PRELIMINARY COPY
CENTERCORE LOGO
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 26, 1995
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
CenterCore, Inc. (the "Company") will be held at the offices of Maris
Equipment Company, Inc. at 110 Summit Drive, Exton, PA 19341 on
Wednesday, July 26, 1995 at 9:00 a.m., local time, for the following
purposes:
1. To elect three directors;
2. To consider and vote upon a proposal to amend the 1993 Stock
Option Plan;
3. To consider and vote upon a proposal for the sale of
substantially all of the assets of the Company's office furnishings
business, including the office seating business operated by the
Company's subsidiary, Corel Corporate Seating, Inc.; and
4. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The Board of Directors has established the close of business on June
27, 1995 as the record date for the determination of stockholders
entitled to notice of and to vote at the meeting or any adjournments
thereof.
The accompanying Information Statement is furnished on behalf of the
Board of Directors of the Company to provide notice of the Company's
Annual Meeting of Stockholders. WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
By order of the Board of Directors,
GEORGE E. MITCHELL
President and Chief Executive Officer
110 Summit Drive
Exton, PA 19341
July 6, 1995
PRELIMINARY COPY
CENTERCORE, INC.
110 Summit Drive
Exton, PA 19341
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY.
--------------------
INFORMATION STATEMENT
This Information Statement is furnished on behalf of the Board of
Directors of CenterCore, Inc. (the "Company") to provide notice of the
Annual Meeting of Stockholders to be held on JulyE26, 1995 (such meeting
and any adjournment or adjournments thereof referred to as the "Annual
Meeting") for the purposes set forth in the accompanying Notice of
Annual Meeting of Stockholders and in this Information Statement. This
Information Statement is being mailed to stockholders on or about July
6, 1995.
Voting Securities
Only the holders of shares of common stock, par value $.01 per share
(the "Common Stock"), and Series A Redeemable Convertible Preferred
Stock, par value $.01 per share (the "Series A Shares"), of the Company
of record at the close of business on June 27, 1995 (cumulatively, the
"Shares") are entitled to receive notice of, and to vote at, the Annual
Meeting. On that date, there were 10,437,326 shares of Common Stock and
15,000 Series A Shares outstanding and entitled to be voted at the
Annual Meeting. Each share of Common Stock is entitled to vote for up
to three persons as directors and to cast one vote on each other matter
to be considered. Each Series A Share is entitled to cast one vote for
each share of Common Stock into which such Series A Shares can be
converted. At June 27, 1995, each Series A Share was convertible into
100 shares of Common Stock.
The three nominees receiving the highest number of affirmative votes
of the Shares present or represented and entitled to be voted shall be
elected as directors. The approval of the adoption of the proposed
amendment to the 1993 Stock Option Plan requires the affirmative vote of
a majority of the votes cast at a meeting at which a quorum is present,
either in person or by proxy, and voting on such amendment. Approval of
the proposal to adopt a resolution for the sale of substantially all of
the assets of the Company's office furnishings business, including the
office seating business operated by the Company's subsidiary, Corel
Corporate Seating, Inc., requires the affirmative vote of a majority of
the outstanding Shares entitled to vote at the Annual Meeting. At June
27, 1995, Safeguard Scientifics (Delaware), Inc., the majority
stockholder of the Company, was the holder of 6,744,747 shares of Common
Stock and 15,000 Series A Shares and has advised the Company that it
intends to vote its Shares in favor of the election of the named
nominees and in favor of proposals 2 and 3.
A majority of outstanding Shares will constitute a quorum for the
transaction of business at the Annual Meeting. Votes withheld from any
director, abstentions and broker non-votes will be counted for purposes
of determining the presence of a quorum for the transaction of business
at the Annual Meeting. Abstentions are counted in tabulations of the
votes cast on proposals presented to stockholders. Broker non-votes are
not counted for purposes of determining whether a proposal has been
approved.
Stockholder Proposals for 1996 Annual Meeting
Stockholders intending to present proposals at the next Annual
Meeting of Stockholders to be held in 1996 must notify the Company of
the proposal no later than March 8, 1996.
Securities Ownership of Certain Beneficial Owners and Management
The following table sets forth as of June 15, 1995, the Company's
Common Stock beneficially owned by each person known to the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock,
and the number of shares of Common Stock owned beneficially by each
director, by each named executive officer, and by all executive officers
and directors as a group. In addition to the information regarding the
Company's Common Stock listed below, as of June 15, 1995, there were
15,000 Series A Shares issued and outstanding. All of such Series A
Shares are owned of record by Safeguard Scientifics (Delaware), Inc., a
wholly owned subsidiary of Safeguard Scientifics, Inc. ("Safeguard"),
and consequently are beneficially owned by Safeguard. The following
table does not take into account the agreement of Safeguard to
contribute 2,000,000 shares of Common Stock to the Company and to sell
2,500,000 shares of Common Stock to Company management. After
consummation of these transactions, Safeguard's ownership will be
reduced to 37.7% of the outstanding Common Stock, and the officers and
directors as a group will own 36.8% of the outstanding Common Stock.
Number of Percent of
Shares Owned(1) Class
--------------- ----------
Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087 (2) 8,244,757 69.1%
George E. Mitchell (3) 651,250 6.2%
110 Summit Drive
Exton, PA 19341
Anthony A. Nichols (4) 29,688 *
Richard P. Richter (4) 5,100 *
Michael H. Pelosi III(4) 47,500 *
Officers and directors
as a group (5 persons)(5) 801,038 7.6%
- - ----------------
(*) Less than 1%.
(1) Except as otherwise disclosed, the nature of beneficial ownership
is the sole power to vote and to dispose of the shares (except for
shares held jointly with spouse).
(2) Safeguard Scientifics (Delaware), Inc. is the record owner of
6,744,757 shares of Common Stock and 15,000 Series A Shares, which are
presently convertible into 1,500,000 shares of Common Stock. Such
shares are beneficially owned by Safeguard. All of the shares
beneficially owned by Safeguard have been pledged by Safeguard as
collateral in connection with its bank line of credit.
(3) Includes 300,000 shares of Common Stock held by Mr. Mitchell's
spouse.
(4) Includes for Messrs. Nichols, Richter and Pelosi 5,000 shares,
5,000 shares and 37,500 shares, respectively, which may be acquired
pursuant to stock options which are currently exercisable or which will
become exercisable by August 14, 1995.
(5) Includes 115,000 shares which may be acquired pursuant to stock
options which are currently exercisable or which will become exercisable
by August 14, 1995.
1. ELECTION OF DIRECTORS
The Board has nominated the individuals set forth below for election
as directors of the Company, to hold office until the Annual Meeting of
Stockholders in 1996 and until their successors are elected and have
qualified. All of the nominees are presently serving as directors of
the Company and have consented to serve if elected.
<TABLE>
<CAPTION>
Principal Occupation and Business Has Been a
Name Experience During Last Five Years Director Since Age
---- --------------------------------- -------------- ---
<S> <C> <C> <C>
George E. Mitchell President, Chairman and Chief Executive
Officer of the Company 1984 57
Anthony A. Nichols President, The Nichols Company, which owns,
manages and leases commercial office and
industrial space(1)(2) 1988 55
Richard P. Richter President Emeritus, Ursinus College(1)(3)(4) 1989 64
</TABLE>
- - ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
(4) Prior to January 1995, Mr. Richter was President of Ursinus
College.
Committees and Meetings of the Board of Directors
The Board of Directors held five meetings in 1994. The Company's
Board of Directors has appointed standing Audit, Compensation and Stock
Option Committees. The Audit Committee, which met once in 1994, is
authorized to conduct such reviews and examinations as it deems
necessary or desirable with respect to the practices and procedures of
hte independent accountants, the scope of the audit, accounting
controls, practices and policies, the recommendation to the Board of the
independent accountants to be selected, and the relationship between the
Company and the independent accountants, including the availability of
Company records, information and personnel. The Compensation
Committee, which met once during 1994, fixes compensation levels,
including incentive compensation for all officers and other principal
employees. The Stock Option Committee, which administers the Company's
stock option plans, did not meet during 1994. The Board does not have a
Nominating Committee. All of the directors attended at least 75% of the
Board and committee meetings of which they were members.
Directors' Compensation
Directors are elected annually and hold office until their successors
are elected and have qualified or until their earlier resignation or
removal. Directors who are not employees of the Company or Safeguard
Scientifics, Inc. are paid a quarterly fee of $1,000 and $400 for each
Board meeting attended, including committee meetings attended on a date
other than a Board meeting date.
The Company also maintains a stock option plan for Non-Employee
Directors (the "Directors' Plan") which provides for the grant of
options to directors not otherwise employed by the Company, its parent
or any of its subsidiaries ("Eligible Director"). Each Eligible
Director receives, as of the date such person first becomes an Eligible
Director, an option to purchase 5,000 shares of the Company's Common
Stock at an option exercise price equal to the asked price of the Common
Stock on the date of grant as reported in the National Association of
Securities Dealers Automated Quotations System. All options granted
under the Directors' Plan vest in four equal annual installments
beginning on the first anniversary of the date of option grant and have
a term of seven years. No options were granted to or exercised by an
Eligible Director during 1994.
REPORT OF THE BOARD COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the
"Committee") determines compensation levels, including incentive
compensation, for the executives of the Company. Anthony A. Nichols is
presently serving as the sole member of the Compensation Committee.
Charles A. Root was a member of the Compensation Committee until his
resignation from the Board of Directors in April 1995.
Executive Compensation Policies
The Company was and is in a highly competitive industry. In order to
succeed, the Company believes that it must be able to attract and retain
qualified executives, promote among them the economic benefits of stock
ownership in the Company, and motivate and reward executives who, by
their industry, loyalty and exceptional service, make contributions of
special importance to the success of the business of the Company. The
Company has structured its executive compensation program to support the
strategic goals and objectives of the Company.
Base compensation levels and benefits for executives generally had
been set in previous years to be between the lower end and the midpoint
of the scale of compensation paid by comparable companies in the
Company's principal industry. Conversely, incentive programs were
regarded to be above the midpoint of the scale in the industry. In
pursuing this philosophy, the Company believed it could keep the fixed
component of the compensation package at reasonable levels while
incenting its key executives and managers to achieve better than average
results. Therefore, the total cash compensation plan is made up of a
lower base and higher incentive opportunity which in total would be
competitive with comparable companies in the industry if the Company's
objectives are achieved. For the purpose of establishing these levels,
the Company had reviewed an evaluation by an independent compensation
consultant of various published industry salary surveys. In setting
executive compensation packages for 1994, the Committee considered an
evaluation of executive compensation levels for comparably-sized
companies in the electrical contracting industry, rather than in the
office furnishings industry.
Annual cash bonuses are based on return on assets and individual
performance. At the beginning of each year, the Committee approves a
target range of return on assets, and a range of potential bonus amounts
for the chief executive officer and each other executive officer, stated
as a percentage of base salary. Performance bonuses are awarded at
year-end based on the actual return on assets compared to the target
range of return on assets, and the achievement of individual objectives
and individual contributions during the year to the achievement by the
Company of its financial and strategic objectives as set forth in the
Company's annual strategic plan.
Grants of Company stock options are intended to align the interests
of executives and key employees with the long-term interests of the
Company's stockholders, and to encourage executives and key employees to
remain in the Company's employ. Generally, grants are not made in every
year, but are awarded subjectively based on a number of factors,
including the pre-tax operating earnings of the Company, the
individual's contributions to the achievement of the Company's financial
and strategic objectives, and the amount and remaining term of options
already held by an individual. The Stock Option Committee of the Board
administers the Company's stock option plan. No options were granted by
the Stock Option Committee to the Company's executive officers for
services rendered in 1994.
CEO Compensation
The Compensation Committee authorized an increase in Mr. Mitchell's
1994 base salary to $140,000. However, based on the Company's
performance during the first quarter and its cash flow problems, in
April 1994, Mr. Mitchell initiated a 16% reduction in his salary in
order to conserve Company resources. Since the Company failed to
achieve the established target range of return on assets during 1994, no
bonus was paid for 1994 to Mr. Mitchell.
Other Executive Compensation
The Compensation Committee re-set executive salaries for 1994 for
certain executives based on its review of executive compensation in the
electrical contracting industry. However, based on the Company's
performance during the first quarter and its cash flow problems, in
April and May 1994, all executives accepted salary reductions in order
to conserve Company resources. Since the Company failed to achieve the
established target range of return on assets during 1994, no bonuses
were paid to any of the Company's executive officers for 1994.
By the Compensation Committee:
Anthony A. Nichols
Summary Compensation of Executive Officers
The following table sets forth information concerning compensation
paid to the Chief Executive Officer and to each other person who was an
executive officer of the Company at any time during 1994 and whose
salary and bonus exceeded $100,000 in 1994.
<TABLE>
<CAPTION>
Summary Compensation Table
- - ---------------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
------------------------------------------------ ------------
Awards
------------
Securities
Other Annual Underlying All Other
Compensa- Options/ Compensa-
Name and Principal Position Year Salary ($)(1) Bonus ($)(2) tion ($)(3) SARS (#) tion ($)(4)
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
George E. Mitchell, 1994 $125,354 $ 0 $ 13,816 0 $ 33,787
President, Chairman and
Chief Executive Officer 1993 130,001 0 13,350 0 36,084
1992 129,000 129,000 10,795 0 33,141
- - ---------------------------------------------------------------------------------------------------------------------------------
Michael H. Pelosi III, 1994 $130,961 $ 0 $ 0 0 $ 0
President, Airo Clean, Inc.(5)
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes annual compensation which has been deferred by the named
executives pursuant to the Company's 401(k) Tax Deferred Retirement and
Incentive Plan ("401(k) Plan").
(2) A portion of the cash bonus listed above for services rendered in
1992 was paid in 1993.
(3) Represents amounts reimbursed during the fiscal year for the
payment of taxes. Perquisites and other personal benefits did not
exceed the lesser of $50,000 or 10% of any executive officer's salary
and bonus and accordingly have been omitted from the table as permitted
by the rules of the Securities and Exchange Commission.
(4) The stated amounts for fiscal 1994 include the follwoing amounts
for each named executive officer: Company contributions under the
401(k) Plan -- Mr. Mitchell, $1,216; Mr. Pelosi, $0; term life and
disability premiums -- Mr. Mitchell, $24,563; Mr. Pelosi, $0; current
dollar value of benefits to the named executives of the remainder of
split-dollar premiums paid by the Company -- Mr. Mitchell, $6,581; Mr.
Pelosi, $0.
(5) Mr. Pelosi was elected as an executive officer of the Company in
mid-1994.
Stock Options
The Company did not grant any stock options or stock appreciation
rights to its Chief Executive Officer or its other named executive
officer during 1994. The following table sets forth information with
respect to the number of unexercised options and the value of
unexercised in-the-money options at December 31, 1994.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- - ---------------------------------------------------------------------------------------------------------------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Options/SARs at Fiscal in-the-Money Options/SARs
on Year-End ($)(1) at Fiscal Year-End (#)(1)
Exercise Value
Name (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
George E. Mitchell 0 $ 0 0 0 $ 0 $ 0
- - ---------------------------------------------------------------------------------------------------------------------------------
Michael H. Pelosi III 0 $ 0 27,500 17,500 $ 0 $ 0
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On December 29, 1994, the fair market value was $.4063. No
options were in-the-money on that date.
Employment Contracts and Termination of Employment and Change-in-Cotnrol
Arrangements.
In connection with the acquisition of the assets of Airo Clean
Engineering, Inc. in 1993, Airo Clean, Inc. entered into a five-year
employment agreement with Michael H. Pelosi III providing for his
employment through February 1, 1998 as President of Airo Clean, Inc. at
a minimum base salary of $100,000 per year, which was subsequently
increased to $137,500 per year. The agreement also provided for Mr.
Pelosi to receive an incentive payment each year equal to 3.75% of Airo
Clean's net income, before allocated expenses and taxes, in excess of
$150,000 per year. Airo Clean did not achieve this target in 1994, and
consequently Mr. Pelosi did not receive any incentive payment for 1994.
In May 1994, in recognition of the Company's liquidity problems, Mr.
Pelosi accepted a temporary salary reduction for the balance of 1994 in
order to conserve Company resources. Upon the termination of Mr.
Pelosi's employment for reasons other than just cause or voluntary
resignation, he will be entitled to receive an amount equal to his base
salary for the balance of the term of the agreement. Pursuant to this
agreement, Mr. Pelosi has agreed to refrain from competing with the
Company until the earlier of February 1, 1998 or two years after the
termination of his employment.
STOCK PERFORMANCE GRAPH
The following chart compares the cumulative total stockholder return
on the Company's Common Stock for the period December 31, 1989 through
December 31, 1994 with the cumulative total return on the NASDAQ nIdex
and the cumulative total return for a peer group index for the same
period. Because the Company has discontinued its furnishings
operations, the Company has selected as a new peer group SIC Code 1731--
Electrical Contractors, which is the primary industry in which the
Company is continuing to operate.
The following table of numbers were used to generate the graphic chart
in the printed piece.
200
180
160
140
120
100
80
60
40
20
0
1989 1990 1991 1992 1993 1994
1989 1990 1991 1992 1993 1994
CenterCore 100 49 49 55 73 39
NASDAQ 100 85 136 159 181 177
Peer Group 100 77 77 21 6 2
As required by the rules of the Securities and Exchange Commission, the
chart below compares the cumulative stockholder return on the Company's
Common Stock with the cumulative total return on the NASDAQ Index and
the peer group used in the chart presented in the Company's 1994 proxy
statement. The peer group in this chart consists of SIC Code 252--
Office Furniture.
The following table of numbers were used to generate the graphic chart
in the printed piece.
200
180
160
140
120
100
80
60
40
20
0
1989 1990 1991 1992 1993 1994
1989 1990 1991 1992 1993 1994
CenterCore 100 49 49 55 73 39
NASDAQ 100 85 136 159 181 177
Peer Group 100 84 103 122 159 144
Each of the above charts assumes that $100 was invested on December 31,
1989 in the Company's Common Stock and in each of the comparison groups,
and assumes reinvestment of dividends.
CERTAIN TRANSACTIONS
The Company and Safeguard are parties to an administrative services
agreement pursuant to which Safeguard provides the Company with
administrative support services for an annual fee and the reimbursement
of certain out-of-pocket expenses incurred by Safeguard in performing
services under the agreement. The administrative support services
include consultation regarding the Company's general management,
investor relations, financial management, human resources management,
certain legal services, insurance programs administration, and tax
research and planning. Since the Company refinanced its bank credit
facility in March, 1994, the administrative services fee has been
subordinated to the bank loan, and has not been paid. The Company paid
administrative services fees of $83,333 to Safeguard in 1994. In
connection with the sale by Safeguard of Company common stock to
management and its contribution of Company Common Stock to the Company,
the administration services agreement will be terminated.
Maris Equipment Company, Inc., a subsidiary of the Company ("Maris"),
rents 21,580 square feet of office space in Exton, Pennsylvania from
Safeguard. The lease expired April 1995, and has been extended on a
month-to-month basis. The Company pays monthly rental payments to
Safeguard of $11,539 and a monthly operating expense allowance of
$4,784, subject to adjustment based upon its proportionate share of
actual operating expenses. The Company also is responsible for its
proportionate share of utility charges and insurance for each of the
leased premises. The Company intends to retain this lease as its
corporate headquarters. The Company has advised that it believes the
lease terms are no less favorable than could be obtained from an
unrelated third party.
The Company also rents 4,600 square feet of office space in Exton,
Pennsylvania from Safeguard, which has served as its corporate
headquarters. The lease expired May 6, 1995, and has been extended on a
month-to-month basis. The Company pays monthly rental payments to
Safeguard of $3,067. The Company also pays a monthly operating expense
allowance of $1,303 subject to adjustment based upon its proportionate
share of actual operating expenses. The Company intends to terminate
this lease shortly.
In September 1993, Safeguard loaned $1.1 million to the Company on a
subordinated, unsecured basis to partially finance the Company's
acquisition of Maris Equipment Company. In the fourth quarter of 1994,
Safeguard contributed this loan to the capital of the Company.
In March 1994, Safeguard guaranteed payment of up to a maximum of
$940,000 under the Company's revolving credit agreement with Mellon
Bank, subject to reduction or elimination upon the Company satisfying
certain requirements imposed by the bank. In June 1994, Safeguard
guaranteed an additional $1.5 million under the Company's credit
facility with Mellon Bank. Safeguard received no monetary compensation
for the extension of these guarantees. The Company has agreed to
indemnify Safeguard against loss resulting from the above described
guarantees.
In June 1994, Safeguard purchased from the Company 15,000 shares of
its Series A Redeemable Convertible Preferred Stock ("Series A Shares")
for an aggregate purchase price of $1.5 million. The Series A Shares
are convertible into shares of Common Stock based on a conversion price
of $1.00 per share of Common Stock. The conversion price and number of
shares into which the Series A Shares may be converted are subject to
anti-dilutive adjustments. The Series A Shares are entitled to a 6% per
annum dividend payable out of legally available funds. Dividends which
are not declared and paid will accumulate. No dividends have been
declared to date. The Series A Shares are entitled to one vote for each
share of Common Stock into which such Series A Shares may be converted.
The Company may redeem the Series A Shares at any time after June 1,
1995 and must redeem all outstanding Series A Shares on June 1, 2001.
In March 1995, the Company sold all of the capital stock of
CenterCore Canada Limited to Safeguard for $10,000. CenterCore Canada
had an intercompany liability to the Company of approximately $369,300,
which liability survived the stock sale. Safeguard intends to cause
CenterCore Canada to sell its assets, and to use the sale proceeds to
satisfy its outstanding liabilities, including its liability to the
Company. The purchase price for CenterCore Canada's assets is expected
to be paid over time, and is not expected to be sufficient to satisfy
all of CenterCore Canada's liabilities to the Company.
In 1995, Safeguard agreed to contribute 2,000,000 shares of the
Company's Common Stock to the capital of the Company. Safeguard also
agreed to sell to George E. Mitchell and certain other members of
management an aggregate of 2,500,000 shares of the Company's Common
Stock, at a price of $.10 per share, payable in the form of five-year,
interest bearing promissory notes secured by 1,800,000 of the purchased
shares. The parties estimated the fair market value of the shares to be
$.10, taking into account a discount for lack of liquidity after the
Common Stock of the Company was delisted from NASDAQ. Mr. Mitchell and
the other management purchasers agreed to contribute 700,000 of such
shares into escrow with the Company which the Company may redeem in
order to satisfy exercises of options under the Company's 1993 Stock
Option Plan when such exercises exceed 500,000 shares in the aggregate.
Safeguard also has agreed to provide loans and/or loan guarantees to the
Company for up to a maximum of $3 million, subject to certain
conditions. In accordance with Safeguard's agreement, in April 1995,
Safeguard pledged to the Company's bank a $1.5 million letter of credit
to secure advances, if any, which the bank might make in excess of the
Company's borrowing base formula. The Company has agreed to indemnify
Safeguard against loss resulting from the pledge.
In connection with the Airo Clean acquisition in 1993, Airo Clean,
Inc. entered into a five-year employment agreement with Joseph P.
Pelosi, the brother of Michael H. Pelosi, III. The agreement provides
for a minimum annual base salary of $80,000, and provides for an
incentive payment each year equal to 3.75% of Airo Clean's net income,
before allocated expenses and taxes, in excess of $150,000. During
1994, the Company paid Joseph Pelosi $80,000 plus normal employee
benefits.
Also in connection with the Airo Clean acquisition, Airo Clean
entered into a lease for approximately 15,300 square feet of flex
office, warehouse and assembly space in Exton, PA from Michael Pelosi,
Jr. and Lucille Pelosi, who are the parents of Michael H. Pelosi, III.
The lease continues through December 2001. During 1994, Airo Clean paid
$107,000 as rent to Mr. and Mrs. Pelosi, and also paid all operating
expenses for the leased premises. The Company plans to consolidate Airo
Clean's operations into Maris' facility and will attempt to sublet the
space.
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE 1993 STOCK OPTION PLAN
Background
At the Annual Meeting, the stockholders will be asked to approve an
amendment to the Company's 1993 Stock Option Plan which was adopted by
the Board, subject to stockholder approval, in May 1995. The 1993 Stock
Option Plan, as proposed to be amended, is hereinafter referred to as
the "1993 Plan."
Proposed Amendment to the 1993 Plan
The proposed amendment to the 1993 Plan authorizes an increase in the
number of shares of Common Stock which may be issued upon exercise of
options granted or to be granted under the 1993 Plan by 700,000 shares
of Common Stock, from 500,000 to 1,200,000 shares of Common Stock in the
aggregate.
It is the Board's intention to issue options for an aggregate of
approximately 700,000 shares to all employees, excluding the current
executive officers, who remain in the Company's employ following the
consummation of the transaction set forth in Proposal 3 herein. In
connection with the sale by Safeguard to Company management of 2,500,000
shares of Common Stock, Company management has agreed that 700,000 of
such shares will be held in escrow with the Company which the Company
may redeem in order to satisfy exercises of options under the Company's
1993 Stock Option Plan when such exercises exceed 500,000 shares in the
aggregate. Therefore, the additional 700,000 shares authorized for
issuance under the Company's 1993 Plan will not be dilutive to existing
stockholders of the Company.
Approval by Stockholders
Approval of the adoption of the amendment to the 1993 Plan requires
the affirmative vote of a majority of the votes cast at a meeting at
which a quorum representing a majority of all outstanding voting stock
of the Company is present, either in person or by proxy, and voting on
the 1993 Plan. If not so approved, then the 1993 Plan in the form as
approved by the stockholders at the 1994 Annual Meeting will remain in
full force and effect and the aggregate number of shares of Common Stock
that are subject to options granted under the 1993 Plan will not exceed
500,000 shares of Common Stock.
DESCRIPTION OF THE 1993 PLAN
The following description of the 1993 Plan is intended merely as a
summary of the principal features of the 1993 Plan.
Purpose of the 1993 Plan
The purpose of the 1993 Plan is to provide additional incentive to
employees of the Company and its subsidiaries and to increase their
proprietary interest in the success of the enterprise to the benefit of
the Company and its stockholders.
Shares Subject to the 1993 Plan
Subject to the adjustment provisions discussed below, the maximum
number of shares of Common Stock which may be issued under the 1993 Plan
is 1,200,000. Such shares may be authorized but unissued shares of
Common Stock or previously issued but reacquired shares of Common Stock.
Shares subject to options which remain unexercised upon expiration,
exchange of existing options, or earlier termination of such options
will again become available for issuance in connection with stock
options awarded under the 1993 Plan. On June 15, 1995, the average of
the bid and asked prices as quoted by the market makers of the Company's
Common Stock was $.125 per share.
Administration
The 1993 Plan is administered by the Stock Option Committee, which
currently is composed of Director Richard P. Richter. The Stock Option
Committee has the authority to interpret the 1993 Plan; to establish
appropriate rules and regulations for the proper administration of the
1993 Plan; to select the persons to whom options should be granted; to
determine the number of shares to be covered by such options, the times
and dates at which such options shall be granted, and whether the
options shall be incentive stock options ("ISO") or non-qualified stock
options ("NQSO"); and generally to administer the 1993 Plan.
Eligibility
Employees (including any directors who are also employees) of the
Company or of any subsidiary who are significant contributors to the
business of the Company and its subsidiaries are eligible to participate
in the 1993 Plan. On June 15, 1995, there were approximately 110
persons considered eligible to participate in the 1993 Plan.
Stock Options
The 1993 Plan requires that each optionee enter into a stock option
agreement with the Company which incorporates the terms of the option
and such other terms, conditions and restrictions, not inconsistent with
the 1993 Plan, as the Stock Option Committee may determine.
The option price will be determined by the Stock Option Committee,
but may not, with respect to ISOs, be less than the greater of 100% of
the fair market value of the optioned shares of Common Stock or the par
value thereof on the date of grant. If the grantee of an ISO under the
1993 Plan owns more than 10% of the total combined voting power of all
shares of stock of the Company or of any parent or subsidiary of the
Company, the option price cannot be less than 110% of the fair market
value at the date of grant and the term of such option cannot be more
than five years.
The term of any other option granted under the 1993 Plan may not
exceed ten years. Options will become exercisable in such installments
and on such dates as the Stock Option Committee may specify. The Stock
Option Committee may accelerate the exercise date of any outstanding
options, in its discretion, if it deems such acceleration desirable.
Any option held by an individual who dies while employed by the Company
or any subsidiary, or whose employment with the Company and all
subsidiaries is terminated, prior to the expiration date of such option,
will remain exercisable by the former employee or his personal
representative for a period of time following the employee's termination
of employment or death as provided for in the 1993 Plan and the
applicable option agreement. Options are not transferable except at
death.
The 1993 Plan provides that the aggregate fair market value
(determined as of the time the ISO is granted) of the shares with
respect to which ISOs are exercisable for the first time by an optionee
during any calendar year under the 1993 Plan and any other ISO plan of
the Company, or any parent or subsidiary of the Company, cannot exceed
$100,000.
The option price is payable in cash or its equivalent or, in the
discretion of the Stock Option Committee, (i) in shares of Common Stock
of the Company previously acquired by the optionee, provided that if
such shares were acquired through exercise of an ISO, such shares have
been held by the optionee for a period of not less than the statutory
holding periods described in the Internal Revenue Code of 1986, as
amended (the "Code"), on the date of exercise (which as of June 15, 1995
are two years from the date of grant of the ISO and one year following
the date of transfer of the shares to the optionee), or if such shares
were acquired through exercise of an NQSO, such shares have been held by
the optionee for a period of more than one year on the date of exercise
and provided further that each optionee may use the procedure described
in this clause (i) only once during any six-month period; (ii) by
delivering a properly executed notice of exercise of the option to the
Company and a broker, with irrevocable instructions to the broker to
promptly sell the underlying shares of Common Stock and deliver to the
Company the amount of sale proceeds necessary to pay the exercise price
of the option; or (iii) by delivery of a full recourse promissory note.
The Stock Option Committee also may elect to cash-out all or part of the
portion of the option to be exercised by paying optionee an amount, in
cash or stock, equal to the excess of the fair market value of the stock
over the exercise price on the effective date of such cash-out.
Adjustments Upon Changes in Capitalization, Mergers and Other Events
The number of shares issuable under the 1993 Plan and upon the
exercise of options outstanding thereunder, and the exercise price of
such options, are subject to adjustment in the event of a stock split,
stock dividend or similar change in the capitalization of the Company.
In the event of a merger, consolidation or other specified corporate
transactions, options will be assumed by the surviving or successor
corporation, if any. However, in the event of such a corporate
transaction, the 1993 Plan also authorizes the Stock Option Committee to
terminate options to the extent they are not exercised prior to
consummation of such a transaction, and to accelerate the vesting of
options so that they are immediately exercisable prior to the
consummation of the transaction.
Duration and Amendment of the 1993 Plan
The Board may amend or modify the 1993 Plan at any time, but no such
amendment or modification, without the approval of the stockholders,
shall (a) increase the amount of stock on which options may be granted,
except pursuant to the adjustment provisions of the 1993 Plan, (b)
change the provision relating to the eligibility of employees to whom
options may be granted, or (c) materially increase the benefits accruing
to participants under the 1993 Plan; provided, however, that no
stockholder approval will be required for an amendment or modification
pursuant to (a) and (b) above if the applicable sections of the Code,
and rules and regulations thereunder governing incentive stock options,
do not require stockholder approval and, provided further, that no
stockholder approval will be required for an amendment or modification
pursuant to (c) above if Rule 16b-3, or any successor provision
promulgated pursuant to Section 16 of the Securities Exchange Act of
1934, does not require stockholder approval. The 1993 Plan will
terminate on October 28, 2003 unless terminated earlier by the Board.
No options may be granted after such termination, but options
outstanding at the time of termination will remain exercisable in
accordance with their terms.
Federal Income Tax Consequences
Based on the advice of counsel, the Company believes that the normal
operation of the 1993 Plan should generally have, under the Code, and
the regulations and rulings thereunder, all as in effect on June 15,
1995, the principal federal income tax consequences described below.
Incentive Stock Options.
If the requirements regarding ISOs set forth in the 1993 Plan are
met, ISOs granted under the 1993 Plan will be afforded favorable federal
income tax treatment under the Code. The optionee will not recognize
taxable income and the Company will not be entitled to a deduction upon
the grant of an ISO. Moreover, the optionee will not recognize taxable
income (except alternative minimum taxable income, if applicable) and
the Company will not be entitled to a deduction upon the exercise by the
optionee of an ISO, provided the optionee was an employee of the Company
or any of its subsidiary corporations, as defined in Section 424(f) of
the Code, during the entire period from the date of grant of the ISO
until three months before the date of exercise.
If the employment requirements described above are not met, the tax
consequences relating to NQSOs (discussed below) will apply.
If the optionee disposes of the Common Stock acquired under an ISO
after at least two years following the date of grant of the ISO and at
least one year following the date of transfer of the Common Stock to the
optionee following exercise of the ISO, the optionee will recognize a
long-term capital gain or loss equal to the difference between the
amount realized upon the disposition and the exercise price. Any net
capital gain will be taxed at the ordinary income tax rates, but only up
to a maximum rate of 28%. Any net capital loss can only be used to
offset up to $3,000 per year ($1,500 per year in the case of a married
individual filing separately) of ordinary income.
If the optionee makes a disqualifying disposition of the Common Stock
(that is, disposes of the Common Stock within two years after the date
of grant of the ISO or within one year after the transfer of the Common
Stock to the optionee), but all other requirements of Section 422 of the
Code are met, the optionee will generally recognize ordinary income upon
disposition of the Common Stock in an amount equal to the lesser of (i)
the fair market value of the Common Stock on the date of exercise minus
the exercise price, or (ii) the amount realized on disposition minus the
exercise price. However, in the case of a disqualifying disposition
made less than six months after the date of grant of the option by a
person subject to Section 16(b) of the Securities Exchange Act of 1934,
the determination of ordinary income under (i) above will generally be
based on the fair market value of the Common Shares as of the date which
is six months following the date the ISO was granted, unless the
optionee makes an election under Section 83(b) of the Code.
Disqualifying dispositions of Common Stock also may, depending upon the
sales price, result in either long-term or short-term capital gain or
loss under the Code rules which govern other stock dispositions.
If the requirements of Section 422 of the Code are not met, the
Company will be allowed a federal income tax deduction to the extent of
the ordinary income includible in the optionee's gross income in
accordance with the provisions of Section 83 of the Code (and Section
3402 of the Code, to the extent applicable) and the regulations
thereunder.
The use of Common Stock received upon the exercise of an ISO to pay
the exercise price in connection with the exercise of other ISOs within
either the two-year or one-year holding periods described above will
constitute a disqualifying disposition of the Common Stock so used which
will result in income (or loss) to the optionee and, to the extent of a
recognized gain, a deduction to the Company. If, however, these holding
period requirements are met and the number of shares of Common Stock
received on the exercise does not exceed the number of shares of Common
Stock surrendered, the optionee will recognize no gain or loss with
respect to the surrendered Common Stock, and will have the same basis
and holding period with respect to the newly acquired shares of Common
Stock as with respect to the surrendered shares. To the extent that the
number of shares of Common Stock received exceeds the number
surrendered, the optionee's basis in such excess shares will equal the
amount of cash paid by the optionee upon the exercise of the option, and
the optionee's holding period with respect to such excess shares will
begin on the date such shares are transferred to the optionee. The tax
treatment described above for shares of Common Stock newly received upon
exercise is not affected by using shares of Common Stock to pay the
exercise price.
Non-qualified Options.
All other options granted under the 1993 Plan are NQSOs and will not
qualify for any special tax benefits to the optionee. Under present
Treasury Regulations, the Company's stock options are not deemed to have
a readily ascertainable value. Accordingly, an optionee will not
recognize any taxable income at the time he or she is granted an NQSO
and the Company will not be entitled to a deduction upon the grant of an
NQSO.
