SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant
Filed by a party other than the Registrant
Check the appropriate box:
x Preliminary proxy statement
Confidential, for Use of the
Commission
Only (as specified by Rule 14a-
6(e)(2))
Definitive proxy statement
Definitive additional materials
Soliciting material pursuant to
Rule 14a-
11(c) or Rule 14a-12
Torotel, Inc.
(Name of Registrant as Specified in Its
Charter)
Payment of Filing Fee (Check the appropriate box):
No fee required.
X Fee computed on table below per Exchange Act
Rules
14a-6(i)(1) and 0-11
(1)Title of each class of securities to which
transaction
applies:
Common Stock, $.50 par value per share;
Class A
$1.00 Preferred Stock, $.50 par value per
share
(2)Aggregate number of securities to which
transactions
applies:
1,800,000 shares of Common Stock and
2,500,000
shares of Preferred Stock
(3)Per unit price or other underlying value of
transaction computed pursuant to Exchange
Act Rule
0-11:
$1.94 per share of Common Stock and $1.00
per
share of Preferred Stock
(4)Proposed maximum aggregate value of
transaction:
$5,992,000
(5)Total fee paid: $1,198.
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as
provided
by Exchange Act Rule 0-11(a)(2) and identify the
filing for
which the offsetting fee was paid previously.
Identify the
previous filing by registration statement number, or
the
Form or Schedule and the date of its filing.
(1)Amount previously paid:
(2)Form, Schedule or Registration Statement No.:
(3)Filing party:
(4)Date filed:
TOROTEL, INC.
13402 South 71 Highway
Grandview, Missouri 64030
December __, 1998
Dear Shareholder:
You are cordially invited to attend the
annual meeting of the shareholders of
Torotel, Inc., a Missouri corporation (the
"Corporation"), to be held at _:00 p.m. local
time on ________, January __, 1999, in the
[to be announced], Kansas City, Missouri, to
transact business as set forth in the formal
notice that follows.
In particular, I would like to call your
attention to the Agreement and Plan of Merger
(the "Agreement") that the Corporation has
entered into with Electronika, Inc., a
California corporation ("Electronika"). The
Agreement is summarized in the accompanying
Proxy Statement and the full text of the
Agreement is attached thereto as Exhibit A.
At the annual meeting, the shareholders of
the Corporation are being asked to approve a
proposal whereby, in connection with the
consummation of the Agreement, (i) the
Corporation would issue 1,800,000 shares of
its common stock to the shareholders of
Electronika, and (ii) the Corporation's
Articles of Incorporation would be amended to
create a new class of preferred stock, which
also would be issued to the shareholders of
Electronika.
YOUR VOTE IS IMPORTANT. Whether or not you
expect to attend the annual meeting, please
sign and date the accompanying Proxy and
return it promptly in the enclosed postage
paid envelope. If you decide to attend the
annual meeting, you may revoke your Proxy and
vote your shares in person.
As always, we appreciate your loyalty and
support as a shareholder of the Corporation.
Sincerely,
Dale H. Sizemore, Jr.
Chairman and Chief Executive Officer
TOROTEL, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held ____________, January __, 1999
TO THE SHAREHOLDERS OF TOROTEL, INC.:
NOTICE is hereby given that the annual meeting of
the shareholders of Torotel, Inc., a Missouri
corporation (the "Corporation"), will be held at
_:00 p.m. local time on ________, January __,
1999, at [to be announced], Kansas City, Missouri
(the "Meeting"), for the following purposes:
1. In connection with the merger (the
"Merger") of a subsidiary of the Corporation and
Electronika, Inc., a California corporation
("Electronika"):
(a) To approve the issuance of 1,800,000
shares of the Corporation's common stock to the
shareholders of Electronika upon the consummation
of the Merger; and
(b) To approve an amendment to the
Corporation's Articles of Incorporation creating
a new class of preferred stock, with 2,500,000
shares of such preferred stock to be issued to
the shareholders of Electronika upon the
consummation of the Merger.
2. To elect five members of the Board of
Directors of the Corporation (if Proposal One is
approved, the Board of Directors of the
Corporation will appoint two additional directors
designated by the shareholders of Electronika, as
more fully discussed in the accompanying Proxy
Statement); and
3. To transact such other business as may
properly come before the annual meeting or any
postponement or adjournment thereof.
Shareholders of record at the close of business
on December __, 1998 will be entitled to receive
notice of and to vote at the Meeting. The
accompanying Proxy is solicited by the Board of
Directors. All of the above matters are more
fully described in the accompanying Proxy
Statement, into which this Notice is incorporated
by reference.
Shareholders are cordially invited to attend the
Meeting in person. WHETHER OR NOT YOU EXPECT TO
ATTEND THE MEETING, PLEASE SIGN AND DATE THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE PAID ENVELOPE. IF YOU DECIDE TO
ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND
VOTE YOUR SHARES IN PERSON.
BY ORDER OF THE BOARD OF DIRECTORS
H. James Serrone
Secretary of Torotel, Inc.
December __, 1998
TOROTEL, INC.
PROXY STATEMENT
TABLE OF CONTENTS
Page
GENERAL INFORMATION
Security Holders Entitled to Vote
Solicitation
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE
ACTED UPON
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
PROPOSAL ONE: THE SHARE ISSUANCE AND THE
ARTICLES AMENDMENT
Summary of the Merger
The Merger.
Merger Consideration
The Escrow; Distribution of the Preferred
Shares
Net Worth Adjustments
Closing
Employment of Mr. Caloyeras
Representations and Warranties
Exclusive Dealing
Voting Trust
Control; Certain Restricted Actions
Due Diligence Period
Interim Operations
Conditions to Closing
Regulatory Compliance
Mandatory Termination
Restrictions on Transfer on the Electronika
Shareholders' Common Stock
Electronika Directors
Indemnification; Insurance
Accounting Treatment
Certain Federal Income Tax Consequences
Interests of Certain Persons in the Merger
Information Regarding Electronika
Description of Electronika's Business
Market for Electronika Common Equity and
Related Stockholder Matters
Discussion and Analysis of Electronika's
Financial Condition and Results of
Operations
Financial Information
Information Regarding the Corporation
Special Factors
Risk Factors
Background of the Merger
Reasons for the Merger
Board Approval and Recommendation
Fairness Opinion
The Share Issuance
The Articles Amendment
Text of the Amendment to the Corporation's
Articles of Incorporation
Rights of Holders of Preferred Shares
General Effect Upon the Rights of Existing
Shareholders
Required Vote; Board Recommendation
PROPOSAL TWO: ELECTION OF THE BOARD OF DIRECTORS
Biographical Information Regarding the
Directors and Executive Officers
Board Meetings and Director Compensation
Committees
Cumulative Voting
Board Recommendation
Section 16(a) Beneficial Ownership Reporting
Compliance
Executive Officer Compensation
Option Grants Table
Aggregate Option Exercises and Fiscal Year-
End Option Value Table
Certain Relationships and Legal Proceedings
OTHER MATTERS
Other Business
Availability of Accountants
Deadline for Receipt of Shareholders'
Proposals
General
TOROTEL INC.
13402 South 71 Highway
Grandview, Missouri 64030
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
To Be Held , January __, 1999
GENERAL INFORMATION
Security Holders Entitled to Vote
Holders of shares of common stock, par value $.50
per share (the "Common Stock"), of Torotel, Inc.,
a Missouri corporation (the "Corporation"), of
record at the close of business on December __,
1998 (the "Shareholders"), will be entitled to
vote at the annual meeting of the Shareholders to
be held at _:00 p.m. local time on ________,
January __, 1999, at [to be announced], Kansas
City, Missouri, and any postponement or
adjournment thereof (the "Meeting"). The
Corporation's principal executive offices are
located at 13402 South 71 Highway, Grandview,
Missouri 64030, and its telephone number is (816)
761-6314.
This Proxy Statement, together with the Notice of
Annual Meeting, the enclosed Proxy, and the
accompanying 1998 Annual Report to Shareholders,
were initially distributed to the Shareholders on
or about December __, 1998.
If the enclosed Proxy is properly executed and
returned prior to voting at the Meeting, the
shares represented thereby will be voted in
accordance with any specifications made therein.
In the absence of instructions, the shares will
be voted as follows: (i) in connection with the
merger of a subsidiary of the Corporation and
Electronika, Inc., a California corporation
("Electronika"), "IN FAVOR" of (a) the issuance
of 1,800,000 shares of the Common Stock to the
shareholders of Electronika (the "Share
Issuance") and (b) the amendment to the
Corporation's Articles of Incorporation creating
a new class of preferred stock to be issued to
the shareholders of Electronika (the "Articles
Amendment"), each as more fully described in the
section herein entitled "Proposal One"; and (ii)
"FOR" the nominees to the Board of Directors of
the Corporation (the "Directors," or the "Board
of Directors") in the election of Directors, as
more fully described in the section herein
entitled "Proposal Two."
A majority of the outstanding shares of Common
Stock entitled to be voted at the Meeting,
represented in person or by Proxy, is necessary
to constitute a quorum to transact business at
the Meeting. If a quorum is present, (i) and a
majority of the outstanding shares of Common
Stock of the Corporation are voted "IN FAVOR" of
Proposal One, then such proposal shall be
approved by the Shareholders of the Corporation,
and (ii) the five nominees for Director receiving
the greatest number of votes at the Meeting will
be elected to the Board of Directors.
Abstentions and broker non-votes (which occur if
a broker or other nominee does not have
discretionary authority and has not received
voting instructions from the beneficial owner
with respect to a particular item) are counted
for purposes of determining the presence or
absence of a quorum for the transaction of
business. Abstentions are counted in tabulations
of the votes cast on proposals presented to the
shareholders and have the same legal effect as a
vote against a particular proposal. Broker non-
votes are not counted for purposes of determining
whether a proposal has been approved by the
requisite shareholder vote. The Shareholders
will not have dissenters' rights of appraisal
with respect to any of the actions to be taken at
the Meeting.
Shareholders who execute Proxies retain the right
to revoke them at any time before they are voted
by notifying the Secretary of the Corporation in
writing, by delivering a duly authorized Proxy
bearing a later date, or by attending the Meeting
and voting in person.
Solicitation
The accompanying Proxy is being solicited by and
on behalf of the Board of Directors. The
Corporation estimates that the total amount to be
spent in solicitation of the Proxies will be
approximately $2,000. The entire cost of this
solicitation will be paid by the Corporation. In
addition, the Corporation may reimburse brokerage
firms and others for their expenses in forwarding
solicitation materials regarding the Meeting to
beneficial owners. In addition to solicitation
by mail, officers and regular employees of the
Corporation may solicit proxies from Shareholders
by telephone, telegram, or personal interview.
Such persons will receive no additional
compensation for such services.
INTEREST OF CERTAIN PERSONS IN MATTERS
TO BE ACTED UPON
For information regarding the interests of the
current shareholders of Electronika and their
affiliates in the matters to be acted upon at the
Meeting, see the section below entitled "Proposal
One -- Summary of the Merger -- Interests of
Certain Persons in the Merger."
VOTING SECURITIES AND PRINCIPAL
HOLDERS THEREOF
The securities entitled to be voted at the
Meeting consist of shares of Common Stock of the
Corporation. Each Shareholder is entitled one
vote per each share of Common Stock. There were
[2,811,590] shares of Common Stock issued and
outstanding (exclusive of treasury shares) at the
close of business on the record date of the
Meeting.
The close of business on December __, 1998 has
been fixed by the Board of Directors as the
record date for determining the Shareholders who
will be entitled to vote at the Meeting.
The following persons beneficially owned more
than 5% of the outstanding Common Stock of the
Corporation at the close of business on the
record date of the Meeting:
Name and Address Amt Beneficially Percent
of Beneficial Owner Owned of Class
Richard A. Sizemore 415,374 (a) 14.7%
Linda V. Sizemore
8356 Hallet
Lenexa, KS 66215
Gregory M. Sizemore 404,358 (b) 14.4%
Julie Sizemore
12735 Mohawk Circle
Leawood, KS 66209
Dale H. Sizemore 379,509 (c) 13.5%
Carol J. Sizemore
2705 W. 121st Terrace
Leawood, KS 66209
Paulette A. Durso 325,131 (d) 11.5%
James T. Durso
3917 N.E. 59th St.
Kansas City, MO 64119
Caloyeras Fam. Prtnr, L.P. 207,900 (e) 7.4%
2041 W. 139th Street
Gardena, CA 90249
Thomas E. Foster 176,600 6.3%
5506 Brite Drive
Bethesda, MD 20817
(a) Richard A. Sizemore and Linda V.
Sizemore are husband and wife. Mr. and Mrs.
Sizemore's individual direct ownerships are
140,226 and 15,666 shares, respectively.
Mr. Sizemore's indirect ownership includes (i)
58,976 shares which are owned by Mr. Sizemore as
trustee for his children and (ii) 200,506 shares
owned by Sizemore Enterprises, a general
partnership, in which Mr. Sizemore is a general
partner.
(b) Gregory M. Sizemore and Julie Sizemore
are husband and wife. Mr. and Mrs. Sizemore's
individual direct ownerships are 137,654 and
15,666 shares, respectively. Mr. Sizemore's
indirect ownership includes (i) 50,532 shares
which are owned by Mr. Sizemore as trustee for
his children and (ii) 200,506 shares owned by
Sizemore Enterprises, a general partnership, in
which Mr. Sizemore is a general partner.
(c) Dale H. Sizemore, Jr. and Carol J.
Sizemore are husband and wife Mr. and Mrs.
Sizemore's individual direct ownerships are
130,964 and 14,351 shares, respectively.
Mr. Sizemore's indirect ownership includes (i)
33,688 shares which are owned by Mr. Sizemore as
trustee for his children and (ii) 200,506 shares
owned by Sizemore Enterprises, a general
partnership, in which Mr. Sizemore is a general
partner.
(d) James T. Durso and Paulette A. Durso are
husband and wife. Mr. and Mrs. Durso's
individual direct ownerships are 9,000 and
103,149 shares, respectively. Mrs. Durso's
indirect ownership includes (i) 12,476 shares
which are owned by Ms. Durso as trustee for her
children and (ii) 200,506 shares owned by
Sizemore Enterprises, a general partnership, in
which Ms. Durso is a general partner.
(e) The Caloyeras Family Partnership L.P., is
a limited partnership in which the three
shareholders of Electronika (who are siblings)
are the sole limited partners and PBC, Inc., a
California corporation, is the sole general
partner. Peter B. Caloyeras, who is the father
of the three shareholders of Electronika, is the
sole shareholder, sole director and president of
PBC, Inc. Each of the three shareholders of
Electronika owns 33% of the outstanding
partnership interests in the Caloyeras Family
Limited Partnership L.P., with PBC, Inc. owning
the remaining 1% partnership interest. The
number of shares indicated as owned by the
Caloyeras Family Partnership L.P. also includes
3,000 shares owned individually by each of the
shareholders of Electronika.
Note: The total amount of shares of Common
Stock owned by Sizemore Enterprises is 200,506.
The general partners of Sizemore Enterprises are
Dale H. Sizemore, Jr., Paulette A. Durso,
Gregory M. Sizemore, and Richard A. Sizemore, who
are brothers and sisters. The 200,506 shares are
included in each of the general partners'
beneficial ownerships.
PROPOSAL ONE
THE SHARE ISSUANCE AND THE
ARTICLES AMENDMENT
The Corporation has entered into an Agreement and
Plan of Merger (the "Merger Agreement") with
Electronika and the three shareholders of
Electronika (the "Electronika Shareholders"),
pursuant to which Electronika will be merged (the
"Merger") with and into a wholly owned subsidiary
of the Corporation ("MergerSub"). The
consummation of the Merger is subject to the
satisfaction of a number of conditions, including
approval of the Share Issuance and the Articles
Amendment, discussed herein, by the Shareholders.
See the section below entitled "Summary of the
Merger -- Conditions to Closing."
SUMMARY OF THE MERGER
The following summary is qualified in its
entirety by the terms and provisions of the
Merger Agreement, which is attached hereto as a
Exhibit A and is incorporated herein by
reference. All capitalized terms not defined
herein shall have the meanings ascribed to such
terms in the Merger Agreement.
The Merger
Subject to the terms and conditions of the Merger
Agreement, and subject to the provisions of laws
of the State of California (where Electronika is
incorporated) and the State of Missouri (where
MergerSub is incorporated), at the time when the
Merger officially becomes effective (the
"Effective Time"), Electronika will merge with
and into MergerSub. MergerSub will continue as a
wholly owned subsidiary of the Corporation and
will continue its corporate existence following
the Merger in accordance with the Missouri
Business and General Corporation Law. Following
the Merger, MergerSub will change its name to
Electronika, Inc. and will succeed to all of the
assets, and will be subject to all of the
liabilities, of the former Electronika, which
will no longer exist as a separate corporate
entity. MergerSub, as the surviving corporation
in the Merger, is sometimes referred to in this
Proxy Statement as the "Surviving Corporation."
Merger Consideration
Upon the consummation of the Merger, the
outstanding shares of capital stock of
Electronika will be converted into a total of
(a) 1,800,000 newly issued shares of the Common
Stock of the Corporation and (b) 2,500,000 shares
of newly issued Class A $1.00 Preferred Stock of
the Corporation (the "Preferred Shares"). The
Preferred Shares, however, will not be issued
directly to the Electronika Shareholders, but,
instead, will be deposited into escrow and held
in accordance with the terms of the escrow. The
Preferred Shares will only be distributed to the
Electronika Shareholders if certain conditions
are satisfied and certain earning targets
following the Merger are reached, all as more
fully described in the section below entitled
"The Escrow; Distribution of the Preferred
Shares."
The Corporation's Common Stock trades on the
American Stock Exchange (the "ASE"), under the
symbol "TTL." On July 27, 1998, the last trading
day before the public announcement regarding the
proposed Merger, the last reported sales prices
of the Common Stock on the ASE were as follows:
High -- $1.00; and Low -- $0.75. The rights,
preferences and privileges of the Preferred
Shares are described in the section below
entitled "The Articles Amendment." The Preferred
Shares will not be registered under any federal
or state securities laws and will not be publicly
traded.
The consideration to be paid to the Electronika
Shareholders was determined through arm's-length
negotiations between the Corporation and
Electronika. Other than for the transactions
contemplated by the Merger Agreement, there have
been no prior transactions, and there are no
presently proposed transactions, between the
Corporation and Electronika or the Electronika
Shareholders.
The Escrow; Distribution of the Preferred Shares
The escrow will be administered pursuant to the
terms of an Escrow Agreement to be entered into
among the Corporation, the Electronika
Shareholders and an escrow agent. As more fully
described below, under the terms of the Merger
Agreement and the Escrow Agreement, the number of
Preferred Shares to be distributed to the
Electronika Shareholders will depend primarily on
the amount of earnings before interest, taxes,
depreciation and amortization ("EBITDA") of the
Surviving Corporation, if any, after the
completion of the Merger. The EBITDA of the
Surviving Corporation will be measured at the end
of five separate periods, with the first period
beginning at the completion of the Merger and
ending on the last day of the fiscal year of the
Corporation immediately following the completion
of the Merger. The next three measurement
periods will be the next three successive full
fiscal years of the Corporation and the final
measurement period will be nine months of the
fourth full fiscal year after the Merger
(measured as three-fourths of the entire fiscal
year).
At the end of each measurement period, the
Corporation and the Electronika Shareholders will
determine the amount of EBITDA of the Surviving
Corporation in accordance with the provisions
specified in the Merger Agreement. For each
dollar of EBITDA as finally determined by the
Corporation and the Electronika Shareholders,
there will be one Preferred Share distributed to
the Electronika Shareholders from the escrow for
that measurement period, subject to adjustment
based on the final determination of the net worth
of Electronika at the time of the Merger. This
net worth adjustment is described in the section
below entitled "Net Worth Adjustments." If there
is a negative EBITDA during a particular
measurement period, no Preferred Shares will be
distributed to the Electronika Shareholders for
that measurement period, and the negative EBITDA
will carry forward to the next measurement period
and reduce, on a dollar-for-dollar basis, any
EBITDA for that next measurement period. If at
the end of the four measurement periods there are
still Preferred Shares remaining in the escrow,
those Preferred Shares will be canceled and the
Electronika Shareholders will lose all rights to
those Preferred Shares. Regardless of the actual
amount of EBITDA of the Surviving Corporation
after the Merger, in no event will the
Electronika Shareholders be entitled to receive
more than the 2,500,000 Preferred Shares or be
required to return any of the shares of Common
Stock issued to them in the Merger.
Net Worth Adjustments
Electronika has represented in the Merger
Agreement that it will have a "net worth" of at
least $400,000 at the Effective Time of the
Merger. For purposes of this calculation, "net
worth" will be determined by taking the total
value of all cash, cash equivalents, accounts
receivable, notes receivable, inventory, work in
process, prepaids, machinery, equipment and
deposits and subtracting from this figure the
total amount of all liabilities of Electronika.
If on or before April 30, 1999, the Corporation
determines that Electronika's net worth was less
than $400,000, it may deliver to the Electronika
Shareholders a schedule setting forth its
calculation of Electronika's net worth. If the
Corporation does not deliver this schedule to the
Electronika Shareholders by April 30, 1999 it
will be deemed to have waived its rights to raise
any objections to Electronika's net worth at the
Effective Time. The Merger Agreement allows the
Electronika Shareholders to verify and challenge
any net worth schedule delivered by the Company
and spells out the procedures to follow if there
is any dispute over the schedule. Once
Electronika's net worth is finally agreed to by
the Corporation and the Electronika Shareholders,
any shortfall in the actual net worth and
$400,000 will reduce, on a dollar-for-dollar
basis, the number of Preferred Shares to be
distributed from the escrow during a measurement
period, until the full amount of the shortfall is
made up. Conversely, if the net worth as finally
determined is more than $400,000, the number of
Preferred Shares to be distributed from the
escrow will be increased, on a dollar-for-dollar
basis, by the full amount of the excess. If
there is a net worth shortfall, and over the term
of the escrow there has not been enough EBITDA to
make up for the shortfall, the Electronika
Shareholders will be required to pay the
Corporation, in cash, the full amount of any
shortfall remaining.
Closing
The Closing of the Merger will take place on the
third business day following the satisfaction or
waiver of all conditions to closing contained in
the Merger Agreement, including the approval by
the Shareholders of this Proposal One. The
Closing is expected to occur on February __,
1999.
Employment of Mr. Caloyeras
Pursuant to the Merger Agreement, following the
consummation of the Merger, Peter B. Caloyeras
will become the Chairman of the Board and Chief
Executive Officer of the Corporation and the
Surviving Corporation. The Corporation and Mr.
Caloyeras have not entered into an employment
agreement with respect to his employment, and Mr.
Caloyeras will continue to devote a portion of
his business time to his other businesses and
interests, including businesses that may market
products that are competitive with the products
manufactured by the Corporation. The Corporation
has agreed that Mr. Caloyeras will receive a
salary of least $50,000 per year during the
Escrow Period. Mr. Caloyeras is the father of
the three Electronika Shareholders and the sole
shareholder, sole director and president of the
sole general partner of Caloyeras Family
Partnership L.P., which owns approximately 7.4%
of the outstanding Common Stock of the
Corporation.
Representations and Warranties
Electronika and the Electronika Shareholders, on
the one hand, and the Corporation and MergerSub,
on the other, make various customary
representations and warranties to each other as
set forth in Articles III and IV of the Merger
Agreement. The representations and warranties
survive the Closing and continue in force and
effect until the expiration of the Escrow Period.
Therefore, if a party were to materially breach
a representation or warranty, such party would be
liable to the non-breaching parties for breach of
contract under applicable law.
Exclusive Dealing
Until the Closing, the Corporation and
Electronika have agreed to deal exclusively with
each other and have agreed not to have dealings
with others that would result in the sale of
their respective businesses, subject to the
fiduciary obligations of the respective boards of
directors of the Corporation and Electronika
under applicable state law.
Voting Trust
In connection with the Merger, various members of
the founder's family shareholders of the
Corporation (the "Sizemore Family") and Mr.
Caloyeras will enter into a voting trust
agreement (the "Voting Trust") whereby Mr.
Caloyeras will be granted the power to vote
during the Escrow Period, 525,165 shares of
Common Stock held by the Sizemore Family (the
"Sizemore Stock").
Control; Certain Restricted Actions
After giving effect to the Merger and the Voting
Trust, the Electronika Shareholders and their
affiliates will hold, or direct the voting of,
54.9% of the Corporation's outstanding Common
Stock, thus effectively resulting in a change of
control of the Corporation. However, pursuant to
the Voting Trust, at the end of the Escrow Period
the voting power associated with the Sizemore
Stock will revert to the members of the Sizemore
Family and the Electronika Shareholders will no
longer have majority control of the Corporation.
Assuming no further stock issuances by the
Corporation during such period, upon the
termination of the Voting Trust the Electronika
Shareholders and their affiliates would then own
approximately 43.5% of the outstanding shares of
Common Stock of the Corporation.
During the Escrow Period, the Electronika
Shareholders have agreed not to, without prior
"Independent Approval" (as that term is defined
below): (a) vote their shares of Common Stock in
favor of any action or agreement, or take any
other action, that would (i) result in a breach
of any covenant, representation or warranty or
any other obligation of Electronika under the
Merger Agreement or (ii) impede, interfere with
or discourage the intended purposes of the Merger
Agreement; (b) acquire, offer to acquire, or
agree to acquire, directly or indirectly, by
purchase or otherwise, any voting securities or
direct or indirect rights or options to acquire
any voting securities of the Corporation, other
than as a result of a stock split, stock dividend
or similar recapitalization; or (c) make or cause
to be made any proposal for any transaction
between (i) the Electronika Shareholders or any
of their affiliates and (ii) the Corporation or
any of its affiliates, including without
limitation any acquisition or disposition of
assets, merger, or other business combination,
restructuring, tender offer, exchange offer,
recapitalization or similar transaction. As used
in the Merger Agreement, the term "Independent
Approval" means either (a) the approval of a
majority of the Board of Directors of the
Corporation who are disinterested with respect to
the matter to be acted upon or (b) if there are
less than two disinterested directors, the
approval of a majority of the outstanding voting
stock of the Corporation, excluding for this
purpose the shares of voting stock held by any
shareholders, or their affiliates, who have an
interest in the matter to be acted upon.
During the Escrow Period, in addition to any
shareholder vote or vote by the Board of
Directors that may be required by law, prior
Independent Approval will be required in order to
authorize any of the following actions or
matters: (a) entering into, or proposing to
enter into, any agreement, arrangement or
transaction with the Electronika Shareholders,
the Sizemore Family or any of their respective
affiliates; (b) amendment of the articles of
incorporation or the bylaws of the Corporation
that may benefit the Electronika Shareholders,
the Sizemore Family or any of their respective
affiliates, to the exclusion of, or
disproportionately to, the other shareholders of
the Corporation; (c) approval of salary increases
or bonus payments to officers or employees
affiliated with the Electronika Shareholders, the
Sizemore Family or any of their respective
affiliates; (d) amendment to, or modification,
waiver or termination of, the Merger Agreement;
(e) dissolution of the Corporation; (f)
initiation of bankruptcy, insolvency or
reorganization proceedings involving the
Corporation; and (g) withdrawal of the
registration of the Corporation's Common Stock
under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
Due Diligence Period
The Corporation and MergerSub, on the one hand,
and Electronika and the Electronika Shareholders,
on the other, are each required to deliver to the
other a disclosure letter by December 24, 1998,
detailing such parties' exceptions to their
respective representations and warranties. Each
of the disclosure letters must be, in form and
substance, acceptable to the receiving party. If
such disclosure letters are not acceptable to the
receiving party, the Merger Agreement shall
immediately terminate and be of no further force
and effect. In addition, the Corporation and
MergerSub, and Electronika and the Electronika
Shareholders, are required to update and
supplement their respective disclosure letters to
reflect any changes that may occur until the
Merger is completed. If any such update is not
acceptable to the receiving party, such party may
terminate the Merger Agreement.
Interim Operations
During the period from the date of the Merger
Agreement to the Closing Date, except (i) as
otherwise required in connection with the
transactions contemplated by the Merger
Agreement, or (ii) as otherwise consented to in
writing by Electronika, the Corporation has
agreed, and has agreed to cause its subsidiaries
to: (a) use its reasonable efforts to do all of
the following: conduct its business diligently
and only in the ordinary course, and, without
making any commitment prohibited by the Merger
Agreement, preserve its business organization
intact, keep available its present officers and
employees and preserve its relationships with
suppliers, customers and others having business
relations with it; (b) not (i) enter into, modify
or extend the term of any employment agreement
with any of its officers or employees or increase
the rate of compensation payable or to become
payable to any of its officers or employees over
the rates being paid to them at the date hereof,
except for normal merit or cost of living
increases, or (ii) adopt any new employee benefit
plan or amend or otherwise increase or accelerate
the payment or vesting of the amounts payable or
to be payable under any existing employee benefit
plan; (c) not pay any obligation or liability,
fixed or contingent, other than current
liabilities incurred in the ordinary course of
business or payments due under its existing loan
agreements or lines of credit, or cancel, without
full payment, any debts, claims or other
obligations (including accounts receivable) owing
to it; (d) not make any material alteration in
the manner of keeping its books, accounts or
records or in the accounting practices therein
reflected except as required by law or generally
accepted accounting principles; (e) use its
reasonable efforts to perform all of its
obligations under any contracts or agreements to
which it is a party or by which any of its
properties are bound (except those being
contested in good faith) and not cancel, amend,
modify, renew or extend any such contracts or
agreements that are material to its business or
waive any rights thereunder; (f) not enter into
any contracts or commitments that are material to
its business, other than contracts to provide
goods and services entered into in the ordinary
course of business consistent with past
practices; (g) use its reasonable efforts to
maintain and keep in good order and repair,
subject to ordinary wear and tear, taking into
account the respective ages of the assets
involved, all of its tangible assets and
properties; (h) not sell, lease, license or
otherwise dispose of any of its properties and
assets (including any of its intangible assets);
(i) use its reasonable efforts to both maintain
in full force and effect all of the insurance
policies in effect as of the date hereof and not
take (or fail to take) any action that would
enable insurers under such policies to avoid
liabilities pursuant to the terms of such
policies for claims arising prior to the Closing
Date; (j) not make any capital expenditures or
enter into any leases for capital equipment or
real estate or commitments with respect thereto,
except for expenditures for ordinary repairs and
maintenance and for capital expenditures not
exceeding $10,000 in the aggregate; (k65535 not
accept any orders from any of its customers under
conditions relating to price, terms of payment or
like matters materially different from the
conditions regularly and usually specified, or
place any orders for inventory, merchandise or
supplies in exceptional or unusual quantities
based on past operating practices; (1) not (i)
permit any lien to attach upon any of its
properties and assets, whether now owned or
subsequently acquired; (ii) assume, guaranty,
endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for
the obligations of any other person or entity; or
(iii) make any loans, advances or capital
contributions to, or investments in, any other
person or entity; (m) not initiate, compromise or
settle any material litigation or arbitration
proceeding; (n) use its reasonable efforts to not
change its Board of Directors; and (o) not enter
into any other transaction or make or enter into
any contract or commitment which is not in the
ordinary course of business.
In addition, the Corporation and its subsidiaries
are prohibited from (x) issuing shares of capital
stock (and options or warrants for such shares,
rights to subscribe to or purchase such shares,
or securities convertible into or exchangeable
for such shares), (y) authorizing, declaring or
paying any dividends, stock splits or liquidating
or other distributions, or redeeming, purchasing
or otherwise acquiring any shares of Common
Stock, and (z) borrowing or guaranteeing the
borrowing of money, except for the borrowing of
money under the Corporation's loan agreements or
lines of credit, or in the ordinary course of
business or as disclosed in or contemplated by
the Merger Agreement or the transactions
contemplated thereby.
Electronika and the Electronika Shareholders have
agreed to similar restrictions, except that
Electronika, as an S corporation, will be
permitted to continue to pay cash dividends to
the Electronika Shareholders until the
consummation of the Merger.
Conditions to Closing
The obligations of the parties to consummate the
transactions contemplated by the Merger Agreement
are subject to the following conditions, among
others: (i) the entering into of the Voting
Trust; (ii) no material adverse change occurring
with respect to either of the Corporation and its
subsidiaries or Electronika; (iii) the fairness
opinion (as discussed in the section below
entitled "Special Factors -- Fairness Opinion")
being confirmed as of the Effective Time; (iv)
the consents of third parties being obtained; (v)
Shareholder approval of Proposal One; and (vi)
the approval by each party of the other's
disclosure letter and any updates thereto.
Regulatory Compliance
Pursuant to New Jersey's Industrial Site Recovery
Act, because the Corporation owns an industrial
establishment in New Jersey, the Corporation is
required to notify the New Jersey Department of
Environmental Protection (the "Department") of
the change of control contemplated by the Merger
Agreement. As a precondition to closing the
Merger Agreement, the Corporation must receive,
and the Corporation is currently seeking,
clearance from the Department. The Corporation
is not aware of any other federal or state
regulatory requirements that must be complied
with or approvals that must be obtained in order
to consummate the Merger.
Mandatory Termination
The Merger Agreement will terminate automatically
if Proposal One is not approved by the
Shareholders at the Meeting.
Restrictions on Transfer on the Electronika
Shareholders' Common Stock
The Electronika Shareholders will be prohibited
from selling or transferring their respective
shares of Common Stock during the Escrow Period
(other than with respect to certain estate
planning transfers). In addition, neither the
shares of Common Stock nor the shares of
Preferred Stock to be issued to the Electronika
Shareholders will be registered under the
Securities Act of 1933, as amended, or under any
other federal or state securities laws, and may
not be sold or transferred unless such sale or
transfer is exempted from registration under such
securities laws. Other than compliance with such
securities laws, any shares of Preferred Stock
released from the Escrow will be freely
transferable by the Electronika Shareholders.
Electronika Directors
Upon the consummation of the Merger, the
Corporation has agreed to appoint to its Board of
Directors two additional directors designated by
the Electronika Shareholders. The Electronika
Shareholders have indicated that they intend to
designate Peter B. Caloyeras and W. Edgar Jessup,
Jr. to the Corporation's Board of Directors
following the Merger, and they have both
indicated that they are able and willing to serve
as directors.
Peter B. Caloyeras, 68, is the father of the
three Electronika Shareholders. Mr. Caloyeras
is currently Chairman of the Board of Magnetika,
Inc., which he founded in 1960, a privately held
manufacturer of magnetic components, including
components manufactured for Electronika. See
"Interests of Certain Person in the Merger"
below. In 1979, Mr. Caloyeras co-founded
Metrobank and served as a director of Metrobank
until it was acquired by Comerica Bank in January
1996. Mr. Caloyeras also currently serves as a
director of Prime Bank, a Los Angeles, California
bank. From 1967 to 1996, Mr. Caloyeras served as
a director of the Robert F. Kennedy Medical
Center in California, and was Chairman of the
Board of this entity at the time of its
acquisition by Catholic Healthcare West/Southern
California Region. Mr. Caloyeras also served as
a director of Catholic Healthcare West/Southern
California Region until September 1998. Together
with his wife, Mr. Caloyeras founded the Basil P.
Caloyeras Center for Modern Greek Studies at
Loyola Marymount University in Los Angeles,
California, in honor of his father, and has
previously served as Chairman of the Board of
Regents of this University. Mr. Caloyeras
currently serves as a member of the Board of
Trustees of Loyola Marymount University. Mr.
Caloyeras holds three degrees in electrical
engineering and is a Life Senior Member of the
Institute of Electrical and Electronic Engineers
and a Life Member of the World President's
Organization.
W. Edgar Jessup, Jr., 76, is a founding partner
of Ervin, Cohen & Jessup LLP, corporate counsel
to Electronika. Mr. Jessup's legal practice
focuses primarily on corporate, general business
and securities law, corporate and business tax
law and estate planning. Mr. Jessup received his
Sc.B. in engineering from Brown University and
received his J.D. degree from the University of
Southern California School of Law. He was
admitted to the California Bar in 1950. Mr.
Jessup is currently a director of Magnetika, Inc.
and of several non-profit corporations.
Indemnification; Insurance
Pursuant to the Merger Agreement, the Corporation
will indemnify and hold harmless each person who
is or was, prior to the Closing Date, an officer,
director or employee of the Corporation or any of
its subsidiaries (collectively, the "Indemnified
Parties" and individually, an "Indemnified
Party") against all losses, liabilities,
expenses, claims or damages in connection with
any claim, suit, action proceeding or
investigation based in whole or in part on the
fact of such Indemnified Party's position with
the Corporation or its subsidiaries and arising
out of acts or omissions occurring prior to and
including the Closing Date to the fullest extent
permitted by Missouri law for a period of not
less than six years following the Closing Date;
provided that, if any claim is asserted or made
within such six-year period, all rights to
indemnification in respect to such claim will
continue until final disposition of such
claim(s). The Corporation has agreed to pay an
Indemnified Party's legal and other expenses
incurred in connection with any matter occurring
on or before the Closing Date, including the
transactions contemplated by the Merger
Agreement.
The Electronika Shareholders have agreed to cause
the articles of incorporation and bylaws of the
Corporation and its subsidiaries to include
provisions for the limitation of liability of
directors and indemnification of the Indemnified
Parties to the fullest extent permitted under
applicable law and consistent with the
indemnification terms outlined in the paragraph
above, and will not permit the amendment of such
provisions in any manner adverse to the
Indemnified Parties without their written consent
for a period of six years from the effective date
of the Merger Agreement.
The Corporation has agreed to maintain, for six
years after the Closing Date, policies of
directors' and officers' liability insurance, in
amounts not less than 1997 coverage (provided
that the Corporation may substitute policies of
at least the same coverage containing terms and
conditions which are substantially equivalent)
with respect to matters occurring prior to the
Closing Date, to the extent such policies are
available. However, if annual premiums for the
Corporation's director and officer liability
insurance exceed 150% of 1997 premiums (the
"Maximum Premium"), the Corporation will only be
obligated to purchase such insurance coverages as
may be purchased by a premium payment equal to
the Maximum Premium.
Accounting TreatmentAccounting
The Merger will be recorded as a purchase of
Electronika by the Corporation for accounting and
financial reporting purposes.
Certain Federal Income Tax
The Merger should qualify as a tax-free
reorganization under Section 368(a)(2)(D) of the
Internal Revenue Code. Neither the Corporation
nor the Shareholders should be required to
recognize income, gain or loss as a result of the
Merger. However, neither the Corporation nor
Electronika has requested a ruling from the
Internal Revenue Service in connection with the
Merger. There can be no assurance that future
legislative, judicial or administrative changes
or interpretations will not adversely affect the
tax consequences of the Merger, and any such
changes or interpretations could be applied
retroactively.
Interests of Certain Persons in the Merger
Pursuant to the Merger Agreement, following the
consummation of the Merger, Peter B. Caloyeras
will become the Chairman of the Board and Chief
Executive Officer of the Corporation and the
Surviving Corporation. While the Corporation and
Mr. Caloyeras have not entered into an employment
agreement, the Corporation has agreed that Mr.
Caloyeras will receive a salary of least $50,000
per year during the Escrow Period. Mr. Caloyeras
will not devote his entire business time to the
Corporation and the Surviving Corporation, but
will continue to be involved with his other
businesses and interests, including businesses
that may market products that are competitive
with the products manufactured by the
Corporation.
Mr. Caloyeras is the father of the three
Electronika Shareholders and is the sole
shareholder, sole director and president of PBC,
Inc., a California corporation which is the sole
general partner of Caloyeras Family Partnership
L.P., a California limited partnership (the
"Family Partnership"). The Electronika
Shareholders are the sole limited partners of the
Family Partnership, and each Electronika
Shareholder owns 33% of the outstanding
partnership interests in the Family Partnership.
PBC, Inc. owns the remaining 1% partnership
interest in the Family Partnership. The Family
Partnership and the Electronika Shareholders
currently own 207,900 shares of Common Stock, or
approximately 7.4% of the outstanding shares of
Common Stock of the Corporation.
Mr. Caloyeras is the Chairman of the Board of
Magnetika, Inc., a company engaged in the
manufacture, design and sale of precision
magnetic components, including transformers,
inductors, reactors and chokes. Several of the
components manufactured and marketed by
Magnetika, Inc. are competitive with the products
manufactured and marketed by the Corporation. A
wholly-owned subsidiary of Magnetika, Inc. also
manufactures all of Electronika's requirements of
ballast transformers, pursuant to the terms of a
Manufacturing Agreement which is described below
under "Information Regarding Electronika-
Description of Electronika's Business." Each of
the Electronika Shareholders owns approximately
15% of the outstanding equity of Magnetika, Inc.
After giving effect to the Merger and the Voting
Trust, and after taking into account the number
of shares of Common Stock currently owned,
directly and indirectly, by the Electronika
Shareholders, following the Merger the
Electronika Shareholders and their affiliates
will have the power to direct the voting of
approximately 54.9% of the outstanding voting
shares of the Corporation.
None of the Electronika Shareholders is expected
to become an officer, director or employee of the
Corporation or of the Surviving Corporation
following the Merger.
INFORMATION REGARDING ELECTRONIKA
Description of Electronika's Business.
Electronika's is engaged in two primary lines of
business. First, Electronika distributes and
sells ballast transformers that are used to
activate and control the lights in commercial
airplane cockpits. Electronika's ballast
transformers are used in McDonnell Douglas
aircraft, which are now manufactured by Boeing
Company, and in Fokker aircraft. Electronika's
net revenues from the sale of these ballast
transformers was approximately $672,000 for the
year ended December 31, 1997, and approximately
$505,000 for the nine months ended September 30,
1998.
All of Electronika's requirements for the ballast
transformers are manufactured by a wholly-owned
subsidiary of Magnetika, Inc., a corporation in
which each of the Electronika Shareholders owns
approximately 15% of the outstanding equity.
Under the terms of the Manufacturing Agreement,
Magnetika, Inc. provides all necessary material,
labor, testing, packaging and related services
required to complete the manufacture, delivery
and sale of the ballast transformers, and
Electronika is obligated to order all of its
ballast transformer requirements exclusively from
Magnetika, Inc.. However, Electronika retains
ownership of all of the designs, drawings,
specifications and intellectual property rights
associated with the ballast transformers. In
exchange for the services provided to Electronika
under the Manufacturing Agreement, Magnetika,
Inc. receives 40% of the net sales price of all
ballast transformers sold by Electronika. The
Manufacturing Agreement continues in effect until
August 1, 2001, and automatically renews for
successive one-year periods thereafter. However,
either party may terminate the Manufacturing
Agreement upon six months' prior written notice.
Electronika's ballast transformers are sold to
both Boeing Company and to Fokker Aircraft for
use in the manufacture of aircraft, as well as to
numerous airline carriers for use as spare or
replacement parts. During 1997, approximately
25% of Electronika's revenues were generated from
sales to Boeing and Fokker Aircraft, and
approximately 75% of its revenues were generated
from sales to over 42 different carriers. During
the first nine months of 1998, approximately
12.5% of Electronika's revenues were generated
from sales to Boeing and Fokker Aircraft, and
approximately 82.5% of its revenues were
generated from sales to over 39 different
carriers.
Electronika's other primary line of business is
the custom design, manufacture and sale of
precision magnetic components, consisting of
transformers, inductors, reactors and chokes.
These products are sold by Electronika to
original equipment manufactures, who, in turn,
use them in products such as aircraft
navigational equipment, conventional missile
guidance systems and aircraft and naval radar and
instrument systems. A substantial portion of the
magnetic products sold by Electronika are used
for military purposes.
All of Electronika's magnetic products are
designed and manufactured to customer
specifications at Electronika's leased facilities
in Marlborough, Massachusetts. Electronika's net
revenues from the sale of these products was
approximately $1,118,000 for the year ended
December 31, 1997, and approximately $832,000 for
the nine months ended September 30, 1998, with
approximately 70% of these revenues generated
from sales to the military.
The magnetic components portion of Electronika's
business has historically been conducted by a
related entity, Magnetika/East Limited, a
Massachusetts limited partnership ("Mag East").
The Electronika Shareholders, who are the sole
limited partners of Mag East, own 99% of the
outstanding partnership interests of Mag East,
with PBC, Inc. owning the remaining 1% interest
as the sole general partner. Prior to the
consummation of the Merger, the business and
assets of Mag East will be transferred by the
Electronika Shareholders to Electronika as a
capital contribution without additional
consideration. In addition, the Family
Partnership has historically leased certain
equipment to Mag East, and all of such equipment
has been transferred to Electronika as a capital
contribution, again without additional
consideration.
Electronika was incorporated under the laws of
the State of California in 1968. Its executive
offices are located at 2041 W. 139th Street,
Gardena, California 90249, and its telephone
number is (310) 527-8100. In September 1998,
Electronika changed its name from Caloyeras, Inc.
to Electronika, Inc. The term "Electronika" as
used herein includes Electronika, Inc. and its
predecessors (including Mag East), unless the
context otherwise requires.
Market for Electronika Common Equity and Related
Stockholder Matters.
The common stock of Electronika is held by the
three Electronika Shareholders and, accordingly,
there is no public trading market for such common
stock. As of the date hereof, there are 1,000
shares of common stock, without par value, of
Electronika currently outstanding, with 333.33
shares of common stock owned by each of the
Electronika Shareholders. In addition, the
Electronika Shareholders, who are the sole
limited partners of Mag East, own 99% of the
outstanding partnership interests of Mag East,
with PBC, Inc. owning the remaining 1% interest
as the sole general partner.
The profits of Electronika, which is an S
corporation, and Mag East, which is a limited
partnership, are paid out to the Electronika
Shareholders either as salaries or distributions,
depending on the amount of cash available and the
needs of the Electronika Shareholders. These
distributions can be made at any time, as
determined by the Electronika Shareholders in
their discretion. For information regarding the
salaries paid to the Electronika Shareholders by
Electronika and Mag East during the years ended
December 31, 1996 and 1997, and during the nine
months ended September 30, 1998, see the
Electronika Financial Statements attached to this
proxy statement as Exhibit B. The following
table sets forth the additional dividends or
distributions paid by Electronika and Mag East,
as the case may be, to the Electronika
Shareholders for the periods indicated:
Year ended Nine months ended
December 31, September 30, 1998
1996 1997
Electronika -0- $180,000 -0-
Mag East $15,000 $300,000 $72,000
Total $15,000 $480,000 $72,000
Discussion and Analysis of Electronika's
Financial Condition and Results of Operations.
The following discussion of Electronika's
financial condition, results of operations,
liquidity and capital resources should be read in
conjunction with the financial statements of
Electronika attached hereto as Exhibit B.
General
Electronika has historically operated as two
separate entities, with the ballast transformer
portion of its business being conducted directly
by Electronika and its magnetic components
business being conducted by a related entity, Mag
East. The Electronika Shareholders, who are the
sole limited partners of Mag East, own 99% of the
outstanding partnership interests of Mag East,
with PBC, Inc. owning the remaining 1% interest
as the sole general partner. Prior to the
consummation of the Merger, the business and
assets of Mag East will be transferred by the
Electronika Shareholders to Electronika as a
capital contribution without additional
consideration. In addition, the Family
Partnership has historically leased certain
equipment to Mag East, and all of such equipment
has been transferred to Electronika as a capital
contribution, again without additional
consideration. For purposes of the information
provided below, the financial information of
Electronika and Mag East have been combined as if
they had operated as a single entity for all of
the periods presented.
All of Electronika's requirements for the ballast
transformers are manufactured by a wholly-owned
subsidiary of Magnetika, Inc., a corporation in
which each of the Electronika Shareholders owns
approximately 15% of the outstanding equity.
Under the terms of the Manufacturing Agreement,
Magnetika, Inc. provides all necessary material,
labor, testing, packaging and related services
required to complete the manufacture, delivery
and sale of the ballast transformers. In
exchange for the services provided to Electronika
under the Manufacturing Agreement, Magnetika,
Inc. receives 40% of the net sales price of all
ballast transformers sold by Electronika.
Neither Electronika, as an S corporation, nor Mag
East, as a limited partnership, is required to
pay federal income taxes, and each pays state
income taxes at reduced rates. In addition, the
profits of Electronika and Mag East are paid out
to the Electronika Shareholders either as
salaries or distributions, depending on the
amount of cash available and the needs of the
Electronika Shareholders. These distributions
can be made at any time, as determined by the
Electronika Shareholders in their discretion. As
such, comparisons of officers salaries between
periods is difficult and has been listed
separately in the tables below.
Results of Operations
The following table sets forth, for the periods
indicated, the percentage of net sales
represented by certain items included in the
statements of operations attached hereto as
Exhibit B:
Year Three months Nine months
ended ended ended
Dec. 31, Sept. 30, Sept. 30,
1996 1997 1997 1998 1997 1998
Sales 100.0% 100.0% 100.0% 100.0% 100.0%100.0%
Cost of
sales 57.0 56.3 60.2 60.4 53.5 57.5
Gross
profit 43.0 43.7 39.8 39.6 46.5 42.5
Selling
exp. 1.4 1.1 1.3 1.1 0.9 0.7
General
and
admin
exp.(1) 10.8 9.3 7.6 13.7 7.1 8.7
Operating
income 30.8 33.3 30.9 24.8 38.5 33.1
Other
expenses
(income) (0.1) - - - - -
Officer
salaries
and
related
exp 7.3 24.9 - - - -
Net
income 23.5% 8.4% 30.9% 24.8% 38.5% 33.1%
(1) Excludes officer salaries and related
expenses, including payroll taxes.
1997 Compared to 1996
Sales for 1997 increased by $416,000, or 30.2%,
from 1996. This increase consisted of a
$133,000, or 24.6%, increase in sales of ballast
transformers by Electronika and a $283,000, or
33.9%, increase in sales of magnetic components
by Mag East.
Cost of sales for 1997 increased by $224,000, or
28.5%, from 1996, with cost of sales for
Electronika increasing by $53,000, or 24.6%, and
cost of sales for Mag East increasing by
$171,000, or 30.0%. The increase is attributable
to the higher level of sales. As a percentage of
sales, cost of sales remained relatively constant
between the periods, with Mag East accounting for
substantially all of the 0.7% reduction
indicated. The cost of sales for Electronika is
fixed at 40% of sales pursuant to the terms of
the manufacturing agreement between Electronika
and Magnetika.
Selling expenses for the 1996 and 1997 periods
remained relatively constant despite the higher
level of sales, with an increase of less than
$1,000 in 1997. For each of the periods
indicated, all of the selling expenses were
incurred by Mag East, as all selling expenses
with respect to Electronika's ballast transformer
business are paid by Magnetika, Inc. pursuant to
the terms of the manufacturing agreement.
General and administrative expenses, which
exclude officer salaries and related expenses,
increased by $15,000, or 10.2%, in 1997 as
compared to 1996, with these expenses decreasing
by $7,000, or 35.2%, for Electronika and
increasing by $22,000, or 17.2%, for Mag East.
As a percentage of sales, general and
administrative expenses decreased by 1.6%, with
Electronika's general and administrative expenses
decreasing from 3.7% to 2.0% of net sales, and
Mag East's general and administrative expenses
decreasing from 15.6% to 13.6% of net sales. In
each case, Electronika and Mag East were able to
increase sales without material additions to
personnel or facilities.
As a result of the foregoing factors, operating
income for 1997 increased by $176,000, or 41.8%,
from 1996, with Electronika accounting for
$86,000 of this increase and Mag East accounting
for $90,000 of the increase. As a percentage of
sales, operating income increased by 2.6%, with
Electronika's operating incoming increasing from
56.2% to 58.0% of net sales, and Mag East's
operating income increasing from 14.1% to 18.5%
of net sales.
Officer salaries and related expenses for 1997
increased by $347,000, or 346%, from 1996, as the
Electronika Stockholders elected to receive
larger salaries in 1997. All of the salaries and
related expenses were paid by Electronika. The
Electronika Stockholders will not be officers of
the Surviving Corporation after the Merger and
will not receive any salary from the Corporation
or the Surviving Corporation following the
Merger.
As a result of the payment of substantially
higher officer salaries in 1997, net income for
1997 decreased by $172,000, or 53.5%, from 1996.
For 1997, Electronika's net income decreased by
$260,000, resulting in a loss of $57,000, which
was only partially offset by an $88,000 increase
in net income for Mag East.
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997
Sales for the three months ended September 30,
1998 increased by $3,000, or less than 1%, over
the comparable period of the prior year. Sales
for Electronika for the 1998 quarter actually
increased by $23,594, or 15.1%, over the 1997
quarter, but this increase was offset by a
decrease of $20,257, or 6.9%, in sales made by
Mag East over the same period. Electronika
attributes this decrease to a shift in the timing
of orders.
Cost of sales for the three months ended
September 30, 1998 remained relatively constant
as a percentage of sales as compared to the three
months ended September 30, 1997, and increased in
dollar amount by approximately $3,000. While
Electronika's cost of sales is fixed at 40% of
sales pursuant to the terms of the Manufacturing
Agreement, Mag East's cost of sales increased as
a percentage of sales from 70.9% for the 1997
quarter to 73.7% for the 1998 quarter. The
increase in cost of sales reflects Mag East's
discovery of an error in the calculation of the
amount of payroll taxes paid during the 1997
period, resulting in the payment of additional
taxes and penalties in the current period. A
portion of these taxes were attributable to
production workers and, accordingly, were
allocated to cost of sales.
Selling expenses for the 1998 quarter decreased
by $1,000, or 15.6%, as compared to the 1997
quarter, as a result of the decrease in sales.
All of the selling expenses were incurred by Mag
East, as all selling expenses with respect to
Electronika's ballast transformer business are
paid by Magnetika, Inc. pursuant to the terms of
the manufacturing agreement.
General and administrative expenses for the 1998
quarter increased by $28,000, or 82.9%, as
compared to the 1997 quarter, with these expenses
increasing by $12,000 for Electronika and $16,000
for Mag East. As a percentage of sales, general
and administrative expenses increased from 7.6%
of sales in the 1997 quarter to 13.7% of sales in
the 1998 quarter, with Electronika showing an
increase from 3.1% to 9.5% and Mag East showing
an increase from 9.9% to 16.5%. The increase
reflects the portion of the additional payroll
taxes and penalties paid during the 1998 quarter
which were attributable to non-production
workers.
As a result of the foregoing factors, operating
income for the 1998 quarter decreased by $27,000,
or 19.3%, as compared to the 1997 quarter, with
operating income for Electronika increasing by
$2,000, or 2.1%, and operating income for Mag
East decreasing by $29,000, or 57%. As a
percentage of sales, operating income for
Electronika decreased from 56.9% for the 1997
quarter to 50.5% for the 1998 quarter, and for
Mag East from 17.1% in the 1997 quarter to 7.9%
in the 1998 quarter.
No salaries were paid to any of the officers of
Electronika or Mag East during the three months
ended September 30, 1998 or September 30, 1997.
Nine Months Ended September 30, 1998 Compare to
Nine Months Ended September 30, 1997
Sales for the nine months ended September 30,
1998 decreased by $10,000, or 0.7%, over the
comparable period of the prior year, with Mag
East accounting for $3,000 of this decrease. For
Mag East, this represented an ___% reduction in
sales between the periods. Electronika
attributes this decrease to a shift in the timing
of orders.
Cost of sales for the nine months ended September
30, 1998 increased by $51,000, or 6.7%, as
compared to the nine months ended September 30,
1997, with cost of sales for Electronika
decreasing slightly and cost of sales for Mag
East increasing by $52,000, or 9.4%. The
increase in cost of sales reflects Mag East's
discovery of an error in the calculation of the
amount of payroll taxes paid during the 1997
period, resulting in the payment of additional
taxes and penalties in the current period. A
portion of these taxes were attributable to
production workers and, accordingly, were
allocated to cost of sales.
Selling expenses for the 1998 period decreased by
$2,000, or 15.8%, as compared to the 1997 period,
as a result of the decrease in sales. All of the
selling expenses were incurred by Mag East, as
all selling expenses with respect to
Electronika's ballast transformer business are
paid by Magnetika, Inc. pursuant to the terms of
the manufacturing agreement.
General and administrative expenses for the 1998
period increased by $22,000, or 21.3%, as
compared to the 1997 quarter, with these expenses
increasing by $14,000 for Electronika and $8,000
for Mag East. As a percentage of sales, general
and administrative expenses increased from 7.1%
of sales in the 1997 period to 8.7% of sales in
the 1998 period, with Electronika showing an
increase from 2.6% to 5.4%, and Mag East showing
an increase from 9.7% to 11.5%. The increase
reflects the portion of the additional payroll
taxes and penalties paid during the 1998 period
which were attributable to non-production
workers.
As a result of the foregoing factors, operating
income for the nine months ended September 30,
1998 decreased by $127,000, or 23.3%, as compared
to the 1997 period, with operating income for
Electronika decreasing by $16,000, or 5.5%, and
operating income for Mag East decreasing by
$111,000, or 43.7%. As a percentage of sales,
operating income for Electronika decreased from
57.4% for the 1997 period to 54.6% for the 1998
period, and for Mag East from 28.0% in the 1997
period to 17.2% in the 1998 period.
No salaries were paid to any of the officers of
Electronika or Mag East during the nine months
ended September 30, 1998 or September 30, 1997.
Liquidity and Capital Resources
Electronika's working capital needs have
historically been met from operating cash flow
and cash on hand, and an occasional advance from
affiliated entities. Electronika has no
outstanding bank financing, and presently has no
commitments beyond its working capital by which
it could obtain additional funds for current
operations. Electronika does not anticipate any
material capital expenditures for the remainder
of 1998. Electronika believes that its current
working capital, coupled with internally
generated funds, will be sufficient to support
its working capital and capital expenditure
requirements for the foreseeable future.
Electronika is not aware of any material
expenditures, significant balloon payments or
other payments, demands or commitments, including
off-balance sheet items, to be incurred beyond
the next 12 months.
Financial Information.
Attached hereto as Exhibit B and incorporated
herein by reference are the following unaudited
combined financial statements of Electronika and
Mag East: (i) balance sheet as of December 31,
1997; (ii) statements of operations for the years
ended December 31, 1996 and 1997; (iii)
statements of cash flows for the twelve month
periods ended December 31, 1996 and 1997; (iv)
balance sheet as of September 30, 1998; (v)
statements of operations for the three month and
nine month periods ended September 30, 1997 and
1998; and (vi) statements of cash flows for the
nine month periods ended September 30, 1998 and
1997. Also included as part of Exhibit B are the
related footnotes to the unaudited financial
statements. In the opinion of management of
Electronika, the quarterly financial information
presented for Electronika and Mag East includes
all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of
the financial position and results of operations
for such companies as of such dates and for such
periods. Results of operations for interim
periods are not necessarily indicative of results
for the full year.
INFORMATION REGARDING THE CORPORATION
This Proxy Statement is accompanied by (i) the
Annual Report to Shareholders for the fiscal year
ended April 30, 1998 (the "Annual Report") and
(ii) the Corporation's quarterly report on Form
10-QSB, as filed with the Commission, for the
fiscal quarter ended [July 31, 1998]. The
Corporation's annual report on Form 10-KSB,
together with all other reports filed with the
Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act since April 30, 1998, are
incorporated herein by reference. In addition,
the following Items of the Annual Report are
incorporated herein by reference: Items 1, 5, 6
and 8; provided, however, that those portions of
the Annual Report not specifically incorporated
herein by reference shall not be deemed to be
part of this Proxy Statement.
SPECIAL FACTORS
Risk Factors
In considering whether or not to approve this
Proposal One, the Shareholders should carefully
consider, among other things, the following risk
factors. The order in which these factors are
discussed is not intended to represent their
relative significance.
Change in Control. Pursuant to the Merger and
the Voting Trust, the Electronika Shareholders
and their affiliates will hold, or have the right
to direct the voting of, approximately 54.9% of
the Common Stock of the Corporation. This
represents a change in control of the affairs of
the Corporation. Because the Electronika
Shareholders will control the voting power of a
majority of the outstanding shares of Common
Stock of the Corporation, any attempt to change
control by shareholders unaffiliated with the
Electronika Shareholders is unlikely to be
successful.
Dilution. As of November 1, 1998 there were
2,811,590 shares of Common Stock of the
Corporation outstanding. The issuance of Common
Stock pursuant to the Merger will dilute the
Shareholders' percentage interest in the
Corporation by 39%, from 100% to 61%.
Superior Rights of Preferred Stock. The holders
of Preferred Stock will have rights to
distributions of dividends, and rights upon a
dissolution or liquidation of the Corporation,
superior to that of holders of Common Stock.
These superior rights will require the
Corporation to pay annual dividends on the
Preferred Stock, plus any accrued and unpaid
dividends thereon, before any amount may be paid
to holders of Common Stock. Also, these superior
rights will require the Corporation to redeem the
Preferred Stock in full, including any accrued
and unpaid dividends thereon, before any amounts
may be paid to holders of Common Stock upon a
dissolution or liquidation of the Corporation.
See the section below entitled "The Articles
Amendment" for a full description of the rights,
preferences and designations of the Preferred
Stock.
Composition of Board of Directors. The business
and affairs of the Corporation are directed by
its Board of Directors. After the Merger, the
Board of Directors will appoint two
representatives of the Electronika Shareholders
to the Board. Pursuant to the Merger Agreement,
the Electronika Shareholders have agreed not to
remove any of the Directors prior to the
Corporation's 1999 annual meeting of
shareholders. Thereafter, although two members
of the Board must be independent directors
pursuant to the rules and regulations of the
America Stock Exchange, the Electronika
Shareholders will have the power to elect a
majority of the Board of Directors. Accordingly,
they will have the ability to control the
business and affairs of the Corporation, subject
to the restrictions contained in the Merger
Agreement and the Voting Trust that will be in
effect during the Escrow Period, as described
above under "Control: Certain Restricted
Actions.".
Dependence on Key Management. The Corporation is
dependent upon its key officers for the
management of its business. Pursuant to the
Merger Agreement, Peter Caloyeras will be
appointed as the Chairman of the Board and Chief
Executive Officer of the Corporation. See the
section above entitled "Summary of the Merger --
Electronika Directors" for a description of the
business experience of Peter Caloyeras. The
Corporation and Mr. Caloyeras have not entered
into an employment agreement with respect to his
services to the Corporation and the Surviving
Corporation. In addition, Mr. Caloyeras will not
be devoting his full business time to the
Corporation and the Surviving Corporation, as he
will continue to be involved in the pursuit of
his other business interests, including business
interests that may be competitive with the
business of the Corporation.
Uncertainty Regarding Business Combination. The
Corporation and Electronika entered into the
Merger Agreement expecting that the Merger will
result in enhanced operations, cost savings and
synergies for the two companies. However, there
can be no assurance that such enhanced
operations, cost savings or synergies will be
realized. Integrating the operations and
management of the Corporation and Electronika
will be a complex process, and there can be no
assurance that this integration will be completed
rapidly or will result in the achievement of all
of the anticipated synergies and other benefits
expected to be realized from the Merger.
Moreover, the integration of the Corporation and
Electronika will require significant management
attention, which may temporarily distract
management from its usual focus on the daily
operations of the combined company.
The Corporation and Electronika estimate that, as
a result of the Merger, the combined company will
incur consolidation and integration expenses of
approximately $_______. In addition, it is
expected that the Corporation and Electronika
will incur merger-related expenses of
approximately $_________, consisting of
investment banking, legal and accounting fees and
financial and other related charges. The
combined company expects to expense the majority
of the $________ charge relating to the above-
referenced expenses in fiscal 1999. The amount
of these charges is a preliminary estimate and is
subject to change. Additional unanticipated
expenses may be incurred in connection with the
integration of the businesses of the Corporation
and Electronika.
Going Concern. The Report of the Independent
Certified Public Accountants of the Corporation,
dated as of June 19, 1998, noted that the
Corporation has sustained losses in 1998 and 1997
and its ability to obtain adequate financing is
uncertain. Because of these factors, the
accountants stated that there are substantial
doubts about the Corporation's ability to
continue as a going concern.
Background of the Merger
From September 1994 to October 1996 Peter
Caloyeras, either directly or through the Family
Partnership, acquired beneficial ownership of
6.81% of the Common Stock for investment
purposes. In February 1998, after the
Corporation's agreement to form a strategic
alliance with Brockson Investment Company was
terminated, Mr. Caloyeras contacted Dale H.
Sizemore, Jr., the Chief Executive Officer of the
Corporation, to inquire regarding the
Corporation's future plans. In March 1998, Mr.
Caloyeras visited the Corporation's headquarters,
and met with various officers and directors of
the Corporation. From March 1998 through June
1998, the Corporation and Mr. Caloyeras held
preliminary discussions regarding a potential
strategic alliance between the Corporation and
Electronika. Also during this time period, the
Corporation conducted internal deliberations
regarding the future of the Corporation. From
June 1998 through July 1998, the parties
negotiated the terms of a letter of intent for
the Merger. The letter of intent was executed on
July 27, 1998. From July 27, 1998 to November
24, 1998, the parties negotiated the terms of the
Merger Agreement. The Merger Agreement was
approved by the Board of Directors of the
Corporation on November 16, 1998 and was executed
by the parties on November 24, 1998. See the
section below entitled "Board Approval and
Recommendation."
Reasons for the Merger
The Merger is designed to accomplish several
objectives of the Corporation, including the
following:
(1) The Merger will bring to the Corporation
an experienced senior executive, Peter Caloyeras,
who has a proven, successful track record in the
Corporation's industry, and who is expected to
build a strong management team to operate the
Corporation.
(2) The Merger is expected to bring operating
profits to the Corporation, through the future
earnings of Electronika.
(3) The Merger is expected to bring operating
efficiencies to the Corporation by reducing costs
and utilizing both companies' existing production
capacity more efficiently.
(4) The Merger is expected to provide the
Corporation with a solid financial and managerial
base on which to make future acquisitions in the
Corporation's industry.
(5) The Merger is expected to increase the
capital and earnings of the Corporation to a
sufficient level to maintain its listing on the
American Stock Exchange.
Board Approval and Recommendation
At meetings held in November 1998, the Board of
Directors, all members being present, unanimously
(i) determined that the Merger and the
transactions contemplated by the Merger Agreement
are advisable and in the best interests of the
Company and its shareholders, (ii) approved the
form and terms of the Merger Agreement and the
other documents required thereunder, and (iii)
approved the other transactions contemplated by
the Merger Agreement. In reaching its
determination, the Board consulted the
Corporation's management and legal counsel and
considered a number of factors, including the
following:
(1) the Corporation's financial condition,
results of operations and business prospects;
(2) Electronika's financial condition,
results of operations and business prospects;
(3) Peter Caloyeras' perceived ability to
effectively direct the growth of the Corporation;
(4) the fairness opinion, as described below;
(5) current industry, economic and market
conditions;
(6) the likelihood that the Merger could be
consummated;
(7) the structure of the transaction and the
terms of the Merger Agreement; and
(8) the compatibility of the corporate
cultures and operating philosophies of the
Corporation and Electronika.
THE BOARD OF DIRECTORS BELIEVES THAT THE
CONSUMMATION OF THE MERGER IS IN THE BEST
INTERESTS OF THE CORPORATION AND THE
SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL OF THE SHARE
ISSUANCE AND THE ARTICLES AMENDMENT AT THE ANNUAL
MEETING.
The Board of Directors believes that the Merger
represents an attractive strategic fit between
two companies with similar business strategies,
as well as complementary operations and
geographic presences. The Board of Directors
believes that the combined company will have
greater financial strength, operational
efficiencies, earning power and growth potential
than either the Corporation or Electronika would
have on its own. In this regard, the Board of
Directors reviewed a number of potential benefits
of the Merger which it believed would contribute
to the success of the combined company, and thus
inure to the benefit of the Shareholders,
including the following:
Synergies of the Combined Company. The Board of
Directors believes that the Merger will produce a
number of important synergies, including (i)
reduced product costs as a result of greater
purchasing volume; (ii) reduced costs of
production as a percentage of revenues as a
result of the consolidation of duplicate
manufacturing facilities and equipment; (iii)
reduced distribution costs as a percentage of
revenues resulting from the combination of
distribution networks; and (iv) reduced general
and administrative expenses as a result of the
opportunity to leverage certain financial and
administrative functions over a larger operation
and the elimination of duplicate costs.
