Preliminary Proxy Statement
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant þ                            Filed by a Party other than the Registrant ¨

 

Check the appropriate box:

 

þ Preliminary proxy statement

 

¨ Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

¨ Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to Rule 14a-12

 

 

 

PECO II, INC.

(Name of Registrant as Specified in its Charter)

 

 

 


(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

 

Payment of Filing Fee (Check the appropriate box):

 

þ No fee required.

 

¨ 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:

 

 
  (2) Aggregate number of securities to which transaction applies:

 

 
  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 
  (4) Proposed maximum aggregate value of transaction:

 

$            

  (5) Total fee paid:

 

$            

 

¨ 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:

 

 


Table of Contents

Subject to Completion, dated November 3, 2005

 

PECO II, INC.

1376 State Route 598

Galion, Ohio 44833

 

Dear Shareholder:

 

On October 13, 2005, we entered into a definitive asset purchase agreement (the “Asset Purchase Agreement”) with Delta Products Corporation (“Delta”) to acquire certain exclusive rights and certain business assets and inventory and to assume certain liabilities associated therewith of Delta’s U.S. and Canadian service provider business. In exchange, we will issue 4,740,375 shares of our common stock without par value (the “Primary Shares”) to Delta and a warrant (the “Warrant”) to purchase up to approximately 12.9 million shares of our common stock, or such other number of shares that, when aggregated with the Primary Shares, will represent 45% of our issued and outstanding shares of capital stock measured as of five business days before the exercise of the Warrant (the “Warrant Shares”), at an exercise price of $2.00 per share, exercisable for a period of 30 months.

 

We will hold a Special Meeting of Shareholders of PECO II at [·] on [·] at [·] local time. At the special meeting, we will ask you to approve the issuance of both the Primary Shares, and the issuance of the Warrant and the Warrant Shares to be issued in connection with the exercise of the Warrant. In addition, we will ask you to vote on an amendment to our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act and a proposal to allow us to adjourn the special meeting, if necessary, to solicit additional proxies to gain approval of all the proposals.

 

You are not being asked to approve the Asset Purchase Agreement. Our board of directors has approved the Asset Purchase Agreement and the transactions contemplated thereby. You are only being asked to approve: (i) an amendment to our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act (ii) the issuance of the Primary Shares, (iii) the issuance of the Warrant and the underlying Warrant Shares, and (iv) a proposal allowing us to adjourn the special meeting, if necessary, to solicit additional proxies to gain approval of all the proposals.

 

Completion of the transactions contemplated by the Asset Purchase Agreement is subject to a number of conditions, including approval at the special meeting by our shareholders of: (i) the amendment to our Amended and Restated Code of Regulations, (ii) the issuance of the Primary Shares, and (iii) the issuance of the Warrant and the underlying Warrant Shares. Approval of the amendment to our Amended and Restated Code of Regulations requires the affirmative vote of a majority of the outstanding shares of our common stock. Approval of the other proposals requires the affirmative vote of a majority of the shares of our common stock voting in person or by proxy at the special meeting.

 

Your vote is important. We cannot complete the transactions contemplated by the Asset Purchase Agreement unless these proposals are approved. Whether or not you plan to attend the special meeting in person, please submit your proxy without delay. We encourage you to read the accompanying proxy statement carefully because it explains the proposed purchase of assets and assumption of liabilities, the documents related to the Asset Purchase Agreement and the proposals which require your favorable vote.

 

Our Board of Directors has carefully reviewed and considered the terms of the Asset Purchase Agreement and has determined that the Asset Purchase Agreement and the transactions contemplated thereby are in the best interests of PECO II and our shareholders. Accordingly, the Board has unanimously approved the Asset Purchase Agreement and the various transactions contemplated in such agreement and unanimously recommends that you vote “FOR” the amendment to the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, “FOR” the issuance of the Primary Shares, “FOR” the issuance of the Warrant and the underlying Warrant Shares, and “FOR” the proposal allowing us to adjourn the special meeting, if necessary, to solicit additional proxies.

 

This proxy statement is dated [·] and is first being mailed to shareholders on or about [·] 2005.

 

Sincerely,

 
James L. Green

Chairman of the Board


Table of Contents

PECO II, INC.

1376 STATE ROUTE 598

GALION, OHIO 44833

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To Be Held On [·]

 

NOTICE IS HEREBY GIVEN THAT a Special Meeting of Shareholders of PECO II, Inc. will be held at [·] on [·] at [·] local time, for the following purposes:

 

  1. To consider and vote on a proposal to approve and adopt an amendment to the PECO II Amended and Restated Code of Regulations providing that the Ohio Control Share Acquisition Act shall not apply to acquisitions of the Company’s equity securities.

 

  2. To consider and vote on a proposal to approve the issuance of 4,740,375 shares of PECO II common stock without par value (the “Primary Shares”) to Delta Products Corporation (“Delta”), pursuant to an asset purchase agreement between PECO II and Delta, dated October 13, 2005 (the “Asset Purchase Agreement”), whereby PECO II will acquire certain exclusive rights and certain business assets and inventory and will assume certain liabilities associated therewith of Delta’s U.S. and Canadian service provider business.

 

  3. To consider and vote on a proposal to issue a warrant (the “Warrant”) to permit Delta to purchase approximately 12.9 million shares of PECO II common stock without par value or such other number of shares that, when aggregated with the Primary Shares, will represent 45% of the issued and outstanding shares of PECO II capital stock, measured as of the date five business days prior to the exercise of the Warrant (the “Warrant Shares”), at an exercise price of $2.00 per share, exercisable until the date that is 30 months following the closing date of the transactions contemplated by the Asset Purchase Agreement.

 

  4. To consider and vote on a proposal to allow the Board of Directors to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve and adopt the proposals.

 

  5. To transact any other business that may properly come before the special meeting or any adjournment or postponement thereof.

 

Only shareholders who held shares of record as of the close of business on [·] are entitled to receive notice of and to vote at the special meeting or any adjournment or postponement of the meeting.

 

By order of the Board of Directors

 
James L. Green
Chairman of the Board


Table of Contents

TABLE OF CONTENTS

 

     Page

Questions and Answers About the Special Meeting

   1

Additional Information

   3

Summary

   4

The Companies

   9

Forward-Looking Statements

   10

Selected Consolidated Financial Data

   11

PECO II Selected Consolidated Financial Data (Historical) for Assets to be Acquired

   11

Delta’s Selected Financial Data (Historical)

   12

Pro Forma Selected Consolidated Financial Data of PECO II and Delta

   12

Pro Forma Comparative Unaudited Per Share Data

   13

Pro Forma Condensed Consolidated Financial Information

   13

The Special Meeting

   19

The Proposals

   19

Record Date and Voting

   19

Required Vote

   19

Proxies; Revocation

   20

The Asset Purchase

   22

Background of the Transactions Contemplated by the Asset Purchase Agreement

   22

Our Reasons for the Transaction Contemplated by the Asset Purchase Agreement; Recommendation of Our Board of Directors

   23

Opinion of Our Financial Advisor

   25

Governmental and Third Party Approvals

   29

The Asset Purchase Agreement

   30

The Transaction

   30

Consideration

   30

The Closing

   30

Representation and Warranties

   30

Conduct of Business Pending the Closing

   32

Our Restrictions

   32

Delta Restrictions

   33

No Solicitation

   33

Conditions to Closing

   35

Termination

   36

Expenses and Termination Fee

   36

Amendment

   37

The Voting Agreement

   37

The Supply Agreement

   38

The Registration Rights Agreement

   38

Proposal 1: Amendment to the Amended and Restated Code of Regulations of PECO II, Inc. to Opt Out of the Ohio Control Share Acquisition Act

  

39

Overview

   39

Reasons for the Proposed Amendment

   39

Summary of the Ohio Control Share Acquisition Act

   39

Vote Required

   41


Table of Contents
     Page

Proposal 2: The Issuance of the Primary Shares

   41

Description of the Asset Purchase

   41

Description of the Primary Shares to be Issued

   41

Vote Required

   41

Proposal 3: The Issuance of the Warrant and the Underlying Warrant Shares

   41

Description of the Asset Purchase

   41

Description of the Warrant and Warrant Shares to be Issued

   42

Vote Required

   42

Proposal 4: Permission of Board of Directors to Adjourn the Special Meeting

   42

Proposal to Permit Adjournment of the Special Meeting

   42

Vote Required

   42

Share Ownership of Principal Holders and Management

   43

Independent Accountants

   45

Shareholder Proposals

   45

Other Business

   45

Where You Can Find More Information

   45

Appendix A—Proposed Second Amended and Restated Code of Regulations of PECO II, Inc.  

   A-1

Appendix B—Asset Purchase Agreement, dated October 13, 2005, between the Company and Delta Products Corporation

  

B-1

Appendix C—Opinion of GBQ Consulting, LLC

   C-1

Appendix D—Annual Report on Form 10-K for the year ended December 31, 2004

   D-1

Appendix E—Quarterly Report on Form 10-Q for the quarter ended March 30, 2005

   E-1

Appendix F—Quarterly Report on Form 10-Q for the quarter ended June 30, 2005

   F-1


Table of Contents

Questions and Answers About the Special Meeting

 

Q. What am I being asked to vote on?

 

A. You are being asked to vote on four proposals:

 

  1. To approve and adopt an amendment to our Amended and Restated Code of Regulations providing that the Ohio Control Share Acquisition Act will not apply to acquisitions of our equity securities.

 

  2. To approve the issuance of 4,740,375 shares of our common stock without par value (the “Primary Shares”) to Delta Products Corporation (“Delta”), pursuant to an asset purchase agreement between PECO II and Delta, dated October 13, 2005 (the “Asset Purchase Agreement”), pursuant to which PECO II will acquire certain exclusive rights and certain business assets and inventory and will assume certain liabilities associated therewith of Delta’s U.S. and Canadian service provider business.

 

  3. To approve the issuance of a warrant (the “Warrant”) to permit Delta to purchase approximately 12.9 million shares of our common stock without par value or such other number of shares that, when aggregated with the Primary Shares, will represent 45% of our outstanding capital stock measured of the date that is five business days from the date of exercise of the Warrant (the “Warrant Shares”), at an exercise price of $2.00 per share, exercisable until the date that is 30 months following the closing date of the transactions contemplated by the Asset Purchase Agreement.

 

  4. To approve a proposal allowing the Board of Directors to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve and adopt the proposals.

 

Q. Why has PECO II entered into the Asset Purchase Agreement?

 

A. We have entered into the Asset Purchase Agreement because we believe that the transactions contemplated thereby will provide us with access to Delta’s manufacturing capabilities and supply agreements, which are expected to reduce our cost of goods sold. Also, we will gain access to new customers and new markets with existing customers. Finally, we will be able to streamline manufacturing toward standardized products, which is also expected to lower our cost of goods sold.

 

Q. What shareholder approvals are needed?

 

A. The affirmative vote of the holders of a majority of our outstanding shares of common stock is required to approve the amendment to our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act. Approval of the other proposals requires the affirmative vote of the holders of a majority of the shares of our common stock voting in person or by proxy at the special meeting.

 

Q. What do I need to do now?

 

A. After carefully reading and considering the information contained in this proxy statement, please respond by completing, signing and dating your proxy card and returning it in the enclosed postage paid envelope.

 

Q. What if I do not vote?

 

A. If you fail to respond, your shares will not count toward a quorum necessary to conduct the vote at the special meeting, and will not be counted as either a vote for or against any of the four proposals. Because the proposal to amend our Amended and Restated Code of Regulations requires that affirmative vote of the holders of a majority of the outstanding shares of our common stock, your failure to vote will have the effect of voting against this proposal.

 

1


Table of Contents

If you respond and do not indicate how you want to vote, your proxy will be counted as a vote in favor of each of the four proposals.

 

Q. Can I change my vote after I have delivered my proxy?

 

A. Yes. You can change your vote at any time before your proxy is voted at the special meeting. You can do this by revoking your proxy or submitting a new proxy. If you choose either of these two methods and you are a shareholder of record, you must submit your notice of revocation or your new proxy to the Secretary of PECO II before the special meeting. If your shares are held in an account at a brokerage firm or bank, you should contact your brokerage firm or bank to change your vote.

 

If you are a shareholder of record, you can also attend the special meeting and vote in person, which will automatically revoke any previously submitted proxy.

 

Q. When do you expect the transactions contemplated by the Asset Purchase Agreement to close and the Primary Shares to be issued?

 

A. We are working to close the transactions contemplated by the Asset Purchase Agreement, including the issuance to Delta of the Primary Shares and the Warrant, as soon as possible after our special meeting. We expect to close the transactions by [·].

 

Q. Who can help answer my questions?

 

A. If you have any questions about the transactions contemplated by the Asset Purchase Agreement or any of the proposals, or how to submit your proxy, or if you need additional copies of the proxy statement or the enclosed proxy card or voting instructions, you should contact:

 

PECO II, Inc.

Investor Relations

1376 State Route 598

Galion, Ohio 44833

(419) 468-7600

 

2


Table of Contents

Additional Information

 

This document incorporates important business and financial information about PECO II from documents that are not included in or delivered with this document. You can obtain documents incorporated by reference in this document by requesting them in writing or by telephone from PECO II, Inc., Attn: Lisa Green, 1376 State Route 598, Galion, Ohio 44833, telephone: (419) 468-7600.

 

You will not be charged for any of these documents that you request. If you wish to request documents, you should do so by [·] in order to receive them before the Special Meeting. See “Where You Can Find More Information” on page     .

 

3


Table of Contents

Summary

 

This summary highlights selected information from this proxy statement about the proposals and may not contain all of the information that is important to you as a PECO II shareholder. Accordingly, we encourage you to read carefully this entire document, including the appendices, and the other documents to which we refer you.

 

Ohio Control Share Acquisition Act Opt Out (page     )

 

    Our Board of Directors has unanimously approved a resolution to amend the Amended and Restated Code of Regulations, which, if adopted, would make an Ohio anti-takeover statute, referred to herein as the “Ohio Control Share Acquisition Act,” inapplicable to the acquisition of our equity securities. The full text of the proposed amendment is contained in Article X of the Company’s proposed Second Amended and Restated Code of Regulations, attached hereto as Appendix A.

 

    Simultaneous with the execution of the Asset Purchase Agreement, Messrs. Matthew P. Smith and James L. Green, and their respective affiliates, executed a support agreement and irrevocable proxy (the “Support Agreement”), under which each such person agreed, severally and not jointly, to vote all of the shares of our common stock beneficially owned by such persons at any PECO II shareholders meeting or by any consensual action:

 

    in favor of the proposal to opt out of the Ohio Control Share Acquisition Act,

 

    in favor of the issuance of the Primary Shares and the Warrant,

 

    in favor of the other transactions contemplated by the Asset Purchase Agreement and in favor of any other matter that could reasonably be expected to facilitate consummation of the transactions contemplated by the Asset Purchase Agreement,

 

    against any change in a majority of the members of our Board of Directors, and

 

    against any other action that would impede, interfere with, delay, postpone or materially adversely affect the closing of the transactions contemplated by the Asset Purchase Agreement.

 

In addition, Messrs. Smith and Green, and their respective affiliates, granted an irrevocable proxy to two of Delta’s designees to vote all of the shares of our common stock beneficially owned by such persons in accordance with the five bullet points above.

 

    Currently, the Ohio Control Share Acquisition Act is applicable to the acquisition of our equity securities, and, therefore, the shares beneficially owned by Mr. Green (because he is an officer of our Company) are deemed to be “interested shares” under the Ohio Control Share Acquisition Act and ineligible for purposes of voting in favor of the proposals at the special meeting. The proposed amendment to the Amended and Restated Code of Regulations will permit the voting of the shares of our common stock beneficially owned by Mr. Green, and his affiliates, in favor of approving the proposals to be included in the vote to be held at the special meeting.

 

Our Board of Directors Unanimously Recommends that Shareholders Vote “FOR” the Amendment to the Amended and Restated Code of Regulations (page     )

 

    Our Board of Directors has determined, by unanimous vote, that the proposed amendment to the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act is in the best interest of PECO II and its shareholders. Our Board of Directors unanimously recommends that you vote “FOR” the proposed amendment to the Amended and Restated Code of Regulations.

 

4


Table of Contents

Issuance of the Primary Shares (page     )

 

    Subject to the terms and conditions of the Asset Purchase Agreement, we will acquire certain assets from Delta. At the closing, we will issue to Delta 4,740,375 shares of our common stock without par value (the “Primary Shares”). As a result, Delta will own approximately 18% of the issued and outstanding shares of our common stock following the issuance of the Primary Shares.

 

Our Board of Directors Unanimously Recommends that Shareholders Vote “FOR” the Issuance of the Primary Shares (page     )

 

    Our Board of Directors has determined, by a unanimous vote, that the issuance of the Primary Shares as contemplated by the Asset Purchase Agreement is in the best interest of PECO II and its shareholders. Our Board of Directors unanimously recommends that you vote “FOR” the issuance of the Primary Shares to Delta at the special meeting.

 

Issuance of the Warrant and the Underlying Warrant Shares (page     )

 

    Subject to the terms and conditions of the Asset Purchase Agreement and a warrant to be issued to Delta at the closing of the transactions contemplated by the Asset Purchase Agreement (the “Warrant”), Delta will have the right to purchase up to approximately 12.9 million shares of our common stock, or such other number of shares that, when aggregated with the Primary Shares, will represent 45% of the issued and outstanding shares of our capital stock measured as of five business days prior to the date of exercise of the Warrant (the “Warrant Shares”), at an exercise price of $2.00 per share, exercisable for a period of 30 months following the closing of the transactions contemplated by the Asset Purchase Agreement.

 

    By way of example, if on the date that is five business days prior to the exercise date, we had 26,335,418 shares of our capital stock issued and outstanding, the number of Warrant Shares would be calculated as follows: (i) the quotient of (A) the issued and outstanding shares (i.e., 26,335,418) minus the shares of common stock issued at closing (i.e., 4,740,375), divided by (B) 0.55, minus (ii) the outstanding shares of Common Stock (i.e., 26,335,418) and (iii) rounded to the nearest whole number of shares. In this example, the number of Warrant Shares would be 12,928,297 representing, when aggregated with the Primary Shares, 45% of our issued and outstanding capital stock.

 

Our Board of Directors Unanimously Recommends that Shareholders Vote “FOR” the Issuance of the Warrant and the Underlying Warrant Shares (page     )

 

    Our Board of Directors has determined, by unanimous vote, that the issuance of the Warrant and the issuance of the underlying Warrant Shares are in the best interest of PECO II and its shareholders. Our Board of Directors unanimously recommends that you vote “FOR” the issuance to Delta of the Warrant and the underlying Warrant Shares.

 

Permission to Adjourn the Special Meeting (page     )

 

    In order to consummate the transactions contemplated by the Asset Purchase Agreement, the proposals to adopt an amendment to the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, approve the issuance of the Primary Shares, and approve the issuance of the Warrant and the underlying Warrant Shares, must first be approved by our shareholders. If there are insufficient votes at the time of the special meeting to approve each of the proposals, our Board of Directors believes it is appropriate and in the best interest of PECO II and its shareholders to adjourn the meeting and solicit additional proxies.

 

5


Table of Contents

Our Board of Directors Unanimously Recommends that Shareholders Vote “FOR” the Proposal to Adjourn the Special Meeting (page     )

 

    Our Board of Directors unanimously recommends that you vote “FOR” the proposal to allow the Board of Directors to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposals.

 

Description of the Assets To Be Purchased (page     )

 

    The assets we will acquire from Delta under the Asset Purchase Agreement consist of certain inventory, rights to and under certain business contracts, rights to and under related business records, all rights, claims and causes of action against third parties exclusively relating to the purchased assets, and all rights of indemnity, warranty rights, rights of contribution, rights to refunds and other rights of recovery exclusively relating to the purchased assets. In addition, we will assume and agree to pay, perform or discharge all liabilities and obligations under the business contracts arising on or after the closing date, and certain other obligations and liabilities set forth in the Asset Purchase Agreement.

 

Financial Advisor Opinion (page     )

 

    GBQ Consulting, LLC (“GBQ”), our financial adviser, has told our Board of Directors that the consideration to be received by our shareholders as a result of the consummation of the transactions contemplated by the Asset Purchase Agreement is fair, from a financial standpoint, to our shareholders.

 

Conditions to the Transactions Contemplated by the Asset Purchase Agreement and Expected Timing (page     )

 

    The completion of the transactions contemplated by the Asset Purchase Agreement depends on a number of conditions being satisfied or waived, including approval by our shareholders of the amendment of our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, the issuance of the Primary Shares to Delta, the issuance of the Warrant and the underlying Warrant Shares, the appointment of Delta’s designee as a Class II member of our Board of Directors, as well as the receipt of third party consents to the assignment and assumption of the business contracts.

 

    We expect to consummate the transactions contemplated by the Asset Purchase Agreement [·], but we cannot be certain when or if the conditions to closing will be satisfied or waived.

 

    Our shareholders must approve EACH of Proposals 1, 2 and 3 for the transactions contemplated by the Asset Purchase Agreement to close.

 

The Asset Purchase Agreement may be Terminated under Some Circumstances (page     )

 

The Asset Purchase Agreement provides that we or Delta may terminate the agreement before the closing of the transactions contemplated thereby in a number of circumstances.

 

Either Delta or we may terminate the Asset Purchase Agreement if:

 

    the two parties mutually agree in writing to terminate;

 

    the closing has not occurred by March 31, 2006;

 

    a governmental entity issues an order, decree, or ruling, or takes any other action (including failure to take a necessary action), that permanently restrains, enjoins, or otherwise prohibits the transactions contemplated by the Asset Purchase Agreement; or

 

    we fail to receive shareholder approval of the proposals described in this proxy statement.

 

6


Table of Contents

In addition, we may terminate the Asset Purchase Agreement if:

 

    Delta materially breaches any representation, warranty, or covenant contained in the Asset Purchase Agreement and such breach is not cured;

 

    we receive a superior offer and, after we give notice to Delta, Delta has a reasonable opportunity to make a revised offer and has not done so; or

 

    Delta’s financial statements to be delivered prior to the closing reflect information that was not previously made available to us and would cause a Material Adverse Effect on the Business (as defined below).

 

Finally, Delta may terminate the Asset Purchase Agreement if:

 

    we materially breach any representation, warranty, or covenant contained in the Asset Purchase Agreement and such breach is not cured; or

 

    any time before our shareholders’ approval of the proposal to issue the Primary Shares, the Warrant and the underlying Warrant Shares, a “Triggering Event” with respect to us occurs. Such a “Triggering Event” shall be deemed to have occurred if:

 

    our Board of Directors or any committee thereof shall for any reason have withdrawn or shall have amended or modified in a manner adverse to Delta, its unanimous recommendation to the shareholders to vote in favor of the proposals set forth in this proxy statement (the “Recommendation”),

 

    we shall have failed to include the Recommendation in this proxy statement,

 

    our Board of Directors or any committee thereof shall have approved or recommended any Acquisition Proposal (as defined below), or

 

    a tender or exchange offer relating to our securities shall have been commenced by a person unaffiliated with us and we shall not have timely sent to our shareholders a statement disclosing that our Board of Directors recommends rejection of such tender or exchange offer.

 

We May be Obligated to Reimburse Delta for its Expenses Relating to the Asset Purchase Agreement and to Pay a Termination Fee Under Some Circumstances (page     )

 

    In the event that we terminate the Asset Purchase Agreement because we received a superior offer, we must pay Delta a fee of $500,000 simultaneously with delivery of the notice to terminate.

 

    In the event the transactions contemplated by the Asset Purchase Agreement are consummated, we must pay up to $100,000 of the fees and expenses incurred by Delta (including attorneys’ fees and accountant fees) in connection with the negotiation, execution and delivery of the Asset Purchase Agreement, plus one-half of the fees and expenses incurred by Delta (including fees incurred by Delta’s auditor) in connection with the preparation and delivery of Delta’s financial statements prior to Closing. These fees must be paid within 10 business days following Delta’s delivery to us of a certificate setting forth the amount of such fees and expenses incurred.

 

Ownership of PECO II After the Acquisition (page     )

 

   

Currently, 21,595,043 shares of our common stock are issued and outstanding. We will issue the Primary Shares to Delta, representing 4,740,375 shares of common stock without par value, at the closing pursuant to the Asset Purchase Agreement. Pursuant to the Warrant to be issued to Delta at the closing, Delta will have the right to purchase Warrant Shares, at an exercise price of $2.00 per share and

 

7


Table of Contents
 

exercisable for a period of 30 months after the closing, that will allow Delta to purchase that number of additional shares of our common stock without par value that, when aggregated with the Primary Shares, will represent 45% of our issued and outstanding capital stock measured as of five business days prior to the exercise date of the Warrant. By way of example, assuming we had 26,335,418 shares of common stock issued and outstanding after the issuance of the Primary Shares, the number of Warrant Shares eligible for purchase by Delta would be 12,928,297. As a result, we would have 39,263,715 issued and outstanding shares of common stock, resulting in Delta owning 45% of our issued and outstanding capital stock.

 

Supply Agreement (page     )

 

    As a condition to the consummation of the transactions contemplated by the Asset Purchase Agreement, at the Closing, we will enter into a supply agreement (the “Supply Agreement”) with Delta Electronics, Inc. (“DEI”), an affiliate of Delta, pursuant to which DEI will grant to us the right to purchase and incorporate DEI modules into our systems and to market, promote, sell and distribute DEI modules, PECO systems and/or DEI systems to our customers in the U.S. and Canadian markets. The rights described above shall be exclusive to us for a period of 24 months from the effective date of the Supply Agreement. The term of the Supply Agreement is 30 months.

 

8


Table of Contents

The Companies

 

PECO II, Inc.

1376 State Route 598

Galion, Ohio 44833

(419) 468-7600

 

We are an Ohio corporation that engages in the design, manufacture, and marketing of communications power systems and equipment for the communication industry in the United States. Our products include power systems, power distribution and measurement equipment, rectifiers, converter plants, inverters, and ringing systems. We also provide engineering and installation; onsite repair, technical training to customer technicians, preventative maintenance programs, refurbishes and upgrades, and transport installation. Additional information about us is included in documents incorporated by reference in this proxy statement. See “Where You Can Find More Information” on page     .

 

Delta Products Corporation

4405 Cushing Parkway

Fremont, California 94538

(510) 668-5100

 

Delta is a California corporation and is part of the Delta Group, one of the world’s largest providers of switching power supplies and a major source of power management solutions, components, visual displays, industrial automation, and networking products. Delta Group has sales offices worldwide and manufacturing plants in Taiwan, Thailand, China, Mexico and Europe.

 

9


Table of Contents

Forward Looking Statements

 

This proxy statement contains or incorporates by reference a number of “forward-looking statements” within the “safe harbor” provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 with respect to our financial condition, results of operations and business, and the expected impact of the Delta asset purchase on our financial performance. Forward-looking statements often, although not always, include words or phrases like “will likely result,” “expect,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “project,” “outlook,” or similar expressions. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those statements and are not guarantees of future performance. Many of the important factors that will determine these results and values are beyond our ability to control or predict. Our shareholders are cautioned not to put undue reliance on any forward-looking statements. Except as otherwise required by law, we do not assume any obligation to update any forward-looking statements.

 

10


Table of Contents

Selected Consolidated Financial Data

 

PECO II Selected Consolidated Financial Data (Historical)

 

Our selected consolidated financial data is derived from our consolidated financial statements and notes to consolidated financial statements. The following information is only a summary. The selected consolidated financial data as of and for the 12-month periods ended December 31, 2004, 2003, 2002, 2001 and 2000 is derived from audited financial statements. Our selected consolidated financial data as of and for the six-month period ended June 30, 2005 is derived from unaudited financial statements. You should read our selected consolidated financial data together with the historical financial statements and related notes contained in the annual reports and other reports that we have filed with the Securities and Exchange Commission. See “Where You Can Find More Information” beginning on page     .

 

PECO II, Inc

 

    Year ended
2000


  Year ended
2001


    Year ended
2002


    Year ended
2003


    Year ended
2004


    Six-month
Period
ended
6/30/2005


 
    in thousands, except share data  

Operating Revenues

  $ 156,548   $ 106,743     $ 62,060     $ 38,607     $ 31,564     $ 18,643  

Income (Loss) from operations

  $ 20,414   $ (11,676 )   $ (47,092 )   $ (36,404 )   $ (12,798 )   $ (1,600 )

Income (Loss) from operations per common Basic share

  $ 1.21   $ (0.54 )   $ (2.19 )   $ (1.72 )   $ (0.60 )   $ (0.07 )

Total Assets

  $ 154,146   $ 160,168     $ 108,856     $ 65,524     $ 53,981     $ 49,178  

LT Obligations

  $ 4,941   $ 10,433     $ 691     $ 535     $ 448     $ 401  

Cash Dividends declared per common share

    N/A     N/A       N/A       N/A       N/A       N/A  

Basic Earnings (loss) per share, as reported

  $ 0.72   $ (0.31 )   $ (1.94 )   $ (1.72 )   $ (0.57 )   $ (0.07 )

Basic weighted average shares outstanding

    16,908     21,579       21,506       21,220       21,488       21,571  

 

For the readers’ information, the following events were determined to have significant impact on the Income (Loss) for each specific year:

 

2001

 

    Operating results were adversely affected by the downturn in the communications industry.

 

    In August 2001, the Company entered into an adjustable industrial revenue bond for $6.5 million for the purchase of the Denver facility.

 

2002

 

    The Company reviewed physical facilities and listed the New Hampshire, Colorado, and Worthington, Ohio facilities for sale.

 

    The Company provided for a write-off and disposed of approximately $8.0 million in inventory.

 

    An asset impairment of $2.0 million was recognized for the physical facilities held for sale.

 

    The industrial revenue bonds for the Denver facility that is held for sale were moved to current debt.

 

2003

 

    The Company added the new Galion, Ohio manufacturing and headquarters buildings to our list of facilities for sale.

 

    Upon review of the listing of the Galion, Ohio facilities, the Company also recognized an $1.1 million asset impairment.

 

11


Table of Contents
    The Company sold the Worthington, Ohio engineering facility in May and the New Hampshire facility in August of 2003.

 

    The Company wrote off $8.6 million of inventory.

 

    The Company recognized a $3.3 million machinery and equipment impairment.

 

    The Company recognized a $5.7 million goodwill impairment.

 

2004

 

    The annual assessment of goodwill resulted in a $6.0 million impairment.

 

Delta’s Selected Financial Data (Historical) for Assets to be Acquired

 

The selected financial data for the Delta Assets is derived from unaudited financial statements, which we believe reflect all adjustments necessary for a fair presentation of the results for the respective periods.

 

Delta Carve Out

 

    Year ended
2000


  Year ended
2001


  Year ended
2002


  Year ended
2003


  Year ended
2004


  Period
ended
6/30/2005


    in thousands, except share data

Operating Revenues

  $ 11,536   $ 9,565   $ 20,309   $ 21,970   $ 10,355   $ 5,425

Income (Loss) from operations

  $ 1,927   $ 2,021   $ 3,631   $ 4,384   $ 517   $ 197

Income (Loss) from operations per common Basic share

    N/A     N/A     N/A     N/A     N/A     N/A

Total Assets

  $ 4,523   $ 4,846   $ 6,443   $ 10,087   $ 9,701   $ 10,424

LT Obligations

  $ —     $ —     $ —     $ —     $ —     $ —  

Cash Dividends declared per common share

    N/A     N/A     N/A     N/A     N/A     N/A

 

Pro Forma Selected Consolidated Financial Data of PECO II and Delta

 

The following tables summarize the unaudited pro forma consolidated financial data, giving effect to the purchase of the assets from Delta, as if they had occurred on the date indicated (which we refer to as “pro forma” information). In presenting the comparative pro forma information for certain time periods, we assumed that we had made the asset purchase throughout those periods and made certain other assumptions.

 

The pro forma information, while helpful in illustrating the financial characteristics of PECO II after the asset purchase under one set of assumptions, does not attempt to predict or suggest future results. The pro forma information also does not necessarily reflect what the historical results of PECO II would have been had the asset purchase occurred prior to these periods. For additional information, you should refer to the section of this document entitled “Pro Forma Condensed Consolidated Financial Information” below.

 

PECO II, Inc/Delta Acquisition

 

     Year ended
2004


    Period
ended
6/30/2005


 
     in thousands, except share data  

Operating Revenues

   $ 41,919     $ 24,068  

Income (Loss) from operations

   $ (12,343 )   $ (1,195 )

Income (Loss) from operations per common Basic share

   $ (0.47 )   $ (0.05 )

Total Assets

   $ 63,836     $ 59,032  

LT Obligations

   $ 448     $ 401  

Cash Dividends declared per common share

     N/A       N/A  

Basic Earnings (loss) per share

   $ (0.45 )   $ (0.04 )

Basic weighted average shares outstanding

     26,228       26,311  

 

12


Table of Contents

Pro Forma Comparative Unaudited Per Share Data

 

The following table shows information about our income (loss) per common share, dividends per share and book value per share, and similar information as if the asset purchase had occurred on the date indicated. In presenting the comparative pro forma information for certain time periods, we assumed that we had acquired the Delta assets prior to those periods and made certain other assumptions.

 

The pro forma information, while helpful in illustrating the financial characteristics of PECO II after the asset purchase under one set of assumptions does not attempt to predict or suggest future results. The pro forma information also does not necessarily reflect what the historical results of PECO II after the asset purchase would have been had the asset purchase occurred prior to these periods.