Generally, an optionee will recognize ordinary income at the time of
exercise of an NQSO, in an amount equal to the excess of the fair market
value of the shares of Common Stock at the time of such exercise over
the exercise price. If, however, an optionee who is subject to Section
16(b) of the Securities Exchange Act of 1934 exercises an NQSO less than
six months after the date it is granted, he or she will generally
recognize ordinary income six months after the NQSO is granted, unless
he or she makes an election under Section 83(b) of the Code to recognize
income at an earlier date.
The Company will be entitled to a deduction to the extent of the
ordinary income recognized by an optionee in accordance with the rules
of Section 83 of the Code and the regulations thereunder. However, no
deduction will generally be allowed to the Company unless the Company
deducts and withholds federal income tax.
An optionee exercising an NQSO is subject to federal income tax on
the income recognized as a result of the exercise of an NQSO and federal
Income tax must be withheld. The Committee, in its discretion, may
permit the optionee to elect to surrender or deliver shares of Common
Stock otherwise issuable upon exercise, or previously acquired shares,
in order to satisfy the federal income tax withholding, subject to
certain restrictions set forth in the 1993 Plan. Such an election will
result in a disposition of the shares of Common Stock which are
surrendered or delivered, and an amount will be included in the
optionee's income equal to the excess of the fair market value of such
shares over the optionee's basis in such shares.
If the optionee pays the exercise price in cash, the basis of the
shares of Common Stock received by an optionee upon the exercise of an
NQSO is the exercise price paid plus the amount recognized by the
optionee as income attributable to such shares upon such exercise. If
the exercise price is paid in cash, the optionee's holding period for
such shares will begin on the day after the date on which the optionee
realized income with respect to the transfer of such option shares,
i.e., generally the day after the exercise date. Any net capital gain
realized by the optionee upon a subsequent disposition of any such
shares is subject to federal income tax on the income recognized at the
ordinary income tax rates, but only up to a maximum of 28%. Any loss
realized on a subsequent disposition, however, will be treated as a
capital loss and thus can only be used to offset up to $3,000 per year
($1,500 in the case of a married individual filing separately) of
ordinary income.
If the optionee surrenders shares of Common Stock to pay the exercise
price, and the number of shares received on the exercise does not exceed
the number of shares surrendered, the optionee will recognize no gain or
loss with respect to the surrendered shares, and will have the same
basis and holding period with respect to the newly acquired shares as
with respect to the surrendered shares. To the extent that the number
of shares of Common Stock received exceeds the number surrendered, the
fair market value of such excess shares on the date of exercise, reduced
by any cash paid by the optionee upon such exercise, will be includible
in the gross income of the optionee. The optionee's basis in such
excess shares will equal the sum of the cash paid by the optionee upon
the exercise of the option plus any amount included in the optionee's
gross income as a result of the exercise of the option and the
optionee's holding period with respect to such excess shares will begin
on the day following the date of exercise.
Other Tax Considerations.
The 1993 Plan is not qualified under Section 401(a) of the Code and
is not subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended to date. The comments set forth in the
above paragraphs are only a summary of certain of the federal income tax
consequences relating to the 1993 Plan. No consideration has been given
to the effects of state, local and other tax laws on the optionee or the
Company.
NEW PLAN BENEFITS
The following table sets forth information with respect to the number
of options which were granted or which are expected to be granted to
each of the named individuals or groups under the 1993 Plan subject to
stockholder approval at the Annual Meeting of the proposal contained in
Proposal 2 above. The options set forth in this table will be rescinded
if such stockholder approval is not obtained.
Name and Position (1) Number of Options Dollar Value ($)(2)
- - --------------------- ----------------- -------------------
George E. Mitchell, President and
Chief Executive Officer 0 0
Michael H. Pelosi III, President
Airo Clean, Inc. 0 0
Executive Officers as a Group
Non-Executive Officer Employees 0 0
as a Group 700,000 0
(1) Non-Employee Directors have been excluded from the above table as
they are not eligible to participate in the 1993 Plan.
(2) All options granted under the 1993 Plan have an exercise price
equal to or greater than the fair market value of the Common Stock on
the date of grant. As optionees must pay the exercise price to the
Copmany to acquire the shares upon exercise of the option, the dollar
value of benefits received by or allocated to the optionees on the grant
date was zero.
3. APPROVAL OF THE SALE OF THE OFFICE FURNISHINGS BUSINESS
Description of the Company and the Purchaser
Prior to 1993, the Company was engaged solely in the business of
designing, manufacturing and distributing space-efficient, modular
workstation systems and a line of complementary office products,
including cable and wiring systems, ergonomically designed seating
products, and air management systems for temperature blending and
breathing zone filtration (collectively, the "Furnishings Business").
The Company conducted the Furnishings Business directly, and through its
90% owned subsidiary, Corel Corporate Seating, Inc. ("Corel"). In
February 1993, the Company, through a subsidiary, acquired the assets
and assumed the liabilities of Airo Clean Engineering, Inc., a designer
and manufacturer of cleanroom and air filtration components and systems
serving industry and the hospital and health care markets. In September
1993, the Company, through a subsidiary, purchased substantially all of
the assets and assumed certain liabilities of Maris Equipment Company, a
specialty contractor providing integration, installation and servicing
of advanced electronic systems for security access control, fire alarm,
sound, communications and other applications on a nationwide basis.
Maris provides these services to business, aviation and transportation
authorities and correctional facilities. The principal executive
offices of the Company are located at 110 Summit Drive, Exton, PA
19341, and its telephone number is (610) 524-7000.
The CenterCore Group, Inc. ("CGI") is a Delaware corporation which
was organized for the sole purpose of acquiring the assets of the
Company's Furnishings Business. CGI was organized by The Apollo Group,
Inc. ("Apollo"), a private investment group specializing in the
acquisition and continued management of established manufacturing
companies. Apollo was founded in 1983, and has participated in the
acquisition and management of 12 small to middle market size operating
companies. The principal executive offices of Apollo are located at One
Captain Thomson Lane, Hingham, MA 02043, and its telephone number is
(617) 740-0462. Neither CGI, Apollo nor its principals are affiliated
with the Company, and neither the Company nor any of its current
executive officers, directors, nor controlling persons has any ownership
interest in CGI. One or more former executive officers of the Company
will become employed by CGI upon consummation of the sale, and may be
granted an equity interest in CGI.
Background and Reasons for Sale
The Company's acquisitions of Airo Clean and Maris were part of an
overall strategy to improve the Company's operating performance by
penetrating new and growing markets to compensate for the steady decline
in Furnishing sBusiness sales to the federal government, particularly
the Department of Defense. The reduced government sales have had a
major impact on the Company's Furnishings Business in recent years, and
the outlook for furnishings sales to the federal government continues to
be uncertain. This decline has been caused by a general decline in
government purchases due to downsizing, and by the increasing
participation of the Federal Prison Industries in the sale of
furnishings products to the government pursuant to preferences granted
to it. The Company has also attempted to offset the reduced government
sales by increasing its marketing efforts to the commercial sector.
However, the commercial furnishings market is highly competitive, with
participants who are substantially larger than the Company with much
greater resources. In light of industry rightsizing and downsizing
limiting overall demand for new office furnishings, it has become more
difficult for niche players such as the Company to successfully compete
in the commercial marketplace.
The Company also attempted in 1993 to improve performance by
significantly downsizing its Canadian operations and consolidating most
of the manufacturing, product development, marketing and service
functions into its domestic furnishings operations based in Plainfield,
New Jersey.
In order to better meet its working capital needs, the Company
refinanced and increased its bank credit facility with a new bank in
March 1994. Safeguard Scientifics, Inc. ("Safeguard"), the Company's
majority stockholder, supported the refinancing by providing $2.4
million of guarantees to the new bank. Safeguard had previously
supported the Company's acquisition of Maris by providing a $1.1 million
subordinated loan to the Company. In June 1994, the Company raised an
additional $1.5 million of capital through the issuance of preferred
stock to Safeguard.
However, the Company's results from its Furnishings Business
continued to deteriorate, and the Company realized substantial losses in
1994 resulting primarily from unanticipated costs and operating
difficulties associated with certain large, bonded correctional facility
and airport construction contracts acquired in the Maris acquisition,
which problems were somewhat exacerbated by insufficient financing to
support the timely performance of the contracts. As a result of these
losses, the Company has suffered a severe liquidity problem in that it
was unable to pay its vendors on a timely basis, was having difficulty
completing work in progress, and defaulted on certain financial
covenants under its bank loan agreement.
In August 1994, Safeguard informed the Company that it would not
continue to provide ongoing financial support to the Company. As a
result, the Company's management and Board of Directors considered a
number of alternative possible means of resolving its liquidity and
operating problems. The alternatives considered included a sale of the
Furnishings Business, a sale of the security systems business, a give-
back of the security systems business to the seller of Maris on the
basis of substantial apparent misrepresentations and breaches of
warranties, or a reorganization in bankruptcy. A bankruptcy
reorganization was rejected because of the damage it would do to the
Company's employees, customers, vendors, and lenders. A give-back of
Maris was considered unfeasible. As between a sale of the Furnishings
Business and a sale of the security systems business, management and the
Board concluded that if the Company could settle its outstanding
liabilities relating to Maris' large bonded projects and to Maris'
seller, Maris has the potential to realize significant future growth in
the business of providing low voltage electronic security systems for
smaller commercial projects and for "smart highway" projects. The
future potential of the Furnishings Business was considered to be less
bright. Therefore, the Board of Directors determined to pursue a sale
of the Furnishings Business in order to pay down the Company's bank debt
as quickly as possible and to pursue settlements of Maris' outstanding
liabilities. Safeguard supported this decision by contributing its $1.1
million subordinated note to the capital of the Company in December 1994
and by agreeing to provide the Company with up to $3 imllion of
additional credit to fund the Company's negotiations relating to the
sale of the Furnishings Business, the settlement of Maris' outstanding
liabilities, and the Company's continuing working capital needs in
addition to its available bank credit facility.
Because of the Company's decision, supported by its majority
stockholder, to sell its Furnishings Business, the Company has
classified its Furnishings Business as discontinued operations.
The Company's management and directors, assisted by Safeguard, began
to pursue a sale of the Furnishings Business in August 1994. In
September 1994, the Company met with Stump & Company ("Stump"), a
business broker and financial advisor specializing in the furniture
industry. After several discussions and a due diligence evaluation of
the Company by Stump, the Company engaged Stump on November 7, 1994 to
act as its exclusive financial advisor to assist in the sale of the
Furnishings Business.
While the Company was pursuing a sale, the management of the
Furnishings Business based in Plainfield, New Jersey (the "MBO Group")
indicated an interest in pursuing a management buyout of the Furnishings
Business. The members of the Company's Board indicated a willingness to
consider an offer from the MBO Group, and directed Stump to pursue
equity sources who would be willing to support such an offer. However,
in order to motivate the MBO Group to respond fairly to inquiries from
other buyers, the Company committed to pay to the MBO Group a bonus in
the aggregate amount of $85,000 if a sale of the Furnishings Business is
consummated to a buyer other than the MBO Group.
Stump conducted a broad search of equity sources to support the MBO
Group as well as strategic buyers within the furniture business and
operating buyout specialists. Stump qualified a number of potential
buyers, who were then given access to information about the Furnishings
Business to perform their due diligence. As a result, the Company
received indications of interest with general proposed terms from
several parties, although none from equity sources willing to finance an
offer from the MBO Group.
During the course of the process, Apollo was introduced to Stump.
Stump performed an initial due diligence check on Apollo, and in early
December 1994 provided Apollo with information about the Furnishings
Business. On December 12, 1994, Apollo made a due diligence visit to
the Company's Plainfield plant. On January 4, 1995, representatives of
Apollo met with management and directors of the Company and executives
of Safeguard, and presented their first proposal for a purchase of the
Furnishings Business. The proposal provided for the purchase of
substantially all of the domestic assets of the Furnishings Business for
a cash payment at closing, additional installment payments beginning 9
months after closing, and a subordinated promissory note payable in
installments beginning approximately two years after closing. The
amount of each of the payments was to be determined by a formula based
on the working capital of the Furnishings Business at the time of
closing. Apollo would assume only certain liabilities associated with
the ongoing operations of the Furnishings Business, would not purchase
any of the foreign assets, and would require the Company and Safeguard
to provide certain indemnities against undisclosed liabilities,
particularly with respect to any environmental liabilities.
Representatives of the Company, Safeguard and Apollo negotiated Apollo's
proposal during the meeting and during the following week.
As a result of the negotiations, the Company's directors and senior
management, in consultation with executives of Safeguard, determined
that Apollo's offer was more favorable than the other offers the Company
had received or was likely to receive. It was believed that Stump had
done a thorough job of identifying potential acquirers, and only a
relatively small number of them had presented a realistic purchase
offer, none of which was as favorable as Apollo's offer. Apollo's offer
provided a significant up front cash payment which could be used to pay
down the Company's bank debt. It was also believed that Apollo had the
necessary management expertise and experience to restructure and operate
the Furnishings Business profitably, which would enable it to pay the
deferred purchase price. Apollo also indicated that it would offer the
MBO Groupt he opportunity to acquire up to a 20% equity interest in the
acquiring entity. This was significantly greater than the percentage
interest which any other bidder had been willing to offer, and was
considered to be a positive factor.
The major areas of negotiation involved the priority and limits of
Safeguard's and the Company's indemnities to Apollo, the fair value of
the fixed assets to be included in the sale, the definition of working
capital for purposes of calculating the various purchase price payments,
the terms of the deferred purchase price payments, and the rights of
offset of Apollo's right to indemnity against the deferred payments. On
January 11, 1995, the Company, Safeguard and Apollo signed a letter of
intent for the sale of the Furnishings Business to Apollo ("the Sale
Transaction"). The letter of intent was conditioned on satisfactory
completion of Apollo's due diligence investigation, Apollo obtaining
financing for the acquisition, satisfactory resolution of the state
environmental review of the sale required because of the transfer of the
lease of the manufacturing facility in Plainfield, New Jersey, and
execution of a mutually agreeable definitive purchase agreement. The
letter of intent was renegotiated in early March 1995, and an amendment
was executed on March 13, 1995.
The Company's counsel prepared a draft purchase agreement, and
representatives of the Company, Safeguard and Apollo and their
respective counsel pursued extensive negotiations on the terms of the
purchase agreement. The Company and Safeguard used common counsel in
the negotiations. Finally, on May 26, 1995, the Company, Safeguard and
Apollo entered into a definitive purchase agreement. The purchase
agreement is contingent on a number of conditions, including approval of
the stockholders of the Company and satisfactory resolution of the state
environmental review of the sale. The terms and conditions of the
purchase agreement are described in more detail below under "Summary of
the Terms of the Sale." The Company's Board of Directors approved the
purchase agreement on May 26, 1995. The Board of Corel and the Company,
as majority stockholder of Corel, have also approved the purchase
agreement on behalf of Corel.
Summary of Terms of the Sale Transaction
Business to be Sold
The Company is selling all of its domestic Furnishings Business to
Apollo. This business includes CenterCore's modular, configured
furniture systems business as well as the commercial and industrial
seating business of its subsidiary Corel. After the sale of the
Furnishings Business, the Company will continue to operate its security
and control system integration and installation business through its
subsidiary Maris and its indoor air quality and hospital/healthcare
environmental control business through its subsidiary Airo Clean.
The assets to be sold include accounts receivable, furniture,
fixtures, machinery and equipment, intellectual property (including
rights to the name "CenterCore"), inventory, real property leases,
leasehold imporvements, and outstanding dealer agreements, government
supply contracts, and other agreements. As a part of the sale, the
Company and Apollo will grant to each other royalty-free licenses (the
"License Agreements") to use certain patents and trademarks relating to
air circulation and filtration products which are currently marketed by
both centerCore and Airo Clean. Apollo will have the right to market
the products in all places where contract furniture may be sold, and the
Company will have the right to market the products in hospital and
industrial cleanroom applications, except where Apollo may sell contract
furniture.
The following is a summary of the terms of the Asset Purchase
Agreement, which has been filed by the Company as an exhibit to the
preliminary copy of this information statement filed with the
Securities and Exchange Commission (the "SEC"), and reference
is hereby made thereto for a complete description of the terms. All
statements herein are qualified in their entirety by reference to the
Asset Purchase Agreement. Copies of such agreement are available from
the Company free of charge upon written request. See "Incorporation
of Certain Documents by Reference."
Purchase Price
The purchase price (the "Purchase Price") for the Furnishings
Business is comprised of three components: cash consideration (the
"Cash Consideration") of $2.5 million less the amount, if any, by which
the Company's working capital is less than $5 million (the "Working
Capital Deficit"); installment payments equal to the sum of $1 million,
plus the amount of the Company's accounts receivable at Closing less
assumed liabilities at Closing, plus one-half thee xcess of the amount
of inventory at Closing over $1 million, less the Cash Consideration
(the "Installment Payments"); and a subordinated note component which is
equal to one-half of the difference between the amount of inventory at
Closing less $1 million, less any excess inventory reserve at Closing,
plus $1.065 million plus or minus certain capital expenditures, plus the
Company's security deposits and pre-paid expenses at Closing (the
"Subordinated Note Component"). Assuming a July 28, 1995 closing, based
on the Company's current best estimate of the assets and liabilities
which will be sold to Apollo, the Cash Consideration will be
approximately $2.5 million, the aggregate Installment Payments will be
approximately $2 million, and the principal amount of the Subordinated
Note will be approximately $2 million for an aggregate Purchase Price of
approximately $6 million.
The Cash Consideration is to paid at Closing with any Working Capital
Deficit to be determined, preliminarily, based on a preliminary pro
forma closing date balance sheet (the "Preliminary Balance Sheet")
prepared by the Company reflecting only the assets and liabilities of
the Company being sold to and assumed by Apollo. The Cash Consideration
will be adjusted, as required, after Closing based on the actual Working
Capital Deficit, if any.
The Installment Payments are to be made in five equal payments with
the first installment commencing nine months after the Closing Date.
The second installment is to be made on the last day of the calendar
quarter in which the first installment is made and thereafter the
remaining three installments will be made on the last day of each of the
three succeeding calendar quarters. Assuming a July 28, 1995 closing,
the installments will be made on April 28, 1996, June 30, 1996,
September 30, 1996, December 31, 1996 and March 31, 1997. The
Installment Payments will be non-interest bearing and secured by a
second lien on all of Apollo's assets.
The Subordinated Note Component will be evidenced by Apollo's
subordinated note (the "Subordinated Note") which will bear interest at
the rate of 8% per annum, commencing to accrue on the first anniversary
of the Closing Date. The principal amount of the Subordinated Note will
be amortized on a seven year level schedule with semi-annual payments
and with a balloon payment due on the fifth anniversary of the Closing
Date. Interest and principal payments will commence 18 months after the
Closing Date and continue semi-annually thereafter until maturity. In
the event that Buyer's EBITAD (earnings before interest, taxes,
depreciation and amortization) exceeds $2 million dollars for any fiscal
year prior to repayment of the Subordinated Note, an additional
principal payment equal to 50% of such excess shall be payable by Apollo
and applied against the Subordinated Note in the inverse order of
maturity. The Subordinated Note will be subordinated to the Company's
senior debt and will be secured by a second lien on all of the Company's
fixed assets purchased by Apollo.
At Closing, the Company is required to deliver to Apollo the
Preliminary Balance Sheet reflecting all of the assets which would be
purchased by Apollo and all of the liabilities which would be assumed by
Apollo as of the last day of the month preceding the month in which
Closing occurs with the assets and liabilities determined assuming that
Closing occurred on such date. The Preliminary Balance Sheet will be
used to compute the Cash Consideration payable at Closing and the
principal amount of the Subordinated Note to be delivered at Closing.
Within 30 days following Closing, the Company, at its expense, must
prepare and deliver to Buyer a pro forma Closing Date balance sheet
reflecting all of the assets purchased and liabilities assumed by Apollo
as of the Closing Date which is to be prepared, in so far as is
possible, in accordance with generally accepted accounting principals
consistently applied (the "Closing Balance Sheet"). Simultaneously, the
Company is to deliver its computation of the Working Capital Deficit for
purposes of computing the Cash Consideration, the amount of the
Installment Payments and the actual principal amount of the Subordinated
Note (collectively, the "Computed Items").
The Closing Balance Sheet and the Computed Items are to become final
and binding upon the parties unless Apollo gives written notice of its
disagreement to the Company within 20 days following delivery to it of
the Closing Balance Sheet setting forth in reasonable detail the nature
of any disagreements so asserted. During the first 10 days following
receipt of any notice of disagreement, the parties are to attempt to
resolve in writing any differences they have. If at the end of the 10
day period, the parties have reached such written agreement, the Closing
Balance Sheet and Computed Items are to be adjusted to reflect such
written agreement and thereafter shall become final and binding on the
parties. If at the end of the 10 day period the parties have failed to
reach agreement, all disputed matters shall be resolved by an arbitrator
which shall be any of the so called "Big Six" accounting firms agreed
upon by the Company and Apollo other than KPMG Peat Marwick. The
determination of the arbitrator will be final and binding on the Company
and Apollo and will control the determination of the Closing Balance
Sheet and the Computed Items.
At such time as the Closing Balance Sheet and the Computed Items are
finally determined, the various components of the Purchase Price are to
be recomputed. Specifically, the actual Cash Consideration shall be
recomputed using the actual Working Capital Deficit, with any excess
refunded by the Company to Apollo, and any deficit paid by Apollo to the
Company, in either case within five days of the final determination of
the Closing Balance Sheet. In addition, if based on the Closing Balance
Sheet and the Computed Items, the principal amount of the Subordinated
Note differs from that computed based on the Preliminary Balance Sheet,
the Seller will surrender for cancellation the Subordinated Note
delivered at Closing in return for a new Subordinated Note with a
principal amount based determined on the Closing Balance Sheet.
At Closing, Apollo will assume certain liabilities of the Company
including all accounts payable, commissions payable, prospective
warranty obligations, outstanding purchase orders and outstanding
customer sales contracts and obligations under certain real and personal
property leases.
Name Change
At the time of the Closing, the Company will change its name from
CenterCore, Inc. to Core Technologies, Inc. This name change was
approved by the Company's stockholders at the 1994 annual stockholders
meeting.
Representations, Warranties and Indemnities
In the Asset Purchase Agreement, the Company is making customary
representations and warranties to Apollo including as to the Company's
financial and other information filed with the SEC, tax matters,
environmental matters, pending or threatened litigation affecting the
Company, compliance with applicable laws, title to the Company's assets,
third party approvals, status of employee benefit plans and employee
compensation arrangements, accounts receivable, intellectual property,
absence of changes, and labor relations. In the Asset Purchase
Agreement, Apollo is making customary representations and warranties to
the Company including third party approvals and existing and pending
litigation.
The Asset Purchase Agreement also provides customary indemnification
obligations. Specifically, each of the parties has agreed to indemnify
the other in connection with inaccuracies, breaches and non-fulfillment
of any of the representations and warranties made, and covenants and
agreements to be performed prior to Closing, by the Company or Apollo
(which have varying periods of survival ranging from 24 months following
Closing to unlimited survival). The Company has also agreed to
indemnify Apollo in connection with any retained liabilities, and Apollo
has agreed to indemnify the Company in connection with any assumed
liabilities. The Asset Purchase Agreement provides generally that a
minimum of $50,000 in damages must be sustained before seeking recovery
pursuant to the indemnifications provisions and that no party will be
obligated to pay more for indemnification than an amount equal to the
Purchase Price. The Asset Purchase Agreement provides that Apollo will
have the right to offset the Company's indemnification obligations
against the Installment Payments and/or the payments payable under the
Subordinated Notes subject to certain terms and conditions.
Closing Conditions.
The obligations of the Company and Apollo to consummate the
transactions as contemplated by the Asset Purchase Agreement are subject
to the satisfaction or waiver of a number of specified conditions. The
obligations of Apollo are subject to: (i) there having been no
misstatement in any material respect of any representation or warranty
of the Company when such representations and warranties were originally
made and as of the Closing (except for such changes as are permitted in
compliance with the Asset Purchase Agreement); (ii) the Company having
fully performed and complied in all material respects with its
obligations under the Asset Purchase Agreement required to be performed
by it prior to the Closing; (iii) all documents, instruments,
certificates and opinions required to be delivered by the Company or any
other party representing the Company, as contemplated by the Asset
Purchase Agreement, having been duly executed and delivered; (iv) all
consents, approvals and authorizations required to be obtained prior to
Closing from certain identified third parties in connection with the
execution and delivery and performance of the Asset Purchase Agreement
have been made or obtained; (v) Apollo having obtained financing from
its senior lender, Shawmut Capital Financing; (vi) the Company having
complied, on a basis acceptable to the Company, with applicable New
Jersey environmental statutes; (vii) completion by the Company of a
physical inventory of the tangible assets being acquired by Apollo;
(viii) the Company having disseminated this Information Statement as
required under the Exchange Act and the requisite 20 day period
following such dissemination shall have been lapsed; and (ix) the
execution, and delivery by Safeguard of the Parent Guarantee Agreement.
The obligations of the Company to consummate the transactions
contemplated by the Asset Purchase Agreement are further subject to the
satisfaction or waiver of the following conditions at or prior to
Closing: (i) there having been no misstatement in any material respect
of any representation and warranty of Apollo when such representations
and warranties originally made and as of the date of the Closing (except
for such changes permitted in compliance with the Asset Purchase
Agreement); (ii) Apollo having fully performed and complied in all
material respects with its obligations required to be performed prior to
Closing under the Asset Purchase Agreement; (iii) all documents,
agreements, certificates and opinions required to be delivered by Apollo
or any party representing Apollo, as contemplated by the Asset Purchase
Agreement, having been duly executed and delivered; (iv) the Company
having complied, on a basis acceptable to the Company, with the
applicable New Jersey environmental statutes; (v) the Company having
received the approval of Mellon Bank to release Mellon's liens on the
assets being purchased by Apollo and (vi) the Company having
disseminated this Information Statement as required under the Exchange
Act and the requisite 20 day period following such dissemination shall
have been lapsed.
No Sale Negotiations
The Asset Purchase Agreement provides that neither the Company nor
any person acting on its behalf will take any action to solicit,
encourage, initiate or participate in any way in discussions or
negotiations with, or furnish any information with respect to the
Furnishings Business to, any third party in connection with any possible
proposed sale of capital stock, sale of the substantial portion of the
assets, any merger, business combination or other similar transaction
involving the Furnishings Business.
Additional Covenants Prior to Closing
The Asset Purchase Agreement provides that the Company will operate
its business only in the ordinary course consistent with past practices
and will preserve its business organization and the Furnishings Business
intact, not to dispose of or transfer any portion of the Furnishings
Business or otherwise make any fundamental change therein.
Termination Provisions
The Asset Purchase Agreement provides it may be terminated any time
prior to Closing (i) by mutual consent of the parties, (ii) by the non-
defaulting party as a result of inaccuracies in the representations and
warranties or the failure to perform covenants and agreements required
to be performed by the defaulting party, (iii) by either party if one or
more of the conditions to such party's obligations to proceed to Closing
has not been fulfilled by the Closing Date, (iv) by either party if
Closing has not occurred on or prior to July 31, 1995, and (v) by either
party if certain legal proceedings are commenced challenging
consummation of the Closing.
If at any tim eSafeguard receives a bona fide written letter of
intent regarding the purchase of its stock investment in CenterCore or
the purchase of substantially or all of the assets of CenterCore, within
seven days of receipt of notice of CenterCore's intent to terminate the
exclusive relationship described above, Apollo shall have the option of
either (i) submitting a letter of intent in similar form and substance
to that received by Safeguard and initiating due diligence regarding the
purchase of Safeguard stock investment in Seller or (ii) terminating all
actions with respect to Seller. In such event, if the Agreement is
terminated pursuant to this provision, the Company will be obligated to
pay Apollo a termination fee equal to Buyer's out of pocket expenses to
third parties plsu $2,000 per business day from January 11, 1995 to the
decision to terminate, up to a maximum of $150,000.
Non Competition Agreement
The Asset Purchase Agreement provides that the Company will not, for
a period of three years following the Closing Date, compete, directly or
indirectly, with Apollo in the Furnishings Business in the United
States, Canada or any other country in which the Furnishings Business
has been conducted since January 1, 1994.
Expenses
The Asset Purchase Agreement provides that each party will pay all of
the fees and expenses incurred by it (including the fees and expenses of
counsel) in connection with the negotiation, execution and delivery and
performance of the Asset Purchase Agreement and transactions
contemplated hereby except that the fees of the arbitrator resolving
disputes respecting the Closing Balance Sheet are to be paid equally by
the parties.
Guarantee Agreement
Safeguard has agreed to guarantee the payment of the indemnification
obligations of the Company pursuant to a certain Parent Guarantee
Agreement subject to certain terms and conditions. In addition,
Safeguard has agreed that to the extent it receives funds from the
Company in reimbursement of any prior indemnifications paid by Safeguard
or any other funds from the Company after March 31, 1995, under certain
circumstances, Safeguard will be required to pay such amounts to Apollo
to the extent Apollo is entitled to indemnification from the Company
which is not paid or Apollo is required to disgorge amounts previously
paid to it by the Company in respect of indemnification obligations.
Safeguard's obligation to make guarantee payments on account of the
Company's indemnification obligations is limited to a maximum of $1
million. In addition, with respect to indemnification relating to
environmental matters, Safeguard is only obligated to pay one-half of
the first $250,000 that the Company fails to pay in respect of any such
matter and, with respect to other Company indemnification obligations,
Safeguard has no obligation to pay until the Company has failed to pay
$100,000 of such other indemnification obligations and then only in
amounts in excess of such $100,000 threshold. The obligation o
fSafeguard to guarantee indemnification obligations of the Company
terminates on the earlier of the expiration of the Company's
indemnification obligationsw ith respect to any specific indemnification
claim and 15 years after Closing.
Stockholder Approval
The Company is a Delaware corporation. The Company believes that the
Sale Transaction constitutes a sale of substantially all of the assets
of the Company under Delaware law, and therefore requires stockholder
approval by the affirmative vote of a majority of the votes cast by all
stockholders entitled to vote thereon. Safeguard, which is the holder
of 69.1% of the outstanding voting shares of the Company has advised the
Company that it will vote its shares to approve the Sale Transaction in
accordance with the purchase agreement. Safeguard's vote, by itself,
will be sufficient to achieve stockholder approval of the Sale
Transaction.
Rights of Dissenting Stockholders
Under Delaware law, dissenting stockholders will not have any rights
of appraisal upon the approval or consummation of the Sale Transaction.
Accounting Treatment
Because the Company decided to dispose of the Furnishings Business as
of the end of 1994 and to treat the business as a discontinued
operation, the Company wrote down certain of its assets related to the
Furnishings Business in the fourth quarter of 1994 to reflect
management's estimate of their value in a disposition, and accrued a
reserve for anticipated costs of disposition of the business. As a
result, the sale price for the business will be approximately equal to
the net book value of the assets being sold, and the Company does not
expect to realize any material gain or loss on the Sale Transaction,
provided that the deferred purchase price payments are made in the
amounts provided for in the Purchase Agreement.
Federal Income Tax Consequences
As described above under "Accounting Treatment," the Company has
taken certain charges in the fourth quarter of 1994, as a result of
which the Company does not expect to realize any material gain or loss
for federal income tax purposes on the Sale Transaction, provided that
the deferred purchase price payments are made in the amounts provided
for in the Purchase Agreement. The Sale Transaction will not result in
any federal income tax consequences to the stockholders of the Company.
Regulatory Compliance
The transfer of the lease of the factory and warehouse facility in
Plainfield, New Jersey, which is a material part of the Sale
Transaction, is subject to review and approval by the New Jersey
Department of Environmental Regulation (the "Department") under New
Jersey's so called "ISRA" statute. It is a condition to the obligations
of the parties to consummate the Sale Transaction that the parties are
satisfied with the requirements, if any, which are imposed by the
Department as a condition to approval of the transaction.
Market Price for the Company's Common Stock
The Company's Common Stock is quoted by certain market makers in what
is commonly referred to as the "pink sheets." On May 25, 1995, the day
before the announcement of the execution of the Purchase Agreement,
there was no trading in the Common Stock, but the bid and asked prices
quoted by a market maker on that day were $.06 and $.25, respectively.
SELECTED FINANCIAL DATA
The historical financial data presented below for the five years
ended December 31, 1994 are derived from the Company's audited
consolidated financial statements. The presentation of selected pro
forma financial data would not clarify any trends in the Company's
operations or financial condition because the furnishings segment to be
sold is already treated as discontinued operations in the historical
financial data. Therefore, no selected pro forma financial data is
presented here. However, pro forma financial statements are presented
elsewhere in this Information Statement. This table should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS," and the
historical and pro forma financial statements and information presented
elsewhere in this Information Statement and in the Company's 1994 Annual
Report to Stockholders. All amounts are in thousands, except per share
data. The Company has never declared cash dividends on its common
stock.
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
----------------------- -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $4,189 $10,860 $31,245 $15,242 $-- $-- $--
Net earnings (loss)
Continuing operations (404) 2 (10,392) (113) -- -- --
Discontinued operations (509) (5,048) (703) 989 282 (1,249)
----------------------- -------------------------------------------------------
Net earnings (loss) (404) (507) (15,440) (816) 989 282 (1,249)
Earnings (loss) per share
Continuing operations (.04) (1.00) (.01) - - -
Discontinued operations (.05) (.48) (.07) .09 .03 (.12)
----------------------- -------------------------------------------------------
Net earnings (loss) (.04) (.05) (1.48) (.08) .09 .03 (.12)
March 31, December 31,
----------------------- -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
- - --------------------------------------------------------------------------------------------------------------------------
Working capital (10,404) 5,831 (11,379) 3,947 -- -- --
Total assets 14,934 34,888 16,691 34,571 16,014 17,773 19,645
Long-term debt 0 11,636 0 9,939 4,451 6,393 8,335
Stockholders' equity (deficit) (4,866) 9,677 (4,208) 10,236 11,078 10,667 10,395
Book value per common share (.47) .93 (.40) .98 1.04 .99 .96
Discontinued operations includes the furnishings segment and Nord Systems.
</TABLE>
MANAGEMENTOS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In 1995 the Company decided to significantly downsize the Maris
business by concentrating on the low voltage security and fire alarm
business and selected smart highway applications. The majority of net
sales in the first quarter of 1994 represented bonded correctional
facility and airport projects that the Company has not pursued in 1995.
Due to declining furniture sales, particularly to the federal
government, the Company has decided to dispose of the furnishings
segment. The Company has agreed to sell the assets of the domestic
furnishings segment including Corel for cash and notes receivable. The
Company will apply the sale proceeds to pay down its bank debt which is
expected to close in July 1995. The UK furnishings business will be
sold to local management in return for notes receivable. The Canadian
operation was sold to Safeguard Scientifics, Inc. in April 1995. Due to
these plans, the furnishings segment has been presented as a
discontinued operation.
Continuing operations reflect the results of the on-going businesses
of Maris Equipment Company ("Maris") and Airo Clean. Due to the
disposition of the furnishings segment and the change in the focus of
the business, comparisons from year to year are not necessarily
meaningful.
Review of continuing operations
Net sales for the quarter ended March 31, 1995 were $4.2 million
compared to $10.9 million for the comparable period in 1994. The
Company reported a net loss of $403,900 or $.04 per share, compared to a
net loss of $507,500 in the same period in 1994. From continuing
operations the first quarter of 1995 loss was $403,900 compared to
essentially break-even for the comparable period in 1994.