Combination of the Most Favorable Attributes of
the Companies. The combined company will be able
to take advantage of the best personnel and best
operating systems and practices currently
employed by the Corporation and Electronika.
Fairness Opinion
The Corporation engaged Stern Brothers Valuation
Advisors ("Stern Brothers") to render its opinion
with respect to the fairness, from a financial
point of view, to the shareholders of the
Corporation of the transactions contemplated by
the Merger Agreement (the "Opinion").
In a letter to the Corporation dated November 16,
1998, Stern Brothers expressed its opinion that,
based upon and subject to certain matters as
stated in its Opinion, other matters it considers
relevant and its general knowledge of such
matters as investment bankers, the transactions
contemplated by the Merger Agreement are fair,
from a financial point of view, to the
shareholders of the Corporation as of November
16, 1998. As a condition to the Corporation's
obligation to consummate the Merger, the
Corporation will require Stern Brothers to
confirm in writing that the fairness opinion
continues to be valid as of the Effective Time.
Stern Brothers is a national business valuation
and financial advisory firm engaged in, among
other things, corporate finance, business
valuation, financial advisory and litigation
support services for a wide variety of public and
private businesses throughout the United States,
representing virtually every industry. Since
1985, it has performed over 1,200 valuation
assignments. Stern Brothers was selected for
this assignment based upon its valuation services
provided to the Corporation on a previous
transaction for which it received a fee of
$_________.
In the course of Stern Brothers' analysis for
purposes of rendering the Opinion, Stern Brothers
(i) visited the Corporation's headquarters and
manufacturing facility; (ii) interviewed key
management regarding the background, operations,
financial performance and prospects of the
Corporation and Electronika; (iii) reviewed and
considered the following information: (a) annual
reports of the Corporation for the periods ended
April 30, 1991 through April 30, 1998; (b) Form
10-Q reports of the Corporation for the quarters
ended October 31, 1997, January 31, 1998 and July
31, 1998; (c) federal and state income tax
returns filed by the Corporation for fiscal year
1997; (d) four year income statement forecast
prepared by the Corporation for fiscal years 1999
through 2002; (e) Board of Directors minutes from
April 21, 1997 through August 10, 1998; (f) the
Corporation's proxy statement dated August 15,
1997; (g) the Articles of Incorporation and
Bylaws, as amended, of the Corporation and its
subsidiaries; (h) Certificate of Merger of
Torotel Magnetics into OPT Industries, Inc.; (i)
second edition brochure of the Corporation's
products; (j) various newspaper articles and
other published information regarding the
Corporation; (k) the Corporation's product
brochure of Inductors/Transformers; and (l) a
draft of the Merger Agreement dated October 1998;
(iv) reviewed and considered the following
additional information: (a) draft of financial
statements and accountants' review report for
Magnetika/East Ltd as of December 31, 1997; (b)
draft of financial statements and accountants'
review report for Caloyeras, Inc. d/b/a
Electronika as of December 31, 1997; (c) tax
returns for Caloyeras, Inc. from 1994 through
1997; (d) tax returns for Magnetika-East Limited
Partnership from 1992 through 1997; (e)
management-prepared financial statements for
Magnetika/East Ltd as of December 31, 1996,
December 31, 1997, June 30, 1997 and June 30,
1998; (f) management-prepared financial
statements for Caloyeras, Inc. as of December 29,
1996, December 31, 1997, June 30, 1997 and June
30, 1998; (g) Articles of Incorporation and
Bylaws of Caloyeras, Inc. (a California
corporation); (h) Agreement and Certificate of
Limited Partnership for Magnetika-East Limited
Partnership (a Massachusetts limited
partnership); (i) Manufacturing Agreement dated
August 1, 1998 between Caloyeras, Inc. d/b/a
Electronika and Ferrodyne Corporation d/b/a
Magnetika West, Inc.; (j) Statement of Corporate
Objectives of the Corporation, its subsidiaries
and affiliates; (k) board actions by unanimous
written consent for Caloyeras, Inc.; (l) resume
of Peter B. Caloyeras; (m) annual reports,
interim reports, Forms 10-K, Forms 10-Q and other
published information on publicly traded
companies as nearly comparable to the Corporation
as Stern Brothers could find; and (n)
publications by Standard & Poor's and Bloomberg
Financial Services, The Value Line Investment
Survey, the Federal Reserve Bulletin, the Wall
Street Journal, Directory of Companies Required
to File Annual Reports with the Securities and
Exchange Commission, Stock Bonds, Bills and
Inflation 1997 Yearbook by Ibbotson Associates
and Mergerstat Review 1997 by Houlihan Lokey
Howard & Zukin; (v) interviews with the
Corporation's and Electronika's accountant and
attorney; (vi) conducted an analysis of the value
of the Corporation and Electronika using several
market comparison methods and a discounted cash
flow approach; and (vii) conducted such other
studies, analyses, inquiries and investigations
as Stern Brothers deemed appropriate. The
foregoing is only a summary of the information
reviewed and factors considered by Stern Brothers
which have influenced their Opinion and does not
recite in detail all of such information and
factors that they have taken into consideration
in connection with the Opinion.
In rendering the Opinion, the Corporation and its
representatives warranted to Stern Brothers that
the information they provided was complete and
accurate to the best of their knowledge and that
the financial statement information reflects the
Corporation's results of operations and financial
condition in accordance with generally accepted
accounting principles, unless otherwise noted.
Stern Brothers has assumed no responsibility for
independent verification of information and
financial forecasts supplied by the Corporation
and its representatives (and Stern Brothers
expresses no opinion on that information). Stern
Brothers has not obtained any independent
appraisal of the assets of the Corporation or
Electronika, nor have they attempted to verify
the information furnished to Stern Brothers by
the Corporation or Electronika. Stern Brothers
used public information and industry and
statistical data from sources which they deem to
be reliable; however, they make no representation
as to the accuracy or completeness of such
information and have accepted such information
without further verification. Stern Brothers was
not authorized to solicit, and did not solicit,
interest from any party with respect to a merger
or other business combination transaction
involving the Corporation or any of its assets,
nor did they have any discussion or negotiation
with any parties, other than the Corporation, in
connection with the issuance of the Corporation's
shares. The Opinion is valid only for the
purposes and standard of value specified therein.
The Opinion assumes that the Corporation will
continue to operate as a going concern, and that
the character of the present business will remain
intact. The Opinion contemplates facts and
conditions existing as of the opinion date.
Events, conditions and circumstances occurring
after that date have not been considered, and
Stern Brothers has no obligation to update their
opinion for such events and conditions.
THE FULL TEXT OF THE OPINION AS OF NOVEMBER 16,
1998, WHICH SETS FORTH THE DESCRIPTION OF THE
ASSIGNMENT, THE SCOPE OF THE WORK, THE
ASSUMPTIONS AND LIMITING CONDITIONS, THE
CERTIFICATIONS AND THE CONCLUSION, IS ATTACHED
HERETO AS EXHIBIT C AND IS INCORPORATED HEREIN BY
REFERENCE. THE STOCKHOLDERS OF THE CORPORATION
ARE URGED TO READ THE OPINION, TOGETHER WITH THE
ASSUMPTIONS AND LIMITING CONDITIONS SET FORTH
THEREIN, IN ITS ENTIRETY. THE OPINION, AS
EXPRESSED HEREIN AND THEREIN, IN ANY EVENT, IS
LIMITED TO THE FAIRNESS OF THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT FROM A
FINANCIAL POINT OF VIEW TO THE STOCKHOLDERS OF
THE CORPORATION AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SUCH STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VIEW THE MERGER. THE
SUMMARY OF THE OPINION SET FORTH IN THIS
TRANSACTION STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION ATTACHED HERETO AS EXHIBIT C.
The following is a summary of certain of the
financial analyses used by Stern Brothers in
connection with providing its Opinion.
Market Comparison Approach
Stern Brothers analyzed and compared certain
financial information relating to the Corporation
with publicly-available financial and operating
information of the following seven publicly
traded companies engaged in the Corporation's
industry (collectively, the "Selected
Companies"): Adflex Solutions, Inc.; Ault, Inc.;
Bel Fuse; Espey Mfg. & Electronics Corp.;
Jetronic, Inc.; Pico Products, Inc.; and Robinson
Nugent, Inc. None of the Selected Companies used
in Stern Brothers' analysis is identical to the
Corporation. Stern Brothers' analysis involves
complex considerations and judgments concerning
differences in the potential financial and
operating characteristics of the Selected
Companies and other factors regarding the trading
values of the Selected Companies.
In conducting its analyses, Stern Brothers
reviewed and considered a variety of multiples
and ratios. In particular, Stern Brothers
computed the following multiples of the stock
price of each of the Selected Companies, the
Corporation and Electronika (the "Stock Price
Multiples"): (i) the last twelve months ("LTM")
earnings per share ("EPS") from continuing
operations; (ii) LTM EPS; (iii) LTM operating
income per share; (iv) LTM earnings before
interest, taxes, depreciation and amortization
("EBITDA") per share; (v) invested capital as a
percentage of earnings before interest and taxes
("EBIT") per share; (vi) invested capital as a
percentage of sales per share; and (vii) invested
capital as a percentage of EBITDA per share.
Stern Brothers compared the average and median
Stock Price Multiples of the Selected Companies
with the Stock Price Multiples of Electronika.
In conducting its analyses, Stern Brothers
assumed the total value of Electronika to be
equal to $3,850,000, which is the aggregate value
of (A) the Preferred Stock being issued to the
Electronika Shareholders in the Merger
($2,500,000) plus (B) the value of the Common
Stock being issued to the Electronika
Shareholders in the Merger (1,800,000 shares
valued at $.75 per share, the value of the Common
Stock on the date that the Merger was announced
to the public, which equals $1,350,000). Stern
Brothers also considered Electronika's LTM EBIT
as a percentage of sales, and Electronika's
historical growth in net income from continuing
operations, EBITDA, EBIT and sales, each as
compared to the Selected Companies. Stern
Brothers determined that the cumulative results
of the market comparison approach indicated that
the transactions contemplated by the Merger
Agreement are fair, from a financial point of
view, to the shareholders of the Corporation.
Discounted Future Returns Approach
Stern Brothers performed a discounted cash flow
analysis of the projected future returns of the
Corporation and Electronika to calculate the
present value per share of the Corporation's
Common Stock using (i) a discount rate of 25%,
(ii) the financial projections prepared by
management of the Corporation for the duration of
the Escrow Period (which projected net income for
the Corporation of $59,000 for the fourth fiscal
quarter of 1999, $450,000 for fiscal year 2000,
$800,000 for fiscal year 2001 and $1,250,000 for
fiscal year 2002), and (iii) a terminal value of
the Corporation and Electronika as of April 31,
2002 of $14,375,000 (calculated by multiplying
the projected cash flows in fiscal year 2002
($1,250,000) by 1.00 plus the projected long-term
growth rate of 15% and dividing that result by
the discount rate minus the long-term growth
rate). The results of this discounted cash flow
approach indicated a present value for the
Corporation's Common Stock of $1.80 per share
(assuming 4,700,000 shares outstanding).
Comparing this result to the value of the Common
Stock prior to the public announcement of the
Merger, Stern Brothers determined that the
cumulative results of the discounted future
returns approach indicated that the transactions
contemplated by the Merger Agreement are fair,
from a financial point of view, to the
shareholders of the Corporation.
General
The summary of the Opinion set forth above does
not purport to be a complete description of the
analyses performed, or the matters considered, by
Stern Brothers in rendering the Opinion. Stern
Brothers believes that its analyses and the
summary set forth above must be considered as a
whole and that selecting portions of such
analyses, without considering all of the
analyses, or of the above summary, would create
an incomplete view of the processes underlying
the analyses set forth in the Opinion. The fact
that any specific analyses has been referred to
in the summary above is not meant to indicate
that such analysis was given greater weight by
Stern Brothers than any of the other analyses.
The preparation of the Opinion is not necessarily
susceptible to partial analyses or summary. In
rendering the Opinion, Stern Brothers applied its
judgment to a variety of complex analyses and
assumptions. Stern Brothers may have given
various analyses more or less wight than other
analyses, and may have deemed various assumptions
more or less probable than other assumptions.
The assumptions made, and the judgments applied,
by Stern Brothers in rendering the Opinion are
not readily susceptible to description beyond
that set forth in the written text of the Opinion
itself.
In performing its analyses, Stern Brothers made
numerous assumptions with respect to industry
performance and general business and economic
considerations, which are beyond the control of
the Corporation. The analyses performed by Stern
Brothers are not necessarily indicative of actual
values or actual future results, which may be
significantly more or less favorable than
suggested by such analyses.
The terms of engagement of Stern Brothers by the
Corporation are set forth in a letter agreement
between Stern Brothers and the Corporation (the
"Engagement Letter"). Pursuant to the terms of
the Engagement Letter, as compensation for
rendering its Opinion to the Corporation, the
Corporation agreed to pay Stern Brothers at the
rate of $150 per hour, plus out-of-pocket
expenses. The Corporation currently anticipates
that the aggregate amount to be charged by Stern
Brothers for fees and costs will be approximately
$______. In addition, the Corporation has agreed
to indemnify Stern Brothers against certain
liabilities and expenses in connection with the
engagement of Stern Brothers. The Opinion is
subject to the understanding that the obligations
of Stern Brothers in the Opinion are solely
corporate obligations, and no officer, director,
employee, agent, shareholder or controlling
person of Stern Brothers shall be subjected to
any personal liability whatsoever to any person,
nor will any such claim be asserted by or on
behalf of the Corporation or its affiliates. No
material ongoing relationship between the
Corporation and Stern Brothers or its affiliates
or representatives is contemplated.
Reasons for Submitting the Transaction to a
Shareholder Vote
Section 6.1 of the Merger Agreement requires the
Corporation to convene a meeting of the
Shareholders for the purpose of approving the
transactions contemplated by the Merger
Agreement. In addition, (i) the rules and
regulations of the American Stock Exchange
require that the Share Issuance be approved by
the Shareholders and (ii) Missouri law requires
that the Articles Amendment be approved by the
Shareholders. If the Shareholders do not approve
Proposal One, the Merger Agreement will
automatically terminate and the Merger will not
be consummated.
THE SHARE ISSUANCE
Pursuant to the Merger Agreement, the Corporation
will issue 1,800,000 shares of Common Stock to
the Electronika Shareholders (the "Electronika
Shares") in the Merger. The Electronika Shares
issued in connection with the Merger will have
the same rights, preferences and privileges as
the shares of Common Stock currently outstanding.
Holders of the Electronika Shares will have no
preemptive rights to acquire additional Common
Stock of the Corporation. For a description of
the Merger, the merger consideration,
restrictions on the ability of the Electronika
Shareholders to transfer the Electronika Shares,
the fairness opinion received by the Corporation
in connection with the Merger and the reasons for
the Merger, see the above sections entitled
"Summary of the Merger" and "Special Factors."
As of the record date of the Meeting, there were
[2,811,590] shares of Common Stock of the
Corporation outstanding, including 207,900 shares
owned, directly or indirectly, by the Electronika
Shareholders. The issuance of the Electronika
Shares in the Merger will dilute the
Shareholders' percentage interest in the
Corporation by 39%, from 100% to 61%, and will
result in the Electronika Shareholders owning an
aggregate of 2,070,900 shares of the
Corporation's Common Stock. These shares,
together with the 525,165 shares of Common Stock
over which Peter Caloyeras will have voting
control under the Voting Trust, will result in
the Electronika Shareholders and their affiliates
holding approximately 54.9% of the outstanding
voting power of the Corporation. See "Summary of
the Merger-Voting Trust" and "-Control; Certain
Restricted Actions."
THE ARTICLES AMENDMENT
In connection with the Merger, the Corporation
will issue 2,500,000 shares (the "Preferred
Shares") of a new Class A $1.00 Preferred Stock
of the Corporation (the "Preferred Stock") to the
Electronika Shareholders. Holders of the
Preferred Shares will have no preemptive rights
to acquire additional Common Stock or Preferred
Stock of the Corporation. For a description of
the Merger, the merger consideration,
restrictions on the ability of the Electronika
Shareholders to transfer the Preferred Stock, the
fairness opinion received by the Corporation in
connection with the Merger and the reasons for
the Merger, see the above sections entitled
"Summary of the Merger" and "Special Factors."
Text of Amendment to the Corporation's Articles
of Incorporation
Article III of the Corporation's Articles of
Incorporation will be deleted in its entirety and
amended to read as follows:
Article III
(a The aggregate number of shares which the
Corporation shall be authorized to issue shall be
Eight Million Five Hundred Thousand (8,500,000)
shares of capital stock, par value $.50 per
share, consisting of Six Million (6,000,000)
shares of common stock (the "Common Stock") and
Two Million Five Hundred Thousand (2,500,000)
shares of Class A $1.00 Preferred Stock (the
"Preferred Stock"). No holder of shares of
Common Stock or Preferred Stock shall have any
preemptive right to acquire additional shares of
the Corporation's capital stock. The Common
Stock shall have no preferences, qualifications,
limitations, restrictions or special rights of
any character whatsoever in respect thereof.
(b The following is a statement of the
designations, powers, privileges and rights, and
the qualifications, limitations and restrictions,
in respect of the Preferred Stock:
(i Accumulation and Payment of Dividends.
The holders of outstanding shares of Preferred
Stock shall be entitled, in preference to the
holders of Common Stock, to receive, out of any
funds legally available therefor, cumulative
mandatory dividends on each share of Preferred
Stock payable in cash at the rate per annum of
$0.05 per share (the "Preferred Dividends");
provided, that Preferred Dividends need not be
paid in cash if and to the extent that such
payment is prohibited by law or under the terms
of one or more agreements or instruments
evidencing indebtedness for money borrowed of the
Corporation at the time such payment would
otherwise be due, in which case such Preferred
Dividends shall accumulate as provided herein.
Preferred Dividends shall accumulate commencing
as of the date of issuance of the Preferred
Stock, will be payable annually within forty-five
(45) days of the Corporation's fiscal year end
and will be cumulative, to the extent unpaid,
whether or not they have been declared and
whether or not there are profits, surplus or
other funds of the Corporation legally available
for the payment of dividends. Preferred
Dividends not paid or paid in an amount less than
the total amount of such dividends at the time
accumulated and payable on all outstanding shares
of Preferred Stock, including fractions, shall be
allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.
The amount of accumulated dividends on any share
of Preferred Stock, or fraction thereof, at any
date, shall be the amount of any dividends
payable thereon to and including such date,
whether or not declared, which have not been paid
in cash, with additional dividends accumulating
on any such accumulated but unpaid dividends
(including without limitation, dividends which
remain unpaid as a result of a prohibition
against payment in any agreement for money
borrowed) until paid. The Preferred Dividends
shall be cumulative, so that if any Preferred
Dividend shall not have been paid when due, the
deficiency shall be fully paid or declared and
set apart for all outstanding shares of Preferred
Stock before the Corporation pays any dividend on
or redeems or makes any other distribution on its
Common Stock. The Preferred Dividends for any
calendar year on any share of Preferred Stock
which is not outstanding on every day of the year
shall be prorated based on the number of days
such share was outstanding during the year. All
numbers relating to the calculation of dividends
pursuant hereto shall be subject to equitable
adjustment in the event of any stock split,
combination, reorganization, recapitalization,
reclassification or other similar event involving
a change in the Preferred Stock. Other than as
provided herein, holders of Preferred Stock shall
have no other right to receive dividends of the
Corporation.
(ii Redemption. The Preferred Stock shall be
redeemable as follows:
a) The Corporation may redeem
Preferred Stock at any time, at its sole option,
in whole or in part, out of funds legally
available therefor, at a per share redemption
price payable in cash equal to the sum of (x) One
Dollar and Ten Cents ($1.10) per share of
Preferred Stock (adjusted appropriately for stock
splits, stock dividends, recapitalizations and
the like with respect to the Preferred Stock)
plus (y) all accumulated, accrued and unpaid
dividends thereon, whether or not declared, in
cash to the date of redemption (the "Total Per
Share Preference Amount").
b) Any redemption of Preferred Stock
shall be accomplished out of funds legally
available for such purpose, subject to such
limitations as may be imposed under any agreement
or instrument evidencing indebtedness for money
borrowed of the Corporation at the time of such
redemption, and shall otherwise be accomplished
in accordance with all applicable laws.
c) If fewer than all of the Preferred
Stock at the time issued and outstanding are to
be redeemed, the shares shall be redeemed from
the holders of Preferred Stock pro rata based on
their respective holdings of such shares.
d) Notice of any redemption of
Preferred Stock (a "Redemption Notice") shall be
mailed at least ten (10) but not more than sixty
(60) calendar days prior to the date fixed for
redemption to each holder of Preferred Stock to
be redeemed, at such holder's address as it
appears on the books of the Corporation. In
order to facilitate any redemption of Preferred
Stock, the Board of Directors may fix a record
date for the determination of holders of
Preferred Stock to be redeemed, which shall not
be less than ten (10) nor more than thirty (30)
calendar days prior to the date fixed for such
redemption. The Redemption Notice shall include
the date fixed for redemption, the Total Per
Share Preference Amount to be paid and the place
at which the preferred stockholders may obtain
payment of the Total Per Share Preference Amount
upon surrender of their share certificates.
e) On or after the redemption date
specified in any Redemption Notice, each holder
of shares of Preferred Stock called to be
redeemed shall surrender the certificate or
certificates evidencing such shares to the
Corporation and shall then be entitled to receive
payment of the redemption price for each such
share. If fewer than all the shares represented
by one share certificate are to be redeemed, the
Corporation shall issue a new share certificate
for the shares not redeemed.
f) If funds are available on the date
fixed in the Redemption Notice, then, whether or
not the share certificates are surrendered for
payment of the Total Per Share Preference Amount,
on such date the holders of Preferred Stock to be
redeemed on such redemption date shall cease to
be stockholders with respect to such shares, such
shares shall no longer be transferable on the
books of the Corporation and such holders shall
have no interest in or claim against the
Corporation with respect to such shares except
the right to receive payment of the redemption
price upon delivery to the Corporation of (x) the
certificates representing such shares of
Preferred Stock, or fractions thereof, and (y)
appropriate endorsements and transfer documents
sufficient to transfer such shares of Preferred
Stock, or fractions thereof, to the Corporation
free of any adverse interest or lien. The Board
of Directors shall cause the transfer books of
the Corporation to be closed as to shares to be
redeemed pursuant hereto. The Corporation shall
return to the status of unauthorized and
undesignated shares each share of Preferred Stock
which it shall redeem or for any other reason
acquire.
g) The Corporation shall redeem all
of the outstanding shares of Preferred Stock from
funds lawfully available therefor twenty-one (21)
days after the consummation of any of the
following events: (x) a reorganization, merger or
consolidation with one or more other corporations
as a result of which the Corporation is not the
surviving corporation or the Corporation survives
as a subsidiary (at least majority owned) of
another corporation, or (y) the sale of all or
substantially all of the assets and property of
the Corporation to another person or entity.
(iii Liquidation, Dissolution or Winding Up.
Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, no
distribution shall be made to the holders of
shares of Common Stock unless, prior thereto, the
holders of shares of Preferred Stock, including
any fractional shares, shall have received per
share in cash the Total Per Share Preference
Amount (the "Liquidation Preference"). If, upon
such liquidation, dissolution or winding up, the
assets thus distributed among the holders of the
Preferred Stock shall be insufficient to permit
the payment to such stockholders of the full
preferential amount set forth herein, then the
entire assets of the Corporation to be
distributed shall be distributed ratably among
the holders of the Preferred Stock. After
payment in full of the Liquidation Preference to
holders of all shares of Preferred Stock,
including any fractional shares, the Preferred
Stock shall not be entitled to receive any
additional cash, property or other assets of the
Corporation upon the liquidation, dissolution or
winding up of the Corporation.
(iv Voting Rights. Except as otherwise
required by law, the holders of shares of
Preferred Stock shall have no voting rights.
Notwithstanding the foregoing, without the
affirmative vote or written consent of the
holders of at least a majority of the outstanding
shares of Preferred Stock, voting as a class, the
Corporation shall not:
a) amend or repeal any provision of or
add any provision to the Corporation's Articles
of Incorporation, or in any other manner modify
any class of capital stock, if such action would
alter or change the rights, preferences,
privileges or powers of, or the restrictions
provided for the benefit of, the Preferred Stock
so as to affect adversely the Preferred Stock; or
b) except as provided elsewhere
herein, authorize or issue any additional shares
of Preferred Stock or reissue any shares of
Preferred Stock that have been reacquired by the
Corporation, by purchase, redemption or
otherwise; or
c) authorize or create shares of any
class of capital stock having equal priority with
the Preferred Stock or any preference or priority
over the Preferred Stock as to dividends or
distribution of assets on liquidation,
dissolution or winding up.
(v Fractional Shares; Uncertificated Shares.
The Corporation may issue fractional shares of
Preferred Stock. The holders of fractional
shares shall be entitled to all rights as
preferred stockholders of the Corporation to the
extent provided herein and under applicable law
in respect of such fractional shares. Shares of
Preferred Stock, or fractions thereof, may, but
need not, be represented by share certificates.
Shares of Preferred Stock, or fractions thereof,
not represented by share certificates
("Uncertificated Shares") shall be registered in
the stock record book of the Corporation. The
Corporation at any time at its sole option may
deliver to any registered holder of Preferred
Stock share certificates to represent
Uncertificated Shares previously issued (or
deemed issued) to such holder.
(c The Board of Directors is authorized in
its discretion to determine, fix and approve the
consideration other than cash for shares which
may be issued, and to determine the fair value to
the Corporation of such consideration.
Rights of Holders of Preferred Shares
For a description of the dividend, voting,
liquidation, redemption and other material rights
of the holders of Preferred Shares, see the above
text of the amendment to the Corporation's
Articles of Incorporation.
General Effect Upon the Rights of Existing
Shareholders
The issuance of the Preferred Shares will have no
effect on the voting control of the Corporation
because the Preferred Stock has no voting rights
(except in the limited circumstances discussed
above). However, the holders of Preferred Stock
will have rights to distributions of dividends,
and rights upon a dissolution or liquidation of
the Corporation, superior to that of holders of
Common Stock. These superior rights will require
the Corporation to pay annual dividends on the
Preferred Stock, plus any accrued and unpaid
dividends thereon, before any amount may be paid
to holders of Common Stock, regardless of whether
the Corporation has any earnings during the year
and regardless of whether any dividends are
declared with respect to the Preferred Stock or
the Common Stock. To the extent the Corporation
is prohibited from paying these annual dividends,
either by law or under the terms of any of its
financing agreements, these unpaid dividends will
accrue and will be payable as soon as permitted.
Also, these superior rights will require the
Corporation to redeem the Preferred Stock in
full, and pay in full any accrued and unpaid
dividends thereon, before any amounts may be paid
to holders of Common Stock upon a dissolution or
liquidation of the Corporation. The Corporation
also will be required to redeem the Preferred
Shares, and pay in full any accrued but unpaid
dividends thereon, upon a reorganization, merger
or consolidation with one or more other
corporations as a result of which the Corporation
is not the surviving corporation or survives as a
subsidiary of another corporation, or upon the
sale of all or substantially all of the assets of
the Corporation.
REQUIRED VOTE; BOARD RECOMMENDATION
A vote of a majority of all outstanding shares of
the Common Stock of the Corporation, whether or
not present in person or by proxy and voting at
the Meeting, is necessary for the approval of the
above-described Share Issuance and Articles
Amendment. THE BOARD OF DIRECTORS RECOMMENDS
THAT THE SHAREHOLDERS APPROVE THIS PROPOSAL ONE.
PROPOSAL TWO
ELECTION OF THE BOARD OF DIRECTORS
THE SHARE ISSUANCE Pursuant to the Merger
Agreement, the Corporation will issue 1,800,000
shares of Common Stock to the Electronika
Shareholders (the Electronika Shares) in the
Merger. The Electronika Shares issued in
connection with the Merger will have the same
rights, preferences and privileges as the shares
of Common Stock currently outstanding. Holders
of the Electronika Shares will have no preemptive
rights to acquire additional Common Stock of the
Corporation. For a description of the Merger,
the merger consideration, restrictions on the
ability of the Electronika Shareholders to
transfer the Electronika Shares, the fairness
opinion received by the Corporation in connection
with the Merger and the reasons for the Merger,
see the above sections entitled Summary of the
Merger and Special Factors. As of the record
date of the Meeting, there were [2,811,590]
shares of Common Stock of the Corporation
outstanding, including 207,900 shares owned,
directly or indirectly, by the Electronika
Shareholders. The issuance of the Electronika
Shares in the Merger will dilute the
Shareholders' percentage interest in the
Corporation by 39%, from 100% to 61%, and will
result in the Electronika Shareholders owning an
aggregate of 2,070,900 shares of the
Corporation's Common Stock. These shares,
together with the 525,165 shares of Common Stock
over which Peter Caloyeras will have voting
control under the Voting Trust, will result in
the Electronika Shareholders and their affiliates
holding approximately 54.9% of the outstanding
voting power of the Corporation. See Summary of
the Merger-Voting Trust and -Control; Certain
Restricted Actions. THE ARTICLES AMENDMENT In
connection with the Merger, the Corporation will
issue 2,500,000 shares (the Preferred Shares) of
a new Class A $1.00 Preferred Stock of the
Corporation (the Preferred Stock) to the
Electronika Shareholders. Holders of the
Preferred Shares will have no preemptive rights
to acquire additional Common Stock or Preferred
Stock of the Corporation. For a description of
the Merger, the merger consideration,
restrictions on the ability of the Electronika
Shareholders to transfer the Preferred Stock, the
fairness opinion received by the Corporation in
connection with the Merger and the reasons for
the Merger, see the above sections entitled
Summary of the Merger and Special Factors. Text
of Amendment to the Corporation's Articles of
Incorporation Article III of the Corporation's
Articles of Incorporation will be deleted in its
entirety and amended to read as follows:
Article III(a i The aggregate number of
shares which the Corporation shall be authorized
to issue shall be Eight Million Five Hundred
Thousand (8,500,000) shares of capital stock, par
value $.50 per share, consisting of Six Million
(6,000,000) shares of common stock (the Common
Stock) and Two Million Five Hundred Thousand
(2,500,000) shares of Class A $1.00 Preferred
Stock (the Preferred Stock). No holder of shares
of Common Stock or Preferred Stock shall have any
preemptive right to acquire additional shares of
the Corporation's capital stock. The Common
Stock shall have no preferences, qualifications,
limitations, restrictions or special rights of
any character whatsoever in respect thereof.(b i
The following is a statement of the
designations, powers, privileges and rights, and
the qualifications, limitations and restrictions,
in respect of the Preferred Stock:(i a
Accumulation and Payment of Dividends. The
holders of outstanding shares of Preferred Stock
shall be entitled, in preference to the holders
of Common Stock, to receive, out of any funds
legally available therefor, cumulative mandatory
dividends on each share of Preferred Stock
payable in cash at the rate per annum of $0.05
per share (the Preferred Dividends); provided,
that Preferred Dividends need not be paid in cash
if and to the extent that such payment is
prohibited by law or under the terms of one or
more agreements or instruments evidencing
indebtedness for money borrowed of the
Corporation at the time such payment would
otherwise be due, in which case such Preferred
Dividends shall accumulate as provided herein.
Preferred Dividends shall accumulate commencing
as of the date of issuance of the Preferred
Stock, will be payable annually within forty-five
(45) days of the Corporation's fiscal year end
and will be cumulative, to the extent unpaid,
whether or not they have been declared and
whether or not there are profits, surplus or
other funds of the Corporation legally available
for the payment of dividends. Preferred
Dividends not paid or paid in an amount less than
the total amount of such dividends at the time
accumulated and payable on all outstanding shares
of Preferred Stock, including fractions, shall be
allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.
The amount of accumulated dividends on any share
of Preferred Stock, or fraction thereof, at any
date, shall be the amount of any dividends
payable thereon to and including such date,
whether or not declared, which have not been paid
in cash, with additional dividends accumulating
on any such accumulated but unpaid dividends
(including without limitation, dividends which
remain unpaid as a result of a prohibition
against payment in any agreement for money
borrowed) until paid. The Preferred Dividends
shall be cumulative, so that if any Preferred
Dividend shall not have been paid when due, the
deficiency shall be fully paid or declared and
set apart for all outstanding shares of Preferred
Stock before the Corporation pays any dividend on
or redeems or makes any other distribution on its
Common Stock. The Preferred Dividends for any
calendar year on any share of Preferred Stock
which is not outstanding on every day of the year
shall be prorated based on the number of days
such share was outstanding during the year. All
numbers relating to the calculation of dividends
pursuant hereto shall be subject to equitable
adjustment in the event of any stock split,
combination, reorganization, recapitalization,
reclassification or other similar event involving
a change in the Preferred Stock. Other than as
provided herein, holders of Preferred Stock shall
have no other right to receive dividends of the
Corporation.(ii a Redemption. The Preferred
Stock shall be redeemable as follows: a) The
Corporation may redeem Preferred Stock at any
time, at its sole option, in whole or in part,
out of funds legally available therefor, at a per
share redemption price payable in cash equal to
the sum of (x) One Dollar and Ten Cents ($1.10)
per share of Preferred Stock (adjusted
appropriately for stock splits, stock dividends,
recapitalizations and the like with respect to
the Preferred Stock) plus (y) all accumulated,
accrued and unpaid dividends thereon, whether or
not declared, in cash to the date of redemption
(the Total Per Share Preference Amount).b)
Any redemption of Preferred Stock shall be
accomplished out of funds legally available for
such purpose, subject to such limitations as may
be imposed under any agreement or instrument
evidencing indebtedness for money borrowed of the
Corporation at the time of such redemption, and
shall otherwise be accomplished in accordance
with all applicable laws. c) If fewer than
all of the Preferred Stock at the time issued and
outstanding are to be redeemed, the shares shall
be redeemed from the holders of Preferred Stock
pro rata based on their respective holdings of
such shares. d) Notice of any redemption of
Preferred Stock (a Redemption Notice) shall be
mailed at least ten (10) but not more than sixty
(60) calendar days prior to the date fixed for
redemption to each holder of Preferred Stock to
be redeemed, at such holder's address as it
appears on the books of the Corporation. In
order to facilitate any redemption of Preferred
Stock, the Board of Directors may fix a record
date for the determination of holders of
Preferred Stock to be redeemed, which shall not
be less than ten (10) nor more than thirty (30)
calendar days prior to the date fixed for such
redemption. The Redemption Notice shall include
the date fixed for redemption, the Total Per
Share Preference Amount to be paid and the place
at which the preferred stockholders may obtain
payment of the Total Per Share Preference Amount
upon surrender of their share certificates. e)
On or after the redemption date specified in
any Redemption Notice, each holder of shares of
Preferred Stock called to be redeemed shall
surrender the certificate or certificates
evidencing such shares to the Corporation and
shall then be entitled to receive payment of the
redemption price for each such share. If fewer
than all the shares represented by one share
certificate are to be redeemed, the Corporation
shall issue a new share certificate for the
shares not redeemed. f) If funds are
available on the date fixed in the Redemption
Notice, then, whether or not the share
certificates are surrendered for payment of the
Total Per Share Preference Amount, on such date
the holders of Preferred Stock to be redeemed on
such redemption date shall cease to be
stockholders with respect to such shares, such
shares shall no longer be transferable on the
books of the Corporation and such holders shall
have no interest in or claim against the
Corporation with respect to such shares except
the right to receive payment of the redemption
price upon delivery to the Corporation of (x) the
certificates representing such shares of
Preferred Stock, or fractions thereof, and (y)
appropriate endorsements and transfer documents
sufficient to transfer such shares of Preferred
Stock, or fractions thereof, to the Corporation
free of any adverse interest or lien. The Board
of Directors shall cause the transfer books of
the Corporation to be closed as to shares to be
redeemed pursuant hereto. The Corporation shall
return to the status of unauthorized and
undesignated shares each share of Preferred Stock
which it shall redeem or for any other reason
acquire. g) The Corporation shall redeem all
of the outstanding shares of Preferred Stock from
funds lawfully available therefor twenty-one (21)
days after the consummation of any of the
following events: (x) a reorganization, merger or
consolidation with one or more other corporations
as a result of which the Corporation is not the
surviving corporation or the Corporation survives
as a subsidiary (at least majority owned) of
another corporation, or (y) the sale of all or
substantially all of the assets and property of
the Corporation to another person or entity.(iii
a Liquidation, Dissolution or Winding Up.
Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, no
distribution shall be made to the holders of
shares of Common Stock unless, prior thereto, the
holders of shares of Preferred Stock, including
any fractional shares, shall have received per
share in cash the Total Per Share Preference
Amount (the Liquidation Preference). If, upon
such liquidation, dissolution or winding up, the
assets thus distributed among the holders of the
Preferred Stock shall be insufficient to permit
the payment to such stockholders of the full
preferential amount set forth herein, then the
entire assets of the Corporation to be
distributed shall be distributed ratably among
the holders of the Preferred Stock. After
payment in full of the Liquidation Preference to
holders of all shares of Preferred Stock,
including any fractional shares, the Preferred
Stock shall not be entitled to receive any
additional cash, property or other assets of the
Corporation upon the liquidation, dissolution or
winding up of the Corporation.(iv a Voting
Rights. Except as otherwise required by law, the
holders of shares of Preferred Stock shall have
no voting rights. Notwithstanding the foregoing,
without the affirmative vote or written consent
of the holders of at least a majority of the
outstanding shares of Preferred Stock, voting as
a class, the Corporation shall not: a) amend
or repeal any provision of or add any provision
to the Corporation's Articles of Incorporation,
or in any other manner modify any class of
capital stock, if such action would alter or
change the rights, preferences, privileges or
powers of, or the restrictions provided for the
benefit of, the Preferred Stock so as to affect
adversely the Preferred Stock; orb) except as
provided elsewhere herein, authorize or issue any
additional shares of Preferred Stock or reissue
any shares of Preferred Stock that have been
reacquired by the Corporation, by purchase,
redemption or otherwise; or c) authorize or
create shares of any class of capital stock
having equal priority with the Preferred Stock or
any preference or priority over the Preferred
Stock as to dividends or distribution of assets
on liquidation, dissolution or winding up.(v a
Fractional Shares; Uncertificated Shares. The
Corporation may issue fractional shares of
Preferred Stock. The holders of fractional
shares shall be entitled to all rights as
preferred stockholders of the Corporation to the
extent provided herein and under applicable law
in respect of such fractional shares. Shares of
Preferred Stock, or fractions thereof, may, but
need not, be represented by share certificates.
Shares of Preferred Stock, or fractions thereof,
not represented by share certificates
(Uncertificated Shares) shall be registered in
the stock record book of the Corporation. The
Corporation at any time at its sole option may
deliver to any registered holder of Preferred
Stock share certificates to represent
Uncertificated Shares previously issued (or
deemed issued) to such holder.(c i The Board
of Directors is authorized in its discretion to
determine, fix and approve the consideration
other than cash for shares which may be issued,
and to determine the fair value to the
Corporation of such consideration .Rights of
Holders of Preferred Shares For a description of
the dividend, voting, liquidation, redemption and
other material rights of the holders of Preferred
Shares, see the above text of the amendment to
the Corporation's Articles of Incorporation.
General Effect Upon the Rights of Existing
Shareholders The issuance of the Preferred Shares
will have no effect on the voting control of the
Corporation because the Preferred Stock has no
voting rights (except in the limited
circumstances discussed above). However, the
holders of Preferred Stock will have rights to
distributions of dividends, and rights upon a
dissolution or liquidation of the Corporation,
superior to that of holders of Common Stock.
These superior rights will require the
Corporation to pay annual dividends on the
Preferred Stock, plus any accrued and unpaid
dividends thereon, before any amount may be paid
to holders of Common Stock, regardless of whether
the Corporation has any earnings during the year
and regardless of whether any dividends are
declared with respect to the Preferred Stock or
the Common Stock. To the extent the Corporation
is prohibited from paying these annual dividends,
either by law or under the terms of any of its
financing agreements, these unpaid dividends will
accrue and will be payable as soon as permitted.
Also, these superior rights will require the
Corporation to redeem the Preferred Stock in
full, and pay in full any accrued and unpaid
dividends thereon, before any amounts may be paid
to holders of Common Stock upon a dissolution or
liquidation of the Corporation. The Corporation
also will be required to redeem the Preferred
Shares, and pay in full any accrued but unpaid
dividends thereon, upon a reorganization, merger
or consolidation with one or more other
corporations as a result of which the Corporation
is not the surviving corporation or survives as a
subsidiary of another corporation, or upon the
sale of all or substantially all of the assets of
the Corporation. REQUIRED VOTE; BOARD
RECOMMENDATIONA vote of a majority of all
outstanding shares of the Common Stock of the
Corporation, whether or not present in person or
by proxy and voting at the Meeting, is necessary
for the approval of the above-described Share
Issuance and Articles Amendment. THE BOARD OF
DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
APPROVE THIS PROPOSAL ONE. PROPOSAL TWO
ELECTION OF THE BOARD OF DIRECTORS At the
Meeting, five individuals will be nominated for
election as members of the Board of Directors, to
serve until the next annual meeting of
shareholders, and until their successors have
been elected. The Corporation's Articles of
Incorporation authorize seven directors. After
consummation of the Merger, the Board of
Directors will appoint two persons selected by
the Electronika Shareholders to the two open
director positions, as described in the section
above entitled "Proposal One -- Summary of the
Merger -- Electronika Directors."
The five nominees to be elected at the Meeting,
each a present member of the Board of Directors,
are as follows: Ronald L. Benjamin, Christian T.
Hughes, Dr. Thomas L. Lyon, Jr., Dale H.
Sizemore, Jr., and Richard A. Sizemore.
Biographical Information
Biographical summaries concerning the five
nominees, the Corporation's executive officers
and significant employees, and information with
respect to the number of shares of Common Stock
beneficially owned by each of them as of November
1, 1998, are shown below. The number of shares
beneficially owned includes shares, if any, held
in the name of the spouse, minor children, or
other relative of the individual living in his or
her home, as well as shares, if any, held in the
name of another person under an arrangement
whereby the individual enjoys the right to vote
such shares or use of the income from such
shares, or whereby the individual can vest or
revest title in himself or herself immediately or
at some future time. Dale H. Sizemore, Jr., both
a Director and an executive officer, and Richard
A. Sizemore, a Director, are brothers.
Bigraphical Summaries Shares of
of Nominees, Executive Common Stock
Officers, and Significant Owned at Percent
Employees Nov. 11, 1998 ofclass
Dale H. Sizemore, Jr., 379,509 (a) 13.5%
age 46, Chairman of
the Board and Chief
Executive Officer
of the Corporation
13402 South 71 Highway
Grandview, MO 64030
Mr. Sizemore became a Director of the Corporation in
1984. He has served as Chairman since 1995, and
served as President from 1995 to 1996. Mr. Sizemore
was President of Kansas Communications, Inc., located
in Lenexa, Kansas, from 1983 to 1995, and was
Chairman
of the Board and Treasurer from 1995 to 1998. Mr.
Sizemore is currently self employed.
Christian T. Hughes,
age 49, Director -0- 0.0%
Director, President
and Chief Operating
Officer of the Corp
13402 South 71 Highway
Grandview, MO 64030
Mr. Hughes became a Director of the Corporation in
1995. He became President and Chief Operating
Officer
in 1996. He became President of Torotel Products in
1996, and President of OPT Industries in 1995, each
of
which are subsidiaries of the Corporation. He joined
OPT in 1992 as Vice President of Sales and Marketing,
and became Executive Vice President in 1993. Prior
to
joining OPT, Mr. Hughes was Vice President of Sales
for Hitran Corporation, located in Flemington, New
Jersey, from 1987 to 1992.
Ronald L. Benjamin,
age 53, Director of -0- 0.0%
Director of the Corp
13402 South 71 Highway
Grandview, MO 64030
Mr. Benjamin became a Director of the Corporation in
1993. He has been President of Resource and
Development Group, Inc. located in Lenexa, Kansas,
since 1985. Mr. Benjamin is also a 50% owner of
Robinson Potato Supply. He holds a B.S. degree in
electrical engineering from Bucknell University and
received his M.B.A. from Harvard University.
Dr. Thomas L. Lyon, Jr.,
age 54, Director of 210 0.0%
Director of the Corp
13402 South 71 Highway
Grandview, MO 64030
Dr. Lyon became a Director of the Corporation in
1993.
He is a professor and Academic Chair of the
Executive
Fellows Program at Rockhurst College, located in
Kansas City, Missouri. Dr. Lyon is a past director
of
the Graduate and Undergraduate Business Division, has
been Acting Dean of the School of Management, and was
the first director of Rockhurst's M.B.A. Program. He
has been at Rockhurst since 1975. He holds his B.A.
in economics from Rockhurst, and his M.A. in
economics
and Ph.D. in economics and finance from the
University
of Missouri.
Richard A. Sizemore,
age 38, Director of 415,374 (b) 14.7%
Director of the Corp
13402 South 71 Highway
Grandview, MO 64030
Mr. Sizemore became a Director of the Corporation in
1995. He has been owner and President of Interactive
Design, Inc., located in Lenexa, Kansas, since 1987.
He holds a B.S. degree in electrical engineering and
an M.B.A. from the University of Kansas.
H. James Serrone,
age 43, Vice President 10,273 (c) 0.4%
of Finance and Chief
Financial Officer of
the Corporation
13402 South 71 Highway
Grandview, MO 64030
Mr. Serrone joined Torotel in 1979, became Controller
in 1982, and was named Vice President in 1993. Mr.
Serrone has served as Vice President of Torotel
Products since 1992, and became Vice President of OPT
Industries in 1993. He has been Acting General
Manager of Torotel Products since August 1996.
All Directors and
Executive Officers
as a Group
(6 persons) 604,860 (d) 21.5%
(a) See the text and footnotes regarding Mr.
Sizemore's beneficial ownership discussed above
in the section entitled "Voting Securities and
Principal Holders Thereof."
(b) See the text and footnotes regarding Mr.
Sizemore's beneficial ownership discussed above
in the section entitled "Voting Securities and
Principal Holders Thereof."
(c) H. James Serrone's beneficial ownership
includes
3,357 shares which are acquirable within 60 days
pursuant to the exercise of outstanding stock
options.
(d) The beneficial ownership of all directors and
executive officers as a group includes 3,357
shares which are acquirable within 60 days
pursuant to the exercise of outstanding stock
options. The percentage ownership of the
individuals identified above does not equal the
percentage ownership of all directors and
officers as a group because the 200,506 shares
owned by Sizemore Enterprises, in which Dale H.
Sizemore, Jr. and Richard Sizemore are general
partners, is included only once in the total
beneficial ownership of the 604,860 shares.
Board Meetings and Director Compensation
During the fiscal year ended April 30, 1998, the
Board of Directors held seven meetings (including
regularly scheduled and special meetings). Each
of the incumbent directors being nominated for
re-election attended 100% of the Board of
Directors meetings held while he was a Director.
Christian T. Hughes was compensated at the rate
of $100 per Board of Directors meeting attended.
Ronald L. Benjamin, Dr. Thomas L. Lyon, Jr.,
Dale H. Sizemore, Jr., and Richard A. Sizemore
were compensated at the rate of $6,000 per fiscal
year, plus $600 per Board of Directors meeting
attended, and $400 per committee meeting
attended.
Committees
Christian T. Hughes and H. James Serrone are
members of the Administrative Committee for the
Employee Stock Purchase Plan (the "Plan
Committee"). Mr. Serrone is not a Director but
is an officer of the Corporation. The Plan
Committee receives its authority from the
Employee Stock Purchase Plan (the "Plan") and
from the Board of Directors. The Plan Committee
administers and implements the Plan and
determines the eligibility of employees to
participate in the Plan. The Plan Committee does
not meet on a regular basis but meets as
required. The Plan Committee did not meet during
the last fiscal year.
Ronald L. Benjamin and Dr. Thomas L. Lyon, Jr.
are members of the Audit Committee. The Audit
Committee held one meeting during the last fiscal
year. In fulfilling its responsibilities, the
Audit Committee's activities included, but were
not limited to, reviewing internal accounting
controls, financial activities, financial
position and related consolidated reports of the
Corporation.
Ronald L. Benjamin, Dr. Thomas L. Lyon, Jr., and
Dale H. Sizemore, Jr., are members of the
Compensation Committee, the purpose of which is
to determine the compensation of the executive
officers of the Corporation. The Compensation
Committee held one meeting during the last fiscal
year.
The Corporation does not have a nominating
committee.
Cumulative Voting
There will be cumulative voting for the election
of Directors. In cumulative voting, each share
carries as many votes as there are vacancies to
be filled and each Shareholder is permitted to
distribute the votes for all of his or her shares
among the nominees in any way he or she desires.
Since five Directors are nominated, each
Shareholder may cast that number of votes which
is equal to the number of shares owned by him or
her multiplied by five. If no choice is
indicated on the enclosed Proxy, the persons
named in the Proxy will cumulate the votes and
distribute them among the nominees in their
discretion. If a Shareholder desires to cumulate
his or her votes for the Directors in a
particular manner, he or she should indicate the
number of votes to be cast on the Shareholder's
behalf for each nominee immediately following
that nominee's name on the Proxy. The Proxies
cannot be voted for a greater number of persons
than the number named herein. If any nominee
should be unable to serve, the Proxy will be
voted for such person as shall be designated by
the Board of Directors of the Corporation to
replace any such nominee. The Board of Directors
presently has no knowledge that any of the
nominees will be unable to serve.
Board Recommendation
THE BOARD OF DIRECTORS RECOMMENDS THAT THE
SHAREHOLDERS VOTE IN FAVOR OF THE ELECTION OF
EACH OF THE NOMINEES TO THE BOARD OF DIRECTORS.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
executive officers and directors of the
Corporation, and persons who beneficially own
more than ten percent (10%) of the Corporation's
Common Stock (collectively referred to herein as
"Reporting Persons"), to file initial reports of
ownership and reports of changes in ownership
with the Securities and Exchange Commission (the
"Commission"). Reporting Persons are required by
Commission regulations to furnish the Corporation
with copies of all Section 16(a) forms they file.
Based solely upon a review of copies of Forms 3,
4 and 5 and amendments thereto furnished to the
Corporation during its most recent fiscal year,
the Corporation believes that all of these forms
required to be filed by Reporting Persons were
timely filed pursuant to Section 16(a) of the
Exchange Act, except that each of Dale H.
Sizemore, Jr., Gregory M. Sizemore, Paulette A.
Durso and Richard A. Sizemore filed one report
late with respect to one transaction.
Executive Officer Compensation
Summary Compensation Table. The following table
sets forth the compensation of the named
executive officers for each of the Corporation's
last three completed fiscal years.
Annual Long-Term
Compensation Compensation
Name and
Principal Options Allother
Position Year Salary Bonus Awarded Comp
<TABLE>
<S> <C> <C> <C> <C> <C>
Dale H.
Sizemore,
Jr. (a)
Chief Exec.
Officer 1998 $0 $0 $0 $0
1997 $0 $0 $0 $0
1998 $0 $0 $0 $0
Christian
T. Hughes (b)
President
and Chief
Operating
Officer 1998 $124216 $0 $0 $0
1997 $126676 $36000 $37500 $7500
Alfred F.
Marsh (c)
Former
President
and Chief
Executive
Officer 1996 $24078 $0 $0 $0
</TABLE>
(a) Dale H. Sizemore, Jr. became Chief Executive
Officer effective August 4, 1996.
(b) Christian T. Hughes became President and Chief
Operating Officer effective September 16, 1996.
(c) Alfred F. Marsh served as President and Chief
Executive Officer during all of fiscal year
1995, and for the period of May 1 to August 3 of
fiscal 1996.
Option Grants Table. There were no grants of
stock options made to any executive officers
during the Corporation's last completed fiscal
year.
Aggregate Option Exercises and Fiscal Year-End
Option Value Table. The following table sets
forth the aggregate stock option exercises made
during the last completed fiscal year and the
fiscal year-end option values for each of the
named executive officers.
Value of
No. unexercised
unexer opt./ in-the-money
Shares SARs at options/SARs
Acq. FY-end($) at FY-end($)
Name on Value exer/ exercisable/
Name Exer.# Real($) unexer unexercisable
<TABLE>
<S> <C> <C> <C> <C>
Dale
H.
Sizemore,
Jr. 0 $0 0 $0
Christian
T.
Hughes 0 $0 0 $0
</TABLE>
Certain Relationships and Legal Proceedings
Indebtedness to Former Officer. The Corporation
has a $429,000 promissory note with Alfred F.
Marsh, former President of Torotel, Inc., dated
July 10, 1996. The amount of this note consists
of the principal sum of $250,000 from a note
executed in April 1986, plus $179,000 of accrued
unpaid interest. For the year ended April 30,
1998, the Corporation incurred $41,000 in
interest on the note. The outstanding balance of
this unsecured note bears interest at a fixed
rate of 10% per annum. The note requires monthly
principal and interest payments of $10,881, and
matures on July 1, 2000. Under the terms of the
note, no payments will be made to Mr. Marsh as
long as any default condition exists under the
terms of the Corporation's credit agreement with
Phillipsburg National Bank & Trust Corporation,
unless the bank has waived the default condition
prior to any payment. As of April 30, 1998, the
aggregate amount due under the note was $438,000,
which consists of the outstanding principal
balance of $384,000 plus accrued interest of
$54,000. The Corporation has suspended all
payments under the note due to the reasons
discussed in the section below entitled "Legal
Proceedings."
Legal Proceedings. On May 6, 1997, Torotel
Products, Inc., one of the Corporation's
operating subsidiaries, was accepted into the
Voluntary Disclosure Program of the United States
Department of Defense resulting from its failure
to perform certain required "thermal shock"
testing as frequently as required and for
inaccurately certifying that all required testing
had been performed. As a result of the
Corporation's investigation into the testing
deficiencies, which were first reported in
November 1996, the Corporation recorded an
estimated charge of $416,000 against earnings in
its fiscal fourth quarter ended April 30, 1997.
Because the investigation was ongoing, the
Corporation subsequently determined that there
also were some deficiencies in performing some
required electrical testing as frequently as
required. As a result, the Corporation recorded
an additional charge of $70,000 against earnings
in the first quarter of the fiscal year ended
April 30, 1998. The Corporation does not
anticipate incurring any additional significant
charges related to the investigation; however,
the aggregate amount of the estimated penalty is
still subject to fluctuation as further
investigation is conducted. At this time, the
Corporation is not certain when payment of the
damage amount will be required; however, the
Corporation does not anticipate making any
payments during the fiscal year ending April 30,
1999. The legal fees associated with the
investigation amounted to $68,000 during the
fiscal year ended April 30, 1998, and $203,000
for the fiscal year ended April 30, 1997. The
Corporation believes that certain of its former
officers may have been responsible for the
misconduct related to the test failures, and will
evaluate ways of recovering the damages once the
government completes its investigation. In the
meantime, the Corporation has suspended all
payments under a note payable to a former
officer.
OTHER MATTERS
Other Business
The Board of Directors is not aware of any other
business to be transacted at the Meeting. If any
other business is properly brought before the
Meeting, it is intended that the shares
represented by the enclosed Proxy will be voted
in respect thereof in accordance with the
judgment of the persons voting the Proxies.
Availability of Accountants
Representatives of Grant Thornton LLP, the
principal accountants for the Corporation (i) are
expected to be present at the Meeting, (ii) will
have the opportunity to make a statement if they
desire to do so and (iii) are expected to be
available to respond to appropriate questions.
Deadline for Receipt of Shareholders' Proposals
Proposals of shareholders of the Corporation
which are intended to be presented by the
Corporation at the Corporation's 1999 annual
meeting of shareholders must be received by the
Corporation no later than September 15, 1999, so
that they may be included in the Proxy Statement
relating to that meeting.
General
In order that your shares may be represented if
you do not plan to attend the Meeting, and in
order to assure the required quorum and voting,
please sign, date and return the enclosed Proxy
promptly.
BY ORDER OF THE BOARD OF DIRECTORS
H. James Serrone
Secretary of the Corporation
Exhibit A
Merger Agreement
AGREEMENT AND PLAN OF MERGER
AMONG
TOROTEL, INC.
TOROTEL MERGER SUBSIDIARY, INC.
ELECTRONIKA, INC.
AND THE
ELECTRONIKA STOCKHOLDERS
NAMED HEREIN
Dated November 24, 1998
TABLE OF CONTENTS
Page
ARTICLE ITHE MERGER
Section 1.1 The Merger
Section 1.2 Effective Time of the Merger
Section 1.3 Merger Consideration and
Conversion of Shares.
Section 1.4 Preferred Shares Escrow.
Section 1.5 Distributions of Preferred
Shares.
Section 1.6 Net Worth Determination.
Section 1.7 Net Worth Adjustment.
Section 1.8 EBITDA.
Section 1.9 Closing
ARTICLE IITHE SURVIVING CORPORATION
Section 2.1 Articles of Incorporation and Bylaws
Section 2.2 Board of Directors and Officers
Section 2.3 Employment of Peter Caloyeras
ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF
ELECTRONIKA
Section 3.1 Subsidiaries.
Section 3.2 Organization and Qualification.
7
Section 3.3 Capitalization.
Section 3.4 Financial Condition.
Section 3.4.1 Assets and Liabilities at
Closing.
Section 3.4.2 Electronika Financial
Statements
Section 3.5 Taxes.
Section 3.6 Undisclosed Liabilities
Section 3.7 Litigation and Claims.
Section 3.8 Properties.
Section 3.9 Contracts and Other Instruments.
Section 3.10 Validity of Electronika Material
Contracts.
Section 3.11 Charter Instruments
Section 3.12 Related Party Transactions.
Section 3.13 Employee Benefit Plans
Section 3.13.1 Arrangements.
Section 3.13.2 ERISA Plans.
Section 3.13.3 Other Employee Fringe
Benefits.
Section 3.13.4 ERISA Affiliate.
Section 3.13.5 Identification of Benefit
Plans.
Section 3.13.6 MEPPA Liability/Post-
Retirement Medical Benefits/
Defined Benefit Plans/Supplemental
Retirement Plans
Section 3.13.7 Liabilities
Section 3.14 Patents, Trademarks, Et
Section 3.15 Questionable Payments
Section 3.16 Authority to Merge
Section 3.17 Year 2000 Compliance
Section 3.18 Assets of Magnetika/East; Name
Change
Section 3.19 Environmental Matters
Section 3.20 Completeness of Disclosure
ARTICLE IVREPRESENTATIONS AND WARRANTIES
OFPARENT AND ACQUISITION
Section 4.1 Subsidiaries
Section 4.2 Organization and Qualification
Section 4.3 Capitalization.
Section 4.4 Financial Condition
Section 4.5 Taxes.
Section 4.6 Undisclosed Liabilities.
Section 4.7 Litigation and Claims.
Section 4.8 Properties.
Section 4.9 Contracts and Other Instruments.
Section 4.10 Validity of Parent Material
Contracts.
Section 4.11 Charter Instruments
Section 4.12 Employee Benefit Plans
Section 4.12.1 Arrangements
Section 4.12.2 ERISA Plans
Section 4.12.3 Other Employee Fringe
Benefits
Section 4.12.4 ERISA Affiliate
Section 4.12.5 Identification of Benefit
Plans
Section 4.12.6 MEPPA Liability/Post-
Retirement Medical Benefits/
Defined Benefit Plans/Supplement
Section 4.12.7 Liabilities
Section 4.13 Patents, Trademarks, Et Cetera
Section 4.14 Questionable Payments
Section 4.15 Authority to Merge.
Section 4.16 Environmental Matters
Section 4.17 Related Party Transactions
Section 4.18 Year 2000 Compliance
Section 4.19 Interim Operations of MergerSub
Section 4.20 Completeness of Disclosure.
ARTICLE VCOVENANTS OF ELECTRONIKA
Section 5.1 Articles of Incorporation and
Bylaws
Section 5.2 Shares and Options.
Section 5.3 Dividends and Purchases of Stock.
Section 5.4 Borrowing of Money
Section 5.5 Access.
Section 5.6 Advice of Changes.
Section 5.7 Confidentiality
Section 5.8 Public Statements.
Section 5.9 Parent Stockholder Approval.
Section 5.10 Conduct of Business.
Section 5.11 Reasonable Efforts.
Section 5.12 Exclusive Dealing
Section 5.13 Obligation to Update Disclosure
Letter
ARTICLE VICOVENANTS OF PARENT AND ACQUISITION
Section 6.1 Stockholder Approval.
Section 6.2 Proxy Statement.
Section 6.3 Articles of Incorporation and
Bylaws
Section 6.4 Shares and Options.
Section 6.5 Dividends and Purchases of Stock.
Section 6.6 Borrowing of Money.
Section 6.7 Access
Section 6.8 Advice of Changes
Section 6.9 Confidentiality
Section 6.10 Public Statements
Section 6.11 Conduct of Business
Section 6.12 Reasonable Efforts
Section 6.13 Exclusive Dealing
Section 6.14 Business After the Effective
Time
Section 6.15 Issuance and Listing of Stock
Section 6.16 Obligation to Update Disclosure
Letter
ARTICLE VIIELECTRONIKA'S CONDITIONS TO
CLOSING
Section 7.1 Voting Trust.
Section 7.2 Accuracy of Representations and
Compliance With Conditions.
Section 7.3 Material Adverse Change.
Section 7.4 Other Documents.
Section 7.5 Review of Proceedings.
Section 7.6 Legal Action.
Section 7.7 No Governmental Action.
Section 7.8 Consents Needed
Section 7.9 Other Agreements.
Section 7.10 Closing Certificate
Section 7.11 Parent Disclosure Letter
ARTICLE VIIIPARENT'S AND
ACQUISITION'SCONDITIONS TO CLOSING
Section 8.1 Voting Trust
Section 8.2 Accuracy of Representations and
Compliance With Conditions.
Section 8.3 Material Adverse Change.
Section 8.4 Other Documents
Section 8.5 Review of Proceedings.
Section 8.6 Legal Action.
Section 8.7 No Governmental Action.
Section 8.8 Fairness Opinion.
Section 8.9 Consents Needed
Section 8.10 Other Agreements
Section 8.11 Stockholder Approval
Section 8.12 Closing Certificate
Section 8.13 Electronika Disclosure Letter
ARTICLE IXTERMINATION
Section 9.1 Mandatory Termination
Section 9.2 Optional Termination
Section 9.3 Effect of Termination
ARTICLE XTRANSFER RESTRICTIONS; GOVERNANCE
Section 10.1 Restrictive Legends.
Section 10.2 Further Restrictions
Section 10.3 Investment Representations.
Section 10.4 Directors.
Section 10.5 Prohibited Stockholder Actions.
Section 10.6 Prohibited Actions by Parent.
Section 10.7 Definition of Independent
Approval
Section 10.8 Definition of Affiliate and
Family Members
Section 10.9 Indemnification; Insurance.
ARTICLE XIMISCELLANEOUS
Section 11.1 Survival
Section 11.2 Further Actions
Section 11.3 Modification
Section 11.4 Notices
Section 11.5 Waiver
Section 11.6 Binding Effect
Section 11.7 No Third-Party Beneficiaries
Section 11.8 Separability
Section 11.9 Headings
Section 11.10 Counterparts; Governing Law
Section 11.11 Assignment.
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as
of November 24 , 1998 (the "Agreement"), is
entered into by and among Torotel, Inc., a
Missouri corporation ("Parent"), Torotel
Merger Subsidiary, Inc., a Missouri
corporation and a wholly-owned subsidiary of
Parent ("MergerSub"), Electronika, Inc., a
California corporation ("Electronika"), and
the stockholders of Electronika identified on
the signature page to this Agreement (the
"Electronika Stockholders"). MergerSub and
Electronika may sometimes be referred to
herein collectively as the "Constituent
Corporations." Parent, MergerSub, Electronika
and the Electronika Stockholders may
collectively be referred to herein as the
"Parties."
WHEREAS, the Parties desire to enter into
this Agreement pursuant to which Parent will
purchase Electronika by merging Electronika
with and into MergerSub in a tax free
reorganization;
WHEREAS, pursuant to the Merger (as defined
below), MergerSub will be the surviving
corporation (the "Surviving Corporation"),
Electronika will cease to exist and Parent
will own 100% of the outstanding capital
stock of MergerSub; and
WHEREAS, pursuant to the Merger, the
Electronika Stockholders will receive, in the
aggregate, (i)1,800,000 shares of the common
stock of Parent, par value $0.50 per share
(the "Parent Common Stock"), and (ii)
2,500,000 shares of new Class A $1.00
Preferred Stock of Parent, par value $.50 per
share (the "Parent Preferred Stock"), which
will be deposited in escrow for the benefit
of the Electronika Stockholders. The rights,
preferences and privileges of the Parent
Preferred Stock are as set forth in Exhibit A
attached hereto.
NOW, THEREFORE, in consideration of the
foregoing and the mutual covenants and
agreements herein contained, and intending to
be legally bound hereby, the Parties hereby
agree as follows:
ARTICLE I.
Section 1.1 THE MERGER At the Effective
Time (as defined below), Electronika shall be
merged with and into MergerSub and the
separate existence of Electronika shall
thereupon cease (the "Merger"). Upon the
effectiveness of the Merger, the Surviving
Corporation shall possess all of the rights,
privileges, powers and franchises, of a
public as well as of a private nature, and be
subject to all of the restrictions,
disabilities and duties, of each of the
Constituent Corporations; and the rights,
privileges, powers and franchises of each of
the Constituent Corporations, and all
property, real, personal, and mixed, and all
that is due to any of the Constituent
Corporations on whatever account, shall be
vested in the Surviving Corporation; but all
rights of creditors and owings upon any
property of any of the Constituent
Corporations shall be preserved unimpaired,
and all debts, liabilities and duties of the
Constituent Corporations shall thenceforth
attach to the Surviving Corporation and may
be enforced against it to the same extent as
if these debts, liabilities and duties had
been incurred or contracted by it.
Section 1.2 Effective Time of the Merger.
If all of the conditions precedent to the
Parties' obligations to consummate the Merger
under this Agreement are satisfied or waived
and this Agreement has not been terminated,
the Parties shall cause the Articles of
Merger in the form attached hereto as Exhibit
B (the "Articles of Merger") to be properly
executed and filed with the Missouri
Secretary of State, in accordance with
Section 351.458 of the Missouri General and
Business Corporation Law, and shall cause to
be filed with the California Secretary of
State, in accordance with Section 1108(d)(1)
of the California General Corporation Law, a
copy of the Articles of Merger certified by
the Missouri Secretary of State. The Merger
shall become effective at such time as (i)
the Missouri Secretary of State issues a
Certificate of Merger and (ii) said
Certificate of Merger is filed with, and
accepted for filing by, the California
Secretary of State (the "Effective Time").
Section 1.3 Merger Consideration and
Conversion of Shares. As of the Effective
Time, by virtue of the Merger and without any
action on the part of any holder thereof:
a) The shares of common stock of
MergerSub which are issued and outstanding
immediately prior to the Effective Time shall
not be changed or converted as a result of
the Merger, but shall remain outstanding as
shares of the Surviving Corporation.
b) All of the outstanding shares of
capital stock of Electronika issued and
outstanding immediately prior to the
Effective Time (the "Electronika Shares")
shall be converted into the right to receive,
in the aggregate, the following: (i)
1,800,000 newly issued shares of Parent
Common Stock (the "Common Shares"); and (ii)
2,500,000 shares of Parent Preferred Stock
(the "Preferred Shares"). The Preferred
Shares shall be deposited into, and shall be
subject to the terms of, the escrow described
in Section 1.4 below and the Escrow Agreement
to be entered into in accordance therewith.
The Common Shares and the Preferred Shares
(together, the "Merger Shares") shall be
subject to the restrictions on transfer as
described in Article X below.
c) Upon surrender to Parent of the
certificate or certificates which,
immediately prior to the Effective Time,
represented the Electronika Shares, the
Electronika Stockholders shall be entitled to
receive in exchange therefor, on a pro rata
basis (as set forth on Schedule 1.3 hereto),
a certificate or certificates representing
the Merger Shares into which the Electronika
Shares shall have been converted pursuant to
the provisions of Section 1.3(b), subject to
the depositing of the Preferred Shares into
escrow in accordance with Section 1.4.
