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Item
1.01
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Entry into a Material
Definitive Agreement.
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On
February 18, 2010, PECO II, Inc., an Ohio corporation (the “Company”), and
Lineage Power Holdings, Inc., a Delaware corporation (“Parent”) and a portfolio
company of The Gores Group, LLC, entered into an Agreement and Plan of Merger
(the “Merger Agreement”), by and among Parent, Lineage Power Ohio Merger Sub,
Inc., an Ohio corporation and wholly-owned subsidiary of Parent (“Merger Sub”),
and the Company, pursuant to which Merger Sub will be merged with and into the
Company, with the Company continuing after the merger as the surviving
corporation and a wholly-owned subsidiary of Parent (the
“Merger”). The Company’s Board of Directors has unanimously approved
the Merger Agreement and has recommended that the Company’s shareholders adopt
the Merger Agreement and the Merger.
Pursuant
to the Merger Agreement, upon consummation of the Merger: (1) each
issued and outstanding common share, without par value (“Common Share”), of the
Company, other than Common Shares owned by the Company, Parent, Merger Sub or
any wholly-owned subsidiary of the Company, Parent or Merger Sub, or by any
shareholders who are entitled to and who properly exercise dissenting
shareholder rights under Ohio law, will be cancelled and converted into the
right to receive $5.86 in cash, without interest; and (2) each unexercised
Company stock option that is outstanding at the effective time of the Merger
(whether or not then vested) will be cancelled and converted into the right to
receive an amount in cash (subject to applicable withholding taxes) equal to (a)
the excess, if any, of $5.86 per share over the per-share exercise or purchase
price of such outstanding Company stock option, multiplied by (b) the number of
Company Common Shares underlying such Company stock option.
The
Company has made customary representations and warranties and agreed to
customary covenants in the Merger Agreement. The completion of the
Merger is subject to adoption of the Merger Agreement and the Merger by the
Company’s shareholders and other customary closing conditions. The
transaction is not subject to any financing condition.
In
addition, the Company has agreed not to (1) solicit, initiate or encourage
proposals or offers relating to alternative Acquisition Proposals (as defined in
the Merger Agreement) or (2) subject to certain exceptions, enter into
discussions concerning alternative Acquisition Proposals. In
addition, the Merger Agreement may be terminated by the Company and Parent under
certain circumstances, including by the Company if its Board of Directors
determines in good faith that it has received an unsolicited bona fide Superior
Proposal (as defined in the Merger Agreement), and otherwise complies with
certain terms of the Merger Agreement. In connection with such
termination, the Company must pay a fee of $1,100,000 to Parent. The
Company may also be required to pay Parent a fee of $1,100,000 under other
specified circumstances in connection with a termination of the Merger
Agreement.
The
foregoing description of the Merger Agreement does not purport to be complete
and is qualified in its entirety by reference to the full text of the Merger
Agreement, which is filed as Exhibit 2.1
hereto and incorporated herein by reference. The Merger Agreement is
included to provide investors and security holders with information regarding
its terms. It is not intended to provide any other factual
information about the Company or the other parties thereto. In
particular, the assertions embodied in the Company’s representations and
warranties contained in the Merger Agreement are qualified by information in the
disclosure letter provided by the Company to Parent in connection with the
signing of the Merger Agreement. This disclosure letter contains
information that modifies, qualifies and creates exceptions to the
representations and warranties set forth in the Merger
Agreement. Moreover, certain representations and warranties in the
Merger Agreement were used for the purpose of allocating risk between the
Company and Parent rather than establishing matters as
facts. Accordingly, investors and security holders should not rely on
the representations and warranties in the Merger Agreement as characterizations
of the actual state of facts about the Company or Parent.
Concurrent
with the execution of the Merger Agreement, the Company, Parent, Merger Sub, and
each of the Green Family Trust U/A/D 03/16/1995, the Green Charitable Trust
U/A/D 05/09/01, Matthew P. Smith, Linda H. Smith, Ashwood I, LLC, and Ashwood
II, LLC (collectively, the “Voting Agreement Shareholders”) entered into a
Voting Agreement (the “Voting Agreement”), which is attached as Exhibit 10.1 hereto
and incorporated by reference. The Voting Agreement provides that
each of the Voting Agreement Shareholders agrees to vote all Common Shares held
by such Voting Agreement Shareholders in favor of the adoption of the Merger
Agreement and the Merger and against any other Acquisition Proposal (as defined
in the Voting Agreement).
The
Voting Agreement terminates on the earlier of (1) the consummation of the
Merger, (2) the termination of the Merger Agreement in accordance with its
terms, or (3) written notice of termination of the Voting Agreement by Parent to
the Voting Agreement Shareholders.
The
foregoing description of the Voting Agreement is not complete and is qualified
in its entirety by reference to the full text of the Voting Agreement, which is
filed as Exhibit 10.1 hereto and incorporated herein by
reference.