 

    PECO II Historical

    Delta Historical

  Pro Forma PECO II
Consolidated


    Pro Forma Delta
Consolidated


   

Six months
ended

June 30,
2005


   

Year

ended

December 31,
2004


   

Six months
ended

June 30,
2005


 

Year

ended

December 31,
2004


 

Six months
ended

June 30,
2005


   

Year

ended

December 31,
2004


    Nine months
ended
September 30,
2004


 

Year

ended

December 31,
2003


Book value per share

  $ 1.66     $ 1.74     N/A   N/A   $ 1.73     $ 1.80     N/A   N/A

Cash dividends declared per share

    —         —       N/A   N/A     —         —       N/A   N/A

Basic earnings from continuing operations per share

  $ (0.07 )   $ (0.60 )   N/A   N/A   $ (0.05 )   $ (0.47 )   N/A   N/A

Diluted earnings from continuing operations per share

  $ (0.07 )   $ (0.60 )   N/A   N/A   $ (0.05 )   $ (0.47 )   N/A   N/A

 

Pro Forma Condensed Consolidated Financial Information

 

The following unaudited pro forma condensed consolidated financial information for PECO II gives effect to the purchase of the assets from Delta using the purchase method of accounting, based on preliminary allocations of the total estimated purchase price. The historical financial information has been derived from the respective historical financial statements of PECO II and the Delta business, and should be read in conjunction with the financial statements and related notes included elsewhere in this proxy statement or incorporated by reference.

 

The unaudited pro forma condensed consolidated balance sheets have been prepared assuming the asset purchase took place as of December 31, 2004 and June 30, 2005, respectively. Allocation of the total estimated purchase price to the fair value of assets and liabilities of the purchased assets at these dates is based on preliminary valuations.

 

The unaudited pro forma condensed consolidated statements of operations consolidate PECO II’s and Delta’s historical statements of operations of the Delta business and give effect to the asset purchase as if they occurred on January 1, 2004, the beginning of the earliest period presented.

 

13


Table of Contents

The total estimated and actual purchase prices of the purchased assets have been allocated on a preliminary basis to assets and liabilities based on management’s estimates of their fair values. These allocations are subject to change pending a final determination and analysis of the total purchase prices and fair values of the assets acquired and liabilities assumed. The impact of these changes could be material.

 

The unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of operating results or financial condition that would have actually occurred if the asset purchase had been completed as of the dates indicated, nor is it necessarily indicative of the future operating results or financial position of PECO II after the asset purchase. The pro forma adjustments are based on the information available as of the date of this proxy statement.

 

PECO II, Inc.

Unaudited Pro Forma Consolidated Balance Sheet with Delta

as of June 30, 2005

 

    Peco II

    Delta

  Pro forma
Adjustment


    Note 3
Ref


  Pro forma
Results
ended
June 30
2005


 
    Period ended
June 30,
2005


    Period ended
June 30,
2005


     

Current Assets

                                 

Cash & equivalents

  $ 4,621     $ 8,376   $ (8,376 )   A   $ 4,621  

Accounts Receivable

    6,401       589     (589 )   B     6,401  

Inventories, Net

    10,313       1,459     541     C     12,313  

Restricted Cash

    9,850                         9,850  

Other current assets

    4,625                         4,625  
   


 

 


     


Total current assets

    35,810       10,424     (8,424 )         37,810  
   


 

 


     


Property & equipment, at cost

                                 

Building, land and improvements

    10,613                         10,613  

Machinery and equipment

    9,200                         9,200  

Furniture and fixtures

    6,089                         6,089  
   


                   


      25,902             —             25,902  

Less: accumulated depreciation

    (14,321 )                       (14,321 )

Property and equipment, net

    11,581             —             11,581  

Other assets

    1,787             7,854     D     9,641  
   


 

 


     


Total Assets

  $ 49,178     $ 10,424   $ (570 )       $ 59,032  
   


 

 


     


Current Liabilities

                                 

Industrial revenue bonds

  $ 5,860                         5,860  

Accounts payable and other accrued expense

    6,990       1,390     (1,290 )   E     7,090  
   


 

 


     


Total current liabilities

  $ 12,850     $ 1,390   $ (1,290 )       $ 12,950  
   


 

 


     


Long term liabilities

    401                         401  
   


                   


Shareholders’ equity

                                 

Common shares

    2,816             601     F     3,417  

Additional paid-in capital

    110,215             9,153     G     119,368  

Retained deficit

    (76,126 )     9,034     (9,034 )   H     (76,126 )

Treasury shares

    (978 )                       (978 )
   


 

 


     


Total shareholders equity

    35,927       9,034     720           45,681  
   


 

 


     


Total liabilities and shareholders’ equity

  $ 49,178     $ 10,424   $ (570 )       $ 59,032  
   


 

 


     


 

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information.

 

14


Table of Contents

PECO II, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Operations with Delta

For the Year Ended December 31, 2004

 

     Peco II, Inc

    Delta

    Pro forma
Adjustment


    Note 3
Ref


   Pro forma
Results
2004


 
     Year ended
December 31,
2004


    Year ended
December 31,
2004


        

Net Sales

                                   

Product

   $ 21,049     $ 10,355                $ 31,404  

Services

     10,515                          10,515  
    


 


 

      


       31,564       10,355     —              41,919  

Cost of Goods Sold

                                   

Product

     17,660       7,843     471     I      25,974  

Services

     9,801                          9,801  
    


 


 

      


       27,461       7,843     471            35,775  

Gross Margin

                                   

Product

     3,389       2,511     (471 )          5,429  

Services

     714       —       —              714  
    


 


 

      


       4,103       2,511     (471 )          6,143  

Operating Expenses

                                   

Research, development and engineering

     2,956                          2,956  

Selling, general and administrative

     7,958       1,994     (409 )   J      9,543  

Impairment charges

     5,987                          5,987  
    


 


 

      


       16,901       1,994     (409 )          18,486  
    


 


 

      


Income (Loss) from continuing operations

     (12,798 )     517     (62 )          (12,343 )

Other (income) and expense

     (65 )     280     (280 )   K      (65 )
    


 


 

      


Income (loss) before tax

     (12,733 )     237     218            (12,278 )

Benefit (provision) for income tax

     463       (95 )   95     L      463  
    


 


 

      


Net Income (Loss)

     (12,270 )     142     313            (11,815 )
    


 


 

      


Basic earnings from continuing operations per share

     (.60 )                        (.47 )

Diluted earnings from continuing operations per share

     (.60 )                        (.47 )

Net loss per common share

                                   

Basic

     (0.57 )                        (0.45 )

Diluted

     (0.57 )                        (0.45 )

Weighted average common shares outstanding

                                   

Basic

     21,488                   M      26,228  

Diluted

     21,488                          26,228  

 

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information.

 

15


Table of Contents

PECO II, Inc.

Unaudited Pro Forma Condensed Consolidated Statement of Operations with Delta

For the Six Months Ended June 30, 2005

 

     Peco II, Inc

    Delta

    Pro forma
Adjustment


    Note 3
Ref


   Pro forma
Results
ended
June 30
2005


 
     Period
ended
June 30,
2005


    Period
ended
June 30,
2005


        

Net Sales

                                   

Product

   $ 13,174     $ 5,425                $ 18,599  

Services

     5,469                          5,469  
    


 


 

      


       18,643       5,425     —              24,068  

Cost of Goods Sold

                                   

Product

     9,787       3,991     236     I      14,014  

Services

     5,070                          5,070  
    


 


 

      


       14,857       3,991     236            19,084  

Gross Margin

                                   

Product

     3,387       1,434     (236 )          4,585  

Services

     399       —       —              399  
    


 


 

      


       3,786       1,434     (236 )          4,984  

Operating Expenses

                                   

Research, development and engineering

     1,444                          1,444  

Selling, general and administrative

     3,942       1,237     (444 )   J      4,735  

Impairment charges

                                —    
    


 


 

      


       5,386       1,237     (444 )          6,179  
    


 


 

      


Income (Loss) from continuing operations

     (1,600 )     197     209            (1,195 )

Other (income) and expense

     (92 )     87     (87 )   K      (92 )
    


 


 

      


Income (loss) before tax

     (1,508 )     110     295            (1,103 )

Benefit (provision) for income tax

     (20 )     (44 )   44     L      (20 )
    


 


 

      


Net Income (Loss)

     (1,528 )     66     339            (1,123 )
    


 


 

      


Basic earnings from continuing operations per share

     (.07 )                        (.05 )

Diluted earnings from continuing operations per share

     (.07 )                        (.05 )

Net loss per common share

                                   

Basic

     (0.07 )                        (0.04 )

Diluted

     (0.07 )                        (0.04 )

Weighted average common shares outstanding

                                   

Basic

     21,571                   M      26,311  

Diluted

     21,571                          26,311  

 

16


Table of Contents

PECO II, Inc.

Note to Unaudited Pro Forma Condensed Consolidated Financial Information

With Delta

 

1. Description of Transaction and Basis of Presentation

 

On October 13, 2005, the Company entered into an Asset Purchase Agreement with Delta to acquire certain business and inventory of Delta’s U.S. and Canadian service provider business (the “Assets”). The Assets principally consist of rights to and under business contracts and business records and inventory. The Company will also assume the associated liabilities of the Assets after the closing. In consideration of the purchase of the Assets, at closing the Company will issue 4,740,375 shares of common stock (the “Primary shares”) to Delta. Also at closing, the Company will issue to Delta a warrant to purchase up to approximately 12.9 million shares of its common stock (the “Warrant Shares”) at an exercise price of $2.00 per share (the “Warrant”). The Warrant has a term of 30 months. As a result of the issuance of the Primary Shares and the purchase rights under the Warrant, Delta will have the right to acquire, when aggregated with the Primary Shares, up to 45% of the issued and outstanding capital stock of the Company measured as of the date that is five business days prior to the date of exercise.

 

2. Purchase Price

 

The reader should be advised that the pro forma information is preliminary and un-audited. The transaction cost is determined by PECO II market value per share, and the final price will not be determined until shareholder approval of the issuance of the Primary Shares, the Warrant and the underlying Warrant Shares. Due to market uncertainty, the transactions reflected in the pro forma balance sheet and statement of operations will change based on changes in market value.

 

A preliminary estimate of the purchase price is as follows (table in thousands):

 

Estimated Market value of PECO II, Inc shares issued

   $ 6,874

Estimated Fair value of Stock Warrant Issued

     2,880
    

Subtotal

     9,754

Estimated transaction costs incurred per agreement

     100
    

Estimated purchase price

   $ 9,854
    

 

For pro forma purposes, the fair value of the shares used in determining the purchase price was $1.45 which was based on the average closing price of PECO II common stock for the seven business days prior to the filing of the proxy. The fair value of the Warrant was also determined using the Black-Scholes option pricing model with the following assumption: stock price of $1.45; volatility of 60%; risk-free interest rate of 3.96%; and an expected life of 2.5 years.

 

For pro forma purposes, the estimated purchase price has been allocated per the Asset Purchase Agreement (table in thousands):

 

Current assets

      

Inventory

   $ 2,000

Other assets

      

Intangible Assets

     6,283

Goodwill

     1,571
    

Total other assets

   $ 7,854
    

Total Assets

   $ 9,854
    

 

The allocation of the purchase price is preliminary. The final determination of the purchase price allocation will be based on the fair value of the Assets, including the fair value of customer contracts, supply

 

17


Table of Contents

agreement, other identifiable intangibles and the fair values of liabilities assumed as of the date that the asset purchase is consummated. The final determination of the purchase price allocation is expected to be completed as soon as practicable after completion of the asset purchase. The final amounts allocated to assets and liabilities acquired could differ significantly from the amounts presented in the unaudited pro forma condensed consolidated financial statements.

 

3. Pro Forma Adjustments (in thousands)

 

A.

   $ (8,376 )         Eliminate Delta’s cash & equivalents accounts.

B.

   $ (589 )         Eliminate Delta’s accounts receivable accounts.

C.

   $ (1,459 )         Eliminate Delta’s inventory accounts.
       2,000           Acquisition of inventory per the Asset purchase agreement.
    


         
       541           Total pro forma inventory adjustment.

D.

   $ 7,854           To record the estimated fair value of the intangible assets acquired in the acquisition, see note 2.

E.

   $ (1,390 )         Elimination of Delta’s accrued expense accounts.
       100           To record the agreed upon legal/accounting expenses in the asset purchase agreement.
    


         
       (1,290 )         Total pro forma accrued expense adjustment.

F.

   $ 601           To record the common share issuance of 4,740,375 at a stated value of $.126857 per share.

G.

   $ 6,272           To record the additional paid-in capital at market price less stated value times common share issuance of 4,740,375.
       2,881           To record the cost of the warrant, see note 2.
    


         
       9,153           Total pro forma additional paid-in capital adjustment.

H.

   $ (9,034 )         To eliminate Delta’s retained earnings accounts.
     2005

    2004

     

I.

   $ (236 )   (471 )   To record the amortization of the supply agreement over the estimated remaining useful life.

J.

   $ (243 )   (373 )   Elimination of the administrative expenses as this is a corporate allocation.
       (994 )   (1,621 )   To eliminate Delta selling expenses.
       400     800     To record the estimated addition selling expenses to be incurred by Peco II.
       393     785     To record the amortization of the remaining intangible over the estimated remaining useful life.
    


 

   
       (444 )   (409 )   Total pro forma operating expense adjustments.

K.

   $ (87 )   (280 )   To remove non-operating income and expense accounts.

L.

   $ (44 )   (95 )   To remove tax provision.

M.

                 To record the following adjustment:

 

     Year ended
December 31, 2004


   Six months ended
June 30, 2005


Weighted average basic common shares, pre acquisition

   21,488    21,571

Primary shares issued per asset agreement

   4,740    4,740
    
  

Weighted average basic common shares, post acquisition

   26,228    26,311
    
  

 

18


Table of Contents

The Special Meeting

 

The Proposals

 

This proxy statement is being furnished to our shareholders in connection with the solicitation of proxies by our Board of Directors for use at a Special Meeting of Shareholders to be held at [·], on [·] at [·] local time. The purpose of the special meeting is for you to consider and vote upon the following proposals:

 

  1. To consider and vote on a proposal to approve and adopt an amendment to our Amended and Restated Code of Regulations providing that the Ohio Control Share Acquisition Act shall not apply to acquisitions of PECO II’s equity securities.

 

  2. To consider and vote on a proposal to approve the issuance of 4,740,375 shares of PECO II common stock without par value (the “Primary Shares”) to Delta Products Corporation (“Delta”), pursuant to an asset purchase agreement between PECO II and Delta, dated October 13, 2005 (the “Asset Purchase Agreement”), whereby PECO II will acquire certain exclusive rights and certain business and inventory and will assume certain liabilities associated therewith of Delta’s U.S. and Canadian service provider business.

 

  3. To consider and vote on a proposal to issue a warrant (the “Warrant”) to permit Delta to purchase approximately 12.9 million shares of PECO II Common Stock without par value or such other number of shares that, when aggregated with the Primary Shares, will represent 45% of the issued and outstanding shares of PECO II capital stock measured as of the date five business days prior to the exercise date of the Warrant (the “Warrant Shares”), at an exercise price of $2.00 per share, exercisable until a date that is 30 months following the closing date of the transactions contemplated by the Asset Purchase Agreement.

 

  4. To consider and vote on a proposal to allow the Board of Directors to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve and adopt the proposals.

 

  5. To transact any other business that may properly come before the special meeting or any adjournment or postponement thereof.

 

A copy of the Asset Purchase Agreement is attached as Appendix B to this proxy statement. This proxy statement and the enclosed form of proxy are first being mailed to our shareholders on or about [·].

 

Record Date and Voting

 

The holders of record of our common stock as of the close of business on the record date, which was [·], are entitled to receive notice of, and to vote at, the special meeting. On the record date, there were [·] shares of our common stock outstanding.

 

The holders of a majority of our shares of common stock that were outstanding on the record date, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Any shares of our common stock held in treasury by us are not considered to be outstanding for purposes of determining a quorum. In accordance with Ohio law, abstentions and properly executed broker non-votes will be counted as shares present and entitled to vote for the purposes of determining a quorum. “Broker non-votes” result when the beneficial owners of shares of common stock do not provide specific voting instructions to their brokers. Under applicable rules, brokers are precluded from exercising their voting discretion with respect to the approval of non-routine matters such as the proposals described in this proxy statement, and, thus, absent specific instructions from the beneficial owner of those shares, brokers are not empowered to vote the shares with respect to the approval of these proposals.

 

Required Vote

 

Each share of our common stock that was outstanding on the record date entitles the holder to one vote at the special meeting. Completion of the transactions contemplated by the Asset Purchase Agreement, such as the

 

19


Table of Contents

issuance of the Primary Shares, the issuance of the Warrant and the underlying Warrant Shares, and the proposal to permit the Board of Directors to adjourn the special meeting requires the affirmative vote of the holders of a majority of our shares of common stock voting in person or by proxy at the special meeting. The affirmative vote of a majority of the shares of our common stock is required to approve the amendment to our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act. Because the vote for the proposal to amend our Amended and Restated Code of Regulations is based on the number of shares of our common stock outstanding rather than on the number of votes cast, failure to vote your shares (including as a result of broker non-votes), and votes to abstain, are effectively votes against this proposal. Record holders may vote their shares of our common stock:

 

    by completing and returning the enclosed proxy card by mail; or

 

    by appearing and voting in person by ballot at the special meeting.

 

Regardless of whether you plan to attend the special meeting, you should vote your shares by proxy as described above as promptly as possible.

 

If you hold your shares through a bank, brokerage firm or nominee, you must vote in accordance with the instructions on the voting instruction card that your bank, brokerage firm or nominee provides to you. You should instruct your bank, brokerage firm or nominee as to how to vote your shares, following the directions contained in such voting instruction card.

 

As of the record date, our executive officers and directors owned an aggregate of approximately [·] shares of our common stock, entitling them to exercise approximately [·] of the voting power of our common stock entitled to vote at the special meeting. These executive officers and directors have indicated that they intend to vote in favor of the proposals.

 

In addition, simultaneous with the execution of the Asset Purchase Agreement, Messrs. Matthew P. Smith and James L. Green, and their respective affiliates, executed a support agreement and irrevocable proxy (the “Support Agreement”), under which each such person agreed, severally and not jointly, to vote all of the shares of our common stock beneficially owned by such persons at any PECO II shareholders meeting or by any consensual action:

 

    in favor of the proposal to opt out of the Ohio Control Share Acquisition Act;

 

    in favor of the issuance of the Primary Shares and the Warrant;

 

    in favor of the other transactions contemplated by the Asset Purchase Agreement and in favor of any other matter that could reasonably be expected to facilitate consummation of the transactions contemplated by the Assert Purchase Agreement;

 

    against any change in a majority of the members of our Board of Directors; and

 

    against any other action that would impede, interfere with, delay, postpone or materially adversely affect the closing of the transactions contemplated by the Asset Purchase Agreement.

 

In addition, Messrs. Smith and Green, and their respective affiliates, granted an irrevocable proxy to two of Delta’s designees to vote all of the shares of our common stock beneficially owned by such persons in accordance with the five bullet points above.

 

Proxies; Revocation

 

If you vote your shares of our common stock by signing a proxy, your shares will be voted at the special meeting as you indicate on your proxy card. If no instructions are indicated on your signed proxy card, your shares of our common stock will be voted “FOR” the approval and adoption of the amendment to our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, “FOR” the approval of

 

20


Table of Contents

the issuance of the Primary Shares, “FOR” the issuance of the Warrant and the underlying Warrant Shares and “FOR” the proposal to allow the Board of Directors to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposals before the special meeting.

 

You may revoke your proxy at any time before the proxy is voted at the special meeting. A proxy may be revoked prior to the vote at the special meeting in any of three ways:

 

    by delivering a written revocation, dated after the date of the proxy that is being revoked, to the Secretary of PECO II at 1376 State Route 598, Galion, OH 44833;

 

    by delivering a later-dated proxy relating to the same shares to the Secretary of PECO II; or

 

    by attending the special meeting and voting in person by ballot.

 

Attendance at the special meeting will not, in itself, constitute revocation of a previously granted proxy. If you do not hold your shares of our common stock in your own name, you may revoke or change a previously given proxy by following the instructions provided by the bank, brokerage firm, nominee or other party that is the registered owner of the shares.

 

We will pay the costs of soliciting proxies for the special meeting. Our officers, directors and employees may solicit proxies by telephone, mail, the Internet or in person; however, they will not be paid any additional amounts for soliciting proxies. We will also request that individuals and entities holding shares in their names, or in the names of their nominees, that are beneficially owned by others, send proxy materials to and obtain proxies from those beneficial owners, and will reimburse those holders for their reasonable expenses in performing those services. We have retained Georgeson Shareholder Communications, Inc. to assist us in the solicitation of proxies, and will pay fees of up to $15,000, plus reimbursement of out-of-pocket expenses.

 

21


Table of Contents

The Asset Purchase

 

Background of the Transactions Contemplated by the Asset Purchase Agreement

 

During late March 2005, Mr. Trygve Ivesdal, one of our Board members, and James L. Green, our current Chairman of the Board, were contacted by Mr. Lanford Liu, Director of Corporate Development, of Delta Electronics, Inc. (“DEI”), an affiliate of Delta, who expressed interest in a possible transaction with us. In April 2005, Mr. Green and other representatives of PECO II engaged in further discussions with Mr. Liu, Mr. Bruce Chen, Chairman, Mr. Albert Chang, General Manager of Telcom Power Systems, Mr. Austin Tseng, Telecom Product Sales Manager of DEI, and other representatives of DEI, concerning DEI’s interest in a possible transaction with us. On May 3, 2005, PECO II and DEI entered into a Mutual Non-Disclosure Agreement pursuant to which the parties agreed to keep discussions confidential.

 

On May 20, 2005, Mr. Liu and other representatives of DEI, including its legal advisor, met with Mr. Green, Ms. Sandra Frankhouse, our Chief Financial Officer, Mr. John G. Heindel, who at that time was serving as a consultant to PECO II, and our legal advisor in Columbus, Ohio. Elements of DEI’s proposal were discussed, including the proposal for PECO II to purchase the assets associated with Delta’s U.S. and Canadian service provider business in exchange for the issuance of common stock and the issuance of a warrant. PECO II determined that DEI needed to provide it with additional information concerning the financial condition of the business proposed to be sold to PECO II as well an evaluation by PECO II of the proposed consideration to be paid in exchange for the assets.

 

On July 8, 2005, DEI sent to us a draft preliminary term sheet, which provided the terms for the proposed transaction, along with a draft amendment to the Mutual Non-Disclosure Agreement. The amendment to the Mutual Non-Disclosure Agreement, dealing with the non-disclosure of the proposed transaction, was executed by PECO II and Delta on July 11, 2005.

 

During the week of August 1, 2005, Mr. Heindel and our legal advisor met with Mr. Liu, other DEI representatives and DEI’s legal advisor in Palo Alto, California to discuss the proposed transaction and proposed transactional documents produced by DEI. During the remainder of August and continuing through September 2005, the parties negotiated the material terms and conditions of the Asset Purchase Agreement and the ancillary agreements thereto.

 

On September 30, 2005, our Board of Directors held a meeting to analyze and review, with the advice and assistance of our legal and financial advisors, among other things, certain strategic, financial and legal considerations concerning a possible transaction with Delta, the terms of the most recent drafts of the Asset Purchase Agreement and ancillary agreements, and the potential impact to our shareholders. At this meeting, GBQ Consulting, LLC (“GBQ”) discussed the methods, factors, and analyses used in preparing its fairness opinion with respect to the fairness of the consideration to be received by our shareholders in connection with the proposed transaction. While no decision was reached at this meeting by our Board of Directors with respect to DEI’s proposal, it was the consensus of our Board of Directors that Mr. Heindel, other representatives of our management, and our legal advisor should continue to negotiate the material terms and conditions of the Asset Purchase Agreement and the ancillary agreements.

 

Messrs. Green and Heindel, other representatives of PECO II management, and our legal advisor continued to finalize the proposed Asset Purchase Agreement and related ancillary agreements from September 30, 2005 through October 13, 2005. At a special meeting of our Board of Directors on October 13, 2005, Mr. Heindel and our legal advisor reported that the parties had satisfactorily resolved all open issues with respect to the material terms and conditions of the Asset Purchase Agreement and ancillary agreements. GBQ then rendered its oral opinion (which was subsequently confirmed in writing) to the effect that, as of October 13, 2005, the consideration to be received by our shareholders pursuant to the Asset Purchase Agreement was fair to such shareholders from a financial point of view. Our Board of Directors unanimously approved the Asset Purchase Agreement and the ancillary agreements, authorized the execution and delivery of the Asset Purchase Agreement

 

22


Table of Contents

and the Voting Agreement (as defined below), unanimously determined that the issuance of the Primary Shares, the issuance of the Warrant and the underlying Warrant Shares and the proposed amendment to the Amended and Restated Code of Regulations was fair to and in the best interest of PECO II and its shareholders, and unanimously resolved to recommend that our shareholders approve the issuance of the Primary Shares, the issuance of the Warrant and the underlying Warrant Shares and the proposed amendment to the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act.

 

Concurrently with the execution of the Asset Purchase Agreement, we also entered into a voting agreement (the “Voting Agreement”) with Delta and certain of our significant shareholders to be effective as of closing, whereby Delta and each such shareholder (collectively, the “Voting Agreement Shareholders”) have agreed to vote all of the shares of our common stock beneficially owned by such Voting Agreement Shareholder at any PECO II shareholder meeting or by any consensual action:

 

    in favor of electing, in the case of Delta, the individual designated by Delta to stand for election to serve on our Board of Directors; and

 

    in favor of electing, in the case of PECO II, the individuals nominated by our Board of Directors to stand for election to serve on our Board of Directors.

 

The Voting Agreement terminates upon the earlier of:

 

    the written agreement of Delta and us;

 

    the date Delta, or any of its affiliates (other than PECO II), no longer holds shares of our common stock or rights to purchase such shares, representing at least 5% of our outstanding voting stock;

 

    the date Delta (alone, or together with any of its affiliates (other than PECO II)) holds 45% or greater of our then issued and outstanding voting capital stock; and

 

    the consummation of:

 

    any a tender offer, exchange offer, merger, consolidation or other business combination of PECO II the result of which is that PECO II shareholders (other than Delta and its affiliates in the case of a tender offer) immediately preceding such transaction hold less than 50% of the equity interests in the surviving or resulting entity of such transaction (or any direct or indirect parent or subsidiary thereof), or

 

    the sale of all or substantially all of our assets.

 

There is no shared voting power pursuant to the terms of the Voting Agreement.

 

On October 13, 2005, we issued a press release announcing the execution of the Asset Purchase Agreement. On October 19, 2005, we filed with the Securities and Exchange Commission Form 8-K describing the material terms of the transactions contemplated by the Asset Purchase Agreement.

 

Our Reasons for the Transactions Contemplated by the Asset Purchase Agreement; Recommendation of our Board of Directors

 

Our Board of Directors reviewed and discussed the various proposals with our management and its financial and legal advisor in determining that the transactions contemplated by the Asset Purchase Agreement are fair to, and in the best interests of, our Company and our shareholders. In reaching its conclusion to approve and adopt the Asset Purchase Agreement and to seek the approval of the shareholders of the proposals described in this proxy statement, our Board of Directors considered a number of factors, including the following:

 

    that the transactions contemplated by the Asset Purchase Agreement will provide us with access to Delta’s low-cost manufacturing capabilities and supply agreements, which is expected to reduce our costs of goods sold;

 

23


Table of Contents
    that we will acquire access to new customers in addition to new markets with existing customers;

 

    that the transactions contemplated by the Asset Purchase Agreement will enable us to streamline manufacturing toward standardized products, which is expected to lower our costs of goods sold;

 

    that we will partner with Delta, an affiliate of a large, publicly-traded company (on the Taiwan Stock Exchange), with more funding and access to public markets;

 

    our Board of Directors’ understanding of, and the presentations of our management regarding, our business, operations, management, financial condition, earnings and prospects;

 

    our Board of Directors’ knowledge of the current and prospective environment in which we operate, including national and local economic conditions, the competitive environment, and the likely effect of these factors on our potential growth, development, productivity, profitability and strategic options;

 

    our Board of Directors’ view that the products and services provided by us beyond the level it believed to be reasonably achievable on an organic basis, was becoming increasingly important to continued success in the current global telecommunications market;

 

    the review by our Board of Directors with its legal advisor of the structure of the acquisition and the financial and other terms of the Asset Purchase Agreement and ancillary agreements;

 

    the current and historical market prices of our common stock, and the current and historical market prices of our common stock relative to those of other industry participants and general market indices;

 

    the likelihood that the transactions contemplated by the Asset Purchase Agreement will be completed, including the likelihood that the shareholder approvals needed to complete the transactions will be obtained; and

 

    management’s view that the transactions contemplated by the Asset Purchase Agreement and the relationships to be obtained by virtue of entering into the ancillary agreements will allow for enhanced products and opportunities for our clients and customers.

 

Our Board of Directors also considered potential risks relating to the transactions contemplated by the Asset Purchase Agreement or the failure by us to consummate such transactions, including the following:

 

    our management’s belief that our business plan must change in order to combat sustained operating losses;

 

    our opportunities to achieve success in the future without partnering with Delta may be limited;

 

    absent the consummation of the transactions contemplated by the Asset Purchase Agreement, a significant reduction in size or even liquidation is possible given historical losses and our current book value of $1.60 per share; and

 

    partnering with a larger, diversified industry participant such as Delta will allow us to retain some autonomy while eliminating costs and adding volume.

 

The discussion of the information and factors considered by our Board of Directors is not exhaustive, but includes all material factors considered by our Board. In view of the wide variety of factors considered by our Board in connection with its evaluation of the transactions contemplated by the Asset Purchase Agreement and the complexity of these matters, our Board of Directors did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision. Our Board evaluated the factors described above, including asking questions of our management and our legal advisor, and reached the unanimous decision that the transactions contemplated by the Asset Purchase Agreement were in the best interests of our Company and our shareholders. In considering the factors described above, individual members of our Board of Directors may have given different weights to different factors. Our Board of Directors considered these factors as a whole, and overall considered them to be favorable to, and to

 

24


Table of Contents

support, its determination. It should be noted that this explanation of our Board’s reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Forward Looking Statements.”

 

Our Board of Directors determined that the proposed amendment to the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, the issuance of the Primary Shares, the issuance of the Warrant and the Warrant Shares, and the proposal to allow our Board of Directors to adjourn the special meeting to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the proposals, are advisable, fair to and in the best interests of PECO II and its shareholders. Accordingly, our Board of Directors unanimously approved and adopted the Asset Purchase Agreement and unanimously recommends that you vote “FOR” the approval and adoption of amendment to the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, the issuance of the Primary Shares, the issuance of the Warrant and the issuance of Warrant Shares, and the proposal to allow our Board of Directors to adjourn the special meeting to solicit additional proxies if there are not sufficient votes at the special meeting to approve the proposals.

 

Opinion of Our Financial Advisor

 

We engaged GBQ Consulting, LLC (“GBQ”) to render its opinion with respect to the fairness or inadequacy, from a financial point of view, to our shareholders, of the transactions contemplated by the Asset Purchase Agreement. On September 30, 2005, GBQ rendered its oral opinion to our board of directors that as of that date, and based upon and subject to certain matters stated in that opinion, from a financial point of view, the transactions contemplated by the Asset Purchase Agreement were fair to them. GBQ subsequently orally confirmed its opinion on October 13, 2005 and by subsequent oral confirmation on and delivery of its written opinion dated October 13, 2005.

 

The full text of GBQ’s opinion is attached as Appendix C to this proxy statement. The opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by GBQ in rendering its opinion. The description of the opinion set forth below is qualified in its entirety by reference to the opinion. We urge you to read the entire opinion carefully in connection with their consideration of the four proposals.

 

The GBQ opinion was provided for the information and assistance of our Board of Directors in connection with its consideration of the fairness of the transactions contemplated by the Asset Purchase Agreement. The GBQ opinion does not address any other aspect of the transaction and is not intended to be and does not constitute a recommendation to any shareholder of our Company as to how that shareholder should vote with respect to the proposed amendment to the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, the issuance of the Primary Shares, the issuance of the Warrant or the Warrant Shares or the proposal to allow our Board of Directors to adjourn the special meeting to solicit additional proxies if there are not sufficient votes at the special meeting to approve the proposals. GBQ was not requested to opine as to, and the GBQ opinion does not address, our underlying business decision to proceed with or effect the transactions contemplated by the Asset Purchase Agreement, nor does the GBQ opinion address the relative merits of the transactions contemplated by the Asset Purchase Agreement compared to any other business strategies or alternatives that might be available to us.

 

In arriving at its opinion, GBQ reviewed and analyzed the following primary sources of information:publicly available information concerning PECO II that GBQ believed to be relevant to its analysis, including

 

    our Annual Reports on Form 10-K for the fiscal years ended December 31, 2000 through 2004;

 

    drafts of the Asset Purchase Agreement, the Warrant and the Supply Agreement;

 

25


Table of Contents
    financial and operating information with respect to the business, operations and prospects of PECO II furnished to GBQ by us;

 

    a review of the historical market prices and trading volume of our publicly traded common stock, an analysis of our shareholder profile and the number of our shareholders, and a review of publicly available news articles and press releases relating to Delta and our Company;

 

    a comparison of the historical financial results and present financial condition of our Company with those of other companies that GBQ deemed relevant to PECO II and Delta; and

 

    various PECO II management-prepared documents, lists and schedules.

 

In addition, GBQ had discussions with our management concerning our business, operations, assets, liabilities, financial condition and prospects and undertook such other studies, analyses and investigations as GBQ deemed appropriate.

 

In arriving at its opinion, GBQ assumed and relied upon the accuracy and completeness of the financial and other information used by GBQ without assuming any responsibility for independent verification of that information. GBQ further relied upon the assurances of our management that they were not aware of any facts or circumstances that would make that information inaccurate or misleading. In arriving at its opinion, GBQ did not conduct a physical inspection of our properties and facilities and did not make or obtain any evaluations or appraisals of our assets or liabilities. GBQ’s opinion necessarily was based upon market, economic and other conditions as they existed on, and could be evaluated as of, the date of the GBQ opinion.

 

At the September 30, 2005 meeting of our Board of Directors, GBQ made a presentation of certain financial analyses of the transactions contemplated by the Asset Purchase Agreement.

 

The following is a summary of the material valuation, financial and comparative analyses in the presentation that was delivered to our Board of Directors by GBQ on September 30, 2005.