First quarter 1995 Maris sales were $2.9 million compared to $9.6
million in 1994. Sales in 1994 included $7.1 million in bonded
correctional facility and airport projects which were turned over to the
bonding companies for completion. Maris gross profit as a percentage
of sales increased to 18.9% in the first quarter of 1995 from 15.4% in
the same period in 1994.
First quarter 1995 and 1994 Airo Clean sales were $1.3 million. Airo
Clean gross profit as a percentage of sales increased to 24.4% in the
first quarter of 1995 from 17.1% in the same period in 1994.
Sales and marketing expenses decreased in the first quarter of 1995
to $380,600 1994 due cost reductions implemented at Maris and Airo
Clean. Sales efforts at Maris are being concentrated in expanding the
electronic security systems business, which typically has had higher
gross profit than the correctional facility and airport hardware
construction business. Marketing efforts at Airo Clean have been
focused on promoting the BioShield and Ultraguard products which are air
scrubbing devices for controlling airborne pathogens and targeted for
the health care industry. First quarter 1995 general and administrative
expenses decreased $356,400 compared to 1994 due cost reductions
implemented at Maris and Airo Clean. The Company continues to closely
monitor and control costs and recognizes that a significantly downsized
business in 1995 is necessary for survival. As a percentage of sales
and marketing and general and administrative expenses increased in the
first quarter of 1995 compare to the first quarter of 1994. This is the
result of the decrease in sales. The Company believes that additional
sales can be achieved without a proportional increase in business
infrastructure.
Interest expense in the quarter of 1995 was $171,500 compared to
$96,100 for the comparable period in 1994. The increase in 1995
reflects additional debt incurred to satisfy working capital
requirements, fund losses and higher interest rates.
The Company currently is not able to utilize any tax benefits from
the losses incurred. The Company has generated an unrecorded loss carry
forward of approximately $3 million which is available to off-set future
income until the year 2010.
Liquidity and Capital Resources
As a result of significant operating difficulties, the Company has a
severe liquidity problem. The Company is in default of its loan
facility ($8.3 million at March 31, 1995). These defautls cause the debt
to be due upon demand, and, should the lender demand payment, the
Company does not have the resources to satisfy the debt. The Company
has withdrawn from the correctional facility security business and is
undertaking to significantly downsize the business which includes the
sale of the furnishings business unit. Proceeds from the sale, as well
as a 1995 tax refund of $1.6 million received in the second quarter of
1995, will reduce outstanding bank debt. In anticipation of these
events, the bank continues to extend credit to the Company under the
existing borrowing base formula. Except for a $2.4 million guarantee of
bank debt, Safeguard is not contractually obligated to satisfy any of
the Company's obligations at December 31,1994. The Company believes
that the combination of cash received from the sale of the furnishings
business, the tax refund, the guarantee of Safeguard and the working
capital assets of the ongoing business will be sufficient to
satisfy/support all of the bank debt.
The Company has entered into an agreement with the parties from whom
it acquired Maris, to significantly restructure the original purchase
transaction. Under this agreement the seller has agreed to offset its
$3.6 million note receivable from the Company in exchange for releases
from its indemnification liabilities to the Company under the original
asset purchase agreement. Because the Company did not have the required
working capital to complete certain projects it turned to its sureties
to assume and complete certain construction contracts and has extended
its payables to vendors. The principal sureties have agreed to release
the Company from its indemnity obligations to them in return for 300,000
shares of CenterCore stock, cash payments of $495,000 and additional
payments equal to 20% of the Company's net earnings in 1998-2002 up to
$1 million in the aggregate. The Company is negotiating with all
principal vendors to arrange a repayment schedule while continuing to
supply the Company with materials needed to meet current requirements.
Safeguard has agreed to contribute 2 million shares of its CenterCore
common stock to the Company, sell 2.5 million shares of its CenterCore
common stock to CenterCore management, and provide up to $3 million in
advances to the Company to address current funding requirements of the
downsized business which will be substantially utilized by the Company
in 1995. Through mid June of 1995 Safeguard has funded approximately
$700 thousand of this advance.
As a result of the restructurings, the Company has emerged as a
significantly downsized company. Availability of bonding on jobs will,
at least in the near term, be limited. Bank financing may be available
for limited working capital requirements to augment any advances from
Safeguard. If these sources of funds prove to be inadequate or in the
case of bank financing, unavailable, then the Company will have to seek
additional funds from other investors in order to continue operations.
There can be no assurance that new sources of funds, if required, will
be available. Although the Company believes it will be able to continue
to operate in this new downsized mode, continuation is contingent on the
Company's ability to adequately reduce its cost structure to a point
where it is supported by the new downsized operations.
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Balance Sheets
March 31, December 31,
1995 1994
------------ ------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash $ 358,100 $ 583,600
Receivables, less allowances ($2,786,900 --1995; $2,865,100 --1994 4,349,500 5,024,900
Costs and estimated earnings in excess of billings on uncompleted contracts 362,300 292,500
Inventories 827,400 625,700
Income taxes receivable 1,399,500 1,357,900
Other current assets 479,500 231,300
----------- -------------
Total current assets 7,776,300 8,115,900
Net assets of discontinued operations 5,791,400 7,157,300
Plant and equipment
Leasehold improvements 155,400 155,400
Machinery and equipment 847,400 816,900
----------- -------------
1,002,800 972,300
Less accumulated depreciation and amortization (455,100) (385,400)
----------- -------------
Net plant and equipment 547,700 586,900
Other assets
Excess of cost over net assets of businesses acquired 188,500 192,300
Other 630,000 638,300
----------- -------------
Total other assets 818,500 830,600
----------- -------------
$14,933,900 $16,690,700
=========== =============
See note to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Balance Sheets
March 31, December 31,
1995 1994
----------- -------------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 5,232,000 $ 5,885,500
Accrued expenses 3,325,600 3,793,500
Taxes on income
Billings in excess of costs and estimated earnings on uncomplete 1,180,500 1,419,800
Current debt 8,442,100 8,396,100
----------- -------------
Total current liabilities 18,180,200 19,494,900
Long-term debt
Other liabilities 120,200 121,300
Deferred taxes
Redeemable convertible preferred stock 1,500,000 1,500,000
Stockholders' equity (deficit)
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - 10,767,326 shares 107,700 107,700
Additional paid-in capital 7,923,400 7,923,400
Retained earnings (accumulated deficit) (12,440,000) (12,036,100)
Foreign currency translation adjustment (37,100) 0
Treasury stock at cost - 330,000 shares (420,500) (420,500)
----------- -------------
Total stockholders' equity (deficit) (4,866,500) (4,425,500)
----------- -------------
$14,933,900 $16,690,700
See note to consolidated financial statements =========== =============
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales $ 4,187,800 $10,859,900
Cost of goods sold 3,322,500 9,165,700
----------- -----------
Gross profit 865,300 1,694,200
Expenses
Sales and marketing 518,300 898,900
General and administrative 579,400 935,800
Interest 171,500 96,100
----------- -----------
1,269,200 1,930,800
Loss from continuing operations before income taxes (403,900) (236,600)
Benefit of income taxes (238,100)
----------- -----------
(Loss) earnings from continuing operations (403,900) 1,500
Loss from discontinued operations (509,000)
----------- -----------
Net loss $(403,900) $(507,500)
=========== ===========
Earnings (loss) per share
Continuing operations $(.04) $.00
Discontinued operations (.05)
----------- -----------
Net earnings (loss) $(.04) $(.05)
=========== ===========
Weighted average shares outstanding 10,437,000 10,437,000
See note to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
--------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Operations
Net Loss $ (403,900) $ (507,500)
Loss from discontinued operations 509,000
Adjustments to reconcile net (loss) to cash from operations
Depreciation and amortization 81,600 107,100
Decrease in deferred taxes (100)
Cash from discontinued operations 1,366,100 384,700
Cash provided by (used in) changes in working capital items
Receivables 675,400 566,400
Inventories (201,700) 62,000
Contracts in progress (309,100) (1,080,500)
Other current assets (248,200) (111,700)
Accounts payable (653,500) (284,200)
Accrued expenses (467,900) (458,100)
Taxes on Income (41,600) (605,900)
------------ ------------
Cash (used in) operations (202,800) (1,418,800)
Financing Activities
Borrowings of debt 44,900 1,762,100
------------ ------------
Cash provided by financing activities 44,900 1,762,100
Investing Activities
Expenditures for plant and equipment (30,500) (37,000)
Other, net (37,100) (72,300)
------------ ------------
Cash used in investing activities (67,600) (109,300)
------------ ------------
Increase (decrease) in cash (225,500) 234,000
Cash beginning of period 583,600 376,900
------------ ------------
Cash end of period $ 358,100 $ 610,900
============ ============
See note to consolidated financial statements
</TABLE>
CENTERCORE, INC.
NOTE TO FINANCIAL STATEMENTS
1. Organization and Business Operations
The accompanying unaudited interim financial statements were
prepared in accordance with generally accepted principles for
interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The summary of significant accounting policies and notes to
financial statements included in the 1994 Form 10-K should be
read in conjunction with the accompanying statements. These
statements include all adjustments (consisting only of normal
recurring accurals) which the Company believes are necessary
for a fair presentation of the statements. The interim operating
results are not necessarily indicative of the results expected
for a full year.
PRO FORMA FINANCIAL STATEMENTS
(unaudited)
The pro forma financial statement and information presented below
give effect to the sale of the Furnishings Business to Apollo. The pro
forma balance sheet is presented as of March 31, 1995, assuming a
closing of the Sale Transaction on that date.
A narrative description of the pro forma effects of the Sale
Transaction on the Company's statement of operations for the fiscal year
ended December 31, 1994 and for the three months ended March 31, 1995 is
provided below in lieu of a pro forma statement of operations.
<TABLE>
<CAPTION>
CENTERCORE, INC.
Pro Forma Consolidated Balance Sheets
As of March 31,1995
(unaudited)
Pro Forma
Adjustments
increase
As reported (decrease) Pro Forma
------------- ------------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash $ 358,100 $ $ 358,100
Receivables, net 4,349,500 4,349,600
Notes receivable 1,030,500 (a) 1,030,600
Costs and estimated earnings in excess of billings on uncompleted contracts 362,300 362,300
Inventories 827,400 827,400
Income taxes receivable 1,399,500 1,399,500
Other current assets 479,500 479,500
----------- ----------- -----------
Total current assets 7,776,300 1,030,500 8,806,800
Net assets of discontinued operations 5,791,400 (5,791,400)(b) 0
Plant and equipment
Leasehold improvements 155,400 155,400
Machinery and equipment 847,400 847,400
----------- ----------- -----------
1,002,800 1,002,800
Less accumulated depreciation and amortization (455,100) (455,100)
----------- ----------- -----------
Net plant and equipment 547,700 547,700
Other assets
Excess of cost over net assets of businesses acquired 188,500 188,500
Notes receivable 2,642,900 (c) 2,642,900
Other 630,000 630,000
----------- ----------- -----------
Total other assets 818,500 2,642,900 3,461,400
----------- ----------- -----------
$14,933,900 $(2,118,000) $12,815,900
=========== =========== ===========
See notes to pro forma consolidated balance sheet
</TABLE>
<TABLE>
<CAPTION>
CENTERCORE, INC.
Pro Forma Consolidated Balance Sheets
As of March 31,1995
(unaudited)
Pro Forma
Adjustments
increase
As reported (decrease) Pro Forma
------------- ------------- -----------
(unaudited)
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 5,232,000 $ 5,232,000
Accrued expenses 3,325,600 (350,000)(d) 2,975,600
Billings in excess of costs and estimated earnings on unccompleted contracts 1,180,500 1,180,500
Current debt 8,442,100 (1,768,000)(e) 6,674,100
----------- ----------- -----------
Total current liabilities 18,180,200 (2,118,000) 16,062,200
Other liabilities 120,200 120,200
Redeemable convertible preferred stock 1,500,000 1,500,000
Stockholders' equity (deficit)
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - 10,767,326 shares 107,700 107,700
Additional paid-in capital 7,923,400 7,923,400
Retained earnings (accumulated deficit) (12,440,000) (12,440,000)
Foreign currency translation adjustment (37,100) (37,100)
Treasury stock at cost - 330,000 shares (420,500) (420,500)
----------- ----------- -----------
Total stockholders' equity (deficit) (4,866,500) (4,866,500)
----------- ----------- -----------
$14,933,900 $(2,118,000) $12,815,900
=========== =========== ===========
See notes to pro forma consolidated balance sheet
</TABLE>
CENTERCORE, INC.
NOTES TO PRO FORMA BALANCE SHEET
(unaudited)
(a) Represents the current portion of the installment note due from the
Apollo Group. The installment note, for $1,717,500 will be payable in 5
equal quarterly installments beginning 9 months after the close of the
transaction which is expected to occur in July 1995 secured by a second
lien on all the assets of the buyer.
(b) Reflects payment to the Company of an assumed furnishings segment
purchase price of $5,791,400 (computed in accordance with terms of the
Asset Purchase Agreement, but based on the furnishing net book valve, as
defined, at March 31,995.
(c) Represents the remaining two payments of the of the installment
note and the entire subordinated note due from the Apollo Group. The
subordinated note, for $1,955,900, will be payable in semiannual
installments beginning 1 year after closing for 5 years and bears
interest at 8% per annum secured by a second lien on the fixed assets of
the buyer.
(d) Closing costs include, professional fees and expenses of $350,000
related to the sale of furnishings segment.
(e) Reflects cash payment to the Company at closing of $2,118,000 less
estimated closing costs of $350,000, see note (d).
If the furnishings segment were sold on January 1, 1995 and 1994 net
earnings from continuing operations would not be materially different,
because the historical statements of operations for the fiscal year
ended 1994 and the first quarter of 1995 reflect the furnishings segment
as a discontinued operation. The only adjustments would be to reduce
interest expense by approximately $182,000 for fiscal year 1994 and by
$56,000 in the first quarter of 1995 to reflect the use of the sale
proceeds to pay down the Company's bank credit facility and the
elimination of the discontinued operations.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Information Statement incorporates by reference the following
documents:
1. The Company's Annual Report to Stockholders which is being
delivered to Stockholders herewith in respect to the annual stockholders
meeting to which this Information Statement relates.
2. The Asset Purchase Agreement dated May 26, 1995 between the
Company, Corel Corporate Seating, Inc., Safeguard Scientifics, Inc. and
The CenterCore Group, Inc., which has been filed by the Company with the
SEC together with a preliminary copy of this Information Statement.
The Company will furnish to any stockholder without charge, upon written
or telephonic request, a copy of the Asset Purchase Agreement. Requests
should be directed to Frederick B. Franks, Chief Financial Officer,
CenterCore, Inc., 110 Summit Drive, Exton, PA 19341; phone: (610) 524-
7000.
INDEPENDENT PUBLIC ACCOUNTANTS
Since 1986, the Company has retained KPMG Peat Marwick LLP as its
independent public accountants, and it intends to retain KPMG Peat
Marwick LLP for the current year ending December 31, 1995.
Representatives of KPMG Peat Marwick LLP are expected to be present at
the Annual Meeting, will have an opportunity at the Annual Meeting to
make a statement if they desire to do so, and will be available to
respond to appropriate questions.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities
("10% Stockholders") to file reports of ownership and changes in
ownership of Common Stock and other equity securities of the Company
with the Securities and Exchange Commission ("SEC"). Officers,
directors and 10% Stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of such forms received by it and
written representations from certain reporting persons that no other
reports were required for those persons, the Company believes that
during the period from January 1, 1994 to December 31, 1994, all Section
16(a) filing requirements applicable to its officers, directors and 10%
Stockholders were complied with, except for a late Form 3 filed by Mr.
Pelosi and one transaction which was reported late on a Form 4 by
Safeguard Scientifics, Inc.
OTHER MATTERS
The Company is not aware of any other business to be presented at the
Annual Meeting. The Company's Annual Report to Stockholders for the
year ended December 31, 1994, including financial statements and other
information with respect to the Company and its subsidiaries, is being
mailed simultaneously to the stockholders.
Dated: July 6, 1995
39
3
35
40
CENTERCORE, INC.
1995 ANNUAL REPORT
To the Stockholders:
As I begin this Stockholder Letter, I feel it best to state the obvious.
The acquisition of Maris was a near term financial mistake. Our
immediate goal will be to rebuild selected parts of our business
centering on a few markets that have higher growth potential, and weave
our way through a difficult liquidity situation. These markets include
security, fire alarm, and communication systems for the commercial
marketplace, and a variety of applications in the overall federal and
state level smart highway programs.
In the press release for the fourth quarter, we announced our decision
to exit the detention hardware part of Maris' security business. The
construction delays and complexities in the prison market made it very
difficult to either make a profit or maintain positive cash flow.
Fortunately, the commercial side of the security business has been shown
to be more viable and we are focusing our efforts in this area. Maris
has downsized to a work force of 90 people from over 250 people a few
short months ago. The major construction prison projects were turned
over to the bonding companies earlier this year for completion, and we
are cooperating with them in this effort. In effect, they supply the
cash flow until the specific projects are finished.
To address the liquidity issue, we have reached an agreement with The
Apollo Group, Inc., and CenterCore's domestic furniture company
management, to sell the furniture manufacturing and Corel Seating
operations to them for cash and notes. This transaction should be
completed in July, subject to stockholder approval, and the proceeds
will go to pay down the bank line. Concurrent with these actions, we
have sold the remaining pieces of the Canadian and UK furniture
operations with the funds also going to pay down the bank balance.
In further addressing our cash situation, we have negotiated the offset
of the $3.7 million sellers note related to the Maris acquisition for
certain claims relating to the acquisition. We have also concluded
arrangements with the three bonding companies to release us from the
indemnification provisions of the surety agreements in exchange for
300,000 shares of stock, a sharing of 20% of after tax profits in the
years 1998 - 2002 up to a maximum of $1 million, and $507,000 in cash
payments. These actions will permit the company to go forward without
fear of being charged for the cost overruns on the detention projects
being completed by the bonding companies.
Safeguard Scientifics, a major shareholder, is contributing to the
corporate restructuring in several ways. First, they have forgiven a
$1.1 million inter-company note and have provided a $2.4 million loan
guarantee on the bank debt. They are also providing a $3.0 million
line-of-credit in support of the bank line. Additionally, they are
contributing 2 million shares back to the company. Along with two other
company officers, I will be purchasing 2.5 million shares from the
current Safeguard holding. Of the 2.5 million management shares,
700,000 shares will be converted into option shares for all employees.
To this point, much of the discussion relates to either funding the
company or otherwise providing for adequate short term cash flow. Under
the circumstances, I believe it is absolutely necessary to clearly point
out the critical nature of the current situation. The nature of all
these transactions requires that multiple parties act in concert with
one another and while that appears to be in everyone's best interest, I
need not understate the complexity.
CenterCore will move forward under its new banner Core Technologies, a
name change approved by all of you last year. Its base business will be
commercial and industrial security systems integration, communication
systems for application in the intelligent vehicle and highway safety
programs, and cleanroom products and services for all markets requiring
less particle-laden environments.
The Company entered this year with a backlog of $9 million of contracts
in commercial security systems. The margins on these projects are
reasonable and they will start providing revenue in the second quarter
of 1995. Our Maris sales operations have been downsized to two
principal operations in Exton, Pennsylvania and Austin, Texas, with
smaller satellite operations in New York City, San Antonio, and Los
Angeles. We view this coming year as one of stabilization for Maris and
a major effort will be put into the selection criteria as to what work
we will take and improving the project controls on these jobs to ensure
that service is delivered to the customer and margin to the company.
Airo Clean finished last year with a profitable last quarter and reduced
their loss from a year ago. They had a profitable first quarter of '95
and bookings of new orders have been on plan through March. The
BioShield product, designed for hospital isolation rooms is now on the
market and we are hopeful this item, along with our UltraGuard fixed
ceiling module, will penetrate areas where patient isolation is of
paramount concern. We also have established distribution to service the
Asian Rim countries and business has been brisk to start the year.
Clean stations, a form of localized cleanrooms, have also shown growth,
and are expected to take market share away from the larger and more
costly clean room. This should benefit Airo Clean in that it favors a
product solution rather than a construction project.
As Core Technologies emerges from its beginning as CenterCore, our focus
will be on returning to profitability, strengthening our balance sheet
and rebuilding shareholder value. There is no way to rationalize the
disappointment in the recent financial statements. There is also
renewed vigor among your management to rebuild what we believe can be
achieved. Your patience is appreciated and hopefully, will not go
unrewarded.
George E. Mitchell
Chairman and CEO
General Development of the Business
Prior to 1993, CenterCore, Inc. (the "Company") was engaged solely in
the business of designing, manufacturing and distributing space-
efficient, modular workstation systems and a line of complementary
office products, including cable and wiring systems, ergonomically
designed seating products, and air management systems for temperature
blending and breathing zone filtration. In February 1993, the Company,
through a subsidiary, acquired the assets and assumed the liabilities of
Airo Clean Engineering, Inc., a designer and manufacturer of clean room
and air filtration components and systems serving industry and the
hospital and health care markets. In September 1993, the Company,
through a subsidiary, purchased substantially all of the assets and
assumed certain liabilities of Maris Equipment Company, a specialty
contractor providing integration, installation and servicing of advanced
electronic systems for security access control, fire alarm, sound,
communications and other applications on a nationwide basis. Maris
provides these services to business, aviation and transportation
authorities and correctional facilities. These acquisitions were part
of the Company's overall strategy to improve the Company's operating
performance by penetrating new and growing markets to compensate for the
continued government spending decline in its furnishings segment,
particularly by the Department of Defense. The reduced government sales
has had a major impact on the Company's domestic furnishings operations
in recent years, and the outlook for furnishings sales to the Federal
government continues to be uncertain.
The Company also attempted in 1993 to improve performance by
significantly downsizing its Canadian operations and consolidating most
of the manufacturing, product development, marketing and service
functions into its domestic furnishings operations based in Plainfield,
New Jersey.
In order to better meet its working capital needs, the Company
refinanced and increased its bank credit facility with a new bank in
March 1994. In June 1994, the Company raised an additional $1.5 million
of capital through the issuance of preferred stock to Safeguard
Scientifics, Inc. ("Safeguard"), the Company's majority shareholder.
However, the Company's results from its office furnishing operations
continued to deteriorate, and the Company realized substantial losses
resulting primarily from unanticipated costs and operating difficulties
associated with certain construction contracts acquired in the Maris
acquisition, which problems were somewhat exacerbated by insufficient
financing to support the timely performance of the contracts. As a
result of these losses, the Company suffered a severe liquidity problem,
in that it was not able to pay its vendors on a timely basis, was having
difficulty completing work in progress, and defaulted on certain
financial covenants under its bank loan agreement.
The Company's management has decided that it is in the Company's best
interest to dispose of its office furnishings business, to downsize its
electronic security systems and detention hardware business, and to
repay its bank debt as quickly as possible. In pursuance of this
determination, the Company has taken the following actions. The Company
has entered into an agreement for the sale of its office furnishings
business as currently carried on by CenterCore, Inc. directly and by its
subsidiary, Corel Corporate Seating, Inc. The Company expects to apply
the sale proceeds to pay down its bank debt. However, the closing of
the sale is subject to certain conditions, and there is no assurance
that the Company will successfully consummate the sale of its
furnishings business. Maris has turned over to its surety companies all
of its bonded construction projects in progress, and has obtained
agreements from the surety companies to release Maris and the Company
from their indemnity obligations to the surety companies in exchange for
cash payments, the issuance of Company common stock, and other
consideration. Most of Maris' largest construction projects were
bonded. Maris has stopped bidding for large, bonded correctional
facility and airport contracts, and all correctional facility projects,
regardless of size, involving the supply and installation of detention
hardware. The Company and Maris have entered into an agreement with the
parties from whom the Company purchased Maris to restructure the terms
of the Company's purchase of Maris and to settle all remaining
obligations and liabilities among them. Finally, Safeguard has agreed
to contribute a portion of its CenterCore stock to the Company, to sell
a portion of its CenterCore stock to the management of the Company, and
to provide the Company with up to $3 million of loans or loan guarantees
to enable the Company to address its current working capital needs. The
Company will continue to operate its electronic security systems
business and its air quality products business. The electronic security
systems business will focus on low voltage security and fire alarm
projects and "smart highway" projects.
Although management believes that the Company will be able to operate
profitably following the restructuring, there can be no assurance that
the Company will not continue to realize losses in the future, or that
it will have adequate capital to fund its operations. Even though the
Company is in default under its bank loan agreement, the Company's bank
lender is continuing to make loans available to the Company in
accordance with its borrowing base formula, plus additional advances
secured by collateral pledged by Safeguard. The bank could determine to
discontinue making loans available to the Company and/or to declare the
outstanding loan balance immediately due and payable at any time,
although it has not notified the Company that it intends to do so. The
Company intends to attempt to restructure the loan agreement. If the
Company is not successful in consummating a sale of its furnishings
business, it would be necessary to either locate another purchaser or
consider alternative restructuring plans. The Company has not developed
any definitive alternative plan. In either such event, the Company
would be unable to pay down its bank loan as quickly as it anticipates,
which would add an additional burden to the Company's working capital
and liquidity needs, and could cause the Company's bank to consider
discontinuing making loans available to the Company and/or declaring the
outstanding loan balance immediately due and payable.
Narrative Description of Business
SECURITY SYSTEMS
Products and Services
The Company, through its wholly owned subsidiary, Maris Equipment
Company, Inc., provides low voltage electronic security systems to the
commercial and institutional markets. Products include fire alarm
systems, closed circuit television surveillance systems, card access
security and alarm monitoring systems, paging and intercom systems,
hospital communications systems, parking and revenue control systems and
programmable logic controller based central alarm and control systems.
The Company no longer intends to pursue large, bonded correctional
facility and airport projects, and will no longer provide correctional
detention hardware, such as doors, security glazing and access operating
devices, to the correctional marketplace. Maris is also pursuing a
developing market--the "smart" highway program--which entails the
integration and installation of communications networks for automated
traffic management systems such as re-routing access lanes on bridges,
tunnels and superhighways as traffic patterns fluctuate throughout the
day. Because the smart highway projects are for state or federal
transportation departments, Maris may be required to provide surety
bonds as a condition to winning these jobs. It is likely that
availability of bonding at Maris will be limited, at best, in the near
future. This may inhibit the rate of growth of the Company's business
in the "smart" highway program.
Patents and Proprietary Rights
The Company is qualified as an electrical or alarm contractor, where
required, in most of the Continental United States. Maris does not hold
any material patents or proprietary rights. In its role as an
integrator, Maris obtains proprietary products from vendors for
integration and installation at customers' facilities or on construction
sites.
Marketing and Distribution; Contracting Practices
Maris has significantly reduced its marketing and sales staff in
accordance with its downsized business. The Company maintains a sales
force in its headquarters in Exton, Pennsylvania and in its regional
office in Austin, Texas.
Maris will focus on bidding for smaller projects involving new or
upgraded construction to electrical contractors and on providing
proposals to owners and building managers for new or upgraded systems.
These bids and proposals are generally made at a fixed price based on
the specifications provided by the contractor, owner or manager.
Accurate estimation of the Company's total cost to complete a project is
therefore crucial to profitability. The Company will no longer bid on
large, bonded correctional facility and airport projects or on any
correctional facility projects which require the provision or
installation of detention hardware. These are the projects which Maris
has in the past experienced difficulties managing and completing
profitably. Maris typically provides the integration engineering,
assembly shop drawings and system start-up with its own staff of project
managers, engineers, computer aided design (CAD) operators and
technicians.
As with any construction activities, there are risks associated with
the business. Cost overruns can occur from a variety of sources,
including but not limited to estimating errors, owner-initiated changes
to system performance or operation, unanticipated conditions at the
installation site, delays in collection of accounts receivable because
of performance issues, delays caused by other contractors which may
cause the Company to be delayed and not be compensated for such delay,
and subjective assessment of system performance compared to
specifications. Maris and its subcontractors may submit change orders
for additional work or costs incurred beyond their control or beyond the
scope of the contract, but they are subject to approval. Working
capital requires active management for several reasons. Contracts
frequently provide for a retention of five percent or more of the total
contract amount until satisfactory completion of the contract. Maris
retains comparable amounts from its subcontractors, but often the
subcontractors' work is completed before Maris' work is completed. The
timing and amounts of payments due to and from Maris are often subject
to dispute for the reasons described above resulting in delays in
collection of receivables and payment of payables. Maris attempts to
match the timing of payments to its subcontractors and vendors with
payments received from the general contractors or construction managers
wherever possible.
Design and Development; Product Availability; Inventory
As an integrator, Maris purchases proprietary products for
integration and installation at customer facilities or construction
sites. The Company does not manufacture, design or develop any of its
systems. The Company is a party to a number of distribution agreements
with the major manufacturers of the systems which it provides. Because
of the Company's financial difficulties, a number of its suppliers have
restricted their purchase terms to the Company, in some cases requiring
C.O.D. terms. The Company is continuing to negotiate with its suppliers
regarding purchase terms. The Company's relationships with several
different suppliers allows the Company to provide the latest technology
to its markets without the necessity of designing and developing new
products. The Company maintains only a sufficient amount of inventory
as may be necessary to provide materials for warranty service and
repairs.
Revenue Recognition and Backlog
The Company recognizes revenues on a percentage of completion basis.
Backlog consists of the uncompleted portion of the contracts. The
backlog for the security systems segment (excluding projects which have
been turned over to sureties) was approximately $9.2 million at December
31, 1994. The Company anticipates that approximately 90% of the backlog
will be fulfilled during 1995. Backlog for the segment at DecemberE31,
1993 included substantial amounts from businesses Maris has discontinued
and therefore the amount is no longer meaningful.
Competition
The Company provides security systems to a variety of institutional
markets. In that marketplace, the Company competes with numerous local
dealers and factory direct operations. There are also numerous firms
operating nationally in the construction marketplace that provide
electronic security systems integration. Competition is based primarily
on price, quality of work, and ability to complete the work on time.
The Company's recent financial difficulties and limited ability to
obtain bonding are a competitive disadvantage in the institutional
markets. Many large institutional projects require the contractor to
provide a completion bond. However, in the commercial and industrial
building markets, the Company believes that its personnel and the depth
of their knowledge are important competitive factors.
U. S. Government Sales and Dependence on Significant Customers
In the past, the Federal Bureau of Prisons has been a substantial
customer of Maris. However, the Company expects that it will do very
little work, on federal or state correctional facilities in the future.
Maris has also performed in the past numerous large airport projects for
different customers, generally lasting not more than 12 months. These
projects had resulted in single customers accounting for significant
portions of Maris' revenues in any single year. Maris surety companies
have taken over all of its bonded correctional facility and airport
jobs, and Maris does not intend to perform any more large bonded
correctional facility or airport projects for the foreseeable future,
although it may perform a number of smaller projects for a single
institutional customer.
Air Technology Products
Products
The Company designs, manufactures and distributes through its wholly
owned subsidiary, Airo Clean, Inc., air filtration components and
systems which are used in a variety of industries which require
particle-free, ultra clean working environments, as well as patient
isolation devices for hospital and health care applications.
The two room-size clean room systems manufactured and distributed by
the Company are the UDF Perforated Ceiling System and the UltraGuard"
HEPA/Fan Module Ceiling System, both of which can be delivered
prepackaged using standard components or can be custom designed to meet
precise client specifications. The UDF Perforated Ceiling System
provides mass air displacement for a more uniform distribution of clean
air throughout a cleanroom environment and other critically controlled
areas. The UltraGuard HEPA/Fan Module Ceiling System is a pressurized
plenum system which utilizes a self-powered blower and HEPA filter
packaged together in one compact housing which can be installed in a
suspended ceiling grid.
The Company also manufactures and distributes several application
specific, modular cleanroom systems which are available in a number of
prepackaged sizes or can be customized to meet special requirements.
The BioShieldTM air filtration unit, a health care product introduced
late in 1993, is an air scrubbing product for controlling airborne
pathogens. The product is targeted for the health care industry. The
BioShield product meets the Center for Disease Control guidelines for
hospital isolation rooms, issued during the fourth quarter of 1994. The
Company expects these guidelines to have a positive impact on BioShield
sales, and is aggressively promoting the product. The Microlab"
portable cleanroom can be set up by one person and operational within 30
minutes to provide Class 100 air for sanitized operations such as animal
studies, health care, hybrid electronics, and medical device assembly.
The Microlab unit's compact design fits through standard 36" doorways,
can be expanded by linking multiple units together where additional
space is required, and can be quickly moved to another location or
folded and stored until needed again. The CleanStation" single-pass
softwall cleanroom is available in 15 sizes for Class 100, 1,000 or
10,000 air requirements and is designed for customers with limited
budgets requiring fast delivery and quick setup using standard tools.
The Flexi-JetTM system is an economical solution that supplies HEPA-
filtered Class 100 air to a large area for industrial and institutional
applications that require minimal dust and other airborne contaminants.
The Bacteria Controlled Nursing UnitTM (BCNU) is a portable, transparent
clean air isolation enclosure which houses a standard size hospital bed
and can provide patient access through direct entry access curtains or
arm/hand insertion gauntlets. The PureZoneTM product is specifically
targeted to the commercial market and can be wall-mounted or retrofitted
on existing furniture systems.
Patents and Proprietary Rights
The Company has a number of patents, patent applications, patent
licenses and trademarks with respect to various air technology products.
The Company believes that these patents and trademarks help
differentiate the Company's product offerings, but price and flexibility
of product offerings are equally important competitive factors.
Marketing and Distribution
The Company primarily conducts its sales and marketing activities for
its cleanroom and other indoor air quality products from its Airo Clean
facility located in Exton, Pennsylvania. The Company markets and sells
these products to a wide variety of end-users throughout the United
States through a network of independent dealers and manufacturers'
representatives primarily located in the eastern United States. Some
of the dealers have exclusive rights to sell the Company's air
technology products to specific markets in a defined territory, so that
a territory servicing different markets may have more than one dealer.
These dealers are paid commissions for product sales. Customers of
cleanroom products include a variety of manufacturing operations,
including biomedical, microelectronics, medical devices,
pharmaceuticals, and the hospital and health care markets.
The Company also has a distributor in Singapore which accounted for
over 30% of the sales for the air technology products segment in 1994.
The Company's marketing activities seek to demonstrate the unique
applications and quality of its products. These activities include
distribution of sales literature, on-site demonstrations, direct mail
programs, advertising, publication of articles in the trade press and
participation in industry conferences and trade shows.
Airo Clean's marketing efforts have been targeted primarily to end-
users and facility managers for use in manufacturing applications.
However, the Company anticipates expanding the marketing efforts for its
air cleansing devices to satisfy the increased demand for the prevention
of infectious contaminants in hospitals and for a variety of industrial
applications.
Manufacturing
The Company's cleanrooms and indoor air quality products are
manufactured in Exton, Pennsylvania. This manufacturing operation
consists primarily of an assembly process and testing of finished
products.
Raw Materials and Supplies
The Company's air technology products include specific filters,
blowers and electronic components that are assembled with steel
assemblies and cabinets which constitute the majority of the products.
Some of these items are custom made for the Company and require
coordination from qualified vendors to assure availability of various
electronic and steel assemblies. If any supplier should terminate its
relationship for any reason, the Company anticipates that it will be
able to develop, or obtain from other sources, substitute components
without sustaining any material adverse effects.
Backlog
The backlog for the air quality segment was approximately $1.4
million at December 31, 1994, compared to approximately $2 million at
December 31, 1993. The Company anticipates that this backlog will be
fulfilled in 1995.
Backlog primarily represents firm accepted orders for air technology
products. Although orders included in backlog may be canceled or
rescheduled by the customer, cancellations are uncommon and cancellation
or restocking charges may apply to a canceled order.
Seasonality
The air quality segment of the business is not seasonal.
