year ended June 30, 1993, the Company issued 20,000 stock options (10,000
each) under this plan to an officer and director, exercisable at a price of
$1.00 per share. These stock options have since expired due to the officer's
cessation of employment and the director's resignation from the board.
During the year ended June 30, 1995, the Company's Board of Directors
awarded 75,000 fully-vested stock options to its chief executive officer,
exercisable at a price of $. 1875 per share, and 2,500 additional stock options
(500 each) to five other key employees, exercisable at a price of $.25 per
share. The exercise price, in each instance, corresponded to the mid-point of
the closing bid and ask price of the Company's common stock on the date of
grant, which was November I, 1994 for the chief executive officer's options and
March 31, 1995 for the other key employees' options.
The chief executive officer exercised his 75,000 options during the
year ended June 30, 1996; accordingly, the Company recorded a stock subscription
receivable for $14,063. During the year ended June 30, 1998, the Company
reclassified the receivable to a current asset, as the receivable was collected
in July 1998. A total of 1,500 stock options awarded to three of the five key
employees expired due to cessation of employment; the remaining 1,000 stock
options issued (to two officers) became fully vested on March 31, 1998 and were
subsequently exercised in August 1998. All of these non-qualified stock options
were issued outside of the existing stock option plan. Currently, no other
options are outstanding nor have any been previously granted.
8. INCOME TAXES
Income taxes (benefits) consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Federal income tax (benefit)......................... $ 184,192 $ 93,413 $ (1,490)
California franchise tax............................. 113,824 28,080 800
----------- ----------- ------------
$ 298,016 $ 121,493 $ (690)
=========== =========== ============
Current.............................................. $ 236,146 $ 800 $ 172
Deferred............................................. 61,870 120,693 (862)
----------- ----------- ------------
$ 298,016 $ 121,493 $ (690)
=========== =========== ============
</TABLE>
The differences between the effective income tax rate and the statutory
federal income tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Computed statutory federal income tax................ $ 434,460 $ 93,665 $ 4,484
Increases (decreases) resulting from:
California franchise tax, net of federal tax
benefit......................................... 75,124 18,533 1,391
Tax credits....................................... (3,862) - (12,104)
Rate differential due to expected utilization of
federal NOL carryforward to future year at
higher effective tax rate....................... - 2,594 5,680
Valuation allowance, due to unlikelihood of
future realization of deferred tax benefit...... (210,000) - 10,000
Other............................................. 2,294 6,701 (10,141)
------------ ----------- ------------
Income tax provision (benefit)....................... $ 298,016$ 121,493 $ (690)
============ =========== ============
</TABLE>
F-12
<PAGE>
Net income taxes paid amounted to $800, $800, and $9,500 during the
fiscal years ended June 30, 1998, 1997, and 1996, respectively. The Company's
current income tax provision (benefit) is based on current year taxable income
(loss). The deferred income tax provision (benefit) is based on the temporary
differences between the book basis and tax basis of assets and liabilities at
the end of each year and the expected reversal of those differences. The
deferred tax provision (benefit) in 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
------------ ------------ ------------
Change in temporary difference:
<S> <C> <C> <C>
Depreciation..................................... $ 3,448 $ 2,606 $ (2,901)
Inventory obsolescence........................... (82,710) (8,660) (4,330)
Pension plan..................................... 47,919 134,300 (1,521)
Litigation....................................... (2,619) 6,109 19,253
Other............................................ 35 2,525 (44)
Accrued vacation and sick leave.................. (3,051) (8,002) (3,511)
Uniform capitalization........................... 1,753 1,298 4,327
Alternative minimum tax credits.................. - - 628
Other tax credits................................ 53,524 (3,000) (12,104)
California franchise tax......................... (38,429) (9,275) 382
Utilization of federal and California NOL
carryforwards................................... 292,000 2,792 -
Benefit of federal and California NOL
carryforwards................................... - - (11,041)
Valuation allowance, due to estimate of future
realization..................................... (210,000) - 10,000
------------ ------------ ------------
Deferred income tax provision (benefit)............. $ 61,870 $ 120,693 $ (862)
============ ============ ============
</TABLE>
During the fiscal year ended June 30, 1998, the Company fully utilized
the tax benefits (approximately $292,000) of its federal and California net
operating loss (NOL) carryforwards in the amounts of approximately $636,000 and
$817,000, respectively. The Company also reversed a cumulative valuation
allowance of $210,000 due to the certainty of the NOL realization. Additionally,
the Company utilized the balance of its federal general business credit
carryover of approximately $29,000, its alternative minimum tax credit carryover
of approximately $5,000, as well as (effectively all of) its California tax
credit carryovers of approximately $20,000.
Significant components of the Company's deferred tax liabilities
and assets at June 30, 1998 and June
30, 1997 are:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
Liabilities
<S> <C> <C>
Depreciable property, plant and equipment................... $ 67,299 $ 63,851
Pension plan................................................ 60,558 12,639
California franchise tax.................................... 2,432 40,861
Litigation.................................................. - 2,619
------------- -------------
Gross deferred tax liabilities.............................. 130,289 119,970
------------- -------------
Assets
Inventory................................................... 173,372 92,415
Accounts receivable......................................... 2,142 2,165
Other employee benefits..................................... 35,767 32,728
Alternative minimum tax credits............................. 709 5,648
Other tax credits........................................... - 48,585
NOL carryforwards........................................... - 292,000
------------- -------------
Gross deferred tax assets................................... 211,990 473,541
------------- -------------
Deferred income tax asset................................... 81,701 353,571
Valuation allowance......................................... - (210,000)
------------- -------------
Deferred income tax asset-- net............................. $ 81,701 $ 143,571
============= =============
</TABLE>
F-13
<PAGE>
The respective deferred tax benefits at the June 30, 1998 and June 30,
1997 balance sheet dates are presented as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Current portion................................................ $ 65,000 $ 24,000
Non-current portion............................................ 16,701 119,571
------------ -------------
Total................................................. $ 81,701 $ 143,571
============ =============
</TABLE>
9. EMPLOYEE RETIREMENT PLAN
The Company has a defined benefit pension plan covering substantially
all of its employees. The plan has been modified through amendment, with all
participants' accrued benefits frozen as of August 31, 1992. The freeze was
necessitated primarily as a means of reducing annual pension funding
requirements.
Pension expense was $39,987, $41,380, and $32,311 for the years ended
June 30, 1998, 1997, and 1996, respectively, and was determined in accordance
with the requirements of Statement of Financial Accounting Standards (SFAS) No.
87 "Employers' Accounting for Pension Plans."
Periodic pension costs for the years ended June 30, 1998, 1997, and
1996 are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ --------------
<S> <C> <C> <C>
Service cost........................................ $ - $ - $ -
Interest cost....................................... 189,233 191,664 193,558
Actual return on plan assets........................ (231,859) (144,607) (116,942)
Net amortization and deferral....................... 82.613 (5,677) (44,305)
------------ ------------ -------------
Total pension expense...................... $ 39,987 $ 41,380 $ 32,311
============ ============ =============
</TABLE>
The status of the plan is as follows:
<TABLE>
<CAPTION>
1998 1997
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits............................................ $ (2,404,153) $ (2,420,450)
Nonvested benefits......................................... (20,563) (25,403)
------------- --------------
Accumulated benefit obligation............................. (2,424,716) (2,445,853)
Effect of future salary increases.......................... - -
------------- -------------
Projected benefit obligation............................... (2,424,716) (2,445,853)
Fair value of plan assets.................................. 2,092,926 1,800,565
------------- -------------
Projected benefit obligation in excess of fair value of
plan assets................................................ (331,790) (645,288)
Unrecognized net loss...................................... 328,192 383,863
------------- -------------
Accrued pension cost....................................... (3,598) (261,425)
Minimum pension adjustment................................. (328,192) (383,863)
------------- -------------
Accrued pension liability.................................. (331,790) (645,288)
Less current portion....................................... (152,157) (279,079)
------------- -------------
Long-term portion.......................................... $ (179,633) $ (366,209)
============= =============
</TABLE>
A minimum pension liability equal to the excess of the accumulated
benefit obligation over the fair value of plan assets and liabilities already
accrued was reflected in the balance sheets at June 30, 1998 and 1997 through
the recording of an increase to stockholders' equity of $55,671 at June 30,
1998, and an increase to stockholders' deficiency in assets of $30,460 at June
30, 1997, respectively.
The expected long-term rate of return on plan assets was 9% for both
1998 and 1997. The discount rate used in determining the actuarial present value
of accumulated benefit obligations was 8% for both 1998
F-14
<PAGE>
and 1997. There was no rate of increase in future compensation levels at both
June 30, 1998 and June 30, 1997 because of the plan curtailment.
Since the court confirmation of its Chapter 11 Reorganization Plan in
November 1994, the Company continues to make pension plan contributions in the
amount of $2,400 per month. In addition, a balloon payment of approximately
$262,000 was made in March 1998 to cover the following: (1) a funding deficiency
of approximately $123,000 carried over from the Plan year ended June 30, 1996,
(2) the balance of the minimum funding standard charges (including interest)
totaling approximately $79,000 for the Plan year ended June 30, 1997, and (3)
the second annual installment of approximately $60,000 due on approximately
$240,000 in plan contributions for the Plan year ended June 30, 1995. The 1995
plan contributions have been deferred and are currently being amortized over a
statutory five year period (beginning with the year ended June 30, 1996), as the
result of IRS granting the Company's request for waiver of the minimum funding
standard.
The total minimum funding requirement for the year ended June 30, 1998
is approximately $152,000, which includes an annual waiver installment (as noted
above) of approximately $60,000, and an additional $92,000 in minimum funding
standard charges for the current year. The Company currently has more than
sufficient liquidity to meet this obligation, which must be fully paid by March
15, 1999 to avoid an IRS, imposed 10% excise tax.
The Plan assets are held by Connecticut General Life Insurance Company
("CIGNA"), through a guaranteed group annuity contract (an immediate
participation guarantee) established in 1980. The contract stipulates that CIGNA
pay benefits and invest funds which have been contributed for the purpose of
providing retirement benefits to eligible participants in accordance with the
terms of the Networks Electronic Corporation Pension Plan.
10. BUSINESS SEGMENTS
The principal business of the Company is the design, fabrication,
assembly and sale of high technology assemblies for aerospace and defense prime
contractors. The Company operates two divisions: ( 1 ) US Bearing Division whose
products are spherical, self-aligned, self-lubricating and specialized bearings
used chiefly in the aircraft and space industries, and (2) Ordnance Division
whose products include miniaturized electro-pyrotechnic devices such as
switches, initiator-igniters for missile subsystems, thermal relay switches, and
glass-to-metal seals used solely for the defense and aerospace industries.
<TABLE>
<CAPTION>
INCOME CAPITAL
BEFORE XPENDITURE EPRECIATION
NCOME TAX
PROVISION
SALES* I(BENEFIT) ASSETS E S D
------------ ------------ ------------ ------------ ------------
Year ended June 30, 1998:
<S> <C> <C> <C> <C> <C>
Bearings............................... $ 3,337,949 $ 474,497 $ 3,433,794 $ 216,402 $ 78,832
Ordnance............................... 2,662,105 1,067,655 2,246,711 109,911 52,566
------------ ------------ ------------ ------------ ------------
$ 6,000,054 1,542,152 $ 5,680,505 $ 326,313 $ 131,398
============ ------------ ============ ============ ============
Interest expense.......................... 264,327
------------
$ 1,277,825
============
Year ended June 30, 1997:
Bearings............................... $ 2,086,521 $ 51,206 $ 2,891,596 $ 856,392 $ 80,080
Ordnance............................... 1,923,198 456,933 1,749,066 441,877 38,646
------------ ------------ ------------ ------------ ------------
$ 4,009,719 508,139 $ 4,640,662 $ 1,298,269 $ 118,726
============ ------------ ============ ============ ============
Interest expense.......................... 225,023
------------
$ 283,116
============
Year ended June 30, 1996:
Bearings............................... $ 2,383,133 $ 211,870 $ 1,984,455 $ 180,328 $ 100,269
Ordnance............................... 1,549,792 47,315 1,297,470 138,274 30,038
------------ ------------ ------------ ------------ ------------
$ 3,932,925 $ 259,185 $ 3,281,925 $ 318,602 $ 130,307
============ ------------ ============ ============ ============
Interest expense.......................... 229,291
------------
$ 29,894
============
F-15
<PAGE>
- ------------
<FN>
* All sales were made to unaffiliated customers and there were no inter-segment
sales.
</FN>
</TABLE>
11. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1996, the Company recorded
significant adjustments to its accounts, which resulted in reducing net income
by approximately $50,000. The adjustments were principally to correct the
Company's year-end inventory accounts.
12. EMPLOYMENT AGREEMENT, RELATED PARTY RECEIVABLE
The Company has an employment agreement effective May 1, 1998 with
David Wachtel, its President and Chief Executive Officer. The agreement provides
for an annual base salary of $175,000, payable through the close of business on
the later of April 30, 1999 or 180 days following delivery of written notice of
the Company's intent to terminate the agreement. Mr. Wachtel's prior employment
contract expired April 30, 1998, and called for minimum annual compensation of
$150,000 for a period of three years. The Board of Directors has also agreed to
pay all medical and dental insurance premiums for the Company's corporate
officers, plus the deductible expense portions operative under the respective
plans.
During the year ended June 30, 1998, a stock subscription receivable
from the Company's President in the amount of $14,063 was reclassified as a
current asset. The receivable was collected in July 1998. The total receivable
due from the officer at June 30, 1998 was $15,093, including $1,030 in personal
expenses.
During the year ended June 30, 1996, the Company's outstanding advances
totaling $27,228 previously made to Mihai D. Patrichi, the Company's Founder and
former President and Chief Executive Officer (who passed away in November 1994),
were repaid by the Mihai D. Patrichi Trust.