Section 1.4 Preferred Shares Escrow. At
the Effective Time, the Preferred Shares
shall be deposited into escrow (the
"Escrow"), to be held by an escrow agent
mutually acceptable to the parties (the
"Escrow Agent"), in accordance with the
provisions of an Escrow Agreement in the form
attached hereto as Exhibit C. The Escrow
Agreement shall provide for the distribution
to the Electronika Stockholders of the
Preferred Shares, on a pro rata basis, at the
expiration of each of five payment periods,
based on the economic performance of the
Surviving Corporation during each such
period, as determined in accordance with the
provisions of Section 1.5 below. The
determination of the number of Preferred
Shares to be distributed shall be made at the
completion of each of five periods (each an
"Escrow Payment Period" and together the
"Escrow Period"), with (i) the first Escrow
Payment Period commencing at the Effective
Time and ending on the last day of the first
fiscal year of the Surviving Corporation
following the Effective Time, (ii) the next
three Escrow Payment Periods being the next
three successive full fiscal years of the
Surviving Corporation immediately following
the fiscal year in which the Effective Time
is a part and (iii) the remaining Escrow
Payment Period being nine (9) months of the
fourth fiscal year of the Surviving
Corporation immediately following the fiscal
year in which the Effective Time is a part
(provided that for the calculations to be
made pursuant to Section 1.5, such nine-month
period shall be treated as three-fourths of
the full fiscal year). At the end of the
Escrow Period, after taking into account all
distributions to be made pursuant to Section
1.5 and all "Net Worth Adjustments" to be
made pursuant to Section 1.7, all Preferred
Shares remaining in the Escrow, if any, shall
be canceled and return to the status of
authorized but unissued shares. In no event
shall the Electronika Stockholders (i) be
entitled to receive in excess of 2,500,000
Preferred Shares or (ii) be required to
return to Parent any Common Shares received
by them in the Merger or (except as set forth
in Section 1.7) pay to Parent any other
amounts with respect to the failure of the
Surviving Corporation to attain any financial
targets following the Effective Time.
Section 1.5 Distributions of Preferred
Shares. The number of Preferred Shares to be
distributed at the end of each Escrow Payment
Period shall be determined based on the
amount of EBITDA (as defined below) generated
by the Surviving Corporation during such
Escrow Payment Period, subject to any Net
Worth Adjustment as provided in Section 1.7
below, as follows: (i) for each One Dollar
($1.00) of EBITDA generated by the Surviving
Corporation during the applicable Escrow
Payment Period, one Preferred Share shall be
released to the Electronika Stockholders, on
a pro rata basis; and (ii) if the EBITDA for
any Escrow Payment Period is negative, then
such negative amount shall be carried forward
to the next Escrow Payment Period (and
succeeding Escrow Payment Periods, if
necessary) and subtracted from the EBITDA for
that next period, such that Preferred Shares
shall only be released when such sum is
positive. Within 90 days after the end of
the applicable Escrow Payment Period, Parent
shall prepare and deliver to the Electronika
Stockholders a schedule (the "EBITDA
Schedule"), which shall set forth in
reasonable detail Parent's estimate of the
EBITDA of the Surviving Corporation for such
Escrow Payment Period. The EBITDA Schedule
shall (i) be based upon the books and records
of the Surviving Corporation and the
generally accepted accounting principles used
by Parent in the preparation of its financial
statements, (ii) be certified as true and
correct by the Chief Financial Officer of
Parent and (iii) be accompanied by the
certification of the independent auditors of
Parent. Upon the receipt by the
Electronika Stockholders of the EBITDA
Schedule, the Electronika Stockholders may
have the same verified by their independent
public accountants. If the EBITDA Schedule
as submitted by Parent is acceptable to the
Electronika Stockholders, then such EBITDA
Schedule shall be deemed final and shall be
used to determine the amount of the
Preferred Shares to be released from the
Escrow. If the EBITDA Schedule is not
acceptable to the Electronika Stockholders,
the Electronika Stockholders shall deliver
to Parent within 30 days after their
receipt of the EBITDA Schedule a statement
describing their objections thereto
(setting forth the amount proposed as an
adjustment thereto and the basis for such
objection). Failure of the Electronika
Stockholders to so object to the EBITDA
Schedule as submitted by Parent shall
constitute acceptance thereof by the
Electronika Stockholders. If the
Electronika Stockholders object to such
EBITDA Schedule, Parent and the Electronika
Stockholders shall use their reasonable
efforts to resolve any such objections, but
if they do not reach a final resolution
within 20 days after Parent has received
the statement of objections, Parent and the
Electronika Stockholders shall select an
independent, nationally recognized
accounting firm (the "Accounting Firm") to
resolve any remaining objections. The
Accounting Firm shall, within 30 days after
submission to it of any remaining
objections, determine and report to the
parties upon the items objected to and such
determination by the Accounting Firm shall
be conclusive and binding upon Parent and
the Electronika Stockholders absent fraud
or manifest error. If the Accounting Firm
determines that a net adjustment should be
made to the EBITDA Schedule in favor of the
Electronika Stockholders equal to at least
$25,000, then the costs and fees of the
Accounting Firm shall be borne and paid by
Parent; otherwise, the costs and fees of
the Accounting Firm shall be borne and paid
by the Electronika Stockholders. If Parent
fails to deliver an EBITDA Schedule to the
Electronika Stockholders within the requisite
90-day period, the Electronika Stockholders
may deliver a proposed EBITDA Schedule to
Parent, and, if the EBITDA Schedule so
submitted is acceptable to Parent, then such
EBITDA Schedule shall be deemed final. If
said EBITDA Schedule is not acceptable to
Parent, Parent shall follow the same
procedures specified above with respect to
the Electronika Stockholders for objecting to
said EBITDA Schedule.
Section 1.6 Net Worth Determination. As
provided in Section 3.4.1, Electronika has
represented and warranted that, on the
Closing Date (as defined below), the assets
of Electronika will include at least $400,000
of cash, cash equivalents, accounts
receivable, notes receivable, inventory, work
in process, prepaids, machinery, equipment
and deposits, net of all liabilities of any
kind whatsoever (the "Net Worth Amount"). If
on or before April 30, 1999, Parent
determines that the Net Worth Amount was less
than $400,000, Parent shall prepare and
deliver to the Electronika Stockholders a
schedule setting forth Parent's proposed
determination of the Net Worth Amount as of
the Closing Date (the "Closing Schedule").
Failure of Parent to deliver a Closing
Schedule to the Electronika Stockholders on
or before such date shall constitute
acceptance of the Net Worth Amount by Parent.
The Closing Schedule shall be based upon the
books and records of the Surviving
Corporation and the generally accepted
accounting principles used by Parent in the
preparation of its financial statements and
be certified as true and correct by the Chief
Financial Officer of Parent. Upon the
receipt by the Electronika Stockholders of
the Closing Schedule, the Electronika
Stockholders may have the same verified by
their independent public accountants. If
the Closing Schedule as submitted by Parent
is acceptable to the Electronika
Stockholders, then such Closing Schedule
shall be deemed final and shall be used to
determine the amount of the Net Worth
Adjustment required by Section 1.7. If the
Closing Schedule is not acceptable to the
Electronika Stockholders, the Electronika
Stockholders shall deliver to Parent within
30 days after their receipt of the Closing
Schedule a statement describing their
objections thereto (setting forth the
amount proposed as an adjustment thereto
and the basis for such objection). Failure
of the Electronika Stockholders to so
object to the Closing Schedule as submitted
by Parent within said 30-day period shall
constitute acceptance thereof by the
Electronika Stockholders. If the
Electronika Stockholders object to such
Closing Schedule, Parent and the
Electronika Stockholders shall use their
reasonable efforts to resolve any such
objections, but if they do not reach a
final resolution within 20 days after
Parent has received the statement of
objections, Parent and the Electronika
Stockholders shall utilize the Accounting
Firm to resolve any remaining objections.
The Accounting Firm shall, within 30 days
after submission to it of any remaining
objections, determine and report to the
parties upon the items objected to and such
determination by the Accounting Firm shall
be conclusive and binding upon Parent and
the Electronika Stockholders absent fraud
or manifest error. If the Accounting Firm
determines that a net adjustment should be
made to the Closing Schedule in favor of
the Electronika Stockholders equal to at
least $25,000, then the costs and fees of
the Accounting Firm shall be borne and paid
by Parent; otherwise, the costs and fees of
the Accounting Firm shall be borne and paid
by the Electronika Stockholders.
Section 1.7 Net Worth Adjustment. If the
Net Worth Amount as shown on the Closing
Schedule as finally determined pursuant to
Section 1.6 is less than $400,000, the number
of Preferred Shares to be distributed from
the Escrow during an Escrow Payment Period
shall be reduced, on a dollar-for-dollar
basis, in an amount equal to the difference
between the Net Worth Amount as finally
determined and $400,000 (the "Net Worth
Adjustment"). If the Net Worth Amount as
shown on the Closing Schedule as finally
determined pursuant to Section 1.6 is more
than $400,000, the number of Preferred Shares
to be distributed from the Escrow during an
Escrow Payment Period shall be increased, on
a dollar-for-dollar basis, in an amount equal
to the difference between $400,000 and the
Net Worth Amount as finally determined. For
example, if the Net Worth Amount as finally
determined pursuant to Section 1.6 is
$200,000 and during the first Escrow Payment
Period the Surviving Corporation has $300,000
in EBITDA, 100,000 Preferred Shares would be
released to the Electronika Stockholders from
the Escrow and no further Net Worth
Adjustments would be made during the Escrow
Period. Conversely, if the Net Worth Amount
as finally determined is $500,000 and during
the first Escrow Payment Period the Surviving
corporation has $300,000 in EBITDA, 400,000
Preferred Shares would be released to the
Electronika Stockholders from the Escrow. If
the aggregate amount of EBITDA (as finally
determined pursuant to Section 1.5) generated
by the Surviving Corporation during the
Escrow Period is less than the aggregate
amount of the Net Worth Adjustment (as
finally determined pursuant to Section 1.6),
any remaining Net Worth Adjustment that has
not been applied against the Preferred Shares
distribution shall be paid by the Electronika
Stockholders, on a pro rata basis (as set
forth on Schedule 1.3 hereto), to Parent in
cash within 30 days after the termination of
the Escrow.
Section 1.8 EBITDA. As used herein, the
term "EBITDA" shall mean, with respect to any
fiscal period, the sum of the Surviving
Corporation's net earnings (or loss) before
interest expense, taxes, depreciation and
amortization for said period, as determined
in accordance with generally accepted
accounting principles, exclusive of any
mutually agreeable allocations between Parent
and the Surviving Corporation.
Section 1.9 Closing. The closing of the
transactions contemplated by this Agreement
shall take place on the third business day
following the satisfaction or waiver of all
conditions to closing contained herein at the
offices of Shook, Hardy & Bacon L.L.P., 9401
Indian Creek Parkway, Overland Park, Kansas
66210, or at such other date, time and place
as the Parties may agree (the "Closing").
The date on which the Closing occurs is
sometimes referred to herein as the "Closing
Date".
ARTICLE II.
THE SURVIVING CORPORATION
EMPLOYMENT OF PETER CALOYERAS
Section 2.1 Articles of Incorporation and
Bylaws. The articles of incorporation and
the bylaws of Merger Sub as in effect at the
Effective Time shall from and after the
Effective Time be the articles of
incorporation and bylaws of the Surviving
Corporation, as the same may be amended from
time to time, except that the name of the
Surviving Corporation shall be changed to
Electronika, Inc.
Section 2.2 Board of Directors and
Officers. The officers and directors of
Merger Sub at the Effective Time shall be the
officers and directors of the Surviving
Corporation, each to serve, subject to the
Surviving Corporation's bylaws, until his or
her respective successor shall have been
elected and qualified.
Section 2.3 Employment of Peter
Caloyeras. From and after the Effective
Time, Peter Caloyeras shall be the Chairman
of the Board and Chief Executive Officer of
Parent and the Surviving Corporation (subject
to his removal by the Board of Directors of
Parent and the Surviving Corporation in
accordance with their respective bylaws), for
which he will receive an annual salary during
the Escrow Period of at least $50,000.
ARTICLE III.
REPRESENTATIONS AND
WARRANTIES OF ELECTRONIKA
Electronika and the Electronika Stockholders
shall deliver to Parent, within 30 days of
the execution hereof, a disclosure letter
(the "Electronika Disclosure Letter").
Except as specifically set forth in the
Electronika Disclosure Letter, Electronika
and the Electronika Stockholders hereby
represent and warrant to Parent and
MergerSub, as follows:
Section 3.1 Subsidiaries. Electronika (i)
has no subsidiaries and (ii) has no material
debt (other than trade accounts receivable)
or equity interest, or right or option to
acquire any debt or equity interest, in any
corporation, partnership, individual,
association, trust or any other entity or
organization (a "Person"). As of the date
hereof, the Electronika Stockholders own,
directly and indirectly, the number of shares
of Parent Common Stock set forth in Schedule
3.1 of the Electronika Disclosure Letter.
Section 3.2 Organization and
Qualification. Electronika is a corporation
duly organized, validly existing, and in good
standing under the laws of its jurisdiction
of incorporation, with all requisite power
and authority, and all necessary consents,
authorizations, approvals, orders, licenses,
certificates, and permits of and from, and
declarations and filings with, all federal,
state, local, and other governmental
authorities and all courts and other
tribunals, to own, lease, license, and use
its properties and assets and to carry on the
business in which it is now engaged and the
business in which it contemplates engaging,
except where the failure to have obtained any
of the foregoing would not have a material
adverse effect on its financial condition,
results of operations, business or prospects
(a "Material Adverse Effect"). Electronika is
duly qualified to transact the business in
which it is engaged and is in good standing
as a foreign corporation in every
jurisdiction in which its ownership, leasing,
licensing, or use of property or assets or
the conduct of its business makes such
qualification necessary, except where failure
to be so qualified would not have a Material
Adverse Effect. Schedule 3.2 of the
Electronika Disclosure Letter includes a list
of the jurisdictions in which Electronika is
qualified to do business.
Section 3.3 Capitalization. The
authorized capital stock of Electronika
consists of 20,000 shares of common stock,
par value $100.00 per share (the "Electronika
Common Stock"), of which 1,000 shares are
outstanding and 20,000 shares of preferred
stock, no shares of which are outstanding.
All such outstanding shares of Electronika
Common Stock were validly authorized and
issued, and are fully paid, and
nonassessable, have not been issued and are
not owned or held in violation of any
preemptive right of stockholders, and are
owned of record and beneficially by the
Electronika Stockholders, in each case free
and clear of all liens, security interests,
pledges, charges, encumbrances, stockholders'
agreements, and voting trusts. There is no
commitment, plan, or arrangement to issue,
and no outstanding option, warrant, or other
right calling for the issuance of, any shares
of capital stock of Electronika or any
security or other instrument convertible
into, exercisable for, or exchangeable for
capital stock of Electronika. There are no
preemptive or similar rights to subscribe for
or to purchase capital stock of Electronika.
Section 3.4 Financial Condition.
Section 3.4.1 Assets and Liabilities at
Closing. On the Closing Date, the assets of
Electronika will include at least $400,000 of
cash, cash equivalents, accounts receivable,
notes receivable, inventory, work in process,
prepaids, machinery, equipment and deposits,
net of all liabilities of any kind
whatsoever.
Section 3.4.2 Electronika Financial
Statements. Electronika has heretofore
delivered to Parent (a) its unaudited balance
sheet as at fiscal year-end in each of the
years 1996 and 1997 together with statements
of income for each of the years then ended
and (b) its unaudited balance sheet as at
June 30, 1998 (the "Electronika Balance Sheet
Date"), and unaudited statements of income
for the quarterly period then ended
(collectively, the "Electronika Financial
Statements"). The balance sheets included in
the Electronika Financial Statements are
true, complete and accurate in all material
respects and fairly present the assets,
liabilities and financial condition of
Electronika as at the respective dates
thereof, and the statements of income
included in the Electronika Financial
Statements are true, complete and accurate in
all material respects and fairly present the
results of operations for the periods
referred to therein. Each of the Electronika
Financial Statements (a) has been prepared
from, is in accordance with and accurately
reflects in all material respects the books
and records of Electronika and (b) has been
prepared in accordance with generally
accepted accounting principals (except as may
be indicated in the notes thereto)
consistently applied throughout the periods
involved. Except as set forth in Schedule
3.4.2 of the Electronika Disclosure Letter,
since June 30, 1998:
a) There has at no time been a material
adverse change in the financial condition,
results of operations, business, properties,
assets, liabilities, or future prospects of
Electronika.
b) Electronika has not authorized,
declared, paid, or effected any liquidating
distribution in respect of its capital stock
or any direct or indirect redemption,
purchase, or other acquisition of any stock
of Electronika.
c) The operations and business of
Electronika have been conducted in all
respects only in the ordinary course.
d) There has been no accepted purchase
order or quotation, arrangement, or
understanding for future sale of the products
or services of Electronika other than in the
ordinary course of business.
a) Electronika has not suffered an
extraordinary loss (whether or not covered by
insurance) or waived any right of substantial
value.
There is no fact known to Electronika which
materially adversely affects or in the future
(as far as the Electronika Stockholders can
foresee) may materially adversely affect the
financial condition, results of operations,
business, properties, assets, liabilities, or
future prospects of Electronika, other than
economic matters of general applicability.
Section 3.5 Taxes. Electronika has filed
all income, franchise and other tax returns
required to be filed by it on and before the
date hereof. All taxes imposed by the United
States, the State of California or by any
other state, municipality, subdivision, or
other taxing authority, which are due and
payable by Electronika have been paid in full
or are adequately provided for by reserves
reflected on the latest balance sheet
included in the Electronika Financial
Statements. All contributions due from
Electronika pursuant to any unemployment
insurance or workers compensation laws and
all sales or use taxes which are due or
payable by Electronika have been paid in
full. Electronika has withheld and paid to,
or will cause to be paid to, the appropriate
taxing authorities all amounts required to be
withheld from the wages of its employees
under state law and the applicable provisions
of the Internal Revenue Code of 1986, as
amended (the "Code"). Electronika has
furnished to Parent true and complete copies
of the federal income tax returns and
comparable state tax returns of Electronika
covering the years ended December 31, 1996
and 1997, constituting complete and accurate
representations in all material respects of
the tax liabilities of Electronika for the
relevant periods stated therein and
accurately setting forth all relevant
material items, including the tax bases of
all assets, where required to be set forth in
such tax returns.
Section 3.6 Undisclosed Liabilities.
Except as disclosed in Schedule 3.6 of the
Electronika Disclosure Letter and except for
liabilities and obligations reflected on the
latest balance sheet included in the
Electronika Financial Statements or arising
in the ordinary course of business since the
date of such balance sheet, none of which
latter items, individually or in the
aggregate, have a Material Adverse Effect:
(a) Electronika is not, and none of its
properties are, subject to any debts,
liabilities or obligations of any nature,
whether accrued, absolute, contingent or
otherwise, which are of a type required to be
shown or reflected on financial statements
prepared in a manner consistent with
generally accepted accounting principles; and
(b) Electronika is not, and none of its
properties are, subject to any material
debts, liabilities or obligations of any
nature, whether accrued, absolute, contingent
or otherwise, whether or not of a type which
are required to be shown or reflected on
financial statements prepared in a manner
consistent with generally accepted accounting
principles.
Section 3.7 Litigation and Claims. There
is no litigation, arbitration, claim,
governmental or other proceeding (formal or
informal), or investigation pending or, to
the best knowledge of Electronika,
threatened, or any basis therefor known to
Electronika, with respect to Electronika or
any of its businesses, properties, or
assets. Electronika is not in violation of,
or in default with respect to, any law, rule,
regulation, order, judgment, or decree such
as would cause a Material Adverse Effect; nor
is Electronika required to take any action in
order to avoid such violation or default.
Section 3.8 Properties. Electronika
represents and warrants as to its properties
as follows:
a) All accounts and notes receivable
reflected in the Electronika Financial
Statements, or arising since the Electronika
Balance Sheet Date, have been collected, or,
to the best knowledge of Electronika, are and
will be good and collectible, in each case at
the aggregate recorded amounts thereof
without right of recourse, defense,
reduction, return of goods, counterclaim,
offset, or set off on the part of the
obligor, net, in the aggregate, of the
applicable reserve reflected on the
Electronika Balance Sheet.
b) All inventory of raw materials and
work in process of Electronika included in
the Electronika Balance Sheet or acquired
since the Electronika Balance Sheet Date is
usable, and all inventory of finished goods
is good and marketable, on a normal basis in
the existing product lines of Electronika.
In no event do such inventories represent
more than a six-month supply measured by the
volume of sales or use for the year ended
December 31, 1997. All inventory is usable
and salable in the normal course of business.
c) Attached as Schedule 3.8(c) to the
Electronika Disclosure Letter hereto is a
true and complete list of all real and other
properties and assets owned by Electronika or
leased or licensed by Electronika from or to
a third party (including inventory but not
including Intangible Assets, as defined in
Section 3.14 hereof), including with respect
to such properties and assets owned by
Electronika a statement of cost, book value
and (except for land) reserve for
depreciation of each item for tax purposes,
and net book value of each item for financial
reporting purposes, and with respect to such
properties and assets leased or licensed by
Electronika, a description of such lease or
license. All such real and other properties
and assets (including Intangibles) owned by
Electronika are reflected on the Electronika
Balance Sheet (except for acquisitions
subsequent to the Electronika Balance Sheet
Date and prior to the Effective Time which
are either noted on Schedule 3.8 or were
approved in writing by Parent) and are owned
by Electronika free and clear of all liens,
mortgages, security interests, pledges,
charges and encumbrances other than (a)
liens, mortgages, security interests,
pledges, charges or encumbrances disclosed in
the Electronika Financial Statements or
Schedule 3.8(c) of the Electronika Disclosure
Letter, (b) landlords', mechanics',
carriers', workers' and similar statutory
liens arising in the ordinary course of
business for sums not delinquent, for which
adequate reserves or other appropriate
provisions have been made in the Electronika
Financial Statements, (c) deed restrictions
and similar exceptions to clear title not
incurred in connection with indebtedness that
do not materially impair the existing use or
materially detract from the value of the
assets or property subject thereto, and (d)
liens for current taxes not delinquent, for
which adequate reserves or other appropriate
provisions have been made in the Electronika
Financial Statements. All real and other
tangible properties and assets owned, leased,
or licensed by Electronika are in good and
usable condition (reasonable wear and tear,
taking into account the respective ages of
the assets involved, which is not such as to
affect adversely the operation of the
business of Electronika, excepted).
d) No real property owned, leased, or
licensed by Electronika lies in an area which
is, or to the knowledge of Electronika will
be, subject to zoning, use, or building code
restrictions which would prohibit, and to the
best knowledge of Electronika, no state of
facts relating to the actions or inaction of
another person or entity or its ownership,
leasing, licensing, or use of any real or
personal property exists which would prevent,
the continued effective ownership, leasing,
licensing, or use of such real property in
the business in which Electronika is now
engaged or the business which it now
contemplates engaging.
e) The assets set forth on Schedule
3.8(c) of the Electronika Disclosure Letter
constitute all such properties and assets
which are necessary for the operation of the
business of Electronika in accordance with
its current methods of operation in all
material respects.
Section 3.9 Contracts and Other
Instruments. Schedule 3.9 of the Electronika
Disclosure Letter includes a listing of all
oral or written (a) contracts, commitments,
sales orders or purchase orders, whether or
not entered into in the ordinary course of
business, which involve future payments,
performance of services or delivery of goods
and/or materials, to or by Electronika of an
amount or value in excess of $50,000;
(b) bonus, incentive compensation, pension,
profit sharing, stock option, group
insurance, medical reimbursement or employee
welfare or benefit plans of any nature
whatsoever; (c) collective bargaining
agreements or other contracts or commitments
to or with labor unions or other employee
groups; (d) leases, contracts or commitments
affecting ownership of, title to, use of or
any material interest in real estate; (e)
employment contracts or other contracts,
agreements, or commitments to or with indi-
vidual employees, consultants or agents of
Electronika that (i) extend for a period of
more than six months from the date hereof,
(ii) provide for earlier termination upon
payment of a penalty or the equivalent
thereof or (iii) involve consideration having
a value in excess of $50,000; (f) equipment
leases providing (in any one lease or group
of related leases) for payments in excess of
$25,000 per year; (g) contracts under which
the performance of any obligation of
Electronika is guaranteed by any of the
Electronika Stockholders or any third party,
including performance bonding arrangements;
(h) contracts or commitments providing for
payments based in any manner upon the
revenues, purchases or profits of
Electronika; (i) bank credit, factoring and
loan agreements, indentures, promissory notes
and other documents representing indebtedness
for borrowed money; (j) patent licensing
agreements and all other agreements with
respect to patents, patent applications,
trademarks, service marks, trade names,
technical assistance, special processes,
know-how, copyright or other like items; (k)
other contracts and agreements to which
Electronika is a party and which have not
been fully performed, involving consideration
having a value in excess of $50,000 or a
remaining period for performance in excess of
nine months; (l) any non-competition
agreements or indemnification agreements to
which Electronika is a party; and (m) any
other contract, agreement, commitment or
understanding that is material to the
financial condition, results of operations,
business or prospects of Electronika. The
items described in this Section 3.9 are
referred to herein collectively as the
"Electronika Material Contracts".
Electronika has furnished to Parent true and
complete copies of the Electronika Material
Contracts.
Section 3.10 Validity of Electronika
Material Contracts. All of the Electronika
Material Contracts are valid and binding
obligations of Electronika and, to the best
knowledge of Electronika, the other parties
thereto, in accordance with their respective
terms, subject to the applicable bankruptcy,
insolvency, reorganization, moratorium or
similar laws of general application relating
to or affecting the enforcement of the rights
of creditors or by equitable principles,
whether enforcement is sought in equity or at
law (the "Bankruptcy Exception"); there have
been no amendments or modifications to any of
the Electronika Material Contracts (except as
set forth in the copies furnished to Parent);
no event has occurred which is, or, following
any grace period or required notice, would
become a material default by Electronika
under the terms of any of the Electronika
Material Contracts; except to the extent
specifically reserved for on the latest
balance sheet included in the Electronika
Financial Statements, Electronika is not a
party to any Electronika Material Contract
for which Electronika or the Electronika
Stockholders anticipate expenses materially
in excess of revenues or which is otherwise
materially adverse; and Electronika has not
expressly waived any material rights under
any Electronika Material Contract.
Section 3.11 Charter Instruments.
Electronika has furnished to Parent complete
and correct copies of its Articles of
Incorporation and Bylaws as in effect on the
date hereof. Electronika has heretofore made
available to Parent for its examination
copies of the minute books, stock certificate
books and corporate seal of Electronika.
Said minute books are accurate in all
material respects and reflect all resolutions
adopted and all material actions expressly
authorized or ratified by the stockholders
and directors of Electronika. The stock
certificate books reflect all issuances,
transfers and cancellations of capital stock
of Electronika.
Section 3.12 Related Party Transactions
Schedule 3.12 of the Electronika Disclosure
Letter contains a description of any
transaction, during the last two years, or
proposed transaction, to which Electronika
was or is to be a party in which any of the
following persons had or is to have a direct
or indirect material interest: (1) any
director or officer of Electronika; (2) any
Electronika Stockholder; and (3) any member
of the immediate family (including spouse,
parents, children, siblings and in-laws) of
any of the foregoing persons (in each case, a
"Related Party"). Such description shall
include the name of the person, the
relationship to Electronika, the nature of
the person's interest in the transaction and,
the amount of such interest; provided,
however, that no disclosure is required if
the amount involved in the transaction or a
series of similar transactions does not
exceed $60,000.
Section 3.13 Employee Benefit Plans. As
used in this Section 3.13, the term "Benefit
Plan" means any plan, program, arrangement,
practice or contract which provides benefits
or compensation to or on behalf of employees
or former employees of Electronika or any
"ERISA Affiliate" (as hereinafter defined),
whether formal or informal, whether or not
written, including but not limited to the
following:
Section 3.13.1 Arrangements. Any bonus,
incentive compensation, stock option,
deferred compensation, commission, severance,
golden parachute or other compensation plan,
rabbi trust, program, contract, arrangement
or practice.
Section 3.13.2 ERISA Plans. Any "employee
benefit plan" (as defined in Section 3(3) of
ERISA), including, but not limited to, any
"multi-employer plan" (as defined in Section
3(37) and Section 4001(a)(3) of ERISA),
defined benefit pension plan, profit sharing
plan, money purchase pension plan, 401(k)
plan, savings or thrift plan, stock bonus
plan, employee stock ownership plan, or any
plan, fund, program, arrangement or practice
providing for medical (including post-
retirement medical), hospitalization,
accident, sickness, disability, or life
insurance benefits.
Section 3.13.3 Other Employee Fringe
Benefits. Any stock purchase, vacation,
scholarship, day care, prepaid legal
services, severance pay or other fringe
benefit plan, program, arrangement, contract
or practice.
Section 3.13.4 ERISA Affiliate. For
purposes of this Section 3.13, the term
"ERISA Affiliate" means each trade or
business (whether or not incorporated) which
together with Electronika is treated as
single employer under Section 414(b), (c),
(m) or (o) of the Code.
Section 3.13.5 Identification of Benefit
Plans. Except as set forth in Section 3.13 of
the Electronika Disclosure Letter, neither
Electronika nor any ERISA Affiliate
maintains, has not at any time established or
maintained, and has not at any time been
obligated to make contributions to or under
or otherwise participate in any Benefit Plan.
Section 3.13.6 MEPPA Liability/Post-
Retirement Medical Benefits/ Defined Benefit
Plans/Supplemental Retirement Plans. Neither
Electronika nor any ERISA Affiliate
maintains, or has at any time established or
maintained, or has at any time been obligated
to make contributions to or under any multi-
employer plan. Neither Electronika nor any
ERISA Affiliate maintains, or has at any time
established or maintained, or has at any time
been obligated to make contributions to or
under (i) any plan which provides post-
retirement medical or health benefits, (ii)
any organization described in Sections
501(c)(9) or 501(c)(20) of the Code, (iii)
any defined benefit pension plan subject to
Title IV of ERISA or (iv) any plan which
provides retirement benefits in excess of the
limitations of Section 415 of the Code.
Section 3.13.7 Liabilities. The execution
and performance of the transactions
contemplated by this Agreement will not
create, accelerate or increase any obligation
to make any payment which, as an "excess
parachute payment" under Section 280G of the
Code, would not be deductible.
Section 3.14 Patents, Trademarks,
Et Cetera. Schedule 3.14 of the
Electronika Disclosure Letter includes a
list of all material patents, patent
applications, trade names, trademark
registrations and applications therefor,
copyrights, licenses, franchises and other
assets of like kind ("Intangible Assets") and
all interests in Intangible Assets which are
owned in whole or in part by or registered in
the name of Electronika. Electronika owns or
has the right to use all Intangible Assets
now used in the conduct of its business.
Such Intangible Assets include all of the
proprietary products and formulations
developed by Electronika or used by it in its
business. Electronika is not obligated to
pay any royalty or other fee to any licensor
or other third party with respect to any
Intangible Assets. Electronika has not
received any claim alleging any conflict
between any aspect of the business of
Electronika and any Intangible Assets claimed
to be owned by others which, if determined
adversely to Electronika, would have a
Material Adverse Effect. None of the
Electronika Stockholders or any Related Party
has any interest in any Intangible Assets
which are presently used by Electronika or
which infringe upon, conflict with or relate
to improvements or modifications of any
Intangible Assets presently used by
Electronika. To the best knowledge of
Electronika, there is no infringement by
others of any Intangible Assets of
Electronika.
Section 3.15 Questionable Payments.
Neither Electronika, nor, to the best
knowledge of Electronika, any director,
officer, agent, employee, or other person
associated with or acting on behalf of
Electronika nor any stockholder of
Electronika has, directly or indirectly:
used any corporate funds for unlawful
contributions, gifts, entertainment, or other
unlawful expenses relating to political
activity; made any unlawful payment to
foreign or domestic government officials or
employees or to foreign or domestic political
parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made
any bribe, payoff, influence payment,
kickback, or other unlawful payment of any
kind.
Section 3.16 Authority to Merge.
Electronika has full corporate power and
authority to execute, deliver, and perform
this Agreement. All necessary corporate
proceedings of Electronika (including
stockholder actions) have been duly taken to
authorize the execution, delivery, and
performance of this Agreement (including
without limitation the consummation of the
Merger) by Electronika. This Agreement (i)
has been duly authorized, executed, and
delivered by Electronika, (ii) constitutes
the legal, valid, and binding obligation of
Electronika, and (iii) is enforceable as to
it in accordance with its terms, subject to
the Bankruptcy Exception. Except for the
filing of the Articles of Merger with the
Missouri and California Secretaries of State,
no consent, authorization, approval, order,
license, certificate, or permit of or from,
or declaration or filing with, any federal,
state, local, or other governmental authority
or any court or other tribunal is required by
Electronika for the execution, delivery, or
performance of this Agreement by Electronika.
No consent of any party to any Electronika
Material Contract is required for the
execution, delivery, or performance of this
Agreement; and the execution, delivery, and
performance of this Agreement will not
violate, result in a breach of, conflict
with, or (with or without the giving of
notice or the passage of time or both)
entitle any party to terminate or call a
default under, entitle any party to any
material rights or privileges that such party
was not receiving or entitled to receive
immediately before this Agreement was
executed under, or create any obligation on
the part of Electronika that it was not
paying or obligated to pay immediately before
this Agreement was executed under, any term
of any Electronika Material Contract, or
violate or result in a breach of any term of
the articles of incorporation (or other
charter document) or bylaws of Electronika,
or violate, result in a breach of, or
conflict with any law, rule, regulation,
order, judgment, or decree binding on
Electronika, or to which any of its
businesses, properties, or assets are
subject. Neither Electronika nor any of its
officers, directors, employees, or agents has
employed any broker or finder or incurred any
liability for any fee, commission, or other
compensation payable by any person on account
of alleged employment as a broker or finder,
or alleged performance of services as a
broker or finder, in connection with or as a
result of this Agreement, the Merger, or the
other transactions contemplated by this
Agreement.