Competition
The Company competes primarily in the hospital and health care
segment and the small to mid-size commercial and industrial applications
segment of the market for indoor air quality products. The Company is
too small to compete for large industrial applications such as for the
semiconductor and biotech/pharmaceutical industries. The Company's
products are based on high efficiency filtration systems, and are
targeted at markets with strict air purity requirements. There are a
wide variety of companies providing services similar to Airo Clean, and
the market is very competitive. Competition is based on price, ability
of the products to satisfy specified air purity standards, ability to
customize products to meet specific customer needs, and reputation.
Management believes that the excellent long term reputation of Airo
Clean and its ability to provide customized solutions, combined with the
growing number of applications requiring air particle control, places
the Company in a good position to grow with the market and potentially
improve its market share.
U.S. Government Sales and Dependence on Significant Customers
Airo Clean does not sell any material amount of products to the U.S.
government. Airo Clean has one distributor located in Singapore which
sells products in China and Southeast Asia, and which accounted for over
30% of Airo Clean's total revenues in 1994. The loss of this
distributor would have a material adverse effect on Airo Clean's
business.
Employees
As of December 31, 1994, the Company had 110 employees engaged in its
continuing operations, excluding certain individuals who are employed by
Maris but are exclusively assisting the surety companies in completing
jobs taken over by them, and who are being funded by the surety
companies. None of the Company's employees is represented by a labor
union. The Company considers its employee relations to be good and has
never experienced any work stoppages.
Financial Information About Foreign and Domestic Operations and Export
Sales
The Company has sold or is negotiating to sell all of its foreign
operations. The Company's air technology products segment had
approximately $1.3 million of export sales through a distributor in
Singapore. The security systems segment does not have any export
sales.
Executive Officers of Registrant
The following persons were executive officers of the Registrant at
June 15, 1995:
<TABLE>
<CAPTION>
Has Been an
Officer
Name Age Since Position
- - ---- --- ----------- --------
<S> <C> <C> <C>
George E. Mitchell 57 1984 President, Chairman and
Chief Executive Officer
Frederick B. Franks, III(1) 55 1989 Vice President-Finance, Chief
Financial Officer, Treasurer and
Assistant Secretary
Michael Pelosi III(2) 37 1994 President, Airo Clean, Inc.
</TABLE>
(1) Mr. Franks joined the Company in May 1989. From March 1981 to
April 1989, Mr. Franks served as Vice President-Finance and Chief
Financial Officer of Ferag, Inc., a manufacturer of newspaper material
handling equipment.
(2) Mr. Pelosi joined Airo Clean in 1981, and became Sales and
Marketing Director in 1985. He was appointed President in 1989.
Properties
The Company's continuing operations are conducted primarily at its
headquarters in Exton, Pennsylvania. This facility occupies
approximately 21,580 square feet of space and is currently leased on a
month-to-month basis from Safeguard. The Company's indoor air quality
products are manufactured and sold from its Airo Clean facility
occupying approximately 15,300 square feet of space in Exton,
Pennsylvania, which is leased through December 2001. The Company plans
to sublet its Airo Clean facility, and to consolidate its air products
operations into its Maris facility in Exton, Pennsylvania. The Company
believes that that facility will be adequate for its present and
anticipated purposes. The Company also leases sales and support offices
in Austin, Texas and Los Angeles California.
The Company is moving out of its leased furniture operations offices
in Exton, Pennsylvania, and has agreed, subject to certain conditions,
to sell its furniture business, including its lease on its furniture
manufacturing facility which occupies approximately 176,000 square feet
of space in Plainfield, New Jersey, and its lease on its seating
products manufacturing and office facility which occupies approximately
26,700 square feet of space in Mansfield, Ohio. The Plainfield lease
runs through June 1998, and the Company's Mansfield lease runs through
June 1995. The Company continues to be obligated under a lease for
approximately 2,900 square feet of office space in London, England which
runs through September 2013. The Company is negotiating with the
landlord to terminate that lease.
Legal Proceedings
Maris is a named party to certain pending law suits relating to
certain of Maris' security system installation projects. In connection
with Maris' settlement with its surety companies, the surety companies
have assumed all liabilities and all claims and counterclaims in respect
of these law suits, and the surety companies have agreed to release
Maris from its indemnity obligations to them.
The Company and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will
not have a material adverse effect on the Company's consolidated
financial position.
Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter 1994.
Market for the Registrant's Common Stock and Related Stockholder Matters
As of May 4, 1995, the Company's common stock was de-listed from the
NASDAQ small-cap market. Since that date, there has been no established
public trading market for the common stock. The Company's common stock
continues to be quoted by a limited number of market makers in what is
commonly referred to as the "pink sheets" under the symbol "CCOR."
There can be no assurance that there will be regularly available
quotations from market makers in the Company's common stock in the
future. The following are the historical high and low bid quotations
for the Company's common stock prior to its de-listing from NASDAQ.
<TABLE>
<CAPTION>
1995 1994 1993
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $.50 $.34 $1.38 $.75 $ .75 $ .56
Second Quarter .38 .16 1.38 .81 1.06 .56
Third Quarter .88 .56 1.06 .56
Fourth Quarter .56 .38 .84 .69
</TABLE>
The above bid quotations reflect inter-dealer prices without mark-
ups, mark-downs or commissions and may not necessarily represent actual
transactions.
There were approximately 1700 holders of the Company's Common Stock
on June 15, 1995. The Company has historically reinvested any earnings
in the growth of the business and has not paid cash dividends on its
common stock.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Due to declining furniture sales, particularly to the federal
government, the Company has decided to dispose of the furnishings
segment. Due to these plans, the furnishings segment has been
presented as a discontinued operation. The Company has agreed to sell
the assets of the domestic furnishings segment including Corel for cash
and notes receivable. The Company will apply the sale proceeds to pay
down its bank debt.
The UK furnishings business will be sold to local management of the
respective operations in return for notes receivable. The Canadian
operation was sold to Safeguard Scientifics, Inc. in April 1995.
Continuing operations reflect the results of the on-going businesses
of Maris Equipment Company ("Maris") and Airo Clean.
Airo Clean was acquired in February 1993 and Maris was purchased in
September 1993. Therefore, 1992 includes only discontinued operations
and 1993 includes the results of the acquired operations subsequent to
their acquisition. In 1995, the Company decided to significantly
downsize the Maris business by concentrating on the low voltage security
and fire alarm businesses and on selected smart highway applications.
Total 1994 Maris sales of $27.2 million includes correctional facility
and airport sales of approximately $16.2 million. Maris does not expect
to pursue larger bonded correctional facility and airport projects in
the future. Due to these developments comparisons from year-to-year are
not meaningful.
Review of continuing operations
Maris sales were $27.2 million in 1994 compared to $12.5 million in
1993. This sales increase reflects the inclusion of Maris operations
for the entire year in 1994 compared to 1993 which included the results
subsequent to its September acquisition. Gross margins as a percentage
of sales at Maris were (8.4%) in 1994 and 15.9% in 1993. The negative
gross margin in 1994 reflects losses incurred to complete fixed fee
major correctional facility and airport projects in process at the time
of the September 1993 Maris acquisition. Since 1993, Maris has
experienced reductions in profitability or losses on fixed fee
contracts. This erosion was caused primarily by unforeseen operational
and contract problems which were exacerbated by insufficient financing
to support the timely performance of the contracts. As a result of this
profit degradation, the Company was not able to pay vendors on a timely
basis and had difficulty completing work in progress. Most of the
larger jobs affected by these issues were bonded and the Company entered
into agreements with the surety companies to have them assume
responsibility for completing their jobs and to release the Company from
its indemnity obligations with respect to those jobs. The Company has
recorded a provision for losses on transferring the contracts to the
surety companies of $4.0 million, more fully discussed in note three to
the financial statements.
As a result of these difficulties, the Company has ceased bidding on
major correctional facility and airport projects. Uncompleted bonded
projects have been turned over to the bonding companies for completion.
The following table summarizes correctional facility and airport
revenues and margins compared to all other revenues in 1994.
Correctional
(In thousands) Facility and Airport All Other
- - -------------- -------------------- ---------
Net sales $16,184.6 $10,993.3
Cost of goods sold 19,762.6 9,689.2
Gross margin % of sales (22.1%) 11.9%
Airo Clean sales were $4.1 million in 1994 compared to $2.7 million
in 1993. The increase in sales in 1994 came from increased product
sales and the inclusion of Airo Clean for twelve months compared to
eleven months in 1993. Airo Clean gross margins as a percentage of
sales declined to 20.9% in 1994 from 24.2% in 1993. Lower margins in
1994 can be attributed to increased sales discounts on several large
export sales.
Sales and marketing expenses for continuing operations were $3.3
million in 1994 and $1.2 million in 1993. These costs, as a percentage
of sales, were 10.6% and 7.8% in 1994 and 1993, respectively. These
costs increased $2.1 million in 1994 primarily due to the inclusion of
Maris operations subsequent to its September 1993 acquisition. Sales
efforts at Maris are being concentrated in expanding the electronic
security systems business, which typically has had higher gross margins
than the correctional facility and airport hardware construction
business. Marketing efforts at Airo Clean have been focused on
promoting the BioShield and Ultraguard products which are air scrubbing
devices for controlling airborne pathogens and targeted for the health
care industry. The Center for Disease Control guidelines were issued in
November 1994 for hospital isolation rooms, and should have a positive
impact on BioShield and Ultraguard sales in 1995.
General and administrative expenses were $4.5 million in 1994 and
$1.5 million in 1993. These costs, as a percentage of sales, were 14.4%
in 1994 and 9.9% in 1993. The absolute dollar increase of $3 million in
1994 reflects the acquisition of Maris. The Company continues to
closely monitor and control costs and recognizes that a significantly
downsized business in 1995 is necessary for survival.
During 1994 the Company restructured it's security business which
resulted in a charge of $2,239,900 in the statement of operations more
fully described in note three to the financial statements.
Interest expense was $593,400 in 1994 compared to $116,200 in 1993.
The increase in 1994 reflects additional debt incurred to satisfy
working capital requirements, fund losses, higher interest rates and the
financing of the Maris and Airo Clean acquisitions.
The income tax benefit of $1.6 million in 1994 principally reflects
the benefit of recoverable U.S. income taxes as a result of the losses
incurred. In addition, the Company has generated an unrecorded loss
carryforward of approximately $3 million, more fully described in note
twelve to the financial statements.
Backlog at December 31, 1994 was $9.2 million at Maris and $1.4
million at Airo Clean.
Liquidity and Capital Resources
As a result of significant operating difficulties, the Company has
a severe liquidity problem. The Company is in default of its loan
facility ($8.3 million at December 31, 1994). These defaults cause the
debt to be due upon demand, and, should the lender demand payment, the
Company does not have the resources to satisfy the debt. The Company
has withdrawn from the correctional facility security business and is
undertaking to significantly downsize the business which includes the
sale of the furnishings business unit. Proceeds from the sale, as well
as a 1995 tax refund of $1.6 million, will be used to reduce
outstanding bank debt. In anticipation of these events, the bank
continues to extend credit to the Company under the existing borrowing
base formula. Except for a $2.4 million guarantee of bank debt,
Safeguard is not contractually obligated to satisfy any of the Company's
obligations at December 31,1994. The Company believes that the
combination of cash received from the sale of the furnishings business,
the tax refund, the guarantee of Safeguard and the working capital
assets of the ongoing business will be sufficient to satisfy/support all
of the bank debt.
The Company has entered into an agreement with the parties from whom
it acquired Maris, to significantly restructure the original purchase
transaction. Under this agreement the seller has agreed to offset its
$3.6 million note receivable from the Company in exchange for releases
from its indemnification liabilities to the Company under the original
asset purchase agreement. Because the Company did not have the required
working capital to complete certain projects it turned to its sureties
to assume and complete certain construction contracts and has extended
its payables to vendors. The principal sureties have agreed to release
the Company from its indemnity obligations to them in return for 300,000
shares of CenterCore stock, cash payments of $495,000 and additional
payments equal to 20% of the Company's net earnings in 1998-2002 up to
$1 million in the aggregate. The Company is negotiating with all
principal vendors to arrange a repayment schedule while continuing to
supply the Company with materials needed to meet current requirements.
Safeguard has agreed to contribute 2 million shares of its CenterCore
common stock to the Company, sell 2.5 million shares of its CenterCore
common stock to CenterCore management, and provide up to $3 million in
advances to the Company to address current funding requirements of the
downsized business which will be substantially utilized by the Company
in 1995.
As a result of the restructurings, the Company will emerge as a
significantly downsized company. Availability of bonding on jobs will,
at least in the near term, be limited. Bank financing may be available
for limited working capital requirements to augment any advances from
Safeguard. If these sources of funds prove to be inadequate or in the
case of bank financing, unavailable, then the Company will have to seek
additional funds frmo other investors in order to continue operations.
There can be no assurance that new sources of funds, if required, will
be available. Although the Company believes it will be able to continue
to operate in this new downsized mode, continuation is contingent on the
Company's ability to adequately reduce its cost structure to a point
where it is supported by the new downsized operations.
Independent Auditors' Report
The Board of Directors and Stockholders
CenterCore, Inc.:
We have audited the consolidated balance sheets of CenterCore, Inc. and
subsidiaries as of December 31, 1994 and 1993 and the related
consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the years in the three year period ended
December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
CenterCore, Inc. and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1994, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 3
and 15 to the financial statements, the Company has incurred losses from
operations, is experiencing liquidity problems, is in default under
certain borrowing agreements and has a net stockholders' deficit all of
which raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in
Note 15. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
May 3, 1995
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31,
Assets 1994 1993
----------- -----------
<S> <C> <C>
Current assets
Cash $ 583,600 $ 376,900
Receivables, less allowances ($2,864,700 --1994; $1,842,900 --1993) 5,024,900 12,705,200
Costs and estimated earnings in excess of billings on uncompleted contracts 292,500 3,233,100
Inventories 625,700 1,127,100
Income taxes receivable 1,357,900
Other current assets 231,300 427,500
----------- -----------
Total current assets 8,115,900 17,869,800
Net assets of discontinued operations 7,157,300 13,069,800
Plant and equipment
Leasehold improvements 155,400 150,800
Machinery and equipment 816,900 708,000
----------- -----------
972,300 858,800
Less accumulated depreciation and amortization (385,400) (90,000)
----------- -----------
Net plant and equipment 586,900 768,800
Other assets
Excess of cost over net assets of businesses acquired 192,300 1,961,300
Other 638,300 900,800
----------- -----------
Total other assets 830,600 2,862,100
----------- -----------
$16,690,700 $34,570,500
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable $ 5,885,500 $ 9,929,100
Accrued expenses 3,793,500 1,625,500
Taxes on income 361,400
Billings in excess of costs and estimated earnings on uncompleted contracts 1,419,800 1,623,100
Current debt 8,396,100 383,300
----------- -----------
Total current liabilities 19,494,900 13,922,400
Long-term debt 9,939,000
Other liabilities 121,300 124,500
Deferred taxes 348,600
Redeemable convertible preferred stock 1,500,000
Stockholders' equity (deficit)
Common stock, $.01 par value; Authorized -- 20,000,000 shares;
Issued - 10,767,326 shares 107,700
Additional paid-in capital 7,923,400 6,823,400
Retained earnings (accumulated deficit) (12,036,100) 3,404,000
Foreign currency translation adjustment 0 321,400
Treasury stock at cost - 330,000 shares (420,500) (420,500)
----------- -----------
Total stockholders' equity (deficit) (4,425,500) 10,236,000
----------- -----------
$16,690,700 $34,570,500
=========== ===========
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Year Ended December 31,
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 31,244,700 $ 15,242,100 $
Cost of goods sold 32,668,200 12,593,100
------------- ------------- -------------
Gross margin (1,423,500) 2,649,000
Expenses
Sales and marketing 3,310,000 1,188,300
General and administrative 4,488,200 1,504,700
Restructuring 2,239,900
Interest 593,400 116,200
------------- ------------- -------------
10,631,500 2,809,200
Loss from continuing operations before income taxes (12,055,000) (160,200)
Benefit of income taxes (1,662,900) (47,000)
------------- ------------- -------------
Loss from continuing operations (10,392,100) (113,200)
Earnings (loss) from discontinued operations (net of tax
of $0 - 1994, $190,200 - 1993, and $1,091,200-19 (1,745,200) (703,000) 988,800
Loss on disposition of discontinued operation (3,302,800)
------------- ------------- -------------
Net earnings (loss) $(15,440,100) $ (816,200) $ 988,800
============= ============= =============
Earnings (loss) per share
Continuing operations $ (1.00) $ (.01)
Discontinued operations (.17) (.07) $ .09
Loss on disposition of discontinued operatio (.31)
----- ----- -----
Net earnings (loss) $ (1.48) $ (.08) $ .09
-------- ------- -----
Weighted average shares outstanding 10,437,000 10,434,000 10,664,000
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity (Deficit)
Retained Foreign
Common stock Additional earnings/ currency
------------------- paid-in (accumulated translation Treasury
Shares Amount capital deficit) adjustment stock
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1991 10,764,826 $107,600 $6,830,800 $ 3,231,400 $ 497,600
Net earnings 988,800
Stock options exercised 2,500 100 1,200
Translation adjustment (133,400)
Purchase of treasury stock $(445,900)
---------- -------- ---------- ------------ ------------ ---------
Balance -- December 31, 1992 10,767,326 107,700 6,832,000 4,220,200 364,200 (445,900)
Net loss (816,200)
Translation adjustment (42,800)
Reissue of treasury stock (8,600) 25,400
---------- -------- ---------- ------------ ------------ ---------
Balance -- December 31, 1993 10,767,326 107,700 6,823,400 3,404,000 321,400 (420,500)
Net loss (15,440,100)
Note receivable contribution 1,100,000
Translation adjustment (196,800)
Write off translation adjustment (124,600)
---------- -------- ---------- ------------ ------------ ---------
Balance -- December 31, 1994 10,767,326 $107,700 $7,923,400 $(12,036,100) $ -- $(420,500)
========== ======== ========== ============ ============ =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year Ended December 31,
1994 1993 1992
----------- ----------- ---------
<S> <C> <C> <C>
Operations
Net Loss $(15,440,100) $ (816,200)
Loss from discontinued operations 1,745,200 703,000
Loss on disposition of discontinued operations 3,302,800
Adjustments to reconcile net earnings (loss) to cash from operations
Provision for restructuring 2,239,900
Depreciation and amortization 473,800 160,400
Decrease in deferred taxes (36,000) (141,900)
Cash from discontinued operations 782,200 315,300
(102,400)
Cash provided by (used in) changes in working capital items
Receivables 1,703,200 (977,600)
Inventories 501,400 (205,600)
Contracts in progress 856,500 974,800
Other current assets (68,900) (52,700)
Accounts payable 326,300 (1,620,100)
Accrued expenses 1,673,900 504,000
Taxes on Income (1,719,300) 237,900
----------- ----------- ---------
Cash (used in) operations (3,659,100) (918,700)
(102,400)
Financing Activities
Additions of term debt 1,100,000
Issuance of preferred stock 1,500,000
Borrowings (repayments) of debt 2,773,700 586,100
Purchase of treasury stock
----------- ----------- ---------
Cash provided by financing activities 4,273,700 1,686,100
Investing Activities
Expenditures for plant and equipment (113,500) (2,500)
Businesses acquired, net of cash (1,170,300)
Other, net (294,400) 128,100
----------- ----------- ---------
Cash used in investing activities (407,900) (1,044,700)
----------- ----------- ---------
Increase (decrease) in cash 206,700 (277,300)
(102,400)
Cash beginning of year 376,900 654,200 756,600
----------- ----------- ---------
Cash end of year $ 583,600 $ 376,900 $ 654,200
=========== =========== =========
See notes to consolidated financial statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS - The Company provides low voltage electronic
security systems to the commercial and institutional markets. Work is
generally performed under fixed fee or unit price contracts as a
subcontractor to the general contractor or as a prime contractor to the
owner. The Company also designs, manufactures and distributes air
filtration components and systems which are used in a variety of
industries which require particulate-free, ultra-clean working
environments, as well as patient isolation devices for hospital and
healthcare applications.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of CenterCore, Inc. and its domestic wholly-owned
subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated. The furnishings segment of the
Company is being disposed of and accordingly is reported as a
discontinued operation.
RETAINAGE RECEIVABLES AND PAYABLES under contracts which may extend
beyond one year are classified as current assets and current liabilities.
Accounts receivable under retainage provision contracts at December 31,
1994 and 1993 was $795,100 and $2,659,900, respectively. Accounts
payable under retainage provision contracts at December 31, 1994 and 1993
was $71,900 and $858,600, respectively.
INVENTORIES are valued at the lower of average cost or market.
PLANT AND EQUIPMENT are carried at cost and depreciated on a straight-
line basis over the estimated useful lives of the assets (leasehold
improvements - 5 years; machinery and equipment - 3 to 7 years).
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED is amortized on
a straight-line basis primarily over 15 years. Assessment of the
carrying amount of goodwill is made when changing facts and circumstances
suggest that the carrying value of goodwill or other assets may be
impaired using the forecasted undiscounted cash flow from the related
business activity (including possible proceeds from a sale of the
business). Accumulated amortization at December 31, 1994 and 1993 was
$32,700 and $271,900, respectively.
TAXES ON INCOME are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in statutory tax
rates is recognized in results of operations in the period that includes
the enactment date.
CONTRACTING SALES are recognized using the percentage of completion
accounting method determined by the ratio of cost incurred to date on the
contract to management's estimate of the total contract cost. Provisions
for estimated losses on uncompleted contracts are recorded in the period
in which the losses are determined. Changes in estimated sales and costs
are recognized in the periods in which such estimates are revised.
SALES of air filtration products are recognized when product is
shipped and title or risk of loss is transferred. Revenue from
installation services is recognized when performed.
EARNINGS (LOSS) PER SHARE of common stock are computed on net earnings
(loss) using the weighted average number of shares outstanding during
each period, including common stock equivalents (unless antidilutive)
which would arise from the exercise of stock options.
2. Acquisitions
On February 1, 1993, the Company acquired the assets and assumed the
liabilities of Airo Clean Engineering, Inc. (Airo Clean), a designer and
manufacturer of cleanroom and air filtration components and systems for
$828,000. The acquisition was accounted for by the purchase method with
cost in excess of net assets of businesses acquired of $220,300 recorded.
On September 22, 1993, the Company purchased substantially all of the
assets and certain liabilities of Maris Equipment Company (Maris), a
wholly-owned subsidiary of JWP, Inc. (JWP). The purchase price was a
fixed amount of $4.3 million plus a contingent payment. The fixed
portion was funded by a note payable to JWP for $3.95 million and
$350,000 in cash at closing. The acquisition was accounted for by the
purchase method, and accordingly, the purchase price was allocated to the
assets acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition. Cost in excess of net assets of
businesses acquired of $1,954,800 was recorded.
The pro forma information below is unaudited and reflects purchase
price accounting adjustments assuming the Maris acquisition occurred at
the beginning of the periods presented, including the impact of certain
adjustments, such as amortization of intangibles, interest expense on the
acquisition debt, and the related tax effects.
(In thousands, except per share amounts) 1993 1992
- - -----------------------------------------------------------------------
Net sales $46,254 $41,953
Net loss (1,402) (2,134)
Net loss per share (.13) (.20)
3. Restructurings
Furnishing Business
Due to declining furniture sales, particularly to the federal
government, the Company has decided to sell the furnishings segment. The
Company has agreed to sell the domestic furniture business which will
generate an estimated $2.5 million of cash at closing, which is expected
to occur by July 1995, and two notes payable from the buyer based on a
contractually specified formula. An installment note for $2 million is
payable in 5 equal quarterly installments beginning 9 months after the
close of the transaction is secured by a second lien on all the assets of
the buyer. A subordinated note, for $2 million, is payable in semiannual
installments beginning 1 year after closing for 5 years and bears
interest at 8% per annum secured by a second lien on the fixed assets of
the buyer. The Company also has tentative agreements to sell the United
Kingdom furnishings businesses to United Kingdom management in return for
a note. The Canadian furnishings business was sold to Safeguard
Scientifics, Inc. who has a tentative agreement to sell the business to
the Canadian management for a note. Proceeds of the note will be applied
to satisfy certain indebtedness of CenterCore Canada to CenterCore after
satisfying remaining lease obligations of CenterCore Canada. The total
of both the UK and Canadian notes is expected to be $566,700. The
Company recorded an anticipated loss of $3,302,800 related to the sale of
these businesses. Revenues for the furnishings segment, which are not
included in consolidated sales, for 1994, 1993 and 1992 were $34,088,200,
$37,924,900 and $45,638,800, respectively
The following is a summary of the net assets of the furnishings
business segment at December 31:
(in thousands) 1994 1993
---- ----
Current assets $12,787 $17,082
Net property and equipment 1,065 3,214
Other assets 325 152
Current liabilities (6,838) (7,218)
Long-term liabilities (182) (160)
-------- -------
Net assets $ 7,157 $13,070
======== =======
Security Business
Since its acquisition of Maris (Note 2) in 1993 the Company
experienced reductions in profitability or losses on fixed fee contracts.
This erosion was caused primarily by unforeseen costs and operational and
contract problems, which were exacerbated by insufficient financing to
support the timely performacne of the effected contracts. As a result of
this profit degradation, the Company was not able to pay its vendors on a
timely basis and was having difficulty completing work in progress.
Most of the larger jobs affected by these issues were bonded and the
Company entered into agreements with surety companies to have them assume
responsibility for completing their respective jobs. The Company has
obtained agreements with such sureties to release the Company from any
financial obligations with respect to completing the jobs in exchange for
300,000 shares of the Company's stock and cash settlements totaling
$495,000 and additional payments of 20% of the Company's net earnings in
1998-2002 up to $1 million in the aggregate.
The Company has agreed with the parties from whom it purchased Maris,
to restructure the original purchase transaction by offsetting its note
receivable from Maris of $3.6 million in exchange for releases from its
indemnification liabilities to the Company under the original asset
purchase agreement. The effective $3.6 million reduction in the note
payable net of the related write-off of $1.8 million of remaining costs
in excess of net assets of businesses acquired recorded for the Maris
acquisition has been reflected in 1994 financial statements.
The financial effect of the above transfer of contracts to the surety
companies and the restructuring of the original purchase transaction is
summarized below:
(In thousands)
Accounts receivable $ 5,977
Costs and estimated earnings in excess of
billings on uncompleted contracts net 1,881
Payables (4,370)
Settlement with surety companies 495
Costs in excess of net assets of business
acquired 1,794
Note payable (3,600)
Other 63
--------
Charge for restructuring $ 2,240
========
These transactions are recorded in the 1994 financial statements of
the Company.
As of December 31, 1994 Safeguard contributed a note receivable from
the Company of $1.1 million as additional paid-in capital.
4. Inventories
(In thousands) 1994 1993
---- ----
Raw materials $311 $ 329
Work in progress 0 46
Finished goods 315 752
---- ------
$626 $1,127
==== ======
5. Accrued Expenses
(In thousands) 1994 1993
---- ----
Commissions $ 122 $ 317
Salaries 794 507
Sales and Use Tax 1,025 164
Other 1,853 568
------ ------
$3,794 $1,556
====== ======
6. Commitments and Contingencies
In consideration for contributions to the development of certain air
filtration products, the Company agreed to pay royalties based on sales
of such products to a former shareholder of the dealer through December
1996. Royalty costs were $18,500 and $20,500 in 1994 and 1993,
respectively.
Maris is a named party to certain pending law suits relating to
certain of Maris' security system installation projects. Maris also
believes that it has certain claims with respect to other security
systems installation projects for which it has not yet filed law suits.
In connection with Maris' settlement with its surety companies, the
surety companies have assumed all claims and all liabilities in respect
of these law suits and potential law suits, and the surety companies have
agreed to release Maris from its indemnity obligations to them.
The company is subject to other pending and threatened legal
proceedings and claims which have arisen in the ordinary course of
business and which have not been fully adjudicated. These actions, when
ultimately concluded and determined, will not, in the opinion of
management, have a material effect on the financial position of the
Company.
7. Contracts in progress
(In thousands) 1994 1993
- - ----------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 30,053 $ 81,557
Estimated earnings 4,258 11,840
-------- --------
34,311 93,367
Billings to date (35,438) (91,757)
-------- --------
$ (1,127) $ 1,610
======== ========
Such amounts are included in the
accompanying consolidated balance sheet as
follows:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 293 $ 3,233
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,420) (1,623)
-------- --------
$ (1,127) $ 1,610
======== ========
8. Related Party Transactions
Safeguard Scientifics, Inc. (Safeguard) owns 65% of the outstanding
common stock of the Company at December 31, 1994 and all of the
redeemable convertible preferred stock. In 1995, Safeguard agreed to
contribute 2 million shares of CenterCore, Inc. common stock to the
Company, sell 2.5 million shares of CenterCore, Inc. common stock to the
management of the Company to further incentivize them, and provide up to
$3 million in advances to address current funding requirements of the
business. Subsequent to these restructurings, Safeguard's ownership
percentage will fall below 50%.
The Company and Safeguard are parties to an administrative services
agreement pursuant to which Safeguard provides the Company with
administrative support. At January 1, 1994 the agreement for these
administrative services was for a maximum annual fee of $500,000 and the
reimbursement of certain out-of-pocket expenses incurred by Safeguard in
performing services under the agreement. However, in conjunction with
the Company's bank agreement, the fee was reduced to $300,000 and
retroactively adjusted. Payment of the $300,000 fee is subject to the
Company's satisfaction of certain requirements under its bank agreement
which the Company has not been able to satisfy, therefore, the monthly
payments have not been made since February 1994. The amount charged to
operations was $220,000 in 1994, $13,500 in 1993 and $0 in 1992,
respectively. The Company leases building space from Safeguard. The
amount payable to Safeguard at December 31, 1994 and 1993 for these
transactions and other expenses incurred on behalf of the Company was
$502,400 and $164,200, respectively. In 1995 the administrative services
agreement was terminated. However, Safeguard is providing certain
administrative services to the Company at no charge in 1995.
During 1994 Safeguard purchased 15,000 shares of redeemable
convertible preferred stock for $1.5 million. The preferred stock has a
stated value of $100 per share and entitles holders to quarterly
dividends of $1.50 per share commencing on July 1, 1994. Unpaid
undeclared cumulative dividends as of December 31, 1994 were $45,000.
The Company may redeem all outstanding preferred stock any time after
June 1, 1995 at the stated value plus any unpaid dividends. However, the
preferred stock must be redeemed prior to June 1, 2001. The preferred
stock is convertible at any time into shares of the Company common stock
at one share for each dollar of stated value plus unpaid dividends. The
preferred stock has voting privileges equivalent to the shares of common
stock into which it converts. The Company has authorized 1,000,000
shares of preferred stock.
9. Debt
Debt consists of the following:
(In thousands) 1994 1993
---- ----
Revolving secured bank facility $8,266 $ 5,199
Note payable 3,700
Safeguard note, subordinated to bank 1,100
Other 130 323
------ -------
8,396 10,322
Less current debt 8,396 383
------ -------
$ -- $ 9,939
====== =======
In March 1994, the Company entered into a $10 million revolving credit
agreement with a bank and repaid the prior credit facilities. Borrowings
bear interest at prime plus 1E1/2%. The agreement limits borrowings
under the credit facility to certain levels of receivables and inventory
and requires the maintenance of liquidity and indebtedness ratios,
minimum levels of net worth and earnings,a nd limits the amounts
available for capital expenditures and amounts to be advanced to the
Company's subsidiaries. The agreement prohibits the payment of cash
dividends. The Company pays a commitment fee of 1/4% on the unused
portion of the credit facility. Safeguard has guaranteed a portion
(maximum $2.4 million) of the outstanding debt.
Due to the losses incurred in the second half of 1994, the Company is
not in compliance with certain financial covenants under its bank
agreements. The Company has not been successful in restructuring these
covenants, therefore the $8.3 million of formerly long-term bank
borrowings has been reflected as a current obligation as the bank has the
ability to request immediate loan repayment. Additionally, in 1995, by
mutual agreement with the bank availability under the credit facility has
been reduced to $7.7 million. The bank continues to extend credit to the
Company under the existing borrowing base formula.
During 1994 and 1993, the Company borrowed a maximum of $8.8 and $5.7
million, respectively, under its credit facilities. The weighted average
interest rate was 8.1% and 6.1% in 1994 and 1993, respectively.
Interest paid in 1994, 1993 and 1992 was $844,000, $316,000 and
$267,000, respectively.
10. Operating Leases
The Company leases its plant and office facilities and certain
equipment under operating leases ranging from one to seven years. Future
minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year are as follows:
(In thousands)
1995 $ 333
1996 175
1997 130
1998 125
1999 107
Thereafter 214
------
$1,084
======
Rental expense in 1994, 1993 and 1992 was $776,900, $204,400 and $0,
respectively.
11. Major Customers
The Company's security systems segment has been primarily in the
prison and airport construction business where the customer is an agent
of either the federal or state governments or local municipalities.
During the year ended December 31, 1994, one customer generated 15%, and
during 1993 three customers generated 15%, 14% and 12% of security
systems sales.
The Company has turned over to its sureties most of its prison and
airport construction projects, and does not intend to bid for any
significant additional prison or airport projects.
12. Income Taxes
The benefit for taxes on losses from continuing operations was:
(In thousands) 1994 1993
---- ----
Current $(1,579) $(50)
Deferred (84) 3
------- ----
Continuing operations $(1,663) $(47)
------- ----
State tax provision included above $22 $6
A reconciliation of the provision (benefit) for income taxes to the
federal statutory rate follows:
Statutory tax benefit $(4,099) $(54)
State taxes net of federal tax benefit 15 4
Non-deductible U.S. losses 2,421 3
------- ----
$(1,663) $(47)
------- ----
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) are presented below:
Deferred tax assets:
Foreign net operating loss carryforwards $ 856
U.S. net operating loss carryforwards $1,014
Bonded jobs allowance 1,420
Receivables allowance 1,146 240
Alternative minimum tax credit 97
Life insurance benefit 48
Goodwill allowance 717
Inventory capitalization 25
------ -----
Total gross deferred assets 4,394 1,169
Less valuation allowance (4,390) (856)
------ -----
Net deferred tax assets 4 313
------ -----
Deferred tax liabilities:
Accelerated depreciation (4) (349)
------ -----
As of December 31, 1994, the Company had net operating loss
carryforwards for U.S. income tax purposes of $8 million. Of this
amount, $5 million has been carried back to offset prior years taxable
income and resulted in the Company receiving a $1.6 million tax refund in
1995. The remaining net operating loss carryforward of $3 million is
available to offset future taxable income until the year 2009.
Total income taxes paid (refunded) in 1994, 1993 and 1992, were
$158,200, ($34,900) and $0, respectively.
13. Stock Options
In 1994, the Company shareholders approved an additional 500,000
common shares for a new employee stock option plan. Under the various
incentive stock option plans, selected employees may be granted options
to purchase the Company's common stock at a price not less than fair
market value on the date of grant.
Generally, all options are exercisable 25% per year beginning one year
from date of grant. Options expire seven years from the date of grant.
A summary of stock option activity in the plans follows:
1994 1993
---- ----
Shares under option beginning of year 749,250 455,625
Options granted 342,000
Options canceled (143,375) (48,375)
-------- -------
Shares under option end of year 605,875 749,250
======== =======
Options exercisable 377,325 287,750
Shares available for future grant 443,000 425,000
Average price of shares under option $.90 $.94
Under the Company's non-employee Director stock option plan, 5,000
options at $1.75 and 5,000 options at $1.13 per share are outstanding at
December 31, 1994. These options are currently exercisable and expire in
1995 and 1996, respectively.
At December 31, 1994, the Company has reserved 1,098,875 shares of
common stock for possible future issuance under all stock option plans.