13. MAJOR CUSTOMERS
Sales to the Department of Defense accounted for approximately 15% of
sales in 1998, 14% of sales in 1997, and 20% of sales in 1996. Sales to
Eagle-Picher Industries accounted for approximately 16% and 11% of sales in 1998
and 1997, respectively. Sales to Textron Systems accounted for approximately 15%
of sales in 1998. Sales to Hughes Missile Systems accounted for approximately
13% of sales in 1996. No other customer had sales exceeding 10% of total revenue
during the years ended June 30, 1998, 1997, and 1996, respectively.
14. GAINS AND LOSSES ON DISPOSITIONS OF PROPERTY
During the year ended June 30, 1996, the Company sold fully depreciated
machinery for $13,500. In January 1996, the Company completed the sale of its
Florida condominium property, recognizing a loss of $20,773. The net proceeds
from the transaction were approximately $51,000. Of this amount, approximately
$22,500 was utilized to pay off the related mortgage debt, with the balance used
for general administrative purposes.
15. LITIGATION
The Company reached final settlement and pay-off of a judgment on a
wrongful discharge lawsuit. The agreed-upon payment of $52,525 was made in April
1998. Separately, the Company's insurance carrier provided a $47,000
reimbursement to the Company.
There were other wrongful discharge claims, but negotiated settlements
were reached. Networks agreed to settle these cases by making payments totaling
$40,000 over a period of one to three years. At June 30, 1998, there were no
unpaid balances remaining on these claims.
The Company, during its normal course of business, may be subjected
from time to time with legal proceedings against it. Both counsel and management
do not expect that the ultimate outcome of any current claims will have a
material adverse effect on the Company's financial statements.
F-16
<PAGE>
16. LEASE AGREEMENT
In March 1997, the Company ("Lessor") leased approximately 35,000
square feet of its Chatsworth facility. The lease agreement requires monthly
base rent at $17,850, with approximately 2 1/2 months free rent and a cost of
living increase every 18 months over the initial 62-month term of the lease.
Accordingly, the scheduled rent increase in September 1998 will incorporate a
cost of living increase of approximately 2.4%. The tenant also reimburses the
Company for pro-rata utilities, property taxes, and insurance. The lessee has an
option to extend the original lease term for an additional 60 months. Rental
income under this agreement, net of allocated depreciation and amortized
deferred lease costs, amounted to $181,920 and $57,583 for the years ended June
30, 1998 and June 30, 1997, respectively.
Additionally, the tenant reimbursed the Company $23,175 for costs
incurred in connection with negotiating the lease arrangement, contributed
$100,000 toward the Company's cost of constructing improvements to its
Chatsworth property, and agreed to loan the Company up to $288,000 at an annual
interest rate of 10% to fund additional improvements. At June 30, 1997,
approximately $185,635 of the available loan commitment had been utilized. The
remainder of the initial commitment was borrowed in September and November 1997.
In December 1997, the tenant loaned the Company an additional $130,000 at an
annual interest rate of 7% to fund roof repairs. At June 30, 1998, the
outstanding aggregate balance remaining on the loans was $344,840. The loans are
being amortized monthly over 5 years (requiring level principal payments
currently totaling $7,663), with the monthly payment netted against the lessee's
rent (See Note 4).
17. SUBSEQUENT EVENTS
(a) In July 1998, shipments approximating $238,000 were returned by an
Ordnance customer. The Company has recorded the customer payments received as
advance deposits which will be recognized as revenue as the order is re-shipped.
The returned parts have an inventory value of approximately $100,000 (net of an
$85,000 reserve) and are functional for other customer applications. The Company
has completed customer-requested modifications to the item and the testing
environment to ensure that future deliveries will be compatible with the
customer's system.
(b) In August 1998, the Company received approval from City National
Bank for a Real Estate Secured Loan (the "Term Loan") and a Revolving Line of
Credit (the "Revolver"). The Term Loan is approved for a maximum amount of
$1,550,000 or the amount owing under the existing first trust deed secured loan
with Wells Fargo Bank (See Notes 4 and 5 above), whichever is less, and is to be
secured by a first trust deed on the Chatsworth facility. The loan is to be
fully amortized over 15 years and is set at an effective annual interest rate of
2.50% over the rate applicable on Ten Year Treasury Notes at the time of the
execution of the loan documents (currently approximately 7.27%). The Term Loan
will not be assumable and a pre-payment penalty will apply. The Revolver allows
for advances not to exceed the lesser of $1,250,000 or 80% of eligible accounts
receivable, and is to be secured by a senior lien and perfected security
interest on all personal property of the Company. The principal will mature on
October I, 1999, with interest payable monthly at a variable annual interest
rate equivalent to a bank reference rate plus 1.50% (currently 10.00%). Various
financial covenants pertaining to a minimum level of working capital, net worth,
etc. will apply. It is anticipated that bank fees on these transactions will
approximate $35,000.
(c) In August 1998, the Community Development Commission of the County
of Los Angeles (the "CDC") approved a $650,000 business loan to the Company, the
proceeds of which are to be used to payoff the Company's unfunded pension
liability (See Note 9) and as a source of permanent working capital. The loan is
to be fully amortized over a five year (60 month) period at a fixed annual
interest rate of 7.50%. Monthly payments will approximate $13,025, with loan
fees totaling approximately $13,000. The loan is to be collateralized by a first
security interest in all equipment, and by a junior security interest in all
other assets. Additionally, the obligation is to be guaranteed by the Mihai D.
Patrichi Trust, and there is to be an assignment of life insurance in the amount
of $650,000 on the life of David Wachtel, the Company's chief executive officer.
The Company also agrees to attain certain employment goals in the 36 months
following the funding of the loan.
F-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Company net sales for the nine months ended March 31, 1999 increased
41% to $6,066,000 from $4,288,000 for the comparable period of the prior year.
Bearing Division sales, comprising approximately 51% of the current sales mix,
increased by 35% and Ordnance Division sales increased by 49%. Approximately
$238,000 of Ordnance Division revenue pertained to re-shipped parts which had
been previously paid-for and returned by a customer prior to June 30, 1998. For
the quarter ended March 31, 1999, net sales increased by approximately 32% from
the comparable period of the prior year.
The Company's backlog of orders increased by 29% when compared to the
same period a year earlier. At March 31, 1999 the backlog was approximately
$6,200,000 compared to $4,800,000 at March 31, 1998.
Gross profit margins during the nine months ended March 31, 1999
improved to 40.2% from 30.9% for the nine months ended March 31, 1998. For the
quarter ended March 31, 1999 gross profit margins improved to 37.7% from 31.7%
for the comparable quarter in the previous year. Management believes the margin
increases are attributable to both increased sales volume and operational
efficiencies brought about through overall organizational improvements. The
Bearing Division margins increased by approximately 11 percentage points from
the nine months ended March 31, 1998, while the Ordnance Division margins
increased by approximately 7 percentage points from the nine month period ended
March 31, 1998.
General and administrative expenses increased by 21% (approximately
$91,000) compared to the nine month period ended March 31, 1998, while for the
quarter ended March 31, 1999 general and administrative expenses increased by
11% when compared to the comparable quarter in the previous year. These
increases are due primarily to higher legal and professional fees associated
with a number of additional disclosures included in this year's Annual Form 10-K
and the engagement of an investment banking firm. The possibility of continued
sales growth in the months ahead, along with additional fees to be paid to the
investment banking firm (upon consummation of a business transaction) could
cause G & A expenses to continue to increase through the remainder of the
current fiscal year.
Consistent with the growth trend established by the Company, operating
income increased by more than $1,023,000 to $1,911,000, when compared with the
nine months ended March 31, 1998. For the quarter ending March 31, 1999
operating income increased by approximately $256,000 to $587,000 from the same
period in the previous year.
Non-operating income during the nine months ended March 31, 1999 was
comparable to the nine months ended March 31, i998 and should remain so for the
foreseeable future. The Company has leased (since March 1997) a portion of its
building to another enterprise, bringing in approximately $180,000 annually
($45,000 quarterly) in net rental income through at least March 2002 (the end of
the initial lease term).
Interest expense declined by about 16% as compared to the prior year's
nine month period ended March 31st, with average aggregate borrowing decreasing
by approximately 7%, primarily the result of the pay-off of a $100,000 officer
note in October 1998 and the pay-off of a $225,000 loan obligation with a
financial institution in March 1999. The effective annual interest rate was
approximately 7.01% and 7.76% during the nine months ended March 31, 1999 and
March 31, 1998 respectively. The interest rate decline was largely due to a
general 0.75% decrease in bank reference rates last fall. Management has
recently refinanced its building loan, thereby further reducing its expected
future borrowing rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 1999 was $2,425,000 compared
to $1,465,000 at June 30, 1998. The $960,000 improvement in working capital was
largely the result of net income earned in the nine months ended March 31, 1999
of $1,137,000, plus $126,000 in depreciation and amortization, less $101,000 in
capital expenditures, less the net reclassification of approximately $187,000 in
debt and pension obligations from long-term to short-term. The short-term
operating liquidity is expected to be enhanced by the current
F-18
<PAGE>
growth trend in sales established by the Company, along with the new revolving
line-of-credit with expected availability in the range of $1,000,000. This
anticipated improvement is expected by the Company to be sufficient to meet the
Company's near and mid-term capital requirements, namely, the funding of its
pension plan obligation and the maturity of additional debt.
YEAR 2000 ISSUE
The Year 2000 readiness issue, which is common to most businesses,
arises from the inability of information systems, and other time and date
sensitive products and systems, to properly recognize and process date-sensitive
information or system failures. Assessments of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
has analyzed, assessed and planned for various Year 2000 issues across its
businesses.
The Year 2000 issue has an impact on both information technology ("IT")
systems and non-IT systems, such as its manufacturing systems and physical
facilities including, but not limited to, security systems and utilities.
Management believes that a majority of the Company's IT systems are Year 2000
ready. The Company has replaced or upgraded those systems that were identified
as non-Year 2000 compliant. Non-IT system issues are more difficult to identify
and resolve. The Company has identified non-IT Year 2000 issues concerning its
products and services, as well as its physical facility locations.
The Company has completed efforts to ensure Year 2000 readiness of its
products and services. The Company has migrated to a Year 2000 compliant Network
Operating System, and its key financial, manufacturing and other in-house
systems have been vendor certified to be compliant.
The Year 2000 readiness of its customers varies, and the Company is
encouraging its customers to evaluate and prepare their own systems. These
efforts by customers to address Year 2000 issues may affect the demand for
certain products and services; however, the impact to the revenue of any change
in revenue patterns is not certain.
The Company in the process of assessing the Year 2000 readiness of its
key suppliers and business partners. The Company's direction of this effort is
to ensure the adequacy of resources and supplies to minimize any potential
business interruptions. Management is in the process of completing this part of
its Year 2000 readiness plan.
Although management believes that its efforts have been successful and
the total costs will be immaterial (i.e., less than $10,000) to its financial
position and results of operations, it recognizes that any failure could cause a
potential impact.
The Year 2000 issue presents a number of other risks and uncertainties
that could impact the Company, such as public utilities failures, potential
claims against it for damages arising from products and services that are not
Year 2000 compliant, and the response ability of certain government commissions
of the various jurisdictions where the Company conducts business. While the
Company continues to believe the Year 2000 issues described above will not
materially affect its financial position or results of operations, it remains
uncertain as to what extent, if any, the Company may be impacted.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
Potential risks and uncertainties that could affect the Company's
future operating results and financial condition include, without limitation,
the following factors:
HISTORY OF LOSSES; VARIABILITY OF OPERATING RESULTS
The Company emerged from bankruptcy protection in November 1994.
Despite historical losses, the Company experienced its first operating profit in
four years during the year ended June 30, 1995, in the amount of approximately
$47,000, and has recorded operating profits during the years ended June 30,
1996, 1997, and 1998 in the amounts of approximately $175,000, $235,000, and
$1,326,000, respectively. There can be no
F-19
<PAGE>
assurance that the Company will be profitable in the future or that future
revenues and operating results will not also vary substantially. Management has
expended and continues to expend substantial time and resources in attempting to
resolve problems arising from the Company's past financial condition and to
restore confidence in the Company. Although the research and development
expenditures of the Company have increased, its financial condition limits its
ability to engage in large-scale research and development.
Continued profits, if any, will depend upon various factors, including,
but not limited to, management's ability to restore confidence in the Company,
continued market acceptance of the Company's current products, the Company's
ability to successfully manufacture its products, the ability of the Company to
develop distribution and marketing channels, develop and introduce new products
or to create new markets for its existing products as well as the successful
implementation of its planned marketing strategies. If the Company is not able
to achieve its operating and business objectives, the Company may find it
necessary to reduce its expenditures for sales, marketing, and research and
development, or undertake other such actions as may be appropriate, and may be
otherwise unable to achieve its goals or continue its operations.
COMPETITION
Certain of the Company's existing and potential competitors have
substantially greater financial, marketing and other resources than the Company.
These competitors have also been able to market their products successfully to
the Company's existing and potential customers in the defense and aerospace
industries. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which could materially adversely affect
the Company. The Company has determined to follow a strategy of continuing
product development to the extent permitted by the financial resources of the
Company to protect its competitive position to the extent practicable. Although
in recent years the Company has shown increases in revenue, there can be no
assurance that the Company will be able to maintain its position in the field or
continue to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not
adversely affect its profitability or financial performance.
TECHNOLOGICAL CHANGE
Advances in technology characterize the markets for specialized
bearings and ordnance products. Accordingly, the Company's ability to compete in
those markets may depend in large part on its success in enhancing its existing
products and in developing new products. There can be no assurance that the
Company will succeed in such efforts or that any of its products will not be
rendered obsolete or uneconomical by technological advances made by others.
DEPENDENCE ON KEY CUSTOMERS
During the nine-month periods ended March 31, 1999 and 1998, sales to
Textron Systems accounted for approximately 23% and 16%, respectively, of the
Company's sales. Sales to Eagle Picher Industries accounted for approximately
11% and 15%, respectively, of the Company's sales during these periods. Sales to
the Department of Defense constituted approximately 19% of the Company's sales
during the nine-month period ended March 31, 1999 and approximately 11% of the
Company's sales during the nine-month period ended March 31, 1998. A significant
decline in sales to any key customers could adversely affect the Company.