 

Discounted Cash Flow Method

 

GBQ analyzed Delta’s sales and operating profits, along with the capital expenditure forecasts of the telecommunications industry. GBQ’s analysis consisted of two operating scenarios for the business of Delta to be acquired by us pursuant to the Asset Purchase Agreement:

 

    a “High” scenario assuming high growth in revenue, steady gross margins and operating expenses growing at the same rate as revenues; and

 

    a “Low” scenario assuming moderate growth in revenue, relatively constant operating margins, and operating expenses growing at the same rate as revenues.

 

Both scenarios reflected Delta’s projected cash flows from PECO II’s standpoint assuming certain cost savings from the acquisition of the business. As a result, the indicated values from the Discounted Cash Flow Method are on a strategic basis.

 

Under the High scenario, revenue and operating income for the business is projected to total $26.9 million and $4.3 million, respectively, by 2009, or a compound annual growth rate of 20.5% over 2004 revenue.

 

Under the Low scenario, revenue and operating income for the business is projected to total $16.1 million and $2.6 million, respectively, by 2009, or a compound annual growth rate of 9.2% over 2004 revenue.

 

Utilizing the financial projections of both scenarios and the required rate of return GBQ suggested to our Board of Directors that a fair value of the business and inventory to be acquired by us pursuant to the Asset Purchase Agreement is $8.0 to $13.6 million.

 

26


Table of Contents

Guideline Public Company Method.

 

GBQ completed an extensive review of publicly available information and held discussions with our management to identify comparable public companies (i.e., companies with an underlying similarity of relevant investment characteristics, such as markets, products, growth, or other pertinent factors).

 

Although no single public company was found to be directly comparable to the business to be acquired from Delta in terms of size, products, and markets served, GBQ identified six publicly-traded companies operating primarily in the telecommunications electronic component industry for use in its analysis. In applying the Guideline Public Company Method, GBQ reviewed and considered various pricing relationships among the guideline companies based on their historical (2004 and five-year weighted average) and projected (2005 and 2006) revenue and their total invested capital (market value of equity plus debt minus cash and equivalents) as of September 21, 2005. To determine the appropriate multiples to apply to the business to be acquired by us, GBQ considered any discernable risk and return characteristics relative to the guideline companies, including size, growth, cost structures, profitability, return on investment, liquidity and leverage.

 

In addition, the range of values from the Guideline Public Company Method did not incorporate the strategic synergies expected to be obtained by us as a result of consummating the transactions contemplated by the Asset Purchase Agreement. Accordingly, GBQ informed our Board of Directors that it was appropriate to consider applying an acquisition premium to the indicated range of values. GBQ reviewed Mergerstat Review which tracks publicly announced formal transfers of ownership of at least 10% of a company’s equity. According to these studies, the medium premium paid for controlling interests relative to non-controlling interests in publicly-traded companies ranged from 23.4% to 43.5% over the past 24 years, with a median premium of 31.8%. These studies indicated that smaller transactions generally featured larger acquisition premiums, although transactions under $25.0 million had a medium premium of 21.4% in 2004. GBQ applied an acquisition premium of 20% to the indicated values from the Guideline Public Company Method. Accordingly, applying the selected ranges and acquisition premium, GBQ suggested a fair value of $7.9 to $12.7 million for the Delta business to be acquired by us pursuant to the Asset Purchase Agreement.

 

GBQ Conclusion of Delta Business Valuation

 

According to GBQ, the results of the Discounted Cash Flow Method and the Guideline Public Company Method suggests a fair value of $7.9 million to $13.6 million for the Delta business to be acquired by us pursuant to the Asset Purchase Agreement.

 

Valuation of PECO II

 

Shares of our common stock are not covered by Wall Street analysts and therefore have little public following. As of September 21, 2005 (the date GBQ valued our shares for its presentation), our trading price of $1.27 per share corresponded with a market capitalization of $28.5 million. To assess the reasonableness of our current market capitalization, GBQ performed an independent valuation analysis of our common stock using valuation techniques including the Discounted Cash Flow Method, the Guideline Public Company Method, and the Net Asset Value Method.

 

In connection with the Discounted Cash Flow Method, GBQ noted that we had not achieved a profit from operations since 2000 and our cash flows had been erratic and unpredictable. In addition, our operating performance is closely tied to the capital expenditure forecasts of the telecommunications industry. Projections provided by our management includes revenue to total $66.2 million by 2009, or a compound annual growth rate of 16.0% from 2004 revenue. Gross margins were projected to fluctuate between 23.1% and 26.0%. Operating expenses were projected to total $11.3 million in 2005 and grow at a modest rate for every year thereafter. Depreciation was forecasted to outpace capital additions in the near future. Utilizing our management’s financial projections and required rate of return, GBQ suggested a fair value of $0.98 per share for PECO II common stock.

 

27


Table of Contents

In connection with the Guideline Public Company Method, GBQ completed an exhaustive review of publicly available information and held discussions with our management to identify comparable public companies. The six publicly-traded companies identified and the pricing multiples analyzed in valuing the Delta business in connection with the Guideline Public Company Method for the Delta business was used in GBQ’s analysis of us. In applying the selected multiple ranges under the Guideline Public Company Method, GBQ suggested a fair value of $0.97 to $1.52 per share for our common stock.

 

In connection with the Net Asset Value Method, all of our business assets and liabilities were identified and restated to fair value either collectively or discretely. GBQ used the reported book value of our common stock as a proxy for net asset value and suggested a fair value of $1.60 per share for our common stock.

 

Based on the Discounted Cash Flow, Guideline Public Company and Net Asset Value Methods, GBQ determined that the current trading price of $1.27 per share for our common stock was in the range of fair value of $0.97 to $1.60 per share for our common stock.

 

Value of Consideration to be Paid by PECO II

 

Based on the number of Primary Shares to be issued to Delta and a current market value of $1.27 per share as of September 21, 2005 (the date GBQ valued our shares for its presentation), GBQ indicated that we would be contributing approximately $6.02 million of our common stock to Delta.

 

In valuing the Warrant, GBQ utilized the Black-Sholes Option Pricing Model (“BSOPM”). The BSOPM is an arbitrate pricing model that was developed using the premise is if two assets have identical payoffs, they must have identical prices to prevent arbitrage. The BSOPM calculates the price of a traditional call option by analyzing the volatility and opportunity cost of investing in the underlying asset.

 

The following is a listing of the six variables used in the BSOPM and GBQ’s input for each variable:

 

    underlying asset price—$1.27 per share per current market price;

 

    strike price—$2.00;

 

    remaining time to maturity—2.5 years (30 months);

 

    risk-free rate of return—GBQ utilized a 3.96% risk free rate of return based on the yields of 2- and 3-year (consistent with the investment time horizon) Treasury bonds;

 

    dividend yield—0.0%; and

 

    annual stock volatility—60.0%.

 

Following an adjustment for dilution that would occur when the Warrant is exercised and Warrant Shares are issued, the GBQ assumptions suggest a market value of $0.22 per share for each Warrant Share. Based on the initial consideration of Primary Shares and fully diluted shares outstanding of 39.26 million (post-exercise of the Warrant), we will be issuing the Warrant on approximately 12.93 million shares. As a result, GBQ suggested the total value of the Warrant issued to Delta to be estimated at $2.83 million.

 

Accordingly, GBQ suggested that the market value of the total consideration to be paid to Delta by us is estimated to be $8.9 million. This value is in the lower range of the fair consideration we will receive, being $7.9 million to $13.6 million.

 

The consideration to be offered to our shareholders by virtue of our Company entering into the Asset Purchase Agreement and consummating the transactions contemplated thereby were determined through arms’-length negotiations between Delta and us and were approved by our Board of Directors. GBQ did not recommend any specific price per share or other form of consideration to our Company or that any specific price per share or

 

28


Table of Contents

other form of consideration constituted the only appropriate consideration for the acquisition. The opinion of GBQ was one of many factors taken into consideration by our Board of Directors in making its determination to approve the Asset Purchase Agreement. The analysis of GBQ summarized above should not be viewed as determinative of the opinion of our Board of Directors with respect to the value of our Company or of whether our Board of Directors would have been willing to agree to a different price per share or other forms of consideration.

 

Our Board of Directors selected GBQ as its financial advisor because of GBQ’s reputation as a recognized financial advisory firm with substantial experience in transactions similar to the transactions contemplated by the Asset Purchase Agreement. As part of its financial advisory business, GBQ is continually engaged in the valuation of businesses and their securities in connection with acquisitions and valuations for corporate and other purposes.

 

Pursuant to an engagement letter between PECO II and GBQ, we agreed to pay a fee which was payable upon delivery of the fairness opinion. We agreed to pay GBQ a fee of $50,000 plus reimbursement of its reasonable out of pocket expenses incurred in connection with the engagement. In addition, we agreed to indemnify GBQ and its related parties from and against certain liabilities, including liabilities under the federal securities laws.

 

Governmental and Third Party Approvals

 

Delta has agreed to use its reasonable commercial efforts to obtain the necessary third party consents to the assignment of the business contracts to and the assumption by us of such contracts to complete the transactions contemplated by the Asset Purchase Agreement. The approval or consent of any governmental authority is not required to consummate the transactions contemplated by the Asset Purchase Agreement.

 

29


Table of Contents

The Asset Purchase Agreement

 

The following is a summary description of the material terms of the Asset Purchase Agreement, not summarized elsewhere herein. Certain capitalized terms used and not defined herein have the meanings ascribed to them in the Asset Purchase Agreement and the other referenced documents which constitute exhibits to the Asset Purchase Agreement. This summary does not purport to be complete and is qualified in its entirety by reference to the Asset Purchase Agreement, a copy of which is attached to this proxy statement as Appendix B and is incorporated herein by reference. Shareholders are advised to read such document in its entirety prior to voting in person or by proxy on the proposals.

 

The Transaction

 

Under the terms of the Asset Purchase Agreement and subject to the satisfaction of the conditions set forth therein, on the Closing Date, we will purchase from Delta certain assets used in Delta’s U.S. and Canadian service provider business. The Business Assets consist of certain Inventory owned by Delta as of the Closing Date, the rights to and under the Business Contracts, rights to and under the Business Records and all rights, claims, and causes of action against third parties exclusively relating to the Business Assets. In addition, we will assume on the Closing Date the Assumed Liabilities relating to the Business Assets.

 

Consideration

 

Under the terms of the Asset Purchase Agreement and subject to the satisfaction of the conditions set forth therein, on the Closing Date, in exchange for the Business Assets we will issue to Delta the Primary Shares. In addition, we will issue to Delta a Warrant to purchase that number of Warrant Shares that, after taking into account the Primary Shares, will represent 45% of our issued and outstanding capital stock measured as of the date that is five business days of the exercise date of the Warrant. The exercise price of the Warrant is $2.00 per share, and the Warrant is exercisable for a period of 30 months following the Closing Date.

 

The Closing

 

Subject to the satisfaction or waiver of all conditions to Closing set forth in the Asset Purchase Agreement, the Closing will occur on a Friday as soon as reasonably practicable following the satisfaction or waiver of all such conditions.

 

Representations and Warranties

 

In the Asset Purchase Agreement, both Delta and we have made representations and warranties, customary for a transaction such as this asset purchase by our Company, with respect to, among other things:

 

    organization and qualification;

 

    authority to execute and deliver the Asset Purchase Agreement;

 

    enforceability and binding effect of the Asset Purchase Agreement;

 

    absence of any breach or conflict with material agreements, governmental authorizations or charter documents;

 

    required consents, approvals and filings;

 

    absence of undisclosed liabilities; and

 

    compliance with applicable laws.

 

30


Table of Contents

In the Asset Purchase Agreement, we have also made representations and warranties, customary for a transaction such as this asset purchase where the consideration consists of the issuance of the buyer’s securities, with respect to, among other things:

 

    our capitalization;

 

    our financial statements;

 

    environmental matters;

 

    employees and employee benefit plans;

 

    intellectual property;

 

    absence of certain changes or events, including any changes or events having a Material Adverse Effect on Buyer (as defined below); and

 

    receipt of a fairness opinion.

 

As used in the Asset Purchase Agreement, “Material Adverse Effect on Buyer” means any change, effect or circumstance (such item, an “Effect”) that, when taken individually or together with all other Effects, is, or would reasonably be expected to be, materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business or operations of Peco II and its subsidiaries, taken as a whole; provided, however, that in no event shall any of the following be taken into account in determining whether there has been or will be a Material Adverse Effect on Buyer:

 

    any Effect that is the result of general market or political factors or economic factors affecting the economy as a whole;

 

    any Effect that is the result of factors generally affecting the industry or specific markets in which Peco II competes;

 

    any Effect that is the result of an outbreak or escalation of hostilities involving the U.S., the declaration by the U.S. of a national emergency or war, or the occurrence of any acts of terrorism;

 

    any Effect arising out of or resulting from the actions expressly contemplated by the Parties in connection with the Asset Purchase Agreement; or

 

    any Effect resulting from the loss, diminution or disruption of our existing or prospective customer, distributor or supplier relationships that we successfully bear the burden of proving directly results from or is directly attributable to the public announcement of the transactions contemplated by the Asset Purchase Agreement.

 

In the Asset Purchase Agreement, Delta has also made representations and warranties, customary for a transaction such as this asset purchase where the consideration consists of the issuance of the buyer’s securities, with respect to, among other things:

 

    the quantity and quality of the Inventory;

 

    title to the Business Assets;

 

    no infringement of intellectual property of a third party;

 

    employee matters;

 

    absence of certain changes or events, including any changes or events having a Material Adverse Effect on the Business (as defined below);

 

    validity and effect of the Business Contracts; and

 

    investment matters.

 

31


Table of Contents

As used in the Asset Purchase Agreement, “Material Adverse Effect on the Business” means any Effect that, when taken individually or together with all other Effects, is, or would reasonably be expected to be, materially adverse to the Business Assets, taken as a whole; provided, however, that in no event shall any of the following be taken into account in determining whether there has been or will be a Material Adverse Effect on the Business:

 

    any Effect that is the result of general market or political factors or economic factors affecting the economy as a whole;

 

    any Effect that is the result of factors generally affecting the industry or specific markets in which the Business competes;

 

    any Effect that is the result of an outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war, or the occurrence of any acts of terrorism;

 

    any Effect arising out of or resulting from the actions expressly contemplated by the Parties in connection with the Asset Purchase Agreement; or

 

    any Effect resulting from the loss, diminution or disruption of Delta’s existing or prospective customer, distributor or supplier relationships relating to the Business that Delta successfully bears the burden of proving directly results from or is directly attributable to the public announcement of the transactions contemplated by the Asset Purchase Agreement.

 

Conduct of Business Pending the Closing

 

In the Asset Purchase Agreement, we have covenanted and agreed that, at all times up to and including the Closing Date, unless Delta otherwise consent in writing, which consent shall not be unreasonably withheld, delayed or conditioned, or as otherwise required or contemplated by the Asset Purchase Agreement, we shall, and shall cause each of our subsidiaries to:

 

    conduct our business only in the ordinary course of business, consistent with past practice;

 

    use commercially reasonable efforts to preserve intact our business, organization and relationship with third parties;

 

    comply with various restrictions on the ability of us and our subsidiaries to take various actions prior to the Closing; and

 

In the Asset Purchase Agreement, Delta has covenanted and agreed that, at all times up to and including the Closing Date, unless we otherwise consent in writing, which consent shall not be unreasonably withheld, delayed or conditioned, or as otherwise required or contemplated by the Asset Purchase Agreement, Delta shall:

 

    use commercially reasonable efforts to preserve the Business Assets and its relationships with third parties with respect thereto; and

 

    comply with various restrictions on the ability of Delta to take various actions prior to the Closing.

 

Our Restrictions

 

The restrictions we agreed to with respect to our and our subsidiaries’ ability to take various actions (without the prior written consent of Delta, which consent is not to be unreasonably withheld, delayed or conditioned) prior to the Closing include, among other things:

 

    except with respect to amending the Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act, amend our charter documents in a manner that would reasonably be likely to adversely affect our capital stock;

 

    pay an extraordinary dividend or distribution;

 

32


Table of Contents
    purchase, redeem, or otherwise acquire any shares of our capital stock;

 

    knowingly take any action that would result in a failure to maintain trading of our common stock on Nasdaq;

 

    fail to make in a timely manner any filings with the Securities and Exchange Commission required under applicable law; or

 

    consummate any significant acquisition.

 

In addition, we agreed to first consult with Delta with respect to:

 

    entering into an agreement relating to a material joint venture, strategic partnership or alliance;

 

    entering, modifying or amending in a manner adverse in any material respect to us any material contract;

 

    grant any exclusive rights with respect to any of our material intellectual property; or

 

    incur any material indebtedness for borrowed money or guarantee the indebtedness of another person.

 

Delta Restrictions

 

The restrictions Delta agreed to with respect to its ability to take various actions (without the prior written consent of PECO II, which consent is not to be unreasonably withheld, delayed or conditioned) prior to the Closing include, among other things:

 

    sell, lease, license, encumber or dispose of the Business Assets except in the ordinary course of business;

 

    incur or assume any material liabilities or obligations with respect to the Business Assets other than in the ordinary course of business;

 

    terminate (except pursuant to its terms), or materially modify or amend any Business Contract; or

 

    revalue any of the Business Assets.

 

No Solicitation

 

The Asset Purchase Agreement provides that we will not, and will not permit or cause any of our subsidiaries or any of our officers or directors or those of our subsidiaries to, and shall direct our and our subsidiaries’ representatives not to, directly or indirectly:

 

    solicit, initiate, encourage or knowingly facilitate the making, submission or announcement of, any Acquisition Proposal (as defined below) with respect to our Company;

 

    participate or engage in any discussions or negotiations regarding, or furnish to any person any nonpublic information with respect to, or take any other action intended to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to, any Acquisition Proposal with respect to our Company;

 

    approve, endorse or recommend any Acquisition Proposal with respect to our Company (except to the extent specifically permitted under the Asset Purchase Agreement); or

 

    enter into any letter of intent or similar document or any contract or commitment contemplating or otherwise relating to any Acquisition Proposal with respect to our Company;

 

provided, however, that in the event that, prior to the approval of the proposals listed in this proxy statement, we received an unsolicited, bona fide Acquisition Proposal that our Board of Directors has in good faith concluded is

 

33


Table of Contents

reasonably likely to result in a Superior Offer (as defined below) and we have otherwise complied with our non-solicitation obligations discussed above, nothing contained in the Asset Purchase Agreement prevents us from:

 

    providing information in response to a request therefor by a person who has made such an unsolicited bona fide written Acquisition Proposal, provided that such person is a party to a confidentiality agreement with us, and we give Delta notice of such event and furnish Delta with the same information;

 

    engaging in any negotiations or discussions with any person who has made such an unsolicited bona fide written Acquisition Proposal, provided we give Delta notice of our intention to enter into such negotiations; or

 

    approving or recommending such an unsolicited bona fide Acquisition Proposal to our shareholders, if and only to the extent that we terminate the Asset Purchase Agreement in a manner whereby we:

 

    notify Delta three business days prior to terminating the Asset Purchase Agreement that we have received a Superior Offer, attaching the then current version of the Superior Offer,

 

    afford Delta a reasonable opportunity to make a revised offer, and

 

    pay Delta a termination fee of $500,000.

 

For purposes of the Asset Purchase Agreement, “Acquisition Proposal” means any offer or proposal or public announcement of a proposal or plan, relating to any transaction or series of related transactions involving:

 

    any purchase from our Company or acquisition by any person or “group” (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of more than a 15% interest in our total outstanding voting securities or any of our subsidiaries, directly or indirectly, or any tender offer or exchange offer that if consummated would result in any person or group beneficially owning 15% or more of our total outstanding voting securities or any of our subsidiaries, directly or indirectly, or any merger, consolidation, business combination or similar transaction involving us or any of our subsidiaries; or

 

    any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the ordinary course of business), acquisition or disposition of more than 15% of our assets (including our subsidiaries taken as a whole).

 

For purposes of the Asset Purchase Agreement, “Superior Offer” means an unsolicited, bona fide written offer made by a third party to acquire, directly or indirectly, pursuant to a tender offer, exchange offer, merger, consolidation or other business combination, all or substantially all of our assets or a majority of the total outstanding voting securities of our Company and as a result of which our shareholders immediately preceding such transaction would hold less than 50% of the equity interests in the surviving or resulting entity of such transaction or any direct or indirect parent or subsidiary thereof, on terms that our Board of Directors has in good faith concluded:

 

    to be more favorable to our shareholders (in their capacities as shareholders) than the terms provided pursuant to the Asset Purchase Agreement;

 

    the conditions to the consummation of which are reasonably capable of being satisfied; and

 

    financing for which, to the extent such offer is conditioned thereon, is then committed or in the good faith judgment of our Board of Directors reasonably available.

 

34


Table of Contents

Conditions to the Closing

 

The Asset Purchase Agreement provides that the respective obligations of Delta and our Company to effect the transactions contemplated by the Asset Purchase Agreement are subject to the satisfaction or waiver on or prior to the Closing Date of each of the following conditions:

 

    the approval of the amendment to our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act by the affirmative vote of a majority of the outstanding shares of our common stock;

 

    approval of the issuance to Delta of the Primary Shares at the Closing by the affirmative vote of a majority of the votes cast by our shareholders voting, in person or by proxy, at the special meeting;

 

    approval of the issuance of the Warrant and the issuance of the Warrant Shares thereunder by the affirmative vote of a majority of the votes cast by our shareholders voting, in person or by proxy, at the special meeting;

 

    the Primary Shares and Warrant Shares shall have been authorized for listing on Nasdaq, subject to official notice of issuance;

 

    all applicable waiting periods (and any extensions thereof) under any applicable antitrust laws shall have expired or otherwise been terminated and all approvals required under applicable antitrust laws shall have been obtained; and

 

    no governmental entity shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, judgment, decree, executive order or award which is then in effect and has the effect of making the transactions contemplated by the Asset Purchase Agreement illegal or otherwise prohibiting consummation of the transactions contemplated by the Asset Purchase Agreement.

 

Our obligations to effect the transactions contemplated by the Asset Purchase Agreement are subject to the satisfaction or waiver on or prior to the Closing Date of the following additional conditions:

 

    the representations and warranties of Delta contained in the Asset Purchase Agreement being true and correct at and as of the Closing Date as if made at and as of such date, except where the failure to be true and correct would not have a Material Adverse Effect on the Business; and

 

    the performance by Delta, in all material respects, of its obligations contained in the Asset Purchase Agreement.

 

The obligations of Delta to effect the transactions contemplated by the Asset Purchase Agreement are subject to the satisfaction or waiver on or prior to the Closing Date of the following additional conditions:

 

    the representations and warranties of our Company contained in the Asset Purchase Agreement being true and correct at and as of the Closing Date as if made at and as of such date, except where the failure to be true and correct would not have a Material Adverse Effect on Buyer;

 

    the representations and warranties of our Company with respect to our capitalization shall be true and correct in all material respects;

 

    the performance by us, in all material respects, of our obligations contained in the Asset Purchase Agreement;

 

    no Material Adverse Effect on Buyer shall have occurred since the date of the Asset Purchase Agreement and be continuing as of the Closing Date; and

 

    Delta’s designee to our Board of Directors shall have been appointed by us to serve as a Class II director on our Board of Directors, and the Voting Agreement relating to such appointment shall be in full force and effect on the Closing Date.

 

35


Table of Contents

Termination

 

The Asset Purchase Agreement provides that it may be terminated and the transactions contemplated thereby abandoned at any time prior to the Closing:

 

    by mutual consent;

 

    by either Delta or us, if the other party materially breaches any representation, warranty or covenant contained in the Asset Purchase Agreement, which breach would cause a material adverse effect, subject to a right to cure;

 

    by either Delta or us, if the Closing shall not have occurred on or before March 31, 2006;

 

    by either Delta or us, if a governmental entity has issued an order, decree or ruling or taken any other action (including the failure to have taken an action), in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Asset Purchase Agreement, which order, decree, ruling or other action is final and nonappealable;

 

    by Delta, if (at any time prior to approval of the various matters subject to the required vote of our shareholders at the special meeting) a Triggering Event (as defined below) with respect to our Company shall have occurred;

 

    by us if we receive a Superior Offer and we afford Delta a reasonable opportunity to make a revised offer, along with payment of a $500,000 termination fee;

 

    by either Delta or us, if the

 

    amendment to our Amended and Restated Code of Regulations to opt out of the Ohio Control Share Acquisition Act,

 

    the issuance of the Primary Shares, and

 

    the issuance of the Warrant and the underlying Warrant Shares thereunder to Delta are not approved by our shareholders by reason of the failure to obtain the required vote at the special meeting; and

 

    by us if Delta’s financial statements required to be delivered prior to the Closing reflect information that was not previously made available to us and would cause a Material Adverse Effect on the Business.

 

For the purposes of the Asset Purchase Agreement, a “Triggering Event” means if:

 

    our Board of Directors or any committee thereof shall for any reason have withdrawn or shall have amended or modified in a manner adverse to Delta, its unanimous recommendation to our shareholders to vote in favor of the proposals set forth herein;

 

    we failed to include such unanimous recommendation in this proxy statement;

 

    our Board of Directors or any committee thereof shall have approved or recommended any Acquisition Proposal; or

 

    a tender or exchange offer relating to our securities shall have been commenced by a person unaffiliated with us and our Board of Directors did not timely send to our shareholders a statement disclosing that our Board of Directors recommends rejection of such tender or exchange offer.

 

Expenses and Termination Fee

 

If the transactions contemplated hereby are not consummated, except as set forth below, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses.

 

If the transactions contemplated by the Asset Purchase Agreement are consummated, we will pay:

 

    up to $100,000 of the fees and expenses incurred by Delta (including attorneys’ fees and accountant fees) in connection with its negotiation, execution and delivery of the Asset Purchase Agreement, plus

 

36


Table of Contents
    one-half of the fees and expenses incurred by Delta (including fees incurred by Delta’s auditor) in connection with the preparation and delivery of financial statements to be delivered to us prior to the Closing.

 

In the event that the Asset Purchase Agreement is terminated by us, due to our receiving a Superior Offer, or by Delta, if a Triggering Event occurs, we will pay Delta a termination fee equal to $500,000.

 

Amendment

 

Subject to applicable law, the Asset Purchase Agreement may be amended by Delta and us at any time before or after approval of the various proposals by our shareholders at the special meeting; provided, after any such approval by our shareholders, no amendment shall be made which by law or in accordance with the rules of any relevant stock exchange requires further approval by our shareholders, without such further shareholder approval.

 

The Voting Agreement

 

Concurrently with the execution of the Asset Purchase Agreement, we also entered into a voting agreement (the “Voting Agreement”) with Delta and certain of our significant shareholders to be effective as of Closing, whereby Delta and each such shareholder (collectively, the “Voting Agreement Shareholders”) have agreed to vote all of the shares of our common stock beneficially owned by such Voting Agreement Shareholder at any PECO II shareholder meeting or by any consensual action:

 

    in favor of electing, in the case of Delta, the individual designated by Delta to stand for election to serve on our Board of Directors; and

 

    in favor of electing, in the case of PECO II, the individuals nominated by our Board of Directors to stand for election to serve on our Board of Directors.

 

In addition, the Voting Agreement provides that during the term of the agreement, Delta shall have the right to designate a representative to serve as a board observer and attend all meetings of our Board of Directors, subject to the right of our Board of Directors to exclude the board observer from any meeting under certain circumstances.

 

The Voting Agreement terminates upon the earlier of:

 

    the written agreement of Delta and us;

 

    the date Delta, or any of its affiliates (other than PECO II), no longer holds shares of our common stock or rights to purchase such shares, representing at least 5% of our outstanding voting stock;

 

    the date Delta (alone, or together with any of its affiliates (other than PECO II)) holds 45% or greater of our then issued and outstanding voting capital stock; and

 

    the consummation of:

 

    any tender offer, exchange offer, merger, consolidation or other business combination of PECO II the result of which is that PECO II shareholders (other than Delta and its affiliates in the case of a tender offer) immediately preceding such transaction hold less than 50% of the equity interests in the surviving or resulting entity of such transaction (or any direct or indirect parent or subsidiary thereof), or

 

    the sale of all or substantially all of our assets.

 

There is no shared voting power pursuant to the terms of the Voting Agreement.

 

37


Table of Contents

The Supply Agreement

 

As a condition to the consummation of the transactions contemplated by the Asset Purchase Agreement, at the Closing, we will enter into a supply agreement (the “Supply Agreement”) with DEI (an affiliate of Delta), pursuant to which DEI will grant to us the right to purchase and incorporate DEI modules into our systems and to market, promote, sell and distribute DEI modules, PECO systems and/or DEI systems to our customers in the U.S. and Canadian markets. The rights described above shall be exclusive to us for a period of 24 months from the Closing of the transactions contemplated by the Asset Purchase Agreement. The term of the Supply Agreement is 30 months. The Supply Agreement also provides that DEI and our Company expect to engage in joint exploration and discussions with respect to system-level design and component-level design.

 

In connection with approving the transactions contemplated by the Asset Purchase Agreement, our Board of Directors considered the benefits of entering into the Supply Agreement. Our Board of Directors considered that the Supply Agreement will provide us with access to DEI’s manufacturing capabilities, which is expected to reduce our costs of goods sold, and we will gain access to new customers in addition to new markets with existing customers.

 

The Registration Rights Agreement

 

As a condition to the consummation of the transactions contemplated by the Asset Purchase Agreement, at the Closing, we will enter into a registration rights agreement (the “Registration Rights Agreement”) with Delta under which we will be obligated to file a shelf registration statement to cover the potential resale by Delta of the Primary Shares and the Warrant Shares. We will be obligated to keep the shelf registration statement continuously effective until either all the Primary Shares and Warrant Shares have been sold pursuant to Rule 144 or pursuant to an effective registration statement, or may be sold without volume restrictions pursuant to Rule 144.

 

38


Table of Contents

Proposal 1

 

Amendment to the Amended and Restated Code of Regulations of PECO II, Inc. to Opt Out of the Ohio Control Share Acquisition Act

 

Proposal 1 is to approve and adopt an amendment to the Amended and Restated Code of Regulations of PECO II, Inc., providing that the Ohio Control Share Acquisition Act shall not apply to acquisitions of its equity securities.

 

Overview

 

Our Board of Directors has approved a resolution to amend our Amended and Restated Code of Regulations, which, if adopted, would make an Ohio anti-takeover statute, referred to herein as the “Ohio Control Share Acquisition Act,” inapplicable to the acquisition of our Company’s equity securities. The full text of the proposed amendment is contained in Article X of our proposed Second Amended and Restated Code of Regulations, attached hereto as Appendix A. Our Board of Directors unanimously recommends a vote for the proposed amendment.

 

Reasons for the Proposed Amendment

 

The adoption of the proposed amendment will facilitate the consummation of the transactions contemplated by the Asset Purchase Agreement. Without the amendment, the granting of the irrevocable proxy under the Support Agreement to the Delta designees to vote the shares of our common stock beneficially owned by Mr. Green in favor of the proposals to be voted on by the shareholders at the special meeting will be deemed to be “interested shares” under the Ohio Control Share Acquisition Act and, accordingly, may not be counted for purposes of voting at the special shareholders meeting. The Support Agreement was negotiated by Delta and us as part of the overall negotiations of the transactional documents and the execution of the Support Agreement by us, and Messrs. Smith and Green was an inducement for Delta to enter into the Asset Purchase Agreement. While we have called this special meeting, at which our shareholders will consider, among other things, the issuance of the Primary Shares and the issuance of the Warrant and underlying Warrant Shares, special meetings of shareholders required by the Ohio Control Share Acquisition Act are subject to certain procedures, including proxy counting requirements, that are complex, time consuming and, in this instance, not beneficial to the interests of our Company. If our shareholders do not approve Proposal 1, a condition to the closing of the transactions contemplated by the Asset Purchase Agreement will not be met and Delta may terminate the Asset Purchase Agreement.

 

In addition, with respect to the proposed transactions contemplated by the Asset Purchase Agreement and the absence of an opt out of the Ohio Control Share Acquisition Act, we will be required to follow certain complex statutory procedures that will ultimately serve to delay and increase the cost of the acquisition. Among these procedures is the requirement for an additional special meeting of shareholders at which the shareholders would be asked to approve the issuance of the Warrant Shares at such time or times that Delta may exercise its purchase rights.

 

Even if we were to obtain shareholder approval in connection with the Ohio Control Share Acquisition Act, the approved transactions must be consummated within 12 months of shareholder approval; thus, we would be unable to issue a warrant to Delta with a term longer than 12 months without obtaining subsequent shareholder approval. Thus, we need the amendment to allow us to issue the Warrant without subsequent shareholder approval.

 

Summary of the Ohio Control Share Acquisition Act

 

In November 1982, the Ohio General Corporation Law was amended to include the “Control Share Acquisition Act,” which requires that “control share acquisitions” be approved by shareholders of an issuing public corporation.

 

39


Table of Contents

The Ohio Control Share Acquisition Act gives shareholders who are not holders of “interested shares” a veto power over certain acquisitions of shares of an “issuing public corporation.” An “issuing public corporation” is a corporation with 50 or more shareholders that has in Ohio:

 

    its principal place of business;

 

    its principal executive offices;

 

    assets having substantial value; or

 

    a substantial percentage of its assets.

 

It also must not have a valid close corporation agreement in place.

 

Under the Ohio Control Share Acquisition Act, a “control share acquisition” is a direct or indirect acquisition by any person or entity of such number of voting shares of a corporation which, when added to those shares which the person or entity already owns or with respect to which the person or entity may exercise or direct the exercise of the voting power, would give the person or entity voting power within any of the following ranges:

 

    one-fifth or more but less than one-third of such voting power;

 

    one-third or more but less than a majority of such voting power; or

 

    a majority or more of such voting power.