Section 3.17 Year 2000 Compliance. To the
best knowledge of Electronika, each item of
hardware, software and firmware owned or used
by Electronika ("Electronika Information
Technology") is able to accurately process
date/time data (including, but not limited
to, calculating, comparing, and sequencing)
from, into, and between the twentieth and
twenty-first centuries and the years 1999 and
2000 and make leap year calculations
independently and to the extent that other
information technology, used in combination
with the Electronika Information Technology,
properly exchanges date/time data with it.
If certain items of the Electronika
Information Technology are required to
perform as a system, then this warranty shall
apply to those items of Electronika
Information Technology as a system.
Section 3.18 Assets of Magnetika/East;
Name Change. Prior to the Closing Date,
Electronika shall have acquired the business
and assets of Magnetika/East. The business
and assets to be acquired are set forth in
Schedule 3.18 of the Electronika Disclosure
Letter. Electronika shall own such business
and assets free and clear of any liens or
encumbrances. Prior to the date hereof,
Electronika changed its corporate name from
"Caloyeras, Inc." to "Electronika, Inc."
Electronika possesses all of the rights,
privileges, powers and preferences, and is
subject to all of the obligations,
restrictions, disabilities and duties, of the
former Caloyeras, Inc.
Section 3.19 Environmental Matters.
a) For purposes of this Agreement, the
following terms shall have the following
meanings:
(i) "Environmental Claims" means any and
all administrative, regulatory or judicial
actions, suits, demands, demand letters,
claims, liens, notices of noncompliance or
violation, investigations or proceedings
relating to any Environmental Law or
Environmental Permit, including, without
limitation, (A) any and all claims by
governmental or regulatory authorities for
enforcement, cleanup, removal, response,
remedial or other actions or damages pursuant
to any applicable Environmental Law, and (B)
any and all claims by any third party seeking
damages, contribution, indemnification, cost
recovery, compensation or injunctive relief
resulting from Hazardous Substances or
arising from alleged injury or threat of
injury to the environment.
(ii) "Environmental Laws" means any
federal, state, or local statute, law, rule,
regulation, ordinance, code or rule of common
law in effect as of the date hereof, and any
judicial or administrative interpretation
thereof, including any judicial or
administrative order, consent decree or
judgment, relating to human health and the
environment or Hazardous Substances,
including, without limitation, the
Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and
Reauthorization Act of 1986, 42 U.S.C.
9601, et seq.; the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C.
11001, et seq.; The Resource Conservation
and Recovery Act, 42 U.S.C. 6901 et seq.;
the Federal Water Pollution Control Act, 33
U.S.C. 1251 et seq.; the Clean Air Act, as
amended, 42 U.S.C. 7401, et seq.; the
Federal Insecticide, Fungicide and
Rodenticide Act, 7 U.S.C. 136, et seq.;
the Safe Drinking Water Act, 42 U.S.C.
300f, et seq.; the Toxic Substances Control
Act, 15 U.S.C. 2601, et seq.; the Oil
Pollution Act of 1990, 33 U.S.C. 1001, et
seq.; the Hazardous Materials Transportation
Act, as amended, 49 U.S.C. 1801, et seq.;
the Occupational Safety and Health Act, as
amended, 29 U.S.C. 651, et seq.; or the
Federal Food, Drug and Cosmetic Act, as
amended, 21 U.S.C. 301, et seq., or any
environmental transfer laws which regulate
the transfer of property and the
corresponding state laws, regulations and
local ordinances, etc., which may be
applicable, as any such acts have been or may
be amended.
(iii) "Environmental Permits" means all
permits, approvals, identification numbers,
licenses and other authorizations required
under any applicable Environmental Law.
(iv) "Hazardous Substances" means (A) any
chemicals, materials or substances defined as
or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes,"
"restricted hazardous wastes," "toxic
substances," "toxic pollutants," "hazardous
air pollutants," "pollutants,"
"contaminants," "toxic chemicals," petroleum
or petroleum products," "toxics," "hazardous
chemicals," "extremely hazardous substances,"
"pesticides" or related materials, as
presently defined in any applicable
Environmental Law; (B) any petroleum or
petroleum products, natural or synthetic gas,
radioactive materials, asbestos-containing
materials, urea formaldehyde foam insulation,
and radon; and (C) any other chemical,
material or substance, the presence of which
requires investigation or remediation under
any Environmental Law.
b) With respect to real property owned or
leased by Electronika, to the best knowledge
of Electronika: (i) Electronika has not
violated nor is in violation in any respect
of any applicable Environmental Law;
(ii) Electronika has all Environmental
Permits and is in material compliance with
their requirements; (iii) such real property
(including, without limitation, soils and
surface, ground waters and buildings) is not
contaminated with any Hazardous Substances
requiring remediation under applicable
Environmental Laws; (iv) Electronika has not
received written notice of any past, pending
or threatened Environmental Claims or
circumstances that could reasonably be
anticipated to form the basis thereof against
Electronika; (v) such real property is not
listed on CERCLIS, the NPL, or any similar
state or local listing nor is it included in
an area included in such a list, and
Electronika has not received written notice
that such a listing is pending or
contemplated.
Section 3.20 Completeness of Disclosure.
No representation or warranty by Electronika
or the Electronika Stockholders in this
Agreement contains or at the Effective Time
will contain an untrue statement of material
fact or omits or at the Effective Time will
omit to state a material fact required to be
stated therein or necessary to make the
statements made, in the light of the
circumstances under which they were made, not
misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
PARENT AND ACQUISITION
Parent and MergerSub shall deliver to
Electronika and the Electronika Stockholders,
within 30 days of the execution hereof, a
disclosure letter (the "Parent Disclosure
Letter"). Except as specifically set forth
in the Parent Disclosure Letter, Parent and
MergerSub hereby represent and warrant to
Electronika and the Electronika Stockholders,
as follows:
Section 4.1 Subsidiaries. Parent owns
all of the outstanding shares of capital
stock of MergerSub, Torotel Products, Inc., a
Missouri corporation, and OPT Industries,
Inc., a New Jersey corporation (each, a
"Parent Subsidiary"). Other than as
described in the immediately preceding
sentence, neither Parent nor any Parent
Subsidiary (i) has any subsidiaries or (ii)
has any material debt (other than trade
accounts receivable) or equity interest, or
right or option to acquire any debt or equity
interest, in any Person.
Section 4.2 Organization and
Qualification. Each of Parent and the Parent
Subsidiaries is a corporation duly organized,
validly existing, and in good standing under
the laws of its jurisdiction of
incorporation, with all requisite power and
authority, and all necessary consents,
authorizations, approvals, orders, licenses,
certificates, and permits of and from, and
declarations and filings with, all federal,
state, local, and other governmental
authorities and all courts and other
tribunals, to own, lease, license, and use
its properties and assets and to carry on the
business in which it is now engaged and the
business in which it contemplates engaging,
except where the failure to have obtained any
of the foregoing would not have a Material
Adverse Effect. Each of Parent and the
Parent Subsidiaries is duly qualified to
transact the business in which it is engaged
and is in good standing as a foreign
corporation in every jurisdiction in which
its ownership, leasing, licensing, or use of
property or assets or the conduct of its
business makes such qualification necessary,
except where the failure to be so qualified
would not have a Material Adverse Effect.
Schedule 4.2 of the Parent Disclosure Letter
includes a list of the jurisdictions in which
Parent and/or the Parent Subsidiaries is
qualified to do business.
Section 4.3 Capitalization. As of the
date hereof, the authorized capital stock of
Parent consists of 6,000,000 shares of Parent
Common Stock, of which 2,811,590 shares are
issued and outstanding (as of November 1,
1998). The authorized capital stock of
MergerSub consists of 1,000 shares of common
stock, all of which are owned by Parent, free
and clear of any liens, security interests,
pledges, charges and encumbrances. All such
outstanding shares of Parent Common Stock and
MergerSub common stock were validly
authorized and issued, and are fully paid and
nonassessable, and have not been issued and
are not owned or held in violation of any
preemptive right of stockholders. Other than
as contemplated hereby and except as set
forth on Schedule 4.3 of the Parent
Disclosure Letter, there is no commitment,
plan, or arrangement to issue, and no
outstanding option, warrant, or other right
calling for the issuance of, any share of
capital stock of Parent or any Parent
Subsidiary or any security or other
instrument convertible into, exercisable for,
or exchangeable for capital stock of Parent
or any Parent Subsidiary. There are no
preemptive or similar rights to subscribe for
or to purchase capital stock of Parent or any
Parent Subsidiary.
Section 4.4 Financial Condition. Parent
has heretofore delivered to Electronika (a)
its Form 10-KSB for the fiscal year ended
April 30, 1998 (the "Form 10-KSB"), as filed
with the Securities and Exchange Commission
(the "SEC") and (b) its Form 10-QSB for the
fiscal quarter ended July 31, 1998 (the "Form
10-QSB"), as filed with the SEC. The Form
10-KSB and the Form 10-QSB, together with all
reports, forms and other documents filed by
Parent with the SEC are referred to herein,
collectively as the "Parent SEC Documents."
As of their respective dates, the Parent SEC
Documents complied in all material respects
with the requirements of the Securities Act
of 1933, as amended (the "Securities Act") or
the Securities Exchange Act of 1934, as
amended, as the case may be, and the rules
and regulations of the SEC thereunder
applicable to such Parent SEC Documents. The
Parent SEC Documents, in the aggregate, do
not contain any untrue statement of a
material fact or omit to state a material
fact required to be stated therein or
necessary to make the statements therein, in
light of the circumstances under which they
were made, not misleading. The consolidated
financial statements of Parent included in
the Parent SEC Documents: (i) are true and
complete as of the respective dates thereof;
(ii) fairly and accurately present the
consolidated financial condition of Parent as
of the respective dates thereof, and the
consolidated results of the operations of
Parent for the respective periods covered
thereby; (iii) disclose all liabilities
required to be disclosed therein; and (iv)
have been prepared in accordance with
generally accepted accounting principles
applied on a consistent basis (except as may
be indicated therein or in the notes thereto)
and except as the application may be modified
in accordance with generally accepted
accounting principles for interim reporting.
Except as set forth in Schedule 4.4 of the
Parent Disclosure Letter, since July 31,
1998:
a) There has at no time been a Material
Adverse change in the financial condition,
results of operations, business, properties,
assets, liabilities or future prospects of
Parent or any Parent Subsidiary.
b) Neither Parent nor any Parent
Subsidiary has authorized, declared, paid, or
effected any dividend or liquidating or other
distribution in respect of its capital stock
or any direct or indirect redemption,
purchase, or other acquisition of any stock
of Parent or any Parent Subsidiary.
c) The operations and business of Parent
and all Parent Subsidiaries have been
conducted in all respects only in the
ordinary course.
d) There has been no accepted purchase
order or quotation, arrangement or
understanding for future sale of the products
or services of Parent or any Parent
Subsidiary, other than in the ordinary course
of business.
e) Neither Parent nor any Parent
Subsidiary has suffered an extraordinary loss
(whether or not covered by insurance) or
waived any right of substantial value. Other
than as disclosed in Parent SEC Documents,
there is no fact known to Parent or any
Parent Subsidiary which materially adversely
affects or in the future (as far as Parent or
any Parent Subsidiary can foresee) may
materially adversely affect the financial
condition, results of operations, business,
properties, assets, liabilities, or future
prospects of Parent or any Parent Subsidiary,
other than economic matters of general
applicability.
Section 4.5 Taxes. Parent and each Parent
Subsidiary has filed all income, franchise
and other tax returns required to be filed by
it on and before the date hereof. All taxes
imposed by the United States, the State of
Missouri or by any other state, municipality,
subdivision, or other taxing authority, which
are due and payable by Parent or any Parent
Subsidiary have been paid in full or are
adequately provided for by reserves reflected
on the latest balance sheet included in the
Parent SEC Documents. All contributions due
from Parent or any Parent Subsidiary pursuant
to any unemployment insurance or workers
compensation laws and all sales or use taxes
which are due or payable by Parent or any
Parent Subsidiary have been paid in full.
Parent and each Parent Subsidiary has
withheld and paid to, or will cause to be
paid to, the appropriate taxing authorities
all amounts required to be withheld from the
wages of its employees under state law and
the applicable provisions of the Code.
Parent has furnished to Electronika true and
complete copies of the federal income tax
returns and comparable state tax returns of
Parent covering the years ended December 31,
1996 and 1997, constituting complete and
accurate representations in all material
respects of the tax liabilities of Parent for
the relevant periods stated therein and
accurately setting forth all relevant
material items, including the tax bases of
all assets, where required to be set forth in
such tax returns.
Section 4.6 Undisclosed Liabilities.
Except as disclosed in the Schedule 4.6 of
the Parent Disclosure Letter or in Parent SEC
Documents and except for liabilities and
obligations arising in the ordinary course of
business since July 31, 1998, none of which
latter items, individually or in the
aggregate, have a Material Adverse Effect:
(a) neither Parent nor any Parent Subsidiary
is, and none of their properties are, subject
to any debts, liabilities or obligations of
any nature, whether accrued, absolute, con-
tingent or otherwise, which are of a type
required to be shown or reflected on
financial statements prepared in a manner
consistent with generally accepted accounting
principles; and (b) neither Parent nor any
Parent Subsidiary is, and none of their
properties are, subject to any material
debts, liabilities or obligations of any
nature, whether accrued, absolute, contingent
or otherwise, whether or not of a type which
are required to be shown or reflected on
financial statements prepared in a manner
consistent with generally accepted accounting
principles.
Section 4.7 Litigation and Claims. Other
than as disclosed in the Parent SEC Documents
or as set forth in Schedule 4.7 of the Parent
Disclosure Letter, there is no litigation,
arbitration, claim, governmental or other
proceeding (formal or informal), or
investigation pending, or, to the best
knowledge of Parent, threatened, or any basis
therefor known to Parent or any Parent
Subsidiary, with respect to Parent or any
Parent Subsidiary or any of their respective
businesses, properties, or assets. Neither
Parent nor any Parent Subsidiary is in
violation of, or in default with respect to,
any law, regulation, order, judgment, or
decree; nor is Parent or any Parent
Subsidiary required to take any action in
order to avoid such violation or default.
Section 4.8 Properties. Each of Parent
and MergerSub represents and warrants as to
its properties as follows:
a) All accounts and notes receivable
reflected on the balance sheet included in
the Parent Form 10-QSB (the "Parent Balance
Sheet"), or arising since the date of the
Parent Balance Sheet (the "Parent Balance
Sheet Date"), have been collected, or, to the
best knowledge of Parent, are and will be
good and collectible, in each case at the
aggregate recorded amounts thereof without
right of recourse, defense, deduction, return
of goods, counterclaim, offset, or set off on
the part of the obligor, net, in the
aggregate, of the applicable reserve
reflected in the Parent Balance Sheet.
b) All inventory of raw materials and
work in process of Parent and each Parent
Subsidiary included in the Parent Balance
Sheet or acquired since the Parent Balance
Sheet Date is usable, and all inventory of
finished goods is good and marketable, on a
normal basis in the existing product lines of
Parent or any Parent Subsidiary, as the case
may be. In no event do such inventories
represent more than a six-month supply
measured by the volume of sales or use for
the year ended April 30, 1998. All inventory
is usable and saleable in the normal course
of business.
c) Attached as Schedule 4.8 to the Parent
Disclosure Letter is a true and complete list
of all real and other properties and assets
owned by Parent and each Parent Subsidiary or
leased or licensed by Parent or any Parent
Subsidiary from or to a third party
(including inventory but not including
Intangibles), including with respect to such
properties and assets owned by Parent or by
any Parent Subsidiary a statement of cost,
book value and (except for land) reserve for
depreciation of each item for tax purposes,
and net book value of each item for financial
reporting purposes, and with respect to such
properties and assets leased or licensed by
Parent or by any Parent Subsidiary from or to
a third party, a description of such lease or
license. All such real and other properties
and assets (including Intangibles) owned by
Parent or any Parent Subsidiary are reflected
on the Parent Balance Sheet (except for
acquisitions subsequent to the Parent Balance
Sheet Date and prior to the Effective Time
which are either noted in Schedule 4.8 hereto
or were approved in writing by Electronika)
and are owned by Parent or any Parent
Subsidiary free and clear of all liens,
mortgages, security interests, pledges,
charges and encumbrances other than (a)
liens, mortgages, security interests,
pledges, charges or encumbrances disclosed in
the Parent SEC Documents or Schedule 4.8, (b)
landlords', mechanics', carriers', workers'
and similar statutory liens arising in the
ordinary course of business for sums not
delinquent, for which adequate reserves or
other appropriate provisions have been made
in the Parent SEC Documents, (c) deed
restrictions and similar exceptions to clear
title not incurred in connection with
indebtedness that do not materially impair
the existing use or materially detract from
the value of the assets or property subject
thereto, and (d) liens for current taxes not
delinquent, for which adequate reserves or
other appropriate provisions have been made
in the Parent SEC Documents. All real and
other tangible properties and assets owned,
leased, or licensed by Parent or any Parent
Subsidiary are in good and usable condition
(reasonable wear and tear, taking into
account the respective ages of the assets
involved, which is not such as to affect
adversely the operation of the business of
Parent or of such Parent Subsidiary,
excepted).
d) No real property owned, leased, or
licensed by Parent or by any Parent
Subsidiary lies in an area which is, or to
the knowledge of Parent or any Parent
Subsidiary will be, subject to zoning, use,
or building code restrictions which would
prohibit, and to the best knowledge of
Parent, no state of facts relating to the
actions or inaction of another person or
entity or its ownership, leasing, licensing
or use of any real or personal property
exists which would prevent, the continued
effective ownership, leasing, licensing, or
use of such real property in the business in
which Parent or any Parent Subsidiary is now
engaged or the business in which it now
contemplates engaging.
e) The assets set forth on Schedule 4.8
of the Parent Disclosure Letter constitute
all such properties and assets which are
necessary for the operation of the business
of Parent and each Parent Subsidiary in
accordance with their current methods of
operation in all material respects.
Section 4.9 Contracts and Other
Instruments. Schedule 4.9 of the Parent
Disclosure Letter includes a listing of all
oral or written (a) contracts, commitments,
sales orders or purchase orders, whether or
not entered into in the ordinary course of
business, which involve future payments,
performance of services or delivery of goods
and/or materials, to or by Parent or any
Parent Subsidiary of an amount or value in
excess of $50,000; (b) bonus, incentive
compensation, pension, profit sharing, stock
option, group insurance, medical
reimbursement or employee welfare or benefit
plans of any nature whatsoever; (c)
collective bargaining agreements or other
contracts or commitments to or with labor
unions or other employee groups; (d) leases,
contracts or commitments affecting ownership
of, title to, use of or any material interest
in real estate; (e) employment contracts or
other contracts, agreements, or commitments
to or with individual employees, consultants
or agents of Parent or any Parent Subsidiary
that (i) extend for a period of more than six
months from the date hereof, (ii) provide for
earlier termination upon payment of a penalty
or the equivalent thereof or (iii) involve
consideration having a value in excess of
$50,000; (f) equipment leases providing (in
any one lease or group of related leases) for
payments in excess of $25,000 per year; (g)
contracts under which the performance of any
obligation of Parent or any Parent Subsidiary
is guaranteed by any of the Parent
Subsidiaries or Parent, as applicable, or any
third party, including performance bonding
arrangements; (h) contracts or commitments
providing for payments based in any manner
upon the revenues, purchases or profits of
Parent or any Parent Subsidiary; (i) bank
credit, factoring and loan agreements,
indentures, promissory notes and other
documents representing indebtedness for
borrowed money; (j) patent licensing
agreements and all other agreements with
respect to patents, patent applications,
trademarks, service marks, trade names,
technical assistance, special processes,
know-how, copyright or other like items; (k)
other contracts and agreements to which
Parent or any Parent Subsidiary is a party
and which have not been fully performed,
involving consideration having a value in
excess of $50,000 or a remaining period for
performance in excess of nine months; (l) any
non-competition agreements or indemnification
agreements to which Parent or any Parent
Subsidiary is a party; and (m) any other
contract, agreement, commitment or
understanding that is material to the
financial condition, results of operations,
business or prospects of Parent or any Parent
Subsidiary. The items described in this
Section 4.9 are referred to herein
collectively as the "Parent Material
Contracts." Parent has furnished to
Electronika true and complete copies of the
Parent Material Contracts.
Section 4.10 Validity of Parent Material
Contracts. All of the Parent Material
Contracts are valid and binding obligations
of Parent or the Parent Subsidiary party
thereto and, to the best knowledge of Parent,
the other parties thereto, in accordance with
their respective terms, subject to the
Bankruptcy Exception; there have been no
amendments or modifications to any of the
Parent Material Contracts (except as set
forth in the copies furnished to
Electronika); no event has occurred which is,
or, following any grace period or required
notice, would become a material default by
Parent or any Parent Subsidiary under the
terms of any of the Parent Material
Contracts; except to the extent specifically
reserved for on the latest balance sheet
included in the Parent SEC Documents, neither
Parent nor any Parent Subsidiary is a party
to any Parent Material Contract for which
Parent anticipates expenses materially in
excess of revenues or which is otherwise
materially adverse; and neither Parent nor
any Parent Subsidiary has expressly waived
any material rights under any Parent Material
Contract.
Section 4.11 Charter Instruments. Parent
and each Parent Subsidiary have furnished to
Electronika complete and correct copies of
their respective Articles of Incorporation
and Bylaws as in effect on the date hereof.
Parent and each Parent Subsidiary have
heretofore made available to Electronika for
its examination copies of their respective
minute books, which are accurate in all
material respects and reflect all resolutions
adopted and all material actions expressly
authorized or ratified by the stockholders
and directors of Parent and each Parent
Subsidiary.
Section 4.12 Employee Benefit Plans. As
used in this Section 4.12, the term "Benefit
Plan" means any plan, program, arrangement,
practice or contract which provides benefits
or compensation to or on behalf of employees
or former employees of Parent, any Parent
Subsidiary or any "ERISA Affiliate" (as
hereinafter defined), whether formal or
informal, whether or not written, including
but not limited to the following:
Section 4.12.1 Arrangements. Any bonus,
incentive compensation, stock option,
deferred compensation, commission, severance,
golden parachute or other compensation plan,
rabbi trust, program, contract, arrangement
or practice.
Section 4.12.2 ERISA Plans. Any "employee
benefit plan" (as defined in Section
3(3) of ERISA), including, but not limited
to, any "multi-employer plan" (as defined in
Section 3(37) and Section 4001(a)(3) of
ERISA), defined benefit pension plan, profit
sharing plan, money purchase pension plan,
401(k) plan, savings or thrift plan, stock
bonus plan, employee stock ownership plan, or
any plan, fund, program, arrangement or
practice providing for medical (including
post-retirement medical), hospitalization,
accident, sickness, disability, or life
insurance benefits.
Section 4.12.3 Other Employee Fringe
Benefits. Any stock purchase, vacation,
scholarship, day care, prepaid legal
services, severance pay or other fringe
benefit plan, program, arrangement, contract
or practice.
Section 4.12.4 ERISA Affiliate. For
purposes of this Section 4.12, the term
"ERISA Affiliate" means each trade or
business (whether or not incorporated) which
together with Parent or any Parent Subsidiary
is treated as single employer under Section
414(b), (c), (m) or (o) of the Code.
Section 4.12.5 Identification of Benefit
Plans. Except as set forth in Schedule 4.12
of the Parent Disclosure Letter, neither
Parent, any Parent Subsidiary nor any ERISA
Affiliate maintains, has not at any time
established or maintained, and has not at any
time been obligated to make contributions to
or under or otherwise participate in, any
Benefit Plan.
Section 4.12.6 MEPPA Liability/Post-
Retirement Medical Benefits/Defined Benefit
Plans/Supplemental Retirement Plans. Neither
Parent, any Parent Subsidiary nor any ERISA
Affiliate maintains, or has at any time
established or maintained, or has at any time
been obligated to make contributions to or
under any multi-employer plan. Neither
Parent, any Parent Subsidiary nor any ERISA
Affiliate maintains, or has at any time
established or maintained, or has at any time
been obligated to make contributions to or
under (i) any plan which provides post-
retirement medical or health benefits, (ii)
any organization described in Sections
501(c)(9) or 501(c)(20) of the Code, (iii)
any defined benefit pension plan subject to
Title IV of ERISA or (iv) any plan which
provides retirement benefits in excess of the
limitations of Section 415 of the Code.
Section 4.12.7 Liabilities. The execution
and performance of the transactions
contemplated by this Agreement will not
create, accelerate or increase any obligation
to make any payment which, as an "excess
parachute payment" under Section 280G of the
Code, would not be deductible.
Section 4.13 Patents, Trademarks, Et
Cetera. Schedule 4.13 of the Parent
Disclosure Letter includes a list of all of
Parent's Intangible Assets and all interests
in Intangible Assets which are owned in whole
or in part by or registered in the name of
Parent or any Parent Subsidiary. Parent and
each Parent Subsidiary owns or has the right
to use all Intangible Assets now used in the
conduct of its business. Such Intangible
Assets include all of the proprietary
products and formulations developed by Parent
or any Parent Subsidiary or used by it in its
business. Neither Parent nor any Parent
Subsidiary is obligated to pay any royalty or
other fee to any licensor or other third
party with respect to any Intangible Assets.
Neither Parent nor any Parent Subsidiary has
received any claim alleging any conflict
between any aspect of the business of Parent
or any Parent Subsidiary and any Intangible
Assets claimed to be owned by others which,
if determined adversely to Parent or any
Parent Subsidiary, would have a Material
Adverse Effect. No stockholder or affiliate
of Parent has any interest in any Intangible
Assets which are presently used by Parent or
any Parent Subsidiary or which infringe upon,
conflict with or relate to improvements or
modifications of any Intangible Assets
presently used by Parent or any Parent
Subsidiary. To the best knowledge of Parent,
there is no infringement by others of any
Intangible Assets of Parent.
Section 4.14 Questionable Payments.
Neither Parent, any Parent Subsidiary nor, to
the best knowledge of Parent, any director,
officer, agent, employee, or other person
associated with or acting on behalf of Parent
or any Parent Subsidiary has, directly or
indirectly: used any corporate funds for
unlawful contributions, gifts, entertainment,
or other unlawful expenses relating to
political activity; made any unlawful payment
to foreign or domestic government officials
or employees or to foreign or domestic
political parties or campaigns from corporate
funds; violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or
made any bribe, payoff, influence payment,
kickback, or other unlawful payment of any
kind.
Section 4.15 Authority to Merge. Parent
and MergerSub each has full corporate power
and authority to execute, deliver, and
perform this Agreement. All necessary
corporate proceedings of Parent and MergerSub
have been duly taken to authorize the
execution, delivery, and performance of this
Agreement by Parent and MergerSub (including
without limitation the consummation of the
Merger), other than the approval of the
holders of Parent Common Stock. This
Agreement (i) has been duly authorized,
executed, and delivered by Parent and
MergerSub, (ii) constitutes the legal, valid,
and binding obligation of Parent and
MergerSub, and (iii) is enforceable as to
them in accordance with its terms, subject to
the Bankruptcy Exception. Except for the
filing of the Articles of Merger with the
Missouri and California Secretaries of State,
and except as set forth in Section 7.8, no
consent, authorization, approval, order,
license, certificate, or permit of or from,
or declaration or filing with, any federal,
state, local, or other governmental authority
or any court or other tribunal is required by
Parent or MergerSub for the execution,
delivery, or performance of this Agreement by
Parent or MergerSub. No consent of any party
to any Parent Material Contract is required
for the execution, delivery, or performance
of this Agreement (except for such consents
disclosed on Schedule 4.15 of the Parent
Disclosure Letter); and the execution,
delivery, and performance of this Agreement
will not (if the consents referred to in such
Schedule 4.15 are obtained prior to the
Effective Time) violate, result in a breach
of, conflict with, or (with or without the
giving of notice or the passage of time or
both) entitle any party to terminate or call
a default under, entitle any party to any
material rights or privileges that such party
was not receiving or entitled to receive
before this Agreement was executed under, or
create any obligation on the part of Parent
or any Parent Subsidiary that it was not
paying or obligated to pay immediately before
this Agreement was executed under, any Parent
Material Contract or violate or result in a
breach of any term of the articles of
incorporation (or other charter document), or
the bylaws of Parent or any Parent
Subsidiary, or violate, result in a breach
of, or conflict with any law, rule,
regulation, order, judgment, or decree
binding on Parent or any Parent Subsidiary or
to which any of their respective businesses,
properties, or assets are subject. Neither
Parent, any Parent Subsidiary, nor any of
their respective officers, directors,
employees, or agents has employed any broker
or finder or incurred any liability for any
fee, commission, or other compensation
payable by any person on account of alleged
employment as a broker or finder, or alleged
performance of services as a broker or
finder, in connection with or as a result of
this Agreement, the Merger, or the other
transactions contemplated by this Agreement.
Section 4.16 Environmental Matters. With
respect to real property owned or leased by
Parent or any Parent Subsidiary, to the best
knowledge of Parent: (i) neither Parent nor
any Parent Subsidiary has violated nor is in
violation in any respect of any applicable
Environmental Law; (ii) Parent and each
Parent Subsidiary has all Environmental
Permits and is in material compliance with
their requirements; (iii) such real property
(including, without limitation, soils and
surface, ground waters and buildings) is not
contaminated with any Hazardous Substances
requiring remediation under applicable
Environmental Laws; (iv) neither Parent nor
any Parent Subsidiary has received written
notice of any past, pending or threatened
Environmental Claims or circumstances that
could reasonably be anticipated to form the
basis thereof against Parent or any Parent
Subsidiary; (v) such real property is not
listed on CERCLIS, the NPL, or any similar
state or local listing nor is it included in
an area included in such a list, and neither
Parent nor any Parent Subsidiary has received
written notice that such a listing is pending
or contemplated.
Section 4.17 Related Party Transactions.
Schedule 4.17 of the Parent Disclosure
Letter contains a description of any
transaction, during the last two years, or
proposed transaction, to which Parent or any
Parent Subsidiary was or is to be a party in
which any of the following persons had or is
to have a direct or indirect material
interest: (1) any director or officer of
Parent; (2) any nominee for election as a
director of Parent; (3) any holder of more
than 5% of Parent's Common Stock; and (4) any
member of the immediate family (including
spouse, parents, children, siblings and in-
laws) of any of the foregoing persons (a
"Related Party"). Such description shall
include the name of the person, the
relationship to Parent, the nature of the
person's interest in the transaction and, the
amount of such interest; provided, however,
that no disclosure is required if the amount
involved in the transaction or a series of
similar transactions does not exceed $60,000.
Section 4.18 Year 2000 Compliance. To
the best knowledge of Parent, each item of
hardware, software and firmware owned or used
by Parent or any Parent Subsidiary ("Parent
Information Technology") is able to
accurately process date/time data (including,
but not limited to, calculating, comparing
and sequencing) from, into and between the
twentieth and twenty-first centuries and the
years 1999 and 2000 and make leap year
calculations independently and to the extent
that other information technology, used in
combination with the Parent Information
Technology, properly exchanges date/time data
with it. If certain items of Parent
Information Technology are required to
perform as a system, then this warranty shall
apply to those items of Parent Information
Technology as a system.
Section 4.19 Interim Operations of
MergerSub. MergerSub was formed solely for
the purpose of engaging in the transactions
contemplated by this Agreement, has engaged
in no other business activities and has
conducted its operations only as contemplated
by this Agreement.
Section 4.20 Completeness of Disclosure.
No representation or warranty by Parent or
MergerSub in this Agreement contains or will
contain an untrue statement of material fact
or omits or at the Effective Time will omit
to state a material fact required to be
stated therein or necessary to make the
statements made, in light of the
circumstances under which they were made, not
misleading.
ARTICLE V
COVENANTS OF ELECTRONIKA
During the period from the date of this
Agreement and continuing until the earlier of
the termination of this Agreement or the
Effective Time, Electronika and the
Electronika Stockholders agree as follows:
Section 5.1 Articles of Incorporation and
BylawsSection 5.1. No amendment will be made
in the articles of incorporation or bylaws of
Electronika.
Section 5.2 Shares and Options. No shares
of capital stock of Electronika, options or
warrants for such shares, rights to subscribe
to or purchase such shares, or securities
convertible into or exchangeable for such
shares, shall be issued or sold by
Electronika, otherwise than as may be
required by this Agreement or the
transactions contemplated hereby.
Section 5.3 Dividends and Purchases of
Stock. No liquidation or stock split shall be
authorized, declared, paid, or effected by
Electronika in respect of the outstanding
shares of Electronika common stock. No
direct or indirect redemption, purchase, or
other acquisition shall be made by
Electronika of shares of Electronika common
stock, except as may be otherwise required by
this Agreement or the transactions
contemplated hereby.
Section 5.4 Borrowing of Money.
Electronika shall not borrow money, guarantee
the borrowing of money, or engage in any
material transaction or enter into any
material agreement therefor, except for the
borrowing of money under Electronika's loan
agreements and lines of credit, or in the
ordinary course of business or as disclosed
in or contemplated by this Agreement or the
transactions contemplated hereby.
Section 5.5 Access. Subject to the
provisions of Section 5.7 regarding
confidentiality, Electronika will afford the
officers, directors, employees, counsel,
agents, investment bankers, accountants, and
other representatives of Parent free and full
access to its plants, properties, books, and
records, will permit them to make extracts
from and copies of such books and records,
and will from time to time furnish Parent
with such additional financial and operating
data and other information as to the
financial condition, results of operations,
business, properties, assets, liabilities, or
future prospects of Electronika as Parent
from time to time may reasonably request.
Electronika will cause the independent
certified public accountants of Electronika
to make available to Parent and its
independent certified public accountants the
work papers relating to the preparation,
review and/or examination of any of the
financial statements of Electronika.
Section 5.6 Advice of Changes.
Electronika will immediately advise Parent in
a detailed written notice of any fact or
occurrence or any pending or threatened
occurrence of which it obtains knowledge and
which (if existing and known at the date of
the execution of this Agreement) would have
been required to be set forth or disclosed in
or pursuant to this Agreement, which (if
existing and known at any time prior to or at
the Effective Time) would make the
performance by any party of a covenant
contained in this Agreement impossible or
make such performance materially more
difficult than in the absence of such fact or
occurrence, or which (if existing and known
at the Effective Time) would cause a
condition to any parties' obligations under
this Agreement not to be fully satisfied.