Additionally, export sales (denominated in U.S. dollars) accounted for
approximately 10% of sales revenue by the Company for both the nine months ended
March 31, 1999 and nine months ended March 31, 1998.
DEPENDENCE UPON DEFENSE INDUSTRY
The Company has been supplying components for United States defense
programs for over forty years. Reliance upon defense programs has certain
inherent risks, including the uncertainty of economic conditions, dependence on
congressional appropriations and administrative allotment of funds, changes in
governmental policies that may reflect military and political developments and
other factors characteristic of the defense industry. The Company is unable to
predict the impact of decreases or shifts in defense appropriations for programs
in which the Company's products are incorporated.
F-20
<PAGE>
PRODUCT LIABILITY AND RISK MANAGEMENT
As a manufacturer of ordnance products and specialized bearings for the
defense and aerospace industries, the Company is subject to the risk of claims
arising from injuries to persons or property. The Company maintains both general
liability insurance and limited product liability insurance. Although the
Company has instituted quality control procedures that it believes produce
products of the highest quality, the Company may become subject to future
proceedings alleging defects in its products.
NO EARTHQUAKE INSURANCE
The Company's principal executive offices are located in a facility
owned by the Company in Chatsworth, California - an area that sustained damage
from the 1994 Northridge, California earthquake. The Company does not currently
carry insurance against earthquake-related risks. The Company suffered
approximately $1.2 million in damages, costs and renovations to its facility
resulting from that earthquake, and recovered only approximately $384,000 from
insurers as a result of insured flood damage caused by the earthquake.
KEY PERSONNEL
The Company's success is highly dependent on the efforts and abilities
of its Chairman, David Wachtel, and key members of staff. The loss of services
of Mr. Wachtel or any of these key members could have a material adverse effect
on the Company. The Company does not maintain key man life insurance on Mr.
Wachtel or any other employee.
The Mihai D. Patrichi Trust presently owns of record approximately
47.3% of the Company's outstanding voting stock. Accordingly, the Trust is, as a
practical matter, able to control the election of a majority of the directors,
and, therefore, the business and affairs of the Company, and approve or
disapprove any corporate action submitted to a vote of the Company's
shareholders, in each ease, regardless of how other shareholders of the Company
may vote.
In the matter of In Re: Mihai D. Patrichi Trust (Case No. BP03796), now
pending in the Superior Court of California for the county of Los Angeles, the
court has ruled that the Trust must dispose of all of its shares in the Company.
Sale by the Trust of its interest in the Company would effect a change in the
control of the Company.
The Board of Directors of the Company has established a special
committee (the "Special Committee") to examine and make a recommendation to the
Board of Directors, as to what actions the Company should take in connection
with the Trust's sale of all of its interest in the Company. The Special
Committee has engaged an investment banking firm (The Seidler Companies
Incorporated) to determine the course of conduct to be adopted by the Company
and to investigate methods of enhancing shareholder value, including the
possible sale of the Company, merger or consolidation of the Company with
complimentary businesses, acquisition and recapitalizations.
The Company believes that there is a significant possibility that the
Special Committee may recommend to the Board of Directors that the Company
pursue one or more transactions that may result in a change of control, and that
absent any action by the Board of Directors, a change of control would likely
occur in connection with a sale by the Trust of its interest in the Company.
There can be no assurance that such a change of control would be
accomplished smoothly or that the Company will be successful in retaining key
members of management. The ability of the Company to make the change of control
successfully will depend on its capability to make the transition in an
efficient, effective and timely manner and on its ability to retain key
management, marketing and production personnel. Making the change in control an
efficient and timely process will also require the dedication of management
resources, which may temporarily distract management's attention from the
day-to-day business of the Company. The inability of management to make the
change of control smoothly could have an adverse effect on the business and
operational results of the Company. In addition, there can be no assurance that
the present and potential customers of the Company will continue their current
utilization patterns without regard to a change of control. A loss of key
members of management could affect business relations with the Company's
customers.
F-21
<PAGE>
Any significant reduction in utilization patterns by the Company's customers
could have an adverse effect on the near-term business and results of operations
of the Company's business.
The Company expects that the costs related to the retention of
investment bankers, as well as additional legal and accounting fees expected to
be incurred, will impact the Company's earnings during the fiscal year.
Also, sales of substantial amounts of Common Stock in the public market
under Rule 144 or otherwise, or even the potential for such sales, could
adversely affect the prevailing market prices for the Company's Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities.
VOLATILITY OF WORKLOAD
To remain profitable, the Company is highly dependent on its ability to
maintain a suitably sized staff of qualified technical personnel commensurate
with a fluctuating volume of work. New contracts often arise at unscheduled or
unanticipated times. The Company endeavors to maintain adequate staff to respond
to these unscheduled opportunities. If the Company overestimates its projected
workload, the resulting financial burden can reduce profitability. Occasionally,
the Company is faced with the opposite problem - a shortage of suitable
technical personnel - or the funds to pay premium rates to obtain the necessary
skilled labor that is in short supply, and is unable to timely perform
contracts, potentially resulting in cost overruns or late delivery penalties.
CONTRACTS
The Company generates substantially all of its revenues pursuant to
procurement contracts for custom designed or manufactured bearings or ordnance
products. The ability of the Company to generate additional revenues will depend
upon its ability to obtain additional contracts. Substantially all of the
Company's contracts are on a fixed-fee basis. Accordingly, the Company is
subject to the risk of cost overruns. Because the Company manufactures ordnance
and specialized bearings for the defense and aerospace industries, the Company
is subject to extremely stringent quality control standards and testing. These
standards are implemented through internal operational quality control
procedures of the Company and through customer audits. Furthermore, lot
acceptance test procedures ("LATs") are required by the Company's customers.
These LATs include environmental testing and detonation and non-detonation
tests. Generally, the Company's ordnance products are manufactured in batches
and then subjected to LATs under standards that result in rejection of an entire
manufactured batch if a single unit fails. From time to time, the Company has
experienced LATs failures resulting from human error or technical problems.
Occurrence of LATs failures of this type on large contracts could adversely
impact the revenues of the Company and no assurance can be given that such
failures will not occur in the future.
GOVERNMENTAL REGULATION
The Company's operations are subject to, and substantially affected by,
extensive federal, state and local laws, regulations, orders and permits which
govern environmental protection, health and safety, zoning and other matters.
These regulations may impose restrictions on the Company's operations that could
adversely affect the Company's results, such as limitations on the expansion of
metals plating facilities of the Company, and limitations on or banning disposal
of hazardous waste generated by the Company's operations. Because of heightened
public concern, companies in the metals plating business, including the Company,
may become subject to judicial and administrative proceedings involving federal,
state or local agencies. These governmental agencies may seek to impose fines on
the Company or to revoke or deny renewal of the Company's waste generation and
disposal permits or licenses for violations of environmental laws or regulations
or to require the Company to remediate environmental problems resulting from its
operations, all of which could have a material adverse effect on the Company.
The Company may also be subject to actions brought by individuals or community
groups in connection with the permitting or licensing of its operations, any
alleged violations of such permits and licenses, or other such matters.
F-22
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company generally has export sales ranging between 5% and 15% of
total sales during the period. These transactions are denominated in U.S.
dollars, effectively protecting the Company against foreign currency
fluctuations.
During the quarter ended March 31, 1999, the Company refinanced a
mortgage note payable of approximately $1,525,000 and paid-off a promissory note
payable of approximately $225,000 that were both indexed to reference rates. At
March 31, 1999, the Company did not have any remaining loan obligations that
were subject to variable interest rates.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
F-23
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
NE HOLDCO CORP.
NE MERGER CORP.
AND
NETWORKS ELECTRONIC CORP.
DATED AS OF JULY 16, 1999
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "AGREEMENT"), is dated as of July 16,
1999, by and among NE Holdco Corp., a Delaware corporation ("Parent"), NE Merger
Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("SUB"),
and Networks Electronic Corp., a California corporation (the "COMPANY").
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. As used herein, the terms below shall have the
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending on the reference.
"ADDITIONAL AMOUNT" shall have the meaning set forth in Section
2.7.
"AGREEMENT" shall have the meaning set forth in the Preamble.
"AGREEMENT OF MERGER " shall have the meaning set forth in Section
2.2.
"ARTICLES OF INCORPORATION" shall mean the Amended Articles of
Incorporation of the Company in effect as of the date hereof.
"BY-LAWS" shall mean the Amended and Restated By-Laws of the Company in
effect as of the date hereof.
"CERTIFICATES" shall have the meaning set forth in Section 2.10(b).
"CGCL" shall mean the General Corporation Law of the State of
California.
"CLOSING" shall have the meaning set forth in Section 2.2.
"CLOSING DATE" shall have the meaning set forth in Section 2.2.
"COMPANY" shall have the meaning set forth in the Preamble.
"COMPANY DISCLOSURE SCHEDULE" shall mean the schedules prepared and
delivered by the Company to and for Parent and Sub and dated as of the date
hereof, which set forth the exceptions to the representations and warranties of
the Company contained herein and certain other information called for by this
Agreement.
"COMPENSATION PLANS" shall have the meaning set forth in Section
5.1(d).
"CONFIDENTIALITY AGREEMENT" shall mean that certain confidentiality
agreement dated as of ____________, 1999 by and between Parent and [the
Financial Advisor, as agent for the Company/the Company], as amended.
A-1
<PAGE>
"DISSENTING SHARES" shall have the meaning set forth in Section
2.9(a).
"EFFECTIVE TIME" shall have the meaning set forth in Section 2.2.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"EXCHANGE AGENT" shall have the meaning set forth in Section
2.10(a).
"FINANCIAL ADVISOR" shall mean The Seidler Companies Incorporated.
"FUND" shall have the meaning set forth in Section 2.10(a).
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INDEMNIFIED PARTIES" shall have the meaning set forth in Section
5.7(c).
"INFORMATION STATEMENT" shall have the meaning set forth in
Section 3.6.
"LETTER OF TRANSMITTAL" shall have the meaning set forth in
Section 2.10(b).
"MERGER" shall have the meaning set forth in Section 2.1.
"MERGER CONSIDERATION" shall have the meaning set forth in Section
2.7.
"OPTION" shall have the meaning set forth in Section 2.12.
"PARENT" shall have the meaning set forth in the Preamble.
"PARENT DISCLOSURE SCHEDULE" shall mean the schedules prepared and
delivered by Parent and Sub to and for the Company and dated as of the date
hereof, which sets forth the exceptions to the representations and warranties of
Parent and Sub contained herein and certain other information called for by this
Agreement.
"SEC" shall mean the Securities and Exchange Commission or any
successor thereto.
"SEC REPORTS" shall have the meaning set forth in Section 3.5.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SHARE" shall mean a share of Stock.
"SIGNIFICANT SUBSIDIARIES" shall have the meaning set forth in
Section 4.1.
"SPECIAL MEETING" shall have the meaning set forth in Section
5.4(a)(i).
"STOCK" shall mean, the common stock of the Company, par value
$.25 per share.
"STOCK OPTION PLAN" shall have the meaning set forth in Section
2.12.
A-2
<PAGE>
"SUB" shall have the meaning set forth in the Preamble.
"SUPERIOR OFFER" shall have the meaning set forth in Section 5.3.
"SURVIVING CORPORATION" shall have the meaning set forth in
Section 2.1.
ARTICLE II
THE MERGER
Section 2.1 THE MERGER. At the Effective Time (as hereinafter defined),
upon the terms and subject to the conditions hereof, and in accordance with the
CGCL, Sub shall be merged with and into the Company (the "Merger") as soon as
practicable following the satisfaction of the conditions set forth in Article VI
hereof. Following the Merger, the Company shall continue as the surviving
corporation (the "SURVIVING CORPORATION") and the separate corporate existence
of Sub shall cease.
Section 2.2 (a) EFFECTIVE TIME/CLOSING. The Merger shall be consummated by
the filing with the California Secretary of State and shall be effective at the
time of acceptance for filing by the California Secretary of State and the
Secretary of State of the State of Delaware of a copy of an agreement of merger
(the "Agreement of Merger") in such form as is required by, and executed in
accordance with, the relevant provisions of the CGCL, and such other documents
as shall be required by the applicable provisions of the CGCL and the Delaware
General Corporation Law (the effective time of such filing being the "EFFECTIVE
TIME").
(b) The closing of the Merger (the "Closing") will take place at 10:00
a.m. PST, on a date to be specified by the Company and Parent, which shall be no
later than the second business day after the satisfaction and/or waiver of each
of the conditions set forth in Sections 6.1 and 6.2 (the "Closing Date") at the
offices of Troop Steuber Pasich Reddick & Tobey, LLP, unless another date, time
or place is agreed to in writing by Parent and the Company.
Section 2.3 EFFECTS OF THE MERGER. At the Effective Time the separate
existence of Sub shall cease and Sub shall be merged with and into the Company
and the Company shall be a wholly-owned subsidiary of Parent.
Section 2.4 ARTICLES OF INCORPORATION AND BY-LAWS. Subject to Section 5.7
hereof, the Articles of Incorporation and By-Laws of the Company as in effect at
the Effective Time shall be the Articles of Incorporation and By-Laws of the
Surviving Corporation.
Section 2.5 DIRECTORS. The directors of Sub at the Effective Time shall be
the directors of the Surviving Corporation, until the next annual shareholders'
meeting of the Surviving Corporation and until their successors shall be elected
or appointed and shall be duly qualified.
Section 2.6 OFFICERS. The officers of the Company at the Effective Time
shall be the initial officers of the Surviving Corporation and will hold office
from the Effective Time until their respective successors are duly elected or
appointed and qualify in the manner provided in the Articles of Incorporation
and By-Laws of the Surviving Corporation, or as otherwise provided by law.