 

A person or entity who proposes to make a control share acquisition must provide notice of the proposal to the corporation in accordance with specific requirements. The board of directors must then call a special meeting of the shareholders within 50 days for the purpose of voting on the proposed control share acquisition. A quorum for this meeting is achieved only if there is present at the meeting, in person or by proxy, a majority of the voting power of the corporation in the election of directors, and a majority of the portion of such voting power excluding the voting power of “interested shares.”

 

“Interested shares” are those shares of the corporation in respect of which any of the following persons may exercise or direct the exercise of the voting power of the corporation in the election of directors:

 

    the acquiring person;

 

    any officer of the corporation elected or appointed by the directors of the corporation; or

 

    any employee of the corporation who is also a director of the corporation.

 

“Interested shares” include any shares of the corporation acquired, directly or indirectly, by any person from the holder or holders thereof for a valuable consideration during the period beginning with the date of the first public disclosure of a proposed control share acquisition of the corporation or any proposed merger, consolidation, or other transaction that would result in a change in control of the corporation or in the sale of all or substantially all of its assets, and ending on the date of any special meeting of the corporation’s shareholders held thereafter for the purpose of voting on a control share acquisition proposed by an acquiring person if either of the following applies: the aggregate consideration paid or given by the person who acquired the shares, and any other persons acting in concert with him, for all such shares exceeds $250,000, or the number of shares acquired by the person who acquired the shares, and any other persons acting in concert with him, exceeds one-half of one percent of the outstanding shares entitled to vote in the election of directors.

 

A proposed control share acquisition may be consummated only if, at a special meeting of the shareholders at which at least a majority of the voting power is represented in person or by proxy, the acquisition is approved by both holders of a majority of the voting power of the corporation in the election of directors represented at the meeting by person or by proxy, and holders of a majority of the portion of such voting power excluding the

 

40


Table of Contents

voting power of interested shares. A proposed control share acquisition which receives approval in the manner described must be consummated, in accordance with the terms so authorized, no later than 360 days following shareholder authorization of the control share acquisition. The Ohio Control Share Acquisition Act does not apply to a corporation whose articles of incorporation or code of regulations provides that it does not apply.

 

Vote Required

 

The affirmative vote of the holders of a majority of the outstanding shares of our common stock is required to approve this proposal.

 

Our Board of Directors Unanimously Recommends a Vote “FOR” Proposal 1.

 

Proposal 2

 

The Issuance of the Primary Shares

 

Description of the Asset Purchase

 

On October 13, 2005, we entered into an Asset Purchase Agreement with Delta pursuant to which we will acquire certain exclusive rights and certain business assets and inventory and will assume certain liabilities associated therewith of Delta’s U.S. and Canadian service provider business, in exchange for the issuance to Delta of the Primary Shares and the issuance of the Warrant and the underlying Warrant Shares.

 

Description of the Primary Shares to be Issued

 

Pursuant to the terms of the Asset Purchase Agreement, at the Closing we will issue to Delta 4,740,375 shares of common stock without par value, free and clear of any encumbrance by us and with no restriction on the voting rights or transfer thereof except as provided for by applicable law, the Voting Agreement and Registration Rights Agreement set forth as exhibits to the Asset Purchase Agreement. There are no preemptive rights with respect to the Primary Shares. The issuance of the Primary Shares will have the effect of diluting your ownership in our Company.

 

Vote Required

 

The affirmative vote of the holders of a majority of the shares of our common stock voting in person or by proxy at the special meeting is required to approve this proposal.

 

Our Board of Directors Unanimously Recommends a Vote “FOR” the Issuance of the Primary Shares.

 

Proposal 3

 

The Issuance of the Warrant and the Underlying Warrant Shares

 

Description of the Asset Purchase

 

On October 13, 2005, we entered into an Asset Purchase Agreement with Delta pursuant to which we will acquire certain exclusive rights and certain business assets and inventory and will assume certain liabilities associated therewith of Delta’s U.S. and Canadian service provider business, in exchange for the issuance to Delta of the Primary Shares and the issuance of the Warrant and the underlying Warrant Shares.

 

41


Table of Contents

Description of the Warrant and Warrant Shares to be Issued

 

Pursuant to the terms of the Asset Purchase Agreement and the Warrant, at the Closing we will issue to Delta a Warrant to purchase that number of Warrant Shares which, when aggregated with the Primary Shares, will permit Delta to acquire up to 45% of our issued and outstanding capital stock measured as of five business days prior to the date of exercise of the Warrant.

 

The formula for determining the number of Warrant Shares is: (i) the quotient of (A) the Outstanding Shares (as defined below) minus the Primary Shares issued at Closing, divided by (B) 0.55, minus (ii) the Outstanding Shares (rounded to the nearest whole share). Currently, we anticipate the maximum number of Warrant Shares to be issued under the Warrant is 12,928,297; however, if we issue additional shares of our common stock, this number will increase. The exercise price under the Warrant is $2.00 per share, and the Warrant is exercisable for a term of 30 months from the issuance date of the Warrant. The Warrant is subject to customary adjustments for subdivisions, combinations and certain issuances, reclassifications, reorganizations and consolidations. The issuance of any Warrant Shares will have the effect of diluting your ownership in our Company.

 

For purposes of the Warrant, the term “Outstanding Shares” means all issued and outstanding shares of our capital stock measured as of the date that is five days before the date of exercise of the Warrant.

 

Vote Required

 

The affirmative vote of the holders of a majority of our shares common stock voting in person or by proxy at the special meeting is required to approve this proposal.

 

Our Board of Directors Unanimously Recommends a Vote “FOR” the Issuance of the Warrant and the Warrant Shares.

 

Proposal 4

 

Permission of Board of Directors to Adjourn Special Meeting

 

Proposal to Permit Adjournment of Special Meeting

 

The proposals set forth in this proxy statement are conditions precedent to the closing of the transactions contemplated by the Asset Purchase Agreement. Our Board of Directors believes each of the proposals are in the best interest of our Company and our shareholders. Accordingly, our Board of Directors is seeking shareholder approval to adjourn the special meeting, if necessary, to solicit additional proxies because there are not sufficient votes available at the special meeting to approve the proposals set forth in the proxy statement.

 

Vote Required

 

The affirmative vote of the holders of a majority of the shares of PECO II common stock voting in person or by proxy at the special meeting is required to approve this proposal.

 

Our Board of Directors Unanimously Recommends a Vote “FOR” the Proposal to Allow the Board to Adjourn the Special Meeting.

 

*  *  *

 

Please note that our shareholders must approve each of Proposals 1, 2 and 3 for the transactions contemplated by the Asset Purchase Agreement to close.

 

42


Table of Contents

Share Ownership of Principal Holders and Management

 

The following table shows information regarding beneficial ownership of our common shares as of September 30, 2005, unless otherwise indicated, by each person or group which is known by us to own beneficially more than 5% of our common shares, each director, each named executive officer, and all directors and executive officers as a group. Unless otherwise indicated, each person named below has sole voting power and investment power or shares this power with his or her spouse with respect to the number of shares set forth opposite his or her respective name.

 

The number of shares beneficially owned by each shareholder is determined under rules issued by the Securities and Exchange Commission. This information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after September 30, 2005 through the exercise of any stock option or other right.

 

Name and Address of Beneficial Owner(1)


   Common Shares
Beneficially Owned


   Percent
Owned


 

Austin W. Marxe and David M. Greenhouse(2)

   1,547,462    7.2 %

Matthew P. Smith(3)

   3,000,857    13.8 %

Linda H. Smith(4)

   2,923,950    13.5 %

James L. Green(5)

   2,504,344    11.5 %

Mary Janet Green(6)

   2,252,200    10.4 %

John G. Heindel(7)

   150,000    *  

Sandra A. Frankhouse(8)

   218,812    1.0 %

Miles A. McIntosh(9)

   240,750    1.1 %

E. Richard Hottenroth(10)

   111,727    *  

Trygve A. Ivesdal(11)

   142,767    *  

Eugene V. Smith(12)

   505,052    2.3 %

George J. Dallas(13)

   5,000    *  

Mark R. McBride(14)

   5,000    *  

R. Louis Schneeberger(15)

   5,000    *  

Thomas R. Thomsen(16)

   5,000    *  

All directors and executive officers as a group (13 persons)(17)

   6,980,358    30.9 %

 * Less than 1%.
(1) The address of Austin W. Marxe and David M. Greenhouse is 153 East 53rd Street, 55th Floor, New York, NY 10022. The address of the directors and executive officers listed is c/o PECO II, Inc., 1376 State Route 598, Galion, OH 44833.
(2) Based on the Schedule 13G/A filed on February 11, 2005, by Austin W. Marxe and David M Greenhouse, controlling principals of AWM Investment Company, Inc. Messrs. Marxe and Greenhouse share voting and investment power over 547,508 common shares owned by Special Situations Cayman Fund, L.P., and 999,954 common shares owned by Special Situations Fund III, L.P.
(3) Mr. Smith is a director of PECO II. Mr. Smith’s ownership includes 1,309,950 shares held by Mr. Smith and his spouse as joint tenants, 1,000,000 common shares held by Ashwood I, LLC and 500,000 common shares held by Ashwood II, LLC. Mr. Smith has shared voting and dispositive power over the securities held by these limited liability companies. Mr. Smith’s ownership also includes 106,500 common shares held by Mr. Smith, as custodian for his three children and 76,907 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options. Mr. Smith’s ownership does not include 7,500 shares held by Mr. Smith’s spouse, as custodian for their three children.
(4)

Ms. Smith’s ownership includes 1,309,950 common shares held by Ms. Smith and her spouse as joint tenants, 1,000,000 common shares held by Ashwood I, LLC, and 500,000 common shares held by Ashwood II, LLC. Ms. Smith has shared voting and dispositive power over the securities held by these limited liability

 

43


Table of Contents
 

companies. Ms. Smith’s ownership also includes 7,500 common shares held by Ms. Smith, as custodian for her three children. Ms. Smith’s ownership does not include 106,500 common shares held by Ms. Smith’s spouse, as custodian for their three children.

(5) Mr. Green is a director and our Chairman of the Board of Directors. Mr. Green’s ownership includes 2,252,200 common shares held by the Green Family Trust over which he shares voting and dispositive power. Mr. Green’s ownership also includes 252,144 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(6) Ms. Green’s ownership includes 2,252,200 common shares held by the Green Family Trust, over which she shares voting and dispositive power.
(7) Mr. Heindel is our President and Chief Executive Officer. Mr. Heindel’s ownership includes 150,000 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(8) Ms. Frankhouse is our Chief Financial Officer, Treasurer, and Secretary. Ms. Frankhouse’s ownership includes 92,144 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(9) Mr. McIntosh is our Vice President of Power Systems. Mr. McIntosh’s ownership includes 240,750 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(10) Mr. Hottenroth is a director of PECO II. Mr. Hottenroth’s ownership includes 6,477 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options. Mr. Hottenroth’s ownership does not include 65,000 common shares held by his spouse.
(11) Mr. Ivesdal is a director of PECO II. Mr. Ivesdal’s ownership includes 104,509 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(12) Mr. Smith is a director of PECO II. Mr. Smith’s ownership includes 177,075 common shares held by Fairbrandt, LLC. Mr. Smith has voting and dispositive power over the securities held by this limited liability company. Mr. Smith’s ownership also includes 6,477 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options. Mr. Smith’s ownership does not include 195,500 common shares held by his spouse.
(13) Mr. Dallas is a director of PECO II. Mr. Dallas’s ownership includes 5,000 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(14) Mr. McBride is a director of PECO II. Mr. McBride’s ownership includes 5,000 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(15) Mr. Schneeberger is a director of PECO II. Mr. Schneeberger’s ownership includes 5,000 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(16) Mr. Thomsen is a director of PECO II. Mr. Thomsen’s ownership includes 5,000 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.
(17) Ownership of all directors and executive officers as a group includes an aggregate of 1,029,408 common shares issuable within 60 days after September 30, 2005 upon the exercise of stock options.

 

44


Table of Contents

Independent Accountants

 

Our independent accountants will be in attendance at the special meeting.

 

Shareholder Proposals

 

Any shareholder proposal to be considered by us for inclusion in the proxy statement and form of proxy for the 2006 annual meeting, expected to be held in April 2006, must be received by our Secretary at our corporate headquarters, 1376 State Route 598, Galion, Ohio 44833, no later than January 2, 2006.

 

Shareholder proposals not intended to be included in the proxy statement and form of proxy for the 2006 annual meeting, as well as proposed shareholder nominations for the election of directors at the 2006 annual meeting must each comply with advance notice procedures set forth in our amended and restated code of regulations to be properly brought before the 2006 annual meeting. In general, written notice of a shareholder proposal or a director nomination not to be included in the proxy statement and form of proxy must be delivered to our Secretary not less than 60 days nor more than 90 days prior to the first anniversary of the date on which the company first mailed our proxy materials for the prior year’s annual meeting. With regard to the 2006 Annual Meeting of Shareholders, written notice must be received by our Secretary at the address above between February 1, 2006 and March 3, 2006. If we do not receive the notice between these dates, the notice will be considered untimely.

 

In addition to timing requirements, the advance notice provisions of our Amended and Restated Code of Regulations contain informational content requirements that also must be met. A copy of our Amended and Restated Code of Regulations may be obtained by writing to our Secretary at the address below.

 

Other Business

 

We do not expect other business to be transacted at the special meeting.

 

Where You Can Find More Information

 

The Securities and Exchange Commission allows us to “incorporate by reference” information into this proxy statement, which means that important business and financial information about us can be disclosed to you by referring you to another document filed separately with the Securities and Exchange Commission. The information incorporated by reference is considered part of this proxy statement, except for any information superseded by information contained directly in this proxy statement or in any document that we later files with the Securities and Exchange Commission.

 

This proxy statement incorporates by reference the documents set forth below that we have previously filed with the Securities and Exchange Commission. These documents contain important business and financial information about us. In addition, we have attached the following documents as appendices to this proxy statement/prospectus.

 

PECO II SEC Filings


  

Period and Date Filed


Annual Report on Form 10-K    Year ended December 31, 2004 (filed March 31, 2005).
Quarterly Reports on Form 10-Q    Quarter ended March 31, 2005 (filed May 13, 2005); Quarter ended June 30, 2005 (filed August 12, 2005).

 

45


Table of Contents

If you are a shareholder, we may have sent you some of the documents incorporated by reference, but you can obtain any of them through us, the Securities and Exchange Commission, or the Securities and Exchange Commission’s Internet web site as set forth below. You may obtain documents we incorporate by reference from us without charge, other than exhibits, except for those that we have specifically incorporated by reference in this proxy statement. Shareholders may obtain documents incorporated by reference in this proxy statement by requesting them in writing or by telephone from us at the following address:

 

PECO II, Inc.

Investor Relations Department

1376 STATE ROUTE 598

GALION, OHIO 44833

(419) 468-7600

 

If you would like to request documents, please do so by [·], to receive the documents before the special meeting. We will send you any of these documents within one business day of your request by first class mail.

 

You may read and copy this information at the Public Reference Room of the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Securities and Exchange Commission’s Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains an internet web site that contains reports, proxy statements and other information about issuers, such as PECO II, who file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. Except as specifically incorporated by reference into this proxy statement, information on the Securities and Exchange Commission’s web site is not part of this proxy statement.

 

46


Table of Contents

Appendix A

 

PROPOSED SECOND AMENDED AND RESTATED

CODE OF REGULATIONS

OF

PECO II, INC.

 

Adopted                     

 

ARTICLE I

FISCAL YEAR

 

The fiscal year of the Corporation shall be such period as the Board of Directors may designate by resolution from time to time.

 

ARTICLE II

SHAREHOLDERS

 

Section 1.  Meetings of Shareholders

 

(a) Annual Meeting. The annual meeting of Shareholders of this Corporation, for the election of Directors, the consideration of financial statements for the most recently concluded fiscal year and other reports, and the transaction of such other business as may properly be brought before such meeting, shall be held at such date after the annual financial statements of the Corporation have been prepared as the Board of Directors shall determine from time to time. Upon due notice there may also be considered and acted upon at an annual meeting any matter which could properly be considered and acted upon at a special meeting, in which case and for which purpose the annual meeting shall also be considered as, and shall be, a special meeting. In the event that the annual meeting is not held or if Directors are not elected thereat, a special meeting may be called and held for that purpose.

 

(b) Special Meeting. Special meetings of the Shareholders may be held on any business day when called at any time by (i) the Chairman of the Board, (ii) the President, (iii) the Directors, by action at a meeting, or a majority of the Directors acting without a meeting, or (iv) the holders of one-half or more of the outstanding shares of the Corporation entitled to vote thereat. Calls for special meetings shall specify the purpose or purposes thereof, and no business shall be considered at any such meeting other than that specified in the call therefor.

 

(c) Place of Meetings. Any meeting of Shareholders may be held at such place within or without the State of Ohio as may be designated in the notice of said meeting.

 

(d) Notice of Meeting and Waiver of Notice.

 

(1) Notice. Written notice of the time, place and purposes of any meeting of shareholders shall be given to each Shareholder entitled thereto not less than seven (7) days nor more than sixty (60) days before the date fixed for the meeting and as prescribed by law. Such notice shall be given either by personal delivery or by mail to each Shareholder entitled to notice of or to vote at such meeting. If such notice is mailed, it shall be directed, postage prepaid, to the Shareholders at their respective addresses as they appear upon the records of the Corporation, and notice shall be deemed to have been given on the day so mailed. If any meeting is adjourned to another time or place, no notice as to such adjourned meeting need be given other than by announcement at the meeting at which such an adjournment is taken. No business shall be transacted at any such adjourned meeting except as might have been lawfully transacted at the meeting at which such adjournment was taken.

 

A-1


Table of Contents

(2) Notice to Joint Owners. All notices with respect to any shares to which persons are entitled by joint or common ownership may be given to that one of such persons who is named first upon the books of this Corporation, and notice so given shall be sufficient notice to all the holders of such shares.

 

(3) Waiver. Notice of any meeting, however, may be waived in writing by any Shareholder either before or after any meeting of Shareholders, or by attendance at such meeting without protest prior to the commencement thereof.

 

(e) Shareholders Entitled to Notice and to Vote. If a record date shall not be fixed or the books of the Corporation shall not be closed against transfers of shares pursuant to statutory authority, the record date for the determination of Shareholders entitled to vote at any meeting of Shareholders shall be the date next preceding the day on which notice is given or the date next preceding the day on which the meeting is held, as the case may be, and only Shareholders of record as of the close of business on such record date shall be entitled to vote at such meeting. Such record date shall continue to be the record date for all adjournments of such meeting unless a new record date shall be fixed and notice thereof and of the date of the adjourned meeting be given to all Shareholders entitled to notice in accordance with the new record date so fixed.

 

(f) Quorum. At any meeting of Shareholders, the holders of shares entitling them to exercise a majority of the voting power of the Corporation, present in person or by proxy, shall constitute a quorum for such meeting; provided, however, that no action required by law, the Articles of Incorporation or this Code of Regulations to be authorized or taken by the holders of a designated proportion of the shares of the Corporation may be authorized or taken by a lesser proportion. The Shareholders present in person or by proxy, whether or not a quorum be present, may adjourn the meeting from time to time without notice other than by announcement at the meeting.

 

(g) Organization of Meetings.

 

(1) Presiding Officer. The Chairman of the Board, or, in his or her absence, the President, or in the absence of both of them, a Vice President of the Corporation shall call all meetings of the Shareholders to order and shall act as Chairman thereof. If all are absent, the Shareholders shall select a Chairman.

 

(2) Minutes. The Secretary of the Corporation, or, in his or her absence, an Assistant Secretary, or, in the absence of both, a person appointed by the Chairman of the meeting, shall act as Secretary of the meeting and shall keep and make a record of the proceedings thereat.

 

(h) Order of Business. The order of business at all meetings of the Shareholders shall be as determined by the Chairman of the meeting.

 

(i) Notice of Shareholder Proposals of Business. Notice of Shareholder Proposals of Business. No business may be transacted at an annual meeting of Shareholders, other than business that is either (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (ii) otherwise properly brought before the annual meeting by or at the direction of the Board (or any duly authorized committee thereof), or (iii) otherwise properly brought before the annual meeting by any Shareholder of the Corporation (A) who is a Shareholder of record on the date of the giving of the notice provided for in this Section 1(i) of Article II and on the record date for the determination of Shareholders entitled to vote at such annual meeting and (B) who complies with the notice procedures set forth in this Section 1(i) of Article II. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a Shareholder, such Shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a Shareholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) nor more than ninety (90) calendar days prior to the date on which the Corporation first mailed its proxy materials for the prior year’s annual meeting of Shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) calendar days before or after the anniversary of the prior year’s annual meeting, notice by the Shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) calendar day following the day on which public disclosure of the date of

 

A-2


Table of Contents

the annual meeting was made. In no event will the public disclosure of an adjournment of an annual meeting commence a new time period for the giving of a Shareholder’s notice as described above. For purposes of the foregoing, the date on which the Corporation first mailed its proxy materials to Shareholders will be the date so described in such proxy materials.

 

To be in the proper written form, a Shareholder’s notice to the Secretary must set forth as to each matter such Shareholder proposes to bring before the annual meeting (i) a description in reasonable detail of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such Shareholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such Shareholder, (iv) a description of all arrangements or understandings between such Shareholder and any other person or persons (including their names) in connection with the proposal of such business by such Shareholder and any material interest of such Shareholder in such business, and (v) a representation that such Shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. Notwithstanding the foregoing provisions of this Code of Regulations, a Shareholder must also comply with all the applicable requirements of the Securities and Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 1(i) of Article II. Nothing in this Section 1(e) of Article II will be deemed to affect any rights of Shareholders to request inclusion of proposals in the proxy statement of the Corporation pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934, as amended.

 

If the Chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the Chairman will declare to the meeting that the business was not properly brought before the meeting and such business will not be transacted.

 

(j) Voting. Except as provided by law or in the Articles of Incorporation, every Shareholder entitled to vote shall be entitled to cast one vote on each proposal submitted to the meeting for each share held of record by him or her on the record date for the determination of the Shareholders entitled to vote at the meeting. At any meeting at which a quorum is present, all questions and business which may come before the meeting shall be determined by a majority of votes cast, except when a greater proportion is required by law, the Articles of Incorporation or this Code of Regulations.

 

(k) Proxies. A person who is entitled to attend a Shareholders’ meeting, to vote thereat, or to execute consents, waivers and releases, may be represented at such meeting or vote thereat, and execute consents, waivers and releases, and exercise any of his or her rights, by proxy or proxies appointed by a writing signed by such person, or by his or her duly authorized attorney, or appointed by a verifiable communication authorized by the person, or his or her duly authorized attorney, as provided by the laws of the State of Ohio.

 

(l) List of Shareholders. At any meeting of Shareholders a list of Shareholders, alphabetically arranged, showing the number and classes of shares held by each on the record date applicable to such meeting shall be produced on the request of any Shareholder.

 

Section 2.  Action of Shareholders Without a Meeting.

 

Any action which may be taken at a meeting of Shareholders may be taken without a meeting if authorized by a writing or writings signed by all of the holders of shares who would be entitled to notice of a meeting for such purpose, which writing or writings shall be filed or entered upon the records of the Corporation.

 

A-3


Table of Contents

ARTICLE III

DIRECTORS

 

Section 1.  General Powers.

 

The business, power and authority of this Corporation shall be exercised, conducted and controlled by a Board of Directors, except where the law, the Articles of Incorporation or this Code of Regulations require action to be authorized or taken by the Shareholders.

 

Section 2.  Election, Number, Qualification and Nomination of Directors.

 

(a) Election. The Directors of the appropriate class shall be elected (i) by the Shareholders at the annual meeting of Shareholders, or if not so elected, at a special meeting of Shareholders called for that purpose or (ii) by the Directors as provided in Article V of the Articles of Incorporation. At any meeting of Shareholders at which Directors are to be elected, only persons nominated as candidates shall be eligible for election, and the candidates receiving the greatest number of votes shall be elected.

 

(b) Number. The Board of Directors shall have a minimum of three (3) and a maximum of fifteen (15) members, the number within such limits to be fixed from time to time by resolution of the Board adopted by the affirmative vote of a majority of the entire Board.

 

(c) Qualification. Directors need not be Shareholders of the Corporation.

 

(d) Nominations. Only persons who are nominated in accordance with the following procedures will be eligible for election as Directors of the Corporation. Nominations of persons for election to the Board of Directors may be made at any annual meeting of Shareholders (i) by or at the direction of the Board (or any duly authorized committee thereof) or (ii) by any Shareholder of the Corporation (A) who is a Shareholder of record on the date of the giving of the notice provided for in this Section 2(d) of Article III and on the record date for the determination of Shareholders entitled to vote at such annual meeting and (B) who complies with the notice procedures set forth in this Section 2(d) of Article III. In addition to any other applicable requirements, for a nomination to be made by a Shareholder, such Shareholder must have given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a Shareholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) nor more than ninety (90) calendar days prior to the date on which the Corporation first mailed its proxy materials for the prior year’s annual meeting of Shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) calendar days before or after the anniversary of the prior year’s annual meeting, notice by the Shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) calendar day following the day on which public disclosure of the date of the annual meeting was made; provided, further, in the case of a special meeting of Shareholders called for the purpose of electing Directors, notice by the Shareholder in order to be timely must be received no later that the close of business on the tenth (10th) calendar day following the date on which notice of the date of the special meeting was mailed to Shareholders or public disclosure of the date of the special meeting was made, whichever occurs first. In no event will the public disclosure of an adjournment of an annual meeting or a special meeting commence a new time period for the giving of a Shareholder’s notice as described above. For purposes of the foregoing, the date on which the Corporation first mailed its proxy materials to Shareholders will be the date so described in such proxy materials.

 

To be in the proper written form, a Shareholder’s notice to the Secretary must set forth (i) as to each person whom the Shareholder proposes to nominate for election as a Director (A) the name, age, business address and residence address of the person, (B) the principal occupation or employment of the person, (C) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person, and (D) any other information relating to the person that would be required to be disclosed in a proxy statement

 

A-4


Table of Contents

or other filings required to be made in connection with solicitations of proxies for election of Directors pursuant to Section 14 of the Securities Exchange Act of 1934 and the rules and regulations thereunder (“Section 14 of the Exchange Act”), or any successor or replacement provision with respect thereto, including, without limitation, such person’s written consent to being a nominee and to serve as a Director if elected; and (ii) as to the Shareholder giving notice (A) the name and record address of such Shareholder, (B) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such Shareholder, (C) a description of all arrangements or understandings between or among such Shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such Shareholder, (D) a representation that such Shareholder intends to appear in person or by proxy at the meeting to nominate the persons in its notice, and (E) any other information relating to such Shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of Directors pursuant to Section 14 of the Exchange Act. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a Director if elected.

 

If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman will declare to the meeting that the nomination was defective and such defective nomination will be disregarded.

 

Section 3.  Meetings of Directors.

 

(a) Regular Meetings. A regular meeting of the Board of Directors shall be held immediately following the adjournment of the annual meeting of Shareholders or a special meeting of Shareholders at which Directors are elected. The holding of such Shareholders’ meeting shall constitute notice of such Directors’ meeting and such meeting may be held without further notice. Other regular meetings shall be held at such other times and places as may be fixed by the Directors.

 

(b) Special Meetings. Special Meetings. Special meetings of the Board of Directors may be held at any time upon call of the Chairman of the Board, the President, any Vice President or any two Directors.

 

(c) Place of Meeting. Any meeting of Directors may be held at any place within or without the State of Ohio in person and/or through any communications equipment if all persons participating in the meeting can hear each other.

 

(d) Notice of Meeting and Waiver of Notice. Notice of the time and place of any regular or special meeting of the Board of Directors (other than the regular meeting of Directors following the adjournment of the annual meeting of Shareholders or following any special meeting of Shareholders at which Directors are elected) shall be given to each Director by personal delivery, telephone, mail, telegram or cablegram at least forty-eight (48) hours before the meeting, which notice need not specify the purpose of the meeting. Such notice, however, may be waived in writing by any Director either before or after any such meeting, or by attendance at such meeting (including attendance (presence) by means of participation through any communications equipment as above provided) without protest prior to the commencement thereof.

 

Section 4.  Quorum and Voting.

 

At any meeting of Directors, no fewer than one-half of the whole authorized number of Directors must be present, in person and/or through any communications equipment, to constitute a quorum for such meeting, except that a majority of the remaining Directors in office constitutes a quorum for filling a vacancy in the Board. At any meeting at which a quorum is present, all acts, questions and business which may come before the meeting shall be determined by a majority of votes cast by the Directors present at such meeting, unless the vote of a greater number is required by the Articles of Incorporation or this Code of Regulations.

 

A-5


Table of Contents

Section 5.  Committees.

 

(a) Appointment. The Board of Directors may from time to time appoint one or more of its members to act as a committee or committees in the intervals between meetings of the Board and may delegate to such committee or committees powers to be exercised under the control and direction of the Board. Each such committee and each member thereof shall serve at the pleasure of the Board.

 

(b) Executive Committee. In particular, the Board of Directors may create from its membership and define the powers and duties of an Executive Committee. During the intervals between meetings of the Board, the Executive Committee shall possess and may exercise all of the powers of the Board in the management and control of the business of the Corporation to the extent permitted by law. All action taken by the Executive Committee shall be reported to the Board at its first meeting thereafter.

 

(c) Committee Action. Unless otherwise provided by the Board of Directors, a majority of the members of any committee appointed by the Board pursuant to this Section 5 of Article III shall constitute a quorum at any meeting thereof and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of such committee. Action may be taken by any such committee without a meeting by a writing signed by all its members. Any such committee shall prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board, and shall keep a written record of all action taken by it.

 

Section 6.  Action of Directors Without a Meeting.

 

Any action which may be taken at a meeting of Directors may be taken without a meeting if authorized by a writing or writings signed by all the Directors, which writing or writings shall be filed or entered upon the records of the Corporation.

 

Section 7.  Compensation of Directors.

 

The Board of Directors may allow compensation for attendance at meetings or for any special services, may allow compensation to members of any committee, and may reimburse any Director for his or her expenses in connection with attending any Board or committee meeting.

 

Section 8.  Special Rules and Regulations.

 

The Board of Directors may adopt such special rules and regulations for the conduct of their meetings and the management of the affairs of the Corporation as they deem proper, not inconsistent with law or this Code of Regulations.

 

ARTICLE IV

OFFICERS

 

Section 1.  General Provisions.

 

The Board of Directors shall elect a President, a Secretary and a Treasurer, and may elect a Chairman of the Board, one or more Vice-Presidents and such other officers and assistant officers as the Board may from time to time deem necessary. The Chairman of the Board shall be a Director, but no other officer need be a Director. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required to be executed, acknowledged or verified by two or more officers.

 

A-6


Table of Contents

Section 2.  Powers and Duties.

 

All officers, as between themselves and the Corporation, shall respectively have such authority and perform such duties as are customarily incident to their respective offices, and as may be specified from time to time by the Board of Directors, regardless of whether such authority and duties are customarily incident to such office. In the absence of any officer of the Corporation, or for any other reason the Board may deem sufficient, the Board may delegate for the time being, the powers or duties of such officer, or any of them, to any other officer or to any Director. The Board may from time to time delegate to any officer authority to appoint and remove subordinate officers and to prescribe their authority and duties. Since the lawful purposes of this Corporation include the acquisition and ownership of real property, personal property and property in the nature of patents, copyrights and trademarks and the protection of the Corporation’s property rights in its patents, copyrights and trademarks, each of the officers of this Corporation is empowered to execute any power of attorney necessary to protect, secure or vest the Corporation’s interest in and to real property, personal property and its property protectable by patents, trademarks and copyright registration and to secure such patents, copyrights and trademark registrations.

 

Section 3.  Term of Office and Removal.

 

(a) Term. Each officer of the corporation shall hold office at the pleasure of the Board of Directors until his or her successor has been elected or until his or her earlier resignation, removal from office or death. It shall not be necessary for the officers of the corporation to be elected annually. The election or appointment of an officer for a given term, or a general provision in the Articles of Incorporation or this Code of Regulations with respect to term of office, shall not be deemed to create contract rights.

 

  (b) Removal. Any officer may be removed, with or without cause, by the Board of Directors.

 

  (c) Vacancies. The Board of Directors may fill any such vacancy in an office occurring for whatever reason.

 

Section 4.  Compensation of Officers.

 

Unless compensation is otherwise determined by a majority of the Directors at a regular or special meeting of the Board of Directors, or unless such determination is delegated by the Board to another officer or officers, the President of the Corporation from time to time shall determine the compensation to be paid to all officers and other employees for services rendered to the Corporation.

 

A-7


Table of Contents

ARTICLE V

SECURITIES HELD BY THE CORPORATION

 

Section 1.  Transfer of Securities Owned by the Corporation.

 

All endorsements, assignments, transfers, stock powers, share powers or other instruments of transfer of securities standing in the name of the Corporation shall be executed for and in the name of the Corporation by the President, by a Vice President, by the Secretary or by the Treasurer or by any other person or persons as may be thereunto authorized by the Board of Directors.

 

Section 2.  Voting Securities Held by the Corporation.

 

The Chairman of the Board, President, any Vice President, Secretary or Treasurer, in person or by another person thereunto authorized by the Board of Directors, in person or by proxy or proxies appointed by him, shall have full power and authority on behalf of the Corporation to vote, act and consent with respect to any securities issued by other corporations which the Corporation may own.

 

ARTICLE VI

SHARE CERTIFICATES

 

Section 1.  Transfer and Registration of Certificates.

 

The Board of Directors shall have authority to make such rules and regulations, not inconsistent with law, the Articles of Incorporation or this Code of Regulations, as it deems expedient concerning the issuance, transfer and registration of certificates for shares and the shares represented thereby and may appoint transfer agents and registrars thereof.

 

Section 2.  Substituted Certificates.

 

Any person claiming that a certificate for shares has been lost, stolen or destroyed, shall make an affidavit or affirmation of that fact and, if required, shall give the Corporation (and its registrar or registrars and its transfer agent or agents, if any) a bond of indemnity, in such form and with one or more sureties satisfactory to the Board of Directors, and, if required by the Board, shall advertise the same in such manner as the Board may require, whereupon a new certificate may be executed and delivered of the same tenor and for the same number of shares as the one alleged to have been lost, stolen or destroyed.