14. Retirement Plans
The Company has defined contribution plans which cover substantially
all domestic employees. Certain plans provide for a limited Company
match of employee contributions. The Company contributed $85,600,
$35,000 and $0 in 1994, 1993 and 1992, respectively.
15. Liquidity and Capital Resources
As a result of significant operating difficulties, the Company has a
severe liquidity problem. The Company is in default of its loan facility
($8.3 million at December 31, 1994). These defaults cause the debt to be
due upon demand, and, should the lender demand payment, the Company does
not have the resources to satisfy the debt. The Company has withdrawn
from the correctional facility security business and is undertaking to
significantly downsize the business which includes the sale of the
furnishings business unit. Proceeds from the sale, as well as a 1995 tax
refund of $1.6 million, will be used to reduce outstanding bank debt.
In anticipation of these events, the bank continues to extend credit to
the Company under the existing borrowing base formula. Except for a $2.4
million guarantee of bank debt, Safeguard is not contractually obligated
to satisfy any of the Company's obligations. The Company believes that
the combination of cash received from the sale of the furnishings
business, the tax refund, the guarantee of Safeguard and the working
capital assets of the ongoing business will be sufficient to
satisfy/support all of the bank debt.
The Company has entered into an agreement with the parties from whom
it acquired Maris, to significantly restructure the original purchase
transaction. Under this agreement the seller has agreed to offset its
$3.6 million note receivable from the Company in exchange for releases
from its indemnification liabilities to the Company under the original
asset purchase agreement. Because the Company did not have the required
working capital to complete certain projects it turned to its sureties to
assume and complete certain construction contracts and has extended its
payables to vendors. The principal sureties have agreed to release the
Company from its indemnity obligations to them in return for 300,000
shares of CenterCore stock, cash payments of $495,000 and additional
payments equal to 20% of the Company's net earnings in 1998-2002 up to $1
million in the aggregate. hTe Company is negotiating with all principal
vendors to arrange a repayment schedule while continuing to supply the
Company with materials needed to meet current requirements.
Safeguard has agreed to contribute 2 million shares of its CenterCore
common stock to the Company, sell 2.5 million shares of its CenterCore
common stock to CenterCore management, and provide up to $3 million in
advances to the Company to address current funding requirements of the
downsized business.
As a result of the restructurings, the Company will emerge as a
significantly downsized company. Availability of bonding on jobs will,
at least in the near term, be limited. Bank financing may be available
for limited working capital requirements to augment any advances from
Safeguard. If these sources of funds prove to be inadequate or in the
case of bank financing, unavailable, then the Company will have to seek
additional funds from other investors in order to continue operations.
There can be no assurance that new sources of funds, if required, will be
available. Although the Company believes it will be able to continue to
operate in this new downsized mode, it is contingent on the Company's
ability to adequately reduce its cost structure to a point where it is
supported by the new downsized operations.
16. Segment Data
In thousands
Security Systems Air Technology
Products
---------------- --------------
1994
- - ----
Net sales $27,178 $4,067
Loss before income taxes (11,895) (160)
Assets employed 5,009 2,213
1993
- - ----
Net sales 12,515 2,727
Earnings (Loss) before income taxes 92 (252)
Assets employed 17,649 1,922
Security systems provides low voltage electronic systems to the
commercial and institutional markets. Air Technology products designs
and manufactures clean room and air filtration components and systems.
Virtually all sales are to United States customers. During 1994 the
Company discontinued the furnishings segment. Assets employed include
continuing operations net of assets used for general corporate purposes
of $2,311 and $1,930 for 1994 and 1993, respectively.
The Company will furnish to any stockholder without charge, upon written
request, a copy of the Company's Annual Report on Form 10-K, including
the financial statements and financial statement schedules, filed with
the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934. Requests should be directed to Frederick B.
Franks, Chief Financial Officer, CenterCore, Inc., 110 Summit Drive,
Exton, PA 19341.
29
ASSET PURCHASE AGREEMENT
BETWEEN
THE CENTERCORE GROUP, INC.
("BUYER")
AND
CENTERCORE, INC.
AND
COREL CORPORATE SEATING, INC.
(collectively, the "SELLER")
Table of Contents
Page
ARTICLE 1 - DEFINITIONS 1
Section 1.1. Definitions 1
ARTICLE 2 - SALE AND PURCHASE OF ASSETS;
TRANSACTION CONSIDERATION 7
Section 2.1. Sale and Purchase of Purchased Assets 7
Section 2.2. Payment of Purchase Price 8
Section 2.3. Closing Date Balance Sheet 9
Section 2.4. Assumption of Specified Liabilities 11
Section 2.5. Allocation of Purchase Price 12
ARTICLE 3 - CLOSING 12
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES
RESPECTING SELLER AND SUBSIDIARY 14
Section 4.1. Organization and Qualification 14
Section 4.2. Due Authorization 14
Section 4.3. Conflict with other Instruments;
Absence of Restrictions 14
Section 4.4. Government and Third-Party Approvals 15
Section 4.5. Title to Purchased Assets
and Related Matters 15
Section 4.6. Other Representations Regarding
Purchased Assets 16
Section 4.7. Conduct of Business 17
Section 4.8. Additional Information 18
Section 4.9. Permits and Approvals 19
Section 4.10. Compliance with Law 19
Section 4.11. Compliance with Environmental Laws 19
Section 4.12. Litigation 21
Section 4.13. Absence of Changes 21
Section 4.14. Contracts, Leases, Etc 22
Section 4.15. Product and Service Warranties 24
Section 4.16. Taxes 24
Section 4.17. Insurance 25
Section 4.18. Employees 25
Section 4.19. Strikes, Picketing, etc; Overtime,
Back Wage, Vacation, Discrimination,
and Occupational Safety Claims 26
Section 4.20. Pension and Other Employee Benefit Plans 26
Section 4.21. Contracts with Affiliates 28
Section 4.22. Commission 28
Section 4.23. Leased Real Property 28
Section 4.24. Customers and Suppliers 28
Section 4.25. Representations Complete and Accurate 28
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
RESPECTING BUYER 29
Section 5.1. Organization 29
Section 5.2. Due Authorization 29
Section 5.3. Conflict With Other Instruments 29
Section 5.4. Government and Third-Party Approvals 29
Section 5.5. Litigation 29
Section 5.6. Commission 30
Section 5.7. Information Statement 30
Section 5.8. Representations Complete and Accurate 30
ARTICLE 6 - CERTAIN COVENANTS AND OTHER MATTERS 30
Section 6.1. Corporate Examinations and Investigations 30
Section 6.2. Confidentiality Agreement 31
Section 6.3 Restriction on Certain Discussions
and Actions 31
Section 6.4. Environmental Investigation 32
Section 6.5. Financing 33
Section 6.6. Conduct of Business Prior to the Closing 33
Section 6.7. Capital Expenditures; Dispositions 34
Section 6.8. Bulk Sales 34
Section 6.9. Consents, Further Assurances 35
ARTICLE 7 - CONDITIONS TO THE OBLIGATION OF BUYER 35
Section 7.1. Representations and Warranties True 35
Section 7.2. Performance of Obligations 35
Section 7.3. Consents 35
Section 7.4. Absence of Litigation 36
Section 7.5. Certified Resolutions 36
Section 7.6. Certificates of Good Standing 36
Section 7.7. Availability of Financing 36
Section 7.8. Delivery of Specified Documents 36
Section 7.9. ISRA Compliance 36
Section 7.10. Opinion of Counsel for Seller 37
Section 7.11. Approval of Counsel 38
Section 7.12. Physical Inventory 38
Section 7.13. Parent Guarantee 39
Section 7.14. Information Statement 39
ARTICLE 8 - CONDITIONS TO THE OBLIGATION
OF SELLER 39
Section 8.1. Representations and Warranties True 39
Section 8.2. Performance of Obligations 39
Section 8.3. Absence of Litigation 39
Section 8.4. Execution of Certain Agreements 40
Section 8.5. Opinion of Counsel for Buyer 40
Section 8.6. Approval of Counsel; Corporate Matters 40
Section 8.7. Information Statement 41
Section 8.9. ISRA Compliance 41
ARTICLE 9 - POST-CLOSING COVENANTS OF SELLER 41
Section 9.1. Books and Records of Seller 41
Section 9.2. Payment of Seller's Liabilities 41
Section 9.3. Covenant Not to Compete 42
Section 9.4. Uncollected Accounts Receivable 43
Section 9.5. Buyer's Access 44
Section 9.6. Government Contracts 44
Section 9.7. ISHA Compliance 44
ARTICLE 10 - POST-CLOSING COVENANTS OF BUYER 45
Section 10.1. Books and Records of Buyer 45
Section 10.2. Seller's Access 45
Section 10.3. Offers of Employment 45
Section 10.4. Borrowing Limitations 46
ARTICLE 11 - SURVIVAL; INDEMNIFICATION; EXPENSES 46
Section 11.1. Survival of Representations and Warranties 46
Section 11.2. General Indemnification 47
Section 11.3. Right of Off-Set 50
Section 11.4. Payment by Seller 51
ARTICLE 12 - TERMINATION 52
Section 12.1. Termination 52
Section 12.2. Survival 53
Section 12.3. Expenses if No Closing 53
ARTICLE 13 - GENERAL 54
Section 13.1. No Tax Representations 54
Section 13.2. Regarding the Representations
and Warranties 54
Section 13.3. Binding Effect and Assignment 54
Section 13.4. Waiver 54
Section 13.5. Dispute Resolution 54
Section 13.6. Notices 56
Section 13.7. Governing Law 57
Section 13.8. No Third Party Beneficiaries 57
Section 13.9. Severability 57
Section 13.10. Schedules 57
Section 13.11. Section Headings 57
Section 13.12. Contents of Agreement 57
Section 13.13. Counterparts 58
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT made this 26th day of MAY, 1995 between
CenterCore, INC., a Delaware corporation ("CenterCore"), COREL CORPORATE
SEATING, INC., a Delaware corporation ("Corel" and collectively with
CenterCore, being called the "Seller"), and THE CENTERCORE GROUP, INC.,
a Delaware corporation ("Buyer").
BACKGROUND
CenterCore, through its domestic furniture division, is engaged in
the business of the manufacture and sale of certain furniture products
(the "CenterCore Furniture Business") and Corel is engaged in the
business of the manufacture and sale of certain other furniture products
(the "Corel Furniture Business", and collectively with the CenterCore
Furniture Business, being called the "Business"). Seller desires to
sell and Buyer desires to purchase substantially all of the assets of
the Seller which are used in carrying out the Business as more
particularly set forth below, and assume specified liabilities of
Seller, all on the terms, and subject to the conditions, set forth
herein. Safeguard Scientifics, Inc. ("Parent") owns certain of the
outstanding capital stock of CenterCore and has agreed to a covenant not
to compete, to vote its shares in favor of the transactions contemplated
by this Agreement and to guarantee a portion of Seller's indemnification
obligations in conjunction with the proposed transactions.
NOW, THEREFORE, in consideration of the mutual benefits to be
derived from this Agreement and the representations, warranties,
conditions and promises hereinafter contained, and intending to be
legally bound hereby, Seller and Buyer hereby represent, warrant and
agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1. Definitions. As used herein, the following terms
shall have the following meanings, respectively:
a. "Accounts Payable" shall mean all of Seller's accounts
payable, excluding Intercompany Liabilities, created or arising in
respect of the Business, outstanding on March 31, 1995 as reflected on
Schedule 1.1(a) as the accounts payable may change in operation of the
Business in the ordinary course consistent with past practices between
April 1, 1995 and the Closing Date, all of which accounts payable
outstanding at the Closing Date to equal, in aggregate, the amount
reflected for Accounts Payable on the Closing Date Balance Sheet.
b. "Accounts Receivable" shall mean all of Seller's accounts
receivable, excluding Intercompany Liabilities, including, without
limitation, applicable bad debt reserves and employer advances, created
or arising in the Business outstanding on March 31, 1995 as reflected on
Schedule 1.1(b) as the accounts receivable may change in the operation
of the Business in the ordinary course consistent with past practices
between April 1, 1995 and the Closing Date, all of which accounts
receivable outstanding at the Closing Date to equal, in aggregate, the
amount reflected for such items on the Closing Date Balance Sheet.
c. "Accrued Items" shall mean all Accounts Payable and all of
Seller's accrued expenses and commissions payable as reflected on the
corresponding line item on the Closing Date Balance Sheet.
d. "Affiliate" shall mean, as to any specified person, (a) any
other person controlling, controlled by or under common control with
such specified person, (b) any officer, director or partner of such
specified person, (c) any other person of which such specified person
is an officer, employee, agent, director, shareholder or partner or (d)
any member of the Family Group of such specified person or of any
individual who is an Affiliate of such specified person by reason of
clause (a) or (b) of this definition. The term "control", with respect
to any person, means possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such
person, whether through the ownership of voting securities or a
partnership interest, by contract or otherwise. "Family Group" means,
as to any individual, such individual's spouse, ancestors, lineal
descendants and trusts for the benefit of any of the foregoing,
provided that all the income beneficiaries and remainderman of any such
trust are such individual's spouse, ancestors or lineal descendants.
e. "Assumed Liabilities Amount" shall mean the sum of the amounts
reflected on the following line items on the Closing Date Balance Sheet:
all of the accounts payable, commissions payable, accrued expenses,
customer deposits and capitalized equipment leases, all of which shall
be exclusive of any Intercompany Liabilities.
f. "Assumed Liabilities" shall mean all of the Accounts Payable
and all commissions payable, accrued expenses and customer deposits
outstanding on March 31, 1995 as reflected on Schedule 1.1(f) as the
commissions payable, accrued expenses and customer deposits may change
in operation of the Business in the ordinary course consistent with past
practices between April 1, 1995 and the Closing Date, all of which items
outstanding at the Closing Date to equal, in aggregate, the amount
reflected on the Closing Date Balance Sheet, Seller's outstanding and
prospective rights, liabilities and obligations under the warranty
obligations of Seller related to products sold to customers in the
operation of the Business specified on Schedule 1.1(f), together with
all such items created or arising in the operation of the Business in
the ordinary course consistent with past practices, Seller's outstanding
purchase orders for merchandise ordered prior to the Closing Date in the
ordinary course of business and consistent with past practices which
have not been delivered and are not Inventory, Seller's outstanding
sales contracts with customers entered into prior to the Closing Date in
the ordinary course of business and consistent with past practices, all
liabilities relating to employee benefit matters as set forth in Section
10 of this Agreement specified in Schedule 1.1(f), as such items may
change in the operation of the Business in the ordinary course
consistent with past practices, all liabilities due and payable or
otherwise arising after the Closing Date under the Capitalized Equipment
Leases, Real Estate Leases and all other contracts identified on
Schedule 2.4, as such schedule may be updated at Closing pursuant to the
provisions contained herein.
g. "Assumption Agreement" shall mean the written agreement
referred to in Section 3.1(b)(ii)(A) hereof evidencing and effecting the
assumption by Buyer of the Assumed Liabilities.
h. "CAPEX Adjustment Amount" shall mean the amount (which may be
negative) equal to (i) the aggregate cost of all assets acquired by
Seller between January 1, 1995 and the Closing Date and which under GAAP
are required to be capitalized, less (ii) the aggregate book value on
the date of disposition of all items of Fixed Assets with a book value
per item in excess of $10,000 that are sold between January 1, 1995 and
the Closing Date.
i. "Capitalized Equipment Leases" shall mean those equipment
leases of Seller as identified on Schedule 2.4, as such schedule may be
updated at Closing.
j. "Cash" shall mean all of Seller's cash and cash equivalents
applicable to, or arising out of the operations of, the Business.
k. "Cash Consideration" shall mean the amount of two and one half
million dollars ($2,500,000) less the Working Capital Deficit Amount, if
any.
l. "Closing" shall mean the consummation of the transactions
contemplated to occur hereunder on the Closing Date pursuant to Article
11 hereof.
m. "Closing Date" shall mean June __, 1995 or such other date and
time as shall be mutually agreed to in writing by Buyer and Seller.
n. "Closing Date Balance Sheet" shall have the meaning assigned
to it in Section 2.3 hereof.
o. "Condition" shall mean the assets, liabilities, business,
prospects, operations, results of operations or condition (financial or
otherwise) of the Business or any of the Purchased Assets aggregating in
value over $5,000.
p. "EBITDA" shall mean an amount equal to the earnings of Buyer
on a consolidated basis for a fiscal year before deductions for such
fiscal year for (i) interest expenses, (ii) federal, state, and local
income taxes, and (iii) depreciation and amortization, and as determined
based on Buyer's audited financial statements for such fiscal year as
reported by Buyer's independent certified public accountants, such
financial statements to be prepared in accordance with generally
accepted accounting principles applied on a consistent basis, except
that nonrecurring transactions shall be included in determining EBITDA
solely to the extent of cash received or cash expended by Buyer in such
fiscal year. Non-recurring transactions shall include, but not be
limited to, the sale or write-off of assets, assignment of leases,
charges relating to prior fiscal years and losses arising out of
litigation, fines, and penalties.
q. "Excess Inventory Reserve" shall mean the difference between
the amount by which a reserve of 100% for slow-moving and obsolete
Inventory exceeds the Inventory reserve reflected on the Closing Date
Balance Sheet.
r. "Financing Commitment" shall mean the commitment letter dated
April 19, 1995 from Shawmut Capital Corporation to Buyer and attached
hereto as Exhibit A.
s. "Financing Source" shall mean Shawmut Capital Corporation or
such other financial institution as shall provide Buyer with funds to
enable it to pay the Purchase Price.
t. "Fixed Assets" shall mean all of Seller's fixed assets,
including, without limitation, all furniture, fixtures, machinery,
equipment, motor vehicles, office equipment, computer hardware, tools,
supplies and replacement parts, wherever located, used or useful in
connection with the Business, all of the Fixed Assets on the date hereof
being listed on Schedule 1.1(t) hereof, which schedule shall be updated
at Closing.
u. "Installment Payments" shall have the meaning set forth in
Section 2.2(b).
v. "Intellectual Property and Information" shall mean all the
following of Seller relating to the Business: patents, applications for
patents, trademarks, trademark registrations, applications for trademark
registrations, trade names, service marks, copyrights, computer
programs, trade secrets, product related artwork and know-how, except
for the intellectual property licensed pursuant to the Royalty-Free
License.
w. "Intercompany Liabilities" shall mean all liabilities (and the
corresponding receivables) of CenterCore or any of its Affiliates which
constitute amounts payable to CenterCore or any Affiliate of CenterCore
(including the Parent and Corel) from any such Affiliate or CenterCore,
as the case may be.
x. "Inventory" shall mean all of Seller's inventory (including
all obsolete inventory), packaging, finished goods, spare parts, work in
process, stockroom inventory and raw materials, wherever located, used
or useful in connection with the Business, or which are offered for sale
in the ordinary course of the Business existing on the Closing Date.
y. "Leased Real Property" shall mean the real property leased by
Seller pursuant to the Real Estate Leases and used in the operation of
the Business and generally described on Schedule 1.1(y) attached hereto.
z. "Leasehold Improvements and Fixtures" shall mean all of the
leasehold improvements, fixtures and appurtenances owned by Seller and
attached to that Leased Real Property.
aa. "Liabilities" shall mean any and all obligations or
liabilities of Seller of any nature whatsoever, express or implied,
matured or unmatured, disputed, liquidated, unliquidated, absolute,
fixed or contingent, known or unknown.
ab. [Reserved]
ac. "Liens" shall mean any liens, pledges, claims, charges,
security interests, and other encumbrances of any nature whatsoever
against or affecting the Purchased Assets.
ad. "Prepaid Items" shall mean all of Seller's prepaid expenses
expended for the benefit of the Business,
including but not limited to advances and deposits, all of which shall
be reflected on the Closing Date Balance Sheet.
ae. "Preliminary Balance Sheet" shall mean a pro forma balance
sheet reflecting all of the Purchased Assets and Assumed Liabilities as
of the last day of the month preceding the month in which the Closing
occurs assuming that the Closing occurred on such date (the "Preliminary
Balance Sheet Date") prepared insofar as is possible in accordance with
generally accepted accounting principles consistently applied (and in a
manner consistent with Seller's historical preparation of financial
statements for the Business.)
af. "Purchase Price" shall mean the
sum of (a) the Cash Consideration; (b) the Installment Payments; and (c)
the principal amount of the Subordinated Note.
ag. "Purchased Assets" shall mean, collectively, the Accounts
Receivable, Fixed Assets, Intellectual Property and Information,
Inventory, Leasehold Improvements and Fixtures, Prepaid Items, and
Rights and Other Property, all as existing on the Closing Date.
ah. "Real Estate Leases" shall mean the leases for the Leased
Real Property specified on Schedule 1.1(ah).
ai. "Rights and Other Property" shall mean all of Seller's assets
(excluding the Excluded Assets) not included in the Accounts Receivable,
Fixed Assets, Intellectual Property and Information, Inventory,
Leasehold Improvements and Fixtures, Prepaid Items and Real Property
used in carrying out the Business, including, without limitation, all of
the following which relate to the Business: Seller's rights under the
agreements identified in Schedule 1.1(ai), executed originals of such
agreements, rights of offset, credits, claims against third parties for
refunds in respect of the Business or the Purchased Assets, causes of
action, judgments, proceeds of insurance in respect of damage to or
destruction of loss of assets included within the Business or the
Purchased Asset, going concern value, goodwill, rights in names
"CenterCore" and "Corel Corporate Seating" or any variation thereof,
security deposits, contract rights, purchase orders, sales orders,
warranties and licenses received from manufacturers and sellers of
Equipment and Inventory, business and marketing plans, vendor and
customer records, lists and information, shipping records, franchises,
licenses, permits, for the operation of the Business (to the extent
assignable), computer software and technical information, telephone
numbers, rights, files, books and records (whether in hard copy or
magnetic form), including, without limitation, blueprints, drawings and
other technical papers, payroll, employee benefit, accounts receivable
and payables, maintenance and asset history records, sales and product
brochures and catalogs and other sales literature and materials.
aj. "Royalty-Free License" shall mean two licenses attached
hereto as Schedule 1.1(aj).
ak. "Senior Debt" shall mean debt owed to Shawmut Capital
Corporation and any successor thereto and any extension or refinancing
thereof subject in any event to the limitations contained in Section
10.4 hereof.
al. "Secured Assets" shall mean all assets of the Buyer, whether
acquired hereunder or purchased after the date hereof.
am. "Subordinated Note" shall mean the subordinated promissory
note of Buyer identified in Section 2.2(c) in the form attached hereto
as Exhibit B with appropriate completeness as provided in said Section
2.2(c).
an. "Working Capital Amount" shall mean the sum of Accounts
Receivable and Inventory less the sum of Accrued Items, all as reflected
on the Closing Date Balance Sheet.
ao. "Working Capital Deficit Amount" shall mean the amount, if
any, by which the Working Capital Amount is less than five million
dollars ($5,000,000).
ARTICLE 2
SALE AND PURCHASE OF ASSETS; TRANSACTION CONSIDERATION
Section 2.1. Sale and Purchase of Purchased Assets.
a. Purchased Assets. Seller will sell and Buyer will buy at the
Closing Date, free and clear of Liens, all the Purchased Assets.
b. Excluded Assets. Specifically excluded from the assets sold
and purchased pursuant hereto are the following assets and property of
Seller (the "Excluded Assets"):
(i) Subsidiaries Stock. Any stock of subsidiary companies,
including Corel and Seller's Canadian, South African and UK
subsidiaries;
(ii) Tax Refunds. Seller's deferred state and federal income
tax accounts receivable and all prepayments of tax, tax credits or
refunds (whether federal, state or local) payable to Seller;
(iii) Corporate Records. Seller's minute books, stock transfer
book and other corporate records;
(iv) Non-Business Assets. Any assets of Seller which are not
used or intended for use and do not arise out of the operation of the
Business;
(v) Rights Under This Agreement. Any and all rights of Seller
under this Agreement; and
(vi) Intercompany Liabilities. Any and all Intercompany
Liabilities;
(vii) Scheduled Excluded Assets. All other assets of Seller
identified on Schedule 2.1(b)(vii) attached hereto.
Section 2.2. Payment of Purchase Price.
a. The Cash Consideration. At the Closing, with the Working
Capital Amount computed on the basis of the Preliminary Balance Sheet
but subject to adjustment subsequent to the Closing Date as provided in
Section 2.3(f), Buyer shall pay to Seller, in cash or by wired funds or
certified check, an amount equal to the Cash Consideration.
b. The Installment Payments. In addition to the Cash
Consideration, Buyer shall pay to Seller the Installment Payments. The
aggregate amount of the Installment Payments shall equal the difference
between (i) the sum of (A) $1,000,000, plus (B) the difference between
the amount of Accounts Receivable less the Assumed Liabilities Amount,
both as reflected on the Closing Date Balance Sheet, plus (C) the
quotient of (I) the difference between the amount of Inventory as
reflected on the Closing Date Balance Sheet (without deducting for the
Excess Inventory Reserve) less $1,000,000, divided by (II) two, less
(ii) the Cash Consideration.
The Installment Payments shall be made in five (5) equal payments,
with first such Installment Payment nine (9) months from the Closing
Date. The second Installment Payment shall be made on the last day of
the calendar quarter in which such first Installment Payment is made,
and thereafter, the remaining three Installment Payments will be made on
the last day of each of the three succeeding calendar quarters. The
Installment Payments will be non-interest bearing and will be secured by
a second lien on the Secured Assets as more particularly provided in the
Buyer Security Agreement attached hereto as Exhibit C (the "Buyer
Security Agreement"). If any Installment Payment is due before the
Closing Date Balance Sheet is final, the amount of such payment(s) shall
be computed based upon the Preliminary Balance Sheet and paid on an
interim basis by Buyer based on such computation. After the Closing
Date Balance Sheet is final, any such interim Installment Payment(s)
shall be adjusted to the actual amount(s) utilizing the Closing Date
Balance Sheet, with any excess or deficit deducted from or added, as the
case may be, the next scheduled Installment Payment.
c. The Subordinated Note or Lease. In addition to the Cash
Consideration and the Installment Payments, at the Closing, Buyer shall
also deliver to Seller the Subordinated Note in a principal amount equal
to the sum of (i) the difference between (A) the quotient of (I) the
difference between (a) the amount of Inventory as reflected on the
Closing Date Balance Sheet, less (b) $1,000,000, divided by (II) two,
less (B) the Excess Inventory Reserve, plus (ii) $1,065,000, plus, if
positive, or minus, if negative, any CAPEX Adjustment Amount, as
applicable, plus (iii) the amounts reflected on the Closing Date Balance
Sheet for security deposits and prepaid expenses.
The Subordinated Note will bear interest at the rate of 8% per
annum, with such interest beginning to accrue on the first anniversary
of the Closing Date. The Subordinated Note will be subordinated solely
to the Senior Debt (as defined below) and will be secured by a second
priority security interest in the Fixed Assets pursuant to the Buyer
Security Agreement. The principal amount of the Subordinated Note will
be amortized on a seven (7) year level-schedule with semi-annual
payments and with a balloon payment due on the fifth anniversary of the
Closing Date. Interest and principal payments will commence eighteen
months after the Closing Date and continue semi-annually thereafter
until maturity. In the event that Buyer's EBITDA exceeds $2,000,000 for
any fiscal year during the term of the Subordinated Note (the "EBITDA
Excess"), an additional principal payment equal to 50% of the EBITDA
Excess shall be payable under the Subordinated Note.
Section 2.3. Closing Date Balance Sheet.
a. Preliminary Balance Sheet. On the Closing Date, Seller shall
deliver to Buyer the Preliminary Balance Sheet which shall be utilized
for computing the Cash Consideration payable at the Closing and the
principal amount of the Subordinated Note to be delivered at the
Closing.
b. Preliminary Closing Date Balance Sheet. Seller shall, at its
sole expense and within thirty (30) days following the Closing Date,
deliver to Buyer a balance sheet reflecting all of the Purchased Assets
and Assumed Liabilities as of the Closing Date (the "Preliminary Closing
Date Balance Sheet") prepared insofar as is possible in accordance with
generally accepted accounting principles consistently applied and
including therewith Seller's computation of the Working Capital Deficit
Amount, the amount of the Installment Payments and the principal amount
of the Subordinated Note (collectively, the "Computed Items").
c. Notice of Disagreement. The Preliminary Closing Date Balance
Sheet and the Computed Items shall become final and binding upon Buyer
and Seller unless Buyer gives written notice of its disagreement (a
"Notice of Disagreement") to Seller within twenty (20) days following
the delivery to it of the Preliminary Closing Date Balance Sheet. A
Notice of Disagreement shall specify in reasonable detail the nature of
any disagreement so asserted. During a period of ten (10) days
following the receipt by Seller of a Notice of Disagreement from Buyer,
the parties shall attempt to resolve in writing any differences they may
have with respect to any matters specified in the Notice of
Disagreement. If at the end of the aforesaid 10-day period, the parties
have reached written agreement with respect to all matters covered by a
Notice of Disagreement, the Preliminary Closing Date Balance Sheet and
the Computed Items shall be adjusted to reflect such written agreement,
shall become final and binding upon Buyer and Seller and shall
constitute the Closing Date Balance Sheet and the Computed Items.
d. Disputed Matters. If at the end of the aforesaid 10-day
period, Seller and Buyer shall have failed to reach written agreement
with respect to all matters covered by a Notice of Disagreement, then
all such matters as to which written agreement has been reached shall
become final and binding upon Buyer and Seller and all such matters as
to which written agreement has not been reached (the "Disputed Matters")
shall be submitted to and reviewed by an arbitrator (the "Arbitrator"),
which shall be any of the so-called "Big 6" accounting firms selected by
Buyer and Seller (other than KPMG Peat Marwick).
e. Arbitration. The Arbitrator shall consider only the Disputed
Matters. The Arbitrator shall act promptly to resolve all Disputed
Matters and its decision with respect to all Disputed Matters shall be
final and binding upon the Parties. Upon resolution by the Arbitrator
of all Disputed Matters, the Arbitrator shall cause to have prepared
and shall deliver to
Buyer and Seller the Preliminary Closing Date Balance Sheet and the
Computed Items adjusted to reflect any written agreement between the
parties with respect thereto and any determination of the Arbitrator
with respect to any Disputed Matter. The Preliminary Closing Date
Balance Sheet and the Computed Items as so adjusted shall be final and
binding upon Buyer and Seller and shall constitute the Closing Date
Balance Sheet and the Computed Items. The expenses of the arbitration
shall be borne equally by Buyer and Seller unless the Arbitrator
determines that one of the parties has not proceeded in good faith with
respect to the matter submitted for arbitration, in which case such
party shall bear fully the expenses of arbitration.
f. Adjustments To Purchase Price.
(i) In the event that based on the Closing Date Balance Sheet
and the Computed Items, the Working Capital Deficit Amount, if any (the
"Actual Working Capital Deficit Amount"), differs from the Working
Capital Deficit Amount computed based on the Preliminary Balance Sheet
and used for computing the Cash Consideration paid at Closing, the
amount of such difference shall, (A) if the Actual Working Capital
Deficit Amount is the larger of the two amounts, be paid by Seller to
Buyer in cash within 5 days of the final determination of the Closing
Date Balance Sheet, and (B) if the Actual Working Capital Deficit Amount
is the smaller of the two amounts, be paid by Buyer to Seller in cash
within 5 days of the final determination of the Closing Date Balance
Sheet.
(ii) In the event that based on the Closing Date Balance Sheet
and the Computed Items, the principal amount of the Subordinated Note
(the "Actual Note Amount") differs from the principal amount of the
Subordinated Note delivered at Closing and determined using the
Preliminary Balance Sheet, the principal amount of the Subordinated Note
shall be adjusted to such Actual Note Amount. In such event, Seller
shall promptly surrender for cancellation the Subordinated Note
delivered at Closing for a new Subordinated Note with a principal amount
equal to the Actual Note Amount.
Section 2.4. Assumption of Specified Liabilities. At the Closing,
Buyer shall assume and agree to pay, perform and discharge the Assumed
Liabilities. In respect of the agreements listed on Schedule 2.4
hereof, Buyer shall, from and after the Closing Date, assume the
performance obligations of Seller thereunder, but only with respect to
obligations accruing thereunder on and after the Closing Date. Except
for the Assumed Liabilities, Buyer does not and will not assume or
become obligated to pay or perform any liabilities or obligations of
Seller whatsoever, whether accrued, absolute, fixed or contingent, known
or unknown or otherwise, including Intercompany Liabilities (all such
liabilities and obligations not assumed by Buyer being called
collectively the "Retained Liabilities").
Retained Liabilities shall include, without limitation all
liabilities of Seller in connection with or arising out of breach of
environmental laws (as defined below), product manufacture and
distribution (other than warranty claims which constitute Assumed
Liabilities) and workers' compensation claims and any other non-
contractual liability of Seller for which there exists no adequate
insurance coverage.
The assumption by Buyer of the Assumed Liabilities shall in no way
expand with respect to those liabilities the rights or remedies of any
third parties against Buyer as compared to the rights and remedies which
such third parties would have against Seller with respect to those
liabilities had Buyer not assumed such liabilities. Seller shall pay
and discharge in full all Retained Liabilities when and as the same
become due and payable.
Section 2.5. Allocation of Purchase Price. Seller and Buyer agree
that the Purchase Price shall be allocated among the Purchased Assets in
the manner set forth in Schedule 2.5, as negotiated by the parties, and
further agree that each will report the federal income tax consequences
of such purchase and sale contemplated hereby in a manner consistent
with such allocation.
ARTICLE 3
CLOSING
Section 3.1. Closing
a. General. Unless otherwise agreed to by the parties hereto,
the closing under this Agreement (the "Closing") will be held at the
offices of Pepper, Hamilton & Scheetz, 3000 Two Logan Square, 18th and
Arch Streets, Philadelphia, Pennsylvania 19103, commencing at 10:00 a.m.
on a date to be mutually agreed in June 1995.
b. Delivery. At the Closing and as a condition to Closing:
(i) Seller will deliver or cause to be delivered to Buyer fully
executed copies of:
(A) A General Assignment and a Bill of Sale duly executed by
Seller, in the form attached hereto as Exhibit D, and such other
instruments of transfer, sale and assignment (including certificates of
title in respect of the motor vehicles included within the Purchased
Assets) as shall be necessary to vest in Buyer good title to, or to
assign and transfer to Buyer all of Seller's right, title and interest
in, the Purchased Assets;
(B) All other agreements, certificates, consents, approvals
and documentary evidence required to be delivered pursuant to Seller's
obligations hereunder;
(C) The agreements specified on Schedule 3.1(b)(i)
(collectively with the deliverables under clause (A) of this clause (i)
being called the "Seller Collateral Agreements"); and
(D) The guarantee agreement of Parent guaranteeing certain
indemnification obligations of Seller in substantially the form attached
hereto as Exhibit 3.1(b)(i)(D) (the "Parent Guarantee Agreement") duly
executed by Parent and acknowledged by Seller.