A-3
<PAGE>
Section 2.7 CONVERSION OF SHARES. Each Share issued and outstanding
immediately prior to the Effective Time (other than Shares held by Parent, Sub
or any other wholly-owned subsidiary of Parent, or in the treasury of the
Company or held by any wholly-owned subsidiary of the Company, all of which
shall be cancelled, and Dissenting Shares, as hereinafter defined) shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into the right to receive the Merger Consideration (as defined
below), subject to applicable withholding or back-up withholding taxes, if any,
payable by the holder thereof, without interest thereon, upon surrender of the
certificate formerly representing such Share. As used in this Agreement, the
term "MERGER CONSIDERATION" shall mean the sum, in cash, of $7.50 plus the
Additional Amount (as defined below). As used in this Agreement, the term
"ADDITIONAL AMOUNT" shall mean an amount equal to the product of: (a) $7.50;
MULTIPLIED BY (b) 10%, MULTIPLIED BY (c) a fraction, the numerator of which
shall be the number of days in the period from and including the date which is
the 120th day following the date of this Agreement to but excluding the date on
which the Effective Time occurs, and the denominator of which shall be 365.
Section 2.8 CONVERSION OF SUB COMMON STOCK. Each share of common stock,
par value $.01 per share, of Sub issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and represent the right to receive one
share of the common stock of the Surviving Corporation.
Section 2.9 DISSENTING SHARES.
GENERAL. Notwithstanding anything in this Agreement to the contrary,
Shares which are issued and outstanding immediately prior to the Effective Time
which are Dissenting Shares (as defined in Section 1300(b) of the CGCL), if any
("DISSENTING SHARES"), shall not be converted into or represent a right to
receive the Merger Consideration pursuant to Section 2.7 hereof, but the holders
thereof shall be entitled only to such rights as are granted by the CGCL. Each
holder of Dissenting Shares who becomes entitled to payment for such Shares
pursuant to the CGCL shall receive payment therefor from the Surviving
Corporation in accordance with the CGCL; PROVIDED, HOWEVER, that (i) if any such
holder of Dissenting Shares shall have failed to establish his entitlement to
appraisal rights as provided in the CGCL, (ii) if any such holder of Dissenting
Shares shall have effectively withdrawn his demand for appraisal of such Shares
or lost his right to appraisal and payment for his Shares under the CGCL or
(iii) if neither any holder of Dissenting Shares nor the Surviving Corporation
shall have filed a petition demanding a determination of the value of all
Dissenting Shares within the time provided in the CGCL, such holder or holders
(as the case may be) shall forfeit the right to appraisal of such Shares and
each such Share shall thereupon be deemed to have been converted, as of the
Effective Time, into and represent the right to receive payment from the
Surviving Corporation of the Merger Consideration, without interest thereon, as
provided in Section 2.7 hereof.
Section 2.10 PAYMENT FOR SHARES.
(a) EXCHANGE MECHANICS. Prior to the Effective Time, Parent shall
designate a bank or trust company reasonably satisfactory to the Company to act
as Exchange Agent in the Merger (the "EXCHANGE AGENT"). At or prior to the
Effective Time, Parent will take all steps necessary to enable and cause the
Surviving Corporation to provide the Exchange Agent funds (the "FUND") necessary
to make the payments contemplated by Section 2.7. Out of the Fund, the
A-4
<PAGE>
Exchange Agent shall, pursuant to irrevocable instructions, make the payments
referred to in Section 2.7. The Fund shall not be used for any other purpose.
The Exchange Agent may invest portions of the Fund, as directed by Parent (so
long as such directions do not impair the Exchange Agent's ability to make the
payments referred to in Section 2.7 hereof or otherwise impair the rights of
holders of Shares), provided that no such investments may be made other than in
direct obligations of the United States of America, obligations for which the
full faith and credit of the United States of America is pledged to provide for
the payment of principal and interest, commercial paper rated of the highest
quality by Moody's Investors Services, Inc. or Standard & Poor's Corporation, or
certificates of deposit issued by a commercial bank having capital exceeding
$500,000,000. Any net earnings resulting from, or interest or income produced
by, such investments shall be paid to the Surviving Corporation as and when
requested by Parent. The Surviving Corporation shall replace any monies lost
through any investment made pursuant to this Section 2.10(a). Deposit of funds
pursuant hereto shall not relieve Parent or the Surviving Corporation of their
obligations to make payments in respect of Shares and Parent hereby guarantees
the Surviving Corporation's obligations in respect thereof.
(b) LETTER OF TRANSMITTAL. Promptly after the Effective Time, the
Surviving Corporation shall cause the Exchange Agent to mail to each record
holder, as of the Effective Time, of an outstanding certificate or certificates
which immediately prior to the Effective Time represented Shares (the
"CERTIFICATES") a form letter of transmittal (the "LETTER OF TRANSMITTAL") for
return to the Exchange Agent (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent) containing
instructions for use in effecting the surrender of the Certificates, and
receiving payment with respect to the Shares evidenced thereby. Upon surrender
to the Exchange Agent of a Certificate, together with the Letter of Transmittal
duly executed, the holder of such Certificate shall be entitled to receive in
exchange therefor cash in an amount equal to the product of the number of Shares
represented by such Certificate MULTIPLIED by the Merger Consideration, and such
Certificate shall forthwith be cancelled. No interest will be paid or accrued on
the cash payable upon the surrender of the Certificates. If payment is to be
made to a person other than the person in whose name the Certificate surrendered
is registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the Certificate surrendered or establish to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable. Until
surrendered in accordance with the provisions of this Section 2.10(b), each
Certificate (other than Certificates representing Shares held by Parent, Sub or
any other wholly-owned subsidiary of Parent, the Company or any wholly-owned
subsidiary of the Company which shall have been cancelled, or Dissenting Shares)
shall represent for all purposes the right to receive the Merger Consideration
in cash MULTIPLIED BY the number of Shares evidenced by such Certificate,
without any interest thereon.
(c) RETURN OF UNCLAIMED FUNDS. Any cash provided to the Exchange Agent
pursuant to this Section 2.10 and not exchanged for Certificates within six
months after the Effective Time will be returned by the Exchange Agent to the
Surviving Corporation which thereafter will act as Exchange Agent.
Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto
shall be liable to a holder of Shares for any Merger Consideration delivered to
a public official pursuant to applicable abandoned property, escheat or similar
laws.
A-5
<PAGE>
Section 2.11 NO FURTHER RIGHTS OR TRANSFERS. At and after the Effective
Time, each holder of a Certificate that represented issued and outstanding
Shares immediately prior to the Effective Time shall cease to have any rights as
a shareholder of the Company, except for the right to surrender his or her
Certificate or Certificates in exchange for the payment provided pursuant to
Sections 2.7 and 2.10 hereof or to perfect his or her right to receive payment
for his or her Shares pursuant to the CGCL and Section 2.9 hereof if such holder
has validly exercised and perfected and not withdrawn his or her right to
receive payment for his or her Shares, and there shall be no transfers on the
stock transfer books of the Surviving Corporation of the Shares which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates formerly representing Shares are presented to the Surviving
Corporation, they shall be cancelled and exchanged for cash as provided in this
Article II.
Section 2.12 STOCK OPTIONS. Immediately prior to the Effective Time, each
holder of a then-outstanding Company stock option issued pursuant to the
Company's Amended 1996 Stock Incentive Plan (the "STOCK OPTION PLAN"), whether
or not then presently exercisable, to purchase Shares (an "OPTION") will be
entitled to receive at such holder's option, and shall receive, in settlement of
such Option, either (i) a cash payment from the Company equal to the product of
(x) the total number of Shares then subject to each such Option with an exercise
price equal to $7.50 per Share or less1 MULTIPLIED BY (y) the excess of the
Merger Consideration over the exercise price per Share subject to such Option,
subject to any required withholding of taxes or (ii) an option to acquire the
same number of shares of the stock of the Surviving Corporation as the holder of
such Option would have been entitled to receive pursuant to the Stock Option
Plan upon the same terms and conditions as the Options exchanged therefore,
provided that the Board of the Company shall, at the request of Parent, limit a
holder's options to that set forth in clause (i) above. If necessary or
appropriate under the Stock Option Plan, the Company will, upon the request of
Parent, use its reasonable best efforts to obtain the written acknowledgment of
each person holding an Option that the payment of the amount of cash or options
referred to above will satisfy in full the Company's obligation to such person
pursuant to such Option. By virtue of the foregoing treatment of the Options, at
the Effective Time all Options shall be cancelled and shall cease to exist.
Section 2.13 ADJUSTMENTS. If, between the date of this Agreement and the
Effective Time, the outstanding Shares shall be changed into a different number
of shares or a different class by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
a stock dividend thereon shall be declared with a record date prior to the
Effective Time, the amount of consideration to be received pursuant to this
Article II in exchange for each outstanding Share or Option or shall be
correspondingly adjusted.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 3.1 ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of its state or
jurisdiction of incorporation and is in good standing as a foreign corporation
in each jurisdiction where the properties owned, leased or
A-6
<PAGE>
operated, or the business conducted, by it require such qualification and where
failure to be in good standing or to so qualify would have a material adverse
effect on the financial condition, results of operations or business of the
Company. The Company has made available to Parent true and correct copies of the
Articles of Incorporation and By-Laws.
Section 3.2 CAPITALIZATION.
(a) COMPANY CAPITALIZATION. The authorized capital stock of the Company
consists of 10,000,000 shares of Stock. As of the date hereof, there are
1,881,133 shares of Stock issued and outstanding, with 7,245 shares held in
treasury. Except as set forth in Section 3.2(a) of the Company Disclosure
Schedule and except for 7,323 shares of Stock issuable upon exercise of
outstanding Options issued pursuant to the Stock Option Plan, there are not now,
and at the Effective Time there will not be, any existing options, warrants,
calls, subscriptions, or other rights, or other agreements or commitments,
obligating the Company to issue, transfer or sell any shares of capital stock of
the Company. All issued and outstanding Shares are validly issued, fully paid,
nonassessable and free of preemptive rights.
(b) SUBSIDIARIES. The Company does not hold any shares of stock or any
other security or interest, nor does it hold, directly or indirectly, any rights
to acquire any shares of stock or any other security or interest in any other
corporation, partnership, trust or other business association.
Section 3.3 AUTHORITY RELATIVE TO THIS AGREEMENT.
(a) COMPANY APPROVALS. The Company has full corporate power and authority
to execute and deliver this Agreement and, subject to obtaining the necessary
approval of this Agreement and the transactions contemplated hereby by its
shareholders to the extent required by applicable law, to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by the Company and the consummation of the transactions contemplated hereby have
been duly authorized by the Board of Directors of the Company, and no other
corporate proceedings on the part of the Company are necessary for the execution
and delivery of this Agreement by the Company and, subject to the filing of the
Agreement of Merger pursuant to Section 2.2 and obtaining the necessary
approvals of the Company's shareholders to the extent required by applicable
law, the performance by the Company of its obligations hereunder and the
consummation by the Company of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by the Company and, assuming (i)
this Agreement constitutes a valid and binding obligation of each of Parent and
Sub, (ii) the necessary approvals of the Company's shareholders to the extent
required by applicable law have been obtained and (iii) the authorizations,
consents and approvals described in Section 3.3(b) of this Agreement have been
obtained, this Agreement constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except to
the extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting the enforcement
of creditors rights generally or by general equitable principles.
(b) OTHER AUTHORIZATIONS. Except as set forth in Section 3.3(b) of the
Company Disclosure Schedule, other than in connection with, or in compliance
with, applicable requirements of (i) the CGCL with respect to the transactions
contemplated hereby, (ii) the Exchange Act
A-7
<PAGE>
(including, without limitation, the filing of the Information Statement), (iii)
the Securities Act, (iv) the securities laws of the various states, and (v) HSR
Act, no authorization, consent or approval of, or filing with, any court or any
public body or authority is necessary for the consummation by the Company of the
transactions contemplated by this Agreement other than authorizations, consents
and approvals the failure to obtain, or filings the failure to make, that would
not, in the aggregate, have a material adverse effect on the financial
conditions, results of operations or business of the Company.
Section 3.4 NO VIOLATION. None of the execution or delivery of this
Agreement by the Company, the performance by the Company of its obligations
hereunder or the consummation by the Company of the transactions contemplated
hereby will (a) subject to shareholder approval, constitute a breach or
violation of any provision of the Articles of Incorporation or By-Laws of the
company, (b) except as set forth in Section 3.4 of the Company Disclosure
Schedule, constitute a breach, violation or default (or any event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in the
creation of any lien or encumbrance upon any of the properties or assets of the
Company under, any note, bond, mortgage, indenture, deed of trust, license,
agreement or other instrument to which the Company is a party or by which they
or any of their respective properties or assets are bound or (c) constitute a
violation of any order, writ, injunction, decree, statute, rule or regulation of
any court or governmental authority applicable to the Company or any of its
properties or assets, other than, in the case of clauses (b) and (c) above, such
breaches, violations, defaults, terminations, accelerations or creation of liens
and encumbrances which, in the aggregate, would not have a material adverse
effect on the financial condition, results of operations or business of the
Company or as set forth in Section 3.4 of the Company Disclosure Schedule.
Section 3.5 SEC REPORTS. Since June 30, 1998 the Company has filed all
forms, reports and documents ("SEC REPORTS") with the SEC required to be filed
by it pursuant to the Securities Act, the Exchange Act and the SEC rules and
regulations promulgated thereunder. Copies of all such SEC Reports have been
made available to Parent by the Company. None of such SEC Reports (as of their
respective filing dates) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The audited and unaudited consolidated financial
statements of the Company included in the SEC Reports have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis (except as otherwise stated in such financial statements, including the
related notes, and except that the interim financial statements do not contain
all of the footnote disclosures required by generally accepted accounting
principles) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of its operations and its
cash flows for the periods then ended, subject, in the case of the interim
unaudited financial statements, to year-end audit adjustments.
Section 3.6 INFORMATION STATEMENT; OTHER INFORMATION. None of the
information included in the information statement to be distributed to
shareholders of the Company in connection with the Merger, or any schedules
required to be filed with the SEC in connection therewith (collectively referred
to herein as the "INFORMATION STATEMENT"), except information supplied by Parent
or Sub in writing for inclusion in the Information Statement or in such
schedules (as to which the Company makes no representation), will, as of the
date the Information Statement
A-8
<PAGE>
is first mailed to such shareholders, and on the
date of the meeting of the Company's shareholders and the date of any
adjournment thereof, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. No representation is made by the Company with respect to
any forward-looking information which may have been supplied by the Company
whether or not included by Parent or Sub in the Information Statement.