 

ARTICLE VII

SEAL

 

The Board of Directors may adopt a seal for the Corporation which shall be in such form and of such style as is determined by the Board. Failure to affix any such corporate seal shall not affect the validity of any instrument.

 

ARTICLE VIII

CONSISTENCY WITH ARTICLES OF INCORPORATION

 

If any provision of this Code of Regulations shall be inconsistent with the Articles of Incorporation (and as they may be amended from time to time), the Articles of Incorporation (as so amended at the time) shall govern.

 

A-8


Table of Contents

ARTICLE IX

SECTION HEADINGS

 

The headings contained in this Code of Regulations are for reference purposes only and shall not be construed to be part of and/or shall not affect in any way the meaning or interpretation of this Code of Regulations.

 

ARTICLE X

OPT-OUT OF OHIO CONTROL SHARE ACQUISITION ACT

 

None of the provisions of Sections 1701.01(Y) through 1701.01(CC) and Section 1701.831 of the Ohio Revised Code, relating to control share acquisitions, shall be applicable to this Corporation.

 

ARTICLE XI

AMENDMENTS

 

Except as set forth in the immediately succeeding sentence, this Code of Regulations may be amended or added to (i) at a meeting called for such purpose by the affirmative vote of the Shareholders of record entitled to exercise a majority of the voting power on such proposal, or (ii) by a writing or writings signed by all of the holders of shares who would be entitled to notice of a meeting for such purpose, provided, however, that if an amendment or addition is adopted by written consent without a meeting of Shareholders, it shall be the duty of the Secretary to enter the amendment or addition in the records of the Corporation. Any amendment or any new regulation which repeals, alters or in any way modifies or affects (i) the provisions of Article II relating to the actions of Shareholders without a meeting, (ii) the provisions of Article III relating to the number, classification, election and nomination of Directors or their respective terms of office, or (iv) the provisions of this Article X, shall require for adoption at a meeting held for such purpose the affirmative vote of the holders of shares entitling them to eighty percent of the voting power of the Corporation on such proposal.

 

A-9


Table of Contents

Appendix B

 

CONFIDENTIAL TREATMENT—Asterisked material has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

 

ASSET PURCHASE AGREEMENT

 

BY AND BETWEEN

 

DELTA PRODUCTS CORPORATION

 

As Seller

 

AND

 

PECO II, INC.

 

As Buyer

 

Dated as of October 13, 2005

 

B-1


Table of Contents

TABLE OF CONTENTS

 

         Page

ARTICLE I

 

DEFINITIONS

   B-7

ARTICLE II

 

THE TRANSACTION

   B-14

2.1

 

The Transaction

   B-14

2.2

 

Business Assets

   B-14

2.3

 

Excluded Assets

   B-14

2.4

 

Assumed Liabilities

   B-15

2.5

 

Excluded Liabilities

   B-15

2.6

 

The Closing

   B-15

2.7

 

Deliveries by Seller

   B-16

2.8

 

Deliveries by Buyer

   B-16

2.9

 

Inventory Adjustment

   B-17

2.10

 

Power Systems Upgrade Program

   B-18

2.11

 

Allocation of Consideration

   B-18

2.12

 

Further Assurances

   B-18

2.13

 

Bulk Sales Law

   B-19

2.14

 

Transfer Taxes

   B-19

ARTICLE III

 

REPRESENTATIONS AND WARRANTIES OF SELLER

   B-19

3.1

 

Organization, Qualification and Corporate Power

   B-19

3.2

 

Authorization of Transaction

   B-19

3.3

 

Noncontravention

   B-19

3.4

 

Litigation

   B-20

3.5

 

Inventory

   B-20

3.6

 

Undisclosed Liabilities

   B-20

3.7

 

Title to Business Assets

   B-20

3.8

 

No Infringement

   B-20

3.9

 

Business Contracts

   B-20

3.10

 

Taxes

   B-20

3.11

 

Employee Matters

   B-21

3.12

 

Labor Relations

   B-21

3.13

 

No Impairment

   B-21

3.14

 

Compliance with Laws

   B-21

3.15

 

Insurance

   B-21

3.16

 

Brokers’ Fees

   B-21

3.17

 

Investment Representations

   B-21

3.18

 

Representations Complete

   B-22

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES OF BUYER

   B-22

4.1

 

Organization and Corporate Power

   B-22

4.2

 

Authorization of Transaction

   B-22

4.3

 

Noncontravention

   B-22

4.4

 

Litigation

   B-23

4.5

 

Capitalization

   B-23

4.6

 

Subsidiaries

   B-23

4.7

 

SEC Filings; Financial Statements; Sarbanes-Oxley

   B-24

4.8

 

Undisclosed Liabilities; Absence of Changes

   B-25

4.9

 

Material Contracts

   B-25

4.10

 

Taxes

   B-26

4.11

 

Employee Benefit Plans

   B-26

 

B-2


Table of Contents

TABLE OF CONTENTS

(Continued)

 

         Page

4.12

 

Labor Relations

   B-27

4.13

 

Intellectual Property

   B-27

4.14

 

No Impairment

   B-28

4.15

 

Real Estate Matters

   B-28

4.16

 

Environmental Matters

   B-28

4.17

 

Compliance with Laws

   B-29

4.18

 

Brokers’ Fees

   B-29

4.19

 

Fairness Opinion

   B-29

4.20

 

Board Approval

   B-29

4.21

 

Vote Required

   B-29

4.22

 

State Takeover Statutes

   B-29

4.23

 

Export Control Laws

   B-29

4.24

 

Representations Complete

   B-30

ARTICLE V

 

COVENANTS

   B-30

5.1

 

Closing Efforts

   B-30

5.2

 

Regulatory Matters

   B-30

5.3

 

Operation of Business by Buyer

   B-30

5.4

 

Business Assets

   B-31

5.5

 

Buyer Consultation

   B-31

5.6

 

Proxy Statement

   B-31

5.7

 

Meeting of Shareholders

   B-32

5.8

 

Board Recommendation

   B-32

5.9

 

Acquisition Proposals

   B-33

5.10

 

Seller Exclusivity

   B-34

5.11

 

Notification of Certain Matters

   B-34

5.12

 

Access to Information

   B-35

5.13

 

Tax Matters

   B-36

5.14

 

Confidentiality

   B-36

5.15

 

Employees

   B-37

5.16

 

Use of Seller’s Name

   B-37

5.17

 

Listing of Buyer Common Stock

   B-37

5.18

 

Third Party Consents

   B-37

5.19

 

Seller Financial Statements

   B-37

ARTICLE VI

 

CONDITIONS TO CONSUMMATION OF TRANSACTION

   B-38

6.1

 

Conditions to Buyer’s and Seller’s Obligations

   B-38

6.2

 

Conditions to Obligations of Buyer

   B-38

6.3

 

Conditions to Obligations of Seller

   B-38

ARTICLE VII

 

TERMINATION

   B-39

7.1

 

Termination of Agreement

   B-39

7.2

 

Effect of Termination

   B-40

7.3

 

Fees and Expenses

   B-40

7.4

 

Amendment

   B-41

7.5

 

Extension; Waiver

   B-41

 

B-3


Table of Contents

TABLE OF CONTENTS

(Continued)

 

         Page

ARTICLE VIII

 

MISCELLANEOUS

   B-41

8.1

 

Non-Survival of Representations and Warranties

   B-41

8.2

 

Press Releases and Announcements

   B-41

8.3

 

No Third Party Beneficiaries

   B-41

8.4

 

Entire Agreement

   B-41

8.5

 

Succession and Assignment

   B-41

8.6

 

Counterparts and Facsimile Signature

   B-42

8.7

 

Headings

   B-42

8.8

 

Notices

   B-42

8.9

 

Governing Law

   B-42

8.10

 

Exclusive Jurisdiction

   B-42

8.11

 

Binding Arbitration

   B-43

8.12

 

Severability

   B-43

8.13

 

Construction

   B-43

8.14

 

Other Remedies; Specific Performance

   B-44

 

B-4


Table of Contents

EXHIBITS

    

Exhibit A

  

Supply Agreement

Exhibit B

  

Transition Services Agreement

Exhibit C

  

Registration Rights Agreement

Exhibit D

  

Voting Agreement

Exhibit E

  

Support Agreement

Exhibit F

  

Common Stock Warrant

Exhibit G

  

Form of Assignment and Bill of Sale

Exhibit H

  

Form of Assumption Agreement

SCHEDULES

    

Schedule 1.12

  

Business Contracts

Schedule 1.15

  

Business Employees

Schedule 1.16

  

Business Records

Schedule 1.25

  

Buyer Permitted Encumbrances

Schedule 1.56

  

Inventory

Schedule 1.59

  

Seller Knowledge

Schedule 1.70

  

Permitted Encumbrances

Schedule 2.3 (f)

  

Excluded Assets

Schedule 2.4 (d)

  

Assumed Liabilities

Schedule 2.9

  

Current Inventory Valuation

Schedule 2.10

  

Upgrade Contract

Schedule 5.3

  

Operation of Business by Buyer

Schedule 5.4

  

Business Assets

Schedule 5.18

  

Required Consents

 

B-5


Table of Contents

ASSET PURCHASE AGREEMENT

 

ASSET PURCHASE AGREEMENT (this “Agreement”) entered into as of October 13, 2005 by and between PECO II, Inc., an Ohio corporation (the “Buyer”) and Delta Products Corporation, a California corporation (“Seller”). Buyer and Seller are referred to individually as a “Party” and collectively herein as the “Parties.”

 

RECITALS

 

A. Seller is, among other activities, engaged in the business of manufacturing, supplying and distributing telecommunications power system products, through its Telecom Power Business Unit (such business and operations as presently conducted by Seller being referred to herein as the “Business”).

 

B. Seller desires to sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller, the Business Assets (as hereinafter defined), and Buyer desires to assume, the Assumed Liabilities (as hereinafter defined), in each case as more fully described and upon the terms and subject to the conditions set forth herein.

 

C. In connection with the Closing (as hereinafter defined) (x) an affiliate of Seller and Buyer shall execute and deliver a Supply Agreement in the form attached hereto as Exhibit A (the “Supply Agreement”), and (y) Seller and Buyer shall execute and deliver (i) a Transition Services Agreement in the form attached hereto as Exhibit B (the “Transition Services Agreement”), and (iii) a Registration Rights Agreement in the form attached hereto as Exhibit C (the “Registration Rights Agreement”), each of which shall be delivered on and effective as of the Closing Date.

 

D. Concurrent with the execution of this Agreement, and as a condition and inducement to the Parties’ willingness to enter into this Agreement, Seller and Buyer have executed a Voting Agreement in the form attached hereto as Exhibit D (the “Voting Agreement”), and certain significant shareholders of Buyer (including each executive officer and director of Buyer) have executed, in their capacity as shareholders of Buyer, and delivered to Seller a Voting Agreement. The Voting Agreement will become effective as of the Closing Date.

 

E. Immediately following execution of this Agreement, certain significant shareholders of Buyer (including each executive officer and director of Buyer) shall execute, in their capacity as shareholders of Buyer, and deliver to Seller a Support Agreement in the form attached hereto as Exhibit E (the “Support Agreement”).

 

F. The board of directors of Buyer has deemed it advisable and in the best interests of its shareholders to enter into this Agreement and to consummate the transactions contemplated hereby, and has resolved to recommend to its shareholders approval of the issuance to Seller of the Securities (as hereinafter defined), all on the terms and subject to the conditions set forth in this Agreement.

 

B-6


Table of Contents

NOW, THEREFORE, in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows:

 

ARTICLE I

DEFINITIONS

 

1.1 “affiliate” of any Person means any Person that controls, is controlled by, or is under common control with such Person. As used herein, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or other interests, by contract or otherwise.

 

1.2 “Acquisition Proposal” shall have the meaning ascribed to such term in Section 5.9(e)(i).

 

1.3 “Agreement” shall have the meaning ascribed to such term in the Preamble.

 

1.4 “Ancillary Agreements” means the Supply Agreement, the Transition Services Agreement, the Registration Rights Agreement, the Voting Agreement, the Assignment and Bill of Sale and the Assumption Agreement.

 

1.5 “Asset Acquisition Statement” shall have the meaning ascribed to such term in Section 2.11.

 

1.6 “Assumed Liabilities” shall have the meaning ascribed to such term in Section 2.4.

 

1.7 “Balance Sheet” means Buyer’s balance sheet dated June 30, 2005 as filed by Buyer with the SEC on August 12, 2005 on Form 10-Q.

 

1.8 “Balance Sheet Date” means June 30, 2005.

 

1.9 “Benefit Plan” shall have the meaning ascribed to such term in Section 4.11.

 

1.10 “Business” shall have the meaning ascribed to such term in paragraph A of the Recitals.

 

1.11 “Business Assets” shall have the meaning ascribed to such terms in Section 2.2.

 

1.12 “Business Contracts” means the Contracts listed on Schedule 1.12 hereto and the Upgrade Contract.

 

1.13 “business day” means a day that is not a Saturday, a Sunday or a statutory or civic holiday in the State of California or any other day on which banking institutions are not required to be open in the State of California.

 

1.14 “Business Disclosure Schedule” shall have the meaning ascribed to such term in Article III.

 

1.15 “Business Employees” means those employees of Seller whose duties primarily relate to the Business Assets and are performed at the Premises who are listed on Schedule 1.15.

 

1.16 “Business Records” means the data and documentation of Seller relating to the Business Assets listed on Schedule 1.16.

 

1.17 “Buyer” shall have the meaning ascribed to such term in the Preamble.

 

1.18 “Buyer Assets” shall have the meaning ascribed to such term in Section 1.22.

 

B-7


Table of Contents

1.19 “Buyer Charter Documents” shall have the meaning ascribed to such term in Section 4.1(b).

 

1.20 “Buyer Closing Deliverables” shall have the meaning ascribed to such term in Section 2.8.

 

1.21 “Buyer Disclosure Schedule” shall have the meaning ascribed to such term in Article IV.

 

1.22 “Buyer Encumbrance” means any material lien, encumbrance, mortgage, pledge, easement or other similar restriction affecting Buyer or its subsidiaries or their respective assets, properties or rights (the “Buyer Assets”), other than Buyer Permitted Encumbrances.

 

1.23 “Buyer Material Contract” shall have the meaning ascribed to such term in Section 4.9(a).

 

1.24 “Buyer Officer Certificate” shall have the meaning ascribed to such term in Section 6.3(d).

 

1.25 “Buyer Permitted Encumbrances” means any (i) lien for Taxes attributable to the Buyer Assets, assessments and other governmental charges or of landlords, liens of carriers, warehouseman, mechanics and material men incurred in the ordinary course of business, in each case for sums not yet due and payable or due but not delinquent or being contested in good faith by appropriate proceedings, (ii) any encumbrance or imperfection in title and encroachments that do not materially impair the use or value of the respective underlying asset, and (iv) any encumbrance set forth on Schedule 1.25.

 

1.26 “Buyer Representative” shall have the meaning ascribed to such term in Section 5.9(a).

 

1.27 “Buyer SEC Documents” shall have the meaning ascribed to such term in Section 4.7.

 

1.28 “Buyer Stock Option Plans” means the Amended and Restated 1995 Non-Qualified Stock Option Plan, the Amended and Restated 1997 Non-Qualified Stock Option Plan, and the 2000 Performance Plan, as amended.

 

1.29 “Buyer Tax Returns” shall have the meaning ascribed to such term in Section 5.13(b).

 

1.30 “CERCLA” means Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.

 

1.31 “Change of Recommendation” shall have the meaning ascribed to such term in Section 5.8(b).

 

1.32 “Closing” shall have the meaning ascribed to such term in Section 2.6.

 

1.33 “Closing Date” shall have the meaning ascribed to such term in Section 2.6.

 

1.34 “COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended and as codified in Section 4980B of the Code and Section 601 et. seq. of ERISA.

 

1.35 “Code” means the Internal Revenue Code of 1986, as amended.

 

1.36 “Confidentiality Agreement” shall have the meaning ascribed to such term in Section 5.13(c).

 

1.37 “Consideration” means the Shares, the Warrant and the Assumed Liabilities.

 

1.38 “Contract” means any legally binding agreement, contract, purchase order or other instrument (whether written or oral).

 

1.39 “Disputed Claim” shall have the meaning ascribed to such term in Section 8.11(a).

 

B-8


Table of Contents

1.40 “Effect” shall have the meaning ascribed to such term in Section 1.62.

 

1.41 “Encumbrance” means any material lien, encumbrance, mortgage, pledge, easement or other similar restriction affecting the Business Assets, other than Permitted Encumbrances.

 

1.42 “Environmental Law” means any Law relating to pollution, protection of the environment, occupational health and safety or exposure to Hazardous Materials, including without limitation any statute, regulation, administrative decision or order pertaining to (i) the prohibition, regulation, or control of any Hazardous Material; (ii) Hazardous Materials Activities; (iii) air, water and noise pollution; (iv) groundwater and soil contamination; (v) the release or threatened release into the environment of Hazardous Materials, including without limitation emissions, discharges, injections, spills, escapes or dumping of pollutants, contaminants or chemicals; and (vi) the protection of wild life, marine life and wetlands, including without limitation all endangered and threatened species. The terms “release” and “environment” shall have the meaning set forth in CERCLA.

 

1.43 “Environmental Liabilities” means all obligations and liabilities, whether known or unknown, absolute or contingent, current or potential, past, present or future, imposed by, under or pursuant to Environmental Laws, including all obligations and liabilities related to Remedial Actions, and all fees, disbursements and expenses of counsel, experts, personnel and consultants based on, arising out of or otherwise in respect of: (i) the presence on or before the Closing Date of any Hazardous Materials in the soil, groundwater, surface water, air or building materials of the Galion Facility (“Pre-Existing Contamination”); (ii) the migration at any time prior to or after the Closing Date of Pre-Existing Contamination to any other real property, or the soil, groundwater, surface water, air or building materials thereof; (iii) any Hazardous Materials Activity conducted on the Galion Facility prior to the Closing Date or otherwise occurring prior to the Closing Date in connection with or to benefit the business of Buyer at the Galion Facility (“Pre-Closing Hazardous Materials Activities”); (iv) the exposure of any person to Pre-Existing Contamination or to Hazardous Materials in the course of or as a consequence of any Pre-Closing Hazardous Materials Activities, without regard to whether any health effect of the exposure has been manifested as of the Closing Date; (v) the violation of any Environmental Laws by the Buyer or its agents, employees, predecessors in interest, contractors, invitees or licensees prior to the Closing Date or in connection with any Pre-Closing Hazardous Materials Activities prior to the Closing Date; (vi) any actions or proceedings brought or threatened by any third party with respect to any of the foregoing; and (viii) any of the foregoing to the extent they continue after the Closing Date.

 

1.44 “ERISA” shall have the meaning ascribed to such term in Section 4.11(a).

 

1.45 “ERISA Affiliate” shall have the meaning ascribed to such term in Section 4.11(h).

 

1.46 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

1.47 “Excluded Assets” shall have the meaning ascribed to such term in Section 2.3.

 

1.48 “Excluded Liabilities” shall have the meaning ascribed to such term in Section 2.5.

 

1.49 “Financial Statements” shall have the meaning ascribed to such term in Section 4.7(b).

 

1.50 “GAAP” means United States generally accepted accounting principles.

 

1.51 Galion Facility shall mean Buyer’s property located at 1376 State Road 598, Galion, Ohio, including the land, the improvements thereon, the groundwater thereunder and the surface water thereon.

 

1.52 “Governmental Entity” shall have the meaning ascribed to such term in Section 3.3.

 

1.53 “Hazardous Materials” means any material, chemical, emission or substance that has been designated by any Governmental Entity to be radioactive, toxic, hazardous, a pollutant or otherwise a danger to health, reproduction or the environment.

 

B-9


Table of Contents

1.54 Hazardous Materials Activity shall mean the transportation, transfer, recycling, storage, use, treatment, manufacture, removal, remediation, release, exposure of others to, sale, collection or distribution of any Hazardous Material or any product or waste containing a Hazardous Material, or product manufactured with Ozone depleting substances, including, without limitation, any required labeling, payment of waste fees or charges (including so-called e-waste fees) and compliance with any product take-back or product content requirements.

 

1.55 “Intellectual Property” means any or all of the following and all rights in, arising out of, or associated therewith: (i) all United States, international and foreign patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof, (ii) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation relating to any of the foregoing, (iii) all copyrights, copyrights registrations and applications therefor, and all other rights corresponding thereto throughout the world, (iv) all industrial designs and any registrations and applications therefor throughout the world, (v) all mask works and any registrations and applications therefor throughout the world, (vi) all trade names, logos, URLs, common law trademarks and service marks, trademark and service mark registrations and applications therefor throughout the world, (vii) all databases and data collections and all rights therein throughout the world, (viii) all moral and economic rights of authors and inventors, however denominated, throughout the world, and (ix) any similar or equivalent rights to any of the foregoing anywhere in the world.

 

1.56 “Inventory” means all inventory, including raw materials, work in process and finished products located at the Premises or the Other Premises and exclusively relating to the categories of Seller Inventory listed on Schedule 1.56 hereto, and any rights of Seller to the warranties received from suppliers and any related claims, credits, rights of recovery and setoff with respect to such Inventory, but only to the extent such rights are assignable to Buyer.

 

1.57 “Issuance Proposal” shall have the meaning ascribed to such term in Section 5.7.

 

1.58 “knowledge of Buyer” means the actual knowledge of John Heindel, James L. Green, Sandra A. Frankhouse, Miles A. McIntosh and Dennis Baughman.

 

1.59 “knowledge of Seller” means the actual knowledge of the individuals listed on Schedule 1.59 hereto.

 

1.60 “Law” means any federal, state, statute, ordinance, rule, regulation, code, order, judgment, injunction or decree of any Governmental Entity.

 

1.61 “Legal Proceeding” shall have the meaning ascribed to such term in Section 3.4.

 

1.62 “Material Adverse Effect on Buyer” means any change, effect or circumstance (such item, an “Effect”) that, when taken individually or together with all other Effects, is, or would reasonably be expected to be, materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business or operations of Buyer and its subsidiaries, taken as a whole; provided, however, that in no event shall any of the following be taken into account in determining whether there has been or will be a Material Adverse Effect on Buyer: (A) any Effect that is the result of general market or political factors or economic factors affecting the economy as a whole, (B) any Effect that is the result of factors generally affecting the industry or specific markets in which Buyer competes, (C) any Effect that is the result of an outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war, or the occurrence of any acts of terrorism, (D) any Effect arising out of or resulting from the actions expressly contemplated by the Parties in connection with this Agreement, or (E) any Effect resulting from the loss, diminution or disruption of Buyer’s existing or prospective customer, distributor or supplier relationships that Buyer successfully bears the burden of proving directly results from or is directly attributable to the public announcement of the transactions contemplated by this Agreement.

 

B-10


Table of Contents

1.63 “Material Adverse Effect on the Business” means any Effect that, when taken individually or together with all other Effects, is, or would reasonably be expected to be, materially adverse to the Business Assets, taken as a whole; provided, however, that in no event shall any of the following be taken into account in determining whether there has been or will be a Material Adverse Effect on the Business: (A) any Effect that is the result of general market or political factors or economic factors affecting the economy as a whole, (B) any Effect that is the result of factors generally affecting the industry or specific markets in which the Business competes, (C) any Effect that is the result of an outbreak or escalation of hostilities involving the United States, the declaration by the United States of a national emergency or war, or the occurrence of any acts of terrorism, (D) any Effect arising out of or resulting from the actions expressly contemplated by the Parties in connection with this Agreement, or (E) any Effect resulting from the loss, diminution or disruption of Seller’s existing or prospective customer, distributor or supplier relationships relating to the Business that Seller successfully bears the burden of proving directly results from or is directly attributable to the public announcement of the transactions contemplated by this Agreement.

 

1.64 “Nasdaq” shall mean the Nasdaq Capital Market.

 

1.65 “Opt-Out Proposal” shall have the meaning ascribed to such term in Section 5.7.

 

1.66 “Ordinary Course of Business” means the ordinary course of the Business as conducted by Seller, consistent with past practice.

 

1.67 “Other Premises” means the following two facilities, to the extent space is rented by Seller at such facilities: Facility located at 3501 S. Tricenter Boulevard, Durham, North Carolina 27713 (space rented by Seller from Estes Innovative and Warehousing) and facility located at 3211 S. Miami Boulevard, Durham, North Carolina 27003 (space rented by Seller from North State Express, Inc.).

 

1.68 “Outstanding Shares” means all issued and outstanding shares of capital stock of the Company as of the date that is the five (5) business days prior to the Exercise Date (as defined in the Warrant) of the Warrant; provided, however, that in the event the Exercise Date (as defined in the Warrant) of the Warrant is within five (5) business days of the Closing Date, the measurement date shall be the Closing Date (and shall include the Shares issued hereunder).

 

1.69 “Party” and “Parties” shall have the meaning ascribed to such term in the Preamble.

 

1.70 “Permitted Encumbrances” means any (i) lien for Taxes attributable to the Business Assets, assessments and other governmental charges, liens of carriers, warehouseman, mechanics and material men incurred in the Ordinary Course of Business, in each case for sums not yet due and payable or due but not delinquent or being contested in good faith by appropriate proceedings to the extent the underlying obligation is an Assumed Liability, (ii) non-exclusive licenses granted by Seller in connection with sales of the Business Assets in the Ordinary Course of Business, (iii) any encumbrance or imperfection in title and encroachments that do not materially impair the use or value of the respective underlying asset, and (iv) any encumbrance set forth on Schedule 1.70.

 

1.71 “Person” means any individual, corporation, partnership, firm, association, joint venture, joint stock company, trust, unincorporated organization or other entity, including any Governmental Entity.

 

1.72 “Post-Closing Period” means any taxable period or portion of a period that begins after the Closing Date.

 

1.73 “Pre-Closing Hazardous Materials Activities” shall have the meaning ascribed to such term in Section 1.43.

 

1.74 “Pre-Closing Period” means any taxable period or portion of a period that begins on or before the Closing Date and ends on the Closing Date.

 

B-11


Table of Contents

1.75 “Pre-Existing Contamination” shall have the meaning ascribed to such term in Section 1.43.

 

1.76 “Premises” means the Seller facilities located at 5101 Davis Drive, Research Triangle Park, North Carolina 27709.

 

1.77 “Proposals” shall have the meaning ascribed to such term in Section 5.7.

 

1.78 “Proxy Statement” shall have the meaning ascribed to such term in Section 5.6(a).

 

1.79 “Recommendation” shall have the meaning ascribed to such term in Section 5.8(a).

 

1.80 “Registration Rights Agreement” shall have the meaning ascribed to such term in paragraph C of the Recitals.

 

1.81 “Remedial Action” shall means any activities undertaken or required to be undertaken by with respect to the investigation, management or clean-up of Hazardous Materials including, without limitation: reporting, investigation, feasibility study, remediation, treatment, removal, transport, disposal, characterization, sampling, health assessment, risk assessment, encapsulation, monitoring, study, report, assessment or analysis of Hazardous Materials.

 

1.82 “Required Consents” shall have the meaning ascribed to such term in Section 5.18.

 

1.83 “Restated Articles” means the Amended and Restated Articles of Incorporation of buyer filed as Exhibit 3.1(i) to Buyer’s Registration Statement on Form S-1 (File No. 333-37566) filed with the SEC on July 3, 2000.

 

1.84 Restricted Period shall have the meaning ascribed to such term in Section 5.3.

 

1.85 “Rules” shall have the meaning ascribed to such term in Section 8.11(b).

 

1.86 “SEC” means the Securities and Exchange Commission.

 

1.87 “Securities” means the Shares, the Warrant and the Warrant Shares.

 

1.88 “Securities Act” means the Securities Act of 1933, as amended.

 

1.89 “Seller” shall have the meaning ascribed to such term in the Preamble.

 

1.90 “Seller Acquisition Proposal” shall have the meaning ascribed to such term in Section 5.10.

 

1.91 “Seller Closing Deliverables” shall have the meaning ascribed to such term in Section 2.7.

 

1.92 “Seller Logos” shall have the meaning ascribed to such term in Section 5.16(a).

 

1.93 “Seller Marks” shall have the meaning ascribed to such term in Section 5.16(a).

 

1.94 “Seller Officer Certificate” shall have the meaning ascribed to such term in Section 6.2(c).

 

1.95 “Seller Representative” shall have the meaning ascribed to such term in Section 5.10.

 

1.96 “Seller Tax Returns” shall have the meaning ascribed to such term in Section 5.13(a).

 

1.97 “Seller Trade Names” shall have the meaning ascribed to such term in Section 5.16(a).

 

B-12


Table of Contents

1.98 “Shareholder Approval Requirement” shall have the meaning ascribed to such term in Section 4.21.

 

1.99 “Shareholders’ Meeting” shall have the meaning ascribed to such term in Section 5.7.

 

1.100 “Shares” shall have the meaning ascribed to such term in Section 2.1.

 

1.101 “Superior Offer” shall have the meaning ascribed to such term in Section 5.9(e)(ii).

 

1.102 “Supply Agreement” shall have the meaning ascribed to such term in paragraph C of the Recitals.

 

1.103 “Support Agreement” shall have the meaning ascribed to such term in paragraph E of the Recitals.

 

1.104 “Tax Returns” means all reports, returns, declarations, statements or other information supplied to a taxing authority in connection with Taxes.

 

1.105 “Taxes” means all taxes, including income, gross receipts, ad valorem, value-added, excise, real property, personal property, sales, use, transfer, withholding, employment, unemployment, insurance, social security, business license, business organization, environmental, workers compensation, profits, license, lease, service, service use, severance, stamp, occupation, windfall profits, customs, duties, franchise and other taxes imposed by the United States of America or any state, local or foreign government, or any agency thereof, or other political subdivision of the United States or any such government, and any interest, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any tax or any contest or dispute thereof, and including any liability for the Taxes of another Person.

 

1.106 “Termination Date” shall have the meaning ascribed to such term in Section 7.1(c).

 

1.107 “Transaction Materials” shall have the meaning ascribed to such term in Section 5.13(c).

 

1.108 “Transfer Taxes” shall have the meaning ascribed to such term in Section 2.14

 

1.109 “Transferred Employee” shall have the meaning ascribed to such term in Section 5.15.

 

1.110 “Transition Services Agreement” shall have the meaning ascribed to such term in paragraph C of the Recitals.

 

1.111 “Triggering Event” shall have the meaning ascribed to such term in Section 7.1.

 

1.112 “Upgrade Contract” means the Contract listed on Schedule 2.10.

 

1.113 “Upgrade Obligations” shall have the meaning ascribed to such term in Section 2.10.

 

1.114 “Upgrade Program” shall have the meaning ascribed to such term in Section 2.10.

 

1.115 “Voting Agreement” shall have the meaning ascribed to such term in paragraph D of the Recitals.

 

1.116 “Warrant” shall have the meaning ascribed to such term in Section 2.1.

 

1.117 “Warrant Shares” shall have the meaning ascribed to such term in Section 2.1.

 

1.118 “Warranties and Liabilities” means Seller’s warranty obligations and liabilities arising under the Business Contracts, including warranty obligations or liabilities relating to the replacement or repair of products manufactured, sold or delivered by Seller under the Business Contracts.

 

B-13


Table of Contents

ARTICLE II

THE TRANSACTION

 

2.1 The Transaction.

 

(a) On the Closing Date and effective as of the Closing, upon the terms and subject to the conditions of this Agreement, Seller shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase from Seller, all of Seller’s right, title and interest in and to the Business Assets, in exchange for: (1) 4,740,375 shares of Buyer’s common stock, free and clear of any Buyer Encumbrance and with no restriction on the voting rights or transfer thereof (other than pursuant to applicable Law and as set forth in the Voting Agreement and Registration Rights Agreement) (the “Shares”); and (2) a warrant, in substantially the form attached hereto as Exhibit F (the “Warrant”), to purchase that number of shares of Buyer’s common stock (the “Warrant Shares”) that is determined by application of the following formula: (x) the quotient of (i) the Outstanding Shares minus the Shares, divided by (ii) 0.55, minus (y) the Outstanding Shares, and (z) rounded to the nearest whole share; and (3) the assumption by Buyer of the Assumed Liabilities.

 

(b) With respect to the calculation of the Warrant Shares, by way of example, assuming that on the date that is five (5) business days prior to the Exercise Date of the Warrant Buyer had 26,335,418 shares of capital stock issued and outstanding, the number of Warrant Shares would be calculated as follows: (x) the quotient of (i) the Outstanding Shares (i.e. 26,335,418) minus the Shares (i.e. 4,740,375), divided by (ii) 0.55, minus (y) the Outstanding Shares (i.e. 26,335,418), and (z) rounded up to the nearest whole share. In this example, the number of Warrant Shares would be 12,928,297, representing, when aggregated with the Shares, forty-five percent (45%) of the Company’s issued and outstanding capital stock on a pro-forma basis (i.e. accounting for the issuance of the Shares and the Warrant Shares).

 

2.2 Business Assets. For purposes of this Agreement, the term “Business Assets” means the following assets, properties and rights:

 

(a) all Inventory owned by Seller as of the Closing Date;

 

(b) rights to and under the Business Contracts;

 

(c) rights to and under the Business Records;

 

(d) all rights, claims and causes of action against third parties exclusively relating to the Business Assets; and

 

(e) all rights of indemnity, warranty rights, rights of contribution, rights to refunds and other rights of recovery exclusively relating to the Business Assets.