Section 5.7 Confidentiality. Electronika
and the Electronika Stockholders shall keep
confidential all non-public information of
Parent and MergerSub which is disclosed to
Electronika; provided, however, that such
information may be shared (i) with
Electronika' directors, employees, partners,
consultants and advisors to the extent
necessary to consummate the transactions
contemplated by this Agreement and (ii) to
the extent Electronika is required by order
of a court of competent jurisdiction (by
subpoena or similar process) to disclose or
discuss any confidential information
(provided that in such case, Electronika
shall promptly inform Parent of such event,
shall cooperate, at Parent's expense, with
the Parent in attempting to obtain a
protective order or to otherwise restrict
such disclosure and shall only disclose
confidential information to the minimum
extent necessary to comply with any such
court order). If the transactions
contemplated by this Agreement are not
consummated, (a) Electronika will not use any
such non-public information to its
competitive advantage unless Electronika
independently acquires such information from
another source, and (b) Electronika will
promptly return or destroy all confidential
materials provided to it by or on behalf of
Parent or MergerSub. To the extent non-
public information is provided to any
person(s) by Electronika and such person(s)
fail to keep such information confidential as
required by this Section, Electronika will be
deemed to be responsible for and in breach of
this Section 5.7.
Section 5.8 Public Statements. Before
Electronika releases any information
concerning this Agreement, the Merger, or any
of the other transactions contemplated by
this Agreement, which is intended for or may
result in public dissemination thereof,
Electronika shall cooperate with Parent,
shall furnish drafts of all documents or
proposed oral statements to Parent for
comments and shall not release any such
information without the written consent of
Parent. Nothing contained herein shall
prevent Electronika from releasing any
information if required to do so by law.
Section 5.9 Parent Stockholder Approval.
Electronika shall (i) cooperate with Parent
in the preparation and filing of its Proxy
Statement (as defined below) in connection
with the Meeting (as defined below), (ii)
promptly obtain and furnish any information
relating to it and within its control
required to be included in the Proxy
Statement and (iii) respond promptly to any
comments or requests made by the SEC with
respect to information respecting Electronika
contained in the Proxy Statement. If at any
time prior to the Effective Time any event
relating to Electronika or any of its
affiliates, officers or directors should be
discovered by Electronika which is required
to be set forth in an amendment to the Proxy
Statement, Electronika shall promptly inform
Parent. In addition, Electronika shall
correct any information supplied by it for
use in the Proxy Statement which shall have
become, or is, false, incomplete or
misleading.
Section 5.10 Conduct of Business. Except
(i) as otherwise required in connection with
the transactions contemplated by this
Agreement or (ii) as otherwise consented to
in writing by Parent, Electronika shall, and
the Electronika Stockholders shall cause
Electronika to:
a) Use its reasonable efforts to do all
of the following: conduct its business
diligently and only in the ordinary course,
and, without making any commitment prohibited
by this Agreement, preserve its business
organization intact, keep available its
present officers and employees and preserve
its relationships with suppliers, customers
and others having business relations with it;
b) Not (i) enter into, modify or extend
the term of any employment agreement with any
of its officers or employees or increase the
rate of compensation payable or to become
payable to any of its officers or employees
over the rates being paid to them at the date
hereof, except for normal merit or cost of
living increases, or (ii) adopt any new
Benefit Plan or amend or otherwise increase
or accelerate the payment or vesting of the
amounts payable or to be payable under any
existing Benefit Plan;
c) Not pay any obligation or liability,
fixed or contingent, other than current
liabilities incurred in the ordinary course
of business, or cancel, without full payment,
any debts, claims or other obligations
(including, without limitation, accounts
receivable) owing to it;
d) Not make any material alteration in
the manner of keeping its books, accounts or
records or in the accounting practices
therein reflected except as required by law
or generally accepted accounting principles;
e) Use its reasonable efforts to perform
all of its obligations under any contracts or
agreements to which it is a party or by which
any of its properties are bound (except those
being contested in good faith) and not
cancel, amend, modify, renew or extend any
such contracts or agreements that are
material to its business or waive any rights
thereunder;
f) Not enter into any contracts or
commitments that would constitute Electronika
Material Contracts, other than contracts to
provide goods and services entered into in
the ordinary course of business consistent
with past practices;
g) Use its reasonable efforts to maintain
and keep in good order and repair, subject to
ordinary wear and tear, taking into account
the respective ages of the assets involved,
all of its tangible assets and properties;
h) Not sell, lease, license or otherwise
dispose of any of its properties and assets
(including any of its Intangible Assets);
i) Use its reasonable efforts to both
maintain in full force and effect all of the
insurance policies in effect as of the date
hereof and not take (or fail to take) any
action that would enable insurers under such
policies to avoid liabilities pursuant to the
terms of such policies for claims arising
prior to the Closing Date;
j) Not make any capital expenditures or
enter into any leases for capital equipment
or real estate or commitments with respect
thereto, except for expenditures for ordinary
repairs and maintenance and for capital
expenditures not exceeding $10,000 in the
aggregate;
k) Not accept any orders from any of its
customers under conditions relating to price,
terms of payment or like matters materially
different from the conditions regularly and
usually specified, or place any orders for
inventory, merchandise or supplies in
exceptional or unusual quantities based on
past operating practices;
l) Not (i) permit any lien to attach upon
any of its properties and assets, whether now
owned or hereafter acquired; (ii) assume,
guaranty, endorse or otherwise become liable
or responsible (whether directly,
contingently or otherwise) for the
obligations of any other Person; or (iii)
make any loans, advances or capital
contributions to, or investments in, any
other Person;
m) Not initiate, compromise or settle any
material litigation or arbitration
proceeding;
n) Not change its Board of Directors; and
o) Not enter into any other transaction
or make or enter into any contract or
commitment which is not in the ordinary
course of business.
Section 5.11 Reasonable Efforts. Subject
to the other provisions of this Agreement,
Electronika shall, and the Electronika
Stockholders shall cause Electronika to, use
its reasonable efforts: (a) to perform its
obligations hereunder; (b) to take, or cause
to be taken, all actions necessary, proper or
advisable to obtain all approvals of
governmental entities and consents of third
parties required to be obtained by or on
behalf of Electronika to consummate the
transactions contemplated by this Agreement;
and (c) to satisfy or cause to be satisfied
all of the conditions precedent to its
obligations hereunder or the obligations of
Parent and MergerSub hereunder to the extent
that its action or inaction can control or
influence the satisfaction of such
conditions.
Section 5.12 Exclusive Dealing. Unless
this Agreement has been terminated in
accordance with its terms, neither
Electronika, any of its officers, directors
or other representatives, nor any of the
Electronika Stockholders, shall, directly or
indirectly, solicit or encourage inquiries or
proposals from, or participate in any
negotiations or discussions or enter into any
agreements or understandings with, or furnish
any information to, third parties with
respect to the sale or other disposition of
any shares of the capital stock of
Electronika, any sale, transfer or other
disposition of any of the business or any
substantial portion of the assets of
Electronika (including by way of merger) or
any similar transaction.
Section 5.13 Obligation to Update
Disclosure Letter. Electronika and the
Electronika Stockholders shall update and
supplement the Electronika Disclosure Letter,
as necessary, to reflect the changes therein
during the period between the date of this
Agreement and the Closing Date (the "Updated
Electronika Disclosure Letter"). The Updated
Electronika Disclosure Letter shall be
acceptable to Parent, in Parent's reasonable
discretion.
ARTICLE VI
COVENANTS OF PARENT AND ACQUISITION
During the period from the date of this
Agreement and continuing until the earlier of
the termination of this Agreement or the
Effective Time, Parent agrees as follows:
Section 6.1 Stockholder Approval. Parent
shall hold a meeting of its stockholders, in
accordance with its articles of
incorporation, bylaws and the corporation
laws of the State of Missouri, no later than
January 31, 1999 (the "Meeting"). The
Meeting shall be held, among other things, to
consider and vote upon the approval of the
issuance of the Common Shares to the
Electronika Stockholders and the amendment to
the Parent's Articles of Incorporation
creating the Parent Preferred Stock. The
board of directors of Parent shall recommend
to its stockholders that such matters be
adopted and approved; provided that the Board
of Directors of Parent may withdraw such
recommendation if (but only if) such Board of
Directors, upon advice of its outside legal
counsel, determines that it is reasonably
likely that a failure to withdraw such
recommendation would constitute a breach of
its fiduciary duties under applicable law.
Parent may also submit additional routine
proposals to its stockholders at the Meeting,
separate from the proposals on the
transactions contemplated hereby, provided
that Parent shall consult with Electronika as
to the submission of such proposals. The
approval by Parent's stockholders of such
additional proposals shall not be a condition
to the closing of the Merger under this
Agreement.
Section 6.2 Proxy Statement. The
information (except for information supplied
by Electronika for inclusion therein, as to
which Parent makes no representation) in the
proxy statement to be provided to the
stockholders of Parent in connection with the
Merger (the "Proxy Statement") shall not, on
the date the Proxy Statement is first mailed
to stockholders of Parent, at the time of the
meeting of Parent stockholders and at the
Effective Time, contain any statement which,
at such time and in light of the
circumstances under which it shall be made,
is false or misleading with respect to any
material fact, or omit to state any material
fact necessary in order to make the
statements made in the Proxy Statement not
false or misleading; or omit to state any
material fact necessary to correct any
statement in any earlier communication with
respect to the solicitation of proxies for
the meeting of Parent stockholders which has
become false or misleading. If at any time
prior to the Effective Time any event
relating to Parent or any of its affiliates,
officers or directors should be discovered by
Parent which is required to be set forth in
an amendment to the Proxy Statement, Parent
shall promptly inform Electronika.
Section 6.3 Articles of Incorporation and
Bylaws. No amendment will be made in the
articles of incorporation or bylaws of Parent
or of any Parent subsidiary unless required
by this Agreement or the transactions
contemplated hereby.
Section 6.4 Shares and Options. Except as
required hereby, no shares of capital stock
of Parent or any Parent subsidiary, options
or warrants for such shares, rights to
subscribe to or purchase such shares, or
securities convertible into or exchangeable
for such shares, shall be issued or sold or
proposed to be issued or sold by Parent or
any Parent subsidiary, otherwise than as may
be required upon the exercise of warrants,
stock options or related stock appreciation
rights now outstanding.
Section 6.5 Dividends and Purchases of
Stock. No dividend or liquidating or other
distribution or stock split shall be
authorized, declared, paid, or effected by
Parent in respect of the outstanding shares
of the Parent Common Stock. No direct or
indirect redemption, purchase, or other
acquisition shall be made by Parent or any
Parent subsidiary of shares of the Parent
Common Stock. Nothing in this Section 6.5
shall be construed to prohibit purchases or
other acquisitions of the Parent Common Stock
by any Parent employee benefit plan which was
or is now in effect.
Section 6.6 Borrowing of Money. Neither
Parent nor any Parent Subsidiary shall borrow
money, guarantee the borrowing of money, or
engage in any material transaction or enter
into any material agreement therefor, except
for the borrowing of money under Parent's
loan agreements or lines of credit, or in the
ordinary course of business or as disclosed
in or contemplated by this Agreement or the
transactions contemplated hereby.
Section 6.7 Access. Subject to the
provisions of Section 6.9 regarding
confidentiality, Parent and MergerSub will
afford the officers, directors, employees,
counsel, agents, investment bankers,
accountants, and other representatives of
Electronika free and full access to the
plants, properties, books, and records of
Parent and the Parent Subsidiaries, will
permit them to make extracts from and copies
of such books and records, and will from time
to time furnish Electronika with such
additional financial and operating data and
other information as to the financial
condition, results of operations, business,
properties, assets, liabilities, or future
prospects of Parent and the Parent
Subsidiaries as Electronika from time to time
may reasonably request. Parent will cause
the independent certified public accountants
of Parent and the Parent Subsidiaries to make
available to Electronika and its independent
certified public accountants the work papers
relating to the preparation, review and/or
examination of any of the financial
statements of Parent and/or the Parent
Subsidiaries.
Section 6.8 Advice of Changes. Parent
will immediately advise Electronika in a
detailed written notice of any fact or
occurrence or any pending or threatened
occurrence of which it obtains knowledge and
which (if existing and known at the date of
the execution of this Agreement) would have
been required to be set forth or disclosed in
or pursuant to this Agreement which (if
existing and known at any time prior to or at
the Effective Time) would make the
performance by any Party of a covenant
contained in this Agreement impossible or
make such performance materially more
difficult than in the absence of such fact or
occurrence, or which (if existing and known
at the time of the Effective Time) would
cause a condition to any Party's obligations
under this Agreement not to be fully
satisfied.
Section 6.9 Confidentiality. Parent and
the Parent Subsidiaries shall keep
confidential all non-public information of
Electronika disclosed to Parent or the Parent
Subsidiaries; provided, however, that such
information may be shared (i) with Parent's
and the Parent Subsidiaries' directors,
employees, partners, consultants and advisors
to the extent necessary to consummate the
transactions contemplated by this Agreement
and (ii) to the extent Parent or the Parent
Subsidiaries are required by order of a court
of competent jurisdiction (by subpoena or
similar process) to disclose or discuss any
confidential information (provided that in
such case, Parent and/or the Parent
Subsidiaries shall promptly inform
Electronika of such event, shall cooperate
with Electronika, at Electronika's expense,
in attempting to obtain a protective order or
to otherwise restrict such disclosure and
shall only disclose confidential information
to the minimum extent necessary to comply
with any such court order). If the
transactions contemplated by this Agreement
are not consummated, (a) neither Parent nor
the Parent Subsidiaries will use any such
non-public information to its competitive
advantage unless Parent or the Parent
Subsidiaries independently acquire such
information from another source, and (b)
Parent and the Parent Subsidiaries will
promptly return or destroy all confidential
materials provided to it by or on behalf of
Electronika. To the extent non-public
information is provided to any person(s) by
Parent or the Parent Subsidiaries and such
person(s) fail to keep such information
confidential as required by this Section,
Parent will be deemed to be responsible for
and in breach of this Section 6.9.
Section 6.10 Public Statements. Before
Parent releases any information concerning
this Agreement, the Merger, or any of the
other transactions contemplated by this
Agreement, which is intended for or may
result in public dissemination thereof,
Parent shall cooperate with Electronika,
shall furnish drafts of all documents or
proposed oral statements to Electronika for
comments, and shall not release any such
information without the written consent of
Electronika. Nothing contained herein shall
prevent Parent from releasing any information
if required to do so by law.
Section 6.11 Conduct of Business. Except
(i) as otherwise required in connection with
the transactions contemplated by this
Agreement or (ii) as otherwise consented to
in writing by Electronika, Parent shall and
shall cause each of the Parent Subsidiaries
to:
a) Use its reasonable efforts to do all
of the following: conduct its business
diligently and only in the ordinary course,
and, without making any commitment prohibited
by this Agreement, preserve its business
organization intact, keep available its
present officers and employees and preserve
its relationships with suppliers, customers
and others having business relations with it;
b) Not (i) enter into, modify or extend
the term of any employment agreement with any
of its officers or employees or increase the
rate of compensation payable or to become
payable to any of its officers or employees
over the rates being paid to them at the date
hereof, except for normal merit or cost of
living increases, or (ii) adopt any new
Benefit Plan or amend or otherwise increase
or accelerate the payment or vesting of the
amounts payable or to be payable under any
existing Benefit Plan;
c) Not pay any obligation or liability,
fixed or contingent, other than current
liabilities incurred in the ordinary course
of business or payments due under its
existing loan agreements or lines of credit,
or cancel, without full payment, any debts,
claims or other obligations (including,
without limitation, accounts receivable)
owing to it;
d) Not make any material alteration in
the manner of keeping its books, accounts or
records or in the accounting practices
therein reflected except as required by law
or generally accepted accounting principles;
e) Use its reasonable efforts to perform
all of its obligations under any contracts or
agreements to which it is a party or by which
any of its properties are bound (except those
being contested in good faith) and not
cancel, amend, modify, renew or extend any
such contracts or agreements that are
material to its business or waive any rights
thereunder;
f) Not enter into any contracts or
commitments that would constitute Parent
Material Contracts, other than contracts to
provide goods and services entered into in
the ordinary course of business consistent
with past practices;
g) Use its reasonable efforts to maintain
and keep in good order and repair, subject to
ordinary wear and tear, taking into account
the respective ages of the assets involved,
all of its tangible assets and properties;
h) Not sell, lease, license or otherwise
dispose of any of its properties and assets
(including any of its Intangible Assets);
i) Use its reasonable efforts to both
maintain in full force and effect all of the
insurance policies in effect as of the date
hereof and not take (or fail to take) any
action that would enable insurers under such
policies to avoid liabilities pursuant to the
terms of such policies for claims arising
prior to the Closing Date;
j) Not make any capital expenditures or
enter into any leases for capital equipment
or real estate or commitments with respect
thereto, except for expenditures for ordinary
repairs and maintenance and for capital
expenditures not exceeding $10,000 in the
aggregate;
k) Not accept any orders from any of its
customers under conditions relating to price,
terms of payment or like matters materially
different from the conditions regularly and
usually specified, or place any orders for
inventory, merchandise or supplies in
exceptional or unusual quantities based on
past operating practices;
l) Not (i) permit any lien to attach upon
any of its properties and assets, whether now
owned or hereafter acquired; (ii) assume,
guaranty, endorse or otherwise become liable
or responsible (whether directly,
contingently or otherwise) for the
obligations of any other Person; or (iii)
make any loans, advances or capital
contributions to, or investments in, any
other Person;
m) Not initiate, compromise or settle any
material litigation or arbitration
proceeding;
n) Use its reasonable efforts to not
change its Board of Directors; and
o) Not enter into any other transaction
or make or enter into any contract or
commitment which is not in the ordinary
course of business.
Section 6.12 Reasonable Efforts. Subject
to the other provisions of this Agreement,
Parent shall, and shall cause each of the
Parent Subsidiaries to, use its reasonable
efforts: (a) to perform its obligations
hereunder; (b) to take, or cause to be taken,
all actions necessary, proper or advisable to
obtain all approvals of governmental entities
and consents of third parties required to be
obtained by or on behalf of Parent or any of
its subsidiaries to consummate the
transactions contemplated by this Agreement;
and (c) to satisfy or cause to be satisfied
all of the conditions precedent to their
obligations hereunder or the obligations of
Electronika hereunder to the extent that its
action or inaction can control or influence
the satisfaction of such conditions.
Section 6.13 Exclusive Dealing. Unless
this Agreement has been terminated in
accordance with its terms, neither Parent,
nor any of its officers, directors or other
representatives, shall, directly or
indirectly, solicit or encourage inquiries or
proposals from, or participate in any
negotiations or discussions or enter into any
agreements or understandings with, or furnish
any information to, third parties with
respect to the sale or other disposition of
any shares of the capital stock of Parent or
any subsidiary of Parent, any sale, transfer
or other disposition of any of the business
or any substantial portion of the assets of
Parent or any subsidiary of Parent (including
by way of merger) or any similar transaction.
Section 6.14 Business After the Effective
Time. During the Escrow Period or such
shorter period as Parent on the advice of
counsel believes will not cause the Merger to
fail to qualify as a tax free reorganization
under the federal tax laws as then construed,
the Surviving Corporation will continue the
historic business of Electronika or use a
significant portion of Electronika's historic
assets in its business.
Section 6.15 Issuance and Listing of
Stock. Parent has reserved for issuance and,
if, as and when required by the provisions of
this Agreement, will issue the Merger Shares
into and for which the shares of capital
stock of Electronika are to be converted and
exchanged in the Merger, and the Merger
Shares, when so issued, will be validly
issued, fully paid and nonassessable. Parent
shall file an application with the American
Stock Exchange (the "ASE") to approve the
Common Shares for listing, subject to
official notice of issuance. Parent shall
use its reasonable efforts to cause the
Common Shares to be approved for listing on
the ASE, subject to official notice of
issuance.
Section 6.16 Obligation to Update
Disclosure Letter. Parent and MergerSub
shall update and supplement the Parent
Disclosure Letter, as necessary, to reflect
the changes therein during the period between
the date of this Agreement and the Closing
Date (the "Updated Parent Disclosure
Letter"). The Updated Parent Disclosure
Letter shall be acceptable to Electronika and
the Electronika Stockholders, in their
reasonable discretion.
ARTICLE VII
ELECTRONIKA'S CONDITIONS TO CLOSING
The obligations of Electronika and the
Electronika Stockholders under this Agreement
are subject to all of the following
conditions being met or waived as of the
Closing:
Section 7.1 Voting Trust. Certain members
of the Sizemore family (the "Sizemore
Family") and Peter Caloyeras shall have
entered into a voting trust, which shall be
in form and substance satisfactory to the
parties thereto.
Section 7.2 Accuracy of Representations
and Compliance With Conditions. All
representations and warranties of Parent and
MergerSub contained in this Agreement, as
modified by the Updated Parent Disclosure
Letter, shall be accurate in all material
respects as of the Effective Time except as
to changes contemplated or permitted by this
Agreement. Parent and MergerSub shall have
performed and complied with all covenants and
agreements in all material respects and
satisfied all conditions required to be
performed and complied with by them at or
before the Effective Time by this Agreement.
Section 7.3 Material Adverse Change.
Between the date hereof and the Closing Date,
there shall not have occurred any material
adverse change in the financial condition or
in the results of operations or the business,
properties, assets (tangible or intangible),
liabilities or prospects of Parent and its
subsidiaries, taken as a whole.
Section 7.4 Other Documents. Parent and
MergerSub shall have delivered to Electronika
at or prior to the Effective Time such other
documents as Electronika may reasonably
request in order to carry out transactions
contemplated by this Agreement.
Section 7.5 Review of Proceedings. All
actions, proceedings, instruments, and
documents required to carry out this
Agreement or incidental thereto and all other
related legal matters shall be subject to the
reasonable approval of counsel to
Electronika, and Parent shall have furnished
such counsel such documents as such counsel
may have reasonably requested for the purpose
of enabling them to pass upon such matters.
Section 7.6 Legal Action. There shall not
have been instituted or threatened any legal
proceeding relating to, or seeking to
prohibit or otherwise challenge the
consummation of, the transactions
contemplated by this Agreement, or to obtain
substantial damages with respect thereto.
Section 7.7 No Governmental Action. There
shall not have been any action taken, or any
law, rule, regulation, order, judgment, or
decree proposed, promulgated, enacted,
entered, enforced, or deemed applicable to
the transactions contemplated by this
Agreement by any federal, state, local, or
other governmental authority or by any court
or other tribunal, including the entry of a
preliminary or permanent injunction, which,
in the reasonable judgment of Electronika,
(i) makes this Agreement, the Merger, or any
of the other transactions contemplated by
this Agreement illegal, (ii) results in a
material delay in the ability of any of the
Parties to consummate the Merger or any of
the other transactions contemplated by this
Agreement, or (iii) otherwise prohibits,
restricts, or materially delays consummation
of the Merger or any of the other
transactions contemplated by this Agreement
or impairs the contemplated benefits to the
Electronika Stockholders of this Agreement,
the Merger, or any of the other transactions
contemplated by this Agreement.
Section 7.8 Consents Needed. Parent
shall have obtained at or prior to the
Effective Time all consents required for the
consummation of the Merger and the other
transactions contemplated by this Agreement,
including without limitation consents from
(i) the New Jersey Department of
Environmental Protection and (ii) any party
to any Parent Material Contract.
Section 7.9 Other Agreements. The Escrow
Agreement and any other agreements between
the Parties to be executed prior to the
Effective Time shall have been authorized,
executed, and delivered by the parties
thereto at or prior to the Effective Time, at
the Effective Time shall be in full force,
valid, and binding upon the parties thereto,
and shall (subject to the Bankruptcy
Exception) be enforceable by them in
accordance with their terms at the Effective
Time.
Section 7.10 Closing Certificate.
Electronika and the Electronika Stockholders
shall have received from Parent and MergerSub
a certificate dated the Closing Date,
certifying that the conditions specified in
Sections 7.2, 7.3, 7.6, 7.7 and 7.8 hereof
have been satisfied.
Section 7.11 Parent Disclosure Letter.
Parent and MergerSub shall have delivered to
Electronika and the Electronika Stockholders
the Parent Disclosure Letter by December 23,
1998, and the Parent Disclosure Letter shall
be, in form and substance, acceptable to
Electronika and the Electronika Stockholders
in their sole and absolute discretion.
Within ten (10) days following receipt of the
Parent Disclosure Letter, Electronika and the
Electronika Stockholders shall deliver to
Parent and MergerSub a written notice either
accepting or rejecting the Parent Disclosure
Letter. If Electronika and the Electronika
Stockholders reject the Parent Disclosure
Letter, or fail to deliver a notice of
acceptance within said 10-day period, this
Agreement shall immediately terminate and be
of no further force and effect as provided in
Section 9.3.
ARTICLE VIII
PARENT'S AND ACQUISITION'S
CONDITIONS TO CLOSING
The obligations of Parent and MergerSub under
this Agreement are subject to all of the
following conditions being met or waived as
of the Closing:
Section 8.1 Voting Trust. Certain
members of the Sizemore Family and Peter
Caloyeras shall have entered into a voting
trust, which shall be in form and substance
satisfactory to the parties thereto.
Section 8.2 Accuracy of Representations
and Compliance With Conditions. All
representations and warranties of Electronika
contained in this Agreement, as modified by
the Updated Electronika Disclosure Letter,
shall be accurate in all material respects as
of the Effective Time, except as to changes
contemplated or permitted by this Agreement.
Electronika and the Electronika Stockholders
shall have performed and complied with all
covenants and agreements in all material
respects and satisfied all conditions
required to be performed and complied with by
them at or before the Effective Time by this
Agreement.
Section 8.3 Material Adverse Change.
Between the date hereof and the Closing Date,
there shall not have occurred any material
adverse change in the financial condition or
in the results of operations or the business,
properties, assets (tangible or intangible),
prospects, or liabilities of Electronika and
its subsidiaries, taken as a whole.
Section 8.4 Other Documents. Electronika
and the Electronika Stockholders shall have
delivered to Parent and MergerSub at or prior
to the Effective Time such other documents as
Parent may reasonably request in order to
carry out the transactions contemplated by
this Agreement.
Section 8.5 Review of Proceedings. All
actions, proceedings, instruments, and
documents required to carry out this
Agreement or incidental thereto and all other
related legal matters shall be subject to the
reasonable approval of counsel to Parent and
MergerSub, and Electronika shall have
furnished such counsel such documents as such
counsel may have reasonably requested for the
purpose of enabling them to pass upon such
matters.
Section 8.6 Legal Action. There shall not
have been instituted or threatened any legal
proceeding relating to, or seeking to
prohibit or otherwise challenge the
consummation of, the transactions
contemplated by this Agreement, or to obtain
substantial damages with respect thereto.
Section 8.7 No Governmental Action. There
shall not have been any action taken, or any
law, rule, regulation, order, judgment, or
decree proposed, promulgated, enacted,
entered, enforced, or deemed applicable to
the transactions contemplated by this
Agreement by any federal, state, local, or
other governmental authority or by any court
or other tribunal, including the entry of a
preliminary or permanent injunction, which,
in the reasonable judgment of Parent,
(i) makes this Agreement, the Merger, or any
of the other transactions contemplated by
this Agreement illegal, (ii) results in a
material delay in the ability of any of the
parties to consummate the Merger or any of
the other transactions contemplated by this
Agreement, or (iii) otherwise prohibits,
restricts, or materially delays consummation
of the Merger or any of the other
transactions contemplated by this Agreement
or impairs the contemplated benefits to
Parent or MergerSub of this Agreement, the
Merger, or any of the other transactions
contemplated by this Agreement.
Section 8.8 Fairness Opinion. Parent
shall have received the opinion of Stern
Brothers Valuation Advisors, dated as of the
date of the Proxy Statement and for inclusion
therein, to the effect that the Merger and
the other transactions contemplated by this
Agreement are fair, from a financial point of
view, to Parent and its stockholders, and
such opinion shall have been confirmed in
writing as of the Effective Time.
Section 8.9 Consents Needed. Electronika
shall have obtained at or prior to the
Effective Time all consents required for the
consummation of the Merger and the other
transactions contemplated by this Agreement,
including without limitation consents from
any party to any Electronika Material
Contract. Parent shall have obtained at or
prior to the Effective Time the consent of
the New Jersey Department of Environmental
Protection to the transactions contemplated
hereby.
Section 8.10 Other Agreements. The
Escrow Agreement and any other agreements to
be executed between the Parties prior to the
Effective Time shall have been duly
authorized, executed, and delivered by the
parties thereto at or prior to the Effective
Time, at the Effective Time shall be in full
force, valid, and binding upon the parties
thereto, and shall (subject to the Bankruptcy
Exception) be enforceable by them in
accordance with their terms at the Effective
Time.
Section 8.11 Stockholder Approval. The
stockholders of Parent shall have duly
approved, by the affirmative vote of at least
a majority of all shares of Parent Common
Stock outstanding, the issuance of the
Common Shares to the Electronika Stockholders
and the amendment to the Parent's Articles of
Incorporation creating the Parent Preferred
Stock.
Section 8.12 Closing Certificate. Parent
and MergerSub shall have received from
Electronika and the Electronika Stockholders
a certificate dated the Closing Date,
certifying that the conditions specified in
Sections 8.2, 8.3, 8.6, 8.7 and 8.9 hereof
have been satisfied.
Section 8.13 Electronika Disclosure
Letter. Electronika and the Electronika
Stockholders shall have delivered to Parent
and MergerSub the Electronika Disclosure
Letter by December 23, 1998, and the
Electronika Disclosure Letter shall be, in
form and substance, acceptable to Parent and
MergerSub in their sole and absolute
discretion. Within ten (10) days following
receipt of the Electronika Disclosure Letter,
Parent and MergerSub shall deliver to
Electronika and the Electronika Stockholders
a written notice either accepting or
rejecting the Electronika Disclosure Letter.
If Parent and MergerSub reject the
Electronika Disclosure Letter, or fail to
deliver a notice of acceptance within said
10-day period, this Agreement shall
immediately terminate and be of no further
force and effect as provided in Section 9.3.
ARTICLE IX
TERMINATION
Section 9.1 Mandatory Termination This
Agreement shall be automatically terminated
if (a) the holders of at least a majority of
all shares of Parent Common Stock outstanding
shall not have voted in favor of the adoption
and approval of the matters described in
Section 8.11 hereof (b) Electronika and the
Electronika Stockholders reject the Parent
Disclosure Letter, or fail to deliver a
notice of acceptance within the specified 10-
day period, as provided in Section 7.11, (c)
Electronika and the Electronika Stockholders
shall determine, in their reasonable
discretion, that any Updated Parent
Disclosure Letter is not acceptable and shall
have delivered a written notice of rejection
to Parent and MergerSub within ten days
following their receipt of the Updated Parent
Disclosure Letter, (d) Parent and MergerSub
reject the Electronika Disclosure Letter, or
fail to deliver a notice of acceptance within
the specified 10-day period, as provided in
Section 8.13, or (e) Parent and MergerSub
shall determine, in their reasonable
discretion, that any Updated Electronika
Disclosure Letter is not acceptable and shall
have delivered a written notice of rejection
to Electronika and the Electronika
Stockholders within ten days following their
receipt of the Updated Electronika Disclosure
Letter.
Section 9.2 Optional Termination. This
Agreement may be terminated on or before the
Effective Time notwithstanding adoption and
approval of this Agreement, the Merger, and
the other transactions contemplated hereby by
the stockholders of the parties hereto:
a) by the mutual written consent of
Electronika and Parent;
b) at the option of either Electronika or
Parent if the Effective Time shall not have
occurred on or before February 28, 1999
(provided that the right to terminate this
Agreement under this Section 9.2(b) shall not
be available to any party whose failure to
fulfill any obligation under this Agreement
has been the cause of or resulted in the
failure of the Effective Time to occur on or
before such date);
c) at the option of Parent, if facts
exist which render impossible the compliance
with one or more of the conditions set forth
in Article VIII and such conditions are not
waived by Parent; and
d) at the option of Electronika, if facts
exist which render impossible the compliance
with one or more of the conditions set forth
in Article VII and such conditions are not
waived by Electronika.
Section 9.3 Effect of Termination. If
this Agreement is rightfully terminated as
provided for in this Article IX or pursuant
to Sections 7.11 or 8.13:
a) This Agreement shall forthwith become
wholly void and of no effect without
liability on the part of any Party to this
Agreement; provided, however, that nothing in
this Section 9.3 shall release any of the
Parties from liability for a willful failure
to carry out its respective obligations under
this Agreement, and provided further that the
provisions of Sections 5.7, 6.9 and 9.3(b)
shall remain in full force and effect and
survive any termination of this Agreement;
and
b) The Parties shall each pay and bear
their own fees and expenses incident to the
negotiation, preparation, and execution of
this Agreement and its respective meetings of
stockholders, including fees and expenses of
its counsel, accountants, investment banking
firm, and other experts.
ARTICLE X
TRANSFER RESTRICTIONS; GOVERNANCE
Section 10.1 Restrictive Legends. The
Merger Shares shall be subject to a stop-
transfer order and the certificate or
certificates evidencing such shares shall
bear a legend substantially in the following
form:
"THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). SAID SECURITIES
MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER THE ACT."
In addition, the certificates representing
the Common Shares shall bear a legend
substantially in the following form:
"THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF AN AGREEMENT DATED AS OF
NOVEMBER 24, 1998 BY AND AMONG TOROTEL,
INC. AND THE HOLDER HEREOF, AMONG
OTHERS, A COPY OF WHICH IS ON FILE WITH
THE SECRETARY OF TOROTEL, AND ARE HELD
AND MAY NOT BE TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE
THEREWITH."
Subject to the terms and conditions of this
Agreement, the Electronika Stockholders may
make any disposition of the Common Shares or
of the Preferred Shares (to the extent the
Preferred Shares have been released from the
Escrow), upon giving to Parent, prior to any
such disposition, (i) written notice
describing briefly the manner in which, and
the transferee or transferees to whom, such
proposed disposition is to be made, and (ii)
written evidence of (a) compliance with the
Act, or evidence to the satisfaction of
Parent that there is an available exemption
from the application of the Act, and (b) the
transferee's undertaking to be bound by any
applicable terms and conditions of this
Agreement.
Section 10.2 Further Restrictions.