Section 3.7 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.7
of the Company Disclosure Schedule, since March 31, 1999, there has not been any
material adverse change in the financial condition, results of operations or
business of the Company ("Material Adverse Change").
Section 3.8 CERTAIN BROKERS' FEES. With the exception of the fees payable
to the Financial Advisor pursuant to the engagement letter with the Company
dated November 9, 1998, a copy of which will be made available to Parent,
neither the Company nor any of its officers, directors or employees has employed
any broker or finder or incurred any liability for any financial advisory,
brokerage or finder's fees or commissions to any brokers or finders in
connection with the transactions contemplated herein.
Section 3.9 LITIGATION. There is no claim, suit or proceeding pending or,
to the knowledge of the Company, threatened which would, if adversely
determined, individually or in the aggregate, effect a Material Adverse Change.
Section 3.10 NO VIOLATIONS. To the knowledge of the Company, the business
of the Company is not being conducted in violation of, or in a manner which
could cause liability under any applicable law, rule or regulation, judgment,
decree or order of any governmental entity, except for any violations or
practices which, individually or in the aggregate, have not effected and will
not effect a Material Adverse Change.
Section 3.11 CERTAIN AGREEMENTS. Except as disclosed in the Company
Disclosure Schedule, neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby or thereby will (i)
result in any payment becoming due to any current or former director, employee
or independent contractor of the Company from the Company under any employee
benefit plan, agreement or otherwise, (ii) materially increase the benefits
otherwise payable under any such plan or agreement or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
Section 3.12 PROPERTIES, LIENS. Except (i) as reflected in the financial
statements (and the notes thereto) as of and for the period ended March 31,
1999, as set forth in the Company's quarterly report on Form 10-Q filed with the
SEC for the quarter ended on March 31, 1999, (ii) as reflected in the financial
statements (and the notes thereto) as of and for the period ended June 30, 1998,
as set forth in the Company's annual report on Form 10-K filed with the SEC for
the year ended on June 30, 1998 and (iii) except for statutory mechanics' and
materialmen's liens, and liens for current taxes not yet due, the Company owns,
free and clear of any liens, claims, charges, options or other encumbrances, all
of its tangible and intangible property, real and personal, whether or not
reflected in the financial statements referred to above. To the knowledge of the
Company, all
A-9
<PAGE>
plants, structures and material equipment owned or leased by the
Company and used in the operation of its business are in satisfactory condition
and repair for the requirements of such business.
Section 3.13 CONTRACTS. Except as disclosed in the Company Disclosure
Schedule, the Company is not a party to or subject to and union agreement or
employment agreement, any lease for real or personal property, any commitment to
buy or sell any products or services in excess of $50,000 per annum or any
material agreement, license or authorization which has not been terminated or
performed in its entirety which may, by its terms, be terminated or adversely
affected by reason of the execution of this Agreement or the consummation of the
transactions contemplated hereby. All material agreements to which the Company
is obligated are valid and in full force and effect, and neither the Company
nor, to its knowledge, the other contracting party has breached any material
provisions thereunder.
Section 3.14 OPINION OF FINANCIAL ADVISOR. The Company has received the
Opinion of the Financial Advisor dated the date hereof, a copy of which has been
delivered to Parent, to the effect that, as of such date, the Merger Price is
fair to the Company's stockholders from a financial point of view.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
Section 4.1 ORGANIZATION. Each of Parent, Sub and their respective
Significant Subsidiaries (within the meaning of Regulation S-X under the
Exchange Act ("SIGNIFICANT SUBSIDIARIES")) is a corporation duly organized,
validly existing and in good standing under the laws of its state or
jurisdiction of incorporation and is in good standing as a foreign corporation
in each other jurisdiction where the properties owned, leased or operated, or
the business conducted, by it require such qualification and where failure to be
in good standing or so to qualify would have a material adverse effect on the
financial condition, results of operations or business of Parent and its
subsidiaries taken as a whole.
Section 4.2 AUTHORITY RELATIVE TO THIS AGREEMENT.
(a) PARENT AND SUB APPROVALS. Each of Parent and Sub has full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Parent and Sub and the consummation of the transactions contemplated hereby
have been duly authorized by the respective Boards of Directors of Parent and
Sub, and by Parent as the sole shareholder of Sub, and no other corporate
proceedings on the part of Parent or Sub are necessary for the execution and
delivery of this Agreement by each of Parent and Sub, the performance by each of
Parent and Sub of their respective obligations hereunder and the consummation by
each of Parent and Sub of the transactions so contemplated. This Agreement has
been duly executed and delivered by each of Parent and Sub and, assuming (i)
this Agreement constitutes a valid and binding obligation of the Company and
(ii) the authorizations, consents and approvals described in Section 4.2(b) of
this
A-10
<PAGE>
Agreement have been obtained, this Agreement constitutes a valid and
binding agreement of each of Parent and Sub, enforceable against each of Parent
and Sub in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors
rights generally or by general equitable principles.
(b) OTHER AUTHORIZATIONS. Other than in connection with, or in compliance
with, applicable requirements of (i) the CGCL and the Delaware General
Corporation Law with respect to the transactions contemplated hereby, (ii) the
Exchange Act (including, without limitation, the filing of the Information
Statement), (iii) the Securities Act, (iv) the Securities Laws of the various
states and (v) the HSR Act no authorization, consent or approval of, or filing
with, any court or any public body or authority is necessary for the
consummation by Parent and Sub of the transaction contemplated by this Agreement
other than authorizations, consents and approvals the failure to obtain, or
filings the failure to make, would not, in the aggregate, have a material
adverse effect on the financial conditions, results of operations or business of
Parent and its subsidiaries taken as a whole or on the ability of Parent and Sub
to consummate the transactions contemplated hereby.
Section 4.3 NO VIOLATION. Neither the execution or delivery of this
Agreement by Parent and Sub, the performance by Parent and Sub of their
respective obligations hereunder nor the consummation by them of the
transactions contemplated hereby will (a) constitute a breach or violation under
the Articles of Incorporation or By-Laws of Parent or Sub or (b) constitute a
breach, violation or default (or any event which, with notice or lapse of time
or both, would constitute a default) under, or result in the termination of or
accelerate the performance required by or result in the creation of any lien or
encumbrance upon any of the properties or assets of Parent or any of its
subsidiaries under, any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument to which Parent or any of its subsidiaries
is a party or by which they or any of their respective properties or assets are
bound or (c) constitute a violation of any order, writ, injunction, decree,
statute, rule or regulation of any court or governmental authority applicable to
Parent or Sub or any of their respective properties or assets, other than, in
the case of clauses (b) and (c) above, such breaches, violations, defaults,
terminations, accelerations or creation of liens and encumbrances which, in the
aggregate, would not have a material adverse effect on the financial condition,
results of operations or business of Parent and its subsidiaries taken as a
whole or on the ability of Parent and Sub to consummate the transactions
contemplated hereby, or as set forth in Section 4.3 of the Parent Disclosure
Schedule
Section 4.4 INFORMATION STATEMENT. None of the information supplied in
writing by Parent, Sub or their respective affiliates specifically for inclusion
in the Information Statement will, at the time the Information Statement is
mailed or at the time of the Special Meeting (as defined in Section 5.4) or at
the Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. If at any time prior to the Special Meeting any event with
respect to Parent or Sub, or with respect to information supplied by Parent or
Sub for inclusion in the Information Statement, shall occur which is required to
be described in an amendment of, or a supplement to, such document, such event
shall be so described to the Company in a timely manner.
A-11
<PAGE>
Section 4.5 FINANCING. Parent is highly confident that one or more
responsible financial institutions will be able to provide Parent with the funds
necessary to consummate the Merger and the transactions contemplated hereby on a
timely basis and on terms and conditions satisfactory to Parent, which
confidence is based solely on Parent's experience and its internal assumptions
based on information made available to Parent. Upon receipt of the necessary
financing from such financial institution(s), Parent will keep cash available to
it sufficient to enable Parent to carry out all of its obligations under this
Agreement. An affiliate of Parent, Gartland Whalley and Barker B.V, has provided
to the Company a support letter, a copy of which is attached as Exhibit A
hereto, upon which the Company is relying upon in entering this Agreement.
Section 4.6 NO PRIOR ACTIVITIES. Sub has not incurred, directly or
indirectly, any liabilities or obligations, except those incurred in connection
with its organization or with the negotiation of this Agreement and the
transactions contemplated hereby. Sub has not engaged, directly or indirectly,
in any business or activity of any type or kind, or entered into any agreement
or arrangement with any person or entity, or is subject to or bound by any
obligation or undertaking, that is not contemplated by or in connection with
this Agreement and the transactions contemplated hereby.
Section 4.7 SURVIVING CORPORATION AFTER THE MERGER. At the Effective Time
and after giving effect to any changes in the Surviving Corporation's assets and
liabilities as a result of the Merger and after giving effect to the financing
for the Merger and the use of proceeds therefrom, the Surviving Corporation will
not (a) be insolvent (either because its financial condition is such that the
sum of its debts is greater than the fair market value of its assets or because
the present fair saleable value of its assets will be less than the amount
required to pay its debts as they become due), (b) have unreasonably small
capital with which to engage in its business or (c) have incurred or plan to
incur debts beyond its ability to pay as they become absolute and matured.
Section 4.8 CERTAIN FEES. Neither Parent, Sub or any affiliate thereof nor
any of their officers, directors or employees has employed any broker or finder
or incurred any liability for any financial advisory, brokerage or finder's fees
or commissions to any brokers and finders in connection with the transactions
contemplated herein.
ARTICLE V
COVENANTS
Section 5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as contemplated by
this Agreement or previously disclosed to Parent, during the period from the
date of this Agreement to the Effective Time, the Company will, and will cause
each of its subsidiaries to, conduct its respective operations according to its
ordinary and usual course of business and consistent with past practice in all
material respects. Without limiting the generality of the foregoing, and except
as contemplated by this Agreement or as previously disclosed to Parent, prior to
the Effective Time, the Company will not, and the Company will cause its
subsidiaries not to, without the prior written consent of Parent:
(a) issue, sell or repurchase, or authorize or propose the issuance, sale
or repurchase, of any shares of capital stock of the Company and its
subsidiaries, or securities convertible into such shares, or any rights,
warrants or options to acquire such shares or other
A-12
<PAGE>
convertible securities, other than the issuance of Shares pursuant to the
exercise of Options as outstanding on the date hereof;
(b) declare or pay dividends or a distribution on any shares of its
capital stock;
(c) except for such transactions in the ordinary and usual course of
business and consistent with past practice, authorize or enter into any
agreement with respect to any material commitment or transaction which requires
the Company to pay in excess of $50,000;
(d) except as set forth in Section 5.1 of the Company Disclosure Schedule
and except in the ordinary course of business and consistent with past practice
and except as previously disclosed to Parent or as may be required by law, adopt
or amend in any material respect any material profit sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, plan, fund or other arrangement
(collectively, "COMPENSATION PLANS"), or grant, or become obligated to grant,
any general or specific increase in the compensation of executive officers or
any increase in the compensation (including severance pay) payable or to become
payable to any executive officer or institute any material new welfare program
or Compensation Plan or make any change in any Compensation Plan;
(e) except as required by the consummation of the Merger, pay, discharge
or satisfy any material claims, liabilities or obligations (absolute, accrued,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary and usual course of business and consistent with past practice;
(f) except for such transactions in the ordinary and usual course of
business and consistent with past practice, incur any material liability
(absolute, accrued, contingent or otherwise) or issue any debt securities or
assume, guarantee, endorse or otherwise as an accommodation become responsible
for, the obligations of any other individual or entity; or
(g) subject to the rights of the Company's shareholders under applicable
law, propose or adopt any amendments to the Articles of Incorporation or
By-laws; or
(h) agree, in writing or otherwise, to take any of the foregoing actions.
Section 5.2 ACCESS TO INFORMATION.
(a) GENERAL. So long as this Agreement has not been terminated, between
the date of this Agreement and the Effective Time, the Company will give Parent
and its authorized representatives reasonable access during normal business
hours to all offices, production facilities and other facilities and to all
books and records of it, will permit Parent to make such inspections as it may
reasonably require and will cause its officers to furnish Parent (at such time
as it would otherwise become available in the ordinary and usual course of
business and consistent with past practice) with such financial and operating
data and other information (consistent with that which is currently being
prepared by the Company) with respect to the business and properties of the
Company as Parent may from time to time reasonably request.
(b) CONFIDENTIALITY. Subject to any additional requirements of law and the
terms of the Confidentiality Agreement, Parent and Sub (i) will hold and will
cause their respective
A-13
<PAGE>
representatives, advisors and financing sources to hold in strict confidence,
unless compelled to disclose by judicial or administrative process, or, in the
written opinion of its counsel with a copy sent to the Company, by other
requirements of law, all documents and information concerning the Company
furnished to Parent, Sub or any of their respective representatives, advisors
and financing sources in connection with the transactions contemplated by this
Agreement, PROVIDED, HOWEVER, that, prior to any disclosure pursuant to the
foregoing, Parent shall notify the Company and afford the Company an opportunity
to obtain a protective order against such disclosure (except to the extent that
such information can be shown to have been (x) previously known by Parent, (y)
in the public domain through no fault of Parent, its representatives or advisors
or (z) later lawfully acquired by Parent from other sources, unless Parent knows
that such other sources are not entitled to disclose such information) and (ii)
will not release or disclose such information to any other person, except in
connection with this Agreement to (1) its auditors, attorneys, and other
representatives and advisors with a need to know such information and (2)
responsible financial institutions in connection with obtaining the financing
contemplated by Section 4.5 hereof, provided that such persons shall have first
been advised of the confidentiality provisions of this Section 5.2(b) and the
Confidentiality Agreement and agreed to be bound thereby. If the transactions
contemplated by this Agreement are not consummated, such confidence shall be
maintained except to the extent such information can be shown to have been (i)
previously known by Parent, (ii) in the public domain through no fault of
Parent, its representatives or advisors or (iii) later lawfully acquired by
Parent from other sources, unless Parent knows that such other sources are not
entitled to disclose such information and, if requested by the Company, Parent
will return to the Company all copies of information furnished by the Company to
Parent or its agents, representatives, advisors or financing sources, or derived
therefrom, or shall in writing confirm the destruction of such information.