 

2.3 Excluded Assets. Notwithstanding anything in Section 2.2 to the contrary, it is hereby expressly acknowledged and agreed that the Business Assets shall not include, and Seller is not selling, conveying, assigning, transferring or delivering to Buyer, and Buyer is not purchasing, acquiring or accepting from Seller, any of the rights, properties or assets set forth or described in paragraphs (a) through (f) below (the rights, properties and assets expressly excluded by this Section 2.3 from the Business Assets being referred to herein as the “Excluded Assets”):

 

(a) all cash, cash equivalents, receivables owed to Seller, bank deposits or similar cash items of Seller whether or not arising from the conduct of the Business;

 

(b) all rights to and under insurance policies of Seller, including rights of proceeds thereunder;

 

(c) all (i) confidential personnel records pertaining to any Business Employee; (ii) all records prepared in connection with the sale of the Business Assets; and (iii) other books and records that Seller is required by

 

B-14


Table of Contents

Law to retain or that Seller determines are necessary or advisable to retain; provided, however, that Buyer shall have the right to make copies of any portions of such retained books and records that exclusively relate to the Business Assets (subject to clause (i));

 

(d) any claim, right or interest of Seller in or to any refund, rebate, abatement or other recovery for Taxes, including those attributable to the Business Assets, together with any interest due thereon or penalty rebate arising therefrom;

 

(e) all rights, claims or causes of action of Seller arising under this Agreement, the Ancillary Agreements, the Warrant and the Support Agreements; and

 

(f) all rights and interests to and under the assets set forth on Schedule 2.3(f).

 

2.4 Assumed Liabilities. On the Closing Date, Buyer shall execute and deliver to Seller the Assumption Agreement, pursuant to which Buyer shall accept, assume and agree to pay, perform or otherwise discharge the liabilities and obligations of Seller pursuant to and under the Assumed Liabilities. For purposes of this Agreement, the term “Assumed Liabilities” means all liabilities and obligations set forth or described in paragraphs (a) through (d) below:

 

(a) all liabilities and obligations under the Business Contracts arising on or after the Closing Date (subject to Section 2.10), including all Warranties and Liabilities arising on or after the Closing Date;

 

(b) all Upgrade Obligations (subject to Section 2.10);

 

(c) all liabilities and obligations arising after the Closing Date in connection with or relating to the Buyer’s ownership of the Business Assets; and

 

(d) all obligations and liabilities set forth on Schedule 2.4(d).

 

2.5 Excluded Liabilities. Buyer shall not assume or be obligated to pay, perform or otherwise discharge any liabilities or obligations of Seller, whether direct or indirect, known or unknown, absolute or contingent, pursuant to and under the Excluded Liabilities. For purposes of this Agreement, the term “Excluded Liabilities” means all obligations and liabilities set forth or described in paragraphs (a) through (c) below:

 

(a) all liabilities and obligations under the Business Contracts arising prior to the Closing Date (subject to Section 2.10), including all Warranties and Liabilities arising prior to the Closing Date;

 

(b) all liabilities and obligations with respect to Taxes attributable to Seller’s ownership of the business Assets for Pre-Closing Periods (except as provided in Section 2.13);

 

(c) intercompany payables to Seller; and

 

(d) all obligations and liabilities of Seller not arising from or relating to the Business Assets.

 

2.6 The Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place on a Friday at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, on such mutually agreeable date as soon as practicable (and in any event not later than seven business days) after the satisfaction or waiver of all conditions set forth in Article VI hereof (other than those conditions that, by their terms, are not capable of being satisfied or waived until the Closing) (the “Closing Date”). The Parties may exchange all closing deliverables contemplated by Sections 2.7, 2.8, 6.2 and 6.3 of this Agreement by electronic means, fax or other mutually agreeable means; provided, that each Party shall provide the other with original copies of its closing deliverables promptly following the Closing.

 

B-15


Table of Contents

2.7 Deliveries by Seller. At the Closing, Seller will deliver or cause to be delivered to Buyer the following (the “Seller Closing Deliverables”):

 

(a) a duly executed counterpart of the Supply Agreement in the form attached hereto as Exhibit A;

 

(b) a duly executed counterpart of the Transition Services Agreement in the form attached hereto as Exhibit B;

 

(c) a duly executed counterpart of the Registration Rights Agreement in the form attached hereto as Exhibit C;

 

(d) a duly executed counterpart of the Voting Agreement in the form attached hereto as Exhibit D;

 

(e) a duly executed counterpart of the Assignment and Bill of Sale in the form attached hereto as Exhibit G;

 

(f) a duly executed counterpart of the Assumption Agreement in the form attached hereto as Exhibit H;

 

(g) the Seller Certificate;

 

(h) the Required Consents; and

 

(i) all other documents, instruments and writings required to be delivered by Seller at or prior to the Closing Date pursuant to this Agreement and the Ancillary Agreements and all other documents, instruments, declarations, affidavits and writings reasonably requested by Buyer that are reasonably necessary to assign, convey, transfer and deliver to Buyer, good and valid title to the Business Assets; provided, however, that Buyer shall be responsible for the payment of all fees for applicable recordations and filings of documents, instruments, declarations, affidavits or other writings necessary to effect any applicable assignments under this Section 2.7(i).

 

2.8 Deliveries by Buyer. At the Closing, Buyer will deliver or cause to be delivered to Seller the following (the “Buyer Closing Deliverables”):

 

(a) a certificate registered in the name of Delta Products Corporation representing the Shares;

 

(b) a duly executed counterpart of the Supply Agreement in the form attached hereto as Exhibit A;

 

(c) a duly executed counterpart of the Transition Services Agreement in the form attached hereto as Exhibit B;

 

(d) a duly executed counterpart of the Registration Rights Agreement in the form attached hereto as Exhibit C;

 

(e) a duly executed counterpart of the Voting Agreement in the form attached hereto as Exhibit D;

 

(f) a duly executed Warrant in the form attached hereto as Exhibit F;

 

(g) a duly executed counterpart of the Assignment and Bill of Sale in the form attached hereto as Exhibit G;

 

(h) a duly executed counterpart of the Assumption Agreement in the form attached hereto as Exhibit H;

 

(i) the Buyer Certificate; and

 

B-16


Table of Contents

(j) all other documents, instruments and writings required to be delivered by Buyer at or prior to the Closing Date pursuant to this Agreement, the Ancillary Agreements, the Warrant and all other documents, instruments, declarations, affidavits and writings reasonably requested by Seller that are reasonably necessary for Buyer to assume the Assumed Liabilities.

 

2.9 Inventory Adjustment.

 

(a) For purposes of this Agreement, “Inventory Adjustment Amount” means the difference (positive or negative) between the Inventory Value as of 5:00 p.m. EST on the Closing Date (the “Closing Inventory Value”) and $2,000,000 (the “Current Inventory Value”) (i.e. Inventory Adjustment Amount equals Closing Inventory Value minus Current Inventory Value). For purposes of this Agreement “Inventory Value” means the fair market value of the Inventory calculated in accordance with the principles and methodologies set forth on Schedule 2.9.

 

(b) As promptly as practicable, but not later than thirty (30) days after the Closing Date, Seller will cause to be prepared and delivered to Buyer a Closing Inventory Valuation Statement. The “Closing Inventory Valuation Statement” will set forth the Closing Inventory Value and the Inventory Adjustment Amount. The Closing Inventory Valuation Statement will be prepared in the format and in accordance with the principles and methodologies set forth on Schedule 2.9.

 

(c) The Closing Inventory Valuation Statement shall be final and binding on each of the Parties hereto unless Buyer objects and delivers a written notice of disagreement to Seller within ten (10) business days after delivery of the Closing Inventory Valuation Statement. Such notice of disagreement shall specify the item or items in dispute and shall state the amount, if any, of any adjustment that Buyer believes should be made to the Closing Inventory Value or the calculation of the Inventory Adjustment Amount, as the case may be.

 

(d) Notwithstanding anything to the contrary set forth in this Agreement, in the event of a disagreement over the Closing Inventory Value or the calculation of the Inventory Adjustment Amount, as the case may be, Buyer and Seller shall use commercially reasonable efforts to resolve their dispute, but if a final resolution thereof is not obtained within fifteen (15) business days of delivery of the Buyer’s written notice of disagreement (or such longer period of time as may be agreed to in writing by the Parties), Buyer and Seller shall promptly retain a mutually agreeable, nationally recognized independent accounting firm (the “Independent Accountant”) to resolve any remaining disputes regarding the Closing Inventory Valuation Statement. The Independent Accountant shall determine, based solely on the provisions of this Agreement and the presentations by Buyer and Seller and their respective representatives, and not by independent review, only the appropriate amount, inclusion or omission of the disputed items, and shall modify the Closing Inventory Value or the calculation of the Inventory Adjustment Amount, as the case may be, to conform to its determination within thirty (30) days after it has been engaged. In resolving any disputed item, the Independent Accountant: (x) shall limit its review to matters specifically set forth in the notice of disagreement as a disputed item, (y) shall further limit its review to whether the Closing Inventory Value or the Inventory Adjustment Amount, as the case may be, is mathematically accurate and has been prepared in accordance with the principles and methodologies set forth in this Section 2.9(d) and Schedule 2.9 with respect to the preparation of the Closing Inventory Value or Inventory Adjustment Amount, as the case may be, and (z) shall not assign a value to any item greater than the greatest value for such item claimed by any Party or less than the smallest value for such item claimed by any other Party. The determination of the Independent Accountant shall be final, conclusive and binding on the Parties and shall not be subject to appeal. In the event the dispute is resolved in (i) Buyer’s favor, Seller shall pay the fees and expenses of the Independent Accountant, or (ii) Seller’s favor, Buyer shall pay the fees and expenses of the Independent Accountant. The Closing Inventory Valuation Statement, if not objected to by Buyer pursuant to Section 2.9(c), or, if required, as adjusted by the Parties or by the Independent Accountant, as applicable, shall be deemed to be the “Closing Inventory Valuation Statement” for all purposes under this Agreement.

 

(e) Buyer and Seller shall cooperate and assist in the preparation of the Closing Inventory Valuation Statement and in the conduct of the reviews referred to in Section 2.9(d), including making available during normal business hours to the extent reasonably necessary, relevant books, records, work papers and personnel.

 

B-17


Table of Contents

(f) If the Inventory Adjustment Amount is a negative number, Seller will provide Buyer with an Inventory Credit equal to the Inventory Adjustment Amount multiplied by negative one. On the other hand, if the Inventory Adjustment Amount is a positive number, Buyer will pay to Seller in cash an amount equal to the Inventory Adjustment Amount. All references to Inventory Adjustment Amount in this paragraph shall mean the Inventory Adjustment Amount reflected on the Closing Inventory Valuation Statement.

 

(g) For purposes of this Agreement, an “Inventory Credit” shall mean an immediately available credit issuable to Buyer to purchase from Seller inventory of the kind listed on Schedule 1.56 hereto or on Exhibit A of the Supply Agreement, or as otherwise provided on Schedule 2.9.

 

(h) Any payment required to be made by Buyer pursuant to Section 2.9(f) shall be delivered to Seller within ten (10) business days after the Closing Inventory Valuation Statement is finalized (including upon resolution by Buyer and Seller of any disagreements or delivery of the determination of the arbitrator, if required, all as contemplated by Section 2.9(d)) by wire transfer in immediately available funds to an account designated by Seller.

 

Buyer and Seller shall not take any action with respect to the accounting books and records relating to the Inventory that would obstruct or prevent the preparation of the Closing Inventory Valuation Statement. During the period of time from the Closing Date through the resolution of any adjustment contemplated by this Section 2.9, each Party shall afford to the other Party and its authorized representatives reasonable access during normal business hours to the books and records relating to the Inventory.

 

2.10 Power Systems Upgrade Program. Buyer acknowledges that (x) Seller has implemented an upgrade program with respect to one of its Power Systems product family on substantially the terms described on Schedule 2.10 hereto (the “Upgrade Program”), and (y) all obligations and liabilities arising from such Upgrade Program (the “Upgrade Obligations”) shall be Assumed Liabilities hereunder. Notwithstanding the foregoing, Seller shall reimburse Buyer for amounts incurred by Buyer pursuant to the terms of the Upgrade Contract in satisfaction of such Upgrade Obligations.

 

2.11 Allocation of Consideration. Seller and Buyer recognize their mutual obligations pursuant to Section 1060 of the Code to timely file IRS Form 8594 (the “Asset Acquisition Statement”) with their respective federal income tax returns. Accordingly, Seller and Buyer shall, no later than ninety (90) days after the Closing Date, attempt to (i) enter into a Consideration allocation agreement providing for the allocation of the Consideration among the Business Assets consistent with the provisions of Section 1060 of the Code and the Treasury Regulations thereunder and (ii) cooperate in the preparation of the Asset Acquisition Statement in accordance with clause (i) for timely filing with their respective federal income tax returns. If Seller and Buyer shall have agreed on a Consideration allocation and an Asset Acquisition Statement, then Seller and Buyer shall file the Asset Acquisition Statement in the form so agreed and neither Seller nor Buyer shall take a Tax position which is inconsistent with such Consideration allocation.

 

2.12 Further Assurances. On and after the Closing, upon the reasonable request of a Party, the other Party shall prepare, execute and deliver such other and further agreements, instruments, certificates, and documents, and take, do and perform such other and further actions, as may be reasonably necessary or appropriate in order to effectuate the purposes and intent of this Agreement and to consummate the transactions contemplated hereby. In this regard, Seller and Buyer shall, and shall cause their respective affiliates to, execute, acknowledge and deliver all such further conveyances, notices, assumptions, releases and acquittances and such other instruments, and shall take such further actions, as may be reasonably necessary or appropriate to transfer and deliver to Buyer and its affiliates and their successors and assigns, all of the properties, rights, titles, interests, estates, remedies, powers and privileges intended to be conveyed to Buyer under this Agreement, and to assure the assumption by Buyer from Seller and its affiliates and their successors and assigns of the liabilities and obligations intended to be assumed by Buyer under this Agreement, and to otherwise make effective the transactions contemplated hereby.

 

B-18


Table of Contents

2.13 Bulk Sales Law. Buyer hereby waives compliance by Seller with the requirements and provisions of any “bulk-transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the sale of any or all of the Business Assets to Buyer.

 

2.14 Transfer Taxes. Buyer shall pay all applicable Taxes and all recording and filing fees that may be imposed, assessed or payable by reason of the operation or as a result of this Agreement including the sales, transfers, leases, rentals, licenses, and assignments contemplated hereby, except for Seller’s net income and capital gains taxes or franchise or other taxes based on Seller’s net income, gross receipts or profits (“Transfer Taxes”). The Party required by Law to file a Tax Return with respect to such Transfer Taxes shall do so within the time period prescribed by law, and Buyer shall promptly reimburse Seller for any Transfer Taxes so paid by Seller upon receipt of notice that such Transfer Taxes have been paid. Buyer and Seller shall use commercially reasonable efforts, to the extent permitted by Law, to reduce any applicable Transfer Taxes.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

 

Seller hereby represents and warrants to Buyer, except as set forth in the Business Disclosure Schedule provided by Seller to Buyer on the date hereof (the “Business Disclosure Schedule”) (as to which Buyer acknowledges and agrees that any matter disclosed pursuant to a section, subsection, paragraph or subparagraph of the Business Disclosure Schedule shall be deemed disclosed for all other purposes of the Business Disclosure Schedule as and to the extent the content or context of such disclosure makes it reasonably apparent, if read in the context of such other section, subsection, paragraph or subparagraph of the Business Disclosure Schedule, that such disclosure is applicable to such other section, subsection, paragraph or subparagraph of the Business Disclosure Schedule), the following:

 

3.1 Organization, Qualification and Corporate Power. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Seller has all requisite corporate power and authority to own and use the Business Assets.

 

3.2 Authorization of Transaction. Seller has all requisite power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution and delivery by Seller of this Agreement and the Ancillary Agreements and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of Seller. This Agreement and the Ancillary Agreements have been duly and validly executed and delivered by Seller and (assuming due authorization, execution and delivery by Buyer) constitute valid and binding obligations of Seller, enforceable against Seller in accordance with their terms, subject to bankruptcy, insolvency and similar laws affecting the rights of creditors generally and subject to rules of Law governing specific performance, injunctive relief and other equitable remedies.

 

3.3 Noncontravention. Neither the execution and delivery by Seller of this Agreement, or the Ancillary Agreements, nor the consummation by Seller of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision of the articles of incorporation or bylaws of Seller, (b) require on the part of Seller any filing with, or any permit, authorization, consent or approval of, any court, arbitrational tribunal, administrative agency or commission or other governmental or regulatory authority or agency (a “Governmental Entity”) (c) conflict with, result in a material breach of, constitute (with or without due notice or lapse of time or both) a material default under, result in the acceleration of any material obligations under, create in any party the right to terminate, materially modify any provision or cancel, or require any notice, consent or waiver under, any Business Contract, (d) result in the imposition of any Encumbrance upon any of the Business Assets, or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to any of the Business Assets, except in the case of clauses (b) or (e), any filing, permit, authorization, consent or approval of, or violation that would not reasonably be expected to be materially adverse to the Business Assets.

 

B-19


Table of Contents

3.4 Litigation. There is no injunction, judgment, order, decree, ruling, charge, action, suit, proceeding, claim, arbitration or to the knowledge of Seller, investigation, of any nature before any Governmental Entity (a “Legal Proceeding”) which is pending, and, to the knowledge of Seller, there is no Legal Proceeding threatened, against Seller relating to the Business Assets that would have a Material Adverse Effect on the Business.

 

3.5 Inventory. All Inventory included in the Business Assets consists of items of a quantity and quality usable or saleable in the Ordinary Course of Business, and as of the Closing Date will be located at the Premises or the Other Premises, and not consigned to any Person.

 

3.6 Undisclosed Liabilities. Seller has no liabilities that would be deemed to be Assumed Liabilities pursuant to Section 2.4, other than those liabilities disclosed on the Schedules to this Agreement and in the Business Disclosure Schedule.

 

3.7 Title to Business Assets. Seller has, and as of immediately prior to the Closing will have, good and valid title to, or a valid and binding leasehold interest or license in, all tangible personal property included in the Business Assets, free and clear of any Encumbrance.

 

3.8 No Infringement. To the knowledge of Seller, the Business Assets do not infringe or misappropriate the Intellectual Property of any third party where such infringement or misappropriation, individually or in the aggregate, would have a Material Adverse Effect on the Business.

 

3.9 Business Contracts. Seller has made available to Buyer a complete and accurate copy of each Business Contract, subject to confidentiality restrictions to which Seller is bound. Each Business Contract is valid and in full force and effect (subject to bankruptcy, insolvency and similar laws affecting the rights of creditors generally and subject to rules of Law governing specific performance, injunctive relief and other equitable remedies) and constitutes an arrangement with such other party under which the Seller is actively providing services in the nature of the Business in consideration of payments from the other party in the Ordinary Course of Business. The pricing terms under each Business Contract do not differ materially from pricing terms generally established by Seller in the Ordinary Course of Business. Neither Seller nor to Seller’s knowledge any party to any Business Contract has violated any material provision of, or committed or failed to perform any act which, with or without notice, lapse of time or both would constitute a default under the material provisions of, any Business Contract.

 

3.10 Taxes.

 

(a) To the extent that failure to do so would have a Material Adverse Effect on Buyer, or a Material Adverse Effect on the Business or materially and adversely impact Buyer’s use of the Business Assets as of the Closing Date, Seller will have:

 

(i) prepared and timely filed all Tax Returns relating to any and all Taxes attributable to Seller and such Returns are or will be true and correct in all material respects and have been or will be completed in accordance with applicable Law; and

 

(ii) paid all Taxes and withheld with respect to the Transferred Employees and timely remitted to the appropriate Governmental Entity all federal, state and foreign income, payroll and other Taxes required to be withheld or paid.

 

(b) To the extent that doing so would have a Material Adverse Effect on Buyer, or a Material Adverse Effect on the Business or materially and adversely impact Buyer’s use of the Business Assets as of the Closing Date, Seller has not been delinquent in the payment of any Tax.

 

(c) No audit or other examination of any Tax Return of Seller is presently in progress, nor has Seller been notified of any request for such an audit or other examination, pursuant to which an assessment would have a Material Adverse Effect on Buyer, or a Material Adverse Effect on the Business or materially and adversely impact Buyer’s use of the Business Assets.

 

B-20


Table of Contents

(d) No Tax deficiency is outstanding, assessed or proposed against the Seller that would have a Material Adverse Effect on Buyer, a Material Adverse Effect on the Business or materially and adversely impact Buyer’s use of the Business Assets.

 

3.11 Employee MattersSection 3.11 of the Business Disclosure Schedule sets forth the name, title and annual salary or wage rate of each Business Employee (including any Business Employee who is on a leave of absence). The employment of each Business Employee is terminable by Seller at will and no Business Employee is entitled to severance pay, a notice period prior to termination or other benefits following termination of such Person’s employment with Seller, except as required by applicable Law.

 

3.12 Labor Relations . With respect to the Business Employees, Seller has withheld all amounts required by Law or agreed to be withheld by it from the wages, salaries and other payments to the Business Employees and is liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. There are no collective bargaining agreements or other labor union contract covering any of the Business Employees. With respect to the Business Employees, there are no pending, or, to Seller’s knowledge, threatened or anticipated (a) employment discrimination charges or complaints against or involving Seller before any federal, state or local board, department, commission or agency, (b) unfair labor practice charges or complaints, disputes or grievances affecting Seller, (c) to Seller’s knowledge, union representation petitions respecting the Business Employees, (d) to Seller’s knowledge, efforts being made to organize any of the Business Employees, or (e) strikes, slow downs, work stoppages, or lockouts or, to Seller’s knowledge, threats thereof affecting Seller.

 

3.13 No Impairment. To Seller’s knowledge, the consummation of the transactions contemplated by this Agreement will not result in: (i) Buyer being bound by any material non-compete or other material restriction on the operation of any business of Buyer or its subsidiaries, or (ii) Buyer or any of its subsidiaries granting any rights or licenses to any material Intellectual Property of Buyer or any of its subsidiaries to any third party (including a covenant not to sue with respect thereto).

 

3.14 Compliance with Laws. Seller has conducted the operations of the Business in compliance with applicable Law, except for any violations or defaults that have not had and would not reasonably be expected to have a Material Adverse Effect on the Business.

 

3.15 Insurance. The Business Assets are covered by insurance policies, self-insurance arrangements and/or indemnity bonds that are currently in effect in insured amounts and with terms and conditions that are reasonable for the Business Assets.

 

3.16 Brokers’ Fees. No broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller.

 

3.17 Investment Representations. Seller understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon the following representations and warranties of Seller:

 

(a) Seller understands that the Securities have not been registered under the Securities Act and may not be sold or transferred without such registration or an exemption therefrom;

 

(b) Seller represents that it is an “accredited investor” within the meaning of Regulation D under the Securities Act; and

 

(c) Seller is acquiring the Securities for its own account for investment only, and not with a view towards their resale or distribution; provided, however, that by making the representations set forth herein, Seller does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption from registration under the Securities Act and any applicable state securities Law.

 

B-21


Table of Contents

3.18 Representations Complete. The representations and warranties made by Seller in this Article III do not contain any untrue statement of a material fact, and do not omit to state a material fact required to be stated or otherwise necessary in order to make such representations and warranties not misleading in light of the circumstances under which they were made.

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BUYER

 

Buyer hereby represents and warrants to Seller, except as set forth in the Buyer Disclosure Schedule provided by Buyer to Seller on the date hereof (the “Buyer Disclosure Schedule”) (as to which Seller acknowledges and agrees that any matter disclosed pursuant to a section, subsection, paragraph or subparagraph of the Buyer Disclosure Schedule shall be deemed disclosed for all other purposes of the Buyer Disclosure Schedule as and to the extent the content or context of such disclosure makes it reasonably apparent, if read in the context of such other section, subsection, paragraph or subparagraph of the Buyer Disclosure Schedule, that such disclosure is applicable to such other section, subsection, paragraph or subparagraph of the Buyer Disclosure Schedule), the following:

 

4.1 Organization and Corporate Power.

 

(a) Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio. Each of Buyer and its subsidiaries has all requisite corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. Each of Buyer and its subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it in the conduct of its business makes such qualification or licensing necessary, except to the extent the failure to be so qualified or in good standing would not have a Material Adverse Effect on Buyer.

 

(b) Exhibit 3.1(i) to Buyer’s Registration Statement on Form S-1 and Exhibit 3.1(ii) to Buyer’s Registration Statement on Form S-1, (File No. 333-37566) filed with the SEC on July 3, 2000, set forth a true and complete copy of Buyer’s articles of incorporation and code of regulations, respectively, each as currently in effect and as amended to date (together with any certificate of designation of Buyer, a true and complete copy of which has been delivered to Buyer, the “Buyer Charter Documents). Buyer is not in violation of any of the provisions of the Buyer Charter Documents.

 

4.2 Authorization of Transaction. Buyer has all requisite power and authority to execute and deliver this Agreement, the Ancillary Agreements and the Warrant and to perform its obligations hereunder and thereunder (provided that the Proposals are subject to satisfaction of the Shareholder Approval Requirement). The execution and delivery by Buyer of this Agreement, the Ancillary Agreements and the Warrant, and the consummation by Buyer of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of Buyer (provided that the Proposals are subject to satisfaction of the Shareholder Approval Requirement). This Agreement, the Ancillary Agreements and the Warrant have been duly and validly executed and delivered by Buyer and (assuming due authorization, execution and delivery by Seller) constitute valid and binding obligations of Buyer, enforceable against Buyer in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the rights of creditors generally and subject to rules of Law governing specific performance, injunctive relief and other equitable remedies.

 

4.3 Noncontravention. Subject to (i) compliance with applicable requirements of the Securities Act, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities or “blue sky” laws, (iii) such consents, approvals, orders, authorizations, registration, declaration or filing as may be required by the rules and regulations of Nasdaq, and (iv) satisfaction of the Shareholder Approval Requirement, neither the execution and delivery by Buyer of this Agreement, the Ancillary Agreements, the Warrant, nor the consummation by Buyer of the transactions contemplated hereby or

 

B-22


Table of Contents

thereby, will (a) conflict with or violate any provision of the Buyer Charter Documents, (b) require on the part of Buyer any filing with, or permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any Buyer Material Contract, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Buyer or any of its properties or assets, except in the case of clauses (b), (c) or (d), any filing, permit, authorization, consent or approval of, or conflict, breach, default, acceleration, right or violation that would not reasonably be expected to be materially adverse to Buyer or any of its subsidiaries.

 

4.4 Litigation. There are no Legal Proceedings that are pending, and, to the knowledge of Buyer, there are no Legal Proceedings threatened, against or relating to Buyer that would have a Material Adverse Effect on Buyer.

 

4.5 Capitalization.

 

(a) The authorized capital stock of Buyer consists of 50,000,000 shares of common stock, no par value, 21,595,043 of which were issued and outstanding, and 406,623 of which were held in treasury, as of October 12, 2005, and 5,000,000 shares of preferred stock, no par value, none of which were issued and outstanding as of October 12, 2005. Buyer’s common stock and preferred stock have the rights, preferences, privileges and restrictions set forth in the Restated Articles.

 

(b) As of October 12, 2005, 4,875,000 shares of common stock were authorized for issuance to employees, consultants and directors pursuant to Buyer’s Stock Option Plans, under which options to purchase 2,775,095 shares were issued and outstanding as of such date. All shares of Buyer capital stock subject to issuance under the Buyer Stock Option Plans, upon issuance on the terms and conditions specified in the Buyer Stock Option Plans and the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable.

 

(c) Except as otherwise set forth in this Section 4.5 and as expressly contemplated by this Agreement, as of October 12, 2005, there are no outstanding or authorized stock appreciation, phantom stock, profit participation or other similar rights with respect to Buyer or any of its subsidiaries, and there are no other securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Buyer or any of its subsidiaries is a party or by which any of them is bound obligating Buyer or any of its subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of Buyer, or obligating Buyer or any of its subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking.

 

(d) All issued and outstanding shares Buyer’s common stock and all issued and outstanding options to purchase shares of Buyer’s capital stock have been duly authorized and validly issued in compliance with applicable laws, and are fully paid and nonassessable. The Securities have been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Warrant, will be validly issued, fully paid and nonassessable, will be free of any encumbrance (provided, however, that the Securities are subject to restrictions on transfer under applicable state and federal securities laws and as set forth in the Voting Agreement and Registration Rights Agreement) and will be issued in compliance with applicable Laws and an exemption from the registration requirements of the Securities Act.

 

(e) Except for the rights granted to Seller pursuant to the Registration Rights Agreement, no other Person has demand or other registration rights to cause Buyer to file any registration statement under the Securities Act relating to any capital stock of Buyer or any right to participate in any such registration statement.

 

4.6 Subsidiaries. Exhibit 21 to Buyer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 includes all the subsidiaries of Buyer which are significant subsidiaries. All the outstanding shares of capital stock of, or other equity interests in, each such significant subsidiary have been validly issued and are

 

B-23


Table of Contents

fully paid and nonassessable and are, except as set forth in such Exhibit 21, owned directly or indirectly, by Buyer, free and clear of all pledges, claims, liens, charges, encumbrances, options and security interests of any kind or nature whatsoever, including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests, except for restrictions imposed by applicable securities laws.

 

4.7 SEC Filings; Financial Statements; Sarbanes-Oxley

 

(a) As of their respective filing dates, each report, statement and other filing filed with the SEC by Buyer (collectively, the “Buyer SEC Documents”) complied in all material respects with the requirements of the Exchange Act or the Securities Act, as applicable, and none of the Buyer SEC Documents as of their respective filing dates contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading.

 

(b) The financial statements of Buyer, including the notes thereto, included in the most recent annual report on Form 10-K and each subsequent quarterly report on Form 10-Q, included in the Buyer SEC Documents (the “Financial Statements”) (i) complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto as of their respective dates, (ii) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated and consistent with each other (except as may otherwise be indicated in the notes thereto or, in the case of unaudited statements included in quarterly reports on Form 10-Q, as permitted by Form 10-Q under the Exchange Act) and (iii) present fairly in all material respects the consolidated financial position and results of operations and cash flows of Buyer as of the dates, and for the periods, indicated therein (subject, in the case of interim period financial statements, to normal recurring year-end audit adjustments).

 

(c)

 

(i) Buyer has timely filed all certifications and statements required by (x) Rule 13a-14 or Rule 15d-14 under the Exchange Act or (y) 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) with respect to any Buyer SEC Documents.

 

(ii) Buyer has in place the “disclosure controls and procedures” (as defined in Rule 13a-15 or Rule 15d-15 under the Exchange Act) required in order for the chief executive officer and chief financial officer of Buyer to engage in the review and evaluation process mandated by Section 302 of the Sarbanes-Oxley Act of 2002; and such controls and procedures are reasonably designed to ensure that material information (both financial and non-financial) concerning Buyer and its subsidiaries required to be disclosed by Buyer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to Buyer’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the chief executive officer and chief financial officer of Buyer required by Section 302 of the Sarbanes-Oxley Act of 2002 with respect to such reports. There are no significant deficiencies or material weaknesses in internal controls or the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect Buyer’s ability to record, process, summarize and report financial data controls and, to the knowledge of Buyer there has not occurred any fraud, whether or not material, that involves management or other employees who have a significant role in Buyer’s internal controls.

 

(iii) Neither Buyer nor any of its subsidiaries nor, to the knowledge of Buyer, any director, officer, employee, auditor, accountant or representative of Buyer or any of its subsidiaries has received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or claim, whether written or oral, regarding the accounting or auditing practices, procedures, methodologies or methods of Buyer or any of its subsidiaries or their respective internal accounting controls, including any material complaint, allegation, assertion or claim that Buyer or any of its subsidiaries has engaged in questionable accounting or auditing practices.

 

B-24


Table of Contents

(iv) There are no outstanding loans made by Buyer or any of its subsidiaries to any executive officer or director of Buyer.

 

(d) Buyer has not received notice from any stock exchange, market or trading facility on which the Buyer’s common stock is or has been listed to the effect that Buyer is not in compliance with the listing or maintenance requirements or such exchange or market.

 

4.8 Undisclosed Liabilities; Absence of Changes.

 

(a) Except as and to the extent of the amounts specifically reflected or reserved against on the Balance Sheet, neither the Buyer nor any of its subsidiaries has any material liabilities or obligations of a nature required to be set forth on a balance sheet in accordance with GAAP, whether due or to become due, accrued, absolute, contingent or otherwise, except for (i) liabilities and obligations incurred since the date of the Balance Sheet in the ordinary course of business, or (ii) liabilities or other obligations that are not required under GAAP to be reflected in the Financial Statements.

 

(b) Since the Balance Sheet Date (i) there has not been a Material Adverse Effect on Buyer, and (ii) through the date hereof, there has not been (x) any alternation of Buyer’s method of accounting, (y) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of Buyer’s capital stock, or any purchase, redemption or other acquisition by Buyer or any of its subsidiaries of any of Buyer’s capital stock or any other securities of Buyer or any options, warrants, calls or rights to acquire any such shares or other securities except for repurchases from service providers following their termination pursuant to the terms of their pre-existing stock option or purchase agreements, or (z) any split, combination or reclassification of any of Buyer’s capital stock.

 

4.9 Material Contracts.

 

(a) For purposes of this Agreement, “Buyer Material Contract” shall mean:

 

(i) any “material contracts” (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC) with respect to Buyer and its subsidiaries; and

 

(ii) any Contract containing any covenant: (A) limiting the right of Buyer or any of its subsidiaries to engage in any material line of business, make use of any material Intellectual Property or compete with any Person in any material line of business, (B) granting any exclusive distribution or supply rights, or (C) otherwise having an adverse effect on the right of Buyer and its subsidiaries to sell, distribute or manufacture any material products or services or to purchase or otherwise obtain any material components, parts or subassemblies;

 

(b) Section 4.9(b) of the Buyer Disclosure Schedule sets forth a list of each Buyer Material Contract to which Buyer or any of its subsidiaries is a party or is otherwise bound by as of the date hereof. Buyer has made available to Seller a complete and accurate copy of each Buyer Material Contract listed in Section 4.9(b) of the Buyer Disclose Schedule.