(ii) Buyer will pay to Seller the sums and deliver the
Subordinated Note and Buyer Security Agreement specified in Section 2.2,
and will deliver to Seller fully executed copies of:
(A) An Assumption Agreement substantially in the form
attached hereto as Exhibit E, whereby Buyer expressly assumes the
Assumed Liabilities;
(B) All other agreements, certificates, consents, approvals
and documentary evidence required to be delivered pursuant to Buyer's
obligations hereunder; and
(C) The agreements specified on Schedule 3.1(b)(ii)
(collectively with the deliverables under clause (A) of this clause (ii)
being called the "Buyer Collateral Agreements").
c. Apportionments under certain Agreements. At the Closing,
Seller and Buyer shall apportion all amounts previously paid or payable
under the agreements identified on Schedule 3.1(c), whether as rent or
otherwise, for or in respect of periods which include both before and
after the Closing Date, such apportionment to be made on a pro rata
basis based on the respective number of days in the pre-Closing Date and
post-Closing Date periods. Similar apportionments shall be made in
respect of all amounts paid or payable under such agreements and not
previously apportioned at Closing and payment of any amount owing by
Seller to Buyer or by Buyer to Seller on account of any such
apportionment shall be made within five (5) business days of demand
therefor accompanied by supporting invoices or relevant documentation.
d. Expenses. Seller shall be responsible for the payment of
costs it has incurred and will incur in connection with the execution
and delivery of this Agreement and consummation of the transactions
contemplated hereby and Buyer shall be responsible for the payment of
costs it has incurred and will incur, as well as any sales taxes, in
connection with the execution and delivery of this Agreement and
consummation of the transactions contemplated hereby; provided, however,
that the initial $25,000 in aggregate, of any property transfer taxes
and similar or related taxes, other than sales taxes, payable in
connection with the transfer of the Purchased Assets shall be shared
equally by Seller and Buyer and any such amounts in excess thereof shall
be borne by Seller. Without limiting the generality of the foregoing
provisions of this paragraph (d), Seller shall pay and discharge all
fees and expenses which may be or become owing to Stump & Company in
connection with this Agreement and the transactions contemplated hereby
(and shall hold Buyer harmless against claims made by or through it).
e. Subsequent Documentation. Seller shall at any time and from
time to time upon the request of Buyer execute,acknowledge and deliver,
or cause to be executed, acknowledged and delivered, all such further
assignments and instruments of sale and transfer as may be reasonably
required for the better assigning,transferring and confirming to Buyer
or its successors and assigns, or for aiding and assisting Buyer or Its
successors and assigns in collecting and reducing to possession, any or
all of the Purchased Assets.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES RESPECTING SELLER AND SUBSIDIARY
Seller represents and warrants to Buyer as follows:
Section 4.1. Organization and Qualification. Each of Seller is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and is duly qualified and in good
standing as a foreign corporation authorized to transact business and to
own and lease property in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties
owned or leased by it requires such qualification in order to avoid
liability or disadvantage. All of such jurisdictions are listed on
Schedule 4.1.
Section 4.2. Due Authorization. The execution and delivery of this
Agreement by Seller and the sale of the Purchased Assets and performance
of the obligations of Seller contemplated hereby and by the Seller
Collateral Agreements have been duly and validly authorized by all
necessary corporate and shareholder action. Seller has the right, power
and authority to enter into and perform this Agreement and the Seller
Collateral Agreements, and this Agreement constitutes, and the Seller
Collateral Agreements will, upon their execution, constitute, the valid
and binding obligations of Seller, enforceable against Seller in
accordance with their terms.
Section 4.3. Conflict with other Instruments; Absence of
Restrictions. The execution, delivery and performance of this Agreement
and the Seller Collateral Agreements by Seller will not contravene any
provision of Seller's articles of incorporation or by-laws and will not
result in a breach of, or constitute a default under, any agreement or
other document to which Seller is a party or by which Seller is bound,
or any decree, order or rule of any domestic or foreign court or
governmental agency or any provision of applicable law which is binding
on Seller or on any of the Purchased Assets, or result in the creation
or imposition of any mortgage, pledge, lien, charge, assessment,
encumbrance, claim or restriction of any nature on any of the Purchased
Assets or give to others any interest or rights therein or create in
any third party the right to modify, terminate or accelerate (or to make
a claim for damages in respect of) any instrument or contract to which
Seller is a party or by which Seller is bound. Seller has no reason to
believe that the execution, delivery and performance of this Agreement
and the Seller Collateral Agreements by Seller will adversely affect
performance by third parties under any supply contracts and distribution
agreements to which Seller is a party. Buyer, as the owner of the
Purchased Assets, will be able to operate the Business, without
violating any covenant or agreement that purports to bind Seller or a
purchaser of assets from Seller.
Section 4.4. Government and Third-Party Approvals. Except as
specified on Schedule 4.4, no consent or novation by, approval or
authorization of or filing, registration or qualification with any
federal, state or local authority, or any foreign governmental
authority, or any corporation, person or other entity (including any
party to any contract or agreement with Seller) is required (i) for the
execution, delivery or performance of this Agreement or the Seller
Collateral Agreements by Seller, (ii) in connection with Seller's
consummation of the transactions contemplated hereby and thereby or
(iii) in order to vest in Buyer good and marketable title in and to all
of the Purchased Assets upon the Closing.
Except as identified on Schedule 4.4, there is no material consent,
approval, license or authorization by any governmental authority issued
or given to Seller or entered into by Seller, which is in effect as of
the date hereof and which permits Seller to operate the Business or
which Seller is required to have in order to operate the Business.
Section 4.5. Title to Purchased Assets and Related Matters.
Seller has good and valid title to all of its assets constituting the
Purchased Assets, whether tangible or intangible, and whether consisting
of real or personal property, and all such Purchased Assets are held
free and clear of mortgages, liens, pledges, claims, charges, security
interests or other encumbrances or limitations of any nature whatsoever,
except the liens identified on Schedule 4.5, which liens shall be
discharged on or prior to the Closing Date, and liens for current taxes
and assessments not in default. The instruments of transfer to be
executed by Seller at the Closing will be effective to transfer to Buyer
good and valid title to, and assign to Buyer all of Seller's right,
title and interest in and to, the Purchased Assets.
Section 4.6. Other Representations Regarding Purchased Assets.
a. Accounts Receivable. All of the Accounts Receivable as of the
Preliminary Balance Sheet Date will be reflected on the Preliminary
Balance Sheet and all of the Accounts Receivable as of the Closing Date
will be reflected on the Closing Date Balance Sheet. The Accounts
Receivable listed on the Preliminary Balance Sheet and/or on the Closing
Date Balance Sheet have arisen or will arise solely in the ordinary
course of business of Seller.
b. Intellectual Property and Information. The Intellectual
Property and Information includes all of Seller's industrial and
intellectual property rights which are used or useful in operating the
Business. Seller owns or has a valid right to use the Intellectual
Property and Information being used to conduct its Business as now
operated and as now proposed to be operated (a complete list of licenses
other than standardized end-user software licenses) and registrations of
and applications for registrations of such Intellectual Property and
Information is attached hereto as Schedule 4.6(b). To Seller's
knowledge, no Intellectual Property and Information infringes or has
infringed on any patent, invention, copyright, trademark, tradename or
other right owned by a third party. Except as set forth on Schedule
4.6(b), no claim is pending or, to Seller's knowledge, threatened
against Seller and/or its officers, employees and consultants to the
effect that any such Intellectual Property and Information owned or
licensed by Seller, or which Seller otherwise has the right to use, is
invalid or unenforceable by Seller. Except pursuant to the terms of any
licenses specified on Schedule 4.6(b), Seller has no obligation to
compensate any person or entity for the use of any such Intellectual
Property and Information, and Seller has not granted any person or
entity any license or other right to use any of the Intellectual
Property and Information of Seller, whether requiring payment of
royalties or not.
Seller has taken all reasonable measures to protect and preserve the
security, confidentiality and value of its Intellectual Property and
Information, including its trade secrets and other confidential
information. All employees and consultants of Seller involved in the
design, review, evaluation or development of products or Intellectual
Property and Information have executed a nondisclosure and assignment of
inventions agreement sufficient to protect the confidentiality and value
of Seller's Intellectual Property and Information and to vest in Seller
exclusive ownership of such Intellectual Property and Information. To
the best knowledge of Seller, all material trade secrets and other
confidential information of Seller are presently valid and protectible
and are not part of the public domain or knowledge, nor, to the best
knowledge of Seller, have they been used, divulged or appropriated for
the benefit of any person other than Seller or otherwise to the
detriment of Seller, and no such employee or consultant is subject to
any contractual or legal restrictions which might interfere with the use
of their best efforts to promote the interests of Seller. To the best
of Seller's knowledge, no employee or consultant of Seller has used any
trade secrets or other confidential information of any other person in
the course of their work for Seller. Seller is the exclusive owner of
all right, title and interest in its Intellectual Property and
Information as purported to be owned by it, and such Intellectual
Property and Information are, to the best knowledge of Seller after
reasonable investigation, valid and in full force and effect. To the
best knowledge of the Seller, no university, hospital, government agency
(whether federal or state) or other organization which sponsored
research and development conducted by Seller has any claim of right to
or ownership of or other encumbrance upon the Intellectual Property and
Information of Seller.
c. Electronic Data Processing Equipment. The Purchased Assets
include all of the electronic data processing equipment and software
currently used by Seller in operating the Business.
d. Generally. The assets constituting the Purchased Assets
constitute all of the assets of Seller used in carrying out the
Business, and the assets constituting the Purchased Assets constitute
all of the assets set forth on the Balance Sheet (other than such assets
as Seller shall have disposed of since January 1, 1995 in the ordinary
course of business consistent with past practices).
Section 4.7. Conduct of Business. Except as set forth on Schedule
4.7, between January 1, 1994 and the date hereof, Seller has conducted
the Business only in the ordinary course and in a manner consistent with
past practices; Seller has not sold or transferred any assets or
property which, in the aggregate, is material to the Business, except
for sales of inventory in the usual and ordinary course of business;
Seller has not suffered any loss or interruption in use of any of the
Purchased Assets or any other material asset used, directly or
indirectly, in the conduct of Business; Seller has not written off any
of the Purchased Assets as unusable or obsolete, except as specified on
Schedule 4.7; and Seller has not made any material change in the conduct
of the Business, whether or not such change had a material adverse
affect on the Condition; and Seller has not forgiven or canceled any
material debts or claims, or waived any material rights arising out of
the conduct of or with respect to the Business. To the best of Seller's
knowledge, Seller has not suffered or been threatened with the
obsolescence of any of the material methods or products used or
constituting a part of the Business or the Purchased Assets.
Section 4.8. Additional Information.
a. SEC Documents; CenterCore Financial Statements. CenterCore
has furnished or made available to Buyer a true and complete copy of its
Form 10-K for the fiscal year ended December 31, 1993, its Forms 10-Q
for the quarters ended March 31, June 30 and September 30, 1994, and its
proxy statement dated April 12, 1994 (collectively, the "SEC Documents")
which CenterCore filed under the Securities Exchange Act of 1934 (the
"Exchange Act") with the Securities and Exchange Commission (the "SEC").
As of their respective filing dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act, and none of
the SEC Documents 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 in which they were made, not misleading, except to the
extent corrected by a subsequently filed document with the SEC. The
financial statements of CenterCore, including the notes thereto,
included in the SEC Documents (the "CenterCore Financial Statements")
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC
with respect thereto, and the CenterCore Financial Statements and the
unaudited monthly financial statements of CenterCore provided by Seller
to Buyer have been prepared in accordance with GAAP consistently applied
(except as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC) and fairly
present the consolidated financial position of CenterCore at the dates
thereof and of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring
audit adjustments). There has been no change in CenterCore accounting
policies except as described in the notes to the Parent Financial
Statements. CenterCore has no material obligations other than (i) those
set forth in the CenterCore Financial Statements and (ii) those not
required to be set forth in the CenterCore Financial Statements under
GAAP.
b. Information Statement. Subject to the accuracy of the
representations of Buyer in Section 6.7, the information statement to be
sent to stockholders of CenterCore pursuant to Section 14(c) of the
Exchange Act (such information statement as amended or supplemented, the
"Information Statement") in connection with the written majority consent
of CenterCore Stockholders approving the transactions contemplated by
this Agreement (the "CenterCore Consent") shall not, on the date the
Information Statement is first mailed to CenterCore's stockholders or at
the time of the effectiveness of CenterCore Consent, contain any
statement which, at such time and in light of the circumstances under
which it shall be made, is false or misleading with respect to any
material fact, or shall omit to state any material fact necessary in
order to make the statements therein not false or misleading. If at any
time prior to the effectiveness of CenterCore Consent any event relating
to Seller or any of their respective affiliates, officers or directors
should be discovered by Seller which should be set forth in a supplement
to the Information Statement, Seller will promptly inform Buyer.
Notwithstanding the foregoing, Seller makes no representation or
warranty with respect to any information supplied by Buyer which is
contained in any of the Information Statement. The Information
Statement shall comply in all material respects as to form and substance
with the requirements of the Securities Act of 1933 (the "Securities
Act"), the Exchange Act and the rules and regulations promulgated
thereunder.
c. Inter-Company Relationships. All services rendered by Seller
or any Affiliate of Seller to the Business have been recorded in the
accounts of the Business at their full value. All goods sold by Seller
or any Affiliate of Seller to the Business, and all goods sold by the
Business to Seller or any Affiliate of Seller, have been accounted for
as if they were transferred in arm's length transactions. There is no
rental charged by Seller to the Business for any real property. Seller
and its Affiliates have provided no services to the Business since the
Financial Statement Date except as, and to the extent, set forth on
Schedule 4.8(c).
Section 4.9. Permits and Approvals. Schedule 4.9 contains a true
and correct description of all material licenses, permits, approvals,
authorizations, consents and registrations pertaining to the Business
and the Purchased Assets issued in favor of Seller, all of which are in
full force and effect, and the Business is currently being operated in
material compliance with the terms of each of the foregoing.
Section 4.10. Compliance with Law. Seller has complied with each,
and is not in violation of any material law, ordinance or governmental
rule or regulation to which the Business or the Purchased Assets are
subject and has not failed to obtain, or to adhere to the requirements
of, any license, permit or authorization necessary to the ownership of
the Purchased Assets or the operation of the Business.
Section 4.11. Compliance with Environmental Laws. With respect to
the Business, the Purchased Assets and the Leased Real Property: (a)
Seller has complied with each, and is not in violation of any material
federal, state or local law, statute, regulation, permit provision or
ordinance, relating to the use, generation, handling, storage,
transportation, release, treatment or disposal of chemicals, toxic
substances, solid wastes, hazardous wastes and hazardous substances (the
"Environmental Laws"); provided, however, that the foregoing
representation as to compliance with Environmental Laws shall not
include any representation as to violations of Environmental Law by
Seller occasioned solely by Seller's failure to remediate any
environmental condition caused by Third Parties which existed prior to
Seller's occupancy of the relevant premises (the "Pre-Existing
Conditions"); (b) Seller has obtained and complied with all necessary
permits and other approvals, including all necessary air and water
permits and interim status under the Reserve Conservation and Recovery
Act, as amended ("RCRA"), necessary to store, treat, dispose of and
otherwise handle hazardous wastes and hazardous substances and have
reported, to the extent required by any Environmental Laws and as set
forth on Schedule 4.11, all past and present sites owned, leased or
operated by them where hazardous wastes or hazardous substances, if any,
have been treated, stored or disposed; and (c) to the best of Seller's
knowledge, there are no Pre-Existing Conditions, no locations at any
facilities owned, leased or operated by Seller where hazardous wastes or
hazardous substances have entered into the soil, surface water,
groundwater or air; there are no on-site or off-site locations to which
Seller has transported chemicals, toxic substances, hazardous wastes or
hazardous or regulated substances or arranged for their transportation
from facilities owned, leased or operated by Seller, which site is the
subject of any federal, state or local enforcement action or other
investigation under any Environmental Laws, which may lead to claims
against Seller or Buyer for clean-up costs, remedial work, damages to
natural resources or for personal injury claims, including, but not
limited to, claims under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"). To the
best of Seller's knowledge, no polychlorinated biphenyls or substances
containing polychlorinated biphenyls are present on facilities owned,
leased or operated by Seller in connection with the Business or the
Purchased Assets, and no asbestos or materials containing asbestos are
present on facilities owned, leased or operated by Seller in connection
with the Business or the Purchased Assets. No portion of the Purchased
Assets or the Leased Real Property constitutes any of the following
"environmentally sensitive areas": (1) a wetland or other "water of the
United States" for purposes of Section 404 of the federal Clean Water
Act, 33 U.S.C. (Section Mark)1344, or any similar area regulated under
any state law; (2) a 100-year floodplain; or (3) a portion of the coastal
zone for purposes of the federal Coastal Zone Management Act, 16 U.S.C.
(double section mark)1451-1464. The Purchased Assets and the Leased Real
Property are free from the presence of radon gas or the presence of the
radioactive decay products of radon.
Section 4.12. Litigation. Except as set forth on Schedule 4.12, no
litigation, arbitration, investigation or other proceeding of or before
any court, arbitrator or governmental or regulatory official, body or
authority is pending or, to the knowledge of Seller, threatened against
Seller with respect to the Business or any of the Purchased Assets or
the transactions contemplated by this Agreement or the Seller Collateral
Agreements, and Seller knows of no basis for any such litigation,
arbitration, investigation or proceeding. Seller is not a party to or
subject to the provisions of any judgment, order, writ, injunction,
decree or award of any court, arbitrator or governmental or regulatory
official, body or authority which affects the Business or the Purchased
Assets or their operation. To the best of Seller's knowledge, Seller
has not made any oral or written warranties with respect to the quality
of, or absence of defects in, the products or services which it has sold
through its conduct of the Business, except with respect to Inventory
sold in the ordinary course of business in accordance with past
practices, and there are no claims pending or threatened against Seller
with respect thereto. Seller has not been required to pay direct,
incidental or consequential damages to any person in connection with its
conduct of the Business or its ownership or control of any of the
Purchased Assets.
Section 4.13. Absence of Changes. Since September 30, 1994 (the
"Financial Statement Date") and the date hereof, except as set forth on
Schedule 4.13, there has not been:
a. Any material change in the Condition, except changes in the
ordinary course of business, none of which individually or in the
aggregate has been or will be prior to the Closing materially adverse to
the Business or the Purchased Assets or could materially affect the
Condition;
b. Any damage, destruction or loss relating to the Business or
the Purchased Assets, whether or not covered by insurance or any other
event or condition which has had or would have a material adverse
effect, in the aggregate, on the assets included within the Purchased
Assets or on the Condition;
c. Any claims relating to the Business or the Purchased Assets
not covered by applicable policies of liability insurance within the
maximum insurable limits of such policies;
d. Any cancellation of supply contracts or purchase orders
relating to the Business;
e. Any deterioration in the financial or competitive prospects of
Seller;
f. Any declaration, setting aside or payment of any dividend or
other distribution in respect of any of the Company's or any
Subsidiary's shares of stock, or any direct or indirect redemption,
purchase or other acquisition of any such shares; or
g. Any increase in the compensation payable or to become payable
by the Company or any Subsidiaries to any of its officers, employees or
agents, or any known payment or arrangement made to or with any thereof.
Section 4.14. Contracts, Leases, Etc. Except as listed and
described on Schedule 4.14 attached hereto, Seller is not, with respect
to the Business or the Purchased Assets, a party to any written or oral
or in any way bound by any:
a. agreement or commitment with any present or former
shareholder, director, officer, employee or consultant or for the
employment of any person, including any consultant;
b. collective bargaining or other agreement, commitment or
arrangement with any labor union or other representative of employees;
c. agreement or commitment for the future purchase of, or payment
for, equipment, supplies or products which obligates Seller to purchase
supplies or products not limited as to quantity or at a specified price
unrelated to the market price and which is not cancelable on thirty (30)
days notice or less without penalty; or for the performance of services
by a third party which involves in any one case Five Thousand Dollars
($5,000.00) and is not cancelable on thirty (30) days notice or less
without penalty;
d. agreement or commitment to sell or supply products or to
perform services which obligates Seller to sell products or perform
services on terms not limited as to quantity but limited as to price
which is not cancelable on thirty (30) days notice or less without
penalty;
e. representative, distribution, purchase or sales agency
agreement, contract or commitment;
f. lease or sublease under which Seller is either lessor,
sublessor, lessee or sublessee;
g. note, debenture, mortgage, pledge, guaranty charge, security
agreement, bond, conditional sale agreement, equipment trust agreement,
letter of credit agreement, loan agreement or other contract or
commitment for borrowing or lending of money or guarantying or acting as
surety for the same (including, without limitation, loans to or from
officers, directors or any member of their immediate families),
agreement or arrangements for a line of credit or guarantee, pledge or
undertaking of the indebtedness of any other person;
h. agreement, contract or commitment for any charitable or
political contribution;
i. agreement, contract or commitment for any capital expenditure
in excess of One Thousand Dollars ($1,000.00);
j. agreement, contract or commitment limiting or restraining it
from engaging or competing in any lines of business with any person;
k. license, franchise, distributorship or other similar
agreement, including those which relate in whole or in part to any
patent, trademark, trade name, service mark or copyright or to any
ideas, technical assistance or other know-how of or used by it in the
operation of the Business;
l. agreement, contract or commitment in respect of bonus,
deferred compensation, profit sharing, stock purchase, stock option,
pension, retirement, long-term disability, hospitalization, insurance or
similar material plans providing employee benefits;
m. other agreement requiring payments or other consideration by
or from Seller in excess of Five Thousand Dollars ($5,000.00) during the
remainder of its term; or
n. agreement, contract or commitment for the advertisement,
display or promotion of any product or services related to the Business
or any of the Purchased Assets; or
o. agreement, contract or commitment for the employment for any
period of time whatsoever, or in regard to the employment, or
restricting the employment, of any employee of Seller or any other
person;
p. other material agreement, contract or commitment not made in
the ordinary course of business.
(All of the foregoing agreements, contracts, commitments, leases and
other documents and undertakings being called the "Contracts").
Each of the Contracts is in full force and effect and is valid and
enforceable in accordance with its terms; and to Seller's knowledge, the
parties thereto are in compliance with the provisions thereof; to
Seller's knowledge, no party is in default in the performance,
observance or fulfillment of any obligation, covenant or condition
contained therein and no event has occurred which with or without the
giving of notice or lapse of time, or both, would constitute a default
thereunder; and Seller's rights under the Contracts listed on Schedule
2.4 are transferable by Seller to Buyer without restriction (except for
the approvals and consents listed on Schedule 4.4). None of the
Contracts contains any provisions which would cause Buyer to be liable
to the other party thereto for any amount (or any increased price for
goods or services being provided by the other party thereto) in the
event Buyer either does not assume such Contract from Seller or does
assume such Contract from Seller and thereafter terminates such
Contract, or, in the case of a supply contract with a vendor, reduces
purchases from such vendor in comparison with past purchases by Seller.
None of the terms or provisions of any of the Contracts includes a
restriction on Seller's ability to compete. Except as specified on
Schedule 4.14, since May 1, 1993, neither Seller nor Parent has been
required, at any time, to give any performance or completion bond or to
give any guaranty or surety with respect to any of the products sold,
services performed or contracts or agreements entered into in respect of
the Business or any of the Purchased Assets, and Seller is not subject
to any liability or claim therefor or for the renegotiation of any
contract or agreement to which it is now or has been a party.
Section 4.15. Product and Service Warranties. Set forth on
Schedule 4.15 are the standard forms of product and service warranties
and guarantees utilized by Seller in connection with the operation of
the Business together with all other material product and service
warranties and guarantees used by Seller in connection with the
operation of the Business. Other than as specified on Schedule 4.15,
Seller is not a party to nor is bound by any warranty or guaranty in
respect of the Business, the services or goods sold with respect thereto
or any of the Purchased Assets.
Section 4.16. Taxes. Seller has duly and timely filed with the
appropriate governmental agencies (federal, state, local and foreign)
all tax and other returns and reports of any nature required to be filed
by it, including, without limitation, all income tax, franchise tax,
gains tax, transfer tax, value added tax, unemployment compensation tax,
social security tax, withholding tax, property tax and sales and use
tax. Seller has paid, or has made sufficient provision for the payment
of, all taxes required (i) to be paid by it for all fiscal and other
applicable tax periods which have ended or (ii) to be accrued for the
portion of the current fiscal or other current applicable tax period up
to the day prior to the Closing Date. No deficiencies for any taxes
have been asserted in writing or assessed against Seller which remain
unpaid and which individually or in the aggregate are material to the
Condition.
Seller has withheld all taxes required to be withheld under all
applicable federal, state, local and foreign tax rules and regulations,
and such withholdings have either been paid to the appropriate
governmental agencies or accrued , reserved against and entered on the
books of Seller. All accrued tax liabilities of Seller are set forth on
Schedule 4.16. None of the Purchased Assets is property which Buyer
will be required to treat as being owned by any other person pursuant to
the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Except as specified on Schedule 4.16, the consolidated federal
income tax returns of Parent have never been audited. There is no
agreement, waiver, consent or other arrangement providing for the
extension of time with respect to any tax deficiency against Seller, and
no power of attorney has been granted by Seller with respect to any take
matter.
Section 4.17. Insurance. Schedule 4.17 sets forth a complete and
accurate list of all policies or binders of fire, liability, product
liability, worker's compensation, vehicular or other insurance held by
or on behalf of Seller in respect of the Business and the Purchased
Assets (specifying for each such insurance policy, except the policies
for worker's compensation and vehicular insurance, the insurer, the
policy number or covering note number with respect to binders, and each
pending claim thereunder of more than $5,000 and setting forth the
aggregate amounts paid out under each such policy through the date
hereof). Such policies and binders are valid, in full force and effect
and sufficient to protect Business and the Purchased Assets against all
insured hazards. Seller is not in default with respect to any provision
contained in any such policy or binder and Seller has not failed to give
any notice or present any claim of which it has notice under any such
policy or binder in a timely fashion. Seller has not received or given
a notice of cancellation or non-renewal with respect to any such policy
or binder. Seller has no knowledge of any material inaccuracy in any
application for such policies or binders, any failure to pay premiums
when due or any similar state of facts which might form the basis for
termination of any such insurance. Seller has no knowledge of any state
of facts or the occurrence of any event that is reasonably likely to
form the basis for any claim against Seller not fully covered by the
policies referred to on Schedule 4.17. Seller has not received written
notice from any of its insurance carriers that any insurance premiums
will be materially increased in the future, that any material equipment
or methods of operation of Seller need to be changed, or that any
insurance coverage listed on Schedule 4.17 will not be available in the
future on substantially the same terms as now in effect.
Section 4.18. Employees. Schedule 4.18 lists each of the employees
of Seller providing services to the Business (collectively, the
"Employees") and the annualized aggregate compensation as salary, wages
and bonuses of each such Employee from January 1, 1994 through December
31, 1994 and from January 1, 1995 through March 31, 1995 (or, if such
Employee was hired after January 1, 1994, for the periods beginning on
the date of hire). In addition, Schedule 4.18 lists (i) the base
salary, as currently in effect, for each of the Employees, (ii) the
bonus arrangements, if any, currently in effect for each of the
Employees, (iii) the commission arrangements, if any, currently in
effect for each of the Employees and (iv) the date on which the most
recent salary increase went into effect for each of the Employees and
the amount of each such increase. No Employee or former employee of
Seller has any right of recall.
Section 4.19. Strikes, Picketing, etc; Overtime, Back Wage,
Vacation, Discrimination, and Occupational Safety Claims. Except as set
forth on Schedule 4.19, there has been no strike, slowdown, picketing,
work stoppage or labor dispute by any union or other group of employees
of Seller in connection with the Business for three years, and to the
knowledge of Seller, no such action or dispute has been threatened.
Seller has not made any loan or given anything in value, directly or
indirectly, to any officer, official, agent or representative of any
labor union or group of employees (other than regular salaries and
wages). Except as set forth on Schedule 4.19, there are no outstanding
claims against Seller (whether under federal, state or foreign law,
under any employment agreement, union labor contract or otherwise)
asserted by any present or former employee of Seller on account of or
for (i) overtime pay, other than overtime pay for work done during the
current payroll period; (ii) wages or salary for any period other than
the current payroll period; (iii) any amount of vacation pay or pay in
lieu of vacation time, other than vacation time or pay in lieu thereof
earned in or in respect of the current fiscal year; or (iv) any
violation of any statute, ordinance or regulation relating to minimum
wages or maximum hours of work. No Person or party has asserted or, to
Seller's knowledge, threatened to assert any claims against Seller under
or arising out of any statute, ordinance or regulation relating to
discrimination, harassment, or occupational safety in employment or
employment practices (including, without limitation, the Occupational
Safety and Health Act of 1970, as amended, the Fair Labor Standards Act,
as amended, Title VII of the Civil Rights Act of 1964, as amended, or
the Age Discrimination in Employment Act of 1967, as amended).
Section 4.20. Pension and Other Employee Benefit Plans. There is
set forth or identified in Schedule 4.20 all of the plans, funds,
policies, programs, arrangements or understandings sponsored or
maintained or to which a contribution is or has been required, by Seller
with respect to the Business which provide any employee or Seller (or
any dependent or beneficiary of any such employee) with (i) retirement
benefits; (ii) severance or separation from service benefits; (iii)
incentive, performance, stock, share appreciation or bonus awards; (iv)
health care benefits; (v) disability income or wage continuation
benefits; (vi) supplemental unemployment benefits; (vii) life insurance,
death or survivor's benefits; (viii) accrued sick pay or vacation pay;
or (ix) any other plan, fund or material program which is an "employee
benefit plan" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (the
foregoing being collectively called ("Employee Benefit Plans"). Except
as identified on Schedule 4.20, none of such Employee Benefit Plans is
an "employee benefit pension plan" or a "pension plan" as defined in
Section 3(2) of ERISA. Except to the extent required under Code section
4980B, no Employee Benefit Plan provides, or has an obligation to
provide, benefits to any former employee. Buyer has been provided, with
respect to each Employee Benefit Plan, copies of the following: (i)
current plan and trust document, (ii) summary plan description, (iii)
latest financial statement, (iv) Forms 5500 and 990 for each of the last
three years and (v) insurance contract, annuity contract or other
funding agreement or arrangement. Seller has not made, or agreed to
make, any change or amendment to any Employee Benefit Plan which would
increase the cost of such Employee Benefit Plan. As to any Employee
Benefit Plan identified in Schedule 4.20, each of the following is true:
(i) all amounts due from Seller as contributions to the date hereof have
been paid or accrued on their books; (ii) Seller and any Affiliated
Company (as hereinafter defined) have performed or satisfied all
material obligations required to be performed or satisfied by them
under, and are not in default under or in violation of, any Employee
Benefit Plan and, to the best of Seller's knowledge, no other party is
in default thereunder or in violation thereof; (iii) Seller and any
Affiliated Company are in compliance in all material respects with the
requirements (including reporting and disclosure requirements applicable
to them) prescribed by all statutes, orders or governmental rules or
regulations applicable to the Employee Benefit Plans, including, but not
limited to, ERISA and the Code; (iv) neither Seller nor any Affiliated
Company or any other "disqualified person" or "party in interest" (as
defined in section 4975 of the Code and section 3(14) of ERISA,
respectively) has engaged in any "prohibited transaction," as such term
is defined in section 4975 of the Code or section 406 of ERISA, which
could subject any Employee Benefit Plan (or its related trust), seller
or any Affiliated Company, Buyer, any shareholder, officer, director,
partner or employee of Seller, any Affiliated Company or Buyer, or any
trustee, administrator or other fiduciary of any Employee Benefit Plan
to the tax or penalty imposed under section 4975 of the Code or section
502(i) of ERISA or any liability for breach of fiduciary duty; and (v)
there are no material actions, suits or claims pending (other than
routine claims for benefits) or, to the best of Seller's knowledge,
threatened, against any Employee Benefit Plan or against the assets of
any Employee Benefit Plan. For purposes of this Section 4.23,
"Affiliated Company" shall mean any member (whether or not incorporated)
of a group which is part of a controlled group of corporations or under
common control (within the meaning of the regulations promulgated under
Section 414 of the Code) and of which Seller is a member. Neither
Seller nor any affiliate thereof maintains, participates in, or
contributes to, or has ever maintained, participated in, or contributed
to any "multiemployer plans" as defined in Section 3(37) of ERISA or any
other plan subject to Title IV of ERISA.
Section 4.21. Contracts with Affiliates. There are no contracts,
obligations or arrangements between Seller and any director, officer,
shareholder or employee of Seller or any Affiliate of any such person
applicable to the Business or the Purchased Assets except for those
identified on Schedule 4.21.
Section 4.22. Commission. Neither Seller nor anyone on its behalf
has made any agreement or taken any action which may cause anyone (other
than Stump & Company, for which Seller is solely responsible) claiming
through Seller to become entitled to a commission as a result of the
sale of the Purchased Assets pursuant to this Agreement.
Section 4.23. Leased Real Property. Seller operates the Business
only from the Leased Real Property. All real property taxes and all
fees to applicable governmental authorities in respect of the Leased
Real Property or the operation of the Business thereon which are
currently due and which are payable by Seller have been paid. There is
no condemnation proceeding pending or, to the best of Seller's
knowledge, threatened with respect to any portion of the Leased Real
Property.
Section 4.24. Customers and Suppliers. Schedule 4.24 contains a
complete and correct list of the twenty (20) largest customers of Seller
and the twenty (20) largest suppliers of Seller (by dollar volume per
annum). Seller has no material dispute with any such customer or
supplier.
Section 4.25. Representations Complete and Accurate. The
representations and warranties contained in this Asset Purchase
Agreement, in the Schedules and Exhibits attached hereto or referred to
herein or in any Seller Collateral Agreement contemplated hereby, are
true, complete and accurate in all material respects. None of the
information contained in such representations and warranties contains
any untrue statement of a material fact or fails or omits to state a
material fact necessary to make the statements contained herein or
therein not misleading in light of the context in which such statements
were made.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES RESPECTING BUYER
Buyer represents and warrants to Seller as follows:
Section 5.1. Organization. Buyer is a corporation duly formed,
validly existing and in good standing under the laws of the State of
Delaware.
Section 5.2. Due Authorization. The execution and delivery of this
Agreement by Buyer and the purchase of the Purchased Assets and
performance of the obligations of Buyer contemplated hereby and by the
Buyer Collateral Agreements, have been duly and validly authorized by
all necessary corporate action. Buyer has the right, power and authority
to enter into and perform this Agreement and the Buyer Collateral
Agreements and this Agreement constitutes, and the Buyer Collateral
Agreements will, upon their execution constitute, the valid and binding
obligations of Buyer, enforceable against Buyer in accordance with their
terms.
Section 5.3. Conflict With Other Instruments. The execution,
delivery and performance of this Agreement and the Buyer Collateral
Agreements by Buyer will not contravene any provision of Buyer's
articles of incorporation or by-laws and will not result in a breach of,
or constitute a default under, any agreement or other document to which
Buyer is a party or by which Buyer is bound, or any decree, order or
rule of any court or governmental agency or any provision of applicable
law which is binding on Buyer.
Section 5.4. Government and Third-Party Approvals. No consent by,
approval or authorization of or filing, registration or qualification
with any federal, state or local authority, or any corporation, person
or other entity (including any party to any contract or agreement with
Buyer) is required for the execution, delivery or performance of this
Agreement or the Buyer Collateral Agreements by Buyer or in connection
with Buyer's consummation of the transactions contemplated hereby and
thereby.
Section 5.5. Litigation. No litigation, arbitration investigation
or other proceeding of or before any court arbitrator or governmental or
regulatory official, body or authority is pending or, to the knowledge
of Buyer, threatened against Buyer or the transactions contemplated by
this Agreement or the Buyer Collateral Documents and Buyer does not know
of any basis for such litigation, arbitration, investigation or
proceeding.
Section 5.6. Commission. Neither Buyer nor anyone acting on its
behalf has made any agreement or taken any action which may cause anyone
claiming through Buyer to become entitled to a commission as a result of
the purchase of the Purchased Assets pursuant to this Agreement.