Section 5.3 ACQUISITION PROPOSALS. From and after the date of this
Agreement, the Company will not, and will instruct its officers, directors,
employees, agents and other representatives not to, solicit any proposals or
offers from any person relating to any acquisition or purchase of all or a
material amount of the assets of, or any securities of, or any merger,
consolidation or business combination with, the Company; PROVIDED, HOWEVER, that
the Company may furnish information to, and may engage in discussions or
negotiations with, any person, and may waive any provision of any
confidentiality or standstill agreement to which it or any of its
representatives is a party, if (i) counsel advises the Company's Board of
Directors that failure to furnish such information, engage in such discussions
or negotiations, or waive any provision of any such agreement, could involve the
Board of Directors in a breach of their fiduciary duties or (ii) the Board of
Directors believes, in good faith, after consultation with the Financial
Advisor, that such person may make a BONA FIDE proposal for a transaction,
including, without limitation, a tender or exchange offer for Shares, more
favorable to the Company's shareholders than the transactions contemplated by
the Merger (such transaction being a "SUPERIOR OFFER"); and provided further
that nothing herein shall prevent the Company's Board of Directors from taking,
and disclosing to the Company's shareholders, a position contemplated by Rules
14d-9 and 14e-2 promulgated under the Exchange Act with respect to any tender
offer, or from making such other disclosure to shareholders which, in the
judgment of the Board of Directors, upon advice of counsel, may be required by
law or necessary to discharge any fiduciary duty imposed thereby.
A-14
<PAGE>
Section 5.4 INFORMATION STATEMENT.
The Company shall prepare an information statement relating to the Merger and
its approval by the Company's shareholders satisfying the requirements of
Section 603 of the CGCL and Regulation 14C promulgated under the Exchange Act
(the "Information Statement"). From and after the date hereof, the Company shall
use its reasonable best efforts to expeditiously (1) obtain and furnish the
information required to be included by it in the Information Statement, (2)
prepare and file the Information Statement with the SEC, (3) respond to any
comments made by the SEC with respect to the preliminary Information Statement
and (4) cause the definitive Information Statement to be mailed to its
shareholders at the earliest practicable time.
Section 5.5 COOPERATION. Subject to the terms and conditions herein
provided and to the fiduciary duties of the Company's directors, each of the
parties hereto agrees to use its reasonable best efforts (a) to take, or cause
to be taken, all action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement including, without
limitation, (i) promptly making their respective filings, and thereafter using
their reasonable best efforts promptly to make any required submissions, under
the HSR Act and (ii) promptly making any filings that are required to be made or
seeking any consents, approvals, permits or authorizations that are required to
be obtained under any other applicable federal, state or foreign law or
regulation and (b) to refrain from taking, directly or indirectly, any action
contrary to or inconsistent with the provisions of this Agreement, including
action which would impair such party's ability to consummate the transactions
contemplated hereby. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall use
their respective reasonable best efforts to take all such necessary action.
Section 5.6 PUBLIC ANNOUNCEMENTS. Parent, Sub and the Company will consult
with each other before issuing any press release or otherwise making any public
statement with respect to the Merger and shall not issue any such press release
or make any such public statement prior to such consultation, except as may bc
required by law or any securities exchange or similar authority (in which case
prior notice of at least 24 hours by the Company to Parent or by Parent or Sub
to the Company, as applicable, of such issuance of a press release or making of
a public statement shall be require). The parties agree that, upon execution of
this Agreement, they will cause to be disseminated the joint press release
attached hereto as Annex A.
Section 5.7 INDEMNIFICATION AND INSURANCE.
(a) CONTINUATION OF CHARTER OBLIGATIONS. The Company shall, and from and
after the Effective Time, Parent and the Surviving Corporation shall, maintain
the right to indemnification and exculpation of officers and directors provided
for in the Articles of Incorporation and By-Laws of the Company as in effect on
the date hereof, with respect to indemnification and exculpation for acts and
omissions occurring prior to the Effective Time, including, without limitation,
the transactions contemplated by this Agreement.
(b) CONTINUATION OF D&O INSURANCE. For six years after the Effective Time,
Parent or the Surviving Corporation shall maintain officers' and directors'
liability
A-15
<PAGE>
insurance covering the persons who are presently covered by the
Company's officers' and directors' liability insurance policies (copies of which
have heretofore been delivered to Parent) with respect to actions and omissions
occurring prior to the Effective Time, on terms which are not less favorable
than the terms of such current insurance in effect for the Company on the date
hereof.
(c) INDEMNIFICATION. (i) The Company shall, and from and after the
Effective Time, Parent and the Surviving Corporation shall, to the fullest
extent permitted under applicable law, indemnify and hold harmless, each present
and former director and officer of the Company (collectively, the "INDEMNIFIED
PARTIES") against any costs or expenses (including attorneys' fees), judgments,
fines, losses, claims, damages, liabilities and amounts paid in settlement in
connection with any pending, threatened or completed claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to any action or omission occurring
prior to the Effective Time (including, without limitation, any claim, action,
suit, proceeding or investigation arising out of or pertaining to the
transactions contemplated by this Agreement) and in the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (ii) the Company or the Surviving Corporation shall advance
expenses to each such Indemnified Party, including the payment of the fees and
expenses of counsel selected by such Indemnified Party, which counsel shall be
reasonably satisfactory to the Company or the Surviving Corporation, as the case
may be, promptly after statements therefor are received, and (iii) the Company
and the Surviving Corporation will cooperate fully in the defense of any such
matter. Neither the Company nor the Surviving Corporation shall be liable for
any settlement effected without its written consent (which consent shall not be
unreasonably withheld).
(d) ELIGIBILITY FOR INDEMNIFICATION. Notwithstanding any provision to the
contrary contained in the Articles of Incorporation or By-Laws of the Company as
in effect on the date hereof, any determination required to be made with respect
to whether an Indemnified Party's conduct complies with the standards set forth
under the CGCL, under such charter provisions shall be made by independent
counsel selected by the Indemnified Party and reasonably acceptable to the
Company, Parent, Sub or the Surviving Corporation, which shall pay such
counsel's fees and expenses (it being agreed that neither the Company, Parent,
Sub nor the Surviving Corporation shall challenge any such determination by such
independent counsel which is favorable to an Indemnified Party).
(e) SURVIVAL. This Section 5.7 shall survive the closing of the
transactions contemplated hereby, is intended to benefit the Company, Parent,
Sub or the Surviving Corporation and each of the Indemnified Parties (each of
whom shall be entitled to enforce this Section 5.7 against the Company or the
Surviving Corporation, as the case may be) and shall be binding on all
successors and assigns of Parent and the Surviving Corporation.
(f) MERGER, ASSIGNMENT, ETC. In the event Parent, the Surviving
Corporation or any of their respective successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger or (ii)
transfers all or substantially all of its properties and assets to any person,
then, and in each such case. proper provision shall be made so that the
successors and assigns of Parent or the Surviving Corporation assume the
obligations set forth in this Section 5.7.
A-16
<PAGE>
Section 5.8 NOTIFICATION OF CERTAIN MATTERS.
Between the date of this Agreement and the consummation of the Merger, the
Company will promptly notify Parent and Sub in writing if it becomes aware of
any fact or condition that causes or constitutes a breach of its representations
and warranties set forth herein or made in connection herewith as of the date of
this Agreement, or if it becomes aware of the occurrence after the date of this
Agreement of any fact or condition which would (except as expressly contemplated
by this Agreement) cause or constitute a breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Company Disclosure Schedule if such Company
Disclosure Schedule were dated prior to the date of occurrence or discovery of
any such fact or condition, the Company will promptly deliver to Parent and Sub
a supplement to the Company Disclosure Schedule specifying such change. Each
party hereto shall promptly notify each other party of any default, the threat
or commencement of any proceeding or any development before the Effective Time
that would be likely to have a material adverse effect on the financial
condition, results of operations or business of the Company. Notwithstanding the
foregoing provisions of this Section 5.8, no party shall be required to give
notice with respect to events that are reported in the financial or general
interest newspapers that do not specifically relate to such party or the
transactions contemplated hereby.
Section 5.9 EMPLOYEE BENEFITS. Parent agrees to honor, and from and after
the Effective Time shall cause the Surviving Corporation to honor, in accordance
with their respective terms as in effect on the date hereof, the employment,
severance, bonus, and commission agreements and similar arrangements to which
the Company is a party which are set forth in Section 5.9 of the Company
Disclosure Schedule.
Section 5.10 ACKNOWLEDGMENT OF PARENT AND SUB. Parent and Sub agree and
acknowledge that they have had the opportunity to ask questions of
representatives of the Company. Parent and Sub acknowledge that any projections
prepared by the Company and provided to Parent and/or Sub as part of the due
diligence process were and are merely estimates made by the Company as of the
time they were provided and Parent and Sub have in no way relied on any such
projections. Parent and Sub agree and acknowledge that neither the Company nor
any of its affiliates has made or is making any representation or warranty as to
the accuracy or completeness of the Confidential Information Memorandum
furnished by the Financial Advisor on behalf of the Company or any subsequent or
supplemental materials provided by such person or any other information which
has been provided by the Company or any other person acting on behalf of the
Company during such due diligence process. Without limiting the foregoing,
Parent and Sub agree and acknowledge that the only representations and
warranties made by the Company with respect to the transactions contemplated
hereby are those representations and warranties contained in Article III of this
Agreement (together with the exceptions to such representations and warranties
set forth in the Company Disclosure Schedule) and only those representations and
warranties have and will have any legal effect following the date hereof, which
effect will continue solely to the extent specifically set forth herein.
A-17
<PAGE>
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver, where legally permissible, prior to the Effective Time
of the following conditions:
(a) This Agreement shall have been adopted by the requisite vote of the
shareholders of the Company in accordance with applicable law, if such vote is
required by applicable law.
(b) No statute, rule, regulation, order, decree or injunction shall have
been enacted, entered, promulgated or enforced by any court or governmental
authority of competent jurisdiction which restrains, enjoins or otherwise
prohibits the consummation of the Merger; PROVIDED, HOWEVER, that the Company,
Parent and Sub shall use their reasonable best efforts to have any) such order,
decree or injunction vacated.
(c) Other than the filing provided for in Section 2.02, all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any court, administrative
agency or commission or other governmental authority or instrumentality, the
failure of which to file, obtain or occur is reasonably likely to have a
material adverse effect on the Company or Parent.
(d) The applicable waiting period under the HSR Act shall have expired or
been terminated.
Section 6.2 CONDITIONS TO THE OBLIGATION OF PARENT AND SUB TO EFFECT THE
MERGER. The obligation of Parent and Sub to effect the Merger is subject to the
satisfaction or waiver, where legally permissible, prior to the Effective Time
of the following conditions:
(a) The representations and warranties of the Company set forth in this
Agreement shall be true and correct as of the date of this Agreement and (except
to the extent such representations and warranties speak as of an earlier date)
as of immediately before the Effective Time (giving effect to any supplement to
the Company Disclosure Schedule), except as otherwise contemplated by this
Agreement, and the Company shall have performed all obligations required to be
performed by it at or prior to the Effective Time, except to the extent the
failure of such representations and warranties to be true and correct or the
failure to perform obligations hereunder would not, individually or in the
aggregate, have a material adverse effect on the financial condition, results of
operations or business of the Company.
(b) Parent shall have received a certificate signed on behalf of the
Company by the chief executive officer and the chief financial officer of the
Company to the effect of clause (a) above.
(c) Parent shall have received an opinion, dated as of the Closing Date,
from Troop Steuber Pasich Reddick & Tobey, LLP, counsel to the Company, as to
matters that are customary for transactions of this type; or
A-18
<PAGE>
(d) Parent shall have received financing of the Merger Price and
associated transaction expenses on terms and conditions satisfactory to Parent
in its sole discretion.
(e) Parent shall have confirmed that the Confidential Information
Memorandum furnished by the Financial Advisor on behalf of the Company does not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, and Parent shall have certified such
confirmation or the failure thereof to the Company in writing no later than
August 18, 1999.
Section 6.3 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger is subject to the
satisfaction or waiver, where legally permissible, prior to the Effective Time
of the following conditions:
(a) The representations and warranties of Parent and Sub set forth in this
Agreement shall be true and correct as of the date of this Agreement and (except
to the extent such representations and warranties speak as of an earlier date)
as of immediately before the Effective Time, except as otherwise contemplated by
this Agreement, and Parent and Sub shall have performed all obligations required
to be performed by them at or prior to the Effective Time, except to the extent
the failure of such representations and warranties to be true and correct as of
immediately before the Effective Time or the failure to perform obligations
hereunder would not, individually or in the aggregate, have a Company Material
Adverse Effect;
(b) The Company shall have received a certificate signed on behalf of
Parent and Sub by their respective chief executive officers and the chief
financial officers to the effect of clause (a) above; and
(c) The Board of Directors of the Company shall have approved the Merger.