Additional
Information and Where to Find It
In connection with the proposed Merger,
the Company will be filing a proxy statement and relevant documents concerning
the transaction with the Securities and Exchange Commission (the
“SEC”). Investors
and security holders of the Company are urged to read the proxy statement and
other relevant documents filed with the SEC when they become available, because
they will contain important information. Investors and
security holders may obtain free copies of the proxy statement and other
documents when they become available by contacting the Company by mail at PECO
II, Inc., Attention: Jocelyn Koozer, 1376 State Route 598, Galion, Ohio
44833. In addition, documents filed with the SEC by the Company are
available free of charge at the SEC’s website at www.sec.gov.
The Company and its directors,
executive officers and other members of its management, and employees may be
deemed to be participants in the solicitation of proxies from the shareholders
of the Company in connection with the proposed
transaction. Information concerning the special interests of these
directors, executive officers and other members of the Company’s management and
employees in the proposed transaction will be included in the proxy statement of
the Company described above. Information regarding the Company’s
directors and executive officers is also available in its 2008 Annual Report on
Form 10-K filed with the SEC on March 31, 2009, and in its definitive proxy
statement relating to its 2009 Annual Meeting of Shareholders filed with the SEC
on April 17, 2009. These documents are available free of charge at
the SEC’s website at www.sec.gov and from the Company as described
above.
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Item
5.02
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Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers.
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On
February 18, 2010, the Company, its wholly-owned subsidiary, PECO II Global
Services, Inc., and John G. Heindel, the Company’s Chairman of the
Board, President, Chief Executive Officer, Chief Financial Officer and
Treasurer, entered into an Amendment No. 1 (the “Amendment”) to the Employment
Agreement, dated January 4, 2010 (the “Employment Agreement”). The
Amendment clarified certain payments (the “Payments”) that would be due Mr.
Heindel if a change of control (as defined in the Employment Agreement) occurs
at any time during the term of the Employment Agreement, and within six months
following the date of the change of control either (1) Mr. Heindel terminates
his employment for any reason or (2) the Company terminates Mr. Heindel’s
employment for any reason other than for Cause (as defined in the Employment
Agreement).
Upon any
such termination, Mr. Heindel is entitled to Payments equal to two times the sum
of (1) Mr. Heindel’s annual salary in effect on the date of termination, (2) the
cash value of the annual restricted stock grant to Mr. Heindel, measured as of
the grant date, and (3) the annual or incentive bonus earned by Mr. Heindel in
the most recently completed fiscal year. In addition, upon any such
termination, Mr. Heindel is entitled to the continuing payment of his Family
COBRA Health Insurance coverage for a maximum of 18 months from the date of
termination, and his stock options will immediately vest 100% and may be
exercised for a period of 12 months from the termination date.
The
Amendment also contains provisions to ensure compliance with certain Internal
Revenue Code sections, and to ensure any amount of the Payments determined to be
nondeductible to the Company under Section 280G of the Internal Revenue Code
will be reduced to the maximum amount which would cause all of the Payments to
be deductible by the Company.
Under the
Employment Agreement, Mr. Heindel may not compete against the Company for a
period of one year following any termination of his employment with the
Company. The Amendment further provides that during this one-year
period, and for an additional six-month period thereafter, Mr. Heindel may not
be employed or engaged by, perform any services for, invest in or become
associated in any capacity with certain competitors of the Company.
On February
18, 2010, the Company and Parent issued a press release announcing the execution
of the Merger Agreement. A copy of the press release is filed as
Exhibit 99.1 and incorporated herein by reference.
Forward-Looking and Cautionary
Statements
Statements in
this release that are not historical fact are forward-looking statements, which
involve risks and uncertainties that may cause actual results or events to
differ materially from those expressed or implied in such
statements. For example, although PECO II and Lineage have signed an
agreement for a subsidiary of Lineage to merge into PECO II, there is no
assurance that they will complete the proposed merger. The proposed
merger may not occur at all if the companies do not receive necessary approval
from PECO II’s shareholders, or if it is blocked by a governmental agency, or if
either PECO II or Lineage fail to satisfy other conditions to
closing. Other risks and uncertainties to which PECO II is subject
are discussed in its reports filed with the SEC under the caption “Risk Factors”
and elsewhere, including, without limitation, its Annual Report on Form 10-K for
the year ended December 31, 2008 (filed March 31, 2009); and its Quarterly
Reports on Forms 10-Q for the fiscal quarter ended March 31, 2009 (filed May 15,
2009); for the fiscal quarter ended June 30, 2009 (filed August 14, 2009); and
for the fiscal quarter ended September 30, 2009 (filed November 13,
2009). This release contains time-sensitive information that reflects
management’s best analysis only as of the date of this release. PECO
II does not undertake any obligation to publicly update or revise any
forward-looking statements to reflect future events, information, or
circumstances that arise after the date of this release.