 

(c) Each Buyer Material Contract is valid and in full force and effect (subject to bankruptcy, insolvency and similar laws affecting the rights of creditors generally and subject to rules of Law governing specific performance, injunctive relief and other equitable remedies), except to the extent they have previously expired in accordance with their terms or if the failure to be in full force and effect, individually or in the aggregate, would not have a Material Adverse Effect on Buyer. Neither Buyer nor any of its subsidiaries nor to Buyer’s knowledge any party to any Buyer Material Contract has violated any provision of, or committed or failed to perform any act which, with or without notice, lapse of time or both would constitute a default under the provisions of, any Buyer Material Contract, except in each case for those violations and defaults which, individually or in the aggregate, would not have a Material Adverse Effect on Buyer.

 

B-25


Table of Contents

4.10 Taxes. Buyer has timely filed all Tax Returns required to be filed by it with the appropriate federal, state, local and foreign Tax authorities, except where the failure to do so would not have a Material Adverse Effect on Buyer. Such Tax Returns are true and correct in all material respects. All Taxes shown to be due and payable on such Returns, any assessments imposed, and, to the Buyer’s knowledge, all other Taxes due and payable by Buyer (including any required withholding and employment Taxes) have been paid or will be paid prior to the time they become delinquent. The provision for Taxes of Buyer as shown in the Financial Statements is adequate for Taxes due or accrued as of the date thereof. Buyer has not been advised in writing (i) that any of its Tax Returns have been or are being audited as of the date hereof, or (ii) of any deficiency in assessment or proposed judgment with respect to its Taxes. Buyer has not constituted either a “distributing corporation” or a “controlled corporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code. Buyer has not engaged in a “reportable transaction,” as set forth in Treas. Reg. § 1.6011-4(b), or any transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a “listed transaction,” as set forth in Treas. Reg. § 1.6011-4(b)(2).

 

4.11 Employee Benefit Plans.

 

(a) Neither the Buyer nor any of its subsidiaries nor any ERISA Affiliate has ever maintained, sponsored, contributed to or incurred any liability under any Benefit Plan that is subject to any provision of Title IV of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or Section 412 of the Code.

 

(b) Neither the Buyer nor any of its subsidiaries nor any ERISA Affiliate has ever incurred any obligation to contribute to or any liability under any “multi-employer plan” within the meaning of Section 4001(a)(3) of ERISA or ever participated in any “multiple employer plan” within the meaning of Section 413(c) of the Code.

 

(c) The written terms of each Benefit Plan of the Buyer, its subsidiaries and of each ERISA Affiliate are, and the Benefit Plans have been administered, in compliance with the requirements of ERISA, and, where applicable, Section 401 of the Code, subject to a timely execution of any legally required update amendments, except as would not have a Material Adverse Effect on Buyer.

 

(d) There are not now, nor have there been, any transactions involving any of the Benefit Plans of Buyer or any of its subsidiaries which are prohibited under ERISA or the Code.

 

(e) As of the date hereof, there are no pending or, to the knowledge of the Buyer, threatened, claims by or on behalf of any of the Benefit Plans of the Buyer or any of its subsidiaries or by any employee of Buyer or any of its subsidiaries alleging a breach or breaches of fiduciary duties or violations of other applicable Laws, including ERISA, which would result in a Material Adverse Effect on Buyer, nor to the knowledge of the Buyer is there any basis for such claim.

 

(f) All returns, reports, disclosure statements and premium payments required to be made under ERISA and the Code with respect to the Benefit Plans of the Buyer and its subsidiaries have been timely filed or delivered.

 

(g) Each Benefit Plan of the Buyer or any of its subsidiaries or any ERISA Affiliate that is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service covering all amendments required to be adopted to date and, to the knowledge of Buyer, there are no circumstances which exist that are reasonably likely to adversely affect the tax-qualified status of such Benefit Plan or result in the revocation of such letter, except as would not have a Material Adverse Effect on Buyer.

 

(h) Buyer, its subsidiaries and each ERISA Affiliate have made all contributions and payments required to be made to each of their Benefit Plans within the time prescribed by law or, if earlier, the terms of the Benefit

 

B-26


Table of Contents

Plan. The term “ERISA Affiliate” means any entity that, together with the Buyer and its subsidiaries, is treated as a single-employer within the meaning of Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA. The term “Benefit Plan” means each “employee benefit plan,” as such term is defined in Section 3(3) of ERISA.

 

4.12 Labor Relations. Buyer and its subsidiaries have withheld all amounts required by Law or agreed to be withheld by them from the wages, salaries and other payments to their employees and are not liable for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. There are no collective bargaining agreements or other labor union contract covering any of the employees of the Buyer or any of its subsidiaries. There are no pending, or to Buyer’s knowledge, threatened or anticipated (a) employment discrimination charges or complaints against or involving Buyer or any of its subsidiaries before any federal, state or local board, department, commission or agency, (b) unfair labor practice charges or complaints, disputes or grievances affecting Buyer or its subsidiaries, (c) to Buyer’s knowledge, union representation petitions respecting the employees of the Buyer or its subsidiaries, (d) to Buyer’s knowledge, efforts being made to organize any of the employees of the Buyer or its subsidiaries or (e) strikes, slow downs, work stoppages, or lockouts or threats thereof affecting Buyer or its subsidiaries.

 

4.13 Intellectual Property. Buyer and its subsidiaries are the sole and exclusive owners of, or have a valid right to use, sell or license, as the case may be, all Intellectual Property used, sold or licensed by Buyer and its subsidiaries, as applicable, in the business of Buyer and its subsidiaries as currently conducted or contemplated to be conducted. To the knowledge of Buyer, all material Intellectual Property owned by Buyer or any of its subsidiaries are valid and enforceable (except with respect to items for which applications are pending).

 

(b) Buyer has the right to use, pursuant to valid licenses, all software development tools, library functions, compilers and all other third-party software that are used in the operation of Buyer or any of its subsidiaries or that are required to create, modify, compile, operate or support any software that is Intellectual Property owned by or exclusively licensed to Buyer or any of its subsidiaries or is incorporated into any product of Buyer or any of its subsidiaries. Without limiting the foregoing, no open source or public library software, including any version of any software licensed pursuant to any GNU public license, was used in the development or modification of any software that is or was Intellectual Property owned by or exclusively licensed to Buyer or any of its subsidiaries or is incorporated into any product of Buyer or any of its subsidiaries.

 

(c) No government funding, resources, facilities of a university, college, other educational institution or research center or funding from third parties was used in the development of any Intellectual Property owned by or exclusively licensed to Buyer or any of its subsidiaries.

 

(d) The products and operation of the business of Buyer and its subsidiaries and the use of the Intellectual Property owned by Buyer and its subsidiaries in connection therewith do not infringe, misappropriate or constitute an unauthorized use of or violate any Intellectual Property right (including any right to privacy or publicity) of any third party or constitute unfair competition or trade practices under the laws of any jurisdiction, except as would not have a Material Adverse Effect on Buyer. Neither Buyer nor any of its subsidiaries has received notice from any person claiming that such operation or any act, product, technology or service (including products, technology or services currently under development) of Buyer or any of its subsidiaries infringes or misappropriates any Intellectual Property of any person or constitutes unfair competition or trade practices under the laws of any jurisdiction (nor does Buyer have knowledge of any basis therefor). The Intellectual Property owned by or licensed to Buyer and each of its subsidiaries includes all of the Intellectual Property used in and/or necessary to enable Buyer and its subsidiaries to conduct their business in the manner in which such businesses are currently being conducted and as contemplated to be conducted, including without limitation, the design, development, manufacture, use, import and sale of the products of Buyer and its subsidiaries.

 

(e) As of the Closing Date, neither Buyer nor any of its subsidiaries has licensed any of its Intellectual Property to any Person on an exclusive basis and no Person has joint ownership of any Intellectual Property of

 

B-27


Table of Contents

Buyer or any of its subsidiaries, nor has Buyer or any of its subsidiaries entered into any Contract limiting its ability to exploit fully any of its Intellectual Property (excluding Intellectual Property licensed on a nonexclusive basis to customers in the ordinary course of business consistent with past practice), nor has Buyer or any of its subsidiaries granted any Person ownership or license rights to improvements made by or for Buyer or any of its subsidiaries in Intellectual Property licensed to Buyer or any of its subsidiaries by such Person.

 

(f) No non-public, proprietary Intellectual Property material to the business of Buyer and its subsidiaries taken as a whole as currently conducted have been authorized to be disclosed or actually disclosed by Buyer or any of its subsidiaries to any employee or third party other than pursuant to a non-disclosure agreement or that are subject to other confidentiality obligations that protects the proprietary interests of Buyer and its subsidiaries in and to such Intellectual Property. Buyer and its subsidiaries have taken reasonable security measures to protect the confidentiality of confidential Intellectual Property of Buyer and its subsidiaries.

 

(g) To the knowledge of Buyer, no third party is infringing, violating, misusing or misappropriating any material Intellectual Property of Buyer or any of its subsidiaries, and no such claims have been made against a third party by Buyer or any of its subsidiaries.

 

4.14 No Impairment. To Buyer’s knowledge, the consummation of the transactions contemplated by this Agreement will not result in: (i) Seller being bound by any material non-compete or other material restriction on the operation of the Business, or (ii) Seller or any of its subsidiaries granting any rights or licenses to any material Intellectual Property of Seller or any of its subsidiaries relating to the Business to any third party (including a covenant not to sue with respect thereto).

 

4.15 Real Estate Matters. Buyer owns the Galion Facility free and clear of all Buyer Encumbrances. There are no structural, electrical, mechanical, plumbing, roof, paving or other defects in any improvements located on the Galion Facility as could, either individually or in the aggregate, have a material and adverse effect on the use, development, occupancy or operation thereof. There are no natural or artificial conditions upon the Galion Facility or any other facts or conditions which could, in the aggregate, have a material and adverse effect on the transferability, financability, ownership, leasing, use, development, occupancy or operation of any such real property. Buyer has not received any notice from any insurance company of any defects or inadequacies in the Galion Facility or any part thereof which could materially and adversely affect the insurability of such property or the premiums for the insurance thereof, nor has any notice been given by any insurer of any such property requesting the performance of any repairs, alterations or other work with which compliance has not been made.

 

4.16 Environmental Matters.

 

(a) As of the Closing, except in compliance with Environmental Laws in a manner that could not reasonably be expected to subject the Buyer or any of its subsidiaries to material liability, no Hazardous Materials are present on the Galion Facility or were present on any other real property at the time it ceased to be owned, operated, occupied, controlled or leased by Buyer. To the knowledge of Buyer, except as could not reasonably be expected to subject Buyer or any of its subsidiaries to material liability, there are no underground storage tanks, asbestos which is friable or likely to become friable or PCBs present on any Galion Facility.

 

(b) Buyer has conducted all Hazardous Material Activities relating to its business in compliance in all material respects with all applicable Environmental Laws. To Buyer’s knowledge, the Hazardous Materials Activities of Buyer or any of its subsidiaries prior to the Closing have not resulted in the exposure of any person to a Hazardous Material in a manner which has caused or could reasonably be expected to cause an adverse health effect to any such person.

 

(c) No action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or to the Buyer’s knowledge, threatened, concerning or relating to any Hazardous Materials Activity of Buyer or any of its subsidiaries.

 

B-28


Table of Contents

(d) Buyer is not aware of any fact or circumstance, which could result in any Environmental Liabilities which could reasonably be expected to result in a Material Adverse Effect on Buyer. Buyer has not, nor has any of its subsidiaries, entered into any agreement that may require it to guarantee, reimburse, pledge, defend, hold harmless or indemnify any other Person with respect to liabilities arising out of Environmental Laws or the Hazardous Materials Activities of Buyer or any of its subsidiaries.

 

(e) Buyer has delivered to Seller or made available for inspection by Seller and its agents, representatives and employees all records in the Buyer’s possession concerning the Hazardous Materials Activities of Buyer and its subsidiaries relating to its business and all environmental audits and environmental assessments of the Galion Facility conducted at the request of, or otherwise in the possession of Buyer.

 

4.17 Compliance with Laws. Buyer has conducted its operations in compliance with applicable Law, except for any violations or defaults that have not had and would not reasonably be expected to have a Material Adverse Effect on Buyer. There is no material judgment, injunction, order or decree binding upon Buyer or any of its subsidiaries which has or would reasonably be expected to have the effect of prohibiting or materially impairing any material business practice of Buyer or any of its subsidiaries, any acquisition of material property by Buyer or any of its subsidiaries or the conduct of business by Buyer and its subsidiaries as currently conducted.

 

4.18 Brokers’ Fees. No broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer.

 

4.19 Fairness Opinion. Buyer’s board of directors has received a written opinion from GBQ Consulting LLC dated as of October 13, 2005, to the effect that, as of such date, the issuance of the Securities in exchange of the Business Assets is fair, from a financial point of view, to Buyer shareholders.

 

4.20 Board Approval. The board of directors of Buyer has at a meeting duly called and held on or prior to the date hereof (i) determined that this Agreement and the transactions contemplated hereby are advisable and in the best interest of Buyer and its shareholders, (ii) approved and adopted this Agreement and the transactions contemplated hereby, including the Ancillary Agreements and the Warrant and transactions contemplated thereby, (iii) directed that the proposed amendment to the Company’s Code of Regulations with respect to the Opt-Out Proposal be submitted to the shareholders of Buyer for approval, and (iv) directed that the issuance of the Securities pursuant to and subject to the terms of this Agreement and the Warrant be submitted to the shareholders of Buyer for approval.

 

4.21 Vote Required. The only vote of the holders of any class or series of capital stock of Buyer necessary to approve and adopt this Agreement and approve each of the Opt-Out Proposal and the Issuance Proposal is, in each case, the affirmative vote of the holders of a majority of the outstanding shares of Buyer’s common stock (the “Shareholder Approval Requirement”).

 

4.22 State Takeover Statutes. Buyer’s board of directors has taken all actions required by Chapter 1704 of the Ohio Revised Code in a manner that constitutes approval of Buyer’s board of directors for purposes of Sections 1704.01 through 1704.07 of the Ohio Revised Code of both (i) any “Chapter 1704 Transaction” (as described in Section 1704.01), including this Agreement and the Support Agreement, and (ii) the issuance of the Securities as contemplated by this Agreement.

 

4.23 Export Control Laws. Neither Buyer nor any of its subsidiaries has exported, since January 1, 1999, any (a) products or technical data under licenses or technical data under License Exception TSR pursuant to the U.S. Export Administration Regulations (15 CFR Parts 730 through 774) or (b) defense articles and defense services under the International Traffic in Arms Regulations (22 CFR Subchapter M).

 

B-29


Table of Contents

4.24 Representations Complete. The representations and warranties made by Buyer in this Article IV do not contain any untrue statement of a material fact, and do not omit to state a material fact required to be stated or otherwise necessary in order to make such representations and warranties not misleading in light of the circumstances under which they were made.

 

ARTICLE V

COVENANTS

 

5.1 Closing Efforts. Each of the Parties shall use its commercially reasonable efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated by this Agreement, the Ancillary Agreements and the Warrant.

 

5.2 Regulatory Matters. Each of the Parties shall use commercially reasonable efforts to obtain all authorizations, consents, orders and approvals of all Governmental Entities that may be or become necessary for the consummation of the transactions contemplated by this Agreement and shall cooperate fully with each other in promptly seeking to obtain all such authorizations, consents, orders and approvals.

 

5.3 Operation of Business by Buyer. Except as contemplated by this Agreement or as set forth in the Buyer Disclosure Schedule, during the period from the date of this Agreement until the earlier of termination of this Agreement pursuant to its terms or the Closing (the “Restricted Period), Buyer (which shall include for purposes of this Section 5.3. Buyer and each of its subsidiaries, taken as a whole) shall conduct its business and operations in all material respects in the ordinary course, consistent with past practice, and shall use its commercially reasonable efforts to preserve intact its business, organization and relationships with third parties. Without limiting the generality of the foregoing, except as set forth on Schedule 5.3 or as otherwise required by this Agreement, during the Restricted Period, Buyer shall not, without the prior written consent of Seller (such written consent not to be unreasonably withheld, delayed or conditioned):

 

(a) except with respect to the Opt-Out Proposal, amend the Buyer Charter Documents in a manner that would reasonably be likely to adversely affect the Buyer’s capital stock;

 

(b) pay or set a record date prior to the Closing Date relating to any extraordinary dividend or extraordinary distribution;

 

(c) purchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock, except repurchases of unvested shares at cost in connection with the termination of the employment relationship with any employee pursuant to stock option or purchase agreements in effect on the date hereof or entered into the ordinary course of business consistent with past practice after the date hereof;

 

(d) issue, deliver, sell, authorize, pledge or otherwise encumber any shares of Buyer capital stock, or any securities convertible into shares of Buyer capital stock, or subscriptions, rights, warrants or options to acquire any shares of Buyer capital stock or any securities convertible into shares of Buyer capital stock, or enter into other agreements or commitments of any character obligating it to issue any such securities or rights, other than the granting of options to purchase shares of Buyer common stock under the Buyer Stock Option Plans as in effect on the date hereof in the ordinary course of business consistent with past practice:

 

(e) knowingly take any action that would result in a failure to maintain trading of Buyer’s common stock on the Nasdaq;

 

(f) fail to make in a timely manner any filings with the SEC required under the Securities Act or the Exchange Act or the rules and regulations promulgated thereunder;

 

B-30


Table of Contents

(g) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other person or division or business unit thereof or any equity interest therein if such acquisition would be deemed to be a significant acquisition as defined in Rule 11 01(b)(1) of Regulation S X;

 

(h) except for any change which is required by reason of a change in GAAP or as otherwise required by applicable Law, change any material method of accounting or accounting practice use by it; or

 

(i) agree in writing or otherwise to take any of the actions described in subsections (a)-(h) above.

 

5.4 Business Assets. Except as contemplated in this Agreement or as set forth in the Business Disclosure Schedule, during the Restricted Period, Seller shall use its commercially reasonable efforts to preserve intact the Business Assets and its relationships with third parties with respect thereto. Without limited the generality of the foregoing, except as set forth on Schedule 5.4 or as otherwise required by this Agreement, during the Restricted Period, Seller shall not, without the prior written consent of Buyer (such written consent not to be unreasonably withheld, delayed or conditioned):

 

(a) sell, lease, license, encumber or otherwise dispose of any of the Business Assets, other than in the Ordinary Course of Business;

 

(b) incur or assume any material liabilities or obligations that would constitute an Assumed Liability, other than in the Ordinary Course of Business;

 

(c) terminate (except pursuant to its terms), or materially modify or amend any Business Contract;

 

(d) revalue any of the Business Assets, including writing down the Inventory, other than in the Ordinary Course of Business or as required by GAAP or applicable Law; or

 

(e) agree in writing or otherwise to take any of the actions described in subsections (a)-(d) above.

 

5.5 Buyer Consultation. In addition, without limiting the generality of Section 5.3, during the Restricted Period, prior to taking any of the following actions, Buyer shall first consult with Seller and shall in good faith consider the advice of Seller with respect to such action:

 

(a) Enter into any binding agreement, agreement in principle, letter of intent, memorandum of understanding or similar agreement with respect to any material joint venture, strategic partnership or alliance;

 

(b) Enter into, modify or amend in a manner adverse in any material respect to Buyer or any of its subsidiaries, or terminate any Buyer Material Contract, or waive, release or assign any material rights or claims thereunder, in each case, in a manner adverse in any material respect to Buyer or any of its subsidiaries, other than any modification, amendment or termination of any such Buyer Material Contract, as the case may be, in the ordinary course of business, consistent with past practice;

 

(c) Grant any exclusive rights with respect to any material Intellectual Property of Buyer; or

 

(d) Incur any material indebtedness for borrowed money or guarantee any such indebtedness of another Person, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of it, guarantee any debt securities of another Person, enter into any “keep well” or other agreement to maintain any financial statement condition of any other Person (other than any wholly-owned subsidiary of Buyer) or enter into any arrangement having the economic effect of any of the foregoing.

 

5.6 Proxy Statement.

 

(a) As promptly as reasonably practicable following the date hereof, Buyer shall prepare and shall file with the SEC a preliminary Proxy Statement, together with a form of proxy, with respect to the Shareholders’

 

B-31


Table of Contents

Meeting at which the shareholders of Buyer will be asked to (i) vote to approve the Opt-Out Proposal, and (ii) vote to approve the Issuance Proposal, and shall use commercially reasonable efforts to have the Proxy Statement and form of proxy cleared by the SEC as promptly as practicable, and promptly thereafter shall mail the definitive Proxy Statement and form of proxy to shareholders of Buyer. Subject to Section 5.8(b), the Proxy Statement shall include the Recommendation. The term “Proxy Statement” shall mean such proxy or information statement and all amendments or supplements thereto, if any, similarly filed and mailed. Buyer will provide Seller and its counsel with a reasonable opportunity to review the Proxy Statement prior to its filing. Buyer will respond to, and provide Seller and its counsel with a reasonable opportunity to participate in the response of Buyer to, any comments from the SEC and will notify Seller promptly upon the receipt of any comments from the SEC in connection with the filing of, or amendments or supplements to, the Proxy Statement.

 

(b) Whenever any event occurs which is required to be set forth in an amendment or supplement to the Proxy Statement, Buyer will promptly inform Seller of such occurrence and the Parties shall cooperate in filing with the SEC and/or mailing to shareholders of Buyer such amendment or supplement. Buyer shall provide Seller (and its counsel) with a reasonable opportunity to review and comment on the Proxy Statement and on any amendment or supplement to the Proxy Statement prior to filing such with the SEC, and will provide Seller with a copy of all such filings made with the SEC. The information provided and to be provided by Buyer for use in Proxy Statement shall, on the date the Proxy Statement is first mailed to Buyer’s shareholders, on the date of the Shareholders’ Meeting, not contain an untrue statement of a material fact or omit to state any material fact necessary in order to make such information, in light of the circumstances under which it was provided, not misleading, and Buyer agrees to correct any information provided by it for use in the Proxy Statement which shall have become false or misleading in any material respect. The Proxy Statement shall comply as to form in all material respects with all applicable requirements of federal securities Laws.

 

5.7 Meeting of Shareholders. Promptly after the execution of this Agreement, Buyer will take all action necessary in accordance with Ohio Law and the Buyer Charter Documents to call, hold and convene a meeting of its shareholders (the “Shareholders’ Meeting”) to consider (i) an amendment to Buyer’s Code of Regulations to opt-out of the Ohio Control Share Acquisition Act (the “Opt-Out Proposal”), and (ii) approval of the issuance of the Securities pursuant to terms of this Agreement (the “Issuance Proposal”, together with the Opt-Out Proposal, the “Proposals”) as soon as practicable after the date hereof. Subject to Section 5.8(b), Buyer will use commercially reasonable efforts to solicit from its shareholders proxies in favor of the Proposals, and will take all other action reasonably necessary or advisable to secure the vote or consent of its shareholders required by Ohio Law to obtain such approval. Notwithstanding anything to the contrary contained in this Agreement, Buyer may adjourn or postpone (i) the Shareholders’ Meeting to the extent necessary to ensure that any necessary supplement or amendment to the Proxy Statement is provided to its shareholders in advance of a vote on the Proposals or, (ii) the time for which the Shareholders’ Meeting is originally scheduled (as set forth in the Proxy Statement) if there are insufficient shares of Buyer common stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of such Shareholders’ Meeting.

 

5.8 Board Recommendation.

 

(a) Except to the extent expressly permitted by Section 5.8(b): (i) the board of directors of Buyer shall unanimously recommend that its shareholders vote in favor of the Proposals (the “Recommendation”), at the Shareholders’ Meeting, (ii) the Proxy Statement shall include a statement to the effect that the board of directors of Buyer has unanimously recommended that the shareholders of Buyer vote in favor of the Proposals at the Shareholders’ Meeting, and (iii) neither the board of directors of Buyer nor any committee thereof shall withdraw, amend or modify, or propose or resolve to withdraw, amend or modify in a manner adverse to Seller, the Recommendation.

 

(b) The board of directors of Buyer may not withhold, withdraw, amend or modify the Recommendation (any of the foregoing actions, whether by a board of directors or a committee thereof, a “Change of Recommendation”), unless, prior to approval of the Issuance Proposal by the required vote of the

 

B-32


Table of Contents

shareholders of Buyer, the board of directors has concluded in good faith, after consultation with its outside legal counsel, that the failure to effect a Change of Recommendation is reasonably likely to result in a breach of its fiduciary obligations to its shareholders under applicable Law.

 

5.9 Acquisition Proposals.

 

(a) No Solicitation. Buyer agrees that during the Restricted Period neither it nor any of its subsidiaries nor any of their respective officers or directors shall, and that Buyer shall use reasonable efforts to cause its and its subsidiaries’ agents and representatives (including any investment banker, attorney or accountant retained by it or any of its subsidiaries), other employees and affiliates not to (and shall not authorize any of them to) directly or indirectly: (i) solicit, initiate, encourage or knowingly facilitate the making, submission or announcement of, any Acquisition Proposal with respect to itself, (ii) participate or engage in any discussions or negotiations regarding, or furnish to any Person any nonpublic information with respect to, or take any other action intended to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to, any Acquisition Proposal with respect to itself, (iii) approve, endorse or recommend any Acquisition Proposal with respect to itself (except to the extent specifically permitted pursuant to Section 5.9(c)), or (iv) enter into any letter of intent or similar document or any Contract or commitment contemplating or otherwise relating to any Acquisition Proposal with respect to itself. Buyer and its subsidiaries will immediately cease, and Buyer shall use reasonable efforts to cause Buyer’s and its subsidiaries’ respective officers, directors, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its subsidiaries), other employees and affiliates (each a “Buyer Representative”) to cease, any and all existing activities, discussions or negotiations with any third parties conducted heretofore with respect to any Acquisition Proposal with respect to itself. Buyer shall be responsible for any breach of this Section 5.9 by any Buyer Representative.

 

(b) Notification of Unsolicited Acquisition Proposals. As promptly as practicable and in any event within one (1) business day after Buyer gains knowledge of its receipt of any Acquisition Proposal or any request for nonpublic information or inquiry which Buyer reasonably believes would lead to an Acquisition Proposal, Buyer shall, to the extent not prohibited by any confidentiality, nondisclosure or similar agreement entered into prior to the date hereof, provide Seller with written notice of the material terms and conditions of such Acquisition Proposal, request or inquiry, and the identity of the Person or group making any such Acquisition Proposal, request or inquiry. Buyer shall, upon receipt of any material amendments to such Acquisition Proposal, request or inquiry, provide Seller as promptly as practicable and in any event within one (1) business day, written notice setting forth the terms of any such material amendments.

 

(c) Superior Offers. Notwithstanding anything to the contrary contained in Section 5.9(a), in the event that, prior to approval of the Proposals by the required vote of the shareholders of Buyer, Buyer receives an unsolicited, bona fide written Acquisition Proposal with respect to itself from a third party that its board of directors has in good faith concluded (after consultation with its outside legal counsel and its financial advisor), is, or is reasonably likely to result in, a Superior Offer and the Company has complied in all material respects with all its obligations under Section 5.9(a) in connection with such Acquisition Proposal, it may then take the following actions:

 

(i) Furnish nonpublic information to the third party making such Acquisition Proposal, provided that (A) (1) concurrently with furnishing any such nonpublic information to such party, its gives Seller written notice of its intention to furnish nonpublic information and (2) it receives from the third party an executed confidentiality agreement in substantially the form of the Confidentiality Agreement prior to taking any action under clause (1) above, and (B) contemporaneously with furnishing any such nonpublic information to such third party, it furnishes such nonpublic information to Seller (to the extent such nonpublic information has not been previously so furnished);

 

(ii) Engage in negotiations with the third party with respect to the Acquisition Proposal, provided that concurrently with entering into negotiations with such third party, it gives Seller written notice of its intention to enter into negotiations with such third party; and

 

B-33


Table of Contents

(iii) Approve or recommend, or publicly propose to approve or recommend, any Superior Offer and enter into any agreement with respect thereto; provided, in each such case, that Buyer has terminated this Agreement pursuant to Section 7.1(g). Nothing in this Section 5.9(c)(iii) shall relieve the Company from its obligation to comply with Section 5.9(c)(ii).

 

(d) Compliance with Tender Offer Rules. Nothing contained in this Agreement shall prohibit either Buyer or its board of directors from taking and disclosing to its shareholders a position contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act.

 

(e) Certain Definitions. For purposes of this Agreement, the following terms shall have the following meanings:

 

(i) “Acquisition Proposal,” with respect to Buyer, shall mean any offer or proposal or public announcement of a proposal or plan, relating to any transaction or series of related transactions involving: (A) any purchase from Buyer or acquisition by any Person or “group” (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of more than a fifteen percent (15%) interest in the total outstanding voting securities of Buyer or any of its subsidiaries, directly or indirectly, or any tender offer or exchange offer that if consummated would result in any Person or group beneficially owning fifteen percent (15%) or more of the total outstanding voting securities of Buyer or any of its subsidiaries, directly or indirectly, or any merger, consolidation, business combination or similar transaction involving Buyer or any of its subsidiaries or (B) any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the ordinary course of business), acquisition or disposition of more than fifteen percent (15%) of the assets of Buyer (including its subsidiaries taken as a whole); provided however that the transactions contemplated by this Agreement shall not be deemed to constitute an Acquisition Proposal; and

 

(ii) “Superior Offer,” with respect to Buyer, shall mean an unsolicited, bona fide written offer made by a third party to acquire, directly or indirectly, pursuant to a tender offer, exchange offer, merger, consolidation or other business combination, all or substantially all of the assets of Buyer or a majority of the total outstanding voting securities of Buyer and as a result of which the shareholders of Buyer immediately preceding such transaction would hold less than fifty percent (50%) of the equity interests in the surviving or resulting entity of such transaction or any direct or indirect parent or subsidiary thereof, on terms that the board of directors of Buyer has in good faith concluded (after consultation with its outside legal counsel and its financial advisor) (i) to be more favorable to Buyer’s shareholders (in their capacities as shareholders) than the terms provided pursuant to this Agreement, (ii) the conditions to the consummation of which are reasonably capable of being satisfied and (iii) financing for which, to the extent such offer is conditioned thereon, is then committed or in the good faith judgment of the board of directors of Buyer (after consultation with its independent financial advisors) reasonably available.

 

5.10 Seller Exclusivity. Seller agrees that during the Restricted Period neither it nor any of its subsidiaries nor any of their respective officers or directors, and that Seller shall use commercially reasonable efforts to cause its and its subsidiaries’ agents and representatives (including any attorney or accountant retained by it or any of it subsidiaries) other employees and affiliates (each a “Seller Representative”) not to, directly or indirectly, (a) solicit, initiate, encourage or knowingly facilitate any proposal or offer from any third party concerning any sale or other disposition of the Business Assets (other than as permitted by Section 5.4) (a “Seller Acquisition Proposal”) or (b) participate or engage in any discussions or negotiations (and, as of the date hereof, Seller shall immediately cease any discussions or negotiations that are ongoing) regarding, or furnish to any Person any non-public information with respect to, or facilitate in any other manner any effort or attempt by any third party in connection with a Seller Acquisition Proposal. Seller shall be responsible for any breach of this Section 5.10 by any Seller Representative.

 

5.11 Notification of Certain Matters.

 

(a) By Buyer. Buyer shall give prompt notice to Seller of any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate, or any failure of Buyer to comply with or satisfy in

 

B-34


Table of Contents

any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, in each case, such that the conditions set forth in Sections 6.3(a) or 6.3(b) would not be satisfied.

 

(b) By Seller. Seller shall give prompt notice to Buyer of any representation or warranty made by it contained in this Agreement becoming untrue or inaccurate, or any failure of Seller to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, in each case, such that the conditions set forth in Sections 6.2(a) or 6.2(b) would not be satisfied.

 

5.12 Access to Information.

 

(a) During the Restricted Period, (i) Seller shall afford Buyer and its officers, authorized employees, accountants, counsel and other authorized representatives reasonable access during normal business hours to the properties, including Inventory, books, records and personnel relating to the Business Assets, as Buyer may reasonably request (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege or third-party confidentiality obligation), and (ii) without the prior written consent of Seller, Buyer shall not contact any Business Employee or any suppliers to or customer of Seller or the Business in connection with or pertaining to any subject matter of this Agreement. Notwithstanding the foregoing, during the Restricted Period, Seller shall use commercially reasonable efforts to arrange for Buyer to contact (with a representative of Seller present on all such conference calls, meetings or other interactions) certain agreed upon suppliers and customers of the Business and certain Business Employees to discuss matters pertaining to this Agreement and the transactions contemplated hereby. In the event Seller is unable, after Seller has used its commercially reasonable efforts, to arrange for Buyer to make contact with an agreed upon customer, Buyer may contact such agreed upon customer, without further consent from Seller, to discuss matters pertaining to this Agreement and the transactions contemplated hereby (subject in all respects to the restrictions set forth in Section 5.9).

 

(b) During the Restricted Period, (i) Buyer shall afford Seller and its officers, authorized employees, accountants, counsel and other authorized representatives reasonable access during normal business hours to the properties, books, records and personnel of Buyer, as Seller may reasonably request (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege or third-party confidentiality obligation), and (ii) without the prior written consent of Buyer, Seller shall not contact any employees or any suppliers to or customers of Buyer in connection with or pertaining to any subject matter of this Agreement.