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
Section 7.1 TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the shareholders of the Company:
(a) by mutual written consent duly authorized by the boards of directors
of Parent and the Company;
(b) subject to Section 7.5(a), by the Company or the Parent if (i) the
conditions specified in Section 6.1 have been satisfied and the Effective Time
shall not have occurred on or before September 30, 1999 or (ii) the Effective
Time shall not have occurred on or before December 31, 1999; PROVIDED, HOWEVER,
that the right of the Company or the Parent to terminate this Agreement pursuant
to this Section 7.1(b) shall not be available in the event that the Company's or
the Parent's, as the case may be, failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before such date;
(c) by Parent or the Company if any court of competent jurisdiction in the
United States or other United States governmental body shall have issued an
order, decree or ruling
A-19
<PAGE>
or taken any other action restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable; or
(d) by the Company, subject to Section 7.2, if the Board of Directors of
the Company shall concurrently approve, and the Company shall concurrently enter
into, a definitive agreement providing for the implementation of a Superior
Offer, PROVIDED, HOWEVER, that (i) the Company is not then in breach of Section
5.3, (ii) the Board of Directors of the Company shall have complied with Section
7.2 in connection with such Superior Offer, and (iii) the Company shall
simultaneously make the payments required by Section 7.3. For purposes of this
Agreement, "SUPERIOR OFFER" means an Alternative Proposal which is superior from
a financial point of view to the Company's shareholders (other than any
shareholders affiliated with the Parent) to the Merger and the other
Transactions contemplated hereby and for which financing, to the extent
required, is then committed or which, in the good faith judgment of the
Company's board of directors after consultation with the Company's financial
advisors is reasonably capable of being obtained.
Section 7.2 CERTAIN ACTION PRIOR TO TERMINATION. The Company shall provide
to the Parent written notice of its intention to terminate this Agreement
pursuant to Section 7.1(e) advising the Parent (a) that the Board of Directors
of the Company has determined, by action of a majority of the members of the
Board of Directors of the Company who are not affiliated with either the Parent
or the person making such Alternative Proposal or their respective affiliates,
that such Alternative Proposal is a Superior Offer and that, in the exercise of
its good faith judgment as to fiduciary duties to shareholders under applicable
law, after consultation with the Company's outside legal counsel, failure by the
Board of Directors to terminate this Agreement could reasonably be expected to
result in a breach of such duties and (b) as to the material terms of any such
Alternative Proposal. At any time after the fifth business day following receipt
of such notice, the Company may terminate this Agreement as provided in Section
7.1(e) only if the Board of Directors of the Company determines, by action of a
majority of the members of the Board of Directors of the Company who are not
affiliated with either the Parent or the person making such Alternative Proposal
or their respective affiliates, that failure by the Board of Directors to
terminate this Agreement continues to be reasonably expected to result in a
breach of its fiduciary duties to shareholders under applicable law (which
determination shall be made in light of any revised proposal made by the Parent
prior to the expiration of such five business day period) and concurrently
enters into a definitive agreement providing for the implementation of such
Alternative Proposal.
A-20
<PAGE>
Section 7.3 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 7.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party or its directors, officers or shareholders, other than the
provisions of the last sentence of Section 5.2(b) and Sections 5.7 and 8.9 and
under the Confidentiality Agreement and other than the payment by the Company to
Parent, in the event of a termination pursuant to Section 7.1(e), of $750,000
cash. Without limiting the generality or effect of any provision of the
Confidentiality Agreement, if this Agreement is terminated pursuant to Section
7.1, for a period of three years after termination of this Agreement (unless
otherwise previously requested in writing by the Company) Parent and Sub will
not, and will cause their subsidiaries and affiliates not to, acquire or offer
or propose to acquire, beneficial ownership of any Shares. Nothing contained in
this Section 7.2 shall relieve the Company, Parent or Sub from liability for any
breach of this Agreement.
Section 7.4 AMENDMENT. To the extent permitted by applicable law, this
Agreement may be amended by action taken by the Company, Parent and Sub (and the
shareholders of the Company, if required by applicable law) at any time before
or after adoption of this Agreement by the Company's shareholders; PROVIDED,
HOWEVER, that after the adoption of this Agreement by the Company's
shareholders, no amendment shall be made which decreases the price per Share,
changes the form of consideration to be received by the holders of Shares in the
Merger or which adversely affects the rights of shareholders of the Company
hereunder without the approval of such shareholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of all the parties.
Section 7.5 EXTENSION WAIVER. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document, certificate
or writing delivered pursuant hereto or (c) waive compliance with any of the
agreements or conditions contained herein UNLESS waiver is unlawful or
specifically prohibited. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
The representations and warranties made herein shall terminate at the Effective
Time or the earlier termination of this Agreement pursuant to Section 7.1 as the
case may be; PROVIDED, HOWEVER, that if the Merger is consummated, Sections
2.10, 5.5 (with respect to the last sentence thereof), 5.7 and 5.10 will survive
the Effective Time to the extent contemplated by such sections, and provided
further that the last sentence of Section 5.2(b), Section 8.9 and the
Confidentiality Agreement will in all events survive the termination of this
Agreement.
Section 8.2 ENTIRE AGREEMENT: ASSIGNMENT. This Agreement, the Annex,
Exhibits and Schedules referred to herein, the letter(s) contemplated by Section
4.5 hereof and the Confidentiality Agreement (a) constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
other prior agreements and understandings, both written and oral, among the
parties or any of them with respect to the subject matter hereof and (b) shall
not be assigned by
A-21
<PAGE>
operation of law or otherwise, provided that Parent may assign its rights and
obligations or those of Sub to any wholly-owned, direct or indirect, subsidiary
of Parent, but no such assignment shall relieve Parent of its obligations
hereunder if such assignee does not perform such obligations.
Section 8.3 VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
Section 8.4 NOTICES. All notices and other communications among the
parties shall be in writing; and shall be deemed to have been duly given when
(i) delivered in person, or (ii) one business day after delivery to a reputable
overnight courier service (i.e., Federal Express), postage pre-paid, or (iii)
delivered by telecopy and promptly confirmed by telephone and by delivery of a
copy in person or overnight as aforesaid, in each case with postage prepaid,
addressed as follows:
If to Parent or Sub:
------------------
------------------
------------------
Tele:
Fax:
Attention:
With a copy to:
------------------
------------------
------------------
Telecopy:
Attention:
If to the Company:
Networks Electronic Corp.
9750 De Soto Avenue
Chatsworth, California 91311
Tel: (818) 341-0440
Fax: (818)
Attention: David Wachtel
With a copy to:
Troop, Steuber, Pasich,
Reddick & Tobey, LLP
2029 Century Park East, 24th Floor
Los Angeles, CA 90067
Tel: (310) 728-3200
A-22
<PAGE>
Fax: (310) 728-2200
Attention: Murray Markiles
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 8.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF
LAWS THEREOF.
Section 8.6 INTERPRETATION. When a reference is made in this Agreement to
subsidiaries of Parent, Sub or the Company, the word "subsidiaries" means any
corporation more than 50 percent of whose outstanding voting securities, or any
partnership, joint venture or other entity more than 50 percent of whose total
equity interest, is directly or indirectly owned by Parent, Sub or the Company,
as the case may be. For. purposes of this Agreement neither the Company nor any
subsidiary of the Company shall not be deemed to be an affiliate or subsidiary
of Sub or Parent. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Inclusion of information in the Company Disclosure Schedule or
the Parent Disclosure Schedule, as applicable, does not constitute an admission
or acknowledgment of the materiality of such information. If an ambiguity or
question of intent or interpretation arises, then this Agreement will be
construed as if drafted jointly by the parties to this Agreement and no
presumption or burden of proof will arise favoring or disfavoring any party to
this Agreement by virtue of the authorship of any of the provisions of this
Agreement.
Section 8.7 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and except for the provisions
of Sections 2.7, 2.12, 2.13, 5.7 and 5.10 (which are intended to be for the
benefit of the persons referred to therein and their beneficiaries, and may be
enforced by such persons as intended third-party beneficiaries), nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 8.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement.
Section 8.9 EXPENSES. All costs and expenses incurred in connection with
the transactions contemplated by this Agreement shall be paid by the party
incurring such expenses.
Section 8.10 OBLIGATION OF PARENT. Whenever this Agreement requires Sub to
take any action, such requirement will be deemed to include an undertaking on
the part of Parent to cause Sub to take such action.
A-23
<PAGE>
Section 8.11 SALE OF THE COMPANY. The parties hereto agree and acknowledge
that for the purposes of this Agreement no "sale" of the Company shall be deemed
to have occurred until the consummation of the Merger at the Effective Time.
* * * * * * * * * *
A-24
<PAGE>
IN WITNESS WHEREOF, each of' the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
---------------------------------
("Parent")
By: /s/ DERICK C. MARSH
---------------------------------
Name: Derick C. Marsh
Title: Vice President
---------------------------------
("Sub")
By: /s/ DERICK C. MARSH
------------------------------
Name: Derick C. Marsh
Title: Vice President
NETWORKS ELECTRONIC CORP.
("Company")
By: /s/ DAVID WACHTEL
-----------------------------
Name: David Wachtel
Title: President/CEO
A-25
<PAGE>
COMPANY DISCLOSURE SCHEDULE
This COMPANY DISCLOSURE SCHEDULE is an itemization by Networks Electronic
Corporation, a California corporation (the "COMPANY"), of those matters that
constitute exceptions to the items set forth in SECTION 3 of the Agreement and
Plan of Merger, dated as of July ___, 1999 (the "AGREEMENT"), by and among the
Company, Parent and Sub. Unless otherwise noted herein, any capitalized term in
this COMPANY DISCLOSURE SCHEDULE shall have the same meaning assigned to such
term in the Agreement. The inclusion of any item herein shall not be deemed to
be an admission of any obligation or liability to any third party. Disclosures
made under the heading of one section may apply to, augment or qualify
disclosures under one or more sections. Section headings are provided herein for
convenience only. Where the terms of a lease, contract or other disclosure item
have been summarized or described in this Company Disclosure Schedule, such
summary or description does not purport to be a complete statement of the
material terms of such lease, contract or other item. This COMPANY DISCLOSURE
SCHEDULE may be amended by the Company prior to the Closing.
SCHEDULE 3.4(B)
The following credit agreements have customary acceleration provisions
upon a "change of control":
(1) Community Redevelopment Agency of Los Angeles
354 South Spring Street, Suite #800
Los Angeles, CA 90013-1258
(Subordination Agreement with City National Bank for amount owed)
per Second Modification, dated August 26, 1996 and recorded
on SEPTEMBER 18, 1996 IN THE AMOUNT OF $1,105,000.00
(2) City National Bank
San Fernando Valley CBC
16133 Ventura Blvd., Suite 280
Encino, CA 91436
SECURED REAL ESTATE LOAN #635510 IN THE AMOUNT OF $1,550,000.
TRANSACTION DATED: FEBRUARY 2, 1999 - MATURITY DATE: FEB. 1, 2014
ACCOUNTS RECEIVABLES & INVENTORY LOAN IN THE AMOUNT OF $1,250,000.
TRANSACTION DATED: FEBRUARY 2, 1999. MATURITY: OCTOBER 1, 1999
LOAN NO. 082-635315/84646
(3) Community Development Commission of the County of Los Angeles
2 Coral Circle
Monterey Park, CA 91755
LOAN AMOUNT: $650,000.
A-26
<PAGE>
TRANSACTION DATE: 4-19-1999 - MATURITY DATE: MAY 1, 2004
("Documents are binding upon Borrower's successors, representatives
and assigns, and are legally enforceable in accordance with their
respective terms") Page 3 of Business Loan Agreement.
SCHEDULE 3.11
(1) Executive Employment Agreement by and between the Company and David
Wachtel, dated May 1, 1998.
SCHEDULE 3.13
(1) Community Redevelopment Agency of Los Angeles
354 South Spring Street, Suite #800
Los Angeles, CA 90013-1258
(Subordination Agreement with City National Bank for amount owed)
per Second Modification, dated August 26, 1996 and recorded
on SEPTEMBER 18, 1996 IN THE AMOUNT OF $1,105,000.00
(2) City National Bank
San Fernando Valley CBC
16133 Ventura Blvd., Suite 280
Encino, CA 91436
SECURED REAL ESTATE LOAN #635510 IN THE AMOUNT OF $1,550,000.
TRANSACTION DATED: FEBRUARY 2, 1999 - MATURITY DATE: FEB. 1, 2014
ACCOUNTS RECEIVABLES & INVENTORY LOAN IN THE AMOUNT OF $1,250,000.
TRANSACTION DATED: FEBRUARY 2, 1999. MATURITY: OCTOBER 1, 1999
LOAN NO. 082-635315/84646
(3) Community Development Commission of the County of Los Angeles
2 Coral Circle
Monterey Park, CA 91755
LOAN AMOUNT: $650,000.
TRANSACTION DATE: 4-19-1999 - MATURITY DATE: MAY 1, 2004
("Documents are binding upon Borrower's successors, representatives
and assigns, and are legally enforceable in accordance with their
respective terms") Page 3 of Business Loan Agreement.
A-27
<PAGE>
(4) Single Tenant Lease Agreement between the Company and Link Door Controls.
(This Lease Agreement was originally by and between the Company and Sentex
Systems, dated August 20, 1996. In December 1997, an Assignment of Lease
was made to Link Door Controls.)
(5) Promissory Notes between Sentex Systems and the Company, currently owing
by the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Loan #1 $45,053.53 Start Date: 3-03-97
Loan #2 $39,196.20 Start Date: 5-05-97
Loan #3 $103,125.73 Start Date: 6-19-97
Loan #4 $79,900.00 Start Date: 9-15-97
Loan #5 $20,724.54 Start Date: 11-18-97
Loan #6 $130,000.00 Start Date: 12-08-97
</TABLE>
Total Principal Amounts: $418,000.00
(6) The following is a purchase order under which the Company has committed to
purchase materials from a supplier:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ORDER DATE SUPPLIER PO# TOTAL ORDER
NAME
6/8/99 Star Net 1576 $508,920.00
</TABLE>
(7) The following is a list of purchase orders under which the Company has
committed to sell products in excess of $50,000 to third parties:
<TABLE>
<CAPTION>
ORDERDATE CUSTOMER NAME PURCHASE ORDER TOTAL ORDER
<S> <C> <C> <C>
11/17/98 KELLY AIR FORCE BASE F41608-99-C-0049 $1,531,038.31
03/25/99 LOCKHEED NEW ORLEANS R140196 $1,195,706.95
05/11/99 DEFENSE SUPPLY CENTER SP0441-99-C-5372 $1,079,024.00
RICHMOND
06/18/99 TEXTRON SYSTEMS I575P0129660 $484,469.55
10/20/98 KELLY AIR FORCE BASE f4-1608-98-c-0698 $437,500.00
04/20/99 DEFENSE SUPPLY CENTER SP0441-99-C-5319 $218,324.40
RICHMOND
06/30/99 INDUSTRIA ENGINEERING 33832 $92,800.00
A-28
<PAGE>
08/24/98 DEFENSE SUPPLY CENTER SPO41-98-M-YA61 $87,849.30
RICHMOND
05/13/99 PSI BEARINGS 99273 $78,925.00
04/26/99 WESCO AIRCRAFT 136691 $72,175.50
07/09/99 AIRLAX, INC. 6972 $59,812.50
04/26/99 WESCO AIRCRAFT 136691 $58,707.90
</TABLE>
- --------
1 Insert base Merger Consideration amount.
Page 32
<PAGE>
ANNEX B
CHAPTER 13
DISSENTERS' RIGHTS
1. SECTION
1300. Shareholder in short-form merger; Purchase at fair market value;
"Dissenting shares"; "Dissenting shareholder".