Notwithstanding Section 10.1 hereof to the
contrary, the Electronika Stockholders shall
not transfer their shares of Parent Common
Stock during the Escrow Period, except to one
or more trusts of which the Electronika
Stockholder is the sole trustee and which was
established for the benefit of such
Electronika Stockholder or such Electronika
Stockholder's spouse, ancestors, issue
(including adopted children and step-
children) or spouses of issue (a "Living
Trust"). Subject to compliance with the
provisions of the Securities Act, the
Preferred Shares shall not be subject to any
restriction on transfer once such shares are
released from the Escrow. During the Escrow
Period, the Electronika Stockholders may
transfer their interests in the Preferred
Shares held in the Escrow only to a Living
Trust.
Section 10.3 Investment Representations
Either the Electronika Stockholders are
"accredited investors," as that term is
defined in Rule 501 of the rules and
regulations promulgated by the SEC under the
Securities Act, or the Electronika
Stockholders, either alone or with their
qualified "purchaser representative" (as
defined in Rule 501), have such knowledge and
experience in financial and business matters
that they are capable of evaluating the risks
and merits of an investment in the Merger
Shares. The Electronika Stockholders are
acquiring the Merger Shares in the Merger for
investment and not with a view to the sale
thereof other than in compliance with the
requirements of the Securities Act and
applicable Blue Sky laws. At the request of
Parent, the Electronika Stockholders will
furnish to Parent evidence reasonably
satisfactory to Parent that the foregoing
representations are true. The Electronika
Stockholders acknowledge that Parent has made
available to them the opportunity to ask
questions and receive answers concerning the
terms and conditions of the Merger and to
obtain any additional information that Parent
is required to furnish under the Securities
Act and the rules and regulations promulgated
thereunder.
Section 10.4 Directors. Concurrently with
the Closing, (i) the number of members of the
Parent Board of Directors shall be increased
to seven, (ii) the Electronika Stockholders
shall be entitled to designate two members of
the seven member Parent Board of Directors,
and (iii) the Parent Board of Directors shall
appoint such designees as directors in order
to fill the existing two vacancies. The
Electronika Stockholders agree not to vote
their respective Common Shares to remove any
director of Parent during the period from the
Effective Time to the earlier of September
30, 1999 or the 1999 annual meeting of Parent
stockholders, except for "Cause." For
purposes of this Section 10.4, a removal is
for "Cause" if such removal is evidenced by a
resolution adopted in good faith by a
majority of the Board of Directors of Parent
finding that the director to be removed (a)
committed an act of embezzlement, fraud,
misappropriation or conversion of assets or
opportunities or other dishonesty against
Parent or any Parent Subsidiary, (b) was
enjoined by the Securities and Exchange
Commission or any other industry regulatory
authority from being and officer or director
of a publicly-held company, (c) engaged in
conduct demonstrably and materially injurious
to Parent or any Parent Subsidiary, (d) has
been convicted by a court of competent
jurisdiction of, or has pleaded guilty or
nolo contendere to, any felony or misdemeanor
involving dishonesty or moral turpitude or
(e) inadequately or improperly performed his
duties as a director of Parent or any Parent
Subsidiary to the detriment of their
respective businesses.
Section 10.5 Prohibited Stockholder
Actions. During the Escrow Period, neither
the Electronika Stockholders nor any of their
affiliates (regardless of whether such person
is an affiliate on the date hereof) shall,
without prior Independent Approval (as
hereinafter defined):
a) Vote their Common Shares in favor of
any action or agreement, or take any other
action, that would (i) result in a breach of
any covenant, representation or warranty or
any other obligation of Electronika under
this Agreement or (ii) impede, interfere with
or discourage the intended purposes of this
Agreement;
b) Acquire, offer to acquire, or agree to
acquire, directly or indirectly, by purchase
or otherwise, any voting securities or direct
or indirect rights or options to acquire any
voting securities of Parent, other than as a
result of a stock split, stock dividend or
similar recapitalization; or
c) Make or cause to be made any proposal
for any transaction between (i) the
Electronika Stockholders or any of their
affiliates and (ii) Parent or any of its
affiliates, including without limitation any
acquisition or disposition of assets, merger,
or other business combination, restructuring,
tender offer, exchange offer,
recapitalization or similar transaction.
Section 10.6 Prohibited Actions by
Parent. During the Escrow Period, in addition
to any stockholder vote or vote by the Board
of Directors of Parent or any affiliate that
may be required by law, neither Parent nor
any affiliate shall, without prior
Independent Approval:
a) Enter into, or propose to enter into,
any agreement, arrangement or transaction
with the Electronika Stockholders, the
Sizemore Family or any of their respective
affiliates;
b) Amend the Articles of Incorporation or
the Bylaws of Parent or any affiliate that
may benefit the Electronika Stockholders, the
Sizemore Family or any of their respective
affiliates, to the exclusion of, or
disproportionately to, the other stockholders
of Parent;
c) Approve salary increases or bonus
payments to officers or employees affiliated
with the Electronika Stockholders, the
Sizemore Family or any of their respective
affiliates;
d) Amend, modify, waive or terminate this
Agreement;
e) Dissolve Parent or any affiliate;
f) Initiate bankruptcy, insolvency or
reorganization proceedings involving Parent
or any affiliate; or
g) Withdraw the registration of the
Parent Common Stock under the Exchange Act.
Section 10.7 Definition of Independent
Approval. For the purposes of this
Agreement, the term "Independent Approval"
shall mean, either (i) the approval of a
majority of the Board of Directors who are
disinterested with respect to the matter
which is the subject of the Board or
stockholder action or (ii) if there are fewer
than two such directors, the approval of the
holders of a majority of the then outstanding
voting securities of the Company held by
persons other than stockholders (including
affiliates and Family Members) interested in
such Board or stockholder action.
Section 10.8 Definition of Affiliate and
Family Members. The term "affiliate" shall
mean, with respect to any Person, any other
Person directly or indirectly controlling,
controlled by or under common control with
such Person and, without limiting the
generality of the foregoing, includes (a) any
director or officer of such Person or of any
affiliate of such Person, (b) any such
director's or officer's Family Members, (c)
any group, acting in concert, of one or more
of such directors, officers or Family
Members, and (d) any Person owned or
controlled by any such director, officer,
Family Member or group which beneficially
owns or holds 10% or more of any class of
equity securities or profits interest. The
term "control" means the possession, directly
or indirectly, of the power to direct or
cause the direction of the management and
policies of an entity, whether through the
ownership of voting securities, by contract
or otherwise. The term "Family Member" shall
mean any brother, sister, spouse, ancestor or
descendant of an affiliate or of a Person,
director of officer.
Section 10.9 Indemnification; Insurance.
a) From and after the Closing Date,
Parent shall indemnify and hold harmless each
person who is, or has been at any time prior
to the date hereof or who becomes prior to
the Closing Date, an officer or director of
Parent or any of the Parent Subsidiaries
(collectively, the "Indemnified Parties" and
individually, an "Indemnified Party") against
all losses, liabilities, expenses, claims or
damages incurred in connection with any
claim, suit, action, proceeding or
investigation based in whole or in part on
the fact that such Indemnified Party is or
was a director or officer of Parent or any of
its subsidiaries and arising out of acts or
omissions occurring prior to and including
the Closing Date (including but not limited
to the transactions contemplated by this
Agreement) to the fullest extent permitted by
Missouri law and its articles of
incorporation and bylaws in effect on the
date hereof, for a period of not less than
six years following the Closing Date;
provided that in the event any claim or
claims are asserted or made within such six-
year period, all rights to indemnification in
respect of any such claim or claims shall
continue until final disposition of any and
all such claims.
b) The Electronika Stockholders shall
cause the articles of incorporation and
bylaws of Parent and its subsidiaries to
include provisions for the limitation of
liability of directors and indemnification of
the Indemnified Parties to the fullest extent
permitted under applicable law and consistent
with Section 10.9(a) and shall not permit the
amendment of such provision in any manner
adverse to the Indemnified Parties, as the
case may be, without the prior written
consent of such persons, for a period of six
years from and after the date hereof.
c) Without limitation of the foregoing,
in the event any such Indemnified Party is or
becomes involved in any capacity in any
action, proceeding or investigation in
connection with any matter, including without
limitation, the transactions contemplated by
this Agreement, occurring prior to, and
including, the Closing Date, Parent shall, to
the fullest extent permitted under applicable
law, pay as incurred such Indemnified Party's
legal and other expenses (including the cost
of any investigation and preparation)
incurred in connection therewith, provided
the Indemnified Party to whom expenses are
advanced provides an undertaking to repay
such advances if it is ultimately determined
that such Indemnified Party is not entitled
to indemnification. Parent shall pay all
expenses, including attorneys' fees, that may
be incurred by an Indemnified Party in
enforcing the indemnity and other obligations
provided for in this Section 10.9(c).
d) For six years after the Closing Date,
Parent shall cause policies of directors' and
officers' liability insurance to be
maintained by Parent in amounts not less than
1998 coverage (provided that Parent may
substitute therefor policies of at least the
same coverage containing terms and conditions
which are substantially equivalent) with
respect to matters occurring prior to the
Closing Date, to the extent such policies are
available. Notwithstanding the foregoing, if
annual premiums for Parent's director and
officer liability insurance exceeds 150% of
1998 premiums ("Maximum Premium"), Parent
shall only be obligated to purchase such
insurance coverage as may be purchased by a
premium payment equal to the Maximum Premium.
e) Any determination to be made as to
whether any Indemnified Party has met any
standard of conduct imposed by law shall be
made by legal counsel reasonably acceptable
to such Indemnified Party and Parent,
retained at Parent's expense.
f) This Section 10.9 is intended to
benefit the Indemnified Party and their
respective heirs, executors and personal
representatives and shall be binding on the
successors and assigns of Parent.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Survival. The
representations, warranties, covenants and
agreements made herein shall survive the
Closing of the transactions contemplated
hereby and continue in force and effect only
until the expiration of the Escrow Period.
Section 11.2 Further Actions. At any
time and from time to time, each party
agrees, at its expense, to take such actions
and to execute and deliver such documents as
may be reasonably necessary to effectuate the
purposes of this Agreement.
Section 11.3 Modification. This
Agreement (including the documents and
instruments referred to herein) sets forth
the entire understanding of the Parties with
respect to the subject matter hereof and
supersedes all existing agreements and
understandings, both written and oral, among
them concerning such subject matter. This
Agreement may be amended prior to the
Effective Time (notwithstanding stockholder
adoption and approval) by a written
instrument executed by the Parties with the
approval of their respective Boards of
Directors; provided, however, that after
approval of this Agreement and the Merger by
the Electronika Stockholders or the
stockholders of Parent, no amendment shall be
made which by law requires further approval
of such stockholders without such further
approval.
Section 11.4 Notices. Any notice or
other communication required or permitted to
be given hereunder shall be in writing and
shall be mailed by certified mail, return
receipt requested or by Federal Express,
Express Mail, or similar overnight delivery
or courier service or delivered (in person or
by telecopy, telex, or similar
telecommunications equipment) against receipt
to the party to which it is to be given at
the address of such party set forth below (or
to such other address as the party shall have
furnished in writing in accordance with the
provisions of this Section 11.4):
To Parent or MergerSub:
Torotel, Inc.
13402 South 71 Highway
Grandview, MO 64030
Attention: Secretary
With a copy to:
Shook, Hardy & Bacon L.L.P.
1010 Grand Boulevard
5th Floor
P.O. Box 15607
Kansas City, MO 64106
Attention: Randall B. Sunberg, Esq.
To Electronika or the Electronika
Stockholders:
Basil Peter Caloyeras
c/o Magnetika, Inc.
2041 W. 139th Street
Gardena, California 90247
With a copy to:
Ervin, Cohen & Jessup LLP
Ninth Floor
9401 Wilshire Boulevard
Beverly Hills, CA 90212-2974
Attention: W. Edgar Jessup, Jr., Esq.
Any notice given in accordance with this
Section 11.4 shall be deemed duly given when
received by the party for whom it is
intended, if personally delivered or
delivered by telecopy, telex or similar
telecommunications equipment, twenty-four
(24) hours after delivery if sent by Federal
Express, Express Mail or similar overnight
delivery or courier service or forty-eight
(48) hours after being deposited in the
United States mail, all fees prepaid.
Section 11.5 Waiver. At any time prior
to the Closing, the Parties may, to the
extent legally permitted: (i) extend the
time for the performance of any of the
obligations or other acts or any other party;
(ii) waive any inaccuracies in the
representations or warranties of any other
party contained in this Agreement or in any
document or certificate delivered pursuant
hereto; (iii) waive compliance or performance
by any other party with any of the covenants,
agreements or obligations of such party
contained herein; and (iv) waive the
satisfaction of any condition that is
precedent to the performance by the party so
waiving of any of its obligations hereunder.
Any waiver by any party of a breach of any
term of this Agreement shall not operate as
or be construed to be a waiver of any other
breach of that term or of any breach of any
other term of this Agreement. The failure of
a party to insist upon strict adherence to
any term of this Agreement on one or more
occasions will not be considered a waiver or
deprive that party of the right thereafter to
insist upon strict adherence to that term or
any other term of this Agreement. Any waiver
must be in writing and signed by the waiving
party.
Section 11.6 Binding Effect. The
provisions of this Agreement shall be binding
upon and inure to the benefit of the Parties
hereto and their respective successors and
permitted assigns and shall inure to the
benefit of each Indemnified Party and his,
her or its successors and assigns.
Section 11.7 No Third-Party
Beneficiaries. This Agreement does not
create, and shall not be construed as
creating, any rights enforceable by any
person not a party to this Agreement except
as specifically provided herein.
Section 11.8 Separability. If any
provision of this Agreement is deemed to be
invalid, illegal, or unenforceable, the
balance of this Agreement shall remain in
effect, and if any provision is inapplicable
to any person or circumstance, it shall
nevertheless remain applicable to all other
persons and circumstances.
Section 11.9 Headings. The headings in
this Agreement are solely for convenience of
reference and shall be given no effect in the
construction or interpretation of this
Agreement.
Section 11.10 Counterparts; Governing
Law. This Agreement may be executed in any
number of counterparts, each of which shall
be deemed an original, but all of which
together shall constitute one and the same
instrument. This Agreement shall be governed
by and construed in accordance with the laws
of Missouri without giving effect to conflict
of laws.
Section 11.11 Assignment. Neither this
Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by
any of the Parties (whether by operation of
law or otherwise) without the prior written
consent of the other Parties.
[The remainder of this page
intentionally left blank]
IN WITNESS WHEREOF, the parties hereto have
executed this Agreement as of the date first
set forth above.
TOROTEL, INC.
____________________________________
By: ________________________________
Title: _______________________________
TOROTEL MERGER SUBSIDIARY, INC.
____________________________________
By: ________________________________
Title: _______________________________
ELECTRONIKA, INC.
_____________________________________
By: ________________________________
Title: _______________________________
_____________________________________
Alexandra Zoe Caloyeras
_____________________________________
Aliki Sophia Caloyeras
_____________________________________
Basil Peter Caloyeras
Exhibit B
Electronika Unaudited Financial Statements
Electronika, Inc. and Magnetika/East Ltd.
COMBINED BALANCE SHEET
December 31, 1997
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets $21,658
Cash 99,041
Accounts receivable,
net of allowance for
doubtful accounts of
$28,553 91,650
Inventories 10,294
Prepaid expenses ______
222,643
Other assets 5,590
$228,233
LIABILITIES AND OWNERS' DEFICIT
Current liabilities $53,403
Accounts payable 40,172
Accrued liabilities 150,834
Due to affiliates 244,409
Common stock - authorized,
20,000 shares of $100 par value;
1,000 shares 100,000
Preferred stock - authorized
20,000 shares of $100 par value;
no shares -
(276,342)
Accumulated deficit 160,166
Partners' equity (16,176)
$228,233
</TABLE>
The accompanying notes are an integral part
of these statements.
Electronika, Inc. and Magnetika/East Ltd.
COMBINED STATEMENTS OF EARNINGS
Year ended December 31,
(Unaudited)
1997 1996
<TABLE>
<S> <C> <C>
Sales $1,790,695 $1,374,991
Cost of goods sold 1,008,825 784,784
Gross profit 781,870 590,207
Operating expenses 19,538 18,960
Selling expenses 447,385 100,295
Officers' salaries
and related
expenses 165,201 150,319
Total operating
expenses 632,124 269,574
Other income - 1,595
NET EARNINGS $ 149,746 $ 322,228
</TABLE>
The accompanying notes are an integral part
of these statements.
Electronika, Inc. and Magnetika/East Ltd.
COMBINED STATEMENTS OF CASH FLOWS
Year ended December 31,
(Unaudited)
1997 1996
<TABLE>
<S> <C> <C>
Cash flows from operating
activities
Net earnings $149,746 $322,228
Adjustments to reconcile net
earnings to net cash provided
by operating activities
Changes in assets and
liabilities
Decrease in accounts
receivable 169,516 (115,030)
Increase in inventories (31,015) (20,255)
Increase in prepaid
expenses (5,347) (1,400)
Increase in due to
affiliates 215,217 193,412
Increase in accounts
payable 4,246 21,762
Decrease in accrued
liabilities (7,195) 36,012
Net cash provided
by operating
activities 495,168 436,729
Collections of notes - 45,000
Net cash provided
by investing
activities - 45,000
Cash flows from financing
activities
Stockholders' distributions (180,000) (509,071)
Partners' drawings (303,030) (15,000)
Net cash used in
financing
activities (483,030) (524,071)
Net increase (decrease) in cash 12,138 (42,342)
Cash at beginning of year 9,520 51,862
Cash at end of year $ 21,658 $ 9,520
</TABLE>
The accompanying notes are an integral part
of these statements.
Electronika, Inc. and Magnetika/East Ltd.
COMBINED BALANCE SHEET
September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash $188,325
Accounts receivable 311,032
Inventories 87,355
Prepaid expenses 10,562
Total current assets 597,274
Other assets 12,399
$609,673
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Accounts payable $20,633
Accrued liabilities 41,935
Due to affiliates 150,356
Total liabilities 212,924
Common stock - authorized,
20,000 shares of $100 par
value; 1,000 shares issued
and outstanding 100,000
Preferred stock - authorized
20,000 shares of $100 par
value; no shares issued and
outstanding -
Accumulated deficit (52,681)
Partners' equity 349,430
$609,673
</TABLE>
The accompanying notes are an integral part
of these statements.
Electronika, Inc. and Magnetika/East Ltd.
COMBINED STATEMENTS OF EARNINGS
Nine months ended September 30,
(Unaudited)
1998 1997
<TABLE>
<S> <C> <C>
Sales $1,405,964 $1,415,273
Cost of goods
sold 807,804 757,030
Gross profit 598,160 659,243
Operating expenses
Selling expenses 10,502 12,475
General and
administrative
expenses 122,733 101,141
Total
operating
expenses 133,235 113,616
Other income - -
NET EARNINGS $ 464,925 $ 545,627
</TABLE>
The accompanying notes are an integral part
of these statements.
Electronika, Inc. and Magnetika/East Ltd.
COMBINED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
(Unaudited)
1998 1997
<TABLE>
<S> <C> <C>
Cash flows from
operating activities
Net earnings $ 464,925 $ 545,627
Adjustments to reconcile
net earnings to net
cash provided by
operating activities
Changes in assets
and liabilities
Decrease in
accounts receivable (211,991) 13,176
Increase in
inventories 4,295 39,039
Increase in prepaid
expenses (268) (5,217)
Increase in due to
affiliates (478) (24,292)
Increase in other
assets (6,809) -
Increase in accounts
payable (32,770) (32,471)
Decrease in accrued
liabilities 1,763 (23,791)
Net cash provided
by operating
activities 218,667 512,071
Cash flows from financing
activities
Stockholders'
distributions (52,000) (148,400)
Partners' drawings - (303,030)
Net cash used
in financing
activities (52,000) (451,430)
Net increase in cash 166,667 60,641
Cash at beginning of period 21,658 9,520
Cash at end of period $ 188,325 $ 70,161
</TABLE>
The accompanying notes are an integral part
of these statements.
Electronika, Inc. and Magnetika/East Ltd.
COMBINED STATEMENTS OF EARNINGS
Three months ended September 30,
(Unaudited)
1998 1997
<TABLE>
<S> <S> <C>
Sales $ 453,234 $ 449,897
Cost of goods sold 273,673 270,738
Gross profit 179,561 179,159
Operating expenses
Selling expenses 5,146 6,100
General and
administrative
expenses 62,234 34,032
Total
operating
expenses 67,380 40,132
Other income - -
NET EARNINGS $ 112,181 $ 139,027
</TABLE>
The accompanying notes are an integral part
of these statements.
Magnetika/East Ltd.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(See Accountants' Review Report)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies applied
in the preparation of the accompanying financial
statements follows.
1. Nature of Operations
Magnetika/East Ltd. is a Massachusetts limited
partnership and is engaged in the manufacturing of
custom magnetic components such as transformers and
inductors. The Company's customers are located
primarily in the New England area.
Electronika, Inc. is a California Corporation engaged
in the sales of ballast and power supplies to the
commercial aircraft and airline industries
nationwide. The Company's only supplier of the
components it sells is a related party, which
manufactures the parts under an agreement exclusively
with the company.
Voting control of each company is vested in the same
stockholders, and the companies are under common
management. Because of these relationships, the
financial statements of the companies (hereinafter
collectively referred to as the Company) have been
prepared as if they were a single entity. All
significant intercompany balances and transactions
have been eliminated.
2. Inventory Valuation
Inventories are valued at the lower of cost or
market, determined on the first-in, first-out basis.
3. Revenue Recognition
Sales and related costs of sales are recognized upon
shipment of products.
4. Income Taxes
Electronika, Inc. made on election under Subchapter S
of the Internal Revenue Code not to be taxed as a
corporation. Magnetika/East Ltd. is a limited
partnership. Income for the partnership is currently
taxable to the partners. Accordingly, no provision
has been made for federal and state income taxes in
the accompanying financial statements.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
5. Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, management
is required to make estimates and assumptions that
affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
NOTE B - INVENTORIES
Inventories consisted of the following at:
September 30, December 31,
1998 1997
<TABLE>
<S> <C> <C>
Raw materials $ 9,696 $ 6,197
Work-in-progress 77,659 85,453
$87,355 $91,650
</TABLE>
NOTE C - RELATED PARTY TRANSACTIONS
Sales to related parties for the year ended December
31, 1997, accounted for approximately $82,000 of net
sales and $47,000 of cost of goods sold.
Sales to related parties for the year ended December
31, 1996, accounted for approximately $157,000 of net
sales and $50,000 of cost of goods sold.
A portion of the Company's operations are conducted
in facilities which also house the operations of a
related party. The Company does not own any fixed
assets. As needed, the Company uses the fixed assets
of the related party sharing the same facilities and
occasionally uses personnel of the related party.
The Company pays no rent expense for use of the
facilities, nor does it reimburse the related party
for the pay of the personnel used. Management has
determined that the amount of use of these assets and
services is not significant.
NOTE D- LEASES
The Company leases all of its equipment, under an
operating lease, from a partnership whose general
partner is also the general partner of the Company.
The operating lease is a month-to-month lease that
calls for monthly payments of $2,100 plus property
taxes and insurance.
The Company conducts its operations utilizing leased
facilities consisting of warehouse and office space.
The operating lease provides that the Company pay
taxes, insurance, maintenance, and other expenses
applicable to the leased property. The lease expires
in 2003 and calls for renewal prior to the
expiration.
The following is a schedule by years of minimum
rental payments under such operating leases.
Year ended
December 31, Amount
<TABLE>
<S> <C> <C>
1998 $26,979
1999 32,500
2000 32,500
2001 32,500
2002 32,500
Thereafter 10,833
$167,812
</TABLE>
Rental expense for all operating leases for the year
ended December 31, 1997 was $62,533, of which $26,953
was to a related party.
Rental expense for all operating leases for the year
ended December 31, 1996 was $65,273, of which $25,150
was to a related party.
NOTE E- EMPLOYEE BENEFIT PLAN
The Company sponsors a defined-contribution
retirement plan for employees with one year of
service. Employees may contribute up to 20% of their
compensation. The Company may match the employees'
contributions and periodically makes discretionary
contributions. The Company made no such
contributions to the plan in 1997 or 1996.
NOTE F- MAJOR CUSTOMERS
In 1997, the Company had one major customer who
accounted for 38% of total sales. In 1996, the
Company had one major customer who accounted for 25%
of total sales. A major customer is considered to be
any customer who accounts for 10% or more of the
Company's total sales.
NOTE G- SUBSEQUENT EVENT
On July 24, 1998, the Company entered into a letter
of intent for a possible business combination with
Torotel, Inc., which manufactures magnetic components
and power supplies. Torotel, Inc. had net sales of
$11,738,000 and a net loss of $1,523,000 for its
fiscal year ending April 30, 1998. In connection
with this business combination, Torotel, Inc. would
exchange 1.8 million shares of its common stock and
$2.5 million of a new class of preferred stock (5
percent cumulative, non-participating) for 100
percent of the outstanding securities of
Magnetika/East, Inc. and Electronika, Inc.. In
addition, the founder's family shareholders of
Torotel, Inc. would form a voting trust or similar
arrangement, pursuant to which Peter B. Caloyeras
would be allowed to vote 525,165 shares of common
stock of Torotel, Inc. owned by the Sizemore family.
As a result of these transactions, the Caloyeras
family would acquire more than 50 percent of the
voting control of Torotel, Inc. This transaction is
subject to, among other things, due diligence, the
negotiation and execution of definitive agreements,
and the approval of Torotel, Inc.'s shareholders.
There can be no assurance that the parties will
consummate the transaction contemplated by the letter
of intent.
Exhibit C
Fairness Opinion
[Stern Brothers Letterhead]
November 16, 1998
Board of Directors
Torotel, Inc.
c/o Mr. Jim Serrone
13402 South 71 Highway
Grandview, Missouri 64030
Gentlemen:
Torotel, Inc. ("Torotel" or the "Company") has
asked Stern Brothers Valuation Advisors ("Stern
Brothers") for our opinion as to the fairness,
from a financial point of view, to the minority
interest shareholders, of the purchase of
Electronika, Inc., a California corporation
("Electronika") by merging Electronika with and
into MergerSub (a wholly-owned subsidiary of
Torotel) in a tax free reorganization. Pursuant
to the Merger, the Electronika stockholders will
receive, in the aggregate, (i) 1,800,000 shares
of common stock of Torotel, and (ii) up to
2,500,000 shares of new Class A $1.00 Preferred
stock of Torotel based on the amount of EBITDA
generated by the Surviving Corporation which will
be deposited in escrow for the benefit of the
Electronika shareholders. Our opinion is based
on information available to us as of November 11,
1998.
Scope of Work
In the course of our analysis for purposes of
rendering our opinion, we have, among other
things, done the following:
1) Visited the Company's administrative
headquarters and manufacturing facility.
2) Interviewed key management regarding the
background, operations, financial performance and
prospects of Torotel and Electronika.
3) Reviewed and considered the following
information:
Torotel's annual reports for the years ended
April 30, 1991 through April 30, 1998.
Torotel's 10Q reports for the quarters ended
October 31, 1997, January 31, 1998 and July 31,
1998.
Federal and state income tax returns filed
by the Company for fiscal year 1997.
Four year income statement forecast prepared
by the Company for Torotel for fiscal years 1999
through 2002.
Board of Directors Minutes from April 21,
1997 through August 10, 1998.
Torotel's proxy statement of Notice of
Annual Meeting of Shareholders, dated 8/15/97.
Certificate and Articles of Incorporation
and Amendments, Bylaws and Amendments for Torotel
Products, Inc., Torotel, Inc., and OPT
Industries, Inc.
Certificate of Merger of Torotel Magnetics
into OPT Industries, Inc.
Second Edition brochure of Torotel's
products.
Various newspaper articles and other
published information on Torotel.
Torotel's product brochure of
Inductors/Transformers.
Draft of Agreement and Plan of Merger among
Torotel, Inc., Torotel Merger Subsidiary, Inc.,
Electronika, Inc. and the Electronika
Stockholders dated October, 1998.
4) Reviewed and considered the following
additional information:
Draft of Financial Statements and
Accountants' Review Report for Magnetika/East
LTD. as of December 31, 1997.
Draft of Financial Statements and
Accountants' Review Report for Caloyeras, Inc.,
d/b/a Electronika as of December 31, 1997.
Tax returns for Caloyeras, Inc. from 1994
through 1997.
Tax returns for Magnetika-East Limited
Partnership from 1992 through 1997.
Management prepared financial statements for
Magnetika/East LTD. as of December 31, 1996,
December 31, 1997, June 30, 1997 and June 30,
1998.
Management prepared financial statements for
Caloyeras, Inc. as of December 29,1996, December
31, 1997, June 30, 1997 and June 30, 1998.
Articles of Incorporation and Bylaws of
Caloyeras, Inc. (a California Corporation).
Agreement and Certificate of Limited
Partnership for Magnetika/East Limited
Partnership, A Massachusetts Limited Partnership.
Manufacturing Agreement dated August 1, 1998
between Caloyeras, Inc. d/b/a Electronika and
Ferrodyne, Corporation d/b/a Magnetika West, Inc.
Statement of Corporate Objectives of
Torotel, Inc., its Subsidiaries and Affiliates.
Board Actions by Unanimous Written Consent
for Caloyeras, Inc.
Resume of Peter B. Caloyeras.
Annual reports, interim reports, 10-K's, 10-
Q's, and other published information of publicly
traded companies as nearly comparable to Torotel
as we could find. Data on transactions of
privately held companies from The Institute of
Business Appraisers.
? Publications by Standard & Poor's and
Bloomberg Financial Services; The Value Line
Investment Survey; Federal Reserve Bulletin; The
Wall Street Journal; Directory of Companies
Required to File Annual Reports with the
Securities and Exchange Commission; Stocks,
Bonds, Bills and Inflation 1996 Yearbook by
Ibbotson Associates; and Mergerstat Review 1996
by Houlihan Lokey Howard & Zukin.
5) Interviewed Torotel's and Electronika's
attorney and accountant.
6) Conducted an analysis of the value of
Torotel and Electronika using several market
comparison methods and a discounted cash flow
approach.
7) Conducted such other studies, analyses,
inquiries and investigations as we deemed
appropriate.
The foregoing is, of course, only a summary of
the information reviewed and factors considered
by us which have influenced our opinion and does
not recite in detail all of such information and
factors that we have taken into consideration in
connection with our opinion.
Assumptions and Limiting Conditions
The Company, Board of Directors, and its
representatives warranted to us that the
information they supplied was complete and
accurate to the best of their knowledge and that
the financial statement information reflects the
Company's results of operations and financial
condition in accordance with generally accepted
accounting principles, unless otherwise noted.
We have not assumed any responsibility for
independent verification of information and
financial forecasts supplied by the Company,
Board of Directors, and its representatives (and
we express no opinion on that information). We
have not obtained any independent appraisal of
the assets of Torotel or Electronika, nor have we
attempted to verify the information furnished to
us by them.
We have used public information and industry and
statistical data from sources which we deem to be
reliable; however, we make no representation as
to the accuracy or completeness of such
information and have accepted such information
without further verification.
We were not authorized to solicit, and did not
solicit, interest from any party with respect to
a merger with or other business combination
transaction involving the Company or any of its
assets, nor did we have any discussions or
negotiations with any parties, other than
Torotel, in connection with the issuance of
Torotel shares.
Possession of this report, or a copy thereof,
does not carry with it the right of publication
of all or part of it, nor may it be used for any
purpose by anyone but the client without the
previous written consent of the client or us and,
in any event, only with proper attribution.
We are not required to give testimony in court,
or be in attendance during any hearings or
depositions, with reference to the Company,
unless previous arrangements have been made.
This opinion is valid only for the purpose(s) and
standard of value specified herein.
This opinion assumes that the Company will
continue to operate as a going concern, and that
the character of the present business will remain
intact.
The opinion contemplates facts and conditions
existing as of the opinion date. Events and
conclusions occurring after that date have not
been considered, and we have no obligation to
update our opinion for such events and
conditions.
This opinion is subject to the understanding that
the obligations of Stern Brothers Valuation
Advisors in the opinion are solely corporate
obligations, and no officer, director, employee,
agent, shareholder or controlling person of Stern
Brothers Valuation Advisors shall be subjected to
any personal liability whatsoever to any person,
nor will any such claim be asserted by or on
behalf of you or your affiliates.
By accepting this opinion, the Board of Directors
and the Company acknowledge the terms and
indemnity provisions provided in the executed
engagement letter and the terms and conditions
contained in these assumptions and limiting
conditions.
Certifications
We certify that, to the best of our knowledge and
belief:
The statements of fact in this report and true
and correct.
The reported analyses, opinions, and conclusions
are limited only by the reported assumptions and
limiting conditions, and are our personal,
unbiased professional analyses, opinions, and
conclusions.
Neither Stern Brothers nor the individuals
involved with this opinion have any present or
contemplated future interest in the common stock
of Torotel or Electronika which might prevent the
rendering of an unbiased opinion.
Our fee for this engagement is not contingent on
an action or event resulting from the analyses,
opinions, or conclusions, in, or the use of this
report.
No one provided significant professional
assistance to the persons signing this report.
The American Society of Appraisers has a
mandatory recertification program for all of its
Senior members. We are in compliance with that
program.
Conclusion
Based upon the foregoing, other matters we
consider relevant and our general knowledge of
such matters as investment bankers, we are of the
opinion that the purchase of Electronika, Inc. by
merging Electronika with and into MergerSub (a
wholly-owned subsidiary of Torotel) in a tax free
reorganization, is fair, from a financial point
of view, to the minority interest shareholders as
of November 16, 1998. Pursuant to the Merger,
the Electronika stockholders will receive, in the
aggregate, (i) 1,800,000 shares of common stock
of Torotel, and (ii) up to 2,500,000 shares of
new Class A $1.00 Preferred stock of Torotel
based on the amount of EBITDA generated by the
Surviving Corporation which will be deposited in
escrow for the benefit of the Electronika
shareholders. Our opinion is based on
information available to us as of November 11,
1998.
Sincerely,
STERN BROTHERS VALUATION ADVISORS
John C. Korschot, CFA, ASA, CBA David K.
Jones, CFA, AM, CBA
President Vice President