Section 5.7. Information Statement. The information supplied by
Buyer for inclusion in the Information Statement shall not, on the date
the Information Statement (or any amendment thereof or supplement
thereto) is first mailed to CenterCore's stockholders or at the time of
the effectiveness of the CenterCore Consent contain any statement which,
at such time and in light of the circumstances under which it shall be
made, is false or misleading with respect to any material fact, or shall
omit to state any material fact necessary in order to make the
statements made therein not false or misleading; or omit to state any
material fact necessary to correct any statement in any earlier
communication with respect to the CenterCore Consent which has become
false or misleading. If at any time prior to the effectiveness of the
CenterCore Consent any event relating to Buyer or any of its affiliates,
officers or directors should be discovered by Buyer which should be set
forth in a supplement to the Information Statement, Buyer shall promptly
inform Seller. Notwithstanding the foregoing, Buyer makes no
representation or warranty with respect to any information supplied by
Seller which is contained in the Information Statement.
Section 5.8. Representations Complete and Accurate. The
representations and warranties contained in this Asset Purchase
Agreement, in the Schedules and Exhibits attached hereto or referred to
herein or in any Buyer Collateral Agreement, are true, complete and
accurate in all material respects. None of the information contained in
such representations and warranties contains any untrue statement of a
material fact or fails or omits to state a material fact necessary to
make the statements contained herein or therein not misleading in light
of the context in which such statements were made.
ARTICLE 6
CERTAIN COVENANTS AND OTHER MATTERS
Section 6.1. Corporate Examinations and Investigations. Between the
date hereof and the Closing Date, Seller agrees to cooperate (and to
cause its officers, employees, consultants, agents, attorneys and
accountants to cooperate) fully with Buyer and the Financing Source and
with their respective counsel, accountants and representatives in the
conduct of their due diligence investigation of the Business from legal,
environmental, insurance, valuation and solvency perspectives and, in
connection with such due diligence investigation, to grant to purchaser
and the Financing Source and such representatives access to the
properties, records and, with the prior consent of Seller (which shall
not be unreasonably withheld), employees, customers, creditors, vendors
and suppliers of the Business). Buyer will complete its due diligence
investigation as promptly as reasonably practicable. No investigation
by Buyer shall diminish any of the representations, warranties,
covenants or agreements of Seller under this Agreement or reduce Buyer's
right to pursue such remedies at law or hereunder as it would otherwise
have in the absence of having conducted such investigation.
Section 6.2. Confidentiality Agreement. Unless otherwise agreed to
in writing by Seller or as otherwise required by law, Buyer agrees for
itself, its agents and employees (i) to keep all Proprietary Information
(as hereafter defined) confidential and not to disclose or reveal any
Proprietary Information to any person other than its officers,
directors, affiliates, employees, attorneys, accountants, other agents
and representatives who are participating in the evaluation of the
Business and the transactions contemplated hereby or who otherwise need
to know the Proprietary Information for the purpose of evaluating the
Business and/or the transactions contemplated hereby (including the
Financing Source); and (ii) not to use the Proprietary Information for
any purpose other than in connection with the evaluation and/or
consummation of the transactions contemplated hereby. As used herein,
the term "Proprietary Information" means confidential information about
the Business furnished to Buyer by Seller; provided, however, that
Proprietary Information shall not include information which (i) is or
becomes generally available to the public other than as a result of a
disclosure by Buyer in violation of this Agreement, (ii) was available
to Buyer on a non-confidential basis prior to its disclosure by Seller
or (iii) becomes available to Buyer on a non-confidential basis from a
person other than Seller who is not otherwise bound by a confidentiality
agreement with Seller. The obligations of Buyer under this Section 6.2
shall terminate upon the earlier of (i) the Closing Date or (ii) five
years from the date of this Agreement. If the Closing is not
consummated, Buyer will, upon the request of Seller, destroy or return
to Seller all Proprietary Information which is in writing or can
otherwise be destroyed or returned.
Section 6.3. Restriction on Certain Discussions and Actions. Seller
agrees that until the Closing Date it will refrain, and will direct and
cause its officers, directors, affiliates, employees, attorneys,
accountants and other agents and representatives to refrain, from taking
any action, directly or indirectly, to solicit, encourage, initiate or
participate in any way in discussions or negotiations with, or furnish
any information with respect to the Business or the Purchased Assets to,
any person or other entity (other than Buyer and its representatives) in
connection with any possible or proposed sale of capital stock, sale of
a substantial portion of the assets, merger or other business
combination involving the Business or the acquisition of an equity
interest in the Business or the Purchased Assets or any similar
transaction involving the Business or the Purchased Assets. Seller
agrees that it will not (without Buyer's prior written consent, which
consent shall not be unreasonably withheld) disclose this Agreement or
the matters referred to herein to any other prospective acquirer of the
Business until the Closing Date.
Section 6.4. Environmental Investigation.
a. Seller acknowledges that Buyer intends to commission an
investigation of (i) Seller's compliance with Environmental Laws (as
defined in Section 4.11) and (ii) the presence of hazardous wastes and
hazardous substances (as defined in Section 4.12) at the facilities
owned or leased by Seller.
b. Seller will comply with any reasonable request for information
made by Buyer or its agents in connection with any such investigation.
Seller represents and warrants that any response to any such request for
information will be full and complete.
c. Seller will assist Buyer and its agents in obtaining any
records pertaining to the facilities owned or leased by Seller in
connection with such an investigation.
d. Seller will afford Buyer and its agents access to all areas of
the facilities owned or leased by Seller at reasonable times and in a
reasonable manner in connection with such an investigation.
e. In the event that Buyer commissions such an investigation and,
as the result of such an investigation or for any other reason, Buyer
believes that Seller breached or may have breached any representation or
warranty contained in Section 4.11 or Section 4.12, Buyer shall have the
right, but not the obligation, to terminate this Agreement by providing
to Seller written notice of the termination. Upon a termination of this
Agreement by Buyer pursuant to the foregoing provision, this Agreement
shall become void and have no effect; provided that Buyer's right to
pursue all legal remedies for breach of contract and damages shall
survive such termination unimpaired.
f. Should Buyer commission such an investigation, that
investigation, and any information which Buyer discovers as a result
thereof, will have no effect upon the representations or warranties made
by Seller to Buyer in this Agreement and will not reduce Buyer's right
to pursue such remedies at law or hereunder as it would otherwise have
in the absence of having undertaken such an investigation.
g. Should Buyer commission such an investigation, the cost of it
shall be borne by Buyer.
Section 6.5. Financing. Buyer's obligation to proceed with the
Closing is subject to Buyer having obtained, by April 28, 1995, on terms
and conditions acceptable to it, a commitment or commitments for
financing, in the form of a senior debt revolving credit facility for up
to, but not in excess of, $8,000,000 (the "Senior Debt"). Such Senior
Debt shall be obtained from a financial institution or institutions
acceptable to Buyer. Promptly following receipt by Buyer of such
commitment or commitments, Buyer shall give written notice of such fact
and copies of such commitments to Seller. In the event that Buyer shall
not have obtained, by April 28, 1995, such commitment or commitments,
Buyer shall deliver written notice to Seller to such effect, and Buyer
and Seller shall each have fifteen (15) business days to deliver written
notice to the other of its election to terminate this Agreement, and
upon the delivery of such notice the obligations of Seller and Buyer
hereunder shall terminate, and this Agreement shall become null and void
and have no further force and effect, except as provided in Sections
3.1(d) and 6.2. In the event that neither Seller nor Buyer delivers
notice of an election to terminate pursuant to this Section 6.5 within
the time period specified, the right of each party to terminate this
Agreement pursuant to the provisions of this Section 6.5 shall cease.
Section 6.6. Conduct of Business Prior to the Closing. Between the
date of this Agreement and the Closing, except as set forth on Schedule
6.6:
a. Seller shall conduct its business, operations, activities and
practices (including, without limitation, its maintenance and management
of Cash) in the usual and ordinary course, consistent with its past
practices;
b. Seller shall not take any action which would render untrue as
of the Closing Date any of the representations or warranties of Seller
herein contained if made on the Closing Date, and Seller shall not omit
to take any action the omission of which would render untrue as of the
Closing Date any such representation and warranty as if made on the
Closing Date; provided, however, the foregoing covenant shall not be
deemed breached by actions taken or omitted to be taken by third parties
(e.g., initiation of litigation by third party against Seller) or
actions taken by Seller in its reasonable commercial judgment to cause
the representations and warranties to be accurate at Closing or
otherwise to preserve the Business and Purchased Assets being acquired
hereunder;
c. Seller shall preserve its business organization intact, keep
available to itself and to Buyer the present services of its employees;
preserve for itself and Buyer the goodwill of Seller's suppliers and
customers and others with whom business relationships pertaining to the
Business exist; maintain its tangible property pertaining to the
Business in the same condition as it now exists, ordinary wear and tear
excepted; maintain the insurance policies identified on Schedule 4.17
and the plans specified on Schedule 4.20 in full force and effect; and
maintain in full force and effect all agreements, licenses, permits,
authorizations and approvals necessary for the operation of the
Business.
d. Seller shall not grant or otherwise make, or agree to grant or
otherwise make, any increase in the compensation payable or to become
payable by it to any employees of the Business.
e. Seller shall not sell or dispose of any of its assets used or
useful in the operation of the Business (otherwise than in the ordinary
course of business consistent with past practice);
f. Seller shall not enter into any agreement not in the ordinary
course of business; and
g. Seller shall not cancel, waive or modify any claims or rights
owned by, or running in favor of, it, which claims or rights will be
transferred to Buyer.
h. Seller shall use its best efforts to obtain the consent of
each contracting party and governmental authority who must consent to
the assignment of any contract, agreement, lease, purchase order, sales
order, permit or license which is to be assigned to Buyer in order
effectively to transfer all of the Purchased Assets; provided, however,
the foregoing shall not obligate Seller to engage in litigation or
expend monies which are not due and payable under the Contracts or other
existing obligations of Seller. Seller promptly will inform Buyer if
any such contracting party or governmental authority refuses so to
consent.
Section 6.7. Capital Expenditures; Dispositions. Buyer and Seller
covenant and agree that any capital expenditures or dispositions of
Fixed Assets by Seller shall require the joint approval of both Buyer
and Seller.
Section 6.8. Bulk Sales. Seller shall have provided the requisite
notice to creditors under and otherwise complied with the provision of
the Ohio Bulk Sales Law.
Section 6.9. Consents, Further Assurances. Consistent with the
terms and conditions hereof, each party hereto will use its best efforts
to execute and deliver such other documents and take such other actions
as reasonably requested by the other party to fulfill the conditions
precedent to the obligation of the other party to consummate the
purchase and sale of the Purchased Assets and assumption of the Assumed
Liabilities, or as the other party hereto may reasonably request in
order to carry out this Agreement and the transactions contemplated
hereby. Buyer and Seller shall use their best efforts and will
cooperate with each other to the extent reasonably necessary to obtain
all consents, approvals and waivers, if any, from third parties required
to consummate the transactions contemplated hereby or which, if not
obtained, would materially adversely affect the Condition or the
operation of the Purchased Assets.
ARTICLE 7
CONDITIONS TO THE OBLIGATION OF BUYER
The obligation of Buyer to proceed with the Closing under this
Agreement is subject to the satisfaction, on or prior to the Closing, of
each of the following conditions, each of which may be waived by Buyer:
Section 7.1. Representations and Warranties True. The
representations and warranties of Seller contained in this Agreement and
the information contained in the Schedules to this Agreement and any
closing documents delivered by Seller in connection with this Agreement
shall have been true and correct in all material respects when made and
shall be true and correct in all material respects at the Closing Date
as though made at such time, and Seller shall have delivered to Buyer a
certificate to that effect, dated the Closing Date, signed by its
President.
Section 7.2. Performance of Obligations. The obligations of each
of Seller to be performed by it on or before the Closing pursuant to the
terms of this Agreement shall have been duly performed and complied with
in all material respects and, at the Closing, Seller shall have
delivered to Buyer a certificate, dated the Closing Date, to that effect
signed by its President.
Section 7.3. Consents. All consents, approvals and waivers from
third parties (including, without limitation, lenders) and government
agencies required to consummate the transactions contemplated hereby, or
as specified on Schedule 4.4, or requested by Buyer in connection with
the consummation of the transactions contemplated hereby, shall have
been obtained.
Section 7.4. Absence of Litigation. There shall not be any
litigation or proceeding, pending or threatened, (including, without
limitation, any litigation or proceeding arising under antitrust or
securities laws), to restrain or invalidate the sale and purchase of the
Purchased Assets or the other transactions contemplated herein, and no
action or proceeding shall be pending or, to the knowledge of Seller,
threatened against Seller or the Purchased Assets, at law or in equity,
before any federal or state court or governmental commission or in
arbitration or by or before any administrative agency, which action or
proceeding would adversely affect the Condition, nor shall any
judgments, consents, injunctions or any other judicial or administrative
mandates be outstanding against Seller which would adversely affect the
Condition.
Section 7.5. Certified Resolutions. Buyer shall have received a
certified copy of the resolutions of the Board of Directors and of the
shareholders of Seller authorizing and approving the execution and
delivery of this Agreement and the Seller Collateral Agreements and the
consummation of the transactions contemplated herein and therein.
Section 7.6. Certificates of Good Standing. Buyer shall have
received good standing certificates of Seller dated not more than ten
(10) days prior to the Closing Date from the Secretary of State of the
States of Delaware and New Jersey and any other jurisdiction where
Seller conducts the Business and qualification to do business as a
foreign corporation is necessary with respect thereto.
Section 7.7. Availability of Financing. The Financing Source shall
have advanced funds to Buyer, on or prior to the Closing Date, in the
amount or amounts specified in the Financing Commitment and otherwise on
the terms and conditions specified therein; provided, however, that the
refusal of the financial institution or institutions to make such
advance or advances shall excuse Buyer of its obligation to proceed with
the Closing under this Agreement only if such refusal is not the result
of a failure by Buyer to have complied with and satisfied the terms of
the commitment or commitments which failure was not occasioned by
Seller's default hereunder.
Section 7.8. Delivery of Specified Documents. Seller shall have
delivered to Buyer all of the documents and instruments specified in
Section 3.1(b)(i) hereof on or prior to the Closing Date.
Section 7.9. ISRA Compliance. Seller shall have received from the
Industrial Site Evaluation Element or its successor of the New Jersey
Department of Environmental Protection and Energy or its successor
(NJDEPE"), on or before the Closing Date, either: (i) a non-
applicability letter; (ii) a de minimis quantity exemption; (iii) an
unconditional approval of Seller's negative declaration; or (iv) an
unconditional approval of Seller's cleanup plan or an executed
remediation agreement, in either case acceptable to Seller, (a "Clean-
up/Remediation Plan") for which Seller shall promptly apply pursuant to
the Industrial Site Recovery Act, N.J.S.A. 13:1K-6 et seq., the
regulations promulgated thereunder and any amending or successor
legislation and regulations ("ISRA").
Section 7.10. Opinion of Counsel for Seller. Seller shall have
delivered to Buyer an opinion of their counsel, Pepper, Hamilton &
Scheetz, dated the date of the Closing and satisfactory to Buyer and its
counsel, to the effect that:
a. Seller is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and Seller
is duly qualified and in good standing as a foreign corporation
authorized to transact business and to own and lease property in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties owned or leased by it requires
such qualification in order to avoid liability or disadvantage;
b. Seller has the right, power and authority to enter into this
Agreement and to sell, assign, transfer, convey and deliver the
Purchased Assets pursuant to this Agreement and to perform its
obligations under this Agreement and Seller has the right, power and
authority to enter into the Seller Collateral Agreements and to perform
its obligations thereunder;
c. The execution and delivery by Seller of this Agreement and the
Seller Collateral Agreements and the performance by Seller of the
transactions contemplated hereunder and thereunder have been duly
authorized by all necessary corporate action, including shareholder
approval, and do not and will not contravene any provisions of Seller's
articles of incorporation or by-laws or to knowledge of counsel any
instrument or agreement to which Seller is a party or which is binding
on the assets of Seller; and this Agreement and the Seller Collateral
Agreements have been duly executed and represent the valid and binding
obligations of Seller, enforceable against Seller, in accordance with
their terms, subject to bankruptcy, reorganization, moratorium,
insolvency or other laws and decisions affecting creditors' rights
generally and to general equity principles;
d. The instruments of transfer delivered by Seller to Buyer at
the Closing have been duly authorized and executed by and are binding
and enforceable against Seller in accordance with their respective
terms, subject to bankruptcy, reorganization, moratorium, insolvency or
other laws and decisions affecting creditors' rights generally and to
general equity principles, and are effective to transfer and convey good
and valid title to and assign all of Seller's right, title and interest
in and to the Purchased Assets;
e. The execution and delivery by Seller of this Agreement and the
Seller Collateral Agreements and, to the knowledge of counsel, the
performance by Seller of the transactions contemplated hereunder and
thereunder do not conflict with any law, statute, regulation or court
order;
f. Such counsel has not been engaged by Seller to devote
substantive attention in the form of legal representation of Seller with
respect to any order, notice, claim, litigation, proceeding or
investigation by or before any court or governmental agency pending
against or directly affecting Seller;
g. Such counsel has no knowledge, without having undertaken an
independent investigation, of any action or proceeding instituted or
threatened by or before any court or other governmental body to restrain
or prohibit or to obtain damages or other relief in connection with this
Agreement, the Seller Collateral Agreements or the transactions
contemplated hereby and thereby; and
h. Parent has the right, power and authority to enter into the
Joinder to this Agreement and the Guarantee Agreement and the
performance by Parent of the transactions contemplated thereunder have
been duly authorized by all necessary corporate actions, and do not and
will not contravene any provisions of Parent's Articles of Incorporation
or By-Laws or, to the knowledge of counsel, any instrument or agreement
to which Parent is a party or which is binding on the assets of Parent;
and said Joinder and Guarantee Agreement have been duly executed and
represent the valid and binding obligations of Parent, enforceable
against Parent, in accordance with their terms, subject to bankruptcy,
reorganization, moratorium, insolvency or other laws and decisions
effecting creditors rights generally and to general equity principles.
Section 7.11. Approval of Counsel. All actions, proceedings,
resolutions, instruments and documents required to carry out this
Agreement or incidental hereto and all other related legal matters shall
have been approved on the Closing Date by Louis J. Braun, Esq. counsel
for Buyer, in the exercise of his reasonable judgment, and Buyer or its
counsel shall have been furnished with such other documents as Buyer or
its counsel shall have reasonably requested.
Section 7.12. Physical Inventory. Seller shall have conducted a
physical inventory of the tangible Purchased Assets as of the Closing
Date and shall provide Buyer with a copy thereof.
Section 7.13. Parent Guarantee. Parent shall have executed and
delivered to Buyer the Parent Guarantee Agreement.
Section 7.14. Information Statement. Seller shall have
disseminated its Information Statement pursuant to Schedule 14(c) of the
Exchange Act and the rules and regulations promulgated pursuant thereto
and the requisite twenty-day period following such dissemination shall
have lapsed.
ARTICLE 8
CONDITIONS TO THE OBLIGATION OF SELLER
The obligation of Seller to proceed with the Closing under this
Agreement is subject to the satisfaction, on or prior to the Closing, of
each of the following conditions, each of which may be waived by Seller:
Section 8.1. Representations and Warranties True. The
representations and warranties of Buyer contained in this Agreement and
the information in the Schedules to this Agreement and any closing
documents delivered by Buyer in connection with this Agreement shall
have been true and correct in all material respects when made and shall
be true and correct in all material respects at the Closing Date as
though made at such time and, at the Closing, Buyer shall have delivered
to Seller a certificate to that effect, dated the Closing Date, signed
by its President.
Section 8.2. Performance of Obligations. Each of the obligations
of Buyer to be performed by it on or before the Closing pursuant to the
terms of this Agreement shall have been duly performed and complied with
in all material respects and, at the Closing, Buyer shall have delivered
to Seller a certificate to that effect, dated the Closing Date, signed
by its President.
Section 8.3. Absence of Litigation. There shall not be any
litigation or proceeding, pending or threatened (including, without
limitation, any litigation of proceeding arising under antitrust or
securities laws), to restrain or invalidate the sale and purchase of the
Purchased Assets or the other transactions contemplated herein which
would, in the judgment of Seller, made in good faith, involve expense or
lapse of time that would be materially adverse to the interests of
Seller.
Section 8.4. Execution of Certain Agreements.
a. Buyer shall execute and deliver Buyer Collateral Agreements.
Section 8.5. Opinion of Counsel for Buyer. Buyer shall have
delivered to Seller an opinion of its counsel, Louis J. Braun, Esq.
dated the date of the Closing and satisfactory to Seller and its
counsel, to the effect that:
a. Buyer is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware;
b. The execution and delivery by Buyer of this Agreement and the
Buyer Collateral Agreements and the performance by Buyer of the
transactions contemplated hereunder and thereunder have been duly
authorized by all necessary corporate action, including shareholder
approval, and do not and will not contravene any provisions of Buyer's
articles of incorporation or by-laws or to knowledge of counsel any
instrument or agreement to which Buyer is a party or which is binding on
the assets of Seller; and this Agreement and the Buyer Collateral
Agreements have been duly executed and represent the valid and binding
obligations of Buyer, enforceable against Buyer, in accordance with
their terms, subject to bankruptcy, reorganization, moratorium,
insolvency or other laws and decisions affecting creditors' rights
generally and to general equity principles; and
c. Such counsel has no knowledge, without having undertaken an
independent investigation, of any action or proceeding instituted or
threatened by or before any court or other governmental body to retrain
or prohibit or to obtain damages or other relief in connection with this
Agreement or the Buyer Collateral Agreements or the transactions
contemplated hereby or thereby.
d. The execution and delivery by Buyer of this Agreement and the
Buyer Collateral Agreements and, to the knowledge of counsel, the
performance by Buyer of the transactions contemplated hereunder and
thereunder do not conflict with any law, statute, regulation or court
order;
Section 8.6. Approval of Counsel; Corporate Matters. All actions,
proceedings, resolutions, instruments and documents required to carry
out this Agreement or incidental hereto and all other related legal
matters shall have been approved on the Closing Date by Messrs. Pepper,
Hamilton & Scheetz, counsel for Sellers, in the exercise of their
reasonable judgment, and Sellers or their counsel shall have been
furnished with such other documents as Sellers or their counsel shall
have reasonably requested.
Section 8.7. Information Statement. Seller shall have disseminated
its Information Statement pursuant to Schedule 14(c) of the Exchange Act
and the rules and regulations promulgated pursuant thereto and the
requisite twenty-day period following such dissemination shall have
lapsed.
Section 8.8. Mellon Bank. Seller shall have reached agreement with
Mellon Bank ("Mellon") in order to obtain a release of Mellon's liens on
the Purchased Assets; provided, however, if Seller shall not have given
notice of Mellon's refusal to give such agreement within ten (10) days
after Buyer's delivery of the definitive loan agreement and
intercreditor agreement for the Senior Debt Transaction, this condition
shall be deemed to have been satisfied.
Section 8.9. ISRA Compliance. Seller shall have received from the
Industrial Site Evaluation Element or its successor ("Element") of the
New Jersey Department of Environmental Protection and Energy or its
successor (NJDEPE"), on or before May 31, 1995, either: (i) a non-
applicability letter; (ii) a de minimis quantity exemption; (iii) an
unconditional approval of Seller's negative declaration; or (iv) an
unconditional approval of a Clean-up/Remediation Plan for which Seller
shall promptly apply pursuant to the Industrial Site Recovery Act,
N.J.S.A. 13:1K-6 et seq., the regulations promulgated thereunder and any
amending or successor legislation and regulations ("ISRA").
ARTICLE 9
POST-CLOSING COVENANTS OF SELLER
Section 9.1. Books and Records of Seller. Following the Closing,
Seller agrees to permit Buyer and its representatives to inspect the
books and records of Seller not included in the Purchased Assets insofar
as they relate to the Purchased Assets during regular hours and at no
expense to Seller in order for Buyer and such representatives to obtain
information relevant to the Closing Date Balance Sheet and to Buyer's
tax returns, third party claims or litigation involving Buyer, or as
otherwise reasonably required for the conduct of Buyer's business.
Seller agrees to maintain such books and records insofar as they relate
to the Purchased Assets for a period of five (5) years after the Closing
Date.
Section 9.2. Payment of Seller's Liabilities. Following the
Closing, Seller shall pay, perform and discharge as they become due, all
Retained Liabilities.
Section 9.3. Covenant Not to Compete.
a. Neither Parent nor Seller will, for a period of three (3)
years following the Closing Date (the "Restricted Period"), compete,
directly or indirectly, with Buyer in the sale, at wholesale or retail,
of the Business. The foregoing prohibition against competition shall
apply to the United States, Canada and any other country in which the
Business has been conducted since January 1, 1994.
b. Seller shall be deemed to be competing as described in
paragraph (a) hereof if Seller shall engage, directly or indirectly, in
any of the business covered thereby, whether for its own account or that
of any other person, firm, corporation, partnership or other business
entity, and whether its participation shall be as a stockholder, general
or limited partner, or investor possessing an ownership interest
exceeding one percent (1%) in any such entity, or as a principal,
consultant, agent, representative, lender or in any other capacity.
c. During the Restricted Period, neither Parent nor Seller shall,
directly or indirectly: (1) solicit, divert, take away or induce
customers (wherever located) of Buyer to avail themselves of the
services or products of others which are competitive with the Business
or (2) solicit, divert, take away or induce any employee of Buyer to
leave the employ of Buyer.
d. Neither Parent nor Seller shall communicate or divulge to, or
use for the benefit of itself or any other person, corporation, firm or
other entity, other than Buyer, any of the trade secrets, methods, know-
how, formulae, business plans, marketing plans, processes or any other
proprietary information used in the conduct of the Business or
constituting a part of the Purchased Assets; provided, however, the
foregoing shall not limit Seller's rights with respect to the Licensed
Process except as limited by the Royalty-Free License Agreement; and
provided, further, that the foregoing shall not apply to such
information as shall be in the public domain, through no fault of Seller
or Parent, disclosed to Seller or Parent by a third party not in
violation of any disclosure obligation by which such third party is
obligated, or as may otherwise be required by law or judicial process.
Seller expressly acknowledges that damages alone will be an
inadequate remedy for any breach or violation of any of the provisions
of this Section 9.3, and that Buyer, in addition to all other remedies
available at law or hereunder, shall be entitled, as a matter of right,
to injunctive relief, including specific performance, with respect to
any such breach or violation, in any court of competent jurisdiction.
If any of the provisions of this Section 9.3 are held to be in any
respect an unreasonable restriction upon Seller, then they shall be
deemed to extend only over the maximum period of time, geographic area
or range of activities as to which they may be enforceable. In the
event that Seller shall be in violation of the restrictive covenants in
this Section 9.3, then the Restricted Period shall be extended for a
period of time equal to the period of time during which such breach
shall occur; and, in the event that Buyer should be required to seek
relief from such breach in any court, board of arbitration or other
tribunal, then the Restricted Period shall be extended for the period of
time required for the pendency of such proceedings, including all
appeals.
Section 9.4. Uncollected Accounts Receivable.
a. Following Closing, any payments received on accounts
receivable of the Business, including the Accounts Receivable and
accounts receivable arising after the Closing Date, shall be applied to
the specific invoices specified by the account debtor to be paid or
satisfied or if no such invoice(s) are specified: first, to the
Accounts Receivable and second, to Buyer's accounts receivable in each
instance, applied against the earliest dated such account receivable(s).
In the event Buyer receives any such written objection to payment of any
specific Account Receivable, Buyer shall promptly notify Seller and co-
operate with Seller in its efforts to resolve any such written objection
and secure payment of the applicable Account Receivable.
b. All Accounts Receivable which remain uncollected (the
"Uncollected Accounts") 120 days after Closing (the "Accounts Receivable
Adjustment Date") shall be sold by Buyer to Seller for a price equal to
the aggregate amount of the Uncollected Accounts (less any reserves
reflected on the Closing Date Balance Sheet for such Accounts Receivable
and less any sales commissions payable against such uncollected accounts
(the "Reassigned Commissions"), which amount shall be deducted from the
Installment Payments in the direct order of their maturity. All
Uncollected Accounts and Reassigned Commissions shall be reassigned to
Seller concurrently with such payment, and Seller will assume and become
solely responsible for payment of all such Reassigned Commissions (after
which reassignment, the Reassigned Commissions shall not constitute
Assumed Liabilities.
c. Thereafter, notwithstanding such reassignment, Buyer will be
responsible for collecting reassigned Uncollected Accounts and
commissions payable in respect of such reassigned accounts shall be paid
from amounts collected thereon. If reassigned Uncollected Accounts
exceed $500,000, Seller shall pay an administrative fee of $50,000 for
such collection activities. Such payment will be made as a $50,000
reduction to the first Installment Payment made by Buyer nine (9) months
from the Closing Date. If reassigned Uncollected Accounts Receivable
are less than $500,000, Buyer will bear all administrative costs of
collection. In either event, if Seller wishes to pursue any legal or
third party collection efforts, it shall do so solely at its own cost by
notifying Buyer of such election and thereafter assuming sole
responsibility for collection of such Uncollected Accounts.
d. In the event that a court of competent jurisdiction in a
proceeding under the Federal Bankruptcy Code or other similar law then
in effect with respect to any account debtor shall order the Buyer to
repay or return any of the Uncollected Accounts collected and credited
to the account of such account debtor, the amount of such repayment(s)
shall become an obligation of Seller to Buyer and (i) shall be payable
along with the other Uncollected Accounts, as provided in this Section
9.4; or (ii) shall be payable on demand if the other Uncollected
Accounts have been paid. Buyer shall provide Seller with notice of any
such proceeding and will cooperate with Seller, at Seller's expense, in
respect thereof.
Section 9.5. Buyer's Access. Seller covenants that after the
Closing, upon reasonable request and notice and at reasonable times,
Seller will and will cause its officers, employees and other
representatives to provide Buyer with access to (i) Seller's accounting
and tax records of the Business and (ii) any and all records, sales
files and information of the Business, as may be reasonably necessary
for Buyer's performance of its obligations and enforcement of its rights
hereunder, to comply with federal, state and local regulations and laws
and to reply to inquires by federal, state, local and other governmental
authorities.
Section 9.6. Government Contracts. The parties agree that if any
of the consents/novations or government contracts required to permit
assignment specified on Schedule 4.4 to Buyer (the "Government
Consents") have not been obtained by closing, until each applicable
Government Consent is so obtained: the applicable Government Contract
shall not be assigned to and assumed by Buyer; Seller shall continue to
perform such Government Contract for the account and benefit of Buyer;
Buyer shall provide appropriate and sufficient support to Seller to
permit Seller so to perform such Government Contract; and Seller shall
have no liability to Buyer for any non-performance or breach of said
Government Contract, unless such non-performance or breach is caused by
Seller's negligence or willful misconduct.
Section 9.7. ISHA Compliance. Seller agrees that it will fully
comply with and perform all obligations remaining to be performed under
any Clean-up/Remediation Plan entered into in order to satisfy the
conditions under Sections 7.9 and 8.9.
ARTICLE 10
POST-CLOSING COVENANTS OF BUYER
Section 10.1. Books and Records of Buyer. Following the Closing,
Buyer agrees to permit Seller and its representatives to inspect the
books and records of Buyer included in the Purchased Assets during
regular business hours and at no expense to Buyer in order for Seller
and such representatives to obtain information relevant to the Closing
Date Balance Sheet and to Seller's tax returns, third party claims or
litigation involving Seller, or as otherwise reasonably required for the
conduct of Seller's business. Buyer agrees to maintain such books and
records insofar as they relate to the Purchased Assets for a period of
five (5) years after the Closing Date.
Section 10.2. Seller's Access. Buyer covenants that after the
Closing, upon reasonable request and notice and at reasonable times,
Buyer will and will cause its officers, employees and other
representatives to provide Seller with access to Buyer's records of the
Business as may be reasonably necessary for Seller's performance of its
obligations and enforcement of its rights hereunder, to comply with
federal, state and local regulations and laws and to reply to inquiries
by federal, state, local and other governmental authorities.
Section 10.3. Offers of Employment. Except as specified in
Schedule 10.3, Buyer shall offer employment at will, effective as of the
Closing Date and conditioned on the Closing, to all Seller's employees
as of the Closing. Any offer of employment by Buyer pursuant to this
Section shall carry compensation which, in the aggregate, taking into
account all aspects of compensation, shall be substantially the same as
the compensation, taking into account, in the aggregate, all aspects of
such compensation, provided by Seller immediately prior to the Closing
Date to each employee to whom an offer is made (an "Employment Offer").
Buyer acknowledges and agrees that the acceptance by such employees of
offers of employment with Buyer shall not constitute a condition to the
Buyer's obligation to purchase the Purchased Assets under this
Agreement. Buyer agrees to provide Seller's employees and "qualified
beneficiaries" (as defined by Section 607(3) of ERISA) with coverage
under a group health plan or plans with such terms (including coverage
period) as are necessary to completely terminate Seller's obligation to
provide continuation coverage to such individuals under Part 6 of Title
I of ERISA and Section 4980B of the Code; provided, however, that no
provision contained herein shall be or shall be deemed to be an
assumption by Buyer of any employee benefit plan, employment contract or
other obligation with respect to the employment of any person, or
maintained, by Seller. All severance, medical and other benefits
continuing after the Closing Date for the individuals specified in
Schedule 10.3 shall constitute Retained Liabilities.
Buyer shall provide to employees of Seller who, upon consummation of
the closing hereunder, become employees of Buyer, credit for years of
service with Seller (for the number of years specified on Schedule 10.3)
under such vacation, severance or holiday plans as Buyer shall maintain
from time to time, with benefits under such plans accruing no sooner
than Closing hereunder; provided, however, that nothing contained herein
shall require Buyer to maintain any such plans or prevent Buyer from
amending, altering or terminating any plans maintained or adopted from
time to time.
Section 10.4. Borrowing Limitations. From the Closing Date until
the payment of the initial installment of the Installment Payments,
Buyer shall not be permitted to have outstanding indebtedness at any
time under the Senior Debt in an amount in excess of $6,500,000 in
aggregate (the "Senior Debt Cap"). Thereafter, as each installment of
the Installment Payments is made by Buyer pursuant to Section 2.2
hereof, the Senior Debt Cap shall increase in an amount equal to
$300,000 (20% of the $1,500,000 difference between the $6,500,000 Senior
Debt Cap and the total Senior Debt amount of $8,000,000). Buyer agrees
that the Senior Debt is the only indebtedness of Buyer which will be
senior in right of payment to the Subordinated Note and that any other
indebtedness for money borrowed or for the deferred purchase of any
assets, other than purchase money debt, capitalized leases and trade
debt incurred by Buyer in connection with the ordinary course of the
operation of the Business, shall be expressly subordinate in right of
payment to the Subordinated Note.
ARTICLE 11
SURVIVAL; INDEMNIFICATION; EXPENSES
Section 11.1. Survival of Representations and Warranties. The
representations and warranties of Seller contained herein or in any
document, agreement or Schedule delivered pursuant hereto and the
agreements and obligations of Seller contained in or made pursuant to
this Agreement to be performed at or prior to Closing Date shall survive
for a period of two (2) years from the Closing Date; provided, however,
that the representations and warranties contained in Sections 4.11 and
4.16 hereof shall survive for a period coterminous with the applicable
statute of limitations period and if no statue of limitations is
applicable such representation and warranty shall be deemed to survive
for so long as Buyer may be liable under the applicable law (the "No
Statute of Limitations Representations"). The representations and
warranties of Buyer contained herein or in any Schedule delivered
pursuant hereto and the agreements and obligations of Buyer contained in
or made pursuant to this Agreement to be performed at or prior to
Closing shall survive for a period of two (2) years from the Closing
Date.