1301. Notice to holder of dissenting shares of reorganization approval;
Demand for purchase of shares; Contents of demand.
1302. Stamping or endorsing dissenting shares.
1303. Dissenting shareholder entitled to agreed price with interest thereon;
When price to be paid.
1304. Action by dissenters to determine whether shares are dissenting shares
of fair market value of dissenting shares or both; Joinder of
shareholders; Consolidation of actions; Determination of issues;
Appointment of appraisers.
1305. Duty and report of appraisers; Court's confirmation of report;
Determination of fair market value by court; Judgment, and payment;
Appeal; Costs of action.
1306. Prevention of payment to holders of dissenting shares of fair market
value; Effect.
1307. Disposition of dividends upon dissenting shares.
1308. Rights and privileges of dissenting shares; Withdrawal of demand for
payment.
1309. When dissenting shares lose their status.
1310. Suspension of proceedings for compensation or valuation pending
litigation.
1311. Shares to which chapter inapplicable.
1312. Attack on validity of reorganization or short-form merger; Rights of
shareholders; Burden of proof.
SS. 1300. SHAREHOLDER IN SHORT-FORM MERGER; PURCHASE AT FAIR MARKET VALUE;
"DISSENTING SHARES"; "DISSENTING SHAREHOLDER". (a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and (b) or subdivision (e) OR (F) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
divided which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come within
all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o)
of Section 25100 or (B) listed on the list of OTC margin stocks
issued by the Board of Governors of the Federal Reserve System, and
the notice of meeting of shareholders to act upon the reorganization
summarizes this section and Sections 1301, 1302, 1303 and 1304;
provided, however, that this provision does not apply to any shares
with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided
further, that this provision does not apply to any class of shares
described in SUBPARAGRAPH (A) OR (B) if demands for payment are
filed with respect to 5 percent or more of the outstanding shares of
that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
SUBPARAGRAPH (A) OR (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the reorganization,
or which were held of record on the effective date of a short-form
merger; provided, however, that SUBPARAGRAPH (A) rather than
SUBPARAGRAPH (B) of this paragraph applies in any case where the
approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
B-1
<PAGE>
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record. Amended Stats
1982 ch 36 ss. 3, effective February 17, 1982; Stats 1990 ch 1018 ss. 2
(AB 2259); Stats 1993 ch 543 ss. 13 (AB 2063). WITKIN SUMMARY (9TH ED)
CORPORATIONS SS. 206-208; RUTTER CAL PRAC GUIDE, CORPORATIONS SS.SS. 8:302
ET SEQ.
SS. 1301. NOTICE TO HOLDER OF DISSENTING SHARES OR REORGANIZATION APPROVAL ;
DEMAND FOR PURCHASE OF SHARES; CONTENTS OF DEMAND. (a) If, in the case or a
reorganization, any shareholders of a corporation have a right, under Section
1300, subject to compliance with paragraphs (3) and (4) of subdivision (b)
thereof, to require the corporation to purchase their shares for cash, such
corporation shall mail to each such shareholder a notice of the approval of the
reorganization by its outstanding shares (Section 152) within 10 days after the
date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304
and this section, a statement of the price determined by the corporation to
represent the fair market value of the dissenting shares and a brief description
of the procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase a the price stated any dissenting shares as
defined in subdivision (b) of Section 1300, unless they lose their status as
dissenting shares under Section 1309. (b) Any shareholder who has a right to
require the corporation to purchase the shareholder's shares for cash under
Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision
(b) thereof, and who desires the corporation to purchase such shares shall make
written demand upon the corporation for the purchase of such shares and payment
to the shareholder in cash of their fair market value. The demand is not
effective for any purpose unless it is received by the corporation or any
transfer agent thereof (1) in the case of shares described in clause (i) or (ii)
of paragraph (1) of subdivision (b) of Section 1300 (without regard to the
provisos in that paragraph), not later than the date of the shareholders'
meeting to vote upon the reorganization, or (2) in any other case within 30 days
after the date on which the notice of the approval by the outstanding shares
pursuant to subdivision (a) or the notice pursuant to the subdivision (i) of
Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by
the shareholder which the shareholder demands that the corporation purchase and
shall contain a statement of what such shareholder claims to be the fair market
value of those shares as of the day before the announcement of the proposed
reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Amended Stats 1980 ch 501 ss. 5, ch 1155 ss. 1. CAL JUR 3D (REV) CORPORATIONS
SS.SS. 414, 430, 431, 434, 435.
SS. 1302. STAMPING OR ENDORSING DISSENTING SHARES. Within 30 days after thE date
on which notice of the approval by the outstanding shares or the notice pursuant
to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares. Amended Stats 1986 ch 766 ss. 23. WITKIN
SUMMARY (9TH ED) CORPORATIONS SS. 207; CAL JUR 3D (REV) CORPORATIONS SS. 435.
SS. 1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST THEREON;
WHEN PRICE TO BE PAID. (a) If the corporation and the shareholder agree that the
shares are dissenting shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed price with interest thereon at
the legal rate on judgments from the date of the agreement. Any agreements
fixing the fair market value of any dissenting shares as between the corporation
and the holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market value
of dissenting shares shall be made within 30 days after the amount thereof has
been agreed or within 30 days after any statutory or contractual conditions to
the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement. Amended Stat 1980 ch 501 ss. 6; Stats
1986 ch 766 ss. 24. WITKIN SUMMARY (9TH ED) CORPORATIONS SS. 208; CAL JUR 3D
(REV) CORPORATIONS SS. 436
SS. 1304. ACTION BY DISSENTERS TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES
OR FAIR MARKET VALUE OF DISSENTING SHARES OR BOTH; JOINDER OF SHAREHOLDERS;
CONSOLIDATION OF ACTIONS; DETERMINATION OF ISSUES; APPOINTMENT OF APPRAISERS.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice
B-2
<PAGE>
of the approval by the outstanding shares (Section 152) or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder, but not
thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as
defendants in any such action and two or more such actions may be consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares. Added Stats 1975
ch 682 ss. 7, effective January 1, 1977. WITKIN SUMMARY (9TH ED) CORPORATIONS
SS. 208; CAL JUR 3D (REV) CORPORATIONS SS. 437
SS. 1305. DUTY AND REPORT OF APPRAISERS; COURT'S CONFIRMATION OF REPORT;
DETERMINATION OF FAIR MARKET VALUE BY COURT; JUDGMENT, AND PAYMENT; APPEAL; COST
OF ACTION. (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the time
fixed by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the
endorsement and delivery to the corporation of the certificates for the shares
described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the appraisers
to be fixed by the court, shall be assessed or apportioned as the court
considers equitable, but, if the appraisal exceeds the price offered by the
corporation, the corporation shall pay the costs (including in the discretion of
the court attorneys' fees, fees of expert witnesses and interest at the legal
rate on judgments from the date of compliance with Sections 1300, 1301 and 1302
if the value awarded by the court for the shares is more than 125 percent of the
price offered by the corporation under subdivision (a) of Section 1301). Amended
Stats 1977 ch 235 ss. 16; Stats 1986 ch 766 ss. 25. WITKIN SUMMARY (9TH ED)
CORPORATIONS SS. 191, 208; CAL JUR 3D (REV) CORPORATIONS SS.SS. 437, 438; RUTTER
CAL PRAC GUIDE, CORPORATIONS SS.SS. 8:341 ET SEQ.
SS. 1306. PREVENTION OF PAYMENT TO HOLDERS OF DISSENTING SHARES OF FAIR MARKET
VALUE; EFFECT. To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5. Added Stats 1975
ch 682 ss. 7, effective January 1, 1977. WITKIN SUMMARY (9TH ED) CORPORATIONS
SS. 206; CAL JUR 3D (REV) CORPORATIONS SS. 432.
SS. 1307. DISPOSITION OF DIVIDENDS UPON DISSENTING SHARES. Cash dividendS
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor. Added Stats 1975 ch 682 ss.
7, effective January 1, 1977.
SS. 1308. RIGHTS AND PRIVILEGES OF DISSENTING SHARES; WITHDRAWAL OF DEMAND FOR
PAYMENT. Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto. Added Stats 1975 ch 682 ss. 7, effective January
1, 1977.
B-3
<PAGE>
SS. 1309. WHEN DISSENTING SHARES LOSE THEIR STATUS. Dissenting shares losE their
status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any
dissenting shareholder who has initiated proceedings in good faith
under this chapter all necessary expenses incurred in such
proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion
into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price
of the shares, and neither files a complaint or intervenes in a
pending action as provided in Section 1304, within six months after
the date on which notice of the approval by the outstanding shares
or notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting
shares. Added Stats 1975 ch 682 ss. 7, effective January 1, 1977.
RUTTER CAL PRAC GUIDE, CORPORATIONS SS.SS. 8:353 ET SEQ.
SS. 1310. SUSPENSION OF PROCEEDINGS FOR COMPENSATION OR VALUATION PENDING
LITIGATION. If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation. Added Stats 1975 ch 682 ss. 7, effectivE January 1, 1977.
SS. 1311. SHARES TO WHICH CHAPTER INAPPLICABLE. This chapter, except SectioN
1312, does not apply to classes of shares whose terms and provisions
specifically set forth the amount to be paid in respect to such shares in the
event of a reorganization or merger. Amended Stats 1988 ch 919 ss. 8. CAL JUR 3D
(REV) CORPORATIONS SS. 431; CAL JUR 3D SUBROGATION SS.SS. 9, 18.
SS. 1312. ATTACK ON VALIDITY OF REORGANIZATION OF SHORT-FORM MERGER; RIGHT OF
SHAREHOLDERS; BURDEN OF PROOF. (a) No shareholder of a corporation was has a
right under this chapter to demand payment of cash for the shares held by the
shareholder shall have any right at law or in equity to attack the validity of
the reorganization or short-form merger set aside or rescinded, except in an
action to test whether the number of shares required to authorized or approve
the reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with,
another party to the reorganization or short-form merger,
subdivision (a) shall not apply to any shareholder of such party was
has not demanded payment of cash for such shareholder's shares
pursuant to this chapter; but if the shareholder institutes any
action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside
or rescinded, the shareholder shall not thereafter have any right to
demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the
reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the
court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such
shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with,
another party to the reorganization or short-form merger, in any
action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside
or rescinded, (1) a party to the reorganization or short-form merger
which controls another party to the reorganization or short-form
merger shall have the burden of proving that the transaction is just
and reasonable as to the shareholders of the controlled party, and
(2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and
reasonable as to the shareholders of any party so controlled.
Amended Stats 1988 ch 919 see 9.
B-4
<PAGE>
WITKIN SUMMARY (9TH ED) CORPORATIONS SS. 206, 210; CAL JUR 3D (REV) CORPORATIONS
SS.SS. 431, 432; RUTTER CAL PRAC GUIDE, CORPORATIONS SS.SS. 8:361 ET SEQ.
B-5
<PAGE>
ANNEX C
OPINION OF TSC
August 27, 1999
The Board of Directors
NETWORKS ELECTRONIC CORP.
9750 De Soto Avenue
Chatsworth, CA 91311
Gentlemen:
You have requested our opinion as to the fairness from a financial point
of view to the shareholders of Networks Electronic Corp. (the "Company") of the
consideration to be received by such shareholders pursuant to the terms of the
Agreement and Plan of Merger, dated as of July 16, 1999 (the "Agreement"),
between the Company and NE Merger Corp. ("Acquisition Sub"), an affiliate of GWB
(USA), Inc. ("GWB"), pursuant to which Acquisition Sub will be merged (the
"Merger") with and into the Company.
Pursuant to the Agreement, each share of common stock of the Company,
other than certain shares specified in the Agreement, will be converted into the
right to receive a cash payment per share equal to $7.50.
In arriving at our opinion, we have reviewed the Agreement and the
exhibits thereto. We also have reviewed financial and other information that was
publicly available or furnished to us by the Company, including information
provided during discussions with the Company's management. Included in the
information provided during discussions with the Company's management were
certain financial projections of the Company for the period beginning July 1,
1998 and ending June 30, 2004 prepared by the management of the Company. In
addition, we have compared certain financial and securities data of the Company
with various other companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of the common stock of
the Company, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that management's
projections have been reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of the Company. We have not
assumed any responsibility for making an independent evaluation of any assets or
liabilities or for making any independent verification of any of the information
reviewed by us. We have relied as to certain legal matters on advice of counsel
to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do no have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the Merger and the other business strategies being considered by the
Company's Board of Directors, nor does it address the Board's decision to
proceed with the Merger. Our opinion does not constitute a recommendation to any
shareholder as to how such shareholder should vote on the proposed transaction.
The Seidler Companies Incorporated ("TSC"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisition, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion that the consideration to be received by the Public
Shareholders of the Company pursuant to the Agreement is fair to such
shareholders from a financial point of view.
Very truly yours,
THE SEIDLER COMPANIES INCORPORATED
C-1