 

(c) After the Closing Date, Seller and Buyer shall provide to each other and to their respective officers, authorized employees, accountants, counsel and other authorized representatives, upon reasonable request (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege or third-party confidentiality obligation), reasonable access for inspection and copying of all the Business Records and any other information existing as of the Closing Date and exclusively relating to the Business Assets or the Transferred Employees (subject to applicable privacy laws), and shall make their respective personnel reasonably available for interviews, depositions and testimony in any legal matter concerning transactions contemplated by this Agreement, and as otherwise may be necessary or desirable to enable the Party requesting such assistance to: (i) comply with any reporting, filing or other requirements imposed by any Governmental Entity, including filing any Tax Returns and responding to Tax audits or Tax authority disputes with respect to the Business Assets and the Transferred Employees; (ii) assert or defend any claims or allegations in any litigation or arbitration or in any administrative or legal proceeding other than claims or allegations that one Party to this Agreement has asserted against the other; or (iii) subject to clause (ii) above, perform its obligations under this Agreement. The Party requesting such information or assistance shall reimburse the other Party for all reasonable and necessary out-of-pocket costs and expenses incurred by such party in providing such information and in rendering such assistance. The access to files, books and records contemplated by this Section 5.12 shall be during normal business hours and upon reasonable prior notice and shall be subject to such reasonable limitations as the Party having custody or control thereof may impose to preserve the confidentiality of information contained therein.

 

B-35


Table of Contents

(d) Buyer shall preserve copies of all Business Contracts for up to seven (7) years after the Closing Date, and all other Business Records for up to five (5) years after the Closing Date.

 

5.13 Tax Matters.

 

(a) Seller Tax Returns. Subject to Section 5.13(b) below, Seller will prepare and file all Tax Returns of Seller (including Tax Returns required to be filed after Closing Date) to the extent such Tax Returns include or relate to the operations of the Business or the use or ownership of the Business Assets attributable to Pre-Closing Periods (the “Seller Tax Returns”). The Seller Tax Returns shall be true, complete and correct in all material respects and prepared in accordance with applicable Law. Seller will make all payments for Taxes required with respect to the Seller Tax Returns.

 

(b) Buyer Tax Returns. Buyer will be responsible for the preparation and filing of all Tax Returns it is required to file with respect to Buyer’s ownership or use of the Business Assets or its operation of the Business attributable to Post-Closing Periods (the “Buyer Tax Returns”). The Buyer Tax Returns shall be true, complete and correct in all material respects and prepared in accordance with applicable Law. Buyer will make all payments for Taxes required with respect to the Buyer Tax Returns.

 

(c) Property Taxes. In the case of any real or personal property Taxes (or other similar taxes) attributable to the Business Assets for which the corresponding Tax Returns cover both a Pre-Closing Period and a Post-Closing Period, Buyer shall prepare such Tax Returns and make all payments required with respect to any such Tax Return; provided, however, that Seller will reimburse Buyer concurrently therewith to the extent that any payment made by Buyer relates to a Pre-Closing Period, prorated on a per diem basis.

 

(d) Compensation Reporting. Seller shall prepare and furnish to each of the Transferred Employees for whom U.S. tax reporting is required a Form W-2 that shall reflect all wages and compensation paid to such employee for the time up to and including the later of December 31, 2005 or the Closing Date. Seller shall send to the appropriate Social Security Administration office a duly completed Form W-3 and accompanying copies of the duly completed Forms W-2. Seller shall also prepare and file all quarterly Forms 941 covering the time up to and including the later of December 31, 2005 or the Closing Date. Seller shall keep on file the Forms W-4 and W-5 provided to it by the Transferred Employees. Buyer shall become responsible for deducting and withholding tax from wages and compensation paid to the Transferred Employees after the later of January 1, 2006 or the Closing Date. Buyer shall require the Transferred Employees to provide it with new Forms W-4 and W-5 for the tax year 2006. Buyer shall prepare and furnish to each of the Transferred Employees for whom U.S. tax reporting is required a Form W-2 that shall reflect all wages and compensation paid to such employee after the later of January 1, 2006 or the Closing Date. Buyer shall send to the appropriate Social Security Administration office a duly completed Form W-3 and accompanying copies of the duly completed Forms W-2. Buyer shall also prepare and file all quarterly Forms 941 covering the time after the later of January 1, 2006 or the Closing Date. It is the intent of the parties hereunder that the obligations of Buyer and Seller under this Section 5.13(d) shall be carried out in accordance with Section 4 of Revenue Procedure 2004-53.

 

5.14 Confidentiality. The terms of the Confidentiality Agreement dated May 3, 2005, as amended on July 11, 2005 executed by the Parties (the “Confidentiality Agreement”) are hereby incorporated herein by reference and shall continue in full force and effect until the Closing, at which time, except as set forth below, such Confidentiality Agreement and the obligations of the parties under this Section (c) shall terminate; provided, however, that the Confidentiality Agreement shall terminate only in respect of that portion of the Confidential Information (as defined in the Confidentiality Agreement) exclusively relating to the Business Assets and Assumed Liabilities (the ownership of which will have been transferred to Buyer), and, without limiting the foregoing, the Confidentiality Agreement shall continue to apply to the Excluded Assets, Excluded Liabilities and the Transaction Materials. The “Transaction Materials” means the terms and conditions of this Agreement, the Ancillary Agreements, the Support Agreements and the Warrant. If this Agreement is, for any reason, terminated prior to the Closing, the Confidentiality Agreement shall continue in full force and effect in all respects.

 

B-36


Table of Contents

5.15 Employees. Prior to the Closing, Buyer may extend offers of employment to the Business Employees, and, if accepted, such offers of employment will be contingent upon the consummation of the Closing and will become effective as of the later of January 1, 2006 or the Closing Date. Each such offer of employment will provide for a total compensation that is substantially similar, in the aggregate, to the respective Business Employee’s total compensation with Seller, or, if applicable, a Seller affiliate. Each Business Employee who accepts Buyer’s offer of employment (and does not withdraw such acceptance prior to the Closing), is referred to herein as a “Transferred Employee”.

 

5.16 Use of Seller’s Name.

 

(a) Buyer acknowledges that Seller has the absolute and exclusive proprietary right to all names, marks, trade names, trademarks and service marks incorporating “Delta” in any form (the “Seller Trade Names”), and to all corporate symbols or logos incorporating “Seller” in any form (the “Seller Logos”, and together with the Seller Trade Names, the “Seller Marks”). Except to the extent permitted by the Supply Agreement, Buyer shall not use, and Buyer shall cause its affiliates not to use, any Seller Marks or any confusingly similar marks in connection with the sale or distribution of any products or services, and if a Business Asset bears a Seller Mark, Buyer shall, prior to the use, sale or distribution of such Business Asset, delete such Seller Mark and clearly and prominently indicate that the Business Asset is no longer affiliated with Seller or any of its affiliates.

 

(b) Buyer acknowledges and agrees that Seller is and shall remain the owner of the Seller Marks and all goodwill attached thereto. Buyer agrees not to attempt to register the Seller Marks nor to register anywhere in the world a mark same as or similar to the Seller Marks. In no event shall Buyer or any affiliate of Buyer advertise or hold itself out as Seller or an affiliate of Seller.

 

5.17 Listing of Buyer Common Stock. Buyer agrees to use all commercially reasonable efforts to authorize for listing on Nasdaq the Shares and Warrant Shares, subject to official notice of issuance. Buyer agrees to promptly make such other additional filings with Nasdaq as may be required in connection with the consummation of the transactions contemplated by this Agreement, the Ancillary Agreement and the Warrant.

 

5.18 Third Party Consents. Prior to the Closing, Seller shall use commercially reasonable efforts to obtain the third party consents listed on Schedule 5.18 required to assign the Business Contracts to Buyer (the “Required Consents”); provided, however, neither Seller nor Buyer shall be required to pay any fee or make any payment to any third party in order to obtain any such consent and Buyer shall not be obligated to accept any material adverse change in the terms and conditions of the Business Contracts to which such consents apply.

 

5.19 Seller Financial Statements.

 

(a) Seller shall use commercially reasonable efforts to cause its auditors to deliver to Buyer, on or prior to December 27, 2005 (i) an audited income statement, balance sheet and statement of cash flows with respect to the Business Assets for the fiscal year ended December 31, 2004, and (ii) an unaudited balance sheet, income statement and statement of cash flows with respect to the Business Assets for the 9 months ended September 30, 2005. In the event the Closing will not occur prior to December 31, 2005, Seller shall, on or prior to March 16, 2006, deliver to Buyer an audited income statement, balance sheet and statement of cash flows with respect to the Business Assets for the fiscal year ended December 31, 2005 (in lieu of the Seller financial statements referenced in clauses (a)(i) and (a)(ii) above). The financial statements to be delivered pursuant to this Section 5.19(a) are referred to as the “Seller Financial Statements”.

 

(b) On or prior to December 22, 2005, Seller shall deliver to Buyer drafts of the financial statements referenced in Section 5.19 (a)(i) and (a)(ii) above.

 

(c) The audited Seller Financial Statements shall be accompanied by a report of Seller’s auditor indicating that the audit was made in accordance with GAAP. At the Closing, Seller shall deliver to Buyer a certificate executed by an executive officer of Seller certifying that the Seller Financial Statements have been

 

B-37


Table of Contents

prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated (except as may otherwise be indicated in the notes thereto) and present fairly in all material respects the financial position and results of operations of the Business Assets as of the dates, and for the periods, indicated therein (subject, with respect to any interim periods, to normal recurring year-end audit adjustments).

 

ARTICLE VI

CONDITIONS TO CONSUMMATION OF TRANSACTION

 

6.1 Conditions to Buyer’s and Seller’s Obligations. The respective obligations of Buyer and Seller to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions:

 

(a) The Proposals shall have been approved by the requisite vote under the Buyer Charter Documents and applicable Law by the shareholders of Buyer.

 

(b) The Shares shall have been authorized for listing on Nasdaq, subject to official notice of issuance.

 

(c) All applicable waiting periods (and any extensions thereof) under any applicable antitrust laws shall have expired or otherwise been terminated and all approvals required under applicable antitrust laws shall have been obtained.

 

(d) No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, judgment, decree, executive order or award which is then in effect and has the effect of making the transactions contemplated by this Agreement illegal or otherwise prohibiting consummation of the transactions contemplated by this Agreement.

 

6.2 Conditions to Obligations of Buyer. The obligation of Buyer to consummate the transactions contemplated by this Agreement is subject to the satisfaction (or waiver by Buyer) of the following additional conditions:

 

(a) The representations and warranties of Seller set forth in Article III (disregarding each exception or qualification therein relating to materiality, including Material Adverse Effect on the Business) shall have been true and correct on the date hereof and shall be true and correct at and as of the Closing as if made as of the Closing, except (A) in each case, or in the aggregate, as does not constitute a Material Adverse Effect on the Business, (B) for changes expressly permitted by this Agreement, and (C) for those representations and warranties that address matters only as of a particular date (which shall be true and correct as of such date, subject to the qualifications set forth in the preceding clauses (A)-(B)) as of such particular date.

 

(b) Seller shall have performed or complied with in all material respects its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Closing.

 

(c) Seller shall have delivered to Buyer a certificate executed by an authorized officer of Seller (the “Seller Officer Certificate”) to the effect that each of the conditions specified in clauses (a)-(b) of this Section 6.2 is satisfied in all respects.

 

(d) Seller shall have delivered to Buyer the Seller Closing Deliverables.

 

6.3 Conditions to Obligations of Seller. The obligation of Seller to consummate the transactions contemplated by this Agreement is subject to the satisfaction (or waiver by Seller) of the following additional conditions:

 

(a) The representations and warranties of Buyer set forth in Article IV (disregarding each exception or qualification therein relating to materiality, including Material Adverse Effect on Buyer) shall have been true and

 

B-38


Table of Contents

correct on the date hereof and shall be true and correct at and as of the Closing as if made as of the Closing, except (A) in each case, or in the aggregate, as does not constitute a Material Adverse Effect on Buyer, (B) for changes expressly permitted by this Agreement, and (C) for those representations and warranties that address matters only as of a particular date (which shall be true and correct as of such date, subject to the qualifications set forth in the preceding clauses (A)-(B)) as of such particular date. Notwithstanding the foregoing, the representations and warranties of Buyer set forth in Section 4.5 (Capitalization) (disregarding each exception or qualification therein relating to materiality, including Material Adverse Effect on Buyer) shall have been true and correct in all material respects as of the date hereof and at and as of the Closing as if made as of the Closing, except for those representations and warranties that address matters only as of a particular date (which shall be true and correct in all material respects as of such date).

 

(b) Buyer shall have performed or complied with in all material respects its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Closing.

 

(c) No Material Adverse Effect on Buyer shall have occurred since the date hereof and be continuing.

 

(d) Buyer shall have delivered to Seller a certificate executed by a duly authorized officer of Buyer (the “Buyer Officer Certificate”) to the effect that each of the conditions specified in clauses (a)-(c) of this Section 6.3 is satisfied in all respects.

 

(e) Buyer shall have delivered to Seller the Buyer Closing Deliverables.

 

(f) Seller’s Shareholder Designee (as defined in the Voting Agreement) shall have been appointed by Buyer to serve as a Class II director on Buyer’s board of directors, and the Voting Agreement shall be in full force and effect.

 

ARTICLE VII

TERMINATION

 

7.1 Termination of Agreement. Buyer or Seller may terminate this Agreement prior to the Closing, as provided below:

 

(a) Buyer and Seller may terminate this Agreement by mutual written consent;

 

(b) Buyer may terminate this Agreement by giving written notice to Seller in the event Seller is in breach of any representation, warranty or covenant contained in this Agreement, and such breach, individually or in combination with any other such breach, (i) would cause the conditions set forth in clauses (a) or (b) of Section 6.2 not to be satisfied and (ii) if curable, is not cured upon the earlier of (x) fifteen (15) business days following delivery by Buyer to Seller of written notice of such breach, or (y) the Termination Date;

 

(c) Seller may terminate this Agreement by giving written notice to Buyer in the event Buyer is in breach of any representation, warranty or covenant contained in this Agreement, and such breach, individually or in combination with any other such breach, (i) would cause the conditions set forth in clauses (a) or (b) of Section 6.3 not to be satisfied and (ii) if curable, is not cured upon the earlier of (x) fifteen (15) business days following delivery by Seller to Buyer of written notice of such breach or (y) the Termination Date;

 

(d) Buyer or Seller may terminate this Agreement if the Closing shall not have occurred by March 31, 2006 (the “Termination Date”); provided, however, that the right to terminate this Agreement under this Section 7.1(d) shall not be available to any Party whose breach of this Agreement has been a principal cause of or resulted in the failure of the Closing to occur on or before such date;

 

B-39


Table of Contents

(e) Buyer or Seller may terminate this Agreement if a Governmental Entity shall have issued an order, decree or ruling or taken any other action (including the failure to have taken an action), in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, which order, decree, ruling or other action is final and nonappealable.

 

(f) by Seller (at any time prior to approval of the Issuance Proposal by the required vote of the shareholders of Buyer) if a Triggering Event with respect to Buyer shall have occurred;

 

(g) by Buyer, if Buyer receives a Superior Offer; provided that (i) Buyer shall have notified Seller in writing three (3) business days prior to terminating this Agreement pursuant to this Section 7.1(g) that Buyer has received a Superior Offer and intends to terminate this Agreement pursuant to this Section 7.1(g), attaching the then current version of such Superior Offer to such notice, and (ii) Buyer shall have afforded Seller the reasonable opportunity to make a revised offer and (iii) Buyer shall simultaneously with its termination hereunder make all payments required by Section 7.3(c);

 

(h) by either Buyer or Seller if the Proposals shall not have been approved by the shareholders of Buyer by reason of the failure to obtain the required vote at a meeting of Buyer’s shareholders duly convened therefore or at any adjournment thereof; provided, however, that the right to terminate this Agreement under this Section 7.1(h) shall not be available to a Party where the failure to obtain such approval of the Proposals shall have been caused by the action or failure to act of such Party and such action or failure to act constitutes a material breach by such Party of this Agreement; and

 

(i) by Buyer, if the Seller Financial Statements delivered pursuant to Section 5.19(a) reflect information that was not previously made available to Buyer and would cause a Material Adverse Effect on the Business.

 

For the purposes of this Agreement, a “Triggering Event,” with respect to Buyer, shall be deemed to have occurred if: (i) its board of directors or any committee thereof shall for any reason have withdrawn or shall have amended or modified in a manner adverse to Seller, the Recommendation, (ii) it shall have failed to include the Recommendation in the Proxy Statement, (iii) its board of directors or any committee thereof shall have approved or recommended any Acquisition Proposal, or (iv) a tender or exchange offer relating to its securities shall have been commenced by a Person unaffiliated with Buyer and it shall not have sent to its securityholders pursuant to Rule 14e-2 promulgated under the Securities Act, within ten (10) business days after such tender or exchange offer is first published, sent or given, a statement disclosing that the board of directors of Buyer recommends rejection of such tender or exchange offer.

 

7.2 Effect of Termination. Except as otherwise set forth in Section 7.1(g), any termination of this Agreement pursuant to Section 7.1 above shall be effective immediately upon delivery of a valid written notice of the terminating Party to the other Party hereto. Subject to Section 7.3(c), if any Party terminates this Agreement pursuant to Section 7.1, all obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party for willful breaches of this Agreement). Notwithstanding the foregoing, this Section 7.2 and Section 7.3, and the provisions of Article VIII and of the Confidentiality Agreement, shall survive the termination of this Agreement.

 

7.3 Fees and Expenses.

 

(a) In the event the transactions contemplated hereby are not consummated, except as set forth in Section 7.3(c), all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses.

 

(b) In the event the transactions contemplated hereby are consummated, Buyer shall pay (x) up to $100,000 of the fees and expenses incurred by Seller (including attorneys’ fees and accountant fees (exclusive of any fees incurred by the Independent Accountant pursuant to Section 2.9 above)) in connection with its

 

B-40


Table of Contents

negotiation, execution and delivery of this Agreement, plus (y) one-half of the fees and expenses incurred by Seller (including fees incurred by Seller’s auditor) in connection with the preparation and delivery of the Seller financial statements pursuant to Section 5.19(a) above. Such fees and expenses shall be paid to Seller promptly (and in any event within ten (10) business days) following Seller’s delivery to Buyer of a certificate setting forth the amount of such fees and expenses, which certificate shall be prepared by Seller in good faith and signed by a duly authorized officer of Seller and shall be accompanied by reasonable supporting documentation.

 

(c) In the event that this Agreement is terminated by Seller or Buyer, as applicable, pursuant to Section 7.1(f) or Section 7.1(g), respectively, Buyer shall promptly, but (except as set forth in Section 7.1(g)) in no event later than five (5) business days after the date of such termination, pay Seller a fee equal to $500,000 in immediately available funds by wire transfer to an account indicated by Seller.

 

7.4 Amendment. Subject to applicable Law, this Agreement may be amended by the Parties hereto, by action taken or authorized by their respective boards of directors, at any time before or after approval of the Proposals by the shareholders of Buyer; provided, after any such approval, no amendment shall be made which by Law or in accordance with the rules of any relevant stock exchange requires further approval by such shareholders without such further shareholder approval. This Agreement may not be amended except by execution of an instrument in writing signed on behalf of each Party.

 

7.5 Extension; Waiver. At any time prior to the Closing Date either Party hereto, by action taken or authorized by their respective board of directors, may, to the extent legally allowed: (i) extend the time for the performance of any of the obligations or other acts of the other Party hereto, (ii) waive any inaccuracies in the representations and warranties made to such Party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such Party contained herein. Any agreement on the part of a Party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such Party. Delay in exercising any right under this Agreement shall not constitute a waiver of such right.

 

ARTICLE VIII

MISCELLANEOUS

 

8.1 Non-Survival of Representations and Warranties. The representations and warranties of Buyer and Seller contained in this Agreement, shall terminate at the Closing, and only those covenants and agreements contained in this Agreement that by their terms survive the Closing, shall survive the Closing.

 

8.2 Press Releases and Announcements. No Party shall issue any press release or public announcement relating to the subject matter of this Agreement without the prior written approval of the other Party; provided, however, that any Party may make any public disclosure it reasonably believes is necessary under applicable Law, regulation or stock market rule (in which case the disclosing Party shall use reasonable efforts to advise the other Party and provide it with a copy of the proposed disclosure prior to making such disclosure).

 

8.3 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns.

 

8.4 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements or representations by or among the Parties, written or oral, with respect to the subject matter hereof, other than the Confidentiality Agreement which shall remain in effect as contemplated by Section 5.13(c).

 

8.5 Succession and Assignment. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Party; provided, however, that Seller may

 

B-41


Table of Contents

assign this Agreement to one or more of its affiliates without the prior written approval of Buyer, but no such assignment shall relieve Seller of its obligations hereunder. Any purported assignment in violation of this Section 8.5 shall be void. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns.

 

8.6 Counterparts and Facsimile Signature. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.

 

8.7 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

 

8.8 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered (x) three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, (y) one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service or (y) on the date sent after transmission by facsimile with written confirmation, in each case to the intended recipient as set forth below:

 

If to Seller:   Copies to:
Delta Products Corporation   Wilson Sonsini Goodrich & Rosati
4405 Cushing Parkway   Professional Corporation
Fremont, CA 94538   650 Page Mill Road
Attention: Yao C.H. Chou   Palo Alto, CA 94304
Fax: 510-668-0681   Attention: Aaron J. Alter, Esq.
    Fax: 650-493-6811
If to Buyer:   Copies to:
PECO II, Inc.   Porter Wright Morris & Arthur LLP
1376 State Route 598   Huntington Center
Galion, Ohio 44833   41 South High Street
Attention: President & Chief Executive Officer  

Columbus, OH 43215-6194

Attention: Curtis A. Loveland

Fax: 419-468-9164   Fax: 614-227-2100

 

Any Party may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth.

 

8.9 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware.

 

8.10 Exclusive Jurisdiction. With respect to any matter based upon or arising out of this Agreement, the Ancillary Agreements, the Warrant or the transactions contemplated hereby or thereby that seeks temporary or injunctive relief or specific performance, each of the Parties (a) irrevocably consents to the exclusive jurisdiction and venue of the state courts of the State of Delaware located in New Castle County, (b) agrees that process may

 

B-42


Table of Contents

be served upon them in any manner authorized by the laws of the State of Delaware for such persons, (c) waives the defense of an inconvenient forum and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction, venue and such process, and (d) agrees that a final judgment in such legal proceeding shall be final, binding and enforceable in any court of competent jurisdiction. Each Party agrees not to commence any legal proceedings subject to this Section 8.10 except in such courts.

 

8.11 Binding Arbitration.

 

(a) Each Party irrevocably agrees and acknowledges that, subject only to Section 8.10 above, any claim, dispute, controversy or other matter based upon, arising out of or relating to this Agreement, the Ancillary Agreements, the Warrant or the transactions contemplated hereby or thereby, including (i) as to the existence, validity, enforceability or interpretation of any such claim, (ii) the performance, breach, waiver or termination of any provision in dispute, (iii) any such claim in tort, or (iv) any such claim raising questions of law, in each case, whether arising before or after termination of this Agreement (each a “Disputed Claim”), shall be resolved, as between the Parties, exclusively and solely by binding arbitration in accordance with Section 8.11(b).

 

(b) Any Disputed Claim shall be resolved exclusively and solely by binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the “Rules”) and in accordance with the following: (a) there shall be three (3) arbitrators, one of whom shall be a member of the American College of Trial Lawyers (who shall chair the arbitration panel) and one of whom shall be a certified public accountant; (b) the arbitration shall take place in Wilmington, Delaware, and in no other place; (c) the arbitration shall be conducted in accordance with the procedural laws of the U.S. Federal Arbitration Act, to the extent not inconsistent with the Rules or this Section 8.11(b); (d) subject to legal privileges, each party shall be entitled to conduct discovery in accordance with the Federal Rules of Civil Procedure; (e) at the arbitration hearing, each party shall be permitted to make written and oral presentations to the arbitration panel, to present testimony and written evidence and to examine witnesses; (f) the arbitration panel shall have the power to grant temporary or permanent injunctive relief and to order specific performance; (g) the arbitration panel shall have the power to order either party to pay, or to allocate between the parties, the fees and expenses of the arbitrators and of the American Arbitration Association and to order either party to pay all or a portion of the other party’s attorneys’ fees and expenses incurred in connection with a Disputed Claim and the arbitration; and (h) the arbitration panel shall issue a written decision explaining the bases for the final ruling, and such decision shall be final and binding on the Parties hereto, and not subject to appeal, and enforceable in any court of competent jurisdiction.

 

8.12 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. The Parties shall use their commercially reasonable efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purposes of such void or unenforceable provision.

 

8.13 Construction.

 

(a) The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any Party.

 

(b) Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise.

 

(c) When reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or Section of this Agreement, unless otherwise indicated.

 

B-43


Table of Contents

(d) Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.

 

(e) Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”.

 

8.14 Other Remedies; Specific Performance.

 

(a) Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a Party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such Party, and the exercise by a Party of any one remedy will not preclude the exercise of any other remedy. The Parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.

 

(b) Specific Performance. It is accordingly agreed that the Parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which they are entitled at law or in equity.

 

[Signature Page Follows]

 

B-44


Table of Contents

IN WITNESS WHEREOF, the Parties have executed this Asset Purchase Agreement as of the date first above written.

 

DELTA PRODUCTS CORPORATION

   

 

/s/    M.S. HUANG        

By:   M.S. Huang
Title:   President

PECO II, INC.

   

/s/    JOHN G. HEINDEL        

By:   John G. Heindel
Title:   President & Chief Executive Officer

 

[Signature Page to Asset Purchase Agreement]

 

B-45


Table of Contents

EXHIBIT A

 

SUPPLY AGREEMENT

 

THIS STRATEGIC SUPPLY AGREEMENT (the “Agreement”) is effective as of                     , 2005 (the “Effective Date”) by and between Delta Electronics, Inc., an ROC corporation having its principal place of business at 186 Ruey Kuang Road, Neihu Taipei 11491 Taiwan, R.O.C. (hereafter referred to as “DEI”), and PECO II Inc., an Ohio corporation having its principal place of business at 1376 State Highway 598, Galion, Ohio 44833 (hereafter referred to as “PECO”), for the purpose of defining the rights and duties of the parties in connection with the distribution by PECO of certain DEI products.

 

WHEREAS, DEI and PECO entered into an OEM/ODM Partnership Agreement dated April 8, 2004 and a Consignment Agreement dated April 2, 2004 (the “Prior Agreements”); and

 

WHEREAS, DEI and PECO desire to terminate and supersede the Prior Agreements, except as reflected in Section 19.14 hereof.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

1. EXHIBITS AND DEFINITIONS.

 

1.1 Exhibits. The following Exhibits are incorporated into and made a part of this Agreement. These Exhibits may be modified or adjusted as provided for in this Agreement.

 

1.1.1 Exhibit A—Products

 

1.1.2 Exhibit B—Pricing

 

1.1.3 Exhibit C—DEI Branding Guidelines

 

1.1.4 Exhibit D—Reserved Entities

 

1.1.5 Exhibit E—Minimum Order Requirements

 

1.1.6 Exhibit F—Supply Records

 

1.2 Definitions. As used in this Agreement, the terms defined below shall have the following meanings:

 

1.2.1 Affiliate” means any entity which directly or indirectly controls, or is under common control with, or is controlled by, such party. As used in this definition, “control” (and its correlative meanings, “controlled by” and “under common control with”) shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through beneficial ownership of securities or other ownership interests, by contract or otherwise).

 

1.2.2 Business Day” means a day that is not Saturday, Sunday or a statutory or civic holiday in the State of Ohio or any other day on which banking institutions are not required to be open in the State of Ohio.

 

1.2.3 Consignment Inventory” means the units of Products delivered to and stored at the Consignment Warehouse hereunder.

 

1.2.4 Consignment Warehouse” means the warehouse operated by PECO to receive, store and deliver Products.

 

B-46


Table of Contents

1.2.5 DEI Indemnitees” has the meaning set forth in Section 5.6.

 

1.2.6 DEI System” means a System principally designed and manufactured by DEI as supplied to PECO pursuant to this Agreement.

 

1.2.7 DEI Technology” means (i) any and all Technology with respect to, related to and/or derived from the Products, and (ii) any and all Technology developed solely by DEI. For clarification, a PECO System includes DEI Technology because it necessarily incorporates a Module.

 

1.2.8 Documentation” means the user manuals, reference manuals, guides or portions thereof, supplied by DEI to PECO and which DEI may update from time to time.

 

1.2.9 Exclusivity Period” has the meaning set forth in Section 2.1.1.

 

1.2.10 Intellectual Property Rights” means any or all of the following and all rights in, arising out of, or associated therewith: (1) all United States and foreign patents and utility models and applications therefor and all reissues, divisions, re-examinations, renewals, extensions, provisionals, continuations and continuations-in-part thereof, and equivalent or similar rights anywhere in the world in inventions and discoveries including without limitation, invention disclosures; (2) all trade secrets and other rights in know-how and confidential or proprietary information; (3) all copyrights, copyrights registrations and applications therefor and all other rights corresponding thereto throughout the world; (4) all industrial designs and any registrations and applications therefor throughout the world; (5) all rights in World Wide Web addresses and domain names and applications and registrations therefor; (6) all rights in trade names, trade dress, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world; and (7) any similar corresponding or equivalent foreign rights to any of the foregoing anywhere in the world, including moral rights.

 

1.2.11 Modules” means DEI’s proprietary modules, including converters, rectifiers and inverters, as set forth on Exhibit A.

 

1.2.12 Order” means a written description of the name and quantity of Products PECO desires to purchase that is sent to DEI pursuant to Section 3.2.1 hereof.

 

1.2.13 PECO Customer” means any entity with a principal place of business in the United States and/or Canada, but excluding Reserved Entities.

 

1.2.14 PECO System” means a System offered by PECO to PECO Customers that incorporates at least one (1) Module and may include the addition of other components purchased from DEI, but exclusive of DEI System.

 

1.2.15 Person” means any individual, corporation, partnership, firm, association, joint venture, joint stock company, trust, unincorporated organization or other entity, including any governmental entity.

 

1.2.16 Prices” means the prices for Products as set forth in Exhibit B or any amendment of Exhibit B as shall be agreed to, in writing, by DEI and PECO.

 

1.2.17 Products” means the Modules and/or DEI Systems as listed in Exhibit A including any improvements, updates, modifications, and derivatives thereof furnished to PECO by DEI during the Term of this Agreement, and any such other DEI products as DEI and PECO shall, from time to time, agree, in writing, to add to Exhibit A. It is understood that the provision of any such improvements, updates, modifications, and derivatives shall be at DEI’s sole discretion and may be subject to additional fees and/or additional terms and conditions. Notwithstanding the foregoing, in no event shall “Products” include any products, components, or

 

B-47


Table of Contents

other assets that are acquired, received, attained, procured or otherwise obtained by DEI (or its affiliates, related companies, divisions, subsidiaries, predecessor and successor corporations, and assigns (hereafter, “DEI Entities”)) in connection with a Transaction occurring during the term hereof. “Transaction,” as used in this provision above, means any transaction entered into by DEI or a DEI Entity, whereby DEI or such DEI Entity (i) acquires any person (or related group of persons) whether by tender or exchange offer made directly to the stockholders, open market purchases or any other transaction or series of transactions, of fifty percent (50%) (or the such lesser percentage as is permitted in those jurisdictions where the maximum percentage permitted by law is lower than 50%) or more of the capital stock entitled to elect the members of the board of directors or other analogous governing body of such entity, (ii) enters into a merger, reverse merger or consolidation with any person (or related group of persons); or (iii) otherwise acquires through asset sale or otherwise all or any portion of the business or assets of any other person.

 

1.2.18 Reserved Entities” means those entities (including affiliates, successors and assigns thereof) listed on Exhibit D, as updated by DEI from time to time with PECO’s consent which cannot be unreasonably withheld, delayed or conditioned.

 

1.2.19 System” means a complete self-contained unit (cabinet), capable of providing a primary function and that incorporates one (1) or more subsystems or products.

 

1.2.20 Technology” means any or all of the following: (1) works of authorship including, without limitation, computer programs, algorithms, routines, source code and executable code, whether embodied in software or otherwise, and documentation provided for use therewith; (2) inventions (whether or not patentable) and improvements; (3) proprietary and confidential information, including, without limitation, technical data and customer and supplier lists, trade secrets, know how and techniques; (4) databases, data compilations and collections; (5) processes, tools, devices, methods, prototypes, schematics, bread boards, net lists, mask works, test methodologies and hardware development tools; and (6) all instantiations of the foregoing in any form and embodied in any media.

 

1.2.21 Territory” means the United States and Canada.

 

2. RIGHTS.

 

2.1 Rights.

 

2.1.1 Subject to the terms of this Agreement, DEI grants PECO, and PECO accepts, a nontransferable right to purchase and incorporate Modules into PECO Systems and to market, promote, sell and distribute the Modules, PECO Systems and/or the DEI Systems solely to PECO Customers only within the Territory. Modules may only be distributed in their unmodified form, as originally received from DEI, or as modified by DEI (except that Modules may be incorporated into PECO Systems as set forth herein). PECO may modify the DEI Systems (exclusive of Modules) purchased hereunder to conform with the specifications of PECO Customers. The rights granted in this Section 2.1.1 shall be exclusive to PECO for a period of twenty-four (24) months from the Effective Date (“Exclusivity Period”). In the event that DEI (i) acquires (or is acquired by) a Restricted Third Party (defined below), (ii) is merged with a Restricted Third Party, or (iii) is a party to an asset transaction whereby DEI sells substantially all its assets relating to this Agreement, including the assignment of this Agreement, to a Restricted Third Party, or, purchases assets from a Restricted Third Party that results in such assets being subject to this Agreement, such exclusivity shall continue to apply to the Products but shall not apply to products or technology sold, owned or controlled by such Restricted Third Party (before or after the transactions described in (i), (ii) and (iii) above), even if after such transactions, such products or technology is ultimately sold, owned or controlled by DEI or a third party. A “Restricted Third Party” is any party that is subject to contractual restrictions precluding purchase of Products from PECO, or a party that is being requested by a customer not to purchase Products from PECO.

 

B-48


Table of Contents

2.1.2 During the Exclusivity Period, PECO shall refer to DEI any inquiry for the purchase of Products or any other DEI products that PECO receives from any of the Reserved Entities. Nothing herein shall prohibit or restrict PECO from soliciting or selling to a Reserved Entity any other services provided by PECO in the general conduct of its business; provided that, during the Exc