Section 11.2. General Indemnification.
a. Seller hereby agrees to (i) indemnify, defend and hold
harmless Buyer and each of its directors, officers, employees,
affiliates, agents and shareholders from and against any and all losses,
damages, liabilities, costs and claims arising out of, based upon or
resulting from (w) any inaccuracy of any representation or warranty of
Seller which is contained in or made pursuant to this Agreement other
than any representation or warranty of Seller contained in Section 4.11
(the "Environmental Representations"), (x) any breach by Seller of any
of its agreements or obligations contained in or made pursuant to this
Agreement to be performed at or prior to the Closing Date, (y) any
Retained Liability, and (z) any inaccuracy of any Environmental
Representations (any such inaccuracies collectively with any fees, costs
and expenses identified in clause (ii) which relate to such
inaccuracies, being called, the "Environmental Indemnities"); and (ii)
reimburse Buyer and each of its directors, officer, employees,
affiliates, agents and shareholders for any and all fees, costs and
expenses of any kind related thereto (including, without limitation, any
and all Legal Expenses) (all of the foregoing contained in clauses (i)
and (ii) above being called collectively, the "Seller Indemnity
Obligations"). As used in this Section 11.2, "Legal Expenses" of a
person shall mean any and all reasonable out-of-pocket fees, costs and
expenses of any kind incurred by such person and its counsel in
investigating, preparing for, defending against or providing evidence,
producing documents or taking other action with respect to any
threatened or asserted claim.
b. Buyer hereby agrees to (i) indemnify, defend and hold harmless
Seller and each of its directors, officers, employees, affiliates,
agents and shareholders from and against any and all losses, damages,
liabilities, costs and claims arising out of, based upon or resulting
from (x) any inaccuracy of any representation or warranty of Buyer which
is contained in or made pursuant to this Agreement to be performed at or
prior to the Closing Date, (y) any breach of Buyer of any of its
agreements or obligations contained in or made pursuant to this
Agreement, and (z) any Assumed Liability; and (ii) reimburse Seller and
each of its directors, officers, employees, affiliates, agents and
shareholder for any and all fees, costs and expenses of any kind related
thereto (including, without limitation, any and all Legal Expenses).
c. Promptly after receipt by any person entitled to
indemnification under this Section 11.2 (an "indemnified party") of
notice of the commencement of any action in respect of which the
indemnified party will seek indemnification hereunder, the indemnified
party shall so notify in writing the person(s) from whom indemnification
hereunder is sought (collectively, the "indemnifying party"), but any
failure so to notify the indemnifying party shall not relieve any such
indemnifying party from any liability that it may have to the
indemnified party under this Section 11.2 except to the extent that the
indemnifying party's ability to defend such claim is materially
prejudiced by the failure to give such notice. The indemnifying party
shall be entitled to participate in the defense of such action and to
assume control of such defense; provided, however, that:
(i) the indemnified party shall be entitled to participate in
the defense of such claim and to employ counsel at its own expense to
assist in the handling of such claim;
(ii) the indemnifying party shall obtain the prior written
approval of the indemnified party before entering into any settlement of
such claim or ceasing to defend against such claim, which approved shall
not be unreasonably withheld except that it shall not be unreasonable to
withhold approval, if, pursuant to or as a result of such settlement or
cessation, injunctive or other equitable relief would be imposed against
the indemnified party;
(iii) the indemnifying party shall not consent to the entry of
any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to
each indemnified party of a release from liability in respect of such
claim; and
(iv) the indemnifying party shall not be entitled to control
but shall be entitled to participate at its own expense in the defense
of, and the indemnified party shall be entitled to have sole control at
its own expense over, the defense or settlement of any claim to the
extent the claim seeks an order, injunction or other equitable relief
against the indemnified party which, if successful, could, in the sole
judgement of the indemnified party, materially interfere with the
business, operations, assets, condition or prospects of the indemnified
party, provided, the indemnified party shall give notice to the
indemnifying party of such judgement and assumption of control as
provided in Section 11.2.d. hereof.
d. At any time, including as provided in Section 11.2(c)(iv), the
indemnified party may assume control of the defense of any such action
by written notice to the indemnifying party. After such written notice
by the indemnified party to the indemnifying party of its election to
assume control, the indemnifying party shall not be liable to such
indemnified party hereunder for any Legal Expenses subsequently incurred
by such indemnified party in connection with the defense thereof, but
shall be otherwise liable to the indemnified party as set forth herein;
provided that the indemnified party shall have the same rights to
approve settlements as provided in Section 11.2(c)(ii).
e. If the indemnifying party does not assume control of the
defense of such claims as provided in the Section 11.2, the indemnified
party shall have the right to defend such claim in any manner as it may
deem appropriate at the cost and expense of the indemnifying party, and
the indemnifying party will promptly reimburse the indemnified party
thereof in accordance with this Section 11.2. The reimbursement of
fees, costs and expenses required by this Section 11.2 shall be made by
periodic payments during the course of the investigation or defense, as
and when bills are received or expenses incurred.
f. Any other provision hereof to the contrary notwithstanding, no
party shall have any liability for indemnification pursuant to Sections
11.2(a)(i)(w), 11.2(a)(i)(x) and 11.2(a)(i)(y) or Sections
11.2(b)(i)(x), 11.2(b)(i)(y) and 11.2(b)(i)(z) (other than as a result
of an inaccuracy in the representations and warranties contained in
Sections 4.22 and 5.6 or Legal Expenses incurred by Buyer in connection
with any litigation proceedings identified on Schedule 4.12) until the
aggregate amount of the liability of such party under such clauses
exceeds $50,000 (the "Threshold Amount"). Once the liability of a party
has exceeded the Threshold Amount, such party shall thereupon become
liable to each indemnified party for all amounts in excess of the
Threshold Amount. Any other provision hereof to the contrary
notwithstanding, no party shall have liability for indemnification
pursuant to this Article 11 if the aggregate of all amounts paid by such
party pursuant to this Article 11, including, without limitation,
amounts set-off pursuant to Section 11.3, would exceed an amount equal
to the Purchase Price.
g. Buyer and Seller shall only be entitled to indemnification
under Section 11.2(a)(i)(w), (x), (y) or (z) or 11.2(b)(i)(x), (y) or
(z) if a written notice describing the claim for which indemnification
is sought is signed by the President or any Vice President of Buyer or
Seller, as the case may be, and is submitted to Seller or Buyer, as the
case may be, not later than the close of business on the last day of the
survival of the representation, warranty, agreement or obligation under
which indemnification is sought as specified in Section 11.1 hereof (the
"Survival Date"). Any claim for indemnification pursuant to Section
11.2(a)(i)(w), (x), (y) or (z) or Section 11.2(b)(i)(x), (y) or (z) not
made prior to the applicable Survival Date shall be extinguished, and
all such representations, warranties, agreements or obligations with
respect to which no claim is made prior to the applicable Survival Date
shall expire and be of no further force and effect.
h. Notwithstanding any provisions herein to the contrary:
(i) the liability of either party computed otherwise in
accordance with this Article XI shall be net of any insurance proceeds
recovered by the indemnified party and shall be limited to the after-tax
consequence to the indemnified party (or the affiliated group of which
such indemnified party is a member) of any such damage, loss, liability,
deficiency cost or expense suffered or incurred by such indemnified
party; and
(ii) neither party shall have any liability to the other party
for misrepresentation, breach of warranty or failure to fulfill any
covenant or agreement to be performed at or prior to the Closing Date
except pursuant to this Article XI.
Section 11.3. Right of Off-Set. In the event and to the extent
that Buyer is entitled to indemnification from Seller pursuant to this
Article 11, Buyer shall be entitled to off-set said indemnification
obligations against the Installment Payments and/or the payments payable
under the Subordinated Note (the "Note Payments") on and subject to the
following terms and conditions: (i) any amounts off-set as provided
below shall be credited to Buyer to discharge the indemnification
obligation in respect of which the off-set is made; (ii) any off-set
shall be taken against the Installment Payments and Note Payments only
in the following order: first, against the Note Payments, commencing
with the first installment payable on the Subordinated Note due on or
after the date such off-set is to be effected, and continuing thereafter
in the direct order of the maturity of said Subordinated Note until the
full amounts payable under the Subordinated Note have been so off-set
(or paid), and second, against the Installment Payments, commencing with
the final Installment Payment and continuing thereafter in the inverse
order of said Installment Payments; (iii) (A) as a condition to the
exercise by Buyer of its right of off-set hereunder, the Buyer shall
have given Seller written notice of its intention to off-set any such
amounts, which notice shall include in reasonable detail the facts
supporting Buyer's claim for indemnification, at least ten (10) days
prior to the date on which the applicable amounts are due and payable
unless the conditions allowing such off-set are discovered within such
10 day period and then as promptly as practical after discovery thereof,
in which event the applicable payment date with respect to which Buyer
intends to exercise its set-off rights shall be automatically extended
until the earlier of 10 days after such notice is given to Seller or the
date on which a notice of dispute is given by Seller with respect to
such notice from Buyer of a claim for indemnification, but in no event
earlier than the date such amounts are due; (B) if Seller, within such
applicable 10 day period, provides written notice to Buyer that it
disputes Buyer's right to indemnification under this Agreement, any
Installment Payments or Note Payments as to which an off-set may
appropriately be made under clause (ii) above, up to the amount of such
disputed off-set and payable at any time before resolution of the
dispute, shall be paid when due (as the applicable payment date may be
extended as aforesaid) to an eligible escrow agent (as defined below) to
hold in escrow in an interest-bearing account until resolution of the
dispute in accordance with the terms of this Agreement; and (C) if
Seller does not give notice disputing Buyer's right of off-set in
respect of a claim for indemnification, Seller shall be deemed to have
consented to such claim and the amount so off-set shall be credited
against the applicable payment amount in the manner provided in clause
(ii) above; and (iv) nothing in this Section 11.3 shall extend or be
deemed to extend the survival period under Section 11.1 or the period in
which indemnification claims may be asserted under Section 11.2, and no
off-set shall be made after the end of the applicable survival period
unless the claim for indemnification in respect of which the off-set is
asserted was made within the applicable period specified in Section
11.2(g). The term "eligible escrow agent" shall mean PNC Bank or such
other person as the parties hereto may agree. Such amounts and any
interest earned thereon shall be held by such escrow agent until receipt
of a joint direction from Buyer and Seller to disburse any funds or an
order from a court of competent jurisdiction directing the escrow agent
to disburse such funds. The fees of the escrow agent shall be paid one-
half by the Buyer and one-half by the Seller.
Section 11.4. Payment by Seller. Notwithstanding anything to the
contrary contained in Section 11.3 hereof, if Buyer is unable to off-set
fully Sellers Indemnity Obligations against any of the Installment
Payments and/or Note Payments due or payable or scheduled to become due
and payable within thirty (30) days after the same shall have become due
and payable, Buyer may, by notice delivered to Seller, demand payment
therefor, and Seller shall, within ten (10) days after receipt of such
demand pay such amount to Buyer or provide written notice to Buyer that
it disputes Buyer's right to indemnification under this Agreement. If
Seller shall deliver such notice to Buyer, Seller shall pay the amount
demanded by Buyer to the eligible escrow agent and such amounts will be
held and disbursed and such escrow agent shall be paid as provided in
Section 11.3 hereof.
ARTICLE 12
TERMINATION
Section 12.1. Termination. This Agreement may be terminated prior
to the Closing as follows:
a. at the election of Buyer, if any one or more of the conditions
set forth in Article VII to its obligation to proceed with the Closing
has not been fulfilled on the Closing Date;
b. at the election of Seller, if any one or more of the
conditions set forth in Article VIII to its obligation to proceed with
the Closing has not been fulfilled on the Closing Date;
c. at the election of Buyer, (a) if Seller has breached, or Buyer
reasonably believes that Seller has breached, any representation,
warranty, covenant or agreement contained in this Agreement, which
breach cannot be or is not cured by the Closing Date or (b) as provided
in Section 6.4 hereof;
d. at the election of Seller, if (a) Buyer has breached, or
Seller reasonably believes that Buyer has breached, any representation,
warranty, covenant or agreement contained in this Agreement, which
breach cannot be or is not cured by the Closing Date or (b) as provided
in Section 6.4 hereof;
e. at the election of Buyer or Seller, if any legal proceeding is
commenced or threatened by any governmental or regulatory body or other
person (other than Buyer or Seller) directed against the consummation of
the Closing and either Buyer or Seller, as the case may be, reasonably
and in good faith deems it impractical or inadvisable to proceed in view
of such legal proceeding or threat thereof, taking into account the
potential expense and delay likely to be involved;
f. at any time on or prior to the Closing Date, by mutual written
consent of Buyer and Seller; or
g. at the election of Buyer or Seller, if the Closing has not
occurred on or prior to July 31, 1995.
h. if, at any time prior to the Closing Date, Parent receives a
bona fide written letter of intent regarding the purchase of its stock
investment in Seller, or the purchase of substantially all the assets of
Seller. Within seven (7) days of receipt of notice of Parent's intent
to terminate its exclusive relationship, Buyer will have the option of
(i) submitting a letter of intent of similar form and substance to the
letter of intent received by Parent and initiating due diligence
regarding the purchase of Parent's stock investment in Seller or (ii)
terminating all activities with respect to Seller.
If this Agreement so terminates, it shall become null and void and have
no further force and effect, except as provided in Section 12.2.
Section 12.2. Survival. If this Agreement is validly terminated
pursuant to Section 12.1 and the transactions contemplated hereby are
not consummated as described above, this Agreement shall become void and
of no further force and effect; provided, however, that if Buyer
terminates this Agreement because any of the conditions contained in
Sections 7.1 or 7.2 have not been satisfied or if Seller terminates this
Agreement because any of the conditions contained in Sections 8.1 or 8.2
have not been satisfied then the terminating party shall have the right
to pursue all of its legal remedies for breach of contract and damages;
provided, further, that if this Agreement is validly terminated pursuant
to Section 12.1 and the transactions contemplated hereby are not
consummated as described above the provisions of Section 6.2 relating to
the obligation of Buyer to keep confidential and not to use certain
information obtained by it from Seller and to return documents and
copies thereof to Seller and the provisions of Section 12.3 relating to
responsibility for expenses shall survive. No party hereto shall have
any liability to any other party in respect of a valid termination of
this Agreement pursuant to Section 12.1, except to the extent provided
in Section 12.3 and as set forth above.
Section 12.3. Expenses if No Closing. If the Closing does not
occur and the transactions contemplated hereby are not consummated,
then, subject to the right of a non-defaulting party to recover damages,
costs and expenses from a defaulting party pursuant to Section 12.2, all
costs and expenses incurred in connection with this Agreement shall be
paid by the person incurring such expenses, i.e., by Buyer if incurred
by Buyer and by Seller if incurred by Seller; provided however, that if
this Agreement terminates pursuant to Section 12.1(h), a termination fee
(the "Termination Fee") shall be paid by Seller to Buyer within five (5)
days of receipt by Seller of Buyer's notice pursuant to Section
12.1(h)(ii). The Termination Fee will be equal to all of Buyer's out of
pocket expenses to third parties plus $2,000 per business day from the
date of the execution of the Letter of Intent to the date of Buyer's
decision to terminate pursuant to Section 12.1(h)(ii); provided however,
that the aggregate amount of such Termination Fee shall not exceed
$150,000.
ARTICLE 13
GENERAL
Section 13.1. No Tax Representations. Seller and Buyer agree that
no representation or warranty has been made by them as to the tax
consequences of the transactions contemplated by this Agreement or the
results of the allocation of the amount of, or the consideration
comprising, the Transaction Consideration, that each is engaging
separate counsel with respect to such tax consequences, and that each is
assuming its own respective tax liability, if any, arising out of this
Agreement or the consummation of the transactions contemplated
hereunder.
Section 13.2. Regarding the Representations and Warranties.
a. Independence. Each of the representations and warranties made
by Seller in Article IV is independent of the other representations and
warranties made therein, and each of the representations and warranties
made by Buyer in Article V is independent of the other representations
and warranties made therein.
b. Knowledge Qualification. Whenever a representation or
warranty is made herein based on the knowledge of Seller or Buyer (as
the case may be) such representation or warranty is made based on the
actual knowledge of Seller or Buyer (as the case may be) or on the
knowledge which Seller or Buyer (as the case may be) would have if it
had conducted a diligent inquiry into the subject matter or the
representation or warranty.
Section 13.3. Binding Effect and Assignment. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by each
of the parties and their respective successors and assigns. This
Agreement may not be assigned by either party without the prior written
consent of the other party.
Section 13.4. Waiver. Any term or provision of this Agreement may
be waived at any time by the party entitled to the benefit thereof by a
written instrument duly executed by such party.
Section 13.5. Dispute Resolution.
a. Good-Faith Negotiations. If any dispute arises under this
Agreement (other than a dispute under Section 2.3) that is not settled
promptly in the ordinary course of business, the parties shall seek to
resolve any such dispute between them, first, by negotiating promptly
with each other in good faith in face-to-face negotiations. These face-
to-face negotiations shall be conducted by the respective designated
senior management representative of each party. If the parties are
unable to resolve the dispute between them within twenty (20) business
days (or such period as the parties shall otherwise agree) through these
face-to-face negotiations, then any such disputes shall be resolved in
the following manner. For purposes of this Section 13.5, Seller shall
be deemed to be a single "party."
b. Resolution of Disputes.
(i) Any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs,
exceeds One Million Dollars (a "Summary Proceeding"), arising out of or
relating to this Agreement or the breach, termination or validity
thereof, shall be litigated exclusively in the Superior Court of the
State of Delaware (the "Delaware Superior Court") as a summary
proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or
any successor rules (the "Summary Proceeding Rules"). Each of the
parties hereto hereby irrevocably and unconditionally (i) submits to the
jurisdiction of the Delaware Superior court for any Summary Proceeding,
(ii) agrees not to commence any Summary Proceeding except in the
Delaware Superior Court, (iii) waives, and agrees not to plead or to
make, any objection to the venue of any Summary Proceeding in the
Delaware Superior Court, (iv) waives, and agrees not to plead or to
make, any claim that the Delaware Superior Court lacks personal
jurisdiction over it, (vi) waives its right to remove any Summary
Proceeding to the federal courts except where such courts are vested
with sole and exclusive jurisdiction by statute, and (vii) understands
and agrees that it shall not seek a jury trial or punitive damages in
any Summary Proceeding based upon or arising out of or otherwise related
to this Agreement and waives any and all rights to any such jury trial
or to seek punitive damages.
(ii) In the event any action, suit or proceeding where the
amount in controversy as to at least one party, exclusive of interest
and costs, does not exceed One Million Dollars (a "Proceeding"), arising
out of or relating to this Agreement or the breach, termination or
validity thereof is brought, the parties to such Proceeding agree to
make application to the Delaware Superior Court to proceed under the
Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding shall be treated as a Summary Proceeding and
all of the foregoing provisions of this Section relating to Summary
Proceedings shall apply to such Proceeding.
(iii) Each of the parties hereto hereby irrevocably designates
and appoints Prentice Hall or CT Corporation (the "Service Agent") as
its agent to receive service of processing any Proceeding or Summary
Proceeding. Each of the parties hereto further covenants and agrees
that, so long as this Agreement shall be in effect, each such party
shall maintain a duly appointed agent for the service of summonses and
other legal processes in the State of Delaware and will notify the other
parties hereto of the name and address of such agent if it is no longer
the Service Agent.
Section 13.6. Notices. All notices, requests, demands, waivers,
consents, approvals, or other communications which are required or
permitted hereunder shall be in writing and shall be deemed given if
delivered personally, sent by reputable overnight courier service (such
as Federal Express), sent by telecopier, or sent by registered or
certified mail, return receipt requested, postage prepaid, to the
addresses set forth below:
If to Buyer:
Brian M. Murphy
The Apollo Group, Inc.
699 Middle Street
Middletown, CT 06457
Phone: (203) 632-2600
Fax: (203) 635-0425
With a copy to:
Louis J. Braun, Esq.
540 Main Street
Mount Kisco, NY 10549
Phone: (914) 241-2839
Fax: (914) 241-2869
If to Parent and/or Seller:
Safeguard Scientifics, Inc
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Attention: James Ounsworth, Esq.
Phone: (610) 293-0600
Fax: (610) 293-0601
With a copy to:
Elam M. Hitchner, III, Esq.
Pepper, Hamilton & Scheetz
3000 Two Logan Square
Philadelphia, PA 19103-2799
Phone: (215) 981-4000
Fax: (215) 981-4750
or to such other address or telecopier number as the party entitled to
receive such notice may, from time to time, specify in writing to the
other party pursuant to the provisions of this Section 13.6.
Section 13.7. Governing Law. This Agreement shall be governed as
to its validity, interpretation and effect by the laws of the State of
Delaware.
Section 13.8. No Third Party Beneficiaries. Notwithstanding
anything to the contrary contained herein, no provision of this
Agreement is intended to benefit any person other than the signatories
hereto nor shall any such provision be enforceable by any other person.
Section 13.9. Severability. Any provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall be ineffective to
the extent of such invalidity or unenforceability without invalidating
or rendering unenforceable the remaining provisions hereof, and any such
invalidity or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
Section 13.10. Schedules. All Schedules referred to in this
Agreement are intended to be and are specifically incorporated by
reference herein.
Section 13.11. Section Headings. All section headings herein have
been inserted for convenience of reference only and shall in no way
modify or restrict any of the terms or provisions hereof.
Section 13.12. Contents of Agreement. This Agreement sets forth
the entire understanding of the parties hereto with respect to the
transaction contemplated hereby and shall not be amended or terminated
except by a written instrument duly executed by each of the parties
hereto. Any and all prior or contemporaneous agreements or
understandings between the parties regarding the subject matter hereof
are superseded in their entirety by this Agreement.
Section 13.13. Counterparts. This Agreement may be executed in two
or more fully executed counterparts, each of which shall be deemed an
original, but all of such counterparts together shall constitute but one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
CENTERCORE, INC.
By: /s/ George E. Mitchell
Title: President
COREL CORPORATE SEATING, INC.
By: /s/ Frederick B. Franks, III
Title: V.P.
THE CENTERCORE GROUP, INC.
By: /s/ B.M. Murphy
Title: Vice President
Joinder
Parent executes this Joinder to this Agreement solely for purposes
of agreeing to be bound by the provisions of Section 9.3 hereof.
Safeguard Scientifics, Inc.
By: /s/ Gerald M. Wilk
Title: V.P. Finance
SUBORDINATED PROMISSORY NOTE
$___________ June , 1995
Philadelphia,
Pennsylvania
For Value Received, The Centercore Group, Inc., a Delaware
corporation, ("Maker") promises to pay to the order of CenterCore, Inc.
("Payee"), at 110 Summit Drive, Suite 200, Exton, Pennsylvania 19341, or
such other place as Payee or any other holder hereof may specify, the
principal sum of ________________ Million Dollars ($__________) in
lawful money of the United States of America, together with interest on
the unpaid principal balance of this Note in accordance with the terms
hereof. Interest shall accrue on the unpaid principal amount of this
Note commencing on the first anniversary of the date hereof and
continuing through the date on which the principal amount of this Note
is paid in full at an annual rate equal to eight percent (8%) per annum
(the "Interest Rate").
1 Payments. Principal on this Note shall be payable in seven equal
semi-annual installments in the amount of [_____________________](1)
commencing on [________________](2) and continuing on each [_______ and
_________](3) thereafter, with a final installment of
[________________](4) payable on [____________________](5).Accrued
interest shall be payable on each [__________(6) and ____________]
commencing on [______________(7)].
In the event that Maker's EBITDA (as defined in the Purchase
Agreement) exceeds $2,000,000 for any fiscal year during the term of the
Subordinated Note (the amount of such excess being called, the "EBITDA
Excess"), an additional principal payment equal to 50% of the EBITDA
Excess shall be payable under this Note as promptly as practicable after
the audited financial statements of Maker are available for such fiscal
year but no later than 120 days after the end of such fiscal year. All
such prepayments will be applied to the scheduled payments of principal
in the inverse order of maturity.
Maker shall prepay the Note in full on either (a) the Sale of the
Maker (as defined herein), or (b) the successful completion of an
initial public offering of the Maker's common stock. For the purposes
hereof, the Sale of the Maker shall mean a sale, transfer, assignment or
other disposition (including by merger or consolidation), of at least a
majority of the outstanding voting capital stock of the Maker, or of all
or substantially all of the assets of the Maker, or a liquidation or
dissolution of the Maker; provided, however, that transfers of voting
capital stock of Maker among Affiliated Entities (as defined in Section
6(iv) below shall not constitute a Sale of Maker.
2. Voluntary Prepayments. This Note may be prepaid at Maker's
election at any time and from time to time, in whole or in part, without
premium or penalty. All voluntary prepayments will be applied to the
scheduled payments of principal in the inverse order of maturity.
3. Costs of Collection; Application of Payments. Maker shall pay,
or reimburse Payee for, any costs incurred in connection with the
collection of any sum due under this Note, including, without
limitation, reasonable attorneys' fees ("Collection Costs"). All
payments shall be applied first to payment in full of any Collection
Costs, then to the payment in full of any late charges, then to the
payment in full of accrued but unpaid interest, and finally to the
reduction of the unpaid principal balance of this Note.
4. Subordination. Maker hereby agrees, and the Payee, by its
acceptance hereof, agrees, that the payment of the principal of and
interest on this Note is hereby expressly made subordinate and junior in
right of payment, to the extent set forth in the following paragraphs
(a) through (f), to the prior payment in full of all Senior Debt (as
defined below) of Maker:
(a) In the event of insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization, or other similar proceedings
in connection therewith, relative to Maker or to any of the property of
Maker, or in the event of any proceedings for voluntary liquidation,
dissolution, or other winding-up of Maker, whether or not involving
insolvency or bankruptcy, then, subject to the provisions of the
Intercreditor and Subordination Agreement of even date herewith between
Payee and Shawmut Capital Corporation (the "Subordination Agreement"),
the holders of Senior Debt shall be entitled to receive payment in full
of all principal of and interest on all Senior Debt before the holder of
this Note shall be entitled to receive any payment on account of
principal or interest on this Note; and to that end the holders of
Senior Debt shall be entitled to receive for application in payment
thereof any payment or distribution of any kind or character, whether in
cash or property or securities, which may be payable or deliverable in
any such proceedings in respect of this Note, to the extent necessary to
make payment in full of all Senior Debt remaining unpaid after giving
effect to any concurrent payment or distribution to the holders of
Senior Debt. Should the holder of this Note receive any distribution in
bankruptcy, dissolution, or similar insolvency proceedings in regard to
Maker, the holder of this Note will hold such distribution in trust for
holders of Senior Debt and will pay over such amounts to such holders to
apply to the Senior Debt until the same is paid in full, after giving
effect to any concurrent payment or distribution to the holders of the
Senior Debt.
(b) In the event that this Note is declared due and payable prior
to its stated maturity, the holder of this Note shall give
contemporaneous written notice of such declaration to all holders of
Senior Debt then known to the holder of this Note.
(c) No payment on account of principal of or interest on this
Note shall be made, and no such payment shall be required or accepted by
the holder of this Note, (other than the issuance of subordinated debt
in payment of interest due hereunder) if: (i) at the time of such
payment or immediately after giving effect thereto, there shall exist
under any Senior Debt or any agreement pursuant to which any Senior Debt
is issued, any default or any condition, event, or act, which, with
notice or lapse of time, or both, would constitute default (but
violation of a covenant to make payments on this Note, without more,
shall not constitute such a default); (ii) the holders of such Senior
Debt shall have declared the entire amount thereof to be immediately due
and payable; and (iii) the holders of such Senior Debt shall have
proceeded and shall be continuing to proceed promptly and diligently to
enforce its remedies against Maker and property of Maker, until the
Senior Debt is paid in full (after giving effect to any concurrent
payment or distribution to the holders of the Senior Debt.) Should the
holder of this Note, while all such conditions have been and remain
satisfied, and after having been notified thereof by the holders of such
Senior Debt and provided with reasonable evidence thereof, receive any
such payment, the holder of this Note will hold such payment or
distribution in trust for holders of Senior Debt and will pay over such
amounts to such holders to apply to the Senior Debt until the same is
paid in full, after giving effect to any concurrent payment or
distribution to the holders of Senior Debt. Upon the earlier of (A) the
conditions set forth in items (i), (ii) and (iii) above no longer being
satisfied and (B) the payment in full of the Senior Debt, Maker shall
immediately make all past-due payments and resume all other required
payments on this Note.
(d) These subordination provisions are for the purpose of
defining the relative rights of the holders of Senior Debt on the one
hand, and the holder of this Note on the other hand, against Maker and
its property; nothing herein shall impair, as between Maker and the
holder of this Note, the obligation of Maker, which is unconditional and
absolute, to pay to the holder hereof the principal hereof and interest
hereon in accordance with its terms and the provisions hereof; nor shall
anything herein prevent the holder of this Note from exercising all
remedies otherwise permitted by applicable law or hereunder upon default
under this Note, subject to the rights, if any, under these
subordination provisions of holders of Senior Debt to receive cash,
property, stock or obligations otherwise payable or deliverable to the
holder of this Note. Maker acknowledges and agrees that the rights of
the holder of this Note with respect to Maker's cash, property, rights,
and other assets of any kind are senior and prior to the rights of any
holder of capital stock of Maker arising from such capital stock.
(e) "Senior Debt" shall have the meaning attributed to it in that
certain Asset Purchase Agreement dated May __, 1995 among Maker, Payee
and Corel Corporate Seating, Inc. (the "Purchase Agreement").
(f) If any holder of Senior Debt receives any payment or
distribution which, except for the provisions of this Section 6, would
have been payable or deliverable with respect to this Note, the Payee
shall (after the Senior Debt has been paid in full) be subrogated to the
rights of the holders of such Senior Debt against the Maker.
5. Security Agreement. This Note is secured by a second priority
security interest in Secured Fixed Assets pursuant to and as defined in
that certain Security Agreement by and between the Maker and the Payee
dated the date hereof (the "Security Agreement).
6. Covenants. So long as any portion of this Note remains unpaid,
Maker shall furnish or cause to be furnished to Payee:
(i) As soon as available and in any event within one hundred
and twenty (120) days after the close of each fiscal year of Maker, the
audited consolidated balance sheets of Maker as at the end of such
fiscal year and the related consolidated statements of operations, of
cash flows and of stockholders' equity for such fiscal year, and a
report on such consolidated balance sheets and financial statements by
Maker's independent public accountants;
(ii) As soon as available and in any event within forty-five
(45) days after the close of each of the first three quarterly
accounting periods in each fiscal year of Maker, the consolidated
balance sheet of Maker as at the end of such quarterly period and the
related consolidated statements of operations, of cash flows and
stockholders' equity for such quarterly period;
(iii) Promptly, but no later than five (5) business days of
Maker's learning thereof, notice of any event of default (or event which
after the passage of time, the giving of notice or both would constitute
an event of default) of which Maker has knowledge under this Note or
declaration of default under any Senior Debt; and
(iv) While any amounts are outstanding under this Note, Maker
will not (a) make any dividends or distributions in respect of or redeem
or in any manner repurchase any shares of its capital stock other than
distributions to shareholders of Maker in an amount not in excess of
Attributable Income Tax Liabilities (as defined below) (b) pay any
salaries, management or other fees or other similar compensation to Paul
V. Allegretto, Brian M. Murphy, or Chirs I. Grigoriou or any of their
Affiliates (as defined in the Purchase Agreement) (collectively, the
"Affiliated Entities") in excess of management or similar fees which, in
aggregate for all Affiliated Entities, do not exceed in any fiscal year
1.5% of Maker's operating revenues for such fiscal year or (c) make any
payments on or with respect to any indebtedness of the Maker to any of
its stockholders or any affiliate thereof. "Attributable Income Tax
Liabilities" means liabilities (including estimated liabilities to the
extent amounts are required to be paid on an estimated basis) for
Federal income taxes and for all relevant state and local income taxes
that are attributed to shareholders of Maker under the provisions of
Subchapter S or analogous state and local income tax laws.
7. Default: Rights, Remedies. Upon the occurrence of an Event of
Default (as defined below) described in clause (i), (iv) or (v) below
and so long as the Event of Default shall continue uncured, unwaived, or
otherwise unremedied, Payee may, by written notice to Maker, declare all
amounts due under this Note immediately due and payable. Upon the
occurrence of an Event of Default described in clause (ii) or (iii)
below, the principal amount of this Note and interest accrued thereon
will immediately become due and payable, without presentment, demand or
notice of any kind. Upon the occurrence of and during the continuance
of an Event of Default, then the principal amount of this Note and any
overdue interest (to the extent permitted by applicable law) will bear
increased interest at a rate equal to the lesser of (i) the highest rate
allowed by applicable law and (ii) 11%, until the Event of Default is
cured, if permitted.
Each of the following shall constitute an Event of Default:
(i) Maker's failure to make any payment of principal or
interest within five (5) days of the date due hereunder; or
(ii) Maker's filing of a voluntary petition in bankruptcy, a
voluntary petition or any answer seeking reorganization, arrangement or
readjustment of its debts or for any other relief under the Bankruptcy
Code or under any other applicable federal or state bankruptcy,
insolvency, reorganization, rehabilitation or other similar law, or the
consent by it to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian or other similar official of
the Maker or for any substantial part of its property, or the making by
it of any assignment for the benefit of creditors, or the failure of the
Maker generally to pay its debt as such debts become due, or the taking
of corporate action by the Maker in furtherance of any of the foregoing;
or
(iii) The filing of involuntary petition against the Maker in
bankruptcy or seeking reorganization, arrangement or readjustment of its
debts or for any other relief under the Bankruptcy Code or under any
other applicable Federal or state bankruptcy, insolvency,
reorganization, rehabilitation or other similar law, or the involuntary
appointment of a reeciver, liquidator, assignee, custodian, trustee or
similar official of the Maker or for any substantial part of its
property and the continuance of any such event for a period of 90
consecutive days undismissed, unbonded or undischarged.
(iv) Maker's breach of any of the covenants of the Maker
contained in this Note or the Security Agreement, which breach shall
continue for a period of fifteen (15) days following written notice to
Maker; or
(v) Any breach by Maker under the Senior Debt, which breach
results in the acceleration of the date of payment of any Senior Debt.
The remedies of Payee shall be cumulative and concurrent, and may be
pursued singly, successively, or together, at it sole discretion, and
may be exercised as often as the occasion therefore shall occur; and the
failure to exercise any such right or remedy shall in no event be
construed as a waiver of release thereof.
8. Off-set. This Note is subject to certain off-set rights as more
particularly set forth in Section 11.3 of the Purchase Agreement.
9. Waivers. Maker waives presentment for payment, demand, notice
of dishonor, protest, and notice of protest with regard to this Note.
10. Nontransferability of Note. This Note may not be sold,
pledged, assigned, hypothecated, gifted, transferred or disposed of in
any manner either voluntarily or involuntarily by operation of law;
provided, however, that notwithstanding the foregoing, this Note may be
collaterally assigned to Safeguard Scientifics, Inc. Subject to the
foregoing and the terms of the Purchase Agreement, the terms of the Note
shall be binding upon the executors, administrators, heirs, successors
and assigns of the Payee.
11. Severability. The words "Payee" and "Maker" whenever occurring
herein shall be deemed and construed to include their respective heirs
or personal representatives. If any provision of this Note hereof is
determined by a court of competent jurisdiction to be invalid or
unenforceable, such invalidity or unenforceability shall not affect the
remaining provisions hereof, other than those to which it is held
invalid or unenforceable, and this Note shall be construed and enforced
as if such invalid or unenforceable provisions had never been inserted.
12. Construction. This Note shall be construed and enforced in
accordance with the domestic, internal law, but not the law of conflict
of laws, of the State of Delaware.
MAKER:
THE CENTERCORE GROUP, INC.
By:/s/
Title:
(1.) [one-fourteenth of the aggregate principal amount]
(2.) [eighteen months from the date hereof]
(3.) [two six month anniversaries hereof]
(4.) [one-half of the aggregate principal amount]
(5.) [fifth anniversary of the date hereof]
(6.) [two six month anniversaries hereof]
(7.) [eighteen months from the date hereof]
